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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission file number: 000-31579
 HYDRIL COMPANY
  DELAWARE
    
    95-2777268(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3300 NORTH SAM HOUSTON PARKWAY EAST 
HOUSTON, TX
    
    77032-3411(Address of principal executive offices)
    
    (Zip Code)
 (281) 449-2000
   Title of Class:
    
    Name of each exchange on which Registered:Common Stock, par value $.50 per share 
Rights to Purchase Preferred Stock
    
    Nasdaq Global Select Market
  þ o
  o þ
  þ o
 þ
  þ o o
 o þ
   Class
    
    Outstanding at February 15, 2007Common Stock, $.50 par value per share 
Class B common stock outstanding
    
    18,222,343 shares
2,928,332 shares
 DOCUMENTS INCORPORATED BY REFERENCE




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##### 



HYDRIL COMPANY
 Form 10-K
 For the Year Ended December 31, 2006
Index
 PagePart IItem 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    15Item 1B. Unresolved Staff Comments
    
    
    26Item 2. Properties
    
    
    27Item 3. Legal Proceedings
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item S-K 401(b) Executive Officers of the Registrant
    
    
    28Part IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    29Item 6. Selected Financial Data
    
    
    31Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    32Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 8. Financial Statements and Supplementary Data
    
    
    47Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    84Item 9A. Controls and Procedures
    
    
    84Item 9B. Other Information
    
    
    84Part IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    84Item 11. Executive Compensation
    
    
    84Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    85Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    85Item 14. Principal Accounting Fees and Services
    
    
    85Part IVItem 15. Exhibits and Financial Statement Schedules
    
    
    86Signatures
    
    
    89Forms of Change in Control AgreementsDescription of Non-Employee Director CompensationSubsidiaries of the RegistrantConsent of Independent Registered Public Accounting FirmPowers of AttorneyCertification by Christopher T. Seaver, CEOCertification by Chris D. North, CFOCertification by Christopher T. Seaver, CEOCertification by Chris D. North, CFO




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Cautionary Statement Regarding Forward-Looking Information
 This annual report contains forward-looking statements. These statements relate to future
events or our future financial performance, including our business strategy and product development
plans, as well as our proposed merger with a subsidiary of Tenaris S.A. These statements involve
known and unknown risks, uncertainties and assumptions including, but not limited to:
 
    
    the impact of changes in oil and natural gas prices and worldwide and domestic economic
conditions on drilling activity and demand for and pricing of Hydrils products,
    
    the risks associated with fixed-price contracts,
    
    the loss of distribution or change to distribution channels or methods or inventory
practices for premium connections in the U.S. and Canada,
    
    competition from steel mills,
    
    limitations on the availability of pipe for threading,
    
    the impact of imports of tubular goods and of international and domestic trade laws,
    
    factors that could cause our results to vary significantly from quarter to quarter,
    
    the consolidation of end-users,
    
    intense competition in our industry,
    
    the risks associated with international operations,
    
    the ability to attract and retain skilled labor,
    
    Hydrils ability to successfully develop new technologies and products and maintain and
increase its market share,
    
    failure to obtain stockholder approval or the failure to satisfy other closing
conditions, including regulatory approvals, with respect to the proposed merger with
Tenaris,
    
    the occurrence of any event, change or other circumstance that could give rise to the
termination of the merger agreement or to delays in the consummation of the merger,
    
    the failure of the proposed merger to close for any other reason,
    
    the amount of the costs, fees, expenses and charges relating to the merger,
    
    uncertainty concerning the effects of the pending merger transaction, and
    
    the retention of Hydril customers and personnel pending the merger transaction.
 Please read ITEM 1A RISK FACTORS for more information about many of these risks and
uncertainties. These factors may cause our companys or our industrys actual results, levels of
activity, performance or achievements to be materially different from those expressed or implied by
the forward-looking statements. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, could, expects, intends, plans, anticipated,
believes, estimated, potential, or the negative of these terms or other comparable
terminology.
 These statements are only projections based on anticipated industry activity. Although we
believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements.
 3




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PART I
 
 ITEM 1BUSINESS
    OVERVIEW OF OUR INDUSTRY
   4




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5




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Market for Premium Connections
    Average GulfAverage United
    
    Of MexicoStates Rig Count Over
    
    Rigs Under
    
    Average International15,000 ft (1)
    
    Contract (2)
    
    Rig Count (3)Year
    
    Number of Rigs
    
    Number of Rigs
    
    Number of Rigs2002
    
    
    128
    
    
    
    127
    
    
    
    7322003
    
    
    143
    
    
    
    124
    
    
    
    7712004
    
    
    170
    
    
    
    118
    
    
    
    8362005
    
    
    186
    
    
    
    130
    
    
    
    9082006
    
    
    212
    
    
    
    125
    
    
    
    925
 
 (1)
    
    Average rig count calculated by Hydril using weekly data published by Smith International.(2)
    
    Average rigs under contract calculated by Hydril using weekly data published by ODS-Petrodata
Group.(3)
    
    Average rig count calculated by Hydril using monthly data published by Baker Hughes
Incorporated. The international rig count includes data for Europe, the Middle East, Africa,
Latin America and Asia Pacific, and excludes data for China, Canada, the former Soviet
Union, and the United States as well as Sudan and Iran as of
January 1st 2006.  6




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Market for Pressure Control Equipment
    Average Worldwide Offshore
    
    Average United States Land RigRigs Under Contract (1)
    
    Count (2)Year
    
    Number of Rigs
    
    Number of Rigs2002
    
    
    530
    
    
    
    7172003
    
    
    527
    
    
    
    9242004
    
    
    538
    
    
    
    1,0952005
    
    
    568
    
    
    
    1,2902006
    
    
    593
    
    
    
    1,559
 
 (1)
    
    Average worldwide offshore rigs under contract calculated by Hydril using weekly data
published by ODS-Petrodata Group.(2)
    
    Average United States land rig count calculated by Hydril using weekly data published by
Baker Hughes Incorporated. BUSINESS SEGMENTS
 Our Premium Connection Business
   7




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
    
    Pressure tight sealing. Our metal-to-metal pressure tight sealing is designed to prevent
both gas and fluid leakage, a critical factor in the case of extreme pressure and
environmentally sensitive drilling.
    
    Tension resistance.Our premium integral thread designs have high tension strength, which
supports the weight of numerous sections of pipe strung together in deep wells.
    
    Torque capability. Our premium thread connection, in particular our proprietary Wedge
Thread connection, is designed to have torque capability that approaches pipe body
strength in casing applications and surpasses it in most drill pipe and tubing applications.
This design prevents connection damage due to overtorque, facilitates easier assembly and
disassembly and reduces wear and tear from recurring service to the pipe.
    
    Clearance.Our integral connections are machined directly onto the pipe, forming a smooth
connection with little or no increase in diameter of the pipe. Coupled connections, on the
other hand, use a bulkier third pipe, or coupling, to make a connection, resulting in less
clearance inside the well. This integral quality is particularly important in deep drilling
where well diameters become increasingly narrow because multiple strings of casing,
production tubing, or drill pipe are utilized in one well.
    
    Compression and bending flexibility. Our premium threads are designed to permit greater
compression and bending of pipe strings than standard connections, which is particularly
important in horizontal and extended-reach wells.
    
    Corrosion resistance. Our unique manufacturing processes and designs reduce the
propensity for galling, especially when applied to corrosion resistant materials, and extend
the useful life of the connections and drill string. Our corrosion barrier ring, when used
on plastic coated tubing connections, provides the
 8




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entire tubing string with continuous internal protection from corrosive well bore fluids and
also extends the useful life of the connections and tubing string. 
    
    Uniformity and compatibility. Our connections are manufactured worldwide with the same
design, high tolerance specifications, and centrally manufactured tools and gauges, which
enhances product uniformity and compatibility.
  Our Pressure Control Business
    Pressure Control Products
 Blowout preventers.
  
    
    Annular blowout preventers, which we invented more than 65 years ago, seal the well by
hydraulically closing a large rubber collar around the drill pipe or against itself if
nothing is in the well.
    
    Ram blowout preventers seal the well by hydraulically driving metal rams against each other
across the top of the well.
 Control Systems.
 9




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Integrated Systems.
 Diverters.
 Drill Stem Valves.
 Pulsation Dampeners.
 Production Chokes.
 Elastomers.
 Aftermarket Products and Services
   Research and Development
  10




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Our Customers, End-Users and Distribution
  Premium Connection Products.
   11




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Pressure Control Products.
  Our Competitors
  Premium Connection Products.
  Pressure Control Products.
 12




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Our Employees
   Insurance
   Environmental Regulation
    13




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International and Other Matters
   14




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ITEM 1ARISK FACTORS
  Risks
Associated with Pending Merger Transaction with Tenaris
 Failure to complete the merger could negatively impact the market price of Hydril common
stock.
  
    
    the market price of Hydrils common stock may decline to the extent that the current market
price of its shares reflects a market assumption that the merger will be completed;
    
    unless the failure to complete the merger is a result of a breach by Tenaris or Merger Sub,
costs relating to the merger, such as legal, accounting and financial advisory fees, and,
in specified circumstances, a termination fee of $77 million and
reimbursement of expenses up to $5 million, must be paid by Hydril even
if the merger is not completed; and
    
    the diversion of managements attention from the day-to-day business of Hydril and the
potential disruption to its employees and its relationships with customers, suppliers,
distributors and business partners during the period before the completion of the merger
may make it difficult for Hydril to regain its financial and market positions if the merger
does not occur.
   Until the merger is completed or the merger agreement is terminated, under certain
circumstances, Hydril may not be able to enter into a merger or business combination with another
party at a favorable price because of restrictions in the merger agreement.
  15




