Grant Prideco Sees Good 3Q06 Results

Grant Prideco, Inc. (NYSE: GRP) reports results for its third quarter 2006. Net income increased to $126.5 million ($0.95 per diluted share) on a 34% increase in revenues to $471.3 million, which includes a $20 million license and royalty fee ($0.10 per diluted share, net of tax) from a recently announced drill bit license agreement with Smith International, Inc. These results compare to net income of $48.1 million ($0.37 per diluted share) on revenues of $352.2 million in last year's third quarter. Last year's third quarter includes refinancing charges of $21.7 million ($0.11 per diluted share, net of tax) related to the Company repurchasing its 9% Senior Notes.

"We are pleased to report another record quarter for Grant Prideco and the achievement of several important milestones," commented Michael McShane, Chairman and CEO of Grant Prideco. "Each of our three segments generated record revenues during the quarter. Our Drilling Products and Services segment continued to increase its record backlog, introduced its new TurboTorque(TM) line of drill pipe and completed the installation of a new weld line in its U.S. manufacturing facility. ReedHycalog continued to make gains in both fixed cutter and roller cone drill bits and, shortly after quarter end, completed the acquisition of Andergauge which will expand and complement its existing suite of downhole products. Finally, Tubular Technology and Service's XL business continued to expand sales of its Viper(TM) product line into international markets."

Operating Income Margins Increased

Consolidated revenues increased by $119.1 million, or 34%, compared to last year's third quarter, as worldwide drilling activity increased 13%. Consolidated operating income margins increased to 34% from 24% for the same prior-year period. Other operating expenses (sales and marketing, general and administrative and research and engineering), while increasing $5.5 million on a year-over-year basis, were reduced to 15% of revenues from 19% for the same prior-year period primarily due to increased revenue base.

Other Items

Interest expense decreased by $1.5 million, reflecting lower year-over- year debt balances due to significant free cash flow and a debt restructuring in 2005, which reduced the Company's average interest rate. Equity income from the Company's unconsolidated affiliates increased to $26.6 million from $15.9 million in last year's third quarter reflecting higher earnings at Voest-Alpine Tubulars (VAT) due to increased volumes and pricing of its seamless tubulars. In addition, losses from the Company's IntelliServ division, previously accounted for as an equity investment, are now included in operating income following the acquisition of the remaining 50% interest in September 2005. Sequentially, equity income decreased by $10.7 million primarily due to longer than expected VAT plant shutdown for summer maintenance. Other income decreased by $2.8 million primarily due to foreign exchange losses from a weakened U.S. dollar.

The Company's effective tax rate improved to 29.9% for the third quarter of 2006 (31.2% year-to-date) compared to 33.1% in last year's third quarter primarily due to additional utilization of foreign tax credits, research and development credits and the domestic manufacturing deduction.


Drilling Products and Services

Revenues for the Drilling Products and Services segment were a record $214.4 million during the quarter, representing a 40% increase over last year's third quarter. Operating income increased by 68% to $78.9 million, and operating income margins increased to 37% from 31% in last year's third quarter. These results reflect increased volumes and improved pricing across all of this segment's product lines, including drill pipe, tool joints and drill collars. Drill pipe footage sold increased by 21% and average sales price per foot increased by 14%. International revenues of approximately $11.0 million were deferred until the fourth quarter 2006 primarily due to unexpected shipping delays. Backlog for this segment increased to a record $1.2 billion at September 30, 2006, which includes 19.0 million feet of drill pipe orders.

Drill Bits

Revenues for the Drill Bits segment increased by 48% to $148.0 million, which reflects the $20.0 million license and royalty fee mentioned above, and operating income increased by 158% to a record $66.4 million. Operating income margins increased to 45% (36% excluding the license and royalty fee) from 26% in last year's third quarter. Excluding the license and royalty fee, these improvements reflect the 13% increase in worldwide rig count, strong market penetration of its Raptor(TM) product line and incremental revenues for coring services resulting from its acquisition of Corion in July 2005. International revenues (excluding Canada) increased by 24%, excluding the license and royalty fee, with the largest increases in the Middle East and Russia. Additionally, this segment continues to benefit from overall improved pricing and better rental fleet management.

Tubular Technology and Services

Revenues for the Tubular Technology and Services segment increased by 9% to $108.2 million during the third quarter of 2006. Operating income increased by 11% to $28.5 million and operating income margins remained relatively flat at 26%. These results reflect improved pricing across all of this segment's product lines partially offset by a decrease in casing sales at TCA's heat- treating facility as distributor purchases have declined while they focus on reducing inventory levels.


Corporate/Other expenses for the third quarter of 2006 decreased to $13.4 million from $13.6 million for the same period last year. This decrease is due to lower Corporate expenses offset by increased operating costs related to the Company's IntelliServ division. The decrease in Corporate expenses is primarily due to incentive stock-based compensation that is valued based on the Company's current stock price.

Subsequent Events

On October 13, 2006, the Company acquired Anderson Group Limited and related companies (Andergauge) for $115.7 million, plus the assumption of net debt of approximately $39.9 million. Andergauge is a provider of specialized downhole drilling tools, including the well known AnderReamer and AG-itator, and provides services related to these tools. This business will be included in the Drill Bits segment from the date of acquisition.

In October 2006, the Company announced that its Board of Directors approved an increase in its stock repurchase program by $200 million (to $350 million from $150 million). The Company has repurchased approximately $150 million since the inception of this program.


Chairman and CEO, Michael McShane commented, "While demand for certain products and services, such as premium connections, casings, tubular processing and VAT's North America OCTG, has experienced some softening in the near term, this has been offset by continued growth in the Drilling Products and Services and Drill Bits segments, which should result in another record quarter in the fourth quarter 2006. We expect fourth quarter earnings to be in the range of $0.93 to $0.95 per share, which would result in $3.36 to $3.38 per share for the full year 2006, including $0.10 per share for the drill bit technology license."


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