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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 March 31, 2005 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. East
Suite 900Houston, Texas
    
    77060(Address of Principal Executive Offices)
    
    (Zip Code)
 (281) 878-8000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the issuer is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: Title of Each Class
    
    
    
    Outstanding at May 3, 2005Common Stock, par value $0.01 per share
    
    
    
    124,475,550




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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 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.
Consolidated Statements of Operations
(Unaudited) Three Months Ended March 31,2005
    
    
    2004(In thousands, except per share data)RestatedRevenues
    
    $
    292,096
    
    
    $
    191,481Operating Expenses:Cost of sales
    
    
    167,916
    
    
    
    113,892Sales and marketing
    
    
    31,704
    
    
    
    29,140General and administrative
    
    
    24,522
    
    
    
    19,452Research and engineering
    
    
    5,763
    
    
    
    5,352Other charges
    
    
    
    
    
    
    2,734229,905
    
    
    
    170,570Operating Income
    
    
    62,191
    
    
    
    20,911Interest Expense
    
    
    (10,010
    )
    
    
    (10,495
    )Other Income, Net
    
    
    1,137
    
    
    
    2,025Equity Income in Unconsolidated Affiliates
    
    
    2,387
    
    
    
    194Income From Continuing Operations Before Income Taxes
and Minority Interests
    
    
    55,705
    
    
    
    12,635Income Tax Provision
    
    
    (17,063
    )
    
    
    (4,811
    )Income from Continuing Operations Before Minority
Interests
    
    
    38,642
    
    
    
    7,824Minority Interests
    
    
    (1,976
    )
    
    
    (1,260
    )Income from Continuing Operations
    
    
    36,666
    
    
    
    6,564Income from Discontinued Operations, Net of Tax
    
    
    
    
    
    
    642Net Income
    
    $
    36,666
    
    
    $
    7,206Basic Net Income Per Share:Income from continuing operations
    
    $
    0.29
    
    
    $
    0.05Income from discontinued operations
    
    
    
    
    
    
    0.01Net income
    
    $
    0.29
    
    
    $
    0.06Basic weighted average shares outstanding
    
    
    125,234
    
    
    
    122,044Diluted Net Income Per Share:Income from continuing operations
    
    $
    0.29
    
    
    $
    0.05Income from discontinued operations
    
    
    
    
    
    
    0.01Net income
    
    $
    0.29
    
    
    $
    0.06Diluted weighted average shares outstanding
    
    

    128,352
    
    
    
    124,262
 The accompanying notes are an integral part of these consolidated financial statements. 2




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GRANT PRIDECO, INC.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash
    
    $
    74,344
    
    
    $
    47,552Restricted cash
    
    
    824
    
    
    
    231Accounts receivable, net of allowance for uncollectible
accounts of $7,854 and $8,024, respectively
    
    
    219,143
    
    
    
    202,084Inventories
    
    
    303,192
    
    
    
    288,820Deferred charges
    
    
    19,728
    
    
    
    17,204Current deferred tax assets
    
    
    27,514
    
    
    
    26,473Prepaid expenses
    
    
    17,918
    
    
    
    12,033Other current assets
    
    
    3,650
    
    
    
    2,370666,313
    
    
    
    596,767Property, Plant and Equipment, Net
    
    
    240,958
    
    
    
    244,305Goodwill
    
    
    394,261
    
    
    
    393,993Intangible Assets, Net
    
    
    42,907
    
    
    
    43,807Investments In and Advances to Unconsolidated Affiliates
    
    
    56,715
    
    
    
    49,159Other Assets
    
    
    14,454
    
    
    
    16,435$
    1,415,608
    
    
    $
    1,344,466LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of long-term
debt
    
    $
    7,009
    
    
    $
    4,181Accounts payable
    
    
    71,251
    
    
    
    71,741Accrued labor and benefits
    
    
    46,836
    
    
    
    53,060Deferred revenues
    
    
    25,993
    
    
    
    21,413Federal income taxes payable
    
    
    21,241
    
    
    
    8,144Current deferred tax liabilities
    
    
    3,084
    
    
    
    3,108Other accrued liabilities
    
    
    37,914
    
    
    
    33,854213,328
    
    
    
    195,501Long-Term Debt
    
    
    377,815
    
    
    
    377,773Deferred Tax Liabilities
    
    
    37,314
    
    
    
    36,433Other Long-Term Liabilities
    
    
    13,826
    
    
    
    13,224Commitments and Contingencies
    
    
    
    
    
    
    Minority Interests
    
    
    17,970
    
    
    
    15,994Stockholders Equity:Preferred stock, $0.01 par value
    
    
    
    
    
    
    Common stock, $0.01 par value
    
    
    1,254
    
    
    
    1,245Capital in excess of par value
    
    
    548,879
    
    
    
    530,687Unearned compensation
    
    
    (11,849
    )
    
    
    (8,300
    )Retained earnings
    
    
    228,955
    
    
    
    192,289Accumulated other comprehensive loss
    
    
    (13,062
    )
    
    
    (12,291
    )Treasury stock, at cost
    
    
    (9,438
    )
    
    
    (8,483
    )Deferred compensation obligation
    
    
    10,616
    
    
    
    10,394755,355
    
    
    
    705,541$
    1,415,608
    
    
    $
    1,344,466
 The accompanying notes are an integral part of these consolidated financial statements. 3




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GRANT PRIDECO, INC.
Consolidated Statements of Cash Flows
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004(In thousands)RestatedCash Flows From Operating Activities:Net income
    
    $
    36,666
    
    
    $
    7,206Adjustments to reconcile net income to net cash provided by
operating activities:Gain on sale of businesses, net
    
    
    
    
    
    
    (774
    )Depreciation and amortization
    
    
    11,118
    
    
    
    10,439Deferred income tax
    
    
    (135
    )
    
    
    2,848Equity income in unconsolidated affiliates
    
    
    (2,387
    )
    
    
    (194
    )Stock-based compensation expense
    
    
    2,194
    
    
    
    880Deferred compensation expense
    
    
    787
    
    
    
    672Minority interests in consolidated subsidiaries
    
    
    1,976
    
    
    
    1,260Loss (gain) on sale of assets
    
    
    1,226
    
    
    
    (2,098
    )Change in operating assets and liabilities, net of effects of businesses
acquired:Accounts receivable
    
    
    (19,174
    )
    
    
    (9,531
    )Inventories
    
    
    (14,525
    )
    
    
    (8,699
    )Deferred charges
    
    
    (2,524
    )
    
    
    (22,945
    )Other current assets
    
    
    (2,132
    )
    
    
    (2,665
    )Other assets
    
    
    1,634
    
    
    
    1,160Accounts payable
    
    
    (1,399
    )
    
    
    6,512Deferred revenues
    
    
    4,580
    
    
    
    28,076Other accrued liabilities
    
    
    (1,680
    )
    
    
    5,285Other, net
    
    
    12,588
    
    
    
    (2,142
    )Net cash provided by operating activities
    
    
    28,813
    
    
    
    15,290Cash Flows From Investing Activities:Proceeds from sales of businesses, net of cash disposed
    
    
    
    
    
    
    2,180Investments in and advances to unconsolidated affiliates
    
    
    (1,761
    )
    
    
    (193
    )Capital expenditures for property, plant and equipment
    
    
    (9,099
    )
    
    
    (6,291
    )Proceeds from sales of fixed assets
    
    
    265
    
    
    
    2,516Net cash used in investing activities
    
    
    (10,595
    )
    
    
    (1,788
    )Cash Flows From Financing Activities:Repayments on debt, net
    
    
    (782
    )
    
    
    (17,853
    )Purchases of treasury stock
    
    
    (1,177
    )
    
    
    (1,005
    )Proceeds from stock option exercises
    
    
    8,895
    
    
    
    3,380Employee stock purchase plan purchases
    
    
    1,896
    
    
    
    928Net cash provided by (used in) financing activities
    
    
    8,832
    
    
    
    (14,550
    )Effect of Exchange Rate Changes on Cash
    
    
    (258
    )
    
    
    76Net Increase (Decrease) in Cash
    
    
    26,792
    
    
    
    (972
    )Cash at Beginning of Period
    
    
    47,552
    
    
    
    19,230Cash at End of Period
    
    $
    74,344
    
    
    $
    18,258
 The accompanying notes are an integral part of these consolidated financial statements. 4




