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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002
OR
[ ] 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
1-8514
SMITH INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3822631
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 NORTH SAM HOUSTON PARKWAY, SUITE 600
HOUSTON, TEXAS 77060
(Address of principal executive offices) (Zip Code)
(281) 443-3370
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock as of
November 11, 2002 was 101,527,034.
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months ended September 30, 2002 and 2001................................... 1
CONSOLIDATED CONDENSED BALANCE SHEETS
As of September 30, 2002 and December 31, 2001........................................................... 2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months ended September 30, 2002 and 2001.................................................... 3
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS..................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 10
Item 3. Qualitative and Quantitative Market Risk Disclosures............................................... 16
Item 4. Controls and Procedures............................................................................ 16
PART II - OTHER INFORMATION
Items 1-6.................................................................................................. 17
SIGNATURES..................................................................................................... 18
CERTIFICATIONS................................................................................................. 19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITH INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
Revenues ............................................... $777,232 $909,682 $2,405,647 $2,647,382
Costs and expenses:
Costs of revenues .................................... 559,507 636,626 1,710,165 1,869,301
Selling expenses ..................................... 128,265 132,735 387,077 384,452
General and administrative expenses .................. 34,517 36,574 105,134 105,176
Goodwill amortization ................................ -- 3,966 -- 11,738
-------- -------- ---------- ----------
Total costs and expenses ..................... 722,289 809,901 2,202,376 2,370,667
-------- -------- ---------- ----------
Operating income ....................................... 54,943 99,781 203,271 276,715
Interest expense, net .................................. 9,299 10,653 29,207 31,734
-------- -------- ---------- ----------
Income before income taxes and minority
interests ............................................ 45,644 89,128 174,064 244,981
Income tax provision ................................... 14,542 28,941 53,493 79,833
-------- -------- ---------- ----------
Income before minority interests ....................... 31,102 60,187 120,571 165,148
Minority interests ..................................... 11,312 18,121 45,129 51,182
-------- -------- ---------- ----------
Net income ............................................. $ 19,790 $ 42,066 $ 75,442 $ 113,966
======== ======== ========== ==========
Basic earnings per share (See Note 4):
Net income ........................................... $ 0.20 $ 0.42 $ 0.76 $ 1.14
======== ======== ========== ==========
Net income, excluding impact of
goodwill amortization ............................. $ 0.20 $ 0.45 $ 0.76 $ 1.21
======== ======== ========== ==========
Diluted earnings per share (See Note 4):
Net income .......................................... $ 0.20 $ 0.42 $ 0.75 $ 1.13
======== ======== ========== ==========
Net income, excluding impact of
goodwill amortization ............................ $ 0.20 $ 0.44 $ 0.75 $ 1.20
======== ======== ========== ==========
Weighted average shares outstanding
(See Note 4):
Basic ................................................ 99,002 99,662 98,929 99,724
Diluted .............................................. 100,069 100,420 100,068 100,800
The accompanying notes are an integral part of these
consolidated condensed financial statements.
1
SMITH INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except par value data)
September 30, December 31,
2002 2001
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 62,860 $ 44,683
Receivables, net ................................................................ 651,942 752,165
Inventories, net ................................................................ 634,224 653,151
Deferred tax assets, net ........................................................ 25,356 35,414
Prepaid expenses and other ...................................................... 48,695 37,618
----------- -----------
Total current assets .................................................... 1,423,077 1,523,031
----------- -----------
Property, Plant and Equipment, net ................................................ 498,413 488,497
Goodwill, net ..................................................................... 594,362 574,550
Other Assets ...................................................................... 175,168 149,750
----------- -----------
Total Assets ...................................................................... $ 2,691,020 $ 2,735,828
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt ..................... $ 58,509 $ 148,693
Accounts payable ................................................................ 235,475 284,502
Accrued payroll costs ........................................................... 54,155 81,803
Income taxes payable ............................................................ 50,274 41,143
Other ........................................................................... 86,075 109,863
----------- -----------
Total current liabilities ............................................... 484,488 666,004
----------- -----------
Long-Term Debt .................................................................... 553,919 538,842
Deferred Tax Liabilities .......................................................... 49,179 40,504
Other Long-Term Liabilities ....................................................... 59,228 51,027
Minority Interests ................................................................ 502,227 490,292
Commitments and Contingencies (See Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000 shares authorized; no shares
issued or outstanding in 2002 or 2001 ......................................... -- --
Common stock, $1 par value; 150,000 shares authorized; 101,509 shares
issued in 2002 (50,594 shares issued in 2001, on a pre-split basis) ........... 101,509 50,594
Additional paid-in capital ...................................................... 345,624 389,989
Retained earnings ............................................................... 637,896 562,454
Accumulated other comprehensive income .......................................... (13,920) (24,748)
Less - Treasury securities, at cost; 2,384 common shares in 2002
(1,192 common shares in 2001, on a pre-split basis) .......................... (29,130) (29,130)
----------- -----------
Total stockholders' equity .............................................. 1,041,979 949,159
----------- -----------
Total Liabilities and Stockholders' Equity ........................................ $ 2,691,020 $ 2,735,828
=========== ===========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
2
SMITH INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................. $ 75,442 $ 113,966
Adjustments to reconcile net income to net cash provided by operating
activities, excluding the net effects of acquisitions:
Depreciation and amortization ........................................................ 65,914 68,108
Minority interests ................................................................... 45,129 51,182
Provision for losses on receivables .................................................. 7,674 2,064
Gain on disposal of property, plant and equipment .................................... (5,645) (5,463)
Foreign currency translation (gains) losses .......................................... (982) 516
