##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2006
 Commission file number 001-15423
 Grant Prideco, Inc.
  Delaware
    
    76-0312499(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 400 N . Sam Houston Pkwy. EastSuite 900Houston, Texas
    
    77060(Address of Principal Executive Offices)
    
    (Zip Code)
 (281) 878-8000
 þ o
  þ o o
 o þ
  Title of Each Class
    
    Outstanding at November 1, 2006Common Stock, par value $0.01 per share
    
    128,041,482




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Market Risk DisclosuresITEM 4. Controls and ProceduresPART IIITEM 1A. Risk FactorsITEM 2. Unregistered Sales of Equity in Securities and Use of ProceedsITEM 6. ExhibitsSIGNATURESEXHIBIT INDEXCertification of Michael McShaneCertification of Matthew D. FitzgeraldSection 1350 Certification    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 GRANT PRIDECO, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share data)Income:Revenues
    
    $
    451,349
    
    
    $
    352,228
    
    
    $
    1,297,558
    
    
    $
    961,271License and royalty income
    
    
    20,000
    
    
    
    
    
    
    
    20,000
    
    
    
    471,349
    
    
    
    352,228
    
    
    
    1,317,558
    
    
    
    961,271Operating Expenses:Cost of sales
    
    
    239,486
    
    
    
    201,438
    
    
    
    695,380
    
    
    
    549,631Sales and marketing
    
    
    38,803
    
    
    
    34,824
    
    
    
    112,088
    
    
    
    101,182General and administrative
    
    
    23,613
    
    
    
    25,150
    
    
    
    79,943
    
    
    
    74,226Research and engineering
    
    
    9,006
    
    
    
    5,965
    
    
    
    25,263
    
    
    
    17,917310,908
    
    
    
    267,377
    
    
    
    912,674
    
    
    
    742,956Operating Income
    
    
    160,441
    
    
    
    84,851
    
    
    
    404,884
    
    
    
    218,315Interest Expense
    
    
    (3,687
    )
    
    
    (5,138
    )
    
    
    (11,105
    )
    
    
    (24,378
    )Other Income (Expense), Net
    
    
    121
    
    
    
    2,920
    
    
    
    (1,726
    )
    
    
    7,513Equity Income in Unconsolidated Affiliates
    
    
    26,619
    
    
    
    15,927
    
    
    
    91,280
    
    
    
    33,849Refinancing Charges
    
    
    
    
    
    
    (21,654
    )
    
    
    
    
    
    
    (57,086
    )Income Before Income Taxes and Minority
Interests
    
    
    183,494
    
    
    
    76,906
    
    
    
    483,333
    
    
    
    178,213Income Tax Provision
    
    
    (54,865
    )
    
    
    (25,453
    )
    
    
    (150,922
    )
    
    
    (59,646
    )Income Before Minority Interests
    
    
    128,629
    
    
    
    51,453
    
    
    
    332,411
    
    
    
    118,567Minority Interests
    
    
    (2,157
    )
    
    
    (3,339
    )
    
    
    (7,922
    )
    
    
    (7,959
    )Net Income
    
    $
    126,472
    
    
    $
    48,114
    
    
    $
    324,489
    
    
    $
    110,608Basic Net Income Per Share:Net income per share
    
    $
    0.97
    
    
    $
    0.37
    
    
    $
    2.47
    
    
    $
    0.87Basic weighted average shares outstanding
    
    
    130,606
    
    
    
    128,373
    
    
    
    131,158
    
    
    
    126,511Diluted Net Income Per Share:Net income per share
    
    $
    0.95
    
    
    $
    0.37
    
    
    $
    2.43
    
    
    $
    0.85Diluted weighted average shares outstanding
    
    
    132,649
    
    
    
    131,657
    
    
    
    133,378
    
    
    
    129,658
  2




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GRANT PRIDECO, INC.
Condensed Consolidated Balance Sheets
(In thousands, except par value amounts)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    97,961
    
    
    $
    28,164Short-term investments
    
    
    6,000
    
    
    
    Accounts receivable, net of allowance for uncollectible
accounts of $4,970 and $5,856 for 2006 and 2005,
respectively
    
    
    330,523
    
    
    
    268,450Inventories
    
    
    459,544
    
    
    
    360,630Deferred charges
    
    
    4,574
    
    
    
    14,629Current deferred tax assets
    
    
    37,020
    
    
    
    39,957Other current assets
    
    
    15,854
    
    
    
    14,425951,476
    
    
    
    726,255Property, Plant and Equipment, Net
    
    
    271,228
    
    
    
    238,770Goodwill
    
    
    420,111
    
    
    
    421,627Other Intangible Assets, Net
    
    
    54,197
    
    
    
    58,181Investment in Unconsolidated Affiliate
    
    
    107,231
    
    
    
    84,547Other Assets
    
    
    11,270
    
    
    
    10,904$
    1,815,513
    
    
    $
    1,540,284LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of long-term
debt
    
    $
    3,844
    
    
    $
    7,045Accounts payable
    
    
    115,016
    
    
    
    92,290Accrued payroll and benefits
    
    
    61,434
    
    
    
    61,863Deferred revenues
    
    
    20,981
    
    
    
    25,336Income taxes payable
    
    
    86,578
    
    
    
    24,708Other accrued liabilities
    
    
    27,070
    
    
    
    35,404314,923
    
    
    
    246,646Long-Term Debt
    
    
    202,857
    
    
    
    217,484Deferred Tax Liabilities
    
    
    13,544
    
    
    
    38,171Other Long-Term Liabilities
    
    
    25,307
    
    
    
    29,365Commitments and Contingencies
    
    
    
    
    
    
    Minority Interests
    
    
    14,931
    
    
    
    12,463Stockholders Equity:Preferred stock, $0.01 par value
    
    
    
    
    
    
    Common stock, $0.01 par value; issued 132,612 and
130,927
in 2006 and 2005, respectively
    
    
    1,326
    
    
    
    1,309Capital in excess of par value
    
    
    683,948
    
    
    
    647,211Unearned compensation
    
    
    
    
    
    
    (6,573
    )Retained earnings
    
    
    705,782
    
    
    
    381,293Accumulated other comprehensive loss
    
    
    (1,522
    )
    
    
    (19,496
    )Treasury stock, at cost
    
    
    (155,506
    )
    
    
    (17,862
    )Deferred compensation obligation
    
    
    9,923
    
    
    
    10,2731,243,951
    
    
    
    996,155$
    1,815,513
    
    
    $
    1,540,284
  3




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GRANT PRIDECO, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005(In thousands)Cash Flows From Operating Activities:Net income
    