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Uncertainties associated with the merger may cause Hydril to lose employees and key personnel
and customers and business partners.
   Risks Associated With Our Business
 A material or extended decline in expenditures by the oil and gas industry, due to a decline
in oil and gas prices or other economic factors, would reduce our revenue.
    
    
    the level of worldwide oil and gas exploration and production activity;
    
    worldwide demand for energy, which is affected by worldwide economic conditions;
    
    the policies of the Organization of Petroleum Exporting Countries, or OPEC;
    
    significant decreases or increases in the production of oil or gas from countries due to
war or civil unrest, such as in Iraq, Nigeria or Venezuela;
    
    the cost of producing oil and gas;
    
    interest rates and the cost of capital;
    
    technological advances affecting hydrocarbon consumption, particularly oil and gas;
    
    environmental regulation;
    
    level of oil and gas inventories in storage;
 16




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
    
    tax policies, including windfall profit taxes on oil and gas companies, which have
recently been proposed in the United States Congress;
    
    extended disruptions of oil and gas drilling and production, refining or pipeline
operations as a result of weather-related factors, such as hurricanes or tropical storms in
the Gulf of Mexico or other natural disasters;
    
    policies of national governments; and
    
    war, civil disturbances and political instability.
  We may lose money on fixed-price contracts, which currently constitute a significant part of
our business, and such contracts could cause our quarterly revenue and earnings to fluctuate
significantly.
  
    
    changes in cost, estimates or expected production time;
    
    schedule delays caused by third party suppliers and subcontractors;
    
    unanticipated cost escalations from the time the order is received to the time of delivery,
which can be up to three years later;
    
    engineering design changes; and
    
    unexpected changes in the availability and cost of labor and raw materials and purchased
components.
  We may lose premium connection business to international and domestic competitors who produce
their own pipe, as well as other new entrants or lose business due to limitations on the
availability of pipe for threading.
  17




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Consolidation or loss of end-users of our products could adversely affect demand for our
products and services and reduce our revenue.
     18




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If we are unable to attract and retain skilled labor, the results of our manufacturing and
services activities will be adversely affected.
  Our quarterly sales and earnings may vary significantly, which could cause our stock price to
fluctuate.
  
    
    the level of drilling activity worldwide, as well as the particular geographic focus of the
activity;
    
    the variability of customer orders, which are particularly unpredictable in international
markets;
    
    the levels of premium connection inventories of our products held by our end-users and our
distributors;
    
    the mix of our products sold and the margins on those products;
    
    new products offered and sold by us or our competitors;
    
    weather conditions or other natural disasters that can affect our operations or our
customers operations, such as Hurricanes Katrina, Rita and Stan in 2005, which disrupted
operations at our Gulf Coast facilities, in particular at our Westwego, Louisiana facility,
as well as the operations of our customers in the region;
    
    changes in commodity prices and currency exchange rates, which in some cases affect the
costs and prices for our products;
    
    pipe costs and their impact on contract prices and the level of our sales that include the
pipe, which bears a low margin and can vary widely from quarter to quarter;
    
    delays in the delivery or other limitations on the availability of plain-end pipe from
steel mills for threading by us for our customers;
    
    the level of long-term capital equipment project orders which varies with the level of new
rig construction and refurbishment activity in the industry;
 19




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
    
    changes in drilling and exploration plans which can be particularly volatile in
international markets; and
    
    delays in the delivery of finished products to customers due to limitations on the
availability of marine transportation, particularly internationally.
  The level and pricing of tubular goods imported into the United States and Canada could
adversely affect demand for our products and our results of operations.
  
    
    United States and worldwide demand for tubular goods;
    
    the trade practices of and government subsidies to foreign producers; and
    
    the presence or absence of antidumping and countervailing duty orders.
   20




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We rely on a few distributors for sales of our premium connections in the United States and
Canada; a loss of one or more of our distributors or a change in the method of distribution could
adversely affect our ability to sell our products.
    Intense competition in our industry could result in reduced profitability and loss of market
share for us.
  
    
    availability and capabilities of the equipment;
    
    ability to meet the customers delivery schedule;
    
    price and indexes affecting price;
    
    pipe costs and their impact on contract prices;
    
    reputation;
    
    experience;
    
    safety record; and
    
    technology.
  21




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Our international operations may experience severe interruptions due to political, economic
and other risks.
  
    
    political instability, civil disturbances, war and terrorism;
    
    nationalization, expropriation, and nullification of contracts;
    
    changes in regulations and labor practices;
    
    changes in currency exchange rates and potential devaluations;
    
    changes in currency restrictions which could limit the repatriations of profits or capital;
    
    restrictive actions by local governments;
    
    seizure of plant and equipment; and
    
    changes in foreign tax laws.
  22




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The occurrence or threat of terrorist attacks could have an adverse affect on our results and
growth prospects, as well as on our ability to access capital and obtain adequate insurance.
  High fixed costs in the pressure control industry could exacerbate the level of price
competition for our products, adversely affecting our business and revenue.
  If we do not develop new technologies and products that are commercially successful, our
revenue may decline or we may be required to write-off any capitalized investment.
  
    
    design and commercially produce products that meet the needs of our customers;
    
    successfully market new products; and
    
    obtain and maintain patent protection.
  23




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Limitations on our ability to protect our intellectual property rights could cause a loss in
revenue and any competitive advantage we hold.
  The loss of any member of our senior management and other key employees may adversely affect
our results of operations.
 .
 We could be subject to substantial liability claims, which would adversely affect our results
and financial condition.
  24




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Changes in regulation or environmental compliance costs and liabilities could have a material
adverse effect on our results and financial condition.
  We could become subject to claims related to the release of hazardous substances which could
adversely affect our results and financial condition.
  25




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Liability to customers under warranties may materially and adversely affect our earnings.
  Excess cash is invested in marketable securities which may subject us to potential losses.
  
 ITEM 1BUNRESOLVED STAFF COMMENTS
  26




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ITEM 2PROPERTIES
  Approximate SquareLocation
    
    Footage (Buildings)
    
    DescriptionUnited StatesHouston, Texas
    
    
    240,530
    
    
    Pressure control products
manufacturing; principal executive
offices.Houston, Texas
    
    
    244,500
    
    
    Premium connection manufacturing.Houston, Texas
    
    
    100,000
    
    
    Pressure control elastomer products
manufacturing.Westwego, Louisiana
    
    
    44,800
    
    
    Premium connection manufacturing.Bakersfield, California (leased)
    
    
    8,000
    
    
    Premium connection manufacturing;warehouses pressure control replacement
parts.InternationalVeracruz, Mexico
    
    
    141,000
    
    
    Premium connection manufacturing.Nisku, Alberta, Canada (leased)
    
    
    48,000
    
    
    Premium connection manufacturing.Pipe Nagar, Maharashtra, India (1)
    
    
    30,000
    
    
    Premium connection manufacturing.Batam,
Indonesia (land is leased)
    
    
    30,000
    
    
    Premium connection manufacturing.
Pressure controlVeracruz, Mexico.
    
    
    33,485
    
    
    manufacturing.Veracruz, Mexico
    
    
    21,200
    
    
    Thread protector manufacturing for
premium connections.Warri, Nigeria
    
    
    20,000
    
    
    Repair and service of premium
connections.Aberdeen, Scotland
    
    
    22,000
    
    
    Premium connection manufacturing;
warehouses pressure control replacement
parts.Dartmouth, Nova Scotia, Canada (leased)
    
    
    15,600
    
    
    Premium connection manufacturing.New Mills, England (leased)
    
    
    10,000
    
    
    Pressure control products manufacturing.
 
 (1)
    
    This facility is owned by a joint venture of which we own 50%.  27




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ITEM 3LEGAL PROCEEDINGS
  
 ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM S-K 401(b) EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    Position(s)Richard C. Seaver
    
    
    84
    
    
    Chairman Emeritus of the BoardChristopher T. Seaver
    
    
    58
    
    
    Chairman of the Board, President and
Chief Executive OfficerCharles E. Jones
    
    
    47
    
    
    Executive Vice President and Chief
Operating OfficerNeil G. Russell
    
    
    61
    
    
    Senior Vice President-Premium
Connections and Senior Vice
President-Business DevelopmentE. Charles Chauviere III
    
    
    42
    
    
    Vice President-Pressure ControlChris D. North
    
    
    51
    
    
    Vice President -Finance and Chief
Financial Officer and SecretaryMichael D. Danford
    
    
    44
    
    
    Vice President-Human Resources
 Richard C. Seaver
 Christopher T. Seaver
 Charles E. Jones
 Neil G. Russell
 28




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E. Charles Chauviere III
 Chris D. North
 Michael D. Danford
 
 PART II
 
 ITEM 5MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  High
    
    Low2005First Quarter
    
    $
    63.18
    
    
    $
    41.36Second Quarter
    
    
    64.58
    
    
    
    46.37Third Quarter
    
    
    70.66
    
    
    
    53.59Fourth Quarter
    
    
    71.48
    
    
    
    55.432006First Quarter
    
    $
    86.49
    
    
    $
    62.69Second Quarter
    
    
    89.71
    
    
    
    65.51Third Quarter
    
    
    79.49
    
    
    
    53.75Fourth Quarter
    
    
    77.90
    
    
    
    48.71
  29




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Total Number of
    
    Maximum ApproximateShares Purchased as
    
    Dollar Value of SharesTotal Number
    
    Average
    
    Part of Publicly
    
    that May Yet beof Shares
    
    Price Per
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Purchased
    
    Share
    
    Programs
    
    Plans or ProgramsOctober 1 - 31, 2006.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 1  30, 2006
    
    
    392,708
    (1)
    
    $
    71.49
    
    
    
    392,708
    
    
    $122 million(2)December 1 - 31, 2006
    
    
    610,166
    (1)
    
    $
    74.30
    
    
    
    610,166
    
    
    $77 million(2)Total
    
    
    1,002,874
    (1)
    
    $
    73.20
    
    
    