Changes in operating assets and liabilities:
Receivables .......................................................................... 98,758 (81,993)
Inventories .......................................................................... 29,960 (47,741)
Accounts payable ..................................................................... (50,717) (634)
Other current assets and liabilities ................................................. (44,312) 32,878
Other non-current assets and liabilities ............................................. (10,814) (9,997)
--------- ---------
Net cash provided by operating activities .............................................. 210,407 122,886
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ........................................ (30,330) (97,119)
Purchases of property, plant and equipment ............................................. (68,174) (88,313)
Proceeds from disposal of property, plant and equipment ................................ 14,866 14,856
Purchase of stock of majority-owned subsidiary ......................................... (231) (2,084)
--------- ---------
Net cash used in investing activities .................................................. (83,869) (172,660)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ............................................... 806 290,742
Principal payments of long-term debt ................................................... (74,434) (213,252)
Net change in short-term borrowings .................................................... (7,792) (14,982)
Purchases of treasury stock ............................................................ -- (21,428)
Proceeds from exercise of stock options ................................................ 4,426 5,463
Minority interest partner contributions (distributions) ................................ (31,600) 12,000
--------- ---------
Net cash provided by (used in) financing activities .................................... (108,594) 58,543
--------- ---------
Effect of exchange rate changes on cash ................................................ 233 (50)
--------- ---------
Increase in cash and cash equivalents .................................................. 18,177 8,719
Cash and cash equivalents at beginning of period ....................................... 44,683 36,544
--------- ---------
Cash and cash equivalents at end of period ............................................. $ 62,860 $ 45,263
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ................................................................. $ 37,818 $ 35,654
Cash paid for income taxes ............................................................. $ 29,443 $ 45,126
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements
were prepared in accordance with U.S. generally accepted accounting principles
and all applicable financial statement rules and regulations of the Securities
and Exchange Commission (the "Commission") pertaining to interim financial
information. These interim financial statements do not include all information
or footnote disclosures required by generally accepted accounting principles for
complete financial statements and, therefore, should be read in conjunction with
the audited financial statements and accompanying notes included in our 2001
Annual Report on Form 10-K and other current filings with the Commission. All
adjustments which are, in the opinion of management, of a normal recurring
nature and are necessary for a fair presentation of the interim financial
statements have been included.
Preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosed amounts of contingent assets and liabilities and the reported amounts
of revenues and expenses. If the underlying estimates and assumptions, upon
which the financial statements are based, change in future periods, actual
amounts may differ from those included in the accompanying consolidated
condensed financial statements.
Management believes the consolidated condensed financial statements
present fairly the financial position, results of operations and cash flows of
Smith International, Inc. and subsidiaries (the "Company") as of the dates
indicated. The results of operations for the three and nine months ended
September 30, 2002 and 2001 may not be indicative of results for the fiscal
year.
From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board (the "FASB") which are adopted by the
Company as of the specified effective date. Unless otherwise discussed,
management believes the impact of recently issued standards, which are not yet
effective, will not have a material impact on the Company's consolidated
financial statements upon adoption.
2. BUSINESS COMBINATION
In July 2002, the Company acquired certain turbodrilling assets of
Neyrfor-Weir Ltd. in exchange for cash consideration of $25.3 million. The
acquired operations, which design proprietary turbodrilling equipment and
provide related services for horizontal and directional drilling applications,
have been integrated into the Company's Oilfield Products and Services segment.
For the fiscal year ended December 31, 2001, the acquired operations reported
revenues of approximately $17 million.
This acquisition has been recorded using the purchase method of
accounting and, accordingly, the acquired operations have been included in the
results of operations since the date of acquisition. The excess of the purchase
price over the estimated fair value of the net assets acquired has been recorded
as goodwill. The purchase price allocation related to this acquisition is based
upon preliminary information and is subject to change when additional data
concerning final asset and liability valuations is obtained. Material changes in
the preliminary allocations are not anticipated by management.
Pro forma results of operations have not been presented because the effect
of this acquisition was not material to the Company's consolidated condensed
financial statements.
4
3. NON-RECURRING CHARGES
During the first quarter of 2002, the Company recognized non-recurring
charges totaling $7.9 million, or $3.4 million net of taxes and minority
interests. The first quarter charge included a $4.3 million provision for losses
on receivables in Argentina attributable to local economic events. The provision
was necessitated by Argentinean legislation, which required the Company to
settle certain U.S. dollar-denominated transactions in pesos. The remainder of
the charge related to restructuring efforts undertaken in response to
activity-level declines, the primary component of which is severance costs
incurred in connection with employee terminations. All such restructuring costs
have been paid prior to September 30, 2002.
In the accompanying consolidated condensed financial statements, $5.8
million of the charges are included in general and administrative expenses, $1.7
million are reflected in selling expenses with the remainder recorded as cost of
revenues.
4. STOCK SPLIT
On June 6, 2002, the Company's Board of Directors approved a
two-for-one stock split, effected in the form of a stock dividend. Stockholders
of record as of June 20, 2002 were entitled to the dividend, which was
distributed on July 8, 2002.
The Consolidated Condensed Balance Sheet includes the reclassification
of $50.7 million from additional paid-in capital to the common stock account, in
order to reflect the transaction. Additionally, all prior year amounts included
in the financial statements related to weighted average shares outstanding and
earnings per share amounts have been restated for the effect of the stock split.
5. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS gives effect
to the potential dilution of earnings which could have occurred if additional
shares were issued for stock option exercises under the treasury stock method.
Certain outstanding employee stock options were not included in the computation
of diluted earnings per common share, as the exercise price was greater than the
average market price for the Company's stock during the corresponding period.