    $
    324,489
    
    
    $
    110,608Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    36,014
    
    
    
    33,956Gain on sale of business
    
    
    
    
    
    
    (1,577
    )Debt refinancing costs
    
    
    
    
    
    
    51,834Deferred income tax
    
    
    (24,718
    )
    
    
    (18,605
    )Equity income in unconsolidated affiliates, net of dividends
    
    
    (3,561
    )
    
    
    (21,808
    )Stock-based compensation expense
    
    
    9,306
    
    
    
    8,242Deferred compensation expense
    
    
    1,984
    
    
    
    1,919Minority interests in consolidated subsidiaries, net of dividends
    
    
    2,287
    
    
    
    1,824(Gain) loss on sale of fixed assets, net
    
    
    (578
    )
    
    
    1,064Change in operating assets and liabilities:Accounts receivable
    
    
    (60,070
    )
    
    
    (28,189
    )Inventories
    
    
    (99,671
    )
    
    
    (77,985
    )Deferred charges
    
    
    10,055
    
    
    
    4,384Accounts payable
    
    
    24,804
    
    
    
    14,825Deferred revenues
    
    
    (5,012
    )
    
    
    (4,144
    )Income taxes payable
    
    
    63,887
    
    
    
    51,863Other accrued liabilities
    
    
    (15,184
    )
    
    
    (9,351
    )Other, net
    
    
    996
    
    
    
    6,829Net cash provided by operating activities
    
    
    265,028
    
    
    
    125,689Cash Flows From Investing Activities:Capital expenditures for property, plant and equipment
    
    
    (64,472
    )
    
    
    (20,324
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (28,725
    )Proceeds from sale of business
    
    
    
    
    
    
    2,521Purchases of available-for-sale securities
    
    
    (153,400
    )
    
    
    Proceeds from sale of available-for-sale securities
    
    
    147,400
    
    
    
    Other, net
    
    
    1,091
    
    
    
    (3,587
    )Net cash used in investing activities
    
    
    (69,381
    )
    
    
    (50,115
    )Cash Flows From Financing Activities:(Repayments) borrowings on credit facility, net
    
    
    (11,200
    )
    
    
    70,000Repayments on debt, net
    
    
    (6,756
    )
    
    
    (177,991
    )Debt redemption premium
    
    
    
    
    
    
    (43,778
    )Debt issuance costs
    
    
    
    
    
    
    (6,041
    )Proceeds from stock option exercises
    
    
    17,064
    
    
    
    59,276Excess tax benefits on stock option exercises
    
    
    12,172
    
    
    
    Repurchase of common stock
    
    
    (136,788
    )
    
    
    Other, net
    
    
    (210
    )
    
    
    (975
    )Net cash used in financing activities
    
    
    (125,718
    )
    
    
    (99,509
    )Effect of Exchange Rate Changes on Cash
    
    
    (132
    )
    
    
    483Net Increase (Decrease) in Cash
    
    
    69,797
    
    
    
    (23,452
    )Cash at Beginning of Period
    
    
    28,164
    
    
    
    47,552Cash at End of Period
    
    $
    97,961
    
    
    $
    24,100
  4




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GRANT PRIDECO, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. General
 Basis of Presentation
   Use of Estimates
  Revenue Recognition
  5




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2. License and Royalty Agreement
  3. Stock-Based Compensation
   6




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Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005(In thousands)Net Income As Reported
    
    $
    48,114
    
    
    $
    110,608Add: stock-based employee compensation expense
included in reported net income, net of related tax
effects
    
    
    1,906
    
    
    
    5,474Deduct: stock-based employee compensation expense
determined under the fair value method for all awards,
net of related tax effects
    
    
    (3,021
    )
    
    
    (8,939
    )Pro Forma Net Income
    
    $
    46,999
    
    
    $
    107,143Net Income Per Share:Basic, as reported
    
    $
    0.37
    
    
    $
    0.87Basic, pro forma
    
    
    0.37
    
    
    
    0.85Diluted, as reported
    
    
    0.37
    
    
    
    0.85Diluted, pro forma
    
    
    0.36
    
    
    
    0.83
   Stock Option and Restricted Stock Plans
   7




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Stock Option Plans
  Nine Months EndedSeptember 30,2006
    
    2005(Actual)
    
    (Pro Forma)Valuation Assumptions:Expected Option Term (Years)
    
    
    5
    
    
    
    5Expected Volatility
    
    
    40
    %
    
    
    41
    %Expected Dividend Rate
    
    
    
    
    
    
    Risk Free Interest Rate
    
    
    4.73
    %
    
    
    3.87
    %Weighted-Average Grant Date Fair Value
    
    $
    15.49
    
    
    $
    9.10
   WeightedWeighted
    
    
    AverageNumber
    
    
    Average
    
    
    Remaining
    
    
    Aggregateof
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at the Beginning of the Year
    
    
    4,747,388
    
    
    $
    12.91Options Granted During the Year
    
    
    307,750
    
    
    
    36.73Options Exercised
    
    
    (1,482,957
    )
    
    
    11.51Options Forfeited
    
    
    (39,705
    )
    
    
    19.16Outstanding at the End of the Period
    
    
    3,532,476
    
    
    $
    15.50
    
    
    
    7.80
    
    
    $
    79,627,044Exercisable at the End of the Period
    
    
    2,679,146
    
    
    $
    12.72
    
    
    
    7.45
    
    
    $
    67,809,004
  8




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Restricted Stock Plans
   2004 and 2005 Restricted Stock Awards
  2006 Restricted Stock Award
  WeightedNumber
    
    
    Averageof
    
    
    Grant-DateShares
    
    
    Fair ValueOutstanding at the Beginning of the Year
    
    
    585,550
    
    
    $
    16.56Awarded
    
    
    287,065
    
    
    
    41.05Vested
    
    
    (10,700
    )
    
    
    42.84Forfeited
    
    
    (25,875
    )
    
    
    17.16Outstanding at the End of the Period
    
    
    836,040
    
    
    $
    24.62
  9




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Employee Stock Purchase Plan
    2006
    
    2005(Actual)
    
    (Pro Forma)Valuation Assumptions:Expected Option Term (Years)
    
    
    1
    
    
    
    1Expected Volatility
    
    
    40
    %
    
    
    41
    %Expected Dividend Rate
    
    
    
    
    
