##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2006
 Commission file number 001-15423
 Grant Prideco, Inc.
  Delaware
    
    76-0312499(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 400 N . Sam Houston Pkwy. EastSuite 900Houston, Texas
    
    77060(Address of Principal Executive Offices)
    
    (Zip Code)
 (281) 878-8000
 þ o
 þ o o
 o þ
  Title of Each Class
    
    Outstanding at May 4, 2006Common Stock, par value $0.01 per share
    
    130,928,074




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Market Risk DisclosuresITEM 4. Controls and ProceduresPART IIITEM 1A. Risk FactorsITEM 2. Unregistered Sales of Equity in Securities and Use of ProceedsITEM 6. ExhibitsSIGNATURESEXHIBIT INDEXCertification of Michael McShaneCertification of Matthew D. FitzgeraldSection 1350 Certification    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 GRANT PRIDECO, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended March 31,2006
    
    
    2005(In thousands, except per share data)Revenues
    
    $
    414,425
    
    
    $
    292,096Operating Expenses:Cost of sales
    
    
    228,529
    
    
    
    167,916Sales and marketing
    
    
    35,980
    
    
    
    31,704General and administrative
    
    
    27,840
    
    
    
    24,522Research and engineering
    
    
    7,696
    
    
    
    5,763300,045
    
    
    
    229,905Operating Income
    
    
    114,380
    
    
    
    62,191Interest Expense
    
    
    (3,831
    )
    
    
    (10,010
    )Other Income (Expense), Net
    
    
    (260
    )
    
    
    1,137Equity Income in Unconsolidated Affiliates
    
    
    27,349
    
    
    
    4,793Income Before Income Taxes and Minority Interests
    
    
    137,638
    
    
    
    58,111Income Tax Provision
    
    
    (43,064
    )
    
    
    (19,469
    )Income Before Minority Interests
    
    
    94,574
    
    
    
    38,642Minority Interests
    
    
    (2,144
    )
    
    
    (1,976
    )Net Income
    
    $
    92,430
    
    
    $
    36,666Basic Net Income Per Share:Net income
per share
    
    $
    0.70
    
    
    $
    0.29Basic weighted average shares outstanding
    
    
    131,388
    
    
    
    125,234Diluted Net Income Per Share:Net income
per share
    
    $
    0.69
    
    
    $
    0.29Diluted weighted average shares outstanding
    
    
    133,929
    
    
    
    128,352
  2




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GRANT PRIDECO, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash
    
    $
    59,418
    
    
    $
    28,164Accounts receivable, net of allowance for uncollectible
accounts of $5,862 and $5,856 for 2006 and 2005, respectively
    
    
    278,771
    
    
    
    268,450Inventories
    
    
    385,383
    
    
    
    360,630Deferred charges
    
    
    13,805
    
    
    
    14,629Current deferred tax assets
    
    
    36,210
    
    
    
    39,957Prepaid expenses
    
    
    17,763
    
    
    
    13,197Other current assets
    
    
    1,763
    
    
    
    1,228793,113
    
    
    
    726,255Property, Plant and Equipment, Net
    
    
    238,122
    
    
    
    238,770Goodwill
    
    
    422,111
    
    
    
    421,627Other Intangible Assets, Net
    
    
    56,825
    
    
    
    58,181Investment In Unconsolidated Affiliate
    
    
    120,656
    
    
    
    84,547Other Assets
    
    
    10,853
    
    
    
    10,904$
    1,641,680
    
    
    $
    1,540,284LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of long-term debt
    
    $
    5,222
    
    
    $
    7,045Accounts payable
    
    
    101,160
    
    
    
    92,290Accrued labor and benefits
    
    
    45,264
    
    
    
    61,863Deferred revenues
    
    
    21,629
    
    
    
    21,424Federal income taxes payable
    
    
    61,483
    
    
    
    24,708Current deferred tax liabilities
    
    
    1,285
    
    
    
    3,818Other accrued liabilities
    
    
    29,886
    
    
    
    35,498265,929
    
    
    
    246,646Long-Term Debt
    
    
    203,212
    
    
    
    217,484Deferred Tax Liabilities
    
    
    29,955
    
    
    
    38,171Other Long-Term Liabilities
    
    
    31,678
    
    
    
    29,365Commitments and Contingencies
    
    
    
    
    
    
    Minority Interests
    
    
    14,656
    
    
    
    12,463Stockholders Equity:Preferred stock, $0.01 par value
    
    
    
    
    
    
    Common stock, $0.01 par value; issued 131,749 and 130,927
in 2006 and 2005, respectively
    
    
    1,318
    
    
    
    1,309Capital in excess of par value
    
    
    672,644
    
    
    
    647,211Unearned compensation
    
    
    (11,501
    )
    
    
    (6,573
    )Retained earnings
    
    
    473,723
    
    
    
    381,293Accumulated other comprehensive loss
    
    
    (11,917
    )
    
    
    (19,496
    )Treasury stock, at cost
    
    
    (38,826
    )
    