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GRANT PRIDECO, INC.
Notes to Consolidated Financial Statements
(Unaudited) 1. General Basis of Presentation The accompanying consolidated financial statements of Grant Prideco, Inc. (the Company or
Grant Prideco) have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required by
generally accepted accounting principles for complete financial statements. All significant
transactions between Grant Prideco and its consolidated subsidiaries have been eliminated. The
interim financial statements have not been audited. However, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of
the financial statements have been included. Results of operations for interim periods are not
necessarily indicative of the results of operations that may be expected for the entire year. The
balance sheet at December 31, 2004 has been derived from the audited financial statements at that
date but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These interim financial statements should
be read in conjunction with the audited financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2004. The Annual Report on Form 10-K for the year ended December 31, 2004 includes disclosures
related to significant accounting policies including revenue recognition, deferred revenues and
charges, inventory valuation, fair value estimations for assets acquired and liabilities assumed in
a business combination, impairment of long-lived assets, impairment of goodwill and intangible
assets, valuation allowance for deferred tax assets, estimates related to contingent liabilities
and future claims and pension liabilities. As a result of the Companys testing of internal controls as of December 31, 2004 in
connection with Sarbanes-Oxley Section 404 requirements, the Company reported a material weakness
in its revenue recognition practices. The material weakness relates to inadequate documentation
supporting the Companys revenue recognition procedures at its Drilling Products and Services and
Tubular Technology and Services segments. As a result of the material weakness, the Company tested
revenue transactions and determined that while title and risk of loss had transferred to the
customer, in certain instances the supporting documentation did not meet all of the requirements to
recognize revenue prior to the products being in the physical possession of the customer.
Therefore, the revenue and profits from these transactions are required to be deferred until the
period in which the customer takes physical possession. The first three quarters of 2004 were
restated to properly reflect these deferred revenue transactions. The impact of this restatement on
the first quarter of 2004 was revenues were decreased by $28.1 million, operating income was
decreased by $5.2 million, net income from continuing operations was decreased by $3.4 million and
basic and diluted net income per share were decreased by $0.03. All sales transactions that did not meet all of the requirements
to recognize revenue prior to the products being in the physical possession of the customer have been recorded as deferred revenues
and the related inventory costs are recorded as deferred charges in the accompanying Consolidated Balance Sheets. Certain reclassifications of prior year balances have been made to conform such amounts to
corresponding 2005 classifications. These reclassifications have no impact on net income. During
the second quarter of 2004, the Company completed the sale of its Texas Arai division. Accordingly,
first quarter of 2004 results of operations of Texas Arai have been reclassified as discontinued
operations. See Note 13 for further details. Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements, and the related reported
amounts of revenues and expenses during the reporting period. The significant estimates made by
management in the accompanying consolidated financial statements include reserves for inventory
obsolescence, restructuring, self-insurance, valuation of goodwill and long-lived assets, allowance
for doubtful accounts, determination of income taxes, contingent liabilities and purchase
accounting allocations. Actual results could differ from those estimates. 5




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2. Stock-Based Compensation Pro Forma Stock Option Compensation Expense The Company has elected to account for its stock-based compensation using the intrinsic value
method of accounting in accordance with Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, as allowed under Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and as amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure. Under this method, no
compensation expense is recognized when the number of shares granted is known and the exercise
price of the stock option at the time of grant is equal to or greater than the market price of the
Companys common stock. Reported net income does include compensation expense associated with
restricted stock awards and accelerated vesting of certain stock awards. Had compensation expense for stock options been determined based on the fair value at the
grant dates for awards under the Companys incentive compensation plans, the Companys net income
and net income per share would have been reduced to the pro forma amounts indicated as follows: Three Months Ended March 31,2005
    
    
    2004(In thousands, except per share data)Net Income As Reported
    
    $
    36,666
    
    
    $
    7,206Add: stock-based employee compensation expense included in reported
net income, net of related tax effects
    
    
    1,522
    
    
    
    914Deduct: stock-based employee compensation expense determined under
the fair value method for all awards, net of related tax effects
    
    
    (2,564
    )
    
    
    (2,097
    )Pro forma net income
    
    $
    35,624
    
    
    $
    6,023Net Income Per Share:Basic as reported
    
    $
    0.29
    
    
    $
    0.06Basic pro forma
    
    $
    0.28
    
    
    $
    0.05Diluted as reported
    
    $
    0.29
    
    
    $
    0.06Diluted pro forma
    
    $
    0.28
    
    
    $
    0.05
 The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Restricted Stock During the three-month period ended March 31, 2005, the Company awarded 195,000 shares of
restricted stock to officers and other key employees under the Companys 2000 Employee Stock Option
and Restricted Stock Plan. The restricted shares vest on the ninth anniversary of the date of
grant, however there is an accelerated vesting schedule based on the achievement of certain
predetermined performance metrics. Beginning with the third anniversary date of the grant through
the eighth anniversary date, the performance metrics are evaluated annually and early vesting will
occur for meeting the performance goals. Restricted shares are subject to certain restrictions on
ownership and transferability when granted. These terms are equivalent to the 2004 restricted
stock award except there is no tax gross up bonus component. 6




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3. Comprehensive Income Comprehensive income includes changes in stockholders equity during the periods that do not
result from transactions with stockholders. The Companys total comprehensive income was as
follows: Three Months EndedMarch 31,2005
    
    
    2004(In thousands)Net Income
    
    $
    36,666
    
    
    $
    7,206Foreign Currency Translation Adjustments
    
    
    (771
    )
    
    
    696Total Comprehensive Income
    
    $
    35,895
    
    
    $
    7,902
 4. Inventories Inventories by category are as follows: March 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Raw Materials, Components and Supplies
    
    $
    119,797
    
    
    $
    104,543Work in Process
    
    
    68,604
    
    
    
    59,308Finished Goods
    
    
    114,791
    
    
    
    124,969$
    303,192
    
    
    $
    288,820
 5. Property, Plant and Equipment Net property, plant and equipment consisted of the following: March 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Land
    
    $
    21,529
    
    
    $
    21,521Buildings and Improvements
    
    
    83,931
    
    
    
    78,557Machinery and Equipment
    
    
    270,449
    
    
    
    269,517Furniture and Fixtures
    
    
    29,666
    
    
    
    29,058Construction in Progress
    
    
    12,994
    
    
    
    19,655418,569
    
    
    
    418,308Less: Accumulated Depreciation
    
    
    (177,611
    )
    
    
    (174,003
    )$
    240,958
    
    
    $
    244,305
 6. Other Charges In the first quarter of 2004, the Company incurred $2.7 million of pre-tax charges, $1.7
million net of tax. These charges include $1.8 million due to lease termination, severance and
other exit costs related to the Drilling Products and Services rationalization program and $0.9
million of severance costs related to the Tubular Technology and Services organizational
restructuring. The remaining liability balance at March 31, 2005
included in Other Accrued Liabilities in the Consolidated Balance Sheets was $1.1 million related to the lease termination
costs, which is expected to be fully utilized by June 2005. 7




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7. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflect the potential
dilution from the exercise or conversion of securities into common stock. Common stock equivalent
shares are excluded from the computation if their effect was antidilutive. The computation of
diluted earnings per share for the three-month period ended March 31, 2005 did not exclude common
stock equivalent shares because the average market price of the common stock for the applicable
period was greater than exercise prices. For the three-month period ended March 31, 2004, the
dilutive earnings per share computation excluded options to purchase 3.9 million shares of common stock because their exercise prices were greater than the average market
price of the common stock for the applicable period. 8. Senior Credit Facility As of March 31, 2005 the Company did not have any outstanding borrowings under its $190
million Senior Credit Facility and $9.3 million of revolver availability had been reserved to
support outstanding letters of credit. Net borrowing availability was $175.0 million at March 31,
2005. 9. Goodwill and Other Intangible Assets The carrying amount of goodwill by reporting unit is as follows: Drilling
    
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    
    TechnologyServices
    
    
    Drill Bits
    
    
    and Services
    
    
    Total(In thousands)Balance, December 31, 2004
    
    $
    130,127
    
    
    $
    166,733
    
    
    $
    97,133
    
    
    $
    393,993Translation and Other Adjustments
    
    
    188
    
    
    
    80
    
    
    
    
    
    
    
    268Balance, March 31, 2005
    
    $
    130,315
    
    
    $
    166,813
    
    
    $
    97,133
    
    
    $
    394,261
 Intangible assets of $42.9 million and $43.8 million, net of accumulated amortization of
$11.4 million and $10.3 million, as of March 31, 2005 and December 31, 2004, respectively, are
recorded at cost and are amortized on a straight-line basis. The Companys intangible assets
primarily consist of patents, technology licenses, customer relationships, trademarks and covenants
not to compete that are amortized over the definitive terms of the related agreement or the
Companys estimate of their useful lives if there are no definitive terms. The following table
shows the Companys intangible assets by asset category: March 31, 2005
    
    
    December 31, 2004Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    NetIntangibles
    
    
    Amortization
    
    
    Intangibles
    
    
    Intangibles
    
    
    Amortization
    
    
    Intangibles(In thousands)Patents
    
    $
    43,532
    
    
    $
    (6,750
    )
    
    $
    36,782
    
    
    $
    43,380
    
    
    $
    (5,908
    )
    
    $
    37,472Technology Licenses
    
    
    1,438
    
    
    
    (503
    )
    
    
    935
    
    
    
    1,438
    
    
    
    (498
    )
    
    
    940Customer Relationships
    
    
    4,600
    
    
    
    (399
    )
    
    
    4,201
    
    
    
    4,600
    
    
    
    (335
    )
    
    
    4,265Trademarks
    
    
    1,610
    
    
    
    (882
    )
    
    
    728
    
    
    
    1,610
    
    
    
    (815
    )
    
    
    795Covenants Not To Compete
    
    
    3,125
    
    
    
    (2,864
    )
    
    
    261
    
    
    
    3,125
    
    
    
    (2,790
    )
    
    
    335$
    54,305
    
    
    $
    (11,398
    )
    
    $
    42,907
    
    
    $
    54,153
    
    
    $
    (10,346
    )
    
    $
    43,807
 Amortization
expense related to intangible assets for the three-month periods ended March
31, 2005 and 2004 was $1.1 million and $1.1 million, respectively, and was recorded in General and
Administrative and Research and Engineering expenses in the Consolidated Statements of
Operations. Amortization expense related to existing intangible assets for the remainder of 2005 is
estimated to be $3.4 million and for each of the years 2006 through 2010 is estimated to be
approximately $3.9 million, $3.6 million, $3.2 million, $3.0 million and $2.9 million,
respectively. 8