    
    Risk Free Interest Rate
    
    
    4.74
    %
    
    
    2.79
    %Weighted-Average Grant Date Fair Value
    
    $
    12.87
    
    
    $
    6.05
  4. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net Income
    
    $
    126,472
    
    
    $
    48,114
    
    
    $
    324,489
    
    
    $
    110,608Foreign Currency Translation Adjustments
    
    
    1,302
    
    
    
    1,760
    
    
    
    8,327
    
    
    
    (769
    )Other Comprehensive Income (Loss) for
Unconsolidated Affiliate, Net of Tax
    
    
    (121
    )
    
    
    (2,652
    )
    
    
    9,647
    
    
    
    (4,599
    )Total Comprehensive Income
    
    $
    127,653
    
    
    $
    47,222
    
    
    $
    342,463
    
    
    $
    105,240
 5. Net Income Per Share
  6. Short-Term Investments
   10




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7. Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Raw Materials, Components and Supplies
    
    $
    209,292
    
    
    $
    169,966Work in Process
    
    
    131,364
    
    
    
    84,783Finished Goods
    
    
    96,761
    
    
    
    83,189Rental Bits (a)
    
    
    22,127
    
    
    
    22,692$
    459,544
    
    
    $
    360,630
 
 (a)
    
    The Company manufactures its rental bit inventory and the cost, which
includes direct and indirect manufacturing costs, is capitalized and carried in
inventory. Prior to 2006, the Company expensed the cost of rental bits upon the
first rental and usage of the bit. During the first quarter of 2006, the Company
completed an analysis of historical rental bit usage to determine an estimate of
rental bit useful life. Effective January 1, 2006, manufactured rental bits are
now amortized, based upon analysis of historical usage, over their estimated
useful life of approximately one year.  8. Property, Plant and Equipment
  September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Land
    
    $
    23,613
    
    
    $
    21,534Buildings and Improvements
    
    
    98,315
    
    
    
    86,371Machinery and Equipment
    
    
    301,293
    
    
    
    287,008Furniture and Fixtures
    
    
    41,185
    
    
    
    35,362Construction in Progress
    
    
    39,951
    
    
    
    13,084504,357
    
    
    
    443,359Less: Accumulated Depreciation
    
    
    (233,129
    )
    
    
    (204,589
    )$
    271,228
    
    
    $
    238,770
 11




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9. Goodwill and Other Intangible Assets
  Drilling
    
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    
    Technology andServices
    
    
    Drill Bits
    
    
    Services
    
    
    Other
    
    
    Total(In thousands)Balance, December 31, 2005
    
    $
    130,885
    
    
    $
    174,769
    
    
    $
    97,133
    
    
    $
    18,840
    
    
    $
    421,627Translation and Other Adjustments
    
    
    1,074
    
    
    
    358
    
    
    
    184
    
    
    
    (3,132
    )
    
    
    (1,516
    )Balance, September 30, 2006
    
    $
    131,959
    
    
    $
    175,127
    
    
    $
    97,317
    
    
    $
    15,708
    
    
    $
    420,111
   September 30, 2006
    
    
    December 31, 2005Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    NetIntangibles
    
    
    Amortization
    
    
    Intangibles
    
    
    Intangibles
    
    
    Amortization
    
    
    Intangibles(In thousands)Patents
    
    $
    59,813
    
    
    $
    (13,043
    )
    
    $
    46,770
    
    
    $
    58,367
    
    
    $
    (8,174
    )
    
    $
    50,193Technology Licenses
    
    
    1,424
    
    
    
    (626
    )
    
    
    798
    
    
    
    1,438
    
    
    
    (583
    )
    
    
    855Customer Relationships
    
    
    6,410
    
    
    
    (854
    )
    
    
    5,556
    
    
    
    6,410
    
    
    
    (612
    )
    
    
    5,798Trademarks
    
    
    1,610
    
    
    
    (1,199
    )
    
    
    411
    
    
    
    1,610
    
    
    
    (1,044
    )
    
    
    566Covenants Not To Compete
    
    
    2,300
    
    
    
    (1,860
    )
    
    
    440
    
    
    
    3,625
    
    
    
    (3,078
    )
    
    
    547Pension Asset (a)
    
    
    222
    
    
    
    
    
    
    
    222
    
    
    
    222
    
    
    
    
    
    
    
    222$
    71,779
    
    
    $
    (17,582
    )
    
    $
    54,197
    
    
    $
    71,672
    
    
    $
    (13,491
    )
    
    $
    58,181
 
 a)
    
    The pension asset is a non-amortizing intangible asset.  12




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10. Investments in Unconsolidated Affiliates
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(In thousands)Net Sales
    
    $
    167,438
    
    
    $
    149,798
    
    
    $
    539,972
    
    
    $
    387,385Gross Profit
    
    
    57,767
    
    
    
    38,815
    
    
    
    192,313
    
    
    
    90,508Net Income
    
    
    53,473
    
    
    
    35,677
    
    
    
    183,735
    
    
    
    78,441Companys Equity Income
    
    $
    26,619
    
    
    $
    17,906
    
    
    $
    91,280
    
    
    $
    39,568Dividends Received
    
    
    
    
    
    
    
    
    
    
    87,719
    
    
    
    12,041
   11. Amended Credit Facility
      13




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12. Segment Information
 Business Segments
  Drilling
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    Technology
    
    CorporateServices
    
    Drill Bits
    
    and Services
    
    and Other
    
    Total(In thousands)Three Months Ended:September 30, 2006Revenues from Unaffiliated
Customers
    
    $
    214,375
    
    
    $
    128,001
    
    
    $
    108,170
    
    
    $
    803
    
    
    $
    451,349Intersegment Revenues
    
    
    362
    
    
    
    12
    
    
    
    1,713
    
    
    
    
    
    
    
    2,087Operating Income (Loss)
    
    
    78,910
    
    
    
    66,386
    
    
    
    28,523
    
    
    
    (13,378
    )
    
    
    160,441Income (Loss) Before Income Taxes
and Minority Interests
    
    
    104,117
    
    
    
    64,977
    
    
    
    28,105
    
    
    
    (13,705
    )
    
    
    183,494September 30, 2005Revenues from Unaffiliated
Customers
    
    $
    153,173
    
    
    $
    100,132
    
    
    $
    98,923
    
    
    $
    
    
    
    $
    352,228Intersegment Revenues
    
    
    14
    
    
    
    
    
    
    
    3,184
    
    
    
    
    
    
    
    3,198Operating Income (Loss)
    
    
    47,008
    
    
    
    25,735
    
    
    
    25,753
    
    
    
    (13,645
    )
    
    
    84,851Income (Loss) Before Income Taxes
and Minority Interests
    
    
    65,344
    
    
    