    1,002,874
 
 (1)
    
    During the quarter ended December 31, 2006, the Company repurchased a total of
1,002,874 shares at an average price, including commission, of $73.20 per share, pursuant to
the repurchase authorization of the Board of Directors discussed below in footnote (2). This
included 186,362 shares delivered to Hydril through December 31, 2006 under a prepaid share
repurchase contract with a third party financial institution. Under this agreement, entered
into in November 2006, Hydril advanced $30 million in cash to the institution in exchange for
the delivery by the institution of a variable number of shares on a monthly basis from
November 2006 through February 2007. The number of shares ultimately repurchased under the
agreement was based upon the volume weighted average price of Hydrils shares during the term
of the agreement less a discount. See Mangements Discussion and AnalysisLiquidity and
Capital Resources for additional information regarding this prepared share repurchase
contract and a similar contract entered into in January 2007.(2)
    
    On November 9, 2006 the Board of Directors authorized the repurchase of up to $150
million of the Companys common stock. As of December 31, 2006, approximately $73 million of
stock had been repurchased by Hydril pursuant to this authorization. This does not give
effect to approximately $17 million accrued on Hydrils balance sheet in Other current
assets at December 31, 2006 which represents the estimated portion, as of that date, of the
total amount prepaid by the Company pursuant to the November 2006 prepaid share repurchase
contract described in footnote (1) above relating to shares to be delivered in January and
February of 2007. 30




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ITEM 6SELECTED FINANCIAL DATA
  Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands, except per share data)Operating Data:Revenue:Premium connection
    
    $
    296,982
    
    
    $
    246,470
    
    
    $
    184,782
    
    
    $
    110,270
    
    
    $
    127,116Pressure control
    
    
    206,066
    
    
    
    130,254
    
    
    
    100,571
    
    
    
    101,747
    
    
    
    114,408Total revenue
    
    
    503,048
    
    
    
    376,724
    
    
    
    285,353
    
    
    
    212,017
    
    
    
    241,524Gross profit
    
    
    203,292
    
    
    
    163,563
    
    
    
    118,413
    
    
    
    81,893
    
    
    
    90,670Selling, general and administration
expenses
    
    
    71,080
    
    
    
    58,607
    
    
    
    52,007
    
    
    
    47,730
    
    
    
    46,345Operating income
    
    
    132,212
    
    
    
    104,956
    
    
    
    66,406
    
    
    
    34,163
    
    
    
    44,325Interest expense (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,101
    
    
    
    4,831Interest income
    
    
    7,767
    
    
    
    3,900
    
    
    
    1,113
    
    
    
    724
    
    
    
    1,477Other income (expense) (2)
    
    
    (241
    )
    
    
    724
    
    
    
    (335
    )
    
    
    (135
    )
    
    
    (214
    )Net income (3)
    
    $
    91,280
    
    
    $
    73,243
    
    
    $
    46,487
    
    
    $
    25,578
    
    
    $
    26,492Earnings per share:Basic
    
    $
    3.94
    
    
    $
    3.12
    
    
    $
    2.02
    
    
    $
    1.13
    
    
    $
    1.18Diluted
    
    $
    3.88
    
    
    $
    3.05
    
    
    $
    1.98
    
    
    $
    1.11
    
    
    $
    1.16Weighted average shares
outstanding:Basic
    
    
    23,169
    
    
    
    23,501
    
    
    
    22,996
    
    
    
    22,711
    
    
    
    22,414Diluted
    
    
    23,526
    
    
    
    24,019
    
    
    
    23,432
    
    
    
    23,001
    
    
    
    22,833Other Data:Capital expenditures
    
    $
    32,195
    
    
    $
    17,144
    
    
    $
    12,356
    
    
    $
    8,558
    
    
    $
    17,928Depreciation and amortization
    
    
    14,802
    
    
    
    13,687
    
    
    
    12,637
    
    
    
    11,900
    
    
    
    10,827Balance Sheet Data:Working capital
    
    $
    183,482
    
    
    $
    260,761
    
    
    $
    176,222
    
    
    $
    116,495
    
    
    $
    90,483Property, net
    
    
    123,235
    
    
    
    105,138
    
    
    
    102,368
    
    
    
    105,047
    
    
    
    107,031Total assets
    
    
    510,031
    
    
    
    450,562
    
    
    
    343,646
    
    
    
    267,116
    
    
    
    278,208Other long-term liabilities
    
    
    18,635
    
    
    
    16,771
    
    
    
    14,100
    
    
    
    14,464
    
    
    
    16,370Total stockholders equity
    
    
    290,608
    
    
    
    360,835
    
    
    
    274,783
    
    
    
    217,010
    
    
    
    187,137
 
 (1)
    
    Includes a $1.2 million pre-tax make-whole premium attributable to the Companys prepayment
of $30.0 million on its senior unsecured notes during the third quarter of 2002.(2)
    
    Other income for 2005 includes a $2.2 million gain recorded from the sale of real estate not
used in operations.(3)
    
    Net income for 2004 includes a U.S. research and experimentation income tax credit of $0.9
million related to qualified spending for the two-year period from 2002 through 2003, and a
U.S. income tax benefit (extraterritorial income exclusion) of $1.3 million related to export
shipments for the years 2002 and 2003. Net income for 2003 includes a U.S. research and
experimentation income tax credit of $3.7 million related to qualified spending for the
ten-year period from 1992 through 2001. 31




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ITEM 7-MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
      32




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33




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Revenue
  Gross Profit
  Selling, General and Administration Expenses
  Operating Income (Loss)
  RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 Revenue
  34




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##### Table of Contents



Gross Profit
  Selling, General and Administrative Expenses
  Operating Income
  Other Income and Expense
  Provision for Income Taxes
  RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
 Revenue
  35




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##### Table of Contents



Gross Profit
  Selling, General and Administrative Expenses
  Operating Income
  Interest Expense
  Other Income and Expense
  Provision for Income Taxes
  36




---



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LIQUIDITY AND CAPITAL RESOURCES
    Operating Activities
   Investing Activities
  37




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Financing Activities
     Credit Facilities
   38




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##### Table of Contents



Contractual Cash Obligations
  Payments Due by Period(in millions)
    
    Total
    
    
    2007
    
    
    2008-2009
    
    
    2010-2011
    
    
    ThereafterOperating leases (1)
    
    $
    4.2
    
    
    $
    2.2
    
    
    $
    1.8
    
    
    $
    0.2
    
    
    $
    Purchase Obligations (2)
    
    
    118.5
    
    
    
    110.1
    
    
    
    6.8
    
    
    
    1.6
    
    
    
    Other long-term liabilities (3)
    
    
    22.5
    
    
    
    0.7
    
    
    
    1.5
    
    
    
    1.9
    
    
    
    18.4Total
    
    $
    145.2
    
    
    $
    113.0
    
    
    $
    10.1
    
    
    $
    3.7
    
    
    $
    18.4
 
 (1)
    
    Represents obligations for minimum payments under noncancelable operating leases. The
Companys lease commitments are primarily for operating facilities, vehicles and equipment.(2)
    
    Represents obligations under outstanding purchase orders and other commitments and
estimated future cash payments pursuant to contractual obligations related to investments
in joint ventures.(3)
    
    Represents estimated future cash payments for post-retirement health and life benefits,
pension plan benefits and deferred compensation. Capital Expenditures
     Dividends
  39




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BACKLOG
    CRITICAL ACCOUNTING ESTIMATES
  Revenue Recognition
    40




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##### Table of Contents



Inventories
    Product Warranties
  41




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##### Table of Contents



Pension Plan
     Impact on 2006Pre-tax Pension
    
    Impact on December(in millions)
    
    Expense
    
    31, 2006 PBOChange in Assumption:50 basis point decrease in discount rate
    
    $
    0.3
    
    
    $
    3.550 basis point increase in discount rate
    
    
    (0.2
    )
    
    
    (3.1
    )50 basis point decrease in expected return on assets
    
    
    0.2
    
    
    
    n/a50 basis point increase in expected return on assets
    
    
    (0.2
    )
    
    
    n/a
 42




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##### Table of Contents



Post Retirement Health and Life Benefits
    Impact on 2006
    
    Impact on DecemberService and
    
    31, 2006 Benefit(in millions)
    
    Interest
    
    ObligationChange in Assumption:50 basis point decrease in discount rate.
    
    *
    
    $
    0.250 basis point increase in discount rate.
    
