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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 March 31, 2003
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock as of May 9,
2003 was 101,971,435.
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months ended March 31, 2003 and 2002.........................1
CONSOLIDATED CONDENSED BALANCE SHEETS
As of March 31, 2003 and December 31, 2002.................................2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months ended March 31, 2003 and 2002.........................3
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.......................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................11
Item 3. Qualitative and Quantitative Market Risk Disclosures................18
Item 4. Controls and Procedures.............................................18
PART II - OTHER INFORMATION
Items 1-6...................................................................19
SIGNATURES......................................................................20
CERTIFICATIONS..................................................................21
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
March 31,
--------------------------
2003 2002
----------- -----------
Revenues ................................................. $ 808,837 $ 827,377
Costs and expenses:
Costs of revenues ...................................... 570,494 585,875
Selling expenses ....................................... 137,128 131,059
General and administrative expenses .................... 38,061 35,995
----------- -----------
Total costs and expenses ....................... 745,683 752,929
----------- -----------
Operating income ......................................... 63,154 74,448
Interest expense, net .................................... 9,692 10,016
----------- -----------
Income before income taxes, minority interests and
cumulative effect of change in accounting principle .... 53,462 64,432
Income tax provision ..................................... 16,840 19,645
----------- -----------
Income before minority interests and cumulative effect of
change in accounting principle ......................... 36,622 44,787
Minority interests ....................................... 14,907 16,057
----------- -----------
Income before cumulative effect of change in accounting
principle .............................................. 21,715 28,730
Cumulative effect of change in accounting principle ...... (1,154) --
----------- -----------
Net income ............................................... $ 20,561 $ 28,730
=========== ===========
Basic (See Note 5):
Earnings per share before cumulative effect of change in
accounting principle ................................. $ 0.22 $ 0.29
Cumulative effect of change in accounting principle .... (0.01) --
----------- -----------
Earnings per share ..................................... $ 0.21 $ 0.29
=========== ===========
Diluted (See Note 5):
Earnings per share before cumulative effect of change in
accounting principle ................................. $ 0.22 $ 0.29
Cumulative effect of change in accounting principle .... (0.01) --
----------- -----------
Earnings per share ..................................... $ 0.21 $ 0.29
=========== ===========
Weighted average shares outstanding (See Note 5):
Basic .................................................. 99,265 98,840
Diluted ................................................ 100,267 99,838
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)
March 31, December 31,
2003 2002
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 43,914 $ 86,750
Receivables, net .................................................... 707,885 633,918
Inventories, net .................................................... 658,760 634,488
Deferred tax assets, net ............................................ 25,473 25,403
Prepaid expenses and other .......................................... 54,738 46,355
----------- -----------
Total current assets ........................................ 1,490,770 1,426,914
----------- -----------
Property, Plant and Equipment, net .................................... 523,686 519,220
Goodwill, net ......................................................... 679,288 620,075
Other Assets .......................................................... 198,492 183,336
----------- -----------
Total Assets .......................................................... $ 2,892,236 $ 2,749,545
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt ......... $ 191,821 $ 159,692
Accounts payable .................................................... 257,736 256,069
Accrued payroll costs ............................................... 46,672 49,946
Income taxes payable ................................................ 54,627 43,936
Other ............................................................... 88,180 85,453
----------- -----------
Total current liabilities ................................... 639,036 595,096
----------- -----------
Long-Term Debt ........................................................ 487,768 441,967
Deferred Tax Liabilities .............................................. 63,648 64,679
Other Long-Term Liabilities ........................................... 74,091 67,011
Minority Interests .................................................... 533,226 517,257
Commitments and Contingencies (See Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000 shares authorized; no shares
issued or outstanding in 2003 or 2002 ............................. -- --
Common stock, $1 par value; 150,000 shares authorized;
101,815 shares issued in 2003 (101,546 shares issued in 2002) ..... 101,815 101,546
Additional paid-in capital .......................................... 351,644 345,911
Retained earnings ................................................... 676,204 655,643
Accumulated other comprehensive income .............................. (6,066) (10,435)
Less - Treasury securities, at cost; 2,384 common shares ............ (29,130) (29,130)
----------- -----------
Total stockholders' equity .................................. 1,094,467 1,063,535
----------- -----------
Total Liabilities and Stockholders' Equity ............................ $ 2,892,236 $ 2,749,545
=========== ===========
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)