    26,596
    
    
    
    25,803
    
    
    
    (40,837
    )
    
    
    76,906
 Drilling
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    Technology
    
    CorporateServices
    
    Drill Bits
    
    and Services
    
    and Other
    
    Total(In thousands)Nine Months Ended:September 30, 2006Revenues from Unaffiliated
Customers
    
    $
    622,220
    
    
    $
    361,031
    
    
    $
    313,229
    
    
    $
    1,078
    
    
    $
    1,297,558Intersegment Revenues
    
    
    588
    
    
    
    52
    
    
    
    3,969
    
    
    
    
    
    
    
    4,609Operating Income (Loss)
    
    
    222,671
    
    
    
    142,758
    
    
    
    89,003
    
    
    
    (49,548
    )
    
    
    404,884Income (Loss) Before Income Taxes
and Minority Interests
    
    
    309,694
    
    
    
    138,157
    
    
    
    87,788
    
    
    
    (52,306
    )
    
    
    483,333September 30, 2005Revenues from Unaffiliated
Customers
    
    $
    425,879
    
    
    $
    283,847
    
    
    $
    251,545
    
    
    $
    
    
    
    $
    961,271Intersegment Revenues
    
    
    144
    
    
    
    
    
    
    
    6,462
    
    
    
    
    
    
    
    6,606Operating Income (Loss)
    
    
    126,559
    
    
    
    67,925
    
    
    
    60,239
    
    
    
    (36,408
    )
    
    
    218,315Income (Loss) Before Income Taxes
and Minority Interests
    
    
    168,246
    
    
    
    66,236
    
    
    
    59,408
    
    
    
    (115,677
    )
    
    
    178,213
 14




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##### Table of Contents



13. Pension Plans
 U.S. Pension Plan
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Service Cost
    
    $
    101
    
    
    $
    94
    
    
    $
    303
    
    
    $
    290Interest Cost
    
    
    222
    
    
    
    192
    
    
    
    667
    
    
    
    572Expected Return on Plan Assets
    
    
    (238
    )
    
    
    (153
    )
    
    
    (714
    )
    
    
    (463
    )Amortization of Prior Service Cost
    
    
    6
    
    
    
    
    
    
    
    18
    
    
    
    Amortization of Loss
    
    
    4
    
    
    
    
    
    
    
    12
    
    
    
    Administration Expenses
    
    
    15
    
    
    
    44
    
    
    
    45
    
    
    
    132Net Periodic Benefit Cost
    
    $
    110
    
    
    $
    177
    
    
    $
    331
    
    
    $
    531
  Non-U.S. Pension Plan
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Interest Cost
    
    $
    229
    
    
    $
    250
    
    
    $
    687
    
    
    $
    744Expected Return on Plan Assets
    
    
    (226
    )
    
    
    (250
    )
    
    
    (678
    )
    
    
    (763
    )Amortization of Prior Service Cost
    
    
    27
    
    
    
    
    
    
    
    82
    
    
    
    Amortization of (Gain)/Loss
    
    
    (30
    )
    
    
    
    
    
    
    (91
    )
    
    
    19Administration Expenses
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    183Net Periodic Benefit Cost
    
    $
    
    
    
    $
    47
    
    
    $
    
    
    
    $
    183
  14. Stock Repurchase Program
  15. Recent Accounting Standards
  15




---



##### Table of Contents



16. Subsequent Events
   17. Subsidiary Guarantor Financial Information
  16




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Income:Revenues
    
    $
    
    
    
    $
    331,733
    
    
    $
    203,199
    
    
    $
    (83,583
    )
    
    $
    451,349License and Royalty Income
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    20,000
    
    
    
    331,733
    
    
    
    223,199
    
    
    
    (83,583
    )
    
    
    471,349Operating Expenses:Cost of sales
    
    
    
    
    
    
    197,138
    
    
    
    111,495
    
    
    
    (69,147
    )
    
    
    239,486Selling, general and administrative
    
    
    58
    
    
    
    51,129
    
    
    
    20,235
    
    
    
    
    
    
    
    71,42258
    
    
    
    248,267
    
    
    
    131,730
    
    
    
    (69,147
    )
    
    
    310,908Operating Income (Expense)
    
    
    (58
    )
    
    
    83,466
    
    
    
    91,469
    
    
    
    (14,436
    )
    
    
    160,441Interest Expense
    
    
    (3,504
    )
    
    
    (171
    )
    
    
    (12
    )
    
    
    
    
    
    
    (3,687
    )Other Income (Expense), Net
    
    
    649
    
    
    
    1,773
    
    
    
    (2,301
    )
    
    
    
    
    
    
    121Equity Income in Unconsolidated Affiliate
    
    
    
    
    
    
    27,263
    
    
    
    
    
    
    
    (644
    )
    
    
    26,619Equity in Subsidiaries, Net of Taxes
    
    
    147,904
    
    
    
    6,702
    
    
    
    
    
    
    
    (154,606
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    144,991
    
    
    
    119,033
    
    
    
    89,156
    
    
    
    (169,686
    )
    
    
    183,494Income Tax Provision
    
    
    (18,519
    )
    
    
    (15,017
    )
    
    
    (21,329
    )
    
    
    
    
    
    
    (54,865
    )Income Before Minority Interests
    
    
    126,472
    
    
    
    104,016
    
    
    
    67,827
    
    
    
    (169,686
    )
    
    
    128,629Minority Interests
    
    
    
    
    
    
    
    
    
    
    (2,157
    )
    
    
    
    
    
    
    (2,157
    )Net Income
    
    $
    126,472
    
    
    $
    104,016
    
    
    $
    65,670
    
    
    $
    (169,686
    )
    
    $
    126,472
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Income:
    
    $
    
    
    
    $
    982,323
    
    
    $
    559,116
    
    
    $
    (243,881
    )
    
    $
    1,297,558Revenues
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    20,000License and Royalty Income
    
    
    
    
    
    
    982,323
    
    
    
    579,116
    
    
    
    (243,881
    )
    
    
    1,317,558Operating Expenses:Cost of sales
    
    
    
    
    
    
    601,945
    
    
    
    293,595
    
    
    
    (200,160
    )
    
    
    695,380Selling, general and administrative
    
    
    166
    
    
    
    156,937
    
    
    
    60,191
    
    
    
    
    
    
    
    217,294166
    
    
    
    758,882
    
    
    
    353,786
    
    
    
    (200,160
    )
    
    
    912,674Operating Income (Loss)
    
    
    (166
    )
    
    
    223,441
    
    
    
    225,330
    
    
    