    *
    
    
    (0.2
    )50 basis point decrease in expected return on assets
    
    n/a
    
    
    n/a50 basis point increase in expected return on assets
    
    n/a
    
    
    n/a
 
 *
    
    Amount was negligible. Tax Matters
   43




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RECENT ACCOUNTING PRONOUNCEMENTS
   44




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##### Table of Contents



ITEM 7A.-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign currency exchange rate risk
  45




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46




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ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 HYDRIL
 INDEX TO FINANCIAL STATEMENTS AND REPORTS
 PageMANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
    
    
    48REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (REGARDING
AUDIT OF FINANCIAL STATEMENTS)
    
    
    49REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (REGARDING
MANAGEMENTS ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL
REPORTING)
    
    
    50FINANCIAL STATEMENTS:Consolidated Balance SheetsDecember 31, 2006 and 2005
    
    
    52Consolidated Statements of OperationsYears Ended December 31, 2006, 2005 and 2004
    
    
    54Consolidated Statements of Changes in Stockholders Equity and Comprehensive IncomeYears Ended December 31, 2006, 2005 and 2004
    
    
    55Consolidated Statements of Cash FlowsYears Ended December 31, 2006, 2005 and 2004
    
    
    56NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    57
 47




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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
     
 48




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49




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      50




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51




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HYDRIL COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Information)
 December 31,2006
    
    
    2005CURRENT ASSETS:Cash and cash equivalents
    
    $
    105,473
    
    
    $
    65,145Investments and marketable securities
    
    
    8,209
    
    
    
    108,084Receivables:Trade, less allowance for doubtful accounts: 2006, $1,210; 2005, $759
    
    
    98,734
    
    
    
    67,523Contract costs and estimated earnings in excess of billings
    
    
    25,520
    
    
    
    8,803Other
    
    
    4,041
    
    
    
    1,878Total receivables
    
    
    128,295
    
    
    
    78,204Inventories:Finished goods
    
    
    56,958
    
    
    
    28,917Work-in-process
    
    
    21,815
    
    
    
    18,828Raw materials
    
    
    18,013
    
    
    
    9,901Total inventories
    
    
    96,786
    
    
    
    57,646Deferred tax asset
    
    
    9,715
    
    
    
    11,390Other current assets
    
    
    22,559
    
    
    
    3,669Total current assets
    
    
    371,037
    
    
    
    324,138PROPERTY:Land and improvements
    
    
    24,986
    
    
    
    21,846Buildings and improvements
    
    
    57,719
    
    
    
    52,620Machinery and equipment
    
    
    178,430
    
    
    
    178,145Construction-in-progress
    
    
    11,308
    
    
    
    5,004Total
    
    
    272,443
    
    
    
    257,615Less accumulated depreciation and amortization
    
    
    (149,208
    )
    
    
    (152,477
    )Property, net
    
    
    123,235
    
    
    
    105,138OTHER LONG-TERM ASSETS:Investments in marketable securities
    
    
    
    
    
    
    8,387Deferred tax asset
    
    
    256
    
    
    
    212Other assets
    
    
    15,503
    
    
    
    12,687TOTAL
    
    $
    510,031
    
    
    $
    450,562
 52




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##### Table of Contents



HYDRIL COMPANY
 CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Information)
 December 31,2006
    
    
    2005CURRENT LIABILITIES:Accounts payable
    
    $
    40,695
    
    
    $
    23,443Billings in excess of contract costs and estimated earnings
    
    
    102,260
    
    
    
    4,482Accrued liabilities
    
    
    29,913
    
    
    
    26,791Income taxes payable
    
    
    14,687
    
    
    
    8,661Total current liabilities
    
    
    187,555
    
    
    
    63,377LONG-TERM LIABILITIES:Deferred tax liability
    
    
    13,233
    
    
    
    9,579Other
    
    
    18,635
    
    
    
    16,771Total long-term liabilities
    
    
    31,868
    
    
    
    26,350COMMITMENTS AND CONTINGENCIES(Note 13)
STOCKHOLDERS EQUITY:Capital stock:Preferred stock  authorized, 10,000,000 shares of $1 par value;
none issued or outstanding
    
    
    
    
    
    
    Common stock  authorized 75,000,000 shares of $.50 par
value; 20,922,239 and 20,182,531 shares issued at December 31, 2006
and 2005, respectively
    
    
    10,461
    
    
    
    10,091Class B common stock  authorized, 32,000,000 shares of $.50 par
value; 2,980,305 and 3,479,920 shares issued and outstanding at
December 31, 2006 and 2005, respectively
    
    
    1,490
    
    
    
    1,740Additional paid-in capital
    
    
    84,775
    
    
    
    79,356Retained earnings
    
    
    371,069
    
    
    
    279,789Deferred compensation
    
    
    
    
    
    
    (6,980
    )Accumulated other comprehensive loss
    
    
    (3,773
    )
    
    
    (3,161
    )Less treasury stock, at cost; 2,547,631 and 0 shares at December 31,
2006 and 2005, respectively
    
    
    (173,414
    )
    
    
    Total stockholders equity
    
    
    290,608
    
    
    
    360,835TOTAL
    
    $
    510,031
    
    
    $
    450,562
 53




---



##### Table of Contents



HYDRIL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Amounts)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004REVENUE
    
    $
    503,048
    
    
    $
    376,724
    
    
    $
    285,353COST OF SALES
    
    
    299,756
    
    
    
    213,161
    
    
    
    166,940GROSS PROFIT
    
    
    203,292
    
    
    
    163,563
    
    
    
    118,413SELLING, GENERAL &
ADMINISTRATION EXPENSES:Engineering
    
    
    14,586
    
    
    
    12,075
    
    
    
    11,618Sales and marketing
    
    
    23,873
    
    
    
    21,516
    
    
    
    18,473General and administration
    
    
    32,621
    
    
    
    25,016
    
    
    
    21,916Total
    
    
    71,080
    
    
    
    58,607
    
    
    
    52,007OPERATING INCOME
    
    
    132,212
    
    
    
    104,956
    
    
    
    66,406INCOME FROM UNCONSOLIDATED
ENTITIES
    
    
    133
    
    
    
    
    
    
    
    INTEREST INCOME
    
    
    7,767
    
    
    
    3,900
    
    
    
    1,113OTHER INCOME (EXPENSE), NET
    
    
    (241
    )
    
    
    724
    
    
    
    (335
    )INCOME BEFORE INCOME
TAXES
    
    
    139,871
    
    
    
    109,580
    
    
    
    67,184PROVISION FOR INCOME
TAXES
    
    
    48,591
    
    
    
    36,337
    
    
    
    20,697NET INCOME
    
    $
    91,280
    
    
    $
    73,243
    
    
    $
    46,487EARNINGS PER SHARE:BASIC
    
    $
    3.94
    
    
    $
    3.12
    
    
    $
    2.02DILUTED
    
    $
    3.88
    
    
    $
    3.05
    
    
    $
    1.98WEIGHTED AVERAGE SHARES
OUTSTANDING:BASIC
    
    
    23,168,589
    
    
    
    23,500,620
    
    
    
    22,996,401DILUTED
    
    
    23,526,037
    
    
    
    24,019,273
    
    
    
    23,432,493
 54




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##### Table of Contents



HYDRIL COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2004, 2005 and 2006
(In Thousands, Except Share Amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    

    Class B Common Stock







    
    
    Paid-In
    
    
    Retained
    
    
    Deferred

    
    
    
    Comprehensive
    
    
TreasuryShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    Loss
    
    
    Stock
    
    
    TotalBalance, December 31, 2003
    
    
    16,058,792
    
    
    $
    8,029
    
    
    
    6,757,721
    
    
    $
    3,379
    
    
    $
    49,312
    
    
    $
    160,059
    
    
    $
    (1,801
    )
    
    $
    (1,968
    )
    
    $
    
    
    
    $
    217,010Net Income
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    46,487
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    46,487Other
Comprehensive Income, net of tax
Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    84Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,487
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    46,571Issuance of Common stock-employee
stock purchase plan, exercise of stock
options, restricted stock and vested
restricted units
    
    
    446,218
    
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    7,546
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,770Tax benefit on option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,773
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,773Issuance of Class B Common stock-
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    8,857
    
    
    
    4
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Conversion of Class B Common stock to
Common stock
    
    
    2,146,448
    
    
    
    1,073
    
    
    
    (2,146,448
    )
    
    
    (1,073
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards of Restricted units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,374
    
    
    
    
    
    
    
    (2,374
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    618
    
    
    
    
    
    
    
    
    
    
    
    618Forfeitures of restricted units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (232
    )
    
    
    
    
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2004
    
    
    18,651,458
    
    
    $
    9,326
    
    
    
    4,620,130
    
    
    $
    2,310
    
    
    $
    61,810
    
    
    $
    206,546
    
    
    $
    (3,325
    )
    
    $
    (1,884
    )
    
    $
    
    
    
    $
    274,783Net Income
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    73,243
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    73,243Other Comprehensive Loss, net of tax
Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,277
    )
    
    
    
    
    
    
    (1,277
    )Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,243
    
    
    
    
    
    
    
    (1,277
    )
    
    
    
    
    
    
    71,966Issuance of Common stock-employee
stock purchase plan, exercise of stock
options, restricted stock and vested
restricted units
    
    
    390,863
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    7,591
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,786Tax benefit on option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,667Conversion of Class B Common stock to
Common stock
    
    
    1,140,210
    
    
    
    570
    
    
    
    (1,140,210
    )
    
    
    (570
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards of Restricted units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,433
    
    
    
    
    
    
    
    (5,433
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,633
    
    
    
    
    
    
    
    
    
    
    
    1,633Forfeitures of restricted units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (145
    )
    
    
    
    
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2005
    
    
    20,182,531
    
    
    $
    10,091
    
    
    
    3,479,920
    
    
    $
    1,740
    
    
    $
    79,356
    
    
    $
    279,789
    
    
    $
    (6,980
    )
    
    $
    (3,161
    )
    
    $
    
    
    
    $
    360,835Net Income
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    91,280
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    91,280Other Comprehensive Loss, net of tax
Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (987
    )
    
    
    
    
    
    
    (987
    )Total
Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,280
    
    
    
    
    
    
    
    (987
    )
    
    
    
    
    
    
    90,293Issuance of Common stock-employee stock
purchase plan and exercise of stock
options
    
    
    213,950
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    4,993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,100Tax benefit on option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,305Treasury shares purchased at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (173,414
    )
    
    
    (173,414
    )Reclassification of deferred compensation
in accordance with the adoption of
SFAS 123(R) See Note 2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,980
    )
    
    
    
    
    
    
    6,980
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,031
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,031Conversion of Class B Common stock to
Common stock
    
    
    499,615
    
    
    
    250
    
    
    
    (499,615
    )
    
    
    (250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vesting of
Restricted units/stock
    
    
    26,143
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    (812
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (799
    )Forfeitures of restricted units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (118
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (118
    )Initial adoption of SFAS 158, net of tax
See Note 8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375
    
    
    
    
    
    
    
    375Balance, December 31, 2006
    
    
    20,922,239
    
    
    $
    10,461
    
    
    
    2,980,305
    
    
    $
    1,490
    
    
    
    $84,775
    
    
    $
    371,069
    
    
    $
    
    
    