The following schedule reconciles the income and shares used in the basic and
diluted EPS computations (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Basic EPS:
Net income ......................................... $ 19,790 $ 42,066 $ 75,442 $113,966
======== ======== ======== ========
Weighted average number of common
shares outstanding ............................... 99,002 99,662 98,929 99,724
======== ======== ======== ========
Basic EPS .......................................... $ 0.20 $ 0.42 $ 0.76 $ 1.14
======== ======== ======== ========
Diluted EPS:
Net income ......................................... $ 19,790 $ 42,066 $ 75,442 $113,966
======== ======== ======== ========
Weighted average number of common
shares outstanding ............................... 99,002 99,662 98,929 99,724
Dilutive effect of stock options ................... 1,067 758 1,139 1,076
-------- -------- -------- --------
100,069 100,420 100,068 100,800
======== ======== ======== ========
Diluted EPS ........................................ $ 0.20 $ 0.42 $ 0.75 $ 1.13
======== ======== ======== ========
5
6. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out ("FIFO"), last-in, first-out ("LIFO") or
average cost methods. Inventory costs, consisting of materials, labor and
factory overhead, are as follows (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Raw materials .................................... $ 47,861 $ 50,821
Work-in-process .................................. 53,498 65,008
Products purchased for resale .................... 165,466 154,787
Finished goods ................................... 393,379 406,143
--------- ---------
660,204 676,759
Reserves to state certain domestic inventories
($298,749 in 2002 and $300,868 in 2001,
respectively) on a LIFO basis .................. (25,980) (23,608)
--------- ---------
$ 634,224 $ 653,151
========= =========
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Land ....................................... $ 33,196 $ 28,390
Buildings .................................. 123,500 100,888
Machinery and equipment .................... 485,237 482,045
Rental tools ............................... 257,902 243,913
-------- --------
899,835 855,236
Less-Accumulated depreciation .............. 401,422 366,739
-------- --------
$498,413 $488,497
======== ========
8. GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted FASB Statement No. 142 ("SFAS
No. 142"), "Goodwill and Other Intangible Assets," which addresses financial
accounting and reporting matters. In accordance with SFAS No. 142, the Company
discontinued amortizing goodwill to earnings as of January 1, 2002. The
Statement also requires that goodwill be tested for impairment on an annual
basis, or more frequently if circumstances indicate that an impairment may
exist.
During the first quarter of 2002, the Company completed the
transitional impairment test required by SFAS No. 142 for goodwill recorded as
of the adoption date. The transitional goodwill impairment test involved a
comparison of the fair value of each of the Company's reporting units, as
defined, with their carrying value and resulted in the identification of no
impairment.
The accompanying Consolidated Condensed Statements of Operations
provide relevant disclosures related to recorded goodwill amortization and the
after-tax impact which would have resulted from the adoption of SFAS No. 142 as
of January 1, 2001.
6
The changes in the carrying amount of goodwill on a segment basis for
the nine months ended September 30, 2002 are as follows (in thousands):
Oilfield Distribution
Segment Segment Consolidated
-------- ------------ ------------
Balance as of December 31, 2001 ....... $537,509 $37,041 $574,550
Goodwill acquired ..................... 10,600 -- 10,600
Purchase price and currency translation
adjustments ........................ 9,070 142 9,212
-------- ------- --------
Balance as of September 30, 2002 ...... $557,179 $37,183 $594,362
======== ======= ========
The accompanying Consolidated Condensed Balance Sheet as of September
30, 2002 includes $41.3 million of intangible assets, which are classified in
Other Assets. The Company amortizes identifiable intangible assets, generally
consisting of patents, trademarks and non-compete agreements, on a straight-line
basis over their expected useful lives, which range from three to 27 years. The
adoption of SFAS No. 142 also required the Company to re-evaluate the remaining
useful lives of its intangible assets to determine whether the periods being
used were appropriate. No changes to the carrying value of the intangibles, nor
the remaining useful lives, were recorded as a result of the review.
9. DEBT
The following summarizes the Company's outstanding debt (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Current:
Short-term borrowings .................... $ 43,356 $ 50,156
Current portion of long-term debt ........ 15,153 98,537
--------- ---------
$ 58,509 $ 148,693
========= =========
Long-Term:
Notes, net of unamortized discounts ...... $ 492,497 $ 532,555
Revolving credit facilities .............. 54,000 81,700
Term loans and other ..................... 22,575 23,124
--------- ---------
569,072 637,379
Less current portion of long-term debt ... (15,153) (98,537)
--------- ---------
$ 553,919 $ 538,842
========= =========
In the second quarter of 2002, the Company repurchased and retired
$30.0 million of its 6.75 percent public notes maturing in 2011. In connection
with the transaction, the Company recorded $0.5 million of termination costs
related to the repurchase, consisting primarily of the prorata portion of
unamortized discount and issuance costs associated with the 6.75 percent notes.
In July 2002, the Company replaced its $200.0 million revolving credit
facility, which was scheduled to expire in December 2002, with a new three-year,
$400.0 million facility provided by a syndicate of nine financial institutions.
The revolving credit agreement (the "Agreement") allows for the election of
interest at a base rate, or a Eurodollar rate ranging from LIBOR plus 62.5 to
75.0 basis points depending on amounts drawn under the facility. The Agreement
also requires the payment of a quarterly commitment fee on the unutilized
portion of the facility and compliance with certain customary covenants,
including maintenance of specified debt-to-total capitalization and interest
coverage ratios, as defined.