    (43,721
    )
    
    
    404,884Interest Expense
    
    
    (10,569
    )
    
    
    (420
    )
    
    
    (116
    )
    
    
    
    
    
    
    (11,105
    )Other Income (Expense), Net
    
    
    1,702
    
    
    
    1,697
    
    
    
    (5,125
    )
    
    
    
    
    
    
    (1,726
    )Equity Income in Unconsolidated Affiliate
    
    
    
    
    
    
    91,924
    
    
    
    
    
    
    
    (644
    )
    
    
    91,280Equity in Subsidiaries, Net of Taxes
    
    
    368,470
    
    
    
    20,041
    
    
    
    
    
    
    
    (388,511
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    359,437
    
    
    
    336,683
    
    
    
    220,089
    
    
    
    (432,876
    )
    
    
    483,333Income Tax Provision
    
    
    (34,948
    )
    
    
    (66,200
    )
    
    
    (49,774
    )
    
    
    
    
    
    
    (150,922
    )Income Before Minority Interests
    
    
    324,489
    
    
    
    270,483
    
    
    
    170,315
    
    
    
    (432,876
    )
    
    
    332,411Minority Interests
    
    
    
    
    
    
    
    
    
    
    (7,922
    )
    
    
    
    
    
    
    (7,922
    )Net Income
    
    $
    324,489
    
    
    $
    270,483
    
    
    $
    162,393
    
    
    $
    (432,876
    )
    
    $
    324,489
 17




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    48,280
    
    
    $
    49,681
    
    
    $
    
    
    
    $
    97,961Short-term investments
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    6,000Accounts receivable, net
    
    
    
    
    
    
    208,859
    
    
    
    121,664
    
    
    
    
    
    
    
    330,523Inventories
    
    
    
    
    
    
    349,223
    
    
    
    171,873
    
    
    
    (61,552
    )
    
    
    459,544Deferred charges
    
    
    
    
    
    
    4,325
    
    
    
    249
    
    
    
    
    
    
    
    4,574Current deferred tax assets
    
    
    39
    
    
    
    30,583
    
    
    
    6,398
    
    
    
    
    
    
    
    37,020Other current assets
    
    
    
    
    
    
    5,508
    
    
    
    10,346
    
    
    
    
    
    
    
    15,85439
    
    
    
    652,778
    
    
    
    360,211
    
    
    
    (61,552
    )
    
    
    951,476Property, Plant and Equipment, Net
    
    
    
    
    
    
    155,201
    
    
    
    116,027
    
    
    
    
    
    
    
    271,228Goodwill
    
    
    
    
    
    
    226,719
    
    
    
    193,392
    
    
    
    
    
    
    
    420,111Investment In and Advances to Subsidiaries
    
    
    1,385,346
    
    
    
    74,631
    
    
    
    
    
    
    
    (1,459,977
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    107,231
    
    
    
    
    
    
    
    
    
    
    
    107,231Other Assets
    
    
    6,789
    
    
    
    45,197
    
    
    
    13,481
    
    
    
    
    
    
    
    65,467$
    1,392,174
    
    
    $
    1,261,757
    
    
    $
    683,111
    
    
    $
    (1,521,529
    )
    
    $
    1,815,513LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    
    
    
    $
    3,844
    
    
    $
    
    
    
    $
    
    
    
    $
    3,844Accounts payable
    
    
    
    
    
    
    81,787
    
    
    
    33,229
    
    
    
    
    
    
    
    115,016Deferred revenues
    
    
    
    
    
    
    13,792
    
    
    
    7,189
    
    
    
    
    
    
    
    20,981Income taxes payable
    
    
    (42,519
    )
    
    
    99,535
    
    
    
    29,562
    
    
    
    
    
    
    
    86,578Intercompany liabilities (assets)
    
    
    (8,778
    )
    
    
    (136,360
    )
    
    
    145,138
    
    
    
    
    
    
    
    Other accrued liabilities
    
    
    1,701
    
    
    
    58,637
    
    
    
    28,166
    
    
    
    
    
    
    
    88,504(49,596
    )
    
    
    121,235
    
    
    
    243,284
    
    
    
    
    
    
    
    314,923Long-Term Debt
    
    
    200,095
    
    
    
    2,762
    
    
    
    
    
    
    
    
    
    
    
    202,857Deferred Tax Liabilities
    
    
    (2,276
    )
    
    
    (9,374
    )
    
    
    25,194
    
    
    
    
    
    
    
    13,544Other Long-Term Liabilities
    
    
    
    
    
    
    24,199
    
    
    
    1,108
    
    
    
    
    
    
    
    25,307Commitments and ContingenciesMinority Interests
    
    
    
    
    
    
    
    
    
    
    14,931
    
    
    
    
    
    
    
    14,931Stockholders Equity
    
    
    1,243,951
    
    
    
    1,122,935
    
    
    
    398,594
    
    
    
    (1,521,529
    )
    
    
    1,243,951$
    1,392,174
    
    
    $
    1,261,757
    
    
    $
    683,111
    
    
    $
    (1,521,529
    )
    
    $
    1,815,513
 18




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash provided by operating activities
    
    $
    104,259
    
    
    $
    98,700
    
    
    $
    85,271
    
    
    $
    (23,202
    )
    
    $
    265,028Cash Flows From Investing Activities:Capital expenditures for property, plant and equipment
    
    
    
    
    
    
    (48,916
    )
    
    
    (15,556
    )
    
    
    
    
    
    
    (64,472
    )Purchases of available-for-sale securities
    
    
    
    
    
    
    (153,400
    )
    
    
    
    
    
    
    
    
    
    
    (153,400
    )Proceeds from sale of available-for-sale securities
    
    
    
    
    
    
    147,400
    
    
    
    
    
    
    
    
    
    
    
    147,400Other, net
    
    
    (39
    )
    
    
    1,187
    
    
    
    (57
    )
    
    
    
    
    
    
    1,091Net cash used in investing activities
    
    
    (39
    )
    
    
    (53,729
    )
    
    
    (15,613
    )
    
    
    
    
    
    
    (69,381
    )Cash Flows From Financing Activities:Repayments on revolver debt, net
    
    
    
    
    
    
    
    
    
    
    (11,200
    )
    
    
    
    
    
    
    (11,200
    )Repayments on debt, net
    
    
    
    
    
    
    (6,756
    )
    
    
    
    
    
    
    
    
    
    
    (6,756
    )Borrowings (repayments) on debt between subs, net
    
    
    3,542
    
    
    
    (3,023
    )
    
    
    (519
    )
    
    
    
    
    
    
    Proceeds from stock option exercises
    
    
    17,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,064Excess tax benefits on stock option exercises
    
    
    12,172
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,172Repurchase of common stock
    
    
    (136,788
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (136,788
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    (23,202
    )
    
    
    23,202
    
    
    
    Other, net
    
    
    (210
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (210
    )Net cash used in financing activities
    
    
    (104,220
    )
    
    
    (9,779
    )
    
    
    (34,921
    )
    
    
    23,202
    
    
    
    (125,718
    )Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    
    
    
    
    (132
    )
    
    
    
    
    
    
    (132
    )Net Increase in Cash
    
    
    
    
    
    
    35,192
    
    
    
    34,605
    
    
    
    
    
    
    
    69,797Cash at Beginning of Period
    
    
    
    
    
    
    13,088
    
    
    
    15,076
    
    
    
    
    
    
    
    28,164Cash at End of Period
    
    $
    
    
    
    $
    48,280
    
    
    $
    49,681
    
    
    $
    
    
    
    $
    97,961
 19




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2005
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    276,013
    
    
    $
    156,009
    
    
    $
    (79,794
    )
    
    $
    352,228Operating Expenses:Cost of sales
    
    
    
    
    
    
    184,196
    
    
    
    81,048
    
    
    
    (63,806
    )
    
    
    201,438Selling, general and administrative
    
    
    1
    
    
    
    46,128
    
    
    
    19,810
    
    
    
    
    
    
    
    65,9391
    
    
    
    230,324
    
    
    
    100,858
    
    
    
    (63,806
    )
    
    
    267,377Operating Income
    
    
    (1
    )
    
    
    45,689
    
    
    
    55,151
    
    
    
    (15,988
    )
    
    
    84,851Interest Expense
    
    
    (5,051
    )
    
    
    (23
    )
    
    
    (64
    )
    
    
    
    
    
    
    (5,138
    )Other Income (Expense), Net
    
    
    603
    
    
    
    (685
    )
    
    
    3,002
    
    
    
    
    
    
    
    2,920Equity Income in Unconsolidated Affiliates
    
    
    
    
    
    
    15,927
    
    
    
    
    
    
    
    
    
    
    
    15,927Refinance Charges
    
    
    (21,654
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,654
    )Equity in Subsidiaries, Net of Taxes
    
    
    65,081
    
    
    
    5,433
    
    
    
    
    
    
    
    (70,514
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    38,978
    
    
    
    66,341
    
    
    
    58,089
    
    
    
    (86,502
    )
    
    
    76,906Income Tax (Provision) Benefit
    
    
    9,136
    
    
    
    (24,004
    )
    
    
    (10,585
    )
    
    
    
    
    
    
    (25,453
    )Income Before Minority Interests
    
    
    48,114
    
    
    
    42,337
    
    
    
    47,504
    
    
    
    (86,502
    )
    
    
    51,453Minority Interests
    
    
    
    
    
    
    
    
    
    
    (3,339
    )
    
    
    
    
    
    
    (3,339
    )Net Income
    
    $
    48,114
    
    
    $
    42,337
    
    
    $
    44,165
    
    
    $
    (86,502
    )
    
    $
    48,114
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2005
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    755,185
    
    
    $
    413,010
    
    
    $
    (206,924
    )
    
    $
    961,271Operating Expenses:Cost of sales
    
    
    
    
    
    
    508,163
    
    
    
    210,064
    
    
    
    (168,596
    )
    
    
    549,631Selling, general and administrative
    
    
    (2
    )
    
    
    135,955
    
    
    
    57,372
    
    
    
    
    
    
    
    193,325(2
    )
    
    
    644,118
    
    
    
    267,436
    
    
    
    (168,596
    )
    
    
    742,956Operating Income
    
    
    2
    
    
    
    111,067
    
    
    
    145,574
    
    
    
    (38,328
    )
    
    
    218,315Interest Expense
    
    
    (23,039
    )
    
    
    (1,075
    )
    
    
    (264
    )
    
    
    
    
    
    
    (24,378
    )Other Income (Expense), Net
    
    
    1,706
    
    
    
    (2
    )
    
    
    5,809
    
    
    
    
    
    
    
    7,513Equity Income in Unconsolidated Affiliates
    
    
    
    
    
    
    33,849
    
    
    
    
    
    
    
    
    
    
    
    33,849Refinance Charges
    
    
    (49,541
    )
    
    
    (7,545
    )
    
    
    
    
    
    
    
    
    
    
    (57,086
    )Equity in Subsidiaries, Net of Taxes
    
    
    156,675
    
    
    
    10,983
    
    
    
    
    
    
    
    (167,658
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    85,803
    
    
    
    147,277
    
    
    
    151,119
    
    
    
    (205,986
    )
    
    
    178,213Income Tax (Provision) Benefit
    
    
    24,805
    
    
    
    (54,685
    )
    
    
    (29,766
    )
    
    
    
    
    
    
    (59,646
    )Income Before Minority Interests
    
    
    110,608
    
    
    
    92,592
    
    
    
    121,353
    
    
    
    (205,986
    )
    
    
    118,567Minority Interests
    
    
    
    
    
    
    
    
    
    
    (7,959
    )
    
    
    
    
    
    
    (7,959
    )Net Income
    
    $
    110,608
    
    
    $
    92,592
    
    
    $
    113,394
    
    
    $
    (205,986
    )
    
    $
    110,608
 20




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2005
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)ASSETSCurrent Assets:Cash
    
    $
    
    
    
    $
    13,088
    
    
    $
    15,076
    
    
    $
    
    
    
    $
    28,164Accounts receivable, net
    
    
    
    
    
    
    164,375
    
    
    
    104,075
    
    
    
    
    
    
    
    268,450Inventories
    
    
    
    
    
    
    272,914
    
    
    
    140,256
    
    
    
    (52,540
    )
    
    
    360,630Deferred charges
    
    
    
    
    
    
    14,397
    
    
    
    232
    
    
    
    
    
    
    
    14,629Current deferred tax assets
    
    
    (2,671
    )
    
    
    30,721
    
    
    
    11,907
    
    
    
    
    
    
    
    39,957Other current assets
    
    
    
    
    
    
    4,963
    
    
    
    9,462
    
    
    
    
    
    
    
    14,425(2,671
    )
    
    
    500,458
    
    
    
    281,008
    
    
    
    (52,540
    )
    
    
    726,255Property, Plant and Equipment, Net
    
    
    
    
    
    
    133,677
    
    
    
    105,093
    
    
    
    
    
    
    
    238,770Goodwill
    
    
    
    
    
    
    229,837
    
    
    
    191,790
    
    
    
    
    
    
    
    421,627Investment In and Advances to Subsidiaries
    
    
    1,063,749
    
    
    
    54,590
    
    
    
    
    
    
    
    (1,118,339
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    84,547
    
    
    
    
    
    
    
    
    
    
    
    84,547Other Assets
    
    
    6,630
    
    
    
    48,192
    
    
    
    14,263
    
    
    
    
    
    
    
    69,085$
    1,067,708
    
    
    $
    1,051,301
    
    
    $
    592,154
    
    
    $
    (1,170,879
    )
    
    $
    1,540,284LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    
    
    
    $
    7,045
    
    
    $
    
    
    
    $
    
    
    
    $
    7,045Accounts payable
    
    
    
    
    
    
    64,343
    
    
    
    27,947
    
    
    
    
    
    
    
    92,290Deferred revenues
    
    
    
    
    
    
    24,932
    
    
    
    404
    
    
    
    
    
    
    
    25,336Income taxes payable
    
    
    9,573
    
    
    
    (8,018
    )
    
    
    23,153
    
    
    
    
    
    
    
    24,708Intercompany liabilities (assets)
    
    
    (147,863
    )
    
    
    (10,728
    )
    
    
    151,814
    
    
    
    6,777
    
    
    
    Other accrued liabilities
    
    
    5,512
    
    
    
    58,641
    
    
    
    33,114
    
    
    
    
    
    
    
    97,267(132,778
    )
    
    
    136,215
    
    
    
    236,432
    
    
    
    6,777
    
    
    
    246,646Long-Term Debt
    
    
    200,095
    
    
    
    6,189
    
    
    
    11,200
    
    
    
    
    
    
    
    217,484Deferred Tax Liabilities
    
    
    4,236
    
    
    
    9,031
    
    
    
    24,904
    
    
    
    
    
    
    
    38,171Other Long-Term Liabilities
    
    
    
    
    
    
    28,072
    
    
    
    1,293
    
    
    
    
    
    
    
    29,365Commitments and Contingencies
Minority Interests
    
    
    
    
    
    
    
    
    
    
    12,463
    
    
    
    
    
    
    
    12,463Stockholders Equity
    
    
    996,155
    
    
    
    871,794
    
    
    
    305,862
    
    
    
    (1,177,656
    )
    
    
    996,155$
    1,067,708
    
    
    $
    1,051,301
    
    
    $
    592,154
    
    
    $
    (1,170,879
    )
    
    $
    1,540,284
 21




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2005
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash provided by (used in) by operating activities
    
    $
    120,395
    
    
    $
    (25,493
    )
    
    $
    44,189
    
    
    $
    (13,402
    )
    
    $
    125,689Cash Flows From Investing Activities:Capital expenditures for property, plant and equipment
    
    
    
    
    
    
    (12,983
    )
    
    
    (7,341
    )
    
    
    
    
    
    
    (20,324
    )Acquisition of businesses, net of cash acquired
    
    
    (28,725
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,725
    )Proceeds from sale of businesses, net of cash disposed
    
    
    
    
    
    
    2,521
    
    
    
    
    
    
    
    
    
    
    
    2,521Other, net
    
    
    
    
    
    
    (3,719
    )
    
    
    132
    
    
    
    
    
    
    
    (3,587
    )Net cash used in investing activities
    
    
    (28,725
    )
    
    
    (14,181
    )
    
    
    (7,209
    )
    
    
    
    
    
    
    (50,115
    )Cash Flows From Financing Activities:Borrowings on revolver debt, net
    
    
    70,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,000Repayments on debt, net
    
    
    (174,905
    )
    
    
    (3,086
    )
    
    
    
    
    
    
    
    
    
    
    (177,991
    )Borrowings (repayments) on debt between subsidiaries, net
    
    
    4,753
    
    
    
    16,782
    
    
    
    (21,535
    )
    
    
    
    
    
    
    Debt redemption premium
    
    
    (43,778
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,778
    )Debt issue costs
    
    
    (6,041
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,041
    )Proceeds from stock option exercises
    
    
    59,276
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,276Dividends paid
    
    
    
    
    
    
    
    
    
    
    (13,402
    )
    
    
    13,402
    
    
    
    Other, net
    
    
    (975
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (975
    )Net cash (used in) provided by financing activities
    
    
    (91,670
    )
    
    
    13,696
    
    
    
    (34,937
    )
    
    
    13,402
    
    
    
    (99,509
    )Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    
    
    
    
    483
    
    
    
    
    
    
    
    483Net Increase (Decrease) in Cash
    
    
    
    
    
    
    (25,978
    )
    
    
    2,526
    
    
    
    
    
    
    
    (23,452
    )Cash at Beginning of Period
    
    
    
    
    
    
    30,721
    
    
    
    16,831
    
    
    
    
    
    
    
    47,552Cash at End of Period
    
    $
    
    
    
    $
    4,743
    
    
    $
    19,357
    
    
    $
    
    
    
    $
    24,100
 22




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   General
  License and Royalty Agreement
  Critical Accounting Policies and Estimates
  Revenue Recognition
   23




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##### Table of Contents



Stock-Based Compensation
     Market Trends
  24




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##### Table of Contents



Three Months EndedSeptember 30,2006
    
    2005WTI Oil(a)Average
    
    $
    70.48
    
    
    $
    63.18Ending
    
    
    62.91
    
    
    
    66.24Henry Hub Gas(b)Average
    
    $
    6.12
    
    
    $
    9.84Ending
    
    
    3.63
    
    
    
    14.50North American Rig Count(c)Average
    
    
    2,213
    
    
    
    1,925Ending
    
    
    2,185
    
    
    
    1,949International Rig Count(c)Average
    
    
    941
    
    
    
    859Ending
    
    
    949
    
    
    
    856
 
 (a)
    
    Price per barrel of West Texas Intermediate (WTI) crude. Source: Bloomberg Energy/Commodity
Service.(b)
    
    Price per MMBtu. Source: Bloomberg Energy/Commodity Service.(c)
    
    Source: Baker Hughes Rig Count (International Rig Count excludes China, the former Soviet
Union and certain embargoed countries). Future Market Trends and Expectations
      25




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In thousands)Revenues:Drilling Products and
Services
    
    $
    214,375
    
    
    $
    153,173
    
    
    
    40
    %
    
    $
    622,220
    
    
    $
    425,879
    
    
    
    46
    %Drill Bits
    
    
    128,001
    
    
    