    $
    (3,773
    )
    
    $
    (173,414
    )
    
    $
    290,608
 55




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##### Table of Contents



HYDRIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    91,280
    
    
    $
    73,243
    
    
    $
    46,487Adjustments to reconcile net income to net
cash provided by operating activities:Stock-based compensation
    
    
    4,913
    
    
    
    1,633
    
    
    
    618Depreciation and amortization
    
    
    14,802
    
    
    
    13,687
    
    
    
    12,637Deferred income taxes
    
    
    5,258
    
    
    
    7,552
    
    
    
    3,127Provision for doubtful accounts
    
    
    470
    
    
    
    33
    
    
    
    81Equity income in unconsolidated affiliates
    
    
    (133
    )
    
    
    
    
    
    
    Gain on sale of real estate holdings not used in operations
    
    
    
    
    
    
    (2,199
    )
    
    
    Change in operating assets and liabilities:Receivables
    
    
    (33,844
    )
    
    
    (11,853
    )
    
    
    (20,934
    )Contract costs and estimated earnings in excess of billings
    
    
    (16,717
    )
    
    
    (3,943
    )
    
    
    (494
    )Inventories
    
    
    (39,140
    )
    
    
    (22,826
    )
    
    
    1,596Other current and non-current assets
    
    
    (272
    )
    
    
    4,091
    
    
    
    6,276Accounts payable
    
    
    17,252
    
    
    
    151
    
    
    
    9,811Contract billings in excess of costs
    
    
    97,778
    
    
    
    4,140
    
    
    
    (145
    )Accrued liabilities
    
    
    1,711
    
    
    
    1,974
    
    
    
    7,717Income taxes payable
    
    
    6,026
    
    
    
    2,759
    
    
    
    1,552Other long-term liabilities
    
    
    1,090
    
    
    
    1,394
    
    
    
    (364
    )Net cash provided by operating activities
    
    
    150,474
    
    
    
    69,836
    
    
    
    67,965NET CASH FROM INVESTING ACTIVITIES:Purchase of held-to-maturity investments
    
    
    
    
    
    
    (20,787
    )
    
    
    (29,508
    )Proceeds from held-to-maturity investments
    
    
    7,737
    
    
    
    27,043
    
    
    
    15,095Purchase of available-for-sale investments
    
    
    (73,070
    )
    
    
    (110,535
    )
    
    
    (47,495
    )Proceeds from available-for-sale investments
    
    
    173,595
    
    
    
    60,674
    
    
    
    2,755Capital expenditures
    
    
    (32,195
    )
    
    
    (17,144
    )
    
    
    (12,356
    )Proceeds from the sale of real estate not used in operations
    
    
    
    
    
    
    2,935
    
    
    
    Purchase of a product line
    
    
    
    
    
    
    (3,640
    )
    
    
    Other, net
    
    
    (4,233
    )
    
    
    (2,756
    )
    
    
    (750
    )Net cash provided by (used in) investing activities
    
    
    71,834
    
    
    
    (64,210
    )
    
    
    (72,259
    )NET CASH FROM FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    152
    
    
    
    265
    
    
    
    242Net proceeds from stock option exercises
    
    
    4,948
    
    
    
    7,521
    
    
    
    7,571Purchase of treasury stock
    
    
    (173,414
    )
    
    
    
    
    
    
    Excess tax benefits from stock option exercises
    
    
    2,921
    
    
    
    
    
    
    
    Advance payment on purchases of treasury stock
    
    
    (16,587
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (181,980
    )
    
    
    7,786
    
    
    
    7,813NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    40,328
    
    
    
    13,412
    
    
    
    3,519CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    65,145
    
    
    
    51,733
    
    
    
    48,214CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    105,473
    
    
    $
    65,145
    
    
    $
    51,733SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Income taxes paid:Domestic
    
    $
    15,381
    
    
    $
    4,406
    
    
    $
    2,530Foreign
    
    
    17,262
    
    
    
    15,981
    
    
    
    8,678
 56




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##### Table of Contents



HYDRIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Operations 
 Principles of Consolidation
 Use of Estimates 
 Revenue Recognition 
  Cash and Cash Equivalents 
 Investments
  57




---



##### Table of Contents



Allowance for Doubtful Accounts 
 (in thousands)
    
    2006
    
    
    2005
    
    
    2004Beginning balance
    
    $
    759
    
    
    $
    1,214
    
    
    $
    1,127Additions charged to expense
    
    
    470
    
    
    
    33
    
    
    
    81Accounts written off
    
    
    
    
    
    
    (24
    )
    
    
    (37
    )Other adjustments
    
    
    (19
    )
    
    
    (464
    )
    
    
    43Ending balance
    
    $
    1,210
    
    
    $
    759
    
    
    $
    1,214
  Inventories
  (in thousands)
    
    2006
    
    
    2005
    
    
    2004Beginning balance
    
    $
    9,338
    
    
    $
    9,810
    
    
    $
    11,103Provision for excess and obsolete inventory
    
    
    990
    
    
    
    620
    
    
    
    2,753Inventory disposed of during the year
    
    
    (81
    )
    
    
    (1,092
    )
    
    
    (4,046
    )Ending balance
    
    $
    10,247
    
    
    $
    9,338
    
    
    $
    9,810
 Property
 Buildings and improvements
    
    15  45 yearsMachinery and equipment.
    
    3  12 years
 58




---



##### Table of Contents



Impairment of Long-Lived Assets
  Product warranties 
 Research and Development Costs
 Environmental Liabilities
 Income Taxes
  59




---



##### Table of Contents



Foreign Currencies Translation
 Concentration of Credit and Customer Risk
 2. STOCK-BASED COMPENSATION
    60




---



##### Table of Contents



Year Ended December 31,(in thousands, except per share data)
    
    2005
    
    
    2004Net income, as reported
    
    $
    73,243
    
    
    $
    46,487Add: Total stock-based employee
compensation for restricted stock awards
included in reported net income, net of tax.
    
    
    1,091
    
    
    
    407Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of tax
    
    
    (2,778
    )
    
    
    (2,295
    )Pro forma net income
    
    $
    71,556
    
    
    $
    44,599Earnings per share:Basic-as reported
    
    $
    3.12
    
    
    $
    2.02Basic-pro forma
    
    $
    3.04
    
    
    $
    1.94Diluted-as reported
    
    $
    3.05
    
    
    $
    1.98Diluted-pro forma
    
    $
    2.98
    
    
    $
    1.90
 61




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##### Table of Contents



Stock Options
   Weighted - Average
    
    
    Aggregate IntrinsicWeighted- Average
    
    
    Remaining
    
    
    Value (inOptions
    
    Shares
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    thousands)Outstanding at December 31, 2005
    
    
    660,343
    
    
    $
    24.89Granted
    
    
    
    
    
    
    Exercised
    
    
    (210,700
    )
    
    
    23.48Cancelled
    
    
    (2,484
    )
    
    
    27.83Outstanding at December 31, 2006
    
    
    447,159
    
    
    $
    25.53
    
    
    
    6.1
    
    
    $
    22,351Exercisable at December 31, 2006
    
    
    228,791
    
    
    $
    23.07
    
    
    
    5.6
    
    
    $
    11,999
  Weighted-AverageGrant-Date FairNonvested Shares
    
    Shares
    
    
    ValueNonvested at December 31, 2005
    
    
    417,208
    
    
    $
    10.81Granted
    
    
    
    
    
    
    Vested
    
    
    (196,356
    )
    
    
    10.83Forfeited
    
    
    (2,484
    )
    
    
    11.02Nonvested at December 31, 2006
    
    
    218,368
    
    
    $
    10.81
   2006*
    
    
    2005*
    
    
    2004Expected life (years)
    
    
    
    
    
    
    
    
    
    
    3.71Interest rate
    
    
    
    
    
    
    
    
    
    
    3.67
    %Volatility
    
    
    
    
    
    
    
    
    
    
    36.00
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    0.00
    %Weighted-average fair value per share at grant date
    
    
    
    
    
    
    
    
    
    $
    9.34
 
 *
 62




---



##### Table of Contents



Restricted Stock and Restricted Stock Units
   Weighted-AverageGrant-Date FairNonvested Shares
    
    Shares
    
    
    ValueNonvested at December 31, 2005
    
    
    245,054
    
    
    $
    38.37Granted
    
    
    87,500
    
    
    
    75.20Vested
    
    
    (36,772
    )
    
    
    27.17Forfeited
    
    
    (2,520
    )
    
    
    47.04Nonvested at December 31, 2006
    
    
    293,262
    
    
    $
    50.69
 3. TREASURY STOCK
    63




---



##### Table of Contents



4. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
  December 31,(in thousands)
    
    2006
    
    
    2005Accrued liabilities:Accrued payroll, bonus and related
    
    $
    7,606
    
    
    $
    8,061Taxes (property, sales, payroll, other).
    
    
    6,484
    
    
    
    5,145Employee benefits
    
    
    4,609
    
    
    
    4,783Product warranties
    
    
    1,560
    
    
    
    1,552Other
    
    
    9,654
    
    
    
    7,250Total
    
    $
    29,913
    
    
    $
    26,791Other long-term liabilities:Post retirement health and life benefits
    
    $
    6,162
    
    
    $
    7,245Deferred compensation
    
    
    5,399
    
    
    
    3,869Pension plan benefits
    
    
    3,736
    
    
    
    3,093Income tax obligation
    
    
    2,564
    
    
    
    2,564Other
    
    
    774
    
    
    
    Total
    
    $
    18,635
    
    
    $
    16,771
  2006
    
    
    2005
    
    
    2004(in thousands)Beginning balance
    
    $
    1,552
    
    
    $
    2,341
    
    
    $
    2,192Claims paid
    
    
    (289
    )
    
    
    (568
    )
    
    
    (530
    )Additional warranty charged (credited) to expense
    
    
    297
    
    
    
    (221
    )
    
    
    679Ending balance
    
    $
    1,560
    
    
    $
    1,552
    
    
    $
    2,341
 64




---



##### Table of Contents



5. LONG-TERM CONTRACTS
  December 31,(in thousands)
    
    2006
    
    
    2005Costs and estimated earnings on uncompleted contracts
    
    $
    76,383
    
    
    $
    19,321Less: billings to date
    
    
    (153,123
    )
    
    
    (15,000
    )Excess of billings over costs and estimated earnings
    
    $
    (76,740
    )
    
    $
    4,321Included in the accompanying balance sheets under the
following captions:Contract costs and estimated earnings in excess of billings
    
    $
    25,520
    
    
    $
    8,803Billings in excess of contract costs and estimated earnings
    
    
    (102,260
    )
    
    
    (4,482
    )Total
    
    $
    (76,740
    )
    
    $
    4,321
 6. LINES OF CREDIT
 Revolving lines of credit
  7. INCOME TAXES
  (in thousands)
    
    2006
    
    
    2005
    
    
    2004United States
    
    $
    75,042
    
    
    $
    54,232
    
    
    $
    28,804Foreign
    
    
    64,829
    
    
    
    55,348
    
    
    
    38,380Income before income taxes
    
    $
    139,871
    
    
    $
    109,580
    
    
    $
    67,184
 65




---



##### Table of Contents



(in thousands)
    
    2006
    
    
    2005
    
    
    2004United States:Current
    
    $
    24,425
    
    
    $
    12,425
    
    
    $
    5,563Deferred
    
    
    5,433
    
    
    
    7,596
    
    
    
    1,965Foreign:Current
    
    
    18,908
    
    
    
    16,359
    
    
    
    12,007Deferred
    
    
    (175
    )
    
    
    (43
    )
    
    
    1,162Total
    
    $
    48,591
    
    
    $
    36,337
    
    
    $
    20,697
   2006
    
    
    2005
    
    
    2004Statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Nondeductible expenses
    
    
    0.1
    %
    
    
    0.1
    %
    
    
    0.1
    %Non-benefited foreign losses and tax credits
    
    
    2.0
    %
    
    
    
    
    
    
    Non-deductible executive compensation
    
    
    0.3
    %
    
    
    
    
    
    
    Incentive stock options
    
    
    0.2
    %
    
    
    
    
    
    
    Research and experimentation tax credit
    
    
    (1.6
    )%
    
    
    (0.7
    )%
    
    
    (2.1
    )%Extraterritorial income exclusion
    
    
    (0.4
    )%
    
    
    (0.3
    )%
    
    
    (2.3
    )%Manufacturing deduction
    
    
    (0.3
    )%
    
    
    (0.2
    )%
    
    
    Tax exempt interest
    
    
    (0.6
    )%
    
    
    (0.7
    )%
    
    
    Effective rate
    
    
    34.7
    %
    
    
    33.2
    %
    
    
    30.7
    %
 66




---



##### Table of Contents



(in thousands)
    
    2006
    
    
    2005Deferred tax assets:Foreign operating losses
    
    $
    2,374
    
    
    $
    1,821Inventory capitalization cost
    
    
    
    
    
    
    3,622Accrued expenses and other items not deductible for tax purposes
    
    
    8,073
    
    
    
    7,583Alternative minimum tax and research credits
    
    
    
    
    
    
    701Deferred and incentive compensation
    
    
    3,663
    
    
    
    2,205Other
    
    
    3,110
    
    
    
    2,727Subtotal
    
    
    17,220
    
    
    
    18,659Valuation Allowances
    
    
    (2,374
    )
    
    
    Total deferred tax assets
    
    
    14,846
    
    
    
    18,659Deferred tax liabilities:Property, plant and equipment
    
    
    (5,942
    )
    
    
    (5,776
    )Unrepatriated foreign earnings and other foreign deferred taxes.
    
    
    (11,888
    )
    
    
    (10,860
    )Inventory capitalization cost
    
    
    (278
    )
    
    
    Total deferred tax liability
    
    
    (18,108
    )
    
    
    (16,636
    )Net deferred tax liability
    
    $
    (3,262
    )
    
    $
    2,023
     67




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##### Table of Contents



68




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##### Table of Contents



8. EMPLOYEE BENEFITS
 Defined Benefit Pension Plans
  (in thousands)
    
    2006
    
    
    2005Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    41,882
    
    
    $
    31,998Service cost
    
    
    46
    
    
    
    Interest cost
    
    
    2,324
    
    
    
    1,920Benefits paid
    
    
    (1,039
    )
    
    
    (798
    )Actuarial (gain)/loss
    
    
    (423
    )
    
    
    1,359Exchange rate changes
    
    
    1,003
    
    
    
    Benefit obligation at end of year
    
    $
    43,793
    
    
    $
    34,479Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    36,551
    
    
    $
    31,159Actual return on plan assets
    
    
    2,809
    
    
    
    1,315Employer contributions
    
    
    1,009
    
    
    
    39Benefits paid
    
    
    (1,039
    )
    
    
    (797
    )Administrative expenses
    
    
    (41
    )
    
    
    (40
    )Exchange rate changes
    
    
    768
    
    
    
    Fair value of plan assets at end of year
    
    $
    40,057
    
    
    $
    31,676Reconciliation of plan funded status:Funded status
    
    $
    (3,736
    )
    
    $
    (2,803
    )Unrecognized net actuarial loss
    
    
    
    
    
    
    Accrued benefit liability
recognized
    
    $
    (3,736
    )
    
    $
    (2,803
    )
 (in thousands)
    
    2006
    
    
    2005
    
    
    2004Components of net periodic benefit
cost:Service cost
    
    $
    46
    
    
    $
    
    
    
    $
    Interest cost
    
    
    2,324
    
    
    
    1,920
    
    
    
    1,828Expected return on plan assets
    
    
    (2,216
    )
    
    
    (1,843
    )
    
    
    (1,760
    )Amortization of prior service cost
    
    
    16
    
    
    
    16
    
    
    
    16Amortization of net loss
    
    
    154
    
    
    
    14
    
    
    
    20Net periodic benefit cost
    
    $
    324
    
    
    $
    107
    
    
    $
    104
 69




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##### Table of Contents



(in thousands)
    
    2006
    
    
    2005Net actuarial loss
    
    $
    (6,381
    )
    
    $
    (4,863
    )Unamortized prior service benefit
    
    
    (87
    )
    
    
    Accumulated Other
Comprehensive Loss
    
    $
    (6,468
    )
    
    $
    (4,863
    )
    (in thousands)2007
    
    $
    1,1962008
    
    
    1,3792009
    
    
    1,6202010
    
    
    2,0342011
    
    
    1,9752012-2016
    
    
    12,992
 Postretirement Health & Life Plan 
 70




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##### Table of Contents



(in thousands)
    
    2006
    
    
    2005Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    5,831
    
    
    $
    5,858Service cost
    
    
    72
    
    
    
    56Interest cost
    
    
    347
    
    
    
    326Participant contributions
    
    
    50
    
    
    
    61Benefits paid
    
    
    (625
    )
    
    
    (615
    )Actuarial loss
    
    
    531
    
    
    
    145Benefit obligation at end of year
    
    $
    6,206
    
    
    $
    5,831Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    
    
    
    $
    Employer contributions
    
    
    575
    
    
    
    554Participant contributions
    
    
    50
    
    
    
    61Benefits paid
    
    
    (625
    )
    
    
    (615
    )Fair value of plan assets at end of year
    
    $
    
    
    
    $
    Reconciliation of plan funded status:Funded status
    
    $
    (6,206
    )
    
    $
    (5,831
    )Unrecognized net actuarial loss
    
    
    
    
    
    
    (33
    )Unamortized prior service benefit
    
    
    
    
    
    
    (1,651
    )Accrued benefit liability recognized
    
    $
    (6,206
    )
    
    $
    (7,515
    )
 (in thousands)
    
    2006
    
    
    2005
    
    
    2004Components of net periodic benefit cost:Service cost
    
    $
    72
    
    
    $
    56
    
    
    $
    50Interest cost
    
    
    347
    
    
    
    326
    
    
    
    347Amortization of prior service
benefit
    
    
    (488
    )
    
    
    (487
    )
    
    
    (488
    )Net periodic benefit cost
    
    $
    (69
    )
    
    $
    (105
    )
    
    $
    (91
    )
  (in thousands)
    
    2006
    
    
    2005Net actuarial loss
    
    $
    (499
    )
    
    $
    Unamortized prior service benefit
    
    
    1,163
    
    
    
    Accumulated Other
Comprehensive Income
    
    $
    664
    
    
    $
    
   One Percent(in thousands)
    
    Increase
    
    
    DecreaseEffect on total of service and interest cost
components for 2006
    
    $
    5
    
    
    $
    (4
    )Effect on December 31, 2006 benefit obligation
    
    
    88
    
    
    
    (84
    )
 71




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##### Table of Contents



(in thousands)2007
    
    $5892008
    
    6062009
    
    6292010
    
    6612011
    
    6862012-2016
    
    2,569
 Defined Contribution Plans 
  Nonqualified Deferred Compensation Arrangement
 Other 
 9. STOCKHOLDERS EQUITY
 Common Stock 
 72




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##### Table of Contents



Preferred Stock 
 Registration Rights Agreement
 Rights Agreement
   Employee Stock Purchase Plan 
 73




---



##### Table of Contents



10. OTHER COMPREHENSIVE LOSS
   11. OTHER INCOME AND EXPENSE
  12. EARNINGS PER SHARE
  74




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##### Table of Contents



WeightedAverage
    
    
    Earnings(in thousands except per share data)
    
    Net Income
    
    
    Shares
    
    
    Per ShareFor the year ended December 31, 2004Basic net income
    
    $
    46,487
    
    
    