    
    (17,862
    )Deferred compensation obligation
    
    
    10,809
    
    
    
    10,2731,096,250
    
    
    
    996,155$
    1,641,680
    
    
    $
    1,540,284
  3




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GRANT PRIDECO, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Cash Flows From Operating Activities:Net income
    
    $
    92,430
    
    
    $
    36,666Adjustments to reconcile net income to net cash provided by operating activities:Gain on sale of business
    
    
    
    
    
    
    (1,577
    )Depreciation and amortization
    
    
    12,099
    
    
    
    11,118Deferred income tax
    
    
    (7,529
    )
    
    
    (135
    )Equity income in unconsolidated affiliates
    
    
    (27,349
    )
    
    
    (4,793
    )Stock-based compensation expense
    
    
    3,428
    
    
    
    1,803Deferred compensation expense
    
    
    1,274
    
    
    
    787Minority interests in consolidated subsidiaries
    
    
    2,144
    
    
    
    1,976(Gain) loss on sale of assets, net
    
    
    (372
    )
    
    
    1,226Change in operating assets and liabilities, net of effects of businesses acquired:Accounts receivable
    
    
    (9,852
    )
    
    
    (19,245
    )Inventories
    
    
    (25,843
    )
    
    
    (14,525
    )Deferred charges
    
    
    824
    
    
    
    (2,524
    )Other current assets
    
    
    (5,101
    )
    
    
    (2,132
    )Accounts payable
    
    
    9,378
    
    
    
    (1,399
    )Deferred revenues
    
    
    205
    
    
    
    4,580Federal income tax payable
    
    
    37,824
    
    
    
    14,048Other accrued liabilities
    
    
    (24,344
    )
    
    
    (1,680
    )Other, net
    
    
    4,320
    
    
    
    2,098Net cash provided by operating activities
    
    
    63,536
    
    
    
    26,292Cash Flows From Investing Activities:Proceeds from sale of business
    
    
    
    
    
    
    2,521Investments in and advances to unconsolidated affiliates
    
    
    
    
    
    
    (1,761
    )Capital expenditures for property, plant and equipment
    
    
    (9,967
    )
    
    
    (9,099
    )Proceeds from sale of fixed assets
    
    
    474
    
    
    
    265Other, net
    
    
    (240
    )
    
    
    Net cash used in investing activities
    
    
    (9,733
    )
    
    
    (8,074
    )Cash Flows From Financing Activities:Repayments on credit facility
    
    
    (11,200
    )
    
    
    Repayments on debt
    
    
    (4,944
    )
    
    
    (782
    )Purchases of treasury stock
    
    
    (1,906
    )
    
    
    (1,177
    )Proceeds from stock option exercises
    
    
    7,673
    
    
    
    8,895Excess tax benefits on stock option exercises
    
    
    5,010
    
    
    
    Repurchase of common stock
    
    
    (20,124
    )
    
    
    Proceeds from employee stock purchase plan
    
    
    2,759
    
    
    
    1,896Net cash (used in) provided by financing activities
    
    
    (22,732
    )
    
    
    8,832Effect of Exchange Rate Changes on Cash
    
    
    183
    
    
    
    (258
    )Net Increase in Cash
    
    
    31,254
    
    
    
    26,792Cash at Beginning of Period
    
    
    28,164
    
    
    
    47,552Cash at End of Period
    
    $
    59,418
    
    
    $
    74,344
  4




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




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Deferred Revenues and Charges
  2. Stock-Based Compensation
    Three Months EndedMarch 31, 2005Net Income As Reported
    
    $
    36,666Add: stock-based employee compensation expense
included in reported net income, net of related tax effects
    
    
    1,459Deduct: stock-based employee compensation expense
determined under the fair value method for all awards,
net of related tax effects
    
    
    (2,530
    )Pro Forma Net Income
    
    $
    35,595Net Income Per Share:Basic, as reported
    
    $
    0.29Basic, pro forma
    
    
    0.28Diluted, as reported
    
    
    0.29Diluted, pro forma
    
    
    0.28
  6




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Stock Option and Restricted Stock Plans
     7




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Stock Option Plans
  Three Months EndedMarch 31,2006
    
    
    2005(Actual)
    
    
    (Pro Forma)Valuation Assumptions -Expected Option Term (Years)
    
    
    5
    
    
    
    5Expected Volatility
    
    
    40
    %
    
    
    41
    %Expected Dividend Rate
    
    
    
    
    
    
    Risk Free Interest Rate
    
    
    4.73
    %
    
    
    3.74
    %Weighted-Average Grant Date
Fair Value
    
    $
    15.50
    
    
    $
    
   WeightedWeighted
    
    
    AverageNumber
    
    
    Average
    
    
    Remaining
    
    
    Aggregateof
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding
at the Beginning of the Year
    
    
    4,747,388
    
    
    $
    12.91Options Granted During the Year
    
    
    304,750
    
    
    
    36.70Options Exercised
    
    
    (636,533
    )
    
    
    11.95Options Forfeited
    
    
    (29,375
    )
    
    
    16.86Outstanding at the End of the Period
    
    
    4,386,230
    
    
    $
    14.67
    
    
    
    8.61
    
    
    $
    123,554,147Exercisable at the End of the Period
    
    
    2,872,481
    
    
    $
    11.93
    
    
    
    8.29
    
    
    $
    88,788,839
   8




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Restricted Stock Plans
   2004 and 2005 Restricted Stock Awards
  2006
Restricted Stock Award
  WeightedNumber
    
    
    Averageof
    
    
    Grant-DateShares
    
    
    Fair ValueOutstanding at the Beginning of the Year
    
    
    585,550
    
    
    $
    16.56Awarded
    
    
    274,065
    
    
    
    40.96Vested
    
    
    (10,700
    )
    
    
    42.84Forfeited
    
    
    (25,875
    )
    
    
    17.16Outstanding at the End of the Period
    
    
    823,040
    
    
    $
    23.88
  Employee Stock Purchase Plan
  9




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Three Months EndedMarch 31,2006
    
    
    2005(Actual)
    
    
    (Pro Forma)Valuation Assumptions -Expected Option Term
(Years)
    
    
    1
    
    
    
    1Expected Volatility
    
    
    40
    %
    
    
    41
    %Expected Dividend Rate
    
    
    
    
    
    
    Risk Free Interest Rate
    
    
    4.74
    %
    
    
    2.79
    %Weighted-Average Grant
Date Fair Value
    
    $
    12.87
    
    
    $
    6.05
  3. Comprehensive Income
  Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Net Income
    
    $
    92,430
    
    
    $
    36,666Foreign Currency Translation Adjustments
    
    
    4,893
    
    
    
    (462
    )Other Comprehensive Income/(Loss) for Unconsolidated Affiliate
    
    
    2,686
    
    
    
    (309
    )Total Comprehensive Income
    
    $
    100,009
    
    
    $
    35,895
 4. Inventories
  March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Raw Materials, Components and Supplies
    
    $
    175,098
    
    
    $
    169,966Work in Process
    
    
    106,687
    
    
    
    84,783Finished Goods
    
    
    81,016
    
    
    
    83,189Rental Bits (a)
    
    
    22,582
    
    
    
    22,692$
    385,383
    
    
    $
    360,630
 
 (a)
    
    The Company manufactures its rental bit inventory and the cost, which includes
direct and indirect manufacturing costs, is capitalized and carried in inventory.
Prior to 2006, the Company expensed the cost of rental bits upon the first rental and
usage of the bit. During the first quarter of 2006, the Company completed an analysis
of historical rental bit usage to determine an estimate of rental bit useful life.
Effective January 1, 2006, manufactured rental bits will be amortized, based upon
analysis of historical usage, over their estimated useful life 10




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of approximately one
year. Such change in accounting estimate was not material to the results of
operations in the first quarter of 2006.  5. Property, Plant and Equipment
  March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Land
    
    $
    21,539
    
    
    $
    21,534Buildings and Improvements
    
    
    86,592
    
    
    
    86,371Machinery and Equipment
    
    
    290,236
    
    
    
    287,008Furniture and Fixtures
    
    
    36,166
    
    
    
    35,362Construction in Progress
    
    
    17,181
    
    
    
    13,084451,714
    
    
    
    443,359Less: Accumulated Depreciation
    
    
    (213,592
    )
    
    
    (204,589
    )$
    238,122
    
    
    $
    238,770
 6. Net Income Per Share
  7. Goodwill and Other Intangible Assets
  Drilling
    
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    
    TechnologyServices
    
    
    Drill Bits
    
    
    and Services
    
    
    Other
    
    
    Total(In thousands)Balance, December 31, 2005
    
    $
    130,885
    
    
    $
    174,769
    
    
    $
    97,133
    
    
    $
    18,840
    
    
    $
    421,627Translation and Other Adjustments
    
    
    204
    
    
    
    123
    
    
    
    137
    
    
    
    20
    
    
    
    484Balance, March 31, 2006
    
    $
    131,089
    
    
    $
    174,892
    
    
    $
    97,270
    
    
    $
    18,860
    
    
    $
    422,111
  11




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WeightedAverage
    
    
    March 31, 2006
    
    
    December 31, 2005Amortization
    
    
    Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    NetPeriod
    
    
    Intangibles
    
    
    Amortization
    
    
    Intangibles
    
    
    Intangibles
    
    
    Amortization
    
    
    Intangibles(Years)
    
    
    (In thousands)Patents
    
    
    13
    
    
    $
    59,377
    
    
    $
    (10,569
    )
    
    $
    48,808
    
    
    $
    58,367
    
    
    $
    (8,174
    )
    
    $
    50,193Technology Licenses
    
    
    12
    
    
    
    1,447
    
    
    
    (609
    )
    
    
    838
    
    
    
    1,438
    
    
    
    (583
    )
    
    
    855Customer Relationships
    
    
    18
    
    
    
    6,410
    
    
    
    (651
    )
    
    
    5,759
    
    
    
    6,410
    
    
    
    (612
    )
    
