HYDL Hydril (MM)

Hydril (Nasdaq:HYDL) reported earnings for the third quarter ended September 30, 2006 of $0.84 per diluted share, down 19% sequentially from $1.04 reported in the second quarter of 2006, and up 4% from $0.81 reported for the third quarter of 2005. On a sequential basis, third quarter revenue of $117.3 million decreased 18%, operating income of $27.8 million was down 23%, and net income of $19.7 million was down 21%. Compared to the third quarter of 2005, revenue increased 26%, operating income increased 2%, and net income was essentially flat. Third quarter financial results reflect deeper than expected inventory de-stocking by U.S. premium connection distributors. As expected, premium connection revenue for Venezuela was also down sequentially as a result of excess inventory built during the first half of the year. Pressure control results were in-line with expectations and reflect increasing capital equipment revenue resulting from progress made on project orders. Chris Seaver, President and CEO, commented, �In the intermediate term, the fundamental drivers for our business continue to gradually improve. We expect U.S. premium connection distributor demand to be flat in the fourth quarter, and then increase next year as we anticipate distributor inventories will stabilize near year-end. We also expect Venezuelan excess inventories to be consumed at about the same time. Our pressure control capital equipment markets continue to strengthen as reflected by our increasing backlog and additional orders for deepwater blowout prevention systems received since the end of the quarter.� Premium Connection Segment Sequentially, third quarter revenue for Hydril�s premium connection segment decreased 29% to $63.8 million, operating income decreased 35% to $18.7 million, and operating margin decreased to 29% from 32%. The majority of the revenue decline was in the Latin American market due to an expected inventory correction in Venezuela, which reduced pipe and threading requirements. In addition, revenue in the U.S. decreased as a result of distributor inventory de-stocking, which was greater than previously expected, while end-user consumption remained stable from the second quarter. Pressure Control Segment Third quarter revenue for the pressure control segment increased 2% sequentially to $53.5 million and operating income increased 7% to $14.5 million. Capital equipment revenue increased 15% sequentially to $32.7 million, while aftermarket revenue decreased 14% to $20.9 million. The increase in capital equipment revenue was primarily the result of progress made on offshore blowout prevention system projects. As expected, aftermarket revenue moderated closer to the average of the past several quarters. Segment operating margin for the third quarter was 27%, slightly higher than 26% recorded in the second quarter. At September 30, 2006, pressure control capital equipment backlog was $289 million, up 9% from $266 million at June 30, 2006, and up from $61 million at September 30, 2005. After the end of the third quarter, the company received purchase orders for an additional $154 million of deepwater blowout prevention systems. Share Repurchase Program During the third quarter, the company purchased $75 million of stock, which completed the $100 million of share repurchases authorized by the Board of Directors in March 2006. Market Indicators As more fully described on our website at www.hydril.com on the �Market Indicators� page, our principal business drivers are: (1) the U.S. rig count for rigs drilling at targets deeper than 15,000 feet, (2) the number of Gulf of Mexico rigs under contract, (3) the international rig count, (4) worldwide offshore rigs under contract, and (5) the total U.S. land rig count. Conference Call Hydril�s conference call to discuss third quarter financial results is scheduled for Tuesday, October 31, 2006 at 8:30�a.m. EST, (7:30�a.m. CST) and is accessible by dialing 888-889-5345 (domestic) or 973-935-8516 (international) and referencing passcode 7947198. For further information on the call or the webcast, please visit the company�s website at www.hydril.com or see the company�s press release announcing the earnings conference call dated October 13, 2006. To the extent not provided in the call, reconciliations of any non-GAAP financial measures discussed in the call will be available on the Investor Relations page of Hydril�s website. Hydril, headquartered in Houston, Texas, is engaged worldwide in engineering, manufacturing and marketing premium connection and pressure control products used for oil and gas drilling and production. Forward-Looking Statements This press release contains forward-looking statements concerning expected future results. These statements relate to future events and the company�s future financial performance, including the