    22,996
    
    
    $
    2.02Effect of dilutive stock options
    
    
    
    
    
    
    436
    
    
    
    Diluted net income
    
    $
    46,487
    
    
    
    23,432
    
    
    $
    1.98For the year ended December 31, 2005Basic net income
    
    $
    73,243
    
    
    
    23,501
    
    
    $
    3.12Effect of dilutive stock options
    
    
    
    
    
    
    518
    
    
    
    Diluted net income
    
    $
    73,243
    
    
    
    24,019
    
    
    $
    3.05For the year ended December 31, 2006Basic net income
    
    $
    91,280
    
    
    
    23,169
    
    
    $
    3.94Effect of dilutive stock options
    
    
    
    
    
    
    357
    
    
    
    Diluted net income
    
    $
    91,280
    
    
    
    23,526
    
    
    $
    3.88
 13. COMMITMENTS AND CONTINGENCIES
 Leases
  (in thousands)
    
    Operating2007
    
    $
    2,2252008
    
    
    1,2862009
    
    
    5042010
    
    
    1162011
    
    
    31Greater than five years
    
    
    23Total minimum lease payments
    
    $
    4,185
  Litigation
 75




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Other
  14. FAIR VALUE OF FINANCIAL INSTRUMENTS
  15. EQUITY COMPENSATION PLANS
   Stock options
  76




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##### Table of Contents



Time-Vesting Restricted Stock Units
 Performance-Based Restricted Stock Units
 Deferred Share Units
  16. SEGMENT AND RELATED INFORMATION
  77




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78




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Year Ended December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2004RevenuePremium Connection
    
    $
    296,982
    
    
    $
    246,470
    
    
    $
    184,782Pressure Control
    
    
    206,066
    
    
    
    130,254
    
    
    
    100,571Total
    
    $
    503,048
    
    
    $
    376,724
    
    
    $
    285,353Operating income (loss)Premium Connection
    
    $
    100,053
    
    
    $
    85,054
    
    
    $
    60,899Pressure Control
    
    
    54,556
    
    
    
    37,381
    
    
    
    20,971Corporate Administration
    
    
    (22,397
    )
    
    
    (17,479
    )
    
    
    (15,464
    )Total
    
    $
    132,212
    
    
    $
    104,956
    
    
    $
    66,406Depreciation and amortizationPremium Connection
    
    $
    9,510
    
    
    $
    8,587
    
    
    $
    7,815Pressure Control
    
    
    3,438
    
    
    
    3,116
    
    
    
    2,920Corporate Administration
    
    
    1,854
    
    
    
    1,984
    
    
    
    1,902Total
    
    $
    14,802
    
    
    $
    13,687
    
    
    $
    12,637Capital expendituresPremium Connection
    
    $
    16,991
    
    
    $
    12,041
    
    
    $
    8,188Pressure Control
    
    
    13,086
    
    
    
    4,475
    
    
    
    2,390Corporate Administration
    
    
    2,118
    
    
    
    628
    
    
    
    1,778Total
    
    $
    32,195
    
    
    $
    17,144
    
    
    $
    12,356Total assetsPremium Connection
    
    $
    156,423
    
    
    $
    142,414
    
    
    $
    121,333Pressure Control
    
    
    189,994
    
    
    
    96,193
    
    
    
    68,900Corporate Administration
    
    
    163,614
    
    
    
    211,955
    
    
    
    153,413Total
    
    $
    510,031
    
    
    $
    450,562
    
    
    $
    343,646
 79




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Year Ended December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2004Revenue(1)United States
    
    $
    271,273
    
    
    $
    185,990
    
    
    $
    141,418Other Western Hemisphere
    
    
    69,069
    
    
    
    72,987
    
    
    
    59,656Subtotal Western Hemisphere
    
    
    340,342
    
    
    
    258,977
    
    
    
    201,074Eastern Hemisphere
    
    
    162,706
    
    
    
    117,747
    
    
    
    84,279Total
    
    $
    503,048
    
    
    $
    376,724
    
    
    $
    285,353Long-lived assets(2)United States
    
    $
    97,415
    
    
    $
    86,048
    
    
    $
    81,063Other Western Hemisphere
    
    
    29,280
    
    
    
    19,650
    
    
    
    18,337Subtotal Western Hemisphere
    
    
    126,695
    
    
    
    105,698
    
    
    
    99,400Eastern Hemisphere
    
    
    12,043
    
    
    
    12,127
    
    
    
    9,582Total
    
    $
    138,738
    
    
    $
    117,825
    
    
    $
    108,982
 (1)
        Revenue is presented on the basis of selling location.(2)

    Includes net property and other long-term assets, (excludes investments and deferred
tax assets).
    80




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17. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
 Year Ended December 31, 2006First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In thousands, except per share data)Revenue
    
    $
    114,060
    
    
    $
    142,114
    
    
    $
    117,312
    
    
    $
    129,562Gross profit
    
    
    49,879
    
    
    
    54,911
    
    
    
    45,408
    
    
    
    53,094Operating income
    
    
    32,851
    
    
    
    36,245
    
    
    
    27,750
    
    
    
    35,366Net income
    
    
    22,669
    
    
    
    25,003
    
    
    
    19,666
    
    
    
    23,942Earnings per share:Basic
    
    $
    0.96
    
    
    $
    1.05
    
    
    $
    0.85
    
    
    $
    1.08Diluted
    
    $
    0.94
    
    
    $
    1.04
    
    
    $
    0.84
    
    
    $
    1.07
 Year Ended December 31, 2005First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In thousands, except per share data)Revenue
    
    $
    78,817
    
    
    $
    91,607
    
    
    $
    92,974
    
    
    $
    113,326Gross profit
    
    
    35,407
    
    
    
    40,465
    
    
    
    41,284
    
    
    
    46,407Operating income
    
    
    22,099
    
    
    
    24,997
    
    
    
    27,175
    
    
    
    30,685Net income (1)
    
    
    15,012
    
    
    
    17,249
    
    
    
    19,612
    
    
    
    21,370Earnings per share:Basic
    
    $
    0.64
    
    
    $
    0.74
    
    
    $
    0.83
    
    
    $
    0.90Diluted
    
    $
    0.63
    
    
    $
    0.72
    
    
    $
    0.81
    
    
    $
    0.88
 
 (1)
    
    The third quarter 2005 includes a $2,199,000 gain on the sale of real estate not used
in operations. 18. RECENT ACCOUNTING PRONOUNCEMENTS
  81




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19. SUBSEQUENT EVENTS (Unaudited)
 82




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Amendment to Rights Agreement
  83




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ITEM 9  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A  CONTROLS AND PROCEDURES
  
 ITEM 9B  OTHER INFORMATION
  
 PART III
  
 ITEM
10  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   
 ITEM 11  EXECUTIVE COMPENSATION
  84




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##### Table of Contents



ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  
 ITEM 14  PRINCIPAL ACCOUNTING FEES AND SERVICES
  85




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##### Table of Contents



PART IV
 
 ITEM 15  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    The following documents are filed as part of this report:
 1.
    
    Financial StatementsAll financial statements of the Registrant as set forth under Item 8 of this Annual
Report on Form 10-K.2.
    
    Financial Statement SchedulesAll schedules have been omitted because either they are not applicable or the required
information is shown in the financial statements.3.
    
    Exhibits
  2.1*
    
    
    
    Agreement and Plan of Merger among Hydril Company, Tenaris S.A. and Hokkaido Acquisition,
Inc. dated as of February 11, 2007 (incorporated by reference to Exhibit 2.1 of the Companys
Form 8-K filed with the Commission on February 12, 2007).3.1*
    
    
    
    Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the
Companys Form 10-Q filed with the Commission on November
14, 2000).3.2*
    
    
    
    Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of Amendment No. 1 to the Registration
Statement on Form S-1 of the Company filed with the
Commission on July 31, 2000).4.1*
    
    
    
    Form of Specimen Common Stock Certificate (incorporated
by reference to Exhibit 4.1 of Amendment No. 1 to the
Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).4.2*
    
    
    
    Rights Agreement dated as of April 9, 2002 between the
Company and Mellon Investor Services LLC, as Rights
Agent, which includes as Exhibit A the form of
Certificate of Designations of Series A Junior
Participating Preferred Stock setting forth the terms of
the Preferred Stock, as Exhibit B the form of Rights
Certificate and as Exhibit C the Summary of Rights to
Purchase Preferred Stock Stock. Pursuant to the Rights
Agreement, Rights Certificates will not be mailed until
after the Distribution Date (as defined in the Rights
Agreement) (incorporated by reference to Exhibit 99.1 to
the Companys Current Report on Form 8-K filed with the
Commission on April 9, 2002).4.3*
    
    
    
    Amendment to the Rights Agreement, dated as of February
11, 2007 between the Company and Mellon Investor Services
LLC, as Rights Agent (incorporated by reference to
Exhibit 4.1 to the Companys Form 8-K filed with the
Commission on February 12, 2007).10.3*+
    
    
    
    Employment Agreement with Neil Russell dated March 12,
2004 (incorporated by reference to Exhibit 10.3 of the
Companys Form 10-K for the year-ended December 31,
2004).
 86




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##### Table of Contents



10.5*+
    
    
    
    Hydril Company 2000 Incentive Plan (incorporated by
reference to Exhibit 10.3 of Amendment No. 1 to the
Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).10.6*+
    
    
    
    Amendment to Hydril Company 2000 Incentive Plan
(incorporated by reference to Exhibit 10.5 of the
Companys Form 10-K for the year-ended December 31,
2003).10.7*+
    
    
    
    Form of Stock Option Award Agreement for Employees under
the Hydril Company 2000 Incentive Plan (incorporated by
reference to Exhibit 10.7 of the Companys Form 10-K for
the year-ended December 31, 2004).10.8*+
    