    
    5,798Trademarks
    
    
    4
    
    
    
    1,610
    
    
    
    (1,096
    )
    
    
    514
    
    
    
    1,610
    
    
    
    (1,044
    )
    
    
    566Covenants Not To
Compete
    
    
    4
    
    
    
    2,300
    
    
    
    (1,616
    )
    
    
    684
    
    
    
    3,625
    
    
    
    (3,078
    )
    
    
    547Pension Asset (a)
    
    
    N/A
    
    
    
    222
    
    
    
    
    
    
    
    222
    
    
    
    222
    
    
    
    
    
    
    
    22210
    
    
    $
    71,366
    
    
    $
    (14,541
    )
    
    $
    56,825
    
    
    $
    71,672
    
    
    $
    (13,491
    )
    
    $
    58,181
 
 (a)
    
    The pension asset is a non-amortizing intangible asset.  8. Stock Repurchase Program
  9. Segment Information
 Business Segments
  12




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Drilling
    
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    
    Technology
    
    
    CorporateServices
    
    
    Drill Bits
    
    
    and Services
    
    
    and Other
    
    
    Total(In thousands)Three Months Ended:March 31, 2006Revenues from Unaffiliated Customers
    
    $
    194,259
    
    
    $
    116,791
    
    
    $
    103,273
    
    
    $
    102
    
    
    $
    414,425Intersegment Revenues
    
    
    136
    
    
    
    
    
    
    
    701
    
    
    
    
    
    
    
    837Operating Income (Loss)
    
    
    65,012
    
    
    
    35,558
    
    
    
    31,243
    
    
    
    (17,433
    )
    
    
    114,380Income (Loss) Before Income Taxes and Minority Interests
    
    
    91,402
    
    
    
    34,371
    
    
    
    30,764
    
    
    
    (18,899
    )
    
    
    137,638March 31, 2005Revenues from Unaffiliated Customers
    
    $
    128,350
    
    
    $
    90,626
    
    
    $
    73,120
    
    
    $
    
    
    
    $
    292,096Intersegment Revenues
    
    
    124
    
    
    
    
    
    
    
    1,359
    
    
    
    
    
    
    
    1,483Operating Income (Loss)
    
    
    36,367
    
    
    
    21,622
    
    
    
    15,261
    
    
    
    (11,059
    )
    
    
    62,191Income (Loss) Before Income Taxes and Minority Interests
    
    
    43,643
    
    
    
    19,151
    
    
    
    14,444
    
    
    
    (19,127
    )
    
    
    58,111
 10. Dispositions
  11. Pension Plans
 U.S. Pension Plan
  Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Service Cost
    
    $
    101
    
    
    $
    74Interest Cost
    
    
    222
    
    
    
    143Expected Return on Plan Assets
    
    
    (238
    )
    
    
    (117
    )Amortization of Prior Service Cost
    
    
    6
    
    
    
    Amortization of Loss
    
    
    4
    
    
    
    Administration Expenses
    
    
    15
    
    
    
    33Net Periodic Benefit Cost
    
    $
    110
    
    
    $
    133
  13




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Non-U.S. Pension Plan
  Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Interest Cost
    
    $
    229
    
    
    $
    244Expected Return on Plan Assets
    
    
    (226
    )
    
    
    (263
    )Amortization of Prior Service Cost
    
    
    27
    
    
    
    Amortization of (Gain)/Loss
    
    
    (30
    )
    
    
    75Net Periodic Benefit Cost
    
    $
    
    
    
    $
    56
  12. Investments in Unconsolidated Affiliates
  Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Net Sales
    
    $
    170,646
    
    
    $
    103,367Gross Profit
    
    
    59,839
    
    
    
    20,241Net Income
    
    
    56,671
    
    
    
    11,270Companys Equity Income
    
    
    27,349
    
    
    
    6,721
    13. Subsidiary Guarantor Financial Information
  14




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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    312,991
    
    
    $
    174,299
    
    
    $
    (72,865
    )
    
    $
    414,425Operating Expenses:Cost of sales
    
    
    
    
    
    
    198,186
    
    
    
    90,834
    
    
    
    (60,491
    )
    
    
    228,529Selling, general and administrative
    
    
    53
    
    
    
    51,395
    
    
    
    20,068
    
    
    
    
    
    
    
    71,51653
    
    
    
    249,581
    
    
    
    110,902
    
    
    
    (60,491
    )
    
    
    300,045Operating Income (Expense)
    
    
    (53
    )
    
    
    63,410
    
    
    
    63,397
    
    
    
    (12,374
    )
    
    
    114,380Interest Expense
    
    
    (3,546
    )
    
    
    (120
    )
    
    
    (165
    )
    
    
    
    
    
    
    (3,831
    )Other Income (Expense), Net
    
    
    527
    
    
    
    337
    
    
    
    (1,124
    )
    
    
    
    
    
    
    (260
    )Equity Income in Unconsolidated Affiliate
    
    
    
    
    
    
    27,349
    
    
    
    
    
    
    
    
    
    
    
    27,349Equity in Subsidiaries, Net of Taxes
    
    
    104,238
    
    
    
    4,166
    
    
    
    
    
    
    
    (108,404
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    101,166
    
    
    
    95,142
    
    
    
    62,108
    
    
    
    (120,778
    )
    
    
    137,638Income Tax Provision
    
    
    (8,736
    )
    
    
    (20,244
    )
    
    
    (14,084
    )
    
    
    
    
    
    
    (43,064
    )Income Before Minority Interests
    
    
    92,430
    
    
    
    74,898
    
    
    
    48,024
    
    
    
    (120,778
    )
    
    
    94,574Minority Interests
    
    
    
    
    
    
    
    
    
    
    (2,144
    )
    
    
    
    
    
    
    (2,144
    )Net Income
    
    $
    92,430
    
    
    $
    74,898
    
    
    $
    45,880
    
    
    $
    (120,778
    )
    
    $
    92,430
 15




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)ASSETSCurrent Assets:Cash
    
    $
    
    
    
    $
    31,042
    
    
    $
    28,376
    
    
    $
    
    
    
    $
    59,418Accounts receivable, net
    
    
    
    
    
    
    169,653
    
    
    
    109,118
    
    
    
    
    
    
    
    278,771Inventories
    
    
    
    
    
    
    297,455
    
    
    
    140,894
    
    
    
    (52,966
    )
    
    
    385,383Deferred charges
    
    
    
    
    
    
    13,448
    
    
    
    357
    
    
    
    
    
    
    
    13,805Current deferred tax assets
    
    
    (2,413
    )
    
    
    31,954
    
    
    
    6,669
    
    
    
    
    
    
    
    36,210Other current assets
    
    
    
    
    
    
    7,440
    
    
    
    12,086
    
    
    
    
    
    
    
    19,526(2,413
    )
    
    
    550,992
    
    
    
    297,500
    
    
    
    (52,966
    )
    
    
    793,113Property, Plant and Equipment, Net
    
    
    
    
    
    
    134,072
    
    
    
    104,050
    
    
    
    
    
    
    
    238,122Goodwill
    
    
    
    
    
    
    229,872
    
    
    
    192,239
    
    
    
    
    
    
    
    422,111Investment In and Advances to Subsidiaries
    
    
    1,121,259
    
    
    
    149,889
    
    
    
    
    
    
    
    (1,271,148
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    120,656
    
    
    
    
    
    
    
    
    
    
    
    120,656Other Assets
    
    
    6,534
    
    
    
    47,046
    
    
    
    14,098
    
    
    
    
    
    
    
    67,678$
    1,125,380
    
    
    $
    1,232,527
    
    
    $
    607,887
    
    
    $
    (1,324,114
    )
    
    $
    1,641,680LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    
    
    
    $
    5,222
    
    
    $
    
    
    
    $
    
    
    
    $
    5,222Accounts payable
    
    
    
    
    
    
    68,138
    
    
    
    33,022
    
    
    
    
    
    
    
    101,160Deferred revenues
    
    
    
    
    
    
    21,046
    
    
    
    583
    
    
    
    
    
    
    
    21,629Federal income taxes payable
    
    
    (2,028
    )
    
    
    33,191
    
    
    
    30,320
    
    
    
    
    
    
    
    61,483Current deferred tax liabilities
    
    
    
    
    
    
    75
    
    
    
    1,210
    
    
    
    
    
    
    
    1,285Intercompany liabilities (assets)
    
    
    (180,505
    )
    
    
    84,983
    
    
    
    95,522
    
    
    
    
    
    
    
    Other accrued liabilities
    
    
    1,807
    
    
    
    45,426
    
    
    
    27,917
    
    
    
    
    
    
    
    75,150(180,726
    )
    
    
    258,081
    
    
    
    188,574
    
    
    
    
    
    
    
    265,929Long-Term Debt
    
    
    200,095
    
    
    
    3,117
    
    
    
    
    
    
    
    
    
    
    
    203,212Deferred Tax Liabilities
    
    
    9,761
    
    
    
    (3,118
    )
    
    
    23,312
    
    
    
    
    
    
    
    29,955Other Long-Term Liabilities
    
    
    
    
    
    
    30,687
    
    
    
    991
    
    
    
    
    
    
    
    31,678Commitments and Contingencies
Minority Interests
    
    
    
    
    
    
    
    
    
    
    14,656
    
    
    
    
    
    
    
    14,656Stockholders Equity
    
    
    1,096,250
    
    
    
    943,760
    
    
    
    380,354
    
    
    
    (1,324,114
    )
    
    
    1,096,250$
    1,125,380
    
    
    $
    1,232,527
    
    
    $
    607,887
    
    
    $
    (1,324,114
    )
    
    $
    1,641,680
 16




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash provided by operating activities
    
    $
    5,407
    
    
    $
    25,362
    
    
    $
    42,731
    
    
    $
    (9,964
    )
    
    $
    63,536Cash Flows From Investing Activities:Capital expenditures for property, plant and equipment
    
    
    
    
    
    
    (7,849
    )
    
    
    (2,118
    )
    
    
    
    
    
    
    (9,967
    )Other, net
    
    
    (39
    )
    
    
    471
    
    
    
    (198
    )
    
    
    
    
    
    
    234Net cash used in investing activities
    
    
    (39
    )
    
    
    (7,378
    )
    
    
    (2,316
    )
    
    
    
    
    
    
    (9,733
    )Cash Flows From Financing Activities:Repayments on revolver debt
    
    
    
    
    
    
    
    
    
    
    (11,200
    )
    
    
    
    
    
    
    (11,200
    )Repayments on debt
    
    
    
    
    
    
    (4,944
    )
    
    
    
    
    
    
    
    
    
    
    (4,944
    )Purchases of treasury stock
    
    
    (1,906
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,906
    )Borrowings (repayments) on debt between subs, net
    
    
    1,220
    
    
    
    4,909
    
    
    
    (6,129
    )
    
    
    
    
    
    
    Proceeds from stock option exercises
    
    
    7,673
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,673Excess tax benefits on stock option exercises
    
    
    5,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,010Repurchase of common stock
    
    
    (20,124
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,124
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    (9,964
    )
    
    
    9,964
    
    
    
    Proceeds from employee stock purchase plan
    
    
    2,759
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,759Net cash used in financing activities
    
    
    (5,368
    )
    
    
    (35
    )
    
    
    (27,293
    )
    
    
    9,964
    
    
    
    (22,732
    )Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    
    
    
    
    183Net Increase in Cash
    
    
    
    
    
    
    17,949
    
    
    
    13,305
    
    
    
    
    
    
    
    31,254Cash at Beginning of Period
    
    
    
    
    
    
    13,093
    
    
    
    15,071
    
    
    
    
    
    
    
    28,164Cash at End of Period
    
    $
    
    
    
    $
    31,042
    
    
    $
    28,376
    
    
    $
    
    
    
    $
    59,418
 17




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2005
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    233,479
    
    
    $
    127,496
    
    
    $
    (68,879
    )
    
    $
    292,096Operating Expenses:Cost of sales
    
    
    
    
    
    
    161,381
    
    
    
    62,723
    
    
    
    (56,188
    )
    
    
    167,916Selling, general and administrative
    
    
    (3
    )
    
    
    43,043
    
    
    
    18,949
    
    
    
    
    
    
    
    61,989(3
    )
    
    
    204,424
    
    
    
    81,672
    
    
    
    (56,188
    )
    
    
    229,905Operating Income
    
    
    3
    
    
    
    29,055
    
    
    
    45,824
    
    
    
    (12,691
    )
    
    
    62,191Interest Expense
    
    
    (9,907
    )
    
    
    (81
    )
    
    
    (22
    )
    
    
    
    
    
    
    (10,010
    )Other Income (Expense), Net
    
    
    587
    
    
    
    1,437
    
    
    
    (887
    )
    
    
    
    
    
    
    1,137Equity Income in Unconsolidated Affiliates
    
    
    
    
    
    
    4,793
    
    
    
    
    
    
    
    
    
    
    
    4,793Equity in Subsidiaries, Net of Taxes
    
    
    49,244
    
    
    
    2,772
    
    
    
    
    
    
    
    (52,016
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    39,927
    
    
    
    37,976
    
    
    
    44,915
    
    
    
    (64,707
    )
    
    
    58,111Income Tax Provision
    
    
    (3,261
    )
    
    
    (6,893
    )
    
    
    (9,315
    )
    
    
    
    
    
    
    (19,469
    )Income Before Minority Interests
    
    
    36,666
    
    
    
    31,083
    
    
    
    35,600
    
    
    
    (64,707
    )
    
    
    38,642Minority Interests
    
    
    
    
    
    
    
    
    
    
    (1,976
    )
    
    
    
    
    
    
    (1,976
    )Net Income
    
    $
    36,666
    
    
    $
    31,083
    
    
    $
    33,624
    
    
    $
    (64,707
    )
    
    $
    36,666
 18




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2005
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash (used in) provided by operating activities
    
    $
    (13,404
    )
    
    $
    28,737
    
    
    $
    10,959
    
    
    $
    
    
    
    $
    26,292Cash Flows From Investing Activities:Proceeds from sale of businesses, net of cash disposed
    
    
    
    
    
    
    2,521
    
    
    
    
    
    
    
    
    
    
    
    2,521Investment 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
    
    
    
    
    
    
    (6,556
    )
    
    
    (1,518
    )
    
    
    
    
    
    
    (8,074
    )Cash Flows From Financing Activities:Repayments on revolver debt
    
    
    
    
    
    
    (782
    )
    
    
    
    
    
    
    
    
    
    
    (782
    )Borrowings (Repayments) between subsidiaries, net
    
    
    3,790
    
    
    
    2,180
    
    
    
    (5,970
    )
    
    
    
    
    
    
    Purchases of treasury stock
    
    
    (1,177
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,177
    )Proceeds from stock option exercises
    
    
    8,895
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,895Proceeds from employee stock purchase plan
    
    
    1,896
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,896Net cash provided by (used in) financing activities
    
    
    13,404
    
    
    
    1,398
    
    
    
    (5,970
    )
    
    
    
    
    
    
    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
 19




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2005
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)ASSETSCurrent Assets:Cash
    
    $
    
    
    
    $
    13,093
    
    
    $
    15,071
    
    
    $
    
    
    
    $
    28,164Accounts receivable, net
    
    
    
    
    
    
    164,439
    
    
    
    104,011
    
    
    
    
    
    
    
    268,450Inventories
    
    
    
    
    
    
    272,914
    
    
    
    140,256
    
    
    
    (52,540
    )
    
    
    360,630Deferred charges
    
    
    
    
    
    
    14,397
    
    
    
    232
    
    
    
    
    
    
    
    14,629Current deferred tax assets
    
    
    (2,671
    )
    
    
    30,721
    
    
    
    11,907
    
    
    
    
    
    
    
    39,957Other current assets
    
    
    
    
    
    
    4,971
    
    
    
    9,454
    
    
    
    
    
    
    
    14,425(2,671
    )
    
    
    500,535
    
    
    
    280,931
    
    
    
    (52,540
    )
    
    
    726,255Property, Plant and Equipment, Net
    
    
    
    
    
    
    133,677
    
    
    
    105,093
    
    
    
    
    
    
    
    238,770Goodwill
    
    
    
    
    
    
    229,837
    
    
    
    191,790
    
    
    
    
    
    
    
    421,627Investment In and Advances to Subsidiaries
    
    
    1,063,749
    
    
    
    101,751
    
    
    
    
    
    
    
    (1,165,500
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    84,547
    
    
    
    
    
    
    
    
    
    
    
    84,547Other Assets
    
    
    6,630
    
    
    
    48,192
    
    
    
    14,263
    
    
    
    
    
    
    
    69,085$
    1,067,708
    
    
    $
    1,098,539
    
    
    $
    592,077
    
    
    $
    (1,218,040
    )
    
    $
    1,540,284LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    
    
    
    $
    7,045
    
    
    $
    
    
    
    $
    
    
    
    $
    7,045Accounts payable
    
    
    
    
    
    
    64,343
    
    
    
    27,947
    
    
    
    
    
    
    
    92,290Deferred revenues
    
    
    
    
    
    
    21,060
    
    
    
    364
    
    
    
    
    
    
    
    21,424Federal income taxes payable
    
    
    9,573
    
    
    
    (7,704
    )
    
    
    22,839
    
    
    
    
    
    
    
    24,708Current deferred tax liabilities
    
    
    
    
    
    
    (11
    )
    
    
    3,829
    
    
    
    
    
    
    
    3,818Intercompany liabilities (assets)
    
    
    (147,863
    )
    
    
    47,631
    
    
    
    93,455
    
    
    
    6,777
    
    
    
    Other accrued liabilities
    
    
    5,512
    
    
    
    62,525
    
    
    
    29,324
    
    
    
    
    
    
    
    97,361(132,778
    )
    
    
    194,889
    
    
    
    177,758
    
    
    
    6,777
    
    
    
    246,646Long-Term Debt
    
    
    200,095
    
    
    
    6,189
    
    
    
    11,200
    
    
    
    
    
    
    
    217,484Deferred Tax Liabilities
    
    
    4,236
    
    
    
    9,031
    
    
    
    24,904
    
    
    
    
    
    
    
    38,171Other Long-Term Liabilities
    
    
    
    
    
    
    28,071
    
    
    
    1,294
    
    
    
    
    
    
    
    29,365Commitments and Contingencies
Minority Interests
    
    
    
    
    
    
    
    
    
    
    12,463
    
    
    
    
    
    
    
    12,463Stockholders Equity
    
    
    996,155
    
    
    
    860,359
    
    
    
    364,458
    
    
    
    (1,224,817
    )
    
    
    996,155$
    1,067,708
    
    
    $
    1,098,539
    
    
    $
    592,077
    
    
    $
    (1,218,040
    )
    
    $
    1,540,284
 20




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   General
  Critical Accounting Policies and Estimates
  Revenue Recognition
  Deferred Revenues and Charges
  Stock-Based Compensation
  21




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##### Table of Contents



Stock Option Plans
  Three Months EndedMarch 31,2006
    
    2005(Actual)
    
    (Pro orma)Valuation Assumptions -Expected Option Term (Years)
    
    
    5
    
    
    
    5Expected Volatility
    
    
    40
    %
    
    
    41
    %Expected Dividend Rate
    
    
    
    
    
    
    Risk Free Interest Rate
    
    
    4.73
    %
    
    
    3.74
    %
  Restricted Stock Plans
  22




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##### Table of Contents



Employee Stock Purchase Plan
  Three Months EndedMarch 31,2006
    
    2005(Actual)
    
    (Pro Forma)Valuation Assumptions -Expected Option Term (Years)
    
    
    1
    
    
    