7
Principal payments of long-term debt for the twelve-month periods
ending subsequent to September 30, are as follows (in thousands):
2003 .......................................... $ 90,715
2004 .......................................... 72,782
2005 .......................................... 13,145
2006 .......................................... 157,372
Thereafter .................................... 219,905
--------
$553,919
========
10. COMPREHENSIVE INCOME
Comprehensive income includes net income and changes in the components
of accumulated other comprehensive income during the periods presented. The
Company's comprehensive income is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------- ------- ------- ---------
Net income .................................... $ 19,790 $42,066 $75,442 $ 113,966
Changes in unrealized fair value
of derivatives, net ......................... 554 2,497 2,339 181
Currency translation adjustments .............. (1,693) 2,154 8,489 (3,409)
-------- ------- ------- ---------
Comprehensive income .......................... $ 18,651 $46,717 $86,270 $ 110,738
======== ======= ======= =========
As of September 30, 2002, accumulated other comprehensive income in the
accompanying Consolidated Condensed Balance Sheet includes $14.4 million of
cumulative currency translation losses and $0.9 million of cumulative pension
liability adjustments, partially offset by $1.4 million of cumulative changes in
the unrealized fair value of derivatives.
11. EMPLOYEE STOCK OPTIONS
The Company's Board of Directors and its stockholders have authorized
an employee stock option plan. As of September 30, 2002, 5.0 million shares were
issued and outstanding under the program and an additional 4.6 million shares
were authorized for future issuance. Options are generally granted at the fair
market value on the date of grant, vest over a four-year period and expire ten
years after the date of grant.
Certain option awards granted on December 4, 2001 were subject to
stockholder approval which was not obtained until April 24, 2002. Accordingly,
these options were granted with a strike price more than 15 percent below the
market value on the date of issuance and do not meet the conditions necessary to
qualify as a non-compensatory option grant. Compensation expense related to
these grants is being recognized over the four-year vesting period and resulted
in the inclusion of $0.1 million and $0.2 million of related expense in the
accompanying Consolidated Condensed Statements of Operations for the three month
and nine month periods ended September 30, 2002, respectively.
The Company continues to apply Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its stock option program, as
allowed under SFAS No. 123, "Accounting for Stock-Based Compensation."
Therefore, for all options other than those mentioned above, the Company elects
to make pro forma disclosures versus recognizing the related compensation
expense in the accompanying consolidated condensed financial statements.
8
Had the Company elected to apply the accounting standards of SFAS No.
123, the Company's net income and earnings per share on a diluted basis would
have approximated the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net Income:
As reported ............................. $ 19,790 $ 42,066 $ 75,442 $ 113,966
Pro forma ............................... 17,894 40,572 69,755 109,484
Diluted earnings per share:
As reported ............................. $ 0.20 $ 0.42 $ 0.75 $ 1.13
Pro forma ............................... 0.18 0.40 0.70 1.08
12. INDUSTRY SEGMENTS
The Company manufactures and markets premium products and services to
the oil and gas exploration and production industry, the petrochemical industry
and other industrial markets. The Company aggregates its operations into two
reportable segments: Oilfield Products and Services and Distribution. The
Oilfield Products and Services segment consists of three business units: M-I,
Smith Bits and Smith Services. The Distribution segment includes the Wilson
business unit. The following table presents financial information for each
reportable segment (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
2002 2001 2002 2001
--------- ----------- ----------- -----------
Revenues:
Oilfield Products and Services ......... $ 557,033 $ 622,203 $ 1,733,561 $ 1,789,179
Distribution ........................... 220,199 287,479 672,086 858,203
--------- ----------- ----------- -----------
$ 777,232 $ 909,682 $ 2,405,647 $ 2,647,382
========= =========== =========== ===========
Operating Income:
Oilfield Products and Services ......... $ 57,268 $ 93,975 $ 209,583 $ 260,217
Distribution ........................... (705) 7,344 (1,518) 21,028
General corporate ...................... (1,620) (1,538) (4,794) (4,530)
--------- ----------- ----------- -----------
$ 54,943 $ 99,781 $ 203,271 $ 276,715
========= =========== =========== ===========
13. CONTINGENCIES
The Company is a party to various legal and environmental matters
arising in the ordinary course of business. In the opinion of management, after
considering established reserves and contractual indemnifications obtained,
these matters are not expected to have a material adverse effect on the
Company's consolidated financial statements. In the unlikely event that the
parties providing the environmental indemnifications do not fulfill their
obligations, such event could result in the recognition of up to $30.0 million
related to indemnified liabilities, potentially impacting earnings and cash
flows in future periods.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is provided to assist readers in
understanding the Company's financial performance during the periods presented
and significant trends which may impact the future performance of the Company.
This discussion should be read in conjunction with the Consolidated Condensed
Financial Statements of the Company and the related notes thereto included
elsewhere in this Form 10-Q and the Consolidated Financial Statements of the
Company and the related notes thereto and the related "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in the
Company's 2001 Annual Report on Form 10-K.
The Company manufactures and markets premium products and services to
the oil and gas exploration and production and petrochemical industries and
other industrial markets. The Company provides a comprehensive line of
technologically-advanced products and engineering services, including drilling
and completion fluid systems, solids-control and separation equipment,
waste-management services, three-cone and diamond drill bits, fishing services,
drilling tools, underreamers, casing exit and multilateral systems, packers and
liner hangers. The Company also offers supply chain management solutions through
an extensive branch network providing pipe, valve, tool, safety and other
maintenance products.
The Company's worldwide operations are largely driven by the level of
exploration and production activity in major energy producing areas and the
depth and drilling conditions of these projects. Drilling activity levels are
primarily influenced by energy prices but may also be affected by expectations
related to the worldwide supply of and demand for oil and natural gas, finding
and development costs, decline and depletion rates, political actions and
uncertainties, environmental concerns, capital expenditure plans of exploration
and production companies and the overall level of global economic growth and
activity.