company�s business strategy and product development plans, and involve known and unknown risks, uncertainties and assumptions. These risks, uncertainties and assumptions, many of which are more fully described in Hydril Company�s Quarterly Report on Form 10-Q for the quarter-ended June 30, 2006 filed with the Securities and Exchange Commission include but are 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 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, and Hydril�s ability to successfully develop new technologies and products and maintain and increase its market share. These factors may cause Hydril�s or the industry�s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. HYDRIL COMPANY � CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Share and Per Share Amounts) � � � � � � � � � Three Months Ended Nine Months Ended (unaudited) (unaudited) September 30, June 30, September 30, September 30, 2006� � 2006� � 2005� 2006� � 2005� Revenue Premium Connection $ 63,785� $ 89,422� $ 62,928� $ 226,756� $ 173,340� Pressure Control Capital Equipment 32,654� 28,513� 13,952� 80,889� 37,732� Aftermarket 20,873� 24,179� 16,094� 65,841� 52,326� Subtotal Pressure Control 53,527� 52,692� 30,046� 146,730� 90,058� � Total Revenue 117,312� 142,114� 92,974� 373,486� 263,398� � Total Gross Profit 45,408� 54,911� 41,284� 150,198� 117,156� Gross Margin 39% 39% 44% 40% 44% � Selling, General, and Admin. Expenses 17,658� 18,666� 14,109� 53,352� 42,885� � Operating Income (Loss) Premium Connection 18,691� 28,584� 22,974� 74,801� 61,270� Pressure Control 14,484� 13,601� 8,628� 38,458� 26,006� Corporate Administration (5,425) (5,940) (4,427) (16,413) (13,005) Total Operating Income 27,750� 36,245� 27,175� 96,846� 74,271� Operating Margin 24% 26% 29% 26% 28% � Income (loss) from Unconsolidated Entites (29) 31� -� (43) -� � Interest Income 2,222� 1,891� 959� 5,583� 2,563� Other Income/(Expense) (81) (70) 1,318� (250) 1,065� � Income Before Income Taxes 29,862� 38,097� 29,452� 102,136� 77,899� Provision for Income Taxes 10,196� 13,094� 9,840� 34,798� 26,026� Net Income $ 19,666� $ 25,003� $ 19,612� $ 67,338� $ 51,873� � Net Income Per Share: Basic $ 0.85� $ 1.05� $ 0.83� $ 2.86� $ 2.21� Diluted $ 0.84� $ 1.04� $ 0.81� $ 2.82� $ 2.16� � Weighted Average Shares Outstanding: Basic 23,179,508� 23,734,236� 23,550,685� 23,535,230� 23,456,702� Diluted 23,521,607� 24,151,659� 24,121,067� 23,915,332� 23,993,313� � Depreciation Premium Connection $ 2,444� $ 2,372� $ 2,181� $ 7,073� $ 6,300� Pressure Control 859� 834� 797� 2,503� 2,312� Corporate Administration 405� 529� 490� 1,440� 1,496� Total Depreciation 3,708� 3,735� 3,468� 11,016� 10,108� � � Capital Expenditures 7,828� 9,320� 3,926� 22,153� 10,690� � Pressure Control Backlog Capital Equipment $ 289,200� $ 266,357� $ 61,164� HYDRIL COMPANY CONSOLIDATED BALANCE SHEETS � (In Thousands) � � � � � � � September 30, June 30, December 31, 2006� 2006� 2005� (unaudited) � (unaudited) � � CURRENT ASSETS: Cash and cash equivalents $ 179,742� $ 187,055� $ 65,145� Investments 9,254� 7,557� 108,084� Total receivables 76,037� 126,916� 78,204� Total inventories 79,323� 72,255� 57,646� Deferred tax asset 9,792� 12,330� 11,390� Other current assets 4,969� 4,781� 3,669� Total current assets 359,117� 410,894� 324,138� � LONG-TERM ASSETS: Property, net 115,693� 111,462� 105,138� Other long-term assets 15,753� 19,954� 21,286� Total long-term assets 131,446� 131,416� 126,424� TOTAL $ 490,563� $ 542,310� $ 450,562� � � CURRENT LIABILITIES: Accounts payable $ 35,990� $ 43,003� $ 23,443� Accrued liabilities and other current liabilities 89,226� 79,384� 39,934� Total current liabilities 125,216� 122,387� 63,377� � LONG-TERM LIABILITIES: Deferred tax liability and other tax obligations 9,594� 15,144� 12,143� Post retirement, pension benefits and other 17,884� 15,040� 14,207� Total long-term liabilities 27,478� 30,184� 26,350� � STOCKHOLDERS' EQUITY: Total stockholders' equity 337,869� 389,739� 360,835� TOTAL $ 490,563� $ 542,310� $ 450,562� Hydril (Nasdaq:HYDL) reported earnings for the third quarter ended September 30, 2006 of $0.84 per diluted share, down 19% sequentially from $1.04 reported in the second quarter of 2006, and up 4% from $0.81 reported for the third quarter of 2005. On a sequential basis, third quarter revenue of $117.3 million decreased 18%, operating income of $27.8 million was down 23%, and net income of $19.7 million was down 21%. Compared to the third quarter of 2005, revenue increased 26%, operating income increased 2%, and net income was essentially flat. Third quarter financial results reflect deeper than expected inventory de-stocking by U.S. premium connection distributors. As expected, premium connection revenue for Venezuela was also down sequentially as a result of excess inventory built during the first half of the year. Pressure control results were