    
    
    Form of Stock Option Award Agreement for Non-employee
Directors under the Hydril Company 2000 Incentive Plan
(incorporated by reference to Exhibit 10.8 of the
Companys Form 10-K for the year-ended December 31,
2004).10.9*+
    
    
    
    Form of Restricted Stock Unit Award Agreement for
Employees under the Hydril Company 2000 Incentive Plan
(incorporated by reference to Exhibit 10.9 of the
Companys Form 10-K for the year-ended December 31,
2004).10.10*+
    
    
    
    Form of Restricted Stock Award Agreement for Employees
under the Hydril Company 2000 Incentive Plan
(incorporated by reference to Exhibit 10.10 of the
Companys Form 10-K for the year-ended December 31,
2004).10.11*+
    
    
    
    Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.5 of Amendment No. 1 to the
Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).10.12*+
    
    
    
    Hydril Company Restoration Plan (incorporated by
reference to Exhibit 10.13 of the Companys Form 10-K for
the year-ended December 31, 2001).10.13+
    
    
    
    Forms of Change in Control Agreements.10.14+
    
    
    
    Description of Non-employee Director Compensation.10.15*+
    
    
    
    Executive Officer 2006 Bonus Criteria under the 2006
Management Incentive Plan (incorporated by reference to
the Companys Form 8-K filed with the Commission on March
10, 2006).10.16*+
    
    
    
    2006 Management Incentive Plan (incorporated by reference
to Exhibit 10.1 of the Companys Form 8-K filed with the
Commission on March 10, 2006).10.17*+
    
    
    
    Executive Officer Salaries (incorporated by reference to
the Companys Form 8-K filed with the Commission on March
10,2006).10.18*+
    
    
    
    Form of Restricted Stock Unit Agreement
(Performance-Based) for Employees under the Hydril 2000
and 2005 Incentive Plans (incorporated by reference to
Exhibit 10.1 of the Companys Form 10-Q for the quarter
ended June 30, 2005).
 87




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##### Table of Contents



10.19*+
    
    
    
    Hydril Company 2005 Incentive Plan (incorporated by
reference to Annex A to our Definitive Proxy Statement on
Schedule 14A filed with the Commission on April 8, 2005).10.20*+
    
    
    
    Form of Deferred Share Unit Award Agreement between
Hydril and Non-employee Directors (incorporated by
reference to Exhibit 10.2 of the Companys Form 8-K filed
with the Commission on May 23, 2005).21.1
    
    
    
    Subsidiaries of the Registrant.23.1
    
    
    
    Consent of Independent Registered Public Accounting Firm.24.1
    
    
    
    Powers of Attorney.31.1
    
    
    
    Certification by Christopher T. Seaver, Chief Executive Officer, pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
 31.2
    
    
    
    Certification by Chris D. North, Chief Financial Officer,
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.32.1
    
    
    
    Certification by Christopher T. Seaver, Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsection (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code).32.2
    
    
    
    Certification by Chris D. North, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsection (a) and (b) of Section 1350, Chapter 63 of Title
18, United States Code).
 
 *
    
    Incorporated by reference as indicated.+
    
    Denotes management compensatory plan or agreement. 88




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##### Table of Contents



HYDRIL COMPANYBy:
    
    /s/ Chris D. NorthChris D. NorthVice President of Finance, Chief Financial Officer and Secretary(Authorized officer and principal accounting and financial officer)
  Signature
    
    Title/s/ CHRISTOPHER T. SEAVER
    
    President, Chief Executive
Officer and Chairman of the
BoardChristopher T. Seaver
    
    (Principal Executive Officer)/s/ Chris D. North
    
    Vice President of Finance,
Chief Financial Officer and
SecretaryChris D. North
    
    (Authorized Officer and
Principal Accounting and
Financial Officer)*
    
    Chairman Emeritus of the BoardRichard C. Seaver*
    
    DirectorJerry S. Cox*
    
    DirectorRoger Goodan*
    
    DirectorGordon T. Hall*
    
    DirectorKenneth S. McCormick*
    
    DirectorPatrick T. Seaver*
    
    DirectorT. Don Stacy*
    
    DirectorLew O. Ward
 *By:
    
    /s/ CHRISTOPHER T. SEAVERChristopher T. SeaverAttorney-in-fact
 89




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##### Table of Contents



INDEX TO EXHIBITS
  2.1*
    
    
    
    Agreement and Plan of Merger among Hydril Company, Tenaris S.A. and Hokkaido Acquisition,
Inc. dated as of February 11, 2007 (incorporated by reference to Exhibit 2.1 of the Companys
Form 8-K filed with the Commission on February 12, 2007).3.1*
    
    
    
    Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the
Companys Form 10-Q filed with the Commission on November
14, 2000).3.2*
    
    
    
    Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of Amendment No. 1 to the Registration
Statement on Form S-1 of the Company filed with the
Commission on July 31, 2000).4.1*
    
    
    
    Form of Specimen Common Stock Certificate (incorporated
by reference to Exhibit 4.1 of Amendment No. 1 to the
Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).4.2*
    
    
    
    Rights Agreement dated as of April 9, 2002 between the
Company and Mellon Investor Services LLC, as Rights
Agent, which includes as Exhibit A the form of
Certificate of Designations of Series A Junior
Participating Preferred Stock setting forth the terms of
the Preferred Stock, as Exhibit B the form of Rights
Certificate and as Exhibit C the Summary of Rights to
Purchase Preferred Stock Stock. Pursuant to the Rights
Agreement, Rights Certificates will not be mailed until
after the Distribution Date (as defined in the Rights
Agreement) (incorporated by reference to Exhibit 99.1 to
the Companys Current Report on Form 8-K filed with the
Commission on April 9, 2002).4.3*
    
    
    
    Amendment to the Rights Agreement, dated as of February
11, 2007 between the Company and Mellon Investor Services
LLC, as Rights Agent (incorporated by reference to
Exhibit 4.1 to the Companys Form 8-K filed with the
Commission on February 12, 2007).10.3*+
    
    
    
    Employment Agreement with Neil Russell dated March 12,
2004 (incorporated by reference to Exhibit 10.3 of the
Companys Form 10-K for the year-ended December 31,
2004).10.5*+
    
    
    
    Hydril Company 2000 Incentive Plan (incorporated by
reference to Exhibit 10.3 of Amendment No. 1 to the
Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).10.6*+
    
    
    
    Amendment to Hydril Company 2000 Incentive Plan
(incorporated by reference to Exhibit 10.5 of the
Companys Form 10-K for the year-ended December 31,
2003).10.7*+
    
    
    
    Form of Stock Option Award Agreement for Employees under
the Hydril Company 2000 Incentive Plan (incorporated by
reference to Exhibit 10.7 of the Companys Form 10-K for
the year-ended December 31, 2004).
 90




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10.8*+
    
    
    
    Form of Stock Option Award Agreement for Non-employee
Directors under the Hydril Company 2000 Incentive Plan
(incorporated by reference to Exhibit 10.8 of the
Companys Form 10-K for the year-ended December 31,
2004).10.9*+
    
    
    
    Form of Restricted Stock Unit Award Agreement for
Employees under the Hydril Company 2000 Incentive Plan
(incorporated by reference to Exhibit 10.9 of the
Companys Form 10-K for the year-ended December 31,
2004).10.10*+
    
    
    
    Form of Restricted Stock Award Agreement for Employees
under the Hydril Company 2000 Incentive Plan
(incorporated by reference to Exhibit 10.10 of the
Companys Form 10-K for the year-ended December 31,
2004).10.11*+
    
    
    
    Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.5 of Amendment No. 1 to the
Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).10.12*+
    
    
    
    Hydril Company Restoration Plan (incorporated by
reference to Exhibit 10.13 of the Companys Form 10-K for
the year-ended December 31, 2001).10.13+
    
    
    
    Forms of Change in Control Agreements.10.14+
    
    
    
    Description of Non-employee Director Compensation.10.15*+
    
    
    
    Executive Officer 2006 Bonus Criteria under the 2006
Management Incentive Plan (incorporated by reference to
the Companys Form 8-K filed with the Commission on March
10, 2006).10.16*+
    
    
    
    2006 Management Incentive Plan (incorporated by reference
to Exhibit 10.1 of the Companys Form 8-K filed with the
Commission on March 10, 2006).10.17*+
    
    
    
    Executive Officer Salaries (incorporated by reference to
the Companys Form 8-K filed with the Commission on March
10,2006).10.18*+
    
    
    
    Form of Restricted Stock Unit Agreement
(Performance-Based) for Employees under the Hydril 2000
and 2005 Incentive Plans (incorporated by reference to
Exhibit 10.1 of the Companys Form 10-Q for the quarter
ended June 30, 2005).10.19*+
    
    
    
    Hydril Company 2005 Incentive Plan (incorporated by
reference to Annex A to our Definitive Proxy Statement on
Schedule 14A filed with the Commission on April 8, 2005).10.20*+
    
    
    
    Form of Deferred Share Unit Award Agreement between
Hydril and Non-employee Directors (incorporated by
reference to Exhibit 10.2 of the Companys Form 8-K filed
with the Commission on May 23, 2005).21.1
    
    
    
    Subsidiaries of the Registrant.23.1
    
    
    
    Consent of Independent Registered Public Accounting Firm.
 91




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24.1
    
    
    
    Powers of Attorney.31.1
    
    
    
    Certification by Christopher T. Seaver, Chief Executive Officer, pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.31.2
    
    
    
    Certification by Chris D. North, Chief Financial Officer,
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.32.1
    
    
    
    Certification by Christopher T. Seaver, Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsection (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code).32.2
    
    
    
    Certification by Chris D. North, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsection (a) and (b) of Section 1350, Chapter 63 of Title
18, United States Code).
 
 *
    
    Incorporated by reference as indicated.+
    
    Denotes management compensatory plan or agreement. 92