The year-over-year decline in the worldwide rig count relates to lower
North American activity levels, particularly in the United States. Drilling
activity in the U.S. market is heavily influenced by natural gas fundamentals,
as over 80 percent of the U.S. rig count is currently natural gas-directed.
After bottoming in late March 2002, activity levels in the United States have
improved 11 percent due, in part, to declining natural gas production which has
resulted in increased natural gas drilling activity. Although the U.S. rig count
has shown moderate improvement, various factors including political and regional
instabilities, oil and natural gas storage levels, commodity prices and
depletion rates, will likely influence activity levels on a going forward basis.
The Company's business outlook, however, is highly dependent on the general
economic environment in the United States and other major world economies, which
ultimately impact energy consumption and the resulting demand for our products
and services. Further weakness in the global economic environment could result
in a substantial decline in worldwide drilling activity, adversely impacting the
Company's future financial results.
Management also believes the increasing complexity of drilling programs
has resulted in a shift in exploration and production spending toward
value-added, technology-based products, which reduce operators' overall drilling
costs. The Company continues to focus on investing in the development of
technology-based products that considerably improve the drilling process through
increased efficiency and rates of penetration and reduced formation damage.
Management believes the overall savings realized by the use of the Company's
premium products, such as polycrystalline diamond drill bits, diamond-enhanced
three-cone drill bits and synthetic drilling fluids, compensate for the higher
costs of these products over their non-premium counterparts.
10
RESULTS OF OPERATIONS
Segment Discussion
The Company markets its products and services throughout the world
through four business units which are aggregated into two reportable segments.
The Oilfield Products and Services segment consists of three business units:
M-I, Smith Bits and Smith Services. The Distribution segment includes the Wilson
business unit. The revenue discussion below has been summarized by business unit
in order to provide additional information in analyzing the Company's operations
(dollars in thousands).
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- ---------------------------------------------
2002 2001 2002 2001
------------------ ------------------ -------------------- --------------------
Amount % Amount % Amount % Amount %
--------- --- --------- --- ----------- --- ----------- ---
Financial Data:
Revenues:
M-I ............................ $ 376,785 49 $ 412,364 45 $ 1,175,083 49 $ 1,197,036 45
Smith Bits ..................... 78,853 10 105,135 12 245,477 10 309,617 12
Smith Services ................. 101,395 13 104,704 11 313,001 13 282,526 11
--------- --- --------- --- ----------- --- ----------- ---
Oilfield Products and Services 557,033 72 622,203 68 1,733,561 72 1,789,179 68
Distribution ................... 220,199 28 287,479 32 672,086 28 858,203 32
--------- --- --------- --- ----------- --- ----------- ---
Total .................. $ 777,232 100 $ 909,682 100 $ 2,405,647 100 $ 2,647,382 100
========= === ========= === =========== === =========== ===
Revenues by Area:
United States .................. $ 359,953 46 $ 480,125 53 $ 1,136,832 47 $ 1,373,109 52
Canada ......................... 68,560 9 96,603 11 218,909 9 310,301 12
Non-North America .............. 348,719 45 332,954 36 1,049,906 44 963,972 36
--------- --- --------- --- ----------- --- ----------- ---
Total .................. $ 777,232 100 $ 909,682 100 $ 2,405,647 100 $ 2,647,382 100
========= === ========= === =========== === =========== ===
Operating Income:
Oilfield Products and Services . $ 57,268 10 $ 93,975 15 $ 209,583 12 $ 260,217 15
Distribution ................... (705) * 7,344 3 (1,518) * 21,028 3
General corporate .............. (1,620) * (1,538) * (4,794) * (4,530) *
--------- --- --------- --- ----------- --- ----------- ---
Total .................. $ 54,943 7 $ 99,781 11 $ 203,271 8 $ 276,715 10
========= === ========= === =========== === =========== ===
Market Data:
M-I Average Worldwide Rig Count:
United States .................. 997 46 1,413 51 938 43 1,384 50
Canada ......................... 219 10 306 11 250 12 347 13
Non-North America .............. 970 44 1,046 38 984 45 1,033 37
--------- --- --------- --- ----------- --- ----------- ---
Total .................. 2,186 100 2,765 100 2,172 100 2,764 100
========= === ========= === =========== === =========== ===
*not meaningful
11
Oilfield Products and Services Segment
Revenues
M-I provides drilling and completion fluid systems, engineering and
technical services to the oil and gas industry through its M-I Fluids division.
M-I's SWACO division manufactures and markets equipment and services for solids
control, separation, pressure control, rig instrumentation and waste management.
M-I's business operations are largely influenced by the number of offshore
drilling programs, which are more revenue-intensive than land-based projects due
to the complex nature of the related drilling environment. For the three months
ended September 30, 2002, M-I's revenues totaled $376.8 million, nine percent
below the prior year quarter. Incremental revenues from acquisitions partially
offset the impact of the decline in base business operations. Excluding the
impact of acquisitions, revenues fell 14 percent due, primarily, to the
reduction in U.S. offshore drilling activity which declined 22 percent from the
prior year period. Over 90 percent of the base revenue reduction from the prior
year quarter was reported in the United States, with lower U.S. offshore revenue
levels accounting for two-thirds of the overall base revenue decline. For the
nine-month period, M-I reported revenues of $1.2 billion, a two percent decline
from the comparable prior year period. Excluding the impact of acquisitions,
revenues declined nine percent attributable to the reduction in Western
Hemisphere activity levels which declined 30 percent between the corresponding
periods. The impact of the Western Hemisphere activity decline was partially
offset by base revenue growth in all other geographic regions.
Smith Bits manufactures and sells three-cone and diamond drill bits for
use in the oil and gas industry. Smith Bits reported revenues of $78.9 million
for the third quarter of 2002, a decline of 25 percent from the prior year
quarter. Base revenues also declined 25 percent as the impact of current year
acquisitions were offset by lower revenues resulting from the contribution of
the mining bit operations to an unconsolidated joint venture in October 2001.
The revenue decline was reported in the Western Hemisphere markets as the 28
percent reduction in related drilling activity primarily influenced demand for
three-cone drill bits. For the first nine months of 2002, Smith Bits' revenues
totaled $245.5 million, a 21 percent decline from the amounts reported in the
comparable prior year period. After excluding the net impact of the mining bit
operations and incremental revenues from current year acquisitions, revenues
were 18 percent below the first nine months of 2001 and compared favorably to
the 21 percent decline in the worldwide average rig count between the
corresponding periods. Over three-quarters of the year-to-year base revenue
variance resulted from lower sales volumes of three-cone bits, reflecting the
significant decline in U.S. drilling activity.
Smith Services manufactures and markets products and services used in
the oil and gas industry for drilling, workover, well completion and well
re-entry. For the three months ended September 30, 2002, Smith Services'
revenues totaled $101.4 million, three percent below the prior year quarter.
Excluding the impact of acquisitions completed in the fourth quarter of 2001,
revenues declined 16 percent from the prior year quarter. The base revenue
decline was reported in the Western Hemisphere reflecting lower demand for
drilling-related products and services associated with the significant reduction
in drilling activity. For the nine-month period, Smith Services reported
revenues of $313.0 million, an increase of 11 percent over the first nine months
of 2001. Excluding the impact of acquisitions, revenues were seven percent lower
period-to-period, reflecting the effect of the 31 percent decline in North
American activity levels on the underlying base business. Increased sales of
drill pipe related to an alliance with a specialty drill pipe manufacturer and
base revenue growth in Europe/Africa, due to higher export sales and increased
activity in the North Sea, served to partially offset the revenue variance from
the corresponding period.
12
Operating Income
Operating income for the Oilfield Products and Services segment
decreased $36.7 million from the third quarter of 2001 as lower gross profit in
the segment was partially offset by reduced operating expenses. Decreased demand
for higher-margin products, specifically drill bits and premium synthetic
drilling fluids which accounted for approximately two-thirds of the revenue
decline from the prior year period, contributed to a four percentage point
deterioration in gross profit margins from the third quarter of 2001. The
reduction in gross profit margins relates to lower volumes and a shift in
revenue mix, as no significant pricing deterioration was experienced during the
period. Operating expenses fell approximately six percent from the third quarter
of 2001 attributable, in part, to cost reduction efforts undertaken in response
to the Western Hemisphere activity level decline. On a year-to-date basis,
segment operating income declined $50.6 million from the first nine months of
2001. As a percentage of revenues, operating income declined approximately two
percentage points, reflecting the deterioration in gross profit margins from the
prior year period. The gross profit margins were impacted by the reduction in
higher-margin sales discussed above.
Distribution Segment
Revenues
Wilson markets pipe, valve, tool, safety and other maintenance products
to energy and industrial markets, primarily through an extensive network of
supply branches in the United States and Canada. Wilson reported revenues of
$220.2 million for the third quarter of 2002, 23 percent below the prior year
quarter. Over three-quarters of the revenue variance was reported in the energy
branch operations related to the impact of the decline in North American
drilling and completion activity combined with lower project spending by
pipeline customers. To a lesser extent, the continued weakness in the industrial
and petrochemical markets, primarily in the United States, resulted in reduced
spending for major maintenance programs and projects. For the first nine months
of 2002, Wilson reported revenues totaling $672.1 million, a decline of 22
percent from the comparable prior year period. Lower activity levels in the
United States and Canada impacted the energy branch operations, which reported
over three-quarters of the year-to-date revenue variance. The balance of the
revenue decline was reported by the industrial sector due to a reduction in
customer spending levels.
Operating Income
Operating income for the Distribution segment decreased $8.0 million
from the third quarter of 2001. The decline in operating income relates to the
impact of the revenue decline on gross profit, partially offset by the reduction
in variable costs associated with the lower sales volumes. The decrease in
Wilson's overall sales volumes on coverage of sales and administrative support
costs contributed to a three percentage point reduction in operating margins
from the prior year period. On a year-to-date basis, Distribution segment
operating income declined $22.5 million from the amounts reported in the first
nine months of 2001. The operating income variance reflects lower gross profit
levels associated with the reported revenue decline, partially offset by a
reduction in variable-based operating expenses. As a percentage of sales,
operating income decreased three percentage points from the prior year
comparable period, as lower sales volumes impacted coverage of fixed sales and
administrative support costs.
13
Consolidated Results
For the periods indicated, the following table summarizes the results
of the Company and presents these results as a percentage of total revenues
(dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------- --------------------------------------------
2002 2001 2002 2001
----------------- ----------------- ------------------- -------------------
Amount % Amount % Amount % Amount %
-------- --- -------- --- ---------- --- ---------- ---
Revenues ........................... $777,232 100 $909,682 100 $2,405,647 100 $2,647,382 100
-------- --- -------- --- ---------- --- ---------- ---
Gross profit ....................... 217,725 28 273,056 30 695,482 29 778,081 29
Operating expenses ................. 162,782 21 173,275 19 492,211 21 501,366 19
-------- --- -------- --- ---------- --- ---------- ---
Operating income ................... 54,943 7 99,781 11 203,271 8 276,715 10
Interest expense, net .............. 9,299 1 10,653 1 29,207 1 31,734 1
-------- --- -------- --- ---------- --- ---------- ---
Income before income taxes
and minority interests ........... 45,644 6 89,128 10 174,064 7 244,981 9
Income tax provision ............... 14,542 2 28,941 3 53,493 2 79,833 3
-------- --- -------- --- ---------- --- ---------- ---
Income before minority
interests ........................ 31,102 4 60,187 7 120,571 5 165,148 6
Minority interests ................. 11,312 1 18,121 2 45,129 2 51,182 2
-------- --- -------- --- ---------- --- ---------- ---
Net income ......................... $ 19,790 3 $ 42,066 5 $ 75,442 3 $ 113,966 4
======== === ======== === ========== === ========== ===
Consolidated revenues totaled $777.2 million for the third quarter of
2002, 15 percent below the prior year period. The revenue decline was split
relatively equally between the Oilfield segment and the Distribution segment.