in-line with expectations and reflect increasing capital equipment revenue resulting from progress made on project orders. Chris Seaver, President and CEO, commented, "In the intermediate term, the fundamental drivers for our business continue to gradually improve. We expect U.S. premium connection distributor demand to be flat in the fourth quarter, and then increase next year as we anticipate distributor inventories will stabilize near year-end. We also expect Venezuelan excess inventories to be consumed at about the same time. Our pressure control capital equipment markets continue to strengthen as reflected by our increasing backlog and additional orders for deepwater blowout prevention systems received since the end of the quarter." Premium Connection Segment Sequentially, third quarter revenue for Hydril's premium connection segment decreased 29% to $63.8 million, operating income decreased 35% to $18.7 million, and operating margin decreased to 29% from 32%. The majority of the revenue decline was in the Latin American market due to an expected inventory correction in Venezuela, which reduced pipe and threading requirements. In addition, revenue in the U.S. decreased as a result of distributor inventory de-stocking, which was greater than previously expected, while end-user consumption remained stable from the second quarter. Pressure Control Segment Third quarter revenue for the pressure control segment increased 2% sequentially to $53.5 million and operating income increased 7% to $14.5 million. Capital equipment revenue increased 15% sequentially to $32.7 million, while aftermarket revenue decreased 14% to $20.9 million. The increase in capital equipment revenue was primarily the result of progress made on offshore blowout prevention system projects. As expected, aftermarket revenue moderated closer to the average of the past several quarters. Segment operating margin for the third quarter was 27%, slightly higher than 26% recorded in the second quarter. At September 30, 2006, pressure control capital equipment backlog was $289 million, up 9% from $266 million at June 30, 2006, and up from $61 million at September 30, 2005. After the end of the third quarter, the company received purchase orders for an additional $154 million of deepwater blowout prevention systems. Share Repurchase Program During the third quarter, the company purchased $75 million of stock, which completed the $100 million of share repurchases authorized by the Board of Directors in March 2006. Market Indicators As more fully described on our website at www.hydril.com on the "Market Indicators" page, our principal business drivers are: (1) the U.S. rig count for rigs drilling at targets deeper than 15,000 feet, (2) the number of Gulf of Mexico rigs under contract, (3) the international rig count, (4) worldwide offshore rigs under contract, and (5) the total U.S. land rig count. Conference Call Hydril's conference call to discuss third quarter financial results is scheduled for Tuesday, October 31, 2006 at 8:30 a.m. EST, (7:30 a.m. CST) and is accessible by dialing 888-889-5345 (domestic) or 973-935-8516 (international) and referencing passcode 7947198. For further information on the call or the webcast, please visit the company's website at www.hydril.com or see the company's press release announcing the earnings conference call dated October 13, 2006. To the extent not provided in the call, reconciliations of any non-GAAP financial measures discussed in the call will be available on the Investor Relations page of Hydril's website. Hydril, headquartered in Houston, Texas, is engaged worldwide in engineering, manufacturing and marketing premium connection and pressure control products used for oil and gas drilling and production. Forward-Looking Statements This press release contains forward-looking statements concerning expected future results. These statements relate to future events and the company's future financial performance, including the company's business strategy and product development plans, and involve known and unknown risks, uncertainties and assumptions. These risks, uncertainties and assumptions, many of which are more fully described in Hydril Company's Quarterly Report on Form 10-Q for the quarter-ended June 30, 2006 filed with the Securities and Exchange Commission include but are 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 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, and Hydril's ability to successfully develop new technologies and products and maintain and increase its market share. These factors may cause Hydril's or the industry's actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. -0- *T HYDRIL COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Share and Per Share Amounts) ---------------------------------------------------------------------- ------------------------------------------ Three Months Ended (unaudited) ------------------------------------------ September 30, June 30, September 30, 2006 2006 2005 ------------------------------------------ Revenue Premium Connection $63,785 $89,422 $62,928 Pressure Control Capital Equipment 32,654 28,513 13,952 Aftermarket 20,873 24,179 16,094 -------------- ------------- ------------- Subtotal Pressure Control 53,527 52,692 30,046 Total Revenue 117,312 142,114 92,974 Total Gross Profit 45,408 54,911 41,284 Gross Margin 39% 39% 44% Selling, General, and Admin. Expenses 17,658 18,666 14,109 -------------- ------------- ------------- Operating Income (Loss) Premium Connection 18,691 28,584 22,974 Pressure Control 14,484 13,601 8,628 Corporate Administration (5,425) (5,940) (4,427) -------------- ------------- ------------- Total Operating Income 27,750 36,245 27,175 Operating Margin 24% 26% 29% Income (loss) from Unconsolidated Entites (29) 31 - Interest Income 2,222 1,891 959 Other Income/(Expense) (81) (70) 1,318 -------------- ------------- ------------- Income Before Income Taxes 29,862 38,097 29,452 Provision for Income Taxes 10,196 13,094 9,840 -------------- ------------- ------------- Net Income $19,666 $25,003 $19,612 Net Income Per Share: Basic $0.85 $1.05 $0.83 Diluted $0.84 $1.04 $0.81 Weighted Average Shares Outstanding: Basic 23,179,508 23,734,236 23,550,685 Diluted 23,521,607 24,151,659 24,121,067 Depreciation Premium Connection $2,444 $2,372 $2,181 Pressure Control 859 834 797 Corporate Administration 405 529 490 -------------- ------------- ------------- Total Depreciation 3,708 3,735 3,468 Capital Expenditures 7,828 9,320 3,926 Pressure Control Backlog Capital Equipment $289,200 $266,357 $61,164 --------------------------- Nine Months Ended (unaudited) --------------------------- September 30, 2006 2005 --------------------------- Revenue Premium Connection $226,756 $173,340 Pressure Control Capital Equipment 80,889 37,732 Aftermarket 65,841 52,326 ------------- ------------- Subtotal Pressure Control 146,730 90,058 Total Revenue 373,486 263,398 Total Gross Profit 150,198 117,156 Gross Margin 40% 44% Selling, General, and Admin. Expenses 53,352 42,885 ------------- ------------- Operating Income (Loss) Premium Connection 74,801 61,270 Pressure Control 38,458 26,006 Corporate Administration (16,413) (13,005) ------------- ------------- Total Operating Income 96,846 74,271 Operating Margin 26% 28% Income (loss) from Unconsolidated Entites (43) - Interest Income 5,583 2,563 Other Income/(Expense) (250) 1,065 ------------- ------------- Income Before Income Taxes 102,136 77,899 Provision for Income Taxes 34,798 26,026 ------------- ------------- Net Income $67,338 $51,873 Net Income Per Share: Basic $2.86 $2.21 Diluted $2.82 $2.16 Weighted Average Shares Outstanding: Basic 23,535,230 23,456,702 Diluted 23,915,332 23,993,313 Depreciation Premium Connection $7,073 $6,300 Pressure Control 2,503 2,312 Corporate Administration 1,440 1,496 ------------- ------------- Total Depreciation 11,016 10,108 Capital Expenditures 22,153 10,690 Pressure Control Backlog Capital Equipment *T -0- *T HYDRIL COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands) ---------------------------------------------------------------------- September 30, June 30, December 31, 2006 2006 2005 ------------- ------------- ------------- (unaudited) (unaudited) ----------------------------------------- CURRENT ASSETS: Cash and cash equivalents $179,742 $187,055 $65,145 Investments 9,254 7,557 108,084 Total receivables 76,037 126,916 78,204 Total inventories 79,323 72,255 57,646 Deferred tax asset 9,792 12,330 11,390 Other current assets 4,969 4,781 3,669 ------------- ------------- ------------- Total current assets 359,117 410,894 324,138 ------------- ------------- ------------- LONG-TERM ASSETS: Property, net 115,693 111,462 105,138 Other long-term assets 15,753 19,954 21,286 ------------- ------------- ------------- Total long-term assets 131,446 131,416 126,424 ------------- ------------- ------------- TOTAL $490,563 $542,310 $450,562 ============= ============= ============= CURRENT LIABILITIES: Accounts payable $35,990 $43,003 $23,443 Accrued liabilities and other current liabilities 89,226 79,384 39,934 ------------- ------------- ------------- Total current liabilities 125,216 122,387 63,377 ------------- ------------- ------------- LONG-TERM LIABILITIES: Deferred tax liability and other tax obligations 9,594 15,144 12,143 Post retirement, pension benefits and other 17,884 15,040 14,207 ------------- ------------- ------------- Total long-term liabilities 27,478 30,184 26,350 ------------- ------------- ------------- STOCKHOLDERS' EQUITY: Total stockholders' equity 337,869 389,739 360,835 ------------- ------------- ------------- TOTAL $490,563 $542,310 $450,562 ============= ============= ============= *T