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10. Restricted Cash At March 31, 2005, the Company had $0.8 million of restricted cash. The restricted cash
relates to the Companys 60% interest in Tianjin Grant Prideco and is subject to dividend and
distribution restrictions; however, such cash is available to fund the local operations in China. 11. Segment Information Business Segments The Company operates through three primary business segments: Drilling Products and Services,
Drill Bits and Tubular Technology and Services. The Companys Drilling Products and Services
segment manufactures and sells a full range of proprietary and API drill pipe, drill collars,
heavyweight drill pipe and accessories. The Drill Bits segment designs, manufactures and
distributes fixed-cutter and roller-cone drill bits. The Companys Tubular Technology and Services
segment designs, manufactures and sells a line of premium connections and associated premium
tubular products and accessories for oil country tubular goods and offshore applications. The
Company also has an Other segment that included the Companys industrial drill pipe operations and
its construction casing and water well operations. The Company exited these product lines during
2003 and as of December 31, 2004, this segment had liquidated the remaining industrial product
inventories. Currently, this segments only remaining activity
are costs associated with the
Companys POS-GRIP technology for subsea applications. Included in Corporate are general
corporate expenses. Drilling
    
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    
    TechnologyServices
    
    
    Drill Bits
    
    

    and Services
    
    
    Other
    
    
    Corporate
    
    
    TotalThree Months Ended March 31,
    
    (In thousands)2005Revenues from Unaffiliated
Customers
    
    $
    128,350
    
    
    $
    90,626
    
    
    $
    73,120
    
    
    $
    
    
    
    $
    
    
    
    $
    292,096Operating Income (Loss)
    
    
    36,261
    
    
    
    21,622
    
    
    
    15,261
    
    
    
    (110
    )
    
    
    (10,843
    )
    
    
    62,191Income from Continuing Operations
Before Income Taxes and Minority
Interests
    
    
    39,203
    
    
    
    19,151
    
    
    
    14,444
    
    
    
    (110
    )
    
    
    (16,983
    )
    
    
    55,7052004Revenues from Unaffiliated
Customers
    
    $
    69,815
    
    
    $
    79,258
    
    
    $
    41,521
    
    
    $
    887
    
    
    $
    
    
    
    $
    191,481Operating Income (Loss)
    
    
    8,580
    
    
    
    19,285
    
    
    
    685
    
    
    
    (1,179
    )
    
    
    (6,460
    )
    
    
    20,911Income from Continuing Operations
Before Income Taxes and Minority
Interests
    
    
    10,042
    
    
    
    17,281
    
    
    
    1,255
    
    
    
    (1,113
    )
    
    
    (14,830
    )
    
    
    12,635
 12. Dispositions On March 4, 2004, the Company sold its Plexus Ocean Systems (POS) rental wellhead business for
$1.3 million in net cash. The POS operations were included in the Companys Other segment. The
Company recognized a pre-tax loss of $0.1 million on the sale, which was recorded in the
Consolidated Statements of Operations in Other Income, Net. For the three-month period ended
March 31, 2004, revenues related to POS included in the Other segments results was $0.2 million
and operating results were break-even. 13. Discontinued Operations On April 23, 2004, the Company sold the assets and business of its Texas Arai division.
Accordingly, the three-month period ended March 31, 2004 now reflects the operations of Texas Arai
as discontinued operations. Summarized financial information for
the discontinued operations of Texas Arai included in the Consolidated Statements of
Operations is as follows: 9




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##### Table of Contents



Three Months EndedMarch 31, 2004(In thousands)Revenues
    
    $
    10,239Income Before Income Taxes
    
    
    988Income Tax Provision
    
    
    (346
    )Income from Operations, Net of Tax
    
    $
    642
 Intercompany sales and profit related to Texas Arai, which were eliminated from the summarized
information above, were not material for the periods presented. 14. Pension Plans U.S. Pension Plan The following table shows the components of Net Periodic Benefit Cost for the Companys Reed
Hourly Pension Plan: Three Months Ended March 31,2005
    
    
    2004(In thousands)Service Cost
    
    $
    74
    
    
    $
    96Interest Cost
    
    
    143
    
    
    
    214Expected Return on Plan Assets
    
    
    (117
    )
    
    
    (141
    )Administration Expenses
    
    
    33
    
    
    
    13Net Periodic Benefit Cost
    
    $
    133
    
    
    $
    182
 The Company made contributions of $0.2 million during the first quarter of 2005 to meet the
minimum funding requirements for the 2004 plan year. Estimated contributions for the 2005 plan
year are expected to be $1.2 million. Non-U.S. Pension Plan The following table shows the components of Net Periodic Benefit Cost for the Companys UK
Hycalog Retirement Death Benefit Scheme: Three Months EndedMarch 31, 2005(In thousands)Interest Cost
    
    $
    244Expected Return on Plan Assets
    
    
    (263
    )Amortization of Gain
    
    
    75Net Periodic Benefit Cost
    
    $
    56
 There was no net periodic benefit pension cost recorded for the three-month period ended March
31, 2004. In addition, the Company does not expect to make any contributions in 2005 related to
this plan. 15. Investments in Unconsolidated Affiliates The Companys 50.01% owned joint venture, Voest-Alpine Tubulars (Voest-Alpine), is accounted
for under the equity method of accounting due to the minority owner having substantive
participating rights. Summarized financial information for Voest-Alpine is as follows: 10




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##### Table of Contents



Three Months Ended March 31,2005
    
    
    2004(In thousands)Net Sales
    
    $
    103,367
    
    
    $
    63,092Gross Profit
    
    
    20,241
    
    
    
    5,044Net Income
    
    
    8,367
    
    
    
    849Companys Equity Income
    
    
    4,315
    
    
    
    522Dividends Received
    
    
    
    
    
    
    
 The Companys equity in earnings differs from its proportionate share of net income due to the
elimination of intercompany profit on Voest-Alpine sales to the Company. 16. Recent Accounting Pronouncements In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that a
conditional asset retirement obligation, as used in SFAS 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an asset retirement activity in which the
timing and/or method of the settlement are conditional on a future event that may or may not be
within the control of the entity. Accordingly, an entity is required to recognize a liability for
the fair value of a conditional asset retirement obligation if the fair value can be reasonably
estimated. FIN 47 is effective January 1, 2006, with early adoption allowed. The Company does not
expect the adoption of this Interpretation will have a material effect on its consolidated
financial statements. In December 2004, the FASB issued the revised SFAS No. 123, Share-Based Payment (SFAS 123R),
which addresses the accounting for share-based payment transactions in which a company obtains
employee services in exchange for (a) equity instruments of the company or (b) liabilities that are
based on the fair value of the companys equity instruments or that may be settled by the issuance
of such equity instruments. This Statement eliminates the ability to account for employee
share-based payment transactions using APB No. 25 and requires instead that such transactions be
accounted for using the grant-date fair value based method. This Statement will be effective as of
the beginning of the first interim period of the fiscal year beginning after June 15, 2005 (January
1, 2006 for the Company). This Statement applies to all awards granted or modified after the
Statements effective date. In addition, compensation cost for the unvested portion of previously
granted awards that remain outstanding on the Statements effective date shall be recognized on or
after the effective date, as the related services are rendered, based on the awards grant-date
fair value as previously calculated for the pro-forma disclosure under SFAS 123. The Company expects that upon the adoption of SFAS 123R, the Company will apply the modified
prospective application transition method, as permitted by the Statement. Under such transition
method, upon the adoption of SFAS 123R, the Companys
financial statements for periods prior to the effective date of the Statement will not be
restated. The impact of this Statement on the Companys financial statements or its results of
operations in 2006 and beyond will depend upon various factors, among them the Companys future
compensation strategy. The Company expects that the effect of applying this Statement on the
Companys results of operations in 2006 as it relates to existing option plans would not be
materially different from the SFAS 123 pro forma effect previously reported. The American Jobs Creation Act of 2004 (the Act) enacted on October 22, 2004 provides for a
temporary 85% dividends received deduction on certain foreign earnings repatriated during a
one-year period. The deduction would result in an approximate 5.25% federal tax rate on the
repatriated foreign earnings. To qualify for the deduction, certain criteria in the Act must be
satisfied. The Company is in the process of evaluating whether it will repatriate foreign earnings
under the repatriation provisions of the Act and if so the amount that will be repatriated. Through
March 31, 2005, the Company has not provided deferred taxes on certain foreign earnings because
such earnings were intended to be indefinitely reinvested outside the United States. Whether the
Company will take advantage of this provision depends on a number of factors including reviewing
future Congressional guidance before a decision can be made. Until that time, the Company will make
no change in its current intention to indefinitely reinvest certain earnings of its foreign
subsidiaries. If the Company were to repatriate these earnings, a one-time tax benefit to the
Companys consolidated results of operations of up to approximately $1.4 million could occur. 11




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##### Table of Contents



17. Subsidiary Guarantor Financial Information The following unaudited condensed consolidating statements of operations for the three-month
periods ended March 31, 2005 and 2004, condensed consolidating
balance sheets as of March 31, 2005
and December 31, 2004, and condensed consolidating statements of cash flows for the
three-month periods ended March 31, 2005 and 2004 are provided for the Companys domestic subsidiaries that are
guarantors of debt securities issued by the Company. The Companys obligations to pay principal and
interest under the 9% and 9 5/8% Senior Notes are guaranteed on a joint and several basis by all of
the Companys domestic subsidiaries. The guarantees are full and unconditional and the guarantor
subsidiaries are 100% owned by Grant Prideco, Inc. 12




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2005 Non-Parent
    
    
    Guarantors
    
    
    Guarantors

    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    188,664
    
    
    $
    103,432
    
    
    $
    
    
    
    $
    292,096Operating Expenses:Cost of sales
    
    
    
    
    
    
    114,554
    
    
    
    53,362
    
    
    
    
    
    
    
    167,916Selling, general and administrative
    
    
    
    
    
    
    43,040
    
    
    
    18,949
    
    
    
    
    
    
    
    61,989Other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,594
    
    
    
    72,311
    
    
    
    
    
    
    
    229,905Operating Income
    
    
    
    
    
    
    31,070
    
    
    
    31,121
    
    
    
    
    
    
    
    62,191Interest Expense
    
    
    (9,190
    )
    
    
    (798
    )
    
    
    (22
    )
    
    
    
    
    
    
    (10,010
    )Equity in Subsidiaries, Net of Taxes
    
    
    43,041
    
    
    
    
    
    
    
    
    
    
    
    (43,041
    )
    
    
    Other Income (Expense), Net
    
    
    
    
    
    
    2,024
    
    
    
    (887
    )
    
    
    
    
    
    
    1,137Equity Income in Unconsolidated Affiliates
    
    
    
    
    
    
    2,387
    
    
    
    
    
    
    
    
    
    
    
    2,38733,851
    
    
    
    3,613
    
    
    
    (909
    )
    
    
    (43,041
    )
    
    
    (6,486
    )Income Before
Income Taxes
and Minority Interest
    
    
    33,851
    
    
    
    34,683
    
    
    
    30,212
    
    
    
    (43,041
    )
    
    
    55,705Income Tax (Provision) Benefit
    
    
    2,815
    
    
    
    (10,563
    )
    
    
    (9,315
    )
    
    
    
    
    
    
    (17,063
    )Income Before
Minority Interests
    
    
    36,666
    
    
    
    24,120
    
    
    
    20,897
    
    
    
    (43,041
    )
    
    
    38,642Minority Interests
    
    
    
    
    
    
    
    
    
    
    (1,976
    )
    
    
    
    
    
    
    (1,976
    )Net Income
    
    $
    36,666
    
    
    $
    24,120
    
    
    $
    18,921
    
    
    $
    (43,041
    )
    
    $
    36,666
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2004 Non-Parent
    
    
    Guarantors
    
    
    Guarantors

    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    114,488
    
    
    $
    76,993
    
    
    $
    
    
    
    $
    191,481Operating Expenses:Cost of sales
    
    
    
    
    
    
    74,044
    
    
    
    39,848
    
    
    
    
    
    
    
    113,892Selling, general and administrative
    
    
    
    
    
    
    36,441
    
    
    
    17,503
    
    
    
    
    
    
    
    53,944Other charges
    
    
    
    
    
    
    918
    
    
    
    1,816
    
    
    
    
    
    
    
    2,734
    
    
    
    111,403
    
    
    
    59,167
    
    
    
    
    
    
    
    170,570Operating Income
    
    
    
    
    
    
    3,085
    
    
    
    17,826
    
    
    
    
    
    
    
    20,911Interest Expense
    
    
    (9,190
    )
    
    
    (1,172
    )
    
    
    (133
    )
    
    
    
    
    
    
    (10,495
    )Equity in Subsidiaries, Net of Taxes
    
    
    12,941
    
    
    
    
    
    
    
    
    
    
    
    (12,941
    )
    
    
    Other Income (Expense), Net
    
    
    
    
    
    
    4,244
    
    
    
    (2,219
    )
    
    
    
    
    
    
    2,025Equity Income in Unconsolidated Affiliates
    
    
    
    
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    1943,751
    
    
    
    3,266
    
    
    
    (2,352
    )
    
    
    (12,941
    )
    
    
    (8,276
    )Income From Continuing Operations Before
Income Taxes
and Minority Interest
    
    
    3,751
    
    
    
    6,351
    
    
    
    15,474
    
    
    
    (12,941
    )
    
    
    12,635Income Tax (Provision) Benefit
    
    
    3,455
    
    
    
    (3,299
    )
    
    
    (4,967
    )
    
    
    
    
    
    
    (4,811
    )Income From Continuing Operations Before
Minority Interests
    
    
    7,206
    
    
    
    3,052
    
    
    
    10,507
    
    
    
    (12,941
    )
    
    
    7,824Minority Interests
    
    
    
    
    
    
    
    
    
    
    (1,260
    )
    
    
    
    
    
    
    (1,260
    )Income From Continuing Operations
    
    
    7,206
    
    
    
    3,052
    
    
    
    9,247
    
    
    
    (12,941
    )
    
    
    6,564Income From Discontinued Operations, Net of Tax
    
    
    
    
    
    
    642
    
    
    
    
    
    
    
    
    
    
    
    642Net Income
    
    $
    7,206
    
    
    $
    3,694
    
    
    $
    9,247
    
    
    $
    (12,941
    )
    
    $
    7,206
 13




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2005 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)ASSETSCurrent Assets:Cash
    
    $
    
    
    
    $
    54,300
    
    
    $
    20,044
    
    
    $
    
    
    
    $
    74,344Restricted cash
    
    
    
    
    
    
    
    
    
    
    824
    
    
    
    
    
    
    
    824Accounts receivable, net
    
    
    
    
    
    
    122,874
    
    
    
    96,269
    
    
    
    
    
    
    
    219,143Inventories
    
    
    
    
    
    
    203,036
    
    
    
    100,156
    
    
    
    
    
    
    
    303,192Deferred charges
    
    
    
    
    
    
    19,504
    
    
    
    224
    
    
    
    
    
    
    
    19,728Current deferred tax assets
    
    
    
    
    
    
    25,162
    
    
    
    2,352
    
    
    
    
    
    
    
    27,514Other current assets
    
    
    
    
    
    
    10,143
    
    
    
    11,425
    
    
    
    
    
    
    
    21,568
    
    
    
    435,019
    
    
    
    231,294
    
    
    
    
    
    
    
    666,313Property, Plant and Equipment, Net
    
    
    
    
    
    
    138,977
    
    
    
    101,981
    
    
    
    
    
    
    
    240,958Goodwill
    
    
    
    
    
    
    205,998
    
    
    
    188,263
    
    
    
    
    
    
    
    394,261Investment In and Advances to Subsidiaries
    
    
    1,137,983
    
    
    
    
    
    
    
    
    
    
    
    (1,137,983
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    56,715
    
    
    
    
    
    
    
    
    
    
    
    56,715Other Assets
    
    
    5,707
    
    
    
    36,161
    
    
    
    15,493
    
    
    
    
    
    
    
    57,361$
    1,143,690
    
    
    $
    872,870
    
    
    $
    537,031
    
    
    $
    (1,137,983
    )
    
    $
    1,415,608LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    
    
    
    $
    7,009
    
    
    $
    
    
    
    $
    
    
    
    $
    7,009Accounts payable
    
    
    
    
    
    
    41,602
    
    
    
    29,649
    
    
    
    
    
    
    
    71,251Deferred revenues
    
    
    
    
    
    
    25,625
    
    
    
    368
    
    
    
    
    
    
    
    25,993Current deferred tax liabilities
    
    
    
    
    
    
    (10
    )
    
    
    3,094
    
    
    
    
    
    
    
    3,084Other accrued liabilities
    
    
    13,808
    
    
    
    56,803
    
    
    
    35,380
    
    
    
    
    
    
    
    105,99113,808
    
    
    
    131,029
    
    
    
    68,491
    
    
    
    
    
    
    
    213,328Long-Term Debt
    
    
    374,527
    
    
    
    3,288
    
    
    
    
    
    
    
    
    
    
    
    377,815Deferred Tax Liabilities
    
    
    
    
    
    
    9,825
    
    
    
    27,489
    
    
    
    
    
    
    
    37,314Other Long-Term Liabilities
    
    
    
    
    
    
    
    
    
    
    17,970
    
    
    
    
    
    
    
    17,970Commitments and Contingencies
    
    
    
    
    
    
    12,511
    
    
    
    1,315
    
    
    
    
    
    
    
    13,826Minority Interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders Equity
    
    
    755,355
    
    
    
    716,217
    
    
    
    421,766
    
    
    
    (1,137,983
    )
    
    
    755,355$
    1,143,690
    
    
    $
    872,870
    
    
    $
    537,031
    
    
    $
    (1,137,983
    )
    
    $
    1,415,608
 14




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2004 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)ASSETSCurrent Assets:Cash
    
    $
    
    
    
    $
    30,721
    
    
    $
    16,831
    
    
    $
    
    
    
    $
    47,552Restricted cash
    
    
    
    
    
    
    
    
    
    
    231
    
    
    
    
    
    
    
    231Accounts receivable, net
    
    
    
    
    
    
    133,589
    
    
    
    68,495
    
    
    
    
    
    
    
    202,084Inventories
    
    
    
    
    
    
    193,738
    
    
    
    95,082
    
    
    
    
    
    
    
    288,820Deferred charges
    
    
    
    
    
    
    17,204
    
    
    
    
    
    
    
    
    
    
    
    17,204Current deferred tax assets
    
    
    
    
    
    
    24,236
    
    
    
    2,237
    
    
    
    
    
    
    
    26,473Other current assets
    
    
    
    
    
    
    5,920
    
    
    
    8,483
    
    
    
    
    
    
    
    14,403
    
    
    
    405,408
    
    
    
    191,359
    
    
    
    
    
    
    
    596,767Property, Plant and Equipment, Net
    
    
    
    
    
    
    141,793
    
    
    
    102,512
    
    
    
    
    
    
    
    244,305Goodwill
    
    
    
    
    
    
    206,004
    
    
    
    187,989
    
    
    
    
    
    
    
    393,993Investment In and Advances to Subsidiaries
    
    
    1,080,596
    
    
    
    
    
    
    
    
    
    
    
    (1,080,596
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    49,159
    
    
    
    
    
    
    
    
    
    
    
    49,159Other Assets
    
    
    6,101
    
    
    
    38,357
    
    
    
    15,784
    
    
    
    
    
    
    
    60,242$
    1,086,697
    
    
    $
    840,721
    
    
    $
    497,644
    
    
    $
    (1,080,596
    )
    
    $
    1,344,466LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    
    
    
    $
    4,181
    
    
    $
    
    
    
    $
    
    
    
    $
    4,181Accounts payable
    
    
    
    
    
    
    40,912
    
    
    
    30,829
    
    
    
    
    
    
    
    71,741Deferred revenues
    
    
    
    
    
    
    21,413
    
    
    
    
    
    
    
    
    
    
    
    21,413Current deferred tax liabilities
    
    
    
    
    
    
    (47
    )
    
    
    3,155
    
    
    
    
    
    
    
    3,108Other accrued liabilities
    
    
    6,673
    
    
    
    56,821
    
    
    
    31,564
    
    
    
    
    
    
    
    95,0586,673
    
    
    
    123,280
    
    
    
    65,548
    
    
    
    
    
    
    
    195,501Long-Term Debt
    
    
    374,483
    
    
    
    3,290
    
    
    
    
    
    
    
    
    
    
    
    377,773Deferred Tax Liabilities
    
    
    
    
    
    
    10,536
    
    
    
    25,897
    
    
    
    
    
    
    
    36,433Other Long-Term Liabilities
    
    
    
    
    
    
    11,954
    
    
    
    1,270
    
    
    
    
    
    
    
    13,224Commitments and Contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority Interests
    
    
    
    
    
    
    
    
    
    
    15,994
    
    
    
    
    
    
    
    15,994Stockholders Equity
    
    
    705,541
    
    
    
    691,661
    
    
    
    388,935
    
    
    
    (1,080,596
    )
    
    
    705,541$
    1,086,697
    
    
    $
    840,721
    
    
    $
    497,644
    
    
    $
    (1,080,596
    )
    
    $
    1,344,466
 15




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2005 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash (used in) provided by operating activities
    
    $
    (9,614
    )
    
    $
    33,438
    
    
    $
    4,989
    
    
    $
    
    
    
    $
    28,813Cash Flows From Investing Activities:Investments in and advances to unconsolidated affiliates
    
    
    
    
    
    
    (1,761
    )
    
    
    
    
    
    
    
    
    
    
    (1,761
    )Capital expenditures for property, plant and equipment
    
    
    
    
    
    
    (7,520
    )
    
    
    (1,579
    )
    
    
    
    
    
    
    (9,099
    )Other, net
    
    
    
    
    
    
    204
    
    
    
    61
    
    
    
    
    
    
    
    265Net cash used in investing activities
    
    
    
    
    
    
    (9,077
    )
    
    
    (1,518
    )
    
    
    
    
    
    
    (10,595
    )Cash Flows From Financing Activities:Repayments on debt, net
    
    
    
    
    
    
    (782
    )
    
    
    
    
    
    
    
    
    
    
    (782
    )Purchases of treasury stock
    
    
    (1,177
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,177
    )Proceeds from stock option exercises
    
    
    8,895
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895ESPP Purchases
    
    
    1,896
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,896Net cash provided by (used in) financing activities
    
    
    9,614
    
    
    
    (782
    )
    
    
    
    
    
    
    
    
    
    
    8,832Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    
    
    
    
    (258
    )
    
    
    
    
    
    
    (258
    )Net Increase in Cash
    
    
    
    
    
    
    23,579
    
    
    
    3,213
    
    
    
    
    
    
    
    26,792Cash at Beginning of Period
    
    
    
    
    
    
    30,721
    
    
    
    16,831
    
    
    
    
    
    
    
    47,552Cash at End of Period
    
    $
    
    
    
    $
    54,300
    
    
    $
    20,044
    
    
    $
    
    
    
    $
    74,344
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2004 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash (used in) provided by operating activities
    
    $
    (3,303
    )
    
    $
    17,836
    
    
    $
    757
    
    
    $
    
    
    
    $
    15,290Cash Flows From Investing Activities:Proceeds from sales of businesses, net of cash disposed
    
    
    
    
    
    
    1,349
    
    
    
    831
    
    
    
    
    
    
    
    2,180Investments in and advances to unconsolidated affiliates
    
    
    
    
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    (193
    )Capital expenditures for property, plant and equipment
    
    
    
    
    
    
    (1,565
    )
    
    
    (4,726
    )
    
    
    
    
    
    
    (6,291
    )Other, net
    
    
    
    
    
    
    2,481
    
    
    
    35
    
    
    
    
    
    
    
    2,516Net cash used in investing activities
    
    
    
    
    
    
    2,072
    
    
    
    (3,860
    )
    
    
    
    
    
    
    (1,788
    )Cash Flows From Financing Activities:Repayments on debt, net
    
    
    
    
    
    
    (17,747
    )
    
    
    (106
    )
    
    
    
    
    
    
    (17,853
    )Purchases of treasury stock
    
    
    (1,005
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,005
    )Proceeds from stock option exercises
    
    
    3,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,380ESPP Purchases
    
    
    928
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    928Net cash provided by (used in) financing activities
    
    
    3,303
    
    
    
    (17,747
    )
    
    
    (106
    )
    
    
    
    
    
    
    (14,550
    )Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    76Net Increase in Cash
    
    
    
    
    
    
    2,161
    
    
    
    (3,133
    )
    
    
    
    
    
    
    (972
    )Cash at Beginning of Period
    
    
    
    
    
    
    2,620
    
    
    
    16,610
    
    
    
    
    
    
    
    19,230Cash at End of Period
    
    $
    
    
    
    $
    4,781
    
    
    $
    13,477
    
    
    $
    
    
    
    $
    18,258
 16




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##### Table of Contents



ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist you in understanding our financial condition as
of March 31, 2005, and our results of operations for the three-month periods ended March 31, 2005
and 2004. This discussion should be read with our financial statements and their notes included
elsewhere in this report, as well as our financial statements and their related notes and related
Managements Discussion and Analysis of Financial Condition and Results of Operations for the year
ended December 31, 2004, previously filed with the Securities and Exchange Commission in our Annual
Report on Form 10-K. The discussion of our results of operations and financial condition contains statements
relating to our future results, including certain projections and trends, which constitute
forward-looking statements. Certain risks and uncertainties may cause actual results to be
materially different from projected results contained in these forward-looking statements and other
disclosures. These risks and uncertainties are more fully described under Forward-Looking
Statements and Exposures below. As used herein, unless otherwise required by the context, the term
Grant Prideco refers to Grant Prideco, Inc. and the terms we, our, and similar words refer to
Grant Prideco and its subsidiaries. The use herein of such terms as group, organization, we,
us, our, and its, or references to specific entities, are not intended to be a precise
description of corporate relationships. General We are the world leader in drill stem technology development and drill pipe manufacturing,
sales and service; a global leader in drill bit technology, manufacturing, sales and service; and a
leading provider of high-performance engineered connections and premium tubular products and
services. We operate primarily through three business segments: (1) Drilling Products and Services,
(2) Drill Bits, and (3) Tubular Technology and Services. Critical Accounting Policies and Estimates In our annual report on Form 10-K for the year ended December 31, 2004, we identified our most
critical accounting policies upon which our financial condition depends as those relating to
revenue recognition including deferred revenues and charges, inventory valuation, fair value
estimations for assets acquired and liabilities assumed in a business combination, impairment of
long-lived assets, impairment of goodwill and intangible assets, valuation allowance for deferred
tax assets, estimates related to contingent liabilities and future claims and pension liabilities. Market Trends and Outlook Our business primarily depends on the level of worldwide oil and gas drilling activity, which
depends on capital spending by major, independent and state-owned exploration and production
companies. Those companies adjust capital spending according to their expectations for oil and gas
prices, which creates cycles in drilling activity. Each of our business segments generally tracks
the level of domestic and international drilling activity, but their revenues, cash flows and
profitability follow the rig count at different stages within these market cycles. Drill pipe
demand is also a function of customer inventory levels and typically lags changes in the worldwide
rig count. In a declining market, customers are contractually required to purchase ordered drill
pipe even if they will no longer need that pipe. This creates a situation where our customers have
an inventory of excess drill pipe. Consequently, in a market with increasing activity, customers
delay purchasing until they no longer have sufficient inventory to sustain current and near-term
expected future activity. Drill bit demand and this segments earnings and cash flows have closely
tracked the worldwide rig count. Within our Tubular Technology and Services segment, there are four
product lines: Atlas Bradford premium connections, Tube-Alloy accessories, TCA premium casing and
XL Systems large bore connections and services. Results for this segments Atlas Bradford,
Tube-Alloy and TCA product lines predominantly follow changes in North American (in particular Gulf
of Mexico) offshore drilling, deep drilling and natural gas drilling rig counts, but short-term
demand for Atlas Bradford products also can be affected by inventories at OCTG distributors. The
TCA product line also is affected by the level of U.S. OCTG mill activity. This segments XL
Systems product line generally follows the level of worldwide offshore drilling activity. For the periods below, the revenues, profitability and cash flows from each of our business
segments have been impacted by changes in oil and gas prices and rig counts. The following table
sets forth certain information with respect to oil and gas prices at the dates indicated and the
North American (U.S. and Canadian) and international rig counts for the periods reflected: 17




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Three Months EndedMarch 31, 2005
    
    
    December 31, 2004
    
    
    March 31, 2004WTI Oil(a)Average
    
    $
    49.83
    
    
    $
    48.31
    
    
    $
    35.33Ending
    
    
    55.40
    
    
    
    43.45
    
    
    
    35.76Henry Hub Gas(b)Average
    
    $
    6.44
    
    
    $
    6.39
    
    
    $
    5.62Ending
    
    
    7.44
    
    
    
    6.01
    
    
    
    5.65North American Rig Count(c)Average
    
    
    1,800
    
    
    
    1,669
    
    
    
    1,647Ending
    
    
    1,726
    
    
    
    1,686
    
    
    
    1,598International Rig Count(c)Average
    
    
    876
    
    
    
    862
    
    
    
    797Ending
    
    
    891
    
    
    
    869
    
    
    
    799
   (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 and the former Soviet
Union). Future Market Trends and Expectations We anticipate future results will be based on the level of drilling activity and our
customers views regarding the sustainability of that activity. These perceptions depend on their
views regarding the oil and natural gas prices. Commodity prices continued to strengthen during the
first quarter of 2005, and this resulted in drilling activity that was slightly stronger than we
originally anticipated. When forecasting our results for the remainder of 2005, we relied on several assumptions about
the market, customers, suppliers, and we also considered the Companys results in the first quarter
of 2005. In the market, we anticipate strong drilling activity will continue. After a seasonal
downturn in Canada during the second quarter, we anticipate drilling will increase to prior year
levels. We anticipate the international rig count will continue to gradually increase throughout
the year, and we expect the US rig count will maintain the strong levels of the first quarter. We
believe price improvements are justifiable and achievable, and we will be able to modestly increase
prices to our customers and also, at a minimum, sustain the results achieved in the first quarter
of 2005. On March 31, 2005, total backlog was $410.7 million, up $118.7 million from December 31,
2004: this is the highest level since the company became public in April, 2000. Improved backlog
and strong drilling activity should translate into increased volumes at our Drilling Products and
Services segment. We anticipate continued strong revenues at our Drill Bits segment, which tend to
move commensurate with the rig count. Also, our Tubular Technology and Services segment, with its
strong leverage to the weak Gulf of Mexico rig count, should continue to benefit from a full year
of restructurings and pricing improvements made during 2004. We expect our full year earnings to
be in the range of $1.20 to $1.25 per share, excluding other charges, and we anticipate our
earnings for the second quarter of 2005 to be relatively flat compared to the first quarter of
2005. 18




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##### Table of Contents



Results of Operations Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31, 2004 The following table summarizes the results of the Company: Three Months Ended March 31,2005
    
    
    2004(In thousands)Revenues:Drilling Products and Services
    
    $
    128,350
    
    
    $
    69,815Drill Bits
    
    
    90,626
    
    
    
    79,258Tubular Technology and Services
    
    
    73,120
    
    
    
    41,521Other
    
    
    
    
    
    
    887Total Revenues
    
    
    292,096
    
    
    
    191,481Operating Income (Loss):Drilling Products and Services
    
    $
    36,261
    
    
    $
    8,580
    (a)Drill Bits
    
    
    21,622
    
    
    
    19,285Tubular Technology and Services
    
    
    15,261
    
    
    
    685
    (b)Other
    
    
    (110
    )
    
    
    (1,179
    )Corporate
    
    
    (10,843
    )
    
    
    (6,460
    )Total Operating Income
    
    
    62,191
    
    
    
    20,911
   (a)
    
    Includes other charges of $1.8 million related to our manufacturing rationalization program,
which includes lease termination, severance and other exit costs in connection with the
downsizing of our Drilling Products and Services Canadian operations.(b)
    
    Includes other charges of $0.9 million for severance costs related to the Tubular Technology
and Services organizational restructuring. Consolidated revenues increased by $100.6 million, or 53%, in the first quarter of 2005
compared to last years first quarter. Consolidated operating income margins increased to 21% from
11% in last years first quarter. The improved margins reflect increased volumes and better
pricing, primarily at our Drilling Products and Services and Tubular Technology and Services
segments, and manufacturing efficiencies implemented in 2004. Additionally, our backlog (which
includes deferred revenues) increased to $410.7 million at March 31, 2005 from $291.9 million at
December 31, 2004. Other operating expenses (sales and marketing, general and administrative and research and
engineering) increased $8.0 million compared to last years first quarter primarily due to
increased sales and marketing expenses in our Drill Bits segment and increased costs related to
compliance with Section 404 of the Sarbanes-Oxley Act. However, as a percentage of revenues
operating expenses were reduced to 21% from 28% in last years first quarter, reflecting the
positive effects from our restructuring programs implemented during 2004. Interest expense decreased by $0.5 million due to lower debt balances. Equity income from our
unconsolidated affiliates increased by $2.2 million, which reflects increased earnings at
Voest-Alpine partially offset by increased development spending in our IntelliServ joint venture.
Other income decreased to $1.1 million from $2.0 million in last years first quarter due primarily
to lower gains on asset sales. Our tax rate in the first quarter of 2005 was 31% compared to 38% in last years first
quarter. The improvement was primarily attributable to increased utilization of foreign tax
credits due to higher U.S. profitability and increased equity earnings at our Voest-Alpine joint
venture that is recorded net of tax. Drilling Products and Services Revenues for the Drilling Products and Services segment increased by 84%, to $128.4 million,
compared to the last years first quarter of $69.8 million. Operating income increased to $36.3
million, compared to $8.6 million in last years first quarter and operating income margins
increased to 28% from 12% for the same period. These improvements reflect a 68% increase in drill
pipe 19




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##### Table of Contents



footage sold and an 11% increase in average sales price per foot. In addition, this segments
results include the benefits from the rationalization program implemented at the beginning of 2004
that streamlined manufacturing processes and reduced costs. Backlog for this segment increased to
$274.7 million compared to $210.0 million at year-end 2004. Drill Bits Revenues
for the Drill Bits segment increased by 14%, to $90.6 million, compared to the last
years first quarter revenues of $79.3 million. This improvement primarily reflects drilling
activity increases of 14% in the U.S. rig count and 10% internationally. Year-over-year operating
income margins remained relatively flat at 24%. Tubular Technology and Services Revenues for the Tubular Technology and Services segment increased by 76%, to $73.1 million,
compared to last years first quarter of $41.5 million. Operating income margins increased to 21%
from 2% in last years first quarter. All product lines within this segment improved due to better
pricing and increased volumes and the 14% increase in the U.S. rig count. TCA pricing has been
particularly strong reflecting strong mill activity. Additionally, this segments results reflect
the benefit of cost cutting initiatives implemented during 2004. Corporate Corporate expenses for the first quarter of 2005 were $10.8 million compared to $6.5 million
in last years first quarter. This increase was primarily due to higher incentive expenses and
costs related to compliance with Section 404 of the Sarbanes-Oxley Act (which totaled $2.1 million)
during the first quarter of 2005. Liquidity and Capital Resources Overview At March 31, 2005, we had cash of $74.3 million, working capital of $453.0 million and unused
borrowing availability of $175.0 million under our revolving credit facility, compared to cash of
$47.6 million, working capital of $401.3 million and unused borrowing availability of $168.0
million at December 31, 2004. The following table summarizes our cash flows provided by operating activities, net cash used
in investing activities and net cash provided by (used in) financing activities for the periods
presented: Three Months EndedMarch 31,2005
    
    
    2004(In thousands)Net Cash Provided by Operating Activities
    
    $
    28,813
    
    
    $
    15,290Net Cash Used in Investing Activities
    
    
    (10,595
    )
    
    
    (1,788
    )Net Cash Provided by (Used in) Financing
Activities
    
    
    8,832
    
    
    
    (14,550
    )
 Operating Activities Net cash flows provided by operating activities increased by $13.5 million for the three-month
period ended March 31, 2005 compared to the same period in 2004. Cash flows before changes in
operating assets and liabilities increased by $31.2 million reflecting the $29.5 million increase
in net income, which was partially offset by a use of cash of $17.7 million, primarily due to
increased inventories and account receivables to support the increased business activity in 2005. Investing Activities Net cash used in investing activities increased by $8.8 million for the three-month period
ended March 31, 2005 compared to the same period in 2004. This increase was primarily attributable
to higher capital expenditures and lower proceeds from the sale of assets in 2005 as compared to
2004. 20




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##### Table of Contents



Financing Activities Net cash provided by financing activities increased $23.4 million for the three-month period
ended March 31, 2005 compared to the same period in 2004. This change primarily reflects decreased
repayments of borrowing and increased proceeds from stock options exercised in 2005 as compared to
2004. As of March 31, 2005, there were no borrowings outstanding under the revolver or term loan
portions of our senior credit facility. Capital Expenditures Our capital expenditures for property, plant and equipment totaled $9.1 million and $6.3
million for the three-month periods ended March 31, 2005 and 2004, respectively. We currently
expect to expend approximately $40 million for capital expenditures for property, plant and
equipment during 2005. Much of this spending will be related to normal maintenance capital,
efficiency enhancements and the introduction of a heavyweight drill pipe line in our facility in
China. Senior Credit Facility and Other Long-Term Debt Our debt balances are primarily comprised of: (1) our 9 5/8% Senior Notes due 2007 and (2) our
9% Senior Notes due 2009. As of March 31, 2005, we did not have any outstanding borrowings under our $190 million Senior
Credit Facility (Senior Credit Facility) and $9.3 million of revolver availability had been
reserved to support outstanding letters of credit. As of March 31, 2005, we were in compliance
with the various covenants under the Senior Credit Facility and the 9 5/8% and 9% Senior Notes
agreements. Currently, required principal and interest payments for our outstanding debt are approximately
$42.1 million for the remainder of 2005. We currently expect to satisfy all capital expenditures
and debt service requirements during 2005 from operating cash flows, with any shortfall utilizing
existing cash balances and the revolver portion of our Senior Credit Facility. Based on our current projected capital expenditures, required principal and interest payments,
operating cash flows, existing cash balances and estimated availability under the Senior Credit
Facility, we believe we can satisfy all of our expected commitments during
the next 12 months and will have sufficient liquidity to not only maintain our existing
operations but to take advantage of strategic opportunities that may present themselves during such
period. Acquisitions and expansions will be financed from cash flows from operations, borrowings
under our Senior Credit Facility, or through the issuance of additional debt and equity financing,
as appropriate. Any future financing will be arranged to meet our requirements, with the timing,
amount and form of issue dependent on the prevailing market and general economic conditions. Other Commitments During 2004, our supply agreement with Voest-Alpine was amended. The amended agreement
provided for a reduced minimum annual purchase commitment through July 31, 2007, effective April 1,
2004. The amendment also provides for a surcharge provision under which actual costs of key raw
materials in the green pipe production process will be indexed to the April 2003 base cost and
surcharges per ton assessed accordingly for the difference. These surcharges were phased in during
2004 and are in place beginning in 2005. Although we are not contractually obligated to purchase an
annual minimum quantity, the contract does include a penalty when purchases fall below a minimum
level calculated using a two-year average. The maximum annual penalty due under the contract would
be approximately 1.9 million Euros annually. We currently believe we will meet our contractual
commitments for 2005 without incurring unnecessary penalties or material unnecessary inventory
positions. In connection with our spinoff from Weatherford in April 2000, we entered into a preferred
supplier agreement with Weatherford in which Weatherford agreed for at least a three-year period
from April 2000, which was extended to March 2005, to purchase at least 70% of its requirements for
certain products from us. In return, we agreed to sell those products at prices not greater than
the price that we sell to similarly situated customers, and, as partial consideration for amounts
due to Weatherford at that time, we provided Weatherford a $30.0 million credit towards 20% of the
purchase price of those products. At March 31, 2005, the remaining credit balance was $2.8 million
and was included in Other Accrued Liabilities in the Consolidated Balance Sheets. We expect that
these credits will be fully utilized by the end of the year. Recent Accounting Pronouncements See Note 16 to the Notes to Consolidated Financial Statements. 21




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##### Table of Contents



Forward-Looking Statements and Exposures In light of the SECs Regulation FD, we have elected to provide in this report various
forward-looking statements and operational details. We have done so to assure full market
disclosure of information that we generally make available to our investors and securities
analysts. We expect to provide updates to this information on a regular basis in our periodic and
current reports filed with the SEC. We have also made our investor conference calls open to all
investors and encourage all investors to listen in on these calls. We will publicly announce the
call-in information in a press release before such calls. We are providing this information to
assist our stockholders in better understanding our business. These expectations reflect only our
current view on these matters as of the date of this report and are subject to change based on
changes of facts and circumstances. There can be no assurance that these expectations will be met
and our actual results will likely vary (up or down) from those currently projected. These
estimates speak only of our expectations as of the date of this report and we make no undertaking
to update this information. The absence of an update should not be considered as an affirmation of
our current expectations or that facts have not changed during the quarter that would impact our
expectations. Risk Factors and Exposures The businesses in which we operate are subject to various risks and uncertainties that could
have adverse consequences on our results of operations and financial condition and that could cause
actual results to be materially different from projected results contained in the forward-looking
statements in this report and in our other disclosures. Investors should carefully consider these
risks and uncertainties when evaluating our company and the forward-looking statements that we
make. These risks and uncertainties include, but are not limited to, the following: A decline in domestic and worldwide oil and gas drilling activity would adversely affect our
results of operations. Our forward-looking statements and projections of future results assume stable to moderately
increasing demand for our products and services. However, our businesses are materially dependent
on the level of oil and gas drilling activity in North America and worldwide, which in turn depends
on the level of capital spending by major, independent and state-owned exploration and production
companies. This capital spending is driven by current prices for oil and gas and the perceived
stability and sustainability of those prices. Oil and gas prices have been subject to significant
fluctuation in recent years in response to changes in the supply and demand for oil and gas, market
uncertainty, world events, governmental actions, and a variety of additional factors that are
beyond our control, including:  
    the level of North American and worldwide oil and gas exploration and production activity;
    worldwide economic conditions, particularly economic conditions in North America;
    oil and gas production costs;
    the expected costs of developing new reserves;
    national government political requirements and the policies of the OPEC;
    the price and availability of alternative fuels;
    environmental regulation; and
    tax policies. Decreased demand for our products results not only from periods of lower drilling activity,
but also from the resulting build up of customer inventory of drill pipe associated with idle rigs,
which can be used on active rigs in lieu of new purchases. The time period during which drill pipe
inventory is used is a function of the number of rigs actively drilling and the expected level of
drilling activity. A decrease in the number of rigs actively drilling results in a large amount of
unused drill pipe on idle rigs and a decrease in demand for new drill pipe. 22




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##### Table of Contents



An economic downturn could adversely affect demand for our products and services and our results of
operations. The U.S. and worldwide economies have been very volatile, and their future directions are
uncertain. If North American or international economies decline unexpectedly, our results of
operations and financial condition could be materially adversely affected. Increases in the prices of our raw materials could affect our results of operations. We use large amounts of steel tubulars and bars in the manufacture of our products. The price
of these raw materials has a significant impact on our cost of producing products. If we are unable
to pass future raw material price increases on to our customers, our margins and results of
operations could be adversely affected. Steel prices have increased significantly since the end of 2003, caused primarily by
significant increases in the prices paid by our suppliers for scrap and coke utilized in their
operations. In addition, rising steel costs also have the potential to delay increases in demand for our
drill stem components and premium casing products. As drill stem products are not consumables, our
customers could elect to defer purchases until such time as they determine that steel prices have
stabilized or returned to more normalized conditions. Our forward-looking statements do not assume
that there will be any reduced demand for our drill stem products or premium casing as a result of
increased prices caused by the current shortages being experienced in the worldwide steel markets.
Reduced demand could adversely affect our results of operations. Interruptions of supply of raw materials could materially adversely affect our results of
operations. We rely on various suppliers to supply the components utilized to manufacture our drilling
products and premium casing. The availability of the raw materials is not only a function of the
availability of steel, but also the alloy materials that are utilized by our suppliers in
manufacturing tubulars that meet our proprietary chemistries. Currently, there is a worldwide
shortage of scrap, coke and alloys that has caused raw material prices to increase for steel
tubulars, billets and bars utilized in our manufacturing operations. To date, these shortages have
not caused a material disruption in availability or our manufacturing operations, however, there
can be no assurance that material disruptions could not occur in the future. If material
disruptions to raw materials availability occur, it could adversely affect our results of
operations and our ability to increase our manufacturing operations to meet the increased revenues
upon which our forward-looking statements are based. Due to intense competition in our industry, our revenues may decline if we do not develop, produce,
and commercialize new competitive technologies and products or if we are unable to adequately
protect our current and future intellectual property rights relating to our technologies and
products. The markets for our premium products and services are characterized by continual developments.
Substantial improvements in the scope and quality of product function and performance can occur
over a short period of time. In order to remain competitive, we must be able to develop
commercially competitive products in a timely manner in response to changes in technology. Our
ability to develop new products and maintain competitive advantages depends on our ability to
design and commercially market products that meet the needs of our customers, including delivery
schedules and product specifications. Additionally, the time and expense invested in product development may not result in
commercially feasible applications that provide revenues. We could be required to write-off our
entire investment in a new product that does not reach commercial viability. Moreover, we may
experience operating losses after new products are introduced and commercialized because of high
start-up costs, unexpected manufacturing costs or problems, or lack of demand. Many of our products and the processes we use to manufacture them have been granted U.S. and
international patent protection, or have patent applications pending. Nevertheless, patents may not
be granted for our applications and, if patents are issued, the claims allowed may not be
sufficient to protect our technology. If our patents are not enforceable, or if any of our products
infringe patents held by others, our financial results may be adversely affected. Our competitors
may be able to independently develop technology that is similar to ours without infringing on our
patents, which is especially true internationally where the protection of intellectual property
rights may not be as effective. In addition, obtaining and maintaining intellectual property
protection internationally may be significantly more expensive than doing so domestically. We may
have to spend substantial time and money defending our patents and, after our patents expire, our
competitors will not be legally constrained from developing products substantially similar to ours. 23




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Our results of operations and financial condition are dependent upon our ability to successfully
increase and decrease, without material disruption, our manufacturing capacity and expense in
response to changes in demand and to maintain prices for our products, which can be adversely
affected by changes in industry conditions and competitive forces. Our projections assume steady to modest increasing demand for our products and services during
2005, in particular our drill stem products. In the event demand for these products increases, we
will be required to increase our production during peak demand periods with minimal operational
disruption and inefficiency. If this does not happen, or we experience difficulties in this regard,
our results of operations during this ramp-up for high demand periods could be adversely affected. Our international operations may experience severe interruptions due to political, economic, or
other risks, which could adversely affect our results of operations and financial condition. For the three-month period ended March 31, 2005, we have derived approximately 36% of our
total revenues from our facilities outside the U.S. In addition, a large part of sales from our
domestic locations were for use in foreign countries. In addition, many of our key manufacturing
operations are outside of the U.S., including Mexico, Italy, United Kingdom, China, Indonesia and
Singapore. Our operations in certain international locations are subject to various political and
economic conditions existing in those countries that could disrupt operations. These risks include:  
    changes in foreign tax laws;
    changes in regulations and labor practices;
    currency fluctuations and devaluations;
    currency restrictions, banking crises, and limitations on repatriation of profits; and
    political instability or military conflict. Our foreign operations may suffer disruptions, and we may incur losses that will not be
covered by insurance. We have not historically carried political risk insurance. In particular,
terrorist attacks and other threats to U.S. national security and resulting U.S. military activity
throughout the world increase the possibility that our operations could be interrupted or adversely
affected. Such disruption could result in our inability to ship products in a timely and
cost-effective manner or our inability to place contractors and employees in various countries or
regions. Any material currency fluctuations or devaluations, or political events that disrupt oil and
gas exploration and production or the movement of funds and assets could materially adversely
affect our results of operations and financial position. We manufacture and sell drill pipe locally through our
Chinese operations. As is customary in this country, our Chinese operations may settle
receivables and payables through bearer bonds and notes. At March 31, 2005, we were holding $1.4
million of such notes. To date, our Chinese operations have not experienced significant losses as a
result of such practice; however, there can be no assurance that such losses could not occur in the
future. Any such losses could have a materially adverse affect on our results of operations in the
period in which they occur. We have renewed an agreement with Voest-Alpine, an entity of which we own 50.01%, to purchase
green tubulars through September 2007. Our future results could be adversely affected if we are
unable to use or resell these tubulars. In addition, we have agreed to be responsible for paying
any anti-dumping duties in the U.S. on the resale of these tubulars, which could affect our
ability to resell the tubulars in the U.S. Further, our long-term supply contract with Voest-Alpine
is denominated in Euros. We have no significant offset for revenues in Euros and we have not hedged
for currency risk with respect to this contract. Thus, a material long-term strengthening of the
Euro versus the U.S. dollar could materially adversely affect our results of operations. In connection with our business operations, we could be subject to substantial liability claims
that adversely affect our results of operations. Our products are complex, and the failure of this equipment to operate properly or to meet
specifications may greatly increase our customers costs of drilling a well. In addition, many of
these products are used in hazardous drilling and production applications where an accident or
product failure can cause personal injury or loss of life; damage to property, equipment, or the
environment; 24




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regulatory investigations and penalties; and the suspension of the end-users operations. If
our products or services fail to meet specifications or are involved in accidents or failures, we
could face warranty, contract, or other litigation claims for which we may be held responsible and
our reputation for providing quality products may suffer. Our insurance may not be adequate in risk coverage or policy limits to cover all losses or
liabilities that we may incur or be responsible. Moreover, in the future we may not be able to
maintain insurance at levels of risk coverage or policy limits that we deem adequate or at premiums
that are reasonable for us, particularly in the recent environment of significant insurance premium
increases. Further, any claims made under our policies will likely cause our premiums to increase. Any future damages deemed to be caused by our products or services that are assessed against
us and that are not covered by insurance, or that are in excess of policy limits or subject to
substantial deductibles, could have a material adverse effect on our results of operations and
financial condition. Litigation and claims for which we are not insured can occur, including
employee claims, intellectual property claims, breach of contract claims, and warranty claims. Our
forward-looking statements assume that such uninsured claims or issues will not occur. We account
for warranty reserves on a specific identification basis. As a result, a significant unexpected
warranty issue during a particular quarter or year could cause a material reduction in our results
of operations in the quarter or year that the reserve for such warranty is made. We are subject to environmental, health, and safety laws and regulations that expose us to
potential financial liability. Our operations are regulated under a number of federal, state, local, and foreign
environmental laws and regulations, which govern, among other things, the discharge of hazardous
materials into the air and water, as well as the handling, storage, and disposal of hazardous
materials and the remediation of contaminated sites. Compliance with these environmental laws is a
major consideration in the manufacturing of our products. Because we use and generate hazardous
substances and wastes in our manufacturing operations, we may be subject to material financial
liability for any investigation and clean up of such hazardous materials, and any related personal
injury damages or toxic tort claims. We have not historically carried insurance for such matters. In addition, many of our current and former properties are or have been used for industrial
purposes. Accordingly, we also may be subject to financial liabilities relating to the
investigation and remediation of hazardous materials resulting from the action of previous owners
or operators of industrial facilities on those sites. Liability in many instances may be imposed on
us regardless of the legality of the original actions relating to the hazardous or toxic substances
or whether or not we knew of, or were responsible for, the presence of those substances. We are also subject to various federal, state, local, and foreign laws and regulations
relating to safety and health conditions in our manufacturing facilities. Those laws and
regulations may subject us to material financial penalties or liabilities for any noncompliance, as
well as potential business disruption if any of our facilities or a portion of any facility is
required to be temporarily closed as a result of any violation of those laws and regulations. Any
such financial liability or business disruption could have a material adverse effect on our
financial condition and results of operations. Our results of operations could be adversely affected by actions under U.S. trade laws and new
foreign entrants into U.S. markets. Although we are a U.S.-based manufacturing company, we do own and operate international
manufacturing operations that support our U.S.-based business. If actions under U.S. trade laws
were instituted that limited our access to these products, our ability to meet our customer
specifications and delivery requirements would be reduced. Any adverse effects on our ability to
import products from our foreign subsidiaries could have a material adverse effect on our results
of operations. Additionally, foreign producers of tubular goods have been found to have sold their products, which
may include premium connections, for export to the U.S. at prices that are lower than the cost of
production, or their prices in their home market, or a major third-country market. Anti-dumping
orders restricting the manner and price at which tubular goods from certain countries can be
imported are currently in effect. If such orders are revoked or changed, we could be exposed to
increased competition from imports that could reduce our sales and market share. In addition, the
premium connections market served by our Atlas Bradford product line is highly competitive. The
level of competition could further increase if foreign steel mills, with their own lines of
internationally accepted premium connections, more successfully penetrate the U.S. market, which
could adversely affect our results of operations. 25




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Off-Balance Sheet Financing As of March 31, 2005, we did not have any off-balance sheet hedging, financing arrangements or
contracts except for those associated with our investments in two companies that are not
consolidated in our financial statements: Voest-Alpine and Intelliserve. 
 ITEM 3.Quantitative and Qualitative Market Risk Disclosures Foreign Currency Risk The functional currency for the majority of our international operations is the U.S. dollar.
Adjustments resulting from the remeasurement of the local currency financial statements into the U.S
dollar functional currency, which uses a combination of current and historical exchange rates, are
included in net income in the current period. The functional currency of our Canadian, Venezuelan
and Chinese operations is the local currency. Adjustments resulting from the translation of the
local functional currency financial statements to the U.S dollar, which is based on current
exchange rates, are included in stockholders equity in the current period. In addition, our
long-term supply contract with Voest-Alpine is denominated in Euros. Foreign currency transaction
gains and losses are reflected in income for the period. Net foreign currency transaction gains
(losses) for the three-month periods ended March 31, 2005 and 2004 were $0 million and ($0.7
million), respectively. Interest Rates As of March 31, 2005, our long-term borrowings at variable rates were paid off, therefore, we
were not exposed to the risk of cash flow variability due to increased or decreased interest
expense in the event of changes in short-term interest rates. However, our fixed rate
Senior Notes outstanding at March 31, 2005 subject us to risks related to changes in the
fair value of the debt and exposes us to potential gains or losses if we were to repay or
refinance such debt. A 1% change in market interest rates would increase or decrease the fair value
of our fixed rate debt by approximately $7.5 million to $8.0 million. 
 ITEM 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures We have performed an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act) as of March 31, 2005. Based on that evaluation,
our management, including our Chief Executive Officer and Chief Financial Officer, concluded that,
as of the end of the period covered by this report (March 31, 2005), our disclosure controls and
procedures were effective in providing reasonable assurance that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms
and that such information is accumulated and communicated to the Companys management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Update on Internal Control Over Financial Reporting Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2004. In making this assessment, it used the framework entitled Internal Control 
Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on its evaluation of the COSO framework applied to Grant Pridecos
internal control over financial reporting, and the identification of a material weakness related to
revenue recognition controls over documentation of delivery terms requested by the customer and
customer notification necessary to record revenue prior to customer possession of the product,
management concluded that Grant Prideco did not maintain effective internal control over financial
reporting as of December 31, 2004. In order to address the material weakness identified as of December 31, 2004, management
implemented corrective measures during the first quarter of 2005 including: 1) requiring a
checklist to be completed prior to revenue recognition to ensure that documentation of delivery
terms requested by the customer and customer notification necessary to record revenue prior to
customer possession of the product is complete and accurate, 2) initiating processes and procedures
to better document the terms of sales 26




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transactions including transaction review and monitoring activities and 3) reviewing all bill
and hold sales transactions during the quarter to ensure that they meet the criteria for revenue
recognition. We believe the corrective actions described above will provide sufficient controls to
remedy the identified material weakness related to revenue recognition, and will improve both our
disclosure controls and procedures and internal control over financial reporting. However, these
controls have not been tested as extensively as required for the annual evaluation under Section
404 of the Sarbanes-Oxley Act of 2002. Additionally, there may be some additional control
procedures implemented in the future to further strengthen the controls over financial
reporting. 27




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PART II 
 ITEM 6.Exhibits (a) Exhibits -  31.1
    Certification of Michael McShane31.2
    Certification of Matthew D. Fitzgerald32.1
    Section 1350 Certification 28




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SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. 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
 Date: May 10, 2005 29




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EXHIBIT INDEX Exhibit Number
    
    Description31.1
    
    Certification of Michael McShane31.2
    
    Certification of Matthew D. Fitzgerald32.1
    
    Section 1350 Certification