The current year revenues were influenced by the completion of 13 acquisitions,
partially offset by the contribution of the Smith Bits' mining operations to an
unconsolidated joint venture in October 2001. Excluding the net impact of
acquired and divested operations, base revenues fell 18 percent from the third
quarter of 2001, as demand for the Company's products and services were impacted
by a 29 percent reduction in North American drilling activity. Base revenue
growth in the Eastern Hemisphere markets, due to new contract awards and higher
export sales, served to partially offset the revenue decline stemming from the
reduction in North American drilling activity. For the nine-month period,
consolidated revenues were $2.4 billion, nine percent lower than the comparable
period in 2001. Over three-quarters of the revenue reduction was reported in the
Company's Distribution operations, which are concentrated in North America, and
were impacted by the significant decline in drilling activity in the United
States and Canada. Excluding the impact of acquired and divested operations,
consolidated revenues were 14 percent below the amounts reported in the first
nine months of 2001, reflecting the 31 percent reduction in North American
drilling activity between the nine-month periods.
Gross profit totaled $217.7 million, or 28 percent of revenues, in the
third quarter of 2002. The $55.3 million decline from the amounts reported in
the prior year quarter primarily reflects the reduction of sales of
higher-margin Oilfield segment products. Consolidated gross profit margins fell
two percentage points from the prior year period driven by the margin
deterioration in the Oilfield segment. The higher year-over-year percentage
decline in Distribution segment revenues, which traditionally generate lower
gross profit margins than the Oilfield operations, served to mask the margin
deterioration reported in the Oilfield segment. For the nine-month period gross
profit totaled $695.5 million, or 29 percent of revenues, less than one
percentage point below the comparable period of the prior year. The majority of
the $82.6 million decline was attributable to the Oilfield operations,
reflecting a shift from higher to lower-margin products combined with reduced
overall sales volumes.
14
Operating expenses decreased $10.5 million, or six percent from the
third quarter of 2001. The operating expense reduction is attributable to cost
reduction efforts initiated in response to the reduction in Western Hemisphere
activity levels, reduced employee profit-sharing requirements and the
elimination of goodwill amortization in accordance with SFAS No. 142. The
operating expense reduction in the base business operations were partially
offset by incremental expenses from acquired operations and the recognition of
certain costs to consolidate the manufacturing and engineering functions within
certain M-I operations. Operating expenses for the first nine months of 2002
decreased $9.2 million from amounts recorded in the prior year period. The
reduction in operating expenses was driven by lower incentive-based requirements
and, to a lesser extent, the elimination of goodwill amortization. Incremental
expenses associated with acquisitions completed in the last twelve months of
2001 and the recognition of non-recurring charges in the first quarter of 2002
served to partially offset the overall expense decline.
Net interest expense, which represents interest expense less interest
income, equaled $9.3 million in the third quarter of 2002. Net interest expense
decreased $1.4 million from the prior year period as lower variable interest
rates combined with a higher proportion of floating-rate borrowings more than
offset the impact of increased debt levels associated with the financing of
acquisitions. Net interest expense for the nine-month period declined $2.5
million attributable to the effect of lower interest rates on the Company's
floating-rate borrowings.
The effective tax rate for the third quarter approximated 32 percent,
which is lower than both the prior year's rate and the U.S. statutory rate. The
effective tax rate is lower than the U.S. statutory rate due to the impact of
M-I's U.S. partnership earnings for which the minority partner is directly
responsible for their related income taxes. The Company properly consolidates
the pre-tax income related to the minority partner's share of U.S. partnership
earnings but excludes the related tax provision. The effective tax rate was 60
basis points below the prior year quarter due to the elimination of goodwill
amortization, a portion of which was not deductible for tax purposes, partially
offset by the lower proportion of M-I's U.S. partnership earnings. The effective
tax rate for the nine-month period approximated 31 percent, two percentage
points below the level reported in the comparable prior year period. The lower
tax rate in the current nine-month period primarily reflects the discontinuance
of amortizing goodwill, as noted above, and to a lesser extent, a shift in the
geographic mix of pre-tax income towards lower rate jurisdictions.
Minority interests reflect the portion of the results of majority-owned
operations, which are applicable to the minority interest partners. Minority
interests was $6.8 million below amounts reported in the prior year quarter and
$6.1 million lower than amounts reported in the first nine months of 2001. The
variance in both periods is related to the lower profitability reported in the
M-I operations, partially offset by the acquisition of a majority interest in
United Engineering Services, which occurred in the fourth quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
General
At September 31, 2002, cash and cash equivalents totaled $62.9 million.
Cash flows provided by operations totaled $210.4 million in the first nine
months of 2002 compared to $122.9 million in the prior year period. The
improvement in operating cash flow is attributable to the significant decline in
North American drilling activity, which favorably impacted working capital
levels, particularly the required investment in accounts receivable and
inventories.
Cash flows used in investing activities in the first nine months of
2002 totaled $83.9 million, which primarily consisted of investments in
property, plant and equipment, net of cash proceeds arising from certain asset
disposals, and to a lesser extent, funding associated with two acquisitions.
This compares to cash used for investing activities of $172.7 million in the
first nine months of 2001, with the difference primarily attributable to the
lower level of acquisition activity during the current year period. Net capital
expenditures also decreased year-over-year, contributing to the improvement, as
lower drilling activity has led to a reduction in discretionary capital
spending.
In the first nine months of 2002, cash generated from operations
exceeded cash used in investing activities, resulting in an $81.4 million
reduction in outstanding debt levels. Cash flows used in financing activities,
which totaled $108.6 million for the nine months ended September 30, 2002, were
also impacted by cash distributions to a minority partner which totaled $31.6
million during the period.
The Company's primary internal source of liquidity is cash flow
generated from operations. Cash flow generated by operations is primarily
influenced by the level of worldwide drilling activity, which affects
profitability
15
levels and working capital requirements. Capacity under revolving credit
agreements is also available, if necessary, to fund operating or investing
activities. During the third quarter, the Company replaced its $200.0 million
revolving credit facilities, which were due to expire in December 2002, with a
three-year, $400.0 million facility provided by a syndicate of nine financial
institutions. As of September 30, 2002, the Company had $346.0 million of funds
available under U.S. revolving credit facilities to fund future operating or
investing needs of its worldwide operations. The Company also has revolving
credit facilities in place outside the United States, which are generally used
to finance local operating needs. At September 30, 2002, borrowing capacity of
$45.4 million was available under the non-U.S. borrowing facilities.
External sources of liquidity include debt and equity financing in the
public capital markets, if needed. Management believes funds generated from
operations, amounts available under existing credit facilities and external
sources of liquidity will be sufficient to finance capital expenditures and
working capital needs of the existing operations for the foreseeable future.
Management continues to evaluate opportunities to acquire products or businesses
complementary to the Company's operations. These acquisitions, if they arise,
may involve the use of cash or, depending upon the size and terms of the
acquisition, may require debt or equity financing.
Contingencies
The Company is a party to various legal and environmental matters
arising in the ordinary course of business. In the opinion of management, after
considering established reserves and contractual indemnifications obtained,
these matters are not expected to have a material adverse effect on the
Company's consolidated financial position or results of operations. In the
unlikely event that the parties providing the environmental indemnifications do
not fulfill their obligations, such event could result in the recognition of up
to $30.0 million related to indemnified liabilities, potentially impacting
earnings and cash flows in future periods.
Critical Accounting Policies and Estimates
The discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. The Company evaluates its estimates on an on-going
basis, based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. In its 2001
Annual Report on Form 10-K, the Company has described the critical accounting
policies that require management's most significant judgments and estimates.
There have been no material changes in these critical accounting policies.
ITEM 3. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
The Company is exposed to certain market risks arising from
transactions that are entered into in the normal course of business. These
risks, which are primarily related to interest rate changes and fluctuations in
foreign exchange rates, are not considered to be material to the Company. During
the reporting period, no events or transactions have occurred which would
materially change the information disclosed in the Company's Annual Report on
Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures and internal
controls designed to ensure that information required to be disclosed in our
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time frame specified in the Commission's
rules and regulations. Our principal executive and financial officers have
evaluated our disclosure controls and procedures within 90 days prior to the
filing of the Quarterly Report on Form 10-Q and have determined that such
disclosure controls and procedures are effective.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect those controls subsequent to
the evaluation date.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Credit Agreement dated as of July 10, 2002 among Smith
International, Inc. and M-I L.L.C., the Lenders from time to
time party hereto and Comerica Bank, as Administrative Agent,
ABN AMRO Bank N.V., as Syndication Agent, Den Norske Bank ASA,
as Documentation Agent, J.P. Morgan Securities Inc., and
Credit Lyonnais New York Branch, as Co-Lead Arrangers and
Joint Bookrunners.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
(b) Reports on Form 8-K
The Registrant filed reports on Form 8-K during the quarterly period
ended September 30, 2002. All filings were reported under "Item 5.
Other Events" and disclosed the following:
1. Form 8-K dated July 19, 2002 relating to a press release
announcing the Company's results for the quarter ended June
30, 2002.
2. Form 8-K dated August 8, 2002 announcing the acquisition of
Neyrfor-Weir turbodrilling operations.
3. Form 8-K dated August 14, 2002 submitting sworn statements by
the Company's Principal Executive Officer and Principal
Financial Officer in compliance with the Securities and
Exchange Commission's order of June 27, 2002, requiring the
submission of sworn statements pursuant to Section 21(a)(1) of
the Securities Exchange Act of 1934.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITH INTERNATIONAL, INC.
Registrant
Date: November 14, 2002 By: /s/ Doug Rock
-------------------------------
Doug Rock
Chairman of the Board, Chief Executive
Officer, President and Chief Operating Officer
Date: November 14, 2002 By: /s/ Margaret K. Dorman
----------------------------------------
Margaret K. Dorman
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
18
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT
OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Doug Rock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith International,
Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Doug Rock
-------------------------
Doug Rock
Chairman of the Board, Chief Executive Officer,
President and Chief Operating Officer
19
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT
OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Margaret K. Dorman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith International,
Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Margaret K. Dorman
-------------------------------------
Margaret K. Dorman
Senior Vice President,
Chief Financial Officer and Treasurer
20
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1 Credit Agreement dated as of July 10, 2002 among Smith
International, Inc. and M-I L.L.C., the Lenders from time to
time party hereto and Comerica Bank, as Administrative Agent,
ABN AMRO Bank N.V., as Syndication Agent, Den Norske Bank ASA,
as Documentation Agent, J.P. Morgan Securities Inc., and
Credit Lyonnais New York Branch, as Co-Lead Arrangers and
Joint Bookrunners.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.