    100,132
    
    
    
    28
    %
    
    
    361,031
    
    
    
    283,847
    
    
    
    27
    %Tubular Technology and
Services
    
    
    108,170
    
    
    
    98,923
    
    
    
    9
    %
    
    
    313,229
    
    
    
    251,545
    
    
    
    25
    %Corporate and Other
    
    
    803
    
    
    
    
    
    
    
    100
    %
    
    
    1,078
    
    
    
    
    
    
    
    100
    %Total Revenues
    
    $
    451,349
    
    
    $
    352,228
    
    
    
    28
    %
    
    $
    1,297,558
    
    
    $
    961,271
    
    
    
    35
    %Operating Income (Loss):Drilling Products and
Services
    
    $
    78,910
    
    
    $
    47,008
    
    
    
    68
    %
    
    $
    222,671
    
    
    $
    126,559
    
    
    
    76
    %Drill Bits
    
    
    66,386
    
    
    
    25,735
    
    
    
    158
    %
    
    
    142,758
    
    
    
    67,925
    
    
    
    110
    %Tubular Technology and
Services
    
    
    28,523
    
    
    
    25,753
    
    
    
    11
    %
    
    
    89,003
    
    
    
    60,239
    
    
    
    48
    %Corporate and Other
    
    
    (13,378
    )
    
    
    (13,645
    )
    
    
    (2
    %)
    
    
    (49,548
    )
    
    
    (36,408
    )
    
    
    36
    %Total Operating Income
    
    $
    160,441
    
    
    $
    84,851
    
    
    
    89
    %
    
    $
    404,884
    
    
    $
    218,315
    
    
    
    85
    %
 Consolidated Revenues and Operating Income
 Results for the three- and nine-month periods ended September 30, 2006 and 2005
    Drilling Products and Services
 Results for the three- and nine-month periods ended September 30, 2006 and 2005
  26




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##### Table of Contents



Drill Bits
 Results for the three- and nine-month periods ended September 30, 2006 and 2005
  Tubular Technology and Services
 Results for the three- and nine-month periods ended September 30, 2006 and 2005
  Corporate and Other
 Results for the three- and nine-month periods ended September 30, 2006 and 2005
  Other Items
    27




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##### Table of Contents



Liquidity and Capital Resources
 Overview
  Historical Cash Flows
  Nine Months EndedSeptember 30,2006
    
    2005(In thousands)Net Cash Provided by Operating Activities
    
    $
    265,028
    
    
    $
    125,689Net Cash Used in Investing Activities
    
    
    (69,381
    )
    
    
    (50,115
    )Net Cash Used in Financing Activities
    
    
    (125,718
    )
    
    
    (99,509
    )
 Operating Activities
  Investing Activities
  Capital Expenditures
  Financing Activities
  28




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##### Table of Contents



Amended Credit Facility
      Long-Term Debt
   Subsequent Events
 Andergauge Acquisition
  Stock Repurchase Program
  29




---



##### Table of Contents



Recent Accounting Pronouncements
  Forward-Looking Statements and Exposures
  Risk Factors and Exposures
  30




---



##### Table of Contents



Off-Balance Sheet Financing
  
 ITEM 3. Quantitative and Qualitative Market Risk Disclosures
 Foreign Currency Risk
  Interest Rates
  
 ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  31




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##### Table of Contents



PART II
 
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity in Securities and Use of Proceeds
  Number of
    
    
    
    
    
    
    Total Number of SharesShares
    
    
    Average Price
    
    
    Purchased as Part of aPeriod
    
    Purchased (a)
    
    
    Per Share
    
    
    Publicly Announced Plan (b)July 1 - 31, 2006
    
    
    407,724
    
    
    $
    39.17
    
    
    
    404,300August 1 - 31, 2006
    
    
    504,031
    
    
    
    41.82
    
    
    
    500,000September 1 - 30, 2006
    
    
    1,270,625
    
    
    
    38.38
    
    
    
    1,264,700Total
    
    
    2,182,380
    
    
    $
    39.32
    
    
    
    2,169,000
 
 (a)
    
    Of the 2,182,380 shares purchased during the three-month period ended September 30, 2006,
13,380 shares were purchased by the trustee for our executive deferred compensation plan for the
benefit of the plan participants using funds directed by the plan participants and funds matched by
us as provided in the plan. These share purchases were not part of a publicly announced program to
purchase common shares.(b)
    
    In February 2006, our Board of Directors approved a stock repurchase program that authorizes
the repurchase of up to $150 million of our common stock with no established expiration date. For
the three-month period ended September 30, 2006, we repurchased 2.2 million shares at a total cost
of $85.3 million. Such shares are reflected in the accompanying Condensed Consolidated Balance
Sheets as Treasury Stock. At September 30, 2006, there is $13.2 million remaining under this
program for future repurchases. In October 2006, our Board of Directors approved an increase in
our stock repurchase program by $200 million (to $350 million from $150 million). 32




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##### Table of Contents



ITEM 6. Exhibits
 Exhibit Number
    
    Description10.1
    
    Amended And Restated Credit Agreement, dated August 31,
2006, among Grant Prideco Inc., certain of its
subsidiaries, the lenders from time to time parties
thereto, Bank of America, N.A., as syndication agent,
and Wells Fargo Bank, National Association, as
administrative agent (incorporated by reference to
Exhibit 10.1 to Grant Prideco, Inc.s Current Report on
Form 8-K, filed on September 6, 2006).31.1
    
    Certification of Michael McShane31.2
    
    Certification of Matthew D. Fitzgerald32.1
    
    Section 1350 Certification
 33




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##### Table of Contents



SIGNATURES
  GRANT PRIDECO, INC.By:
    /s/ MATTHEW D. FITZGERALDMatthew D. FitzgeraldSr. Vice President and Chief Financial OfficerBy:

/s/ GREG L. BOANEGreg L. BoaneCorporate Controller and Principal Accounting Officer  34




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##### Table of Contents



Exhibit Number
    
    Description10.1
    
    Amended And Restated Credit Agreement, dated August 31,
2006, among Grant Prideco Inc., certain of its
subsidiaries, the lenders from time to time parties
thereto, Bank of America, N.A., as syndication agent,
and Wells Fargo Bank, National Association, as
administrative agent (incorporated by reference to
Exhibit 10.1 to Grant Prideco, Inc.s Current Report on
Form 8-K, filed on September 6, 2006).31.1
    
    Certification of Michael McShane31.2
    
    Certification of Matthew D. Fitzgerald32.1
    
    Section 1350 Certification
 35