    1Expected Volatility
    
    
    40
    %
    
    
    41
    %Expected Dividend Rate
    
    
    
    
    
    
    Risk Free Interest Rate
    
    
    4.74
    %
    
    
    2.79
    %
  Market Trends
  23




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##### Table of Contents



Three Months Ended March 31,2006
    
    
    2005WTI Oil(a)Average
    
    $
    63.34
    
    
    $
    49.83Ending
    
    
    66.63
    
    
    
    55.40Henry Hub Gas(b)Average
    
    $
    7.66
    
    
    $
    6.44Ending
    
    
    6.98
    
    
    
    7.44North American Rig Count(c)Average
    
    
    2,184
    
    
    
    1,800Ending
    
    
    2,171
    
    
    
    1,726International Rig Count(c)Average
    
    
    896
    
    
    
    815Ending
    
    
    898
    
    
    
    830
 
 (a)
    
    Price per barrel of West Texas Intermediate (WTI) crude. Source: Bloomberg Energy/Commodity
Service.(b)
    
    Price per MMBtu. Source: Bloomberg Energy/Commodity Service.(c)
    
    Source: Baker Hughes Rig Count (International Rig Count excludes China, the former Soviet
Union and certain embargoed countries). Future Market Trends and Expectations
    24




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##### Table of Contents



Results of Operations
  Three Months Ended March 31,2006
    
    
    2005
    
    
    % Change(In thousands)Revenues:Drilling Products and Services
    
    $
    194,259
    
    
    $
    128,350
    
    
    
    51
    %Drill Bits
    
    
    116,791
    
    
    
    90,626
    
    
    
    29
    %Tubular Technology and Services
    
    
    103,273
    
    
    
    73,120
    
    
    
    41
    %Corporate and Other
    
    
    102
    
    
    
    
    
    
    
    100
    %Total Revenues
    
    $
    414,425
    
    
    $
    292,096
    
    
    
    42
    %Operating Income (Loss):Drilling Products and Services
    
    $
    65,012
    
    
    $
    36,367
    
    
    
    79
    %Drill Bits
    
    
    35,558
    
    
    
    21,622
    
    
    
    64
    %Tubular Technology and Services
    
    
    31,243
    
    
    
    15,261
    
    
    
    105
    %Corporate and Other
    
    
    (17,433
    )
    
    
    (11,059
    )
    
    
    58
    %Total Operating Income
    
    $
    114,380
    
    
    $
    62,191
    
    
    
    84
    %
 Consolidated Revenues and Operating Income
   Drilling Products and Services
  Drill Bits
  Tubular Technology and Services
  Corporate and Other
  25




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##### Table of Contents



Other Items
   Liquidity and Capital Resources
 Overview
  Historical Cash Flows
  Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Net Cash Provided by Operating Activities
    
    $
    63,536
    
    
    $
    26,292Net Cash Used in Investing Activities
    
    
    (9,733
    )
    
    
    (8,074
    )Net Cash (Used in) Provided by Financing
Activities
    
    
    (22,732
    )
    
    
    8,832
 Operating Activities
  Investing Activities
  Capital Expenditures
  26




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##### Table of Contents



Financing Activities
  Long-Term Debt
   Stock Repurchase Program
  Other Commitments
  Recent Accounting Pronouncements
  Forward-Looking Statements and Exposures
  27




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##### Table of Contents



Risk Factors and Exposures
  Off-Balance Sheet Financing
  
 ITEM 3. Quantitative and Qualitative Market Risk Disclosures
 Foreign Currency Risk
  Interest Rates
  
 ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  28




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##### Table of Contents



PART II
 
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity in Securities and Use of Proceeds
    Number of
    
    
    
    
    
    Total Number of Shares
    
    Maximum Dollar Value ofShares
    
    Average Price
    
    Purchased as Part of a
    
    Shares that May Yet BePeriod
    
    Purchased
    
    Per Share
    
    Publicly Announced Plan
    
    Purchased Under the Plan(In thousands)January 1  31, 2006
    
    
    2,897
    
    
    $
    50.07
    
    
    
    
    
    
    February 1  28, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    March 1  31, 2006
    
    
    567,125
    
    
    $
    38.57
    
    
    
    522,500
    
    
    $
    129,891
 
 ITEM 6. Exhibits
 (a)
    
    Exhibits -
 Exhibit Number
    
    Description31.1
    
    
    Certification of Michael McShane31.2
    
    
    Certification of Matthew D. Fitzgerald32.1
    
    
    Section 1350 Certification
 29




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##### Table of Contents



SIGNATURES
  GRANT PRIDECO, INC.By:
    
    /s/ MATTHEW D. FITZGERALDMatthew D. FitzgeraldSr. Vice President and Chief Financial OfficerBy:
    
    /s/ GREG L. BOANEGreg L. BoaneCorporate Controller and Principal Accounting Officer
  30




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##### Table of Contents



Exhibit Number
    
    Description31.1
    
    
    Certification of Michael McShane31.2
    
    
    Certification of Matthew D. Fitzgerald32.1
    
    
    Section 1350 Certification
 31