Three Months Ended
March 31,
--------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................ $ 20,561 $ 28,730
Adjustments to reconcile net income to net cash provided by operating
activities, excluding the net effects of acquisitions:
Cumulative effect of change in accounting principle ..................... 1,154 --
Depreciation and amortization ........................................... 24,384 21,024
Minority interests ...................................................... 14,907 16,057
Provision for losses on receivables ..................................... 430 5,549
Gain on disposal of property, plant and equipment ....................... (2,110) (1,676)
Foreign currency translation losses (gains) ............................. 813 (140)
Changes in operating assets and liabilities:
Receivables ............................................................. (64,331) 21,820
Inventories ............................................................. (10,946) 7,881
Accounts payable ........................................................ (3,297) (21,993)
Other current assets and liabilities .................................... (3,374) (33,254)
Other non-current assets and liabilities ................................ (8,150) (4,593)
----------- -----------
Net cash provided by (used in) operating activities ....................... (29,959) 39,405
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ........................... (77,769) --
Purchases of property, plant and equipment ................................ (20,699) (25,746)
Proceeds from disposal of property, plant and equipment ................... 4,420 4,001
----------- -----------
Net cash used in investing activities ..................................... (94,048) (21,745)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt .................................. 58,758 593
Principal payments of long-term debt ...................................... (1,316) (14,413)
Net change in short-term borrowings ....................................... 19,390 (5,943)
Proceeds from exercise of stock options ................................... 4,253 1,525
----------- -----------
Net cash provided by (used in) financing activities ....................... 81,085 (18,238)
----------- -----------
Effect of exchange rate changes on cash ................................... 86 (170)
----------- -----------
Decrease in cash and cash equivalents ..................................... (42,836) (748)
Cash and cash equivalents at beginning of period .......................... 86,750 44,683
----------- -----------
Cash and cash equivalents at end of period ................................ $ 43,914 $ 43,935
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest .................................................... $ 16,665 $ 18,275
Cash paid for income taxes ................................................ $ 5,929 $ 9,459
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
of Smith International, Inc. and subsidiaries (the "Company") 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 the Company's
2002 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
the Company as of the dates indicated. The results of operations for the interim
periods presented may not be indicative of results for the fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement
Obligations," which addresses the financial accounting and reporting for
retirement obligations and costs associated with tangible long-lived assets.
SFAS No. 143 requires that liabilities for asset retirement obligations be
recognized during the periods incurred rather than when expended. The Company's
asset retirement obligations principally relate to the removal of leasehold
improvements upon exiting certain leased properties, primarily associated with
the M-I operations. Upon adoption, the Company recognized a charge of $2.5
million, or $1.2 million after tax and minority interests, to reflect the
cumulative amount of expense which was required to be recognized as of January
1, 2003. This amount has been recorded as a cumulative effect of change in
accounting principle in the accompanying consolidated condensed statement of
operations. Additionally, the Company recorded a $3.7 million long-term
liability at the adoption date reflecting the present value of projected future
asset retirement obligations. The differential of $1.2 million, which primarily
represents the associated capitalized retirement costs, will be charged to
earnings over the remaining leasehold period. Neither the amount charged to
earnings in the first quarter of 2003 nor the pro forma effect for the three
months ended March 31, 2002 (assuming adoption of SFAS No. 143 as of January 1,
2002) were significant to net income or earnings per share amounts.
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.
4
3. BUSINESS COMBINATION
On January 29, 2003, M-I acquired certain oilfield chemical assets of
Dynea International ("Dynea") for cash consideration of $77.8 million. The
acquired operations, which are based in Norway, provide a complete line of
oilfield specialty chemicals used to eliminate hydrocarbon flow problems
encountered during production and transportation.
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.
The following unaudited pro forma supplemental information presents
consolidated results of operations as if the Company's significant current and
prior year acquisitions had occurred on January 1, 2002. The unaudited pro forma
data is based on historical information and does not include estimated cost
savings; therefore, it does not purport to be indicative of the results of
operations had the combinations been in effect at the dates indicated or of
future results for the combined entities (in thousands, except per share data):
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
Revenues ............................................................ $ 814,445 $ 854,389
Income before cumulative effect of change in accounting principle ... 21,813 30,183
Net income .......................................................... 20,659 30,183
Basic:
Earnings per share before cumulative effect of change in
accounting principle ............................................ $ 0.22 $ 0.31
Earnings per share ................................................ 0.21 0.31
Diluted:
Earnings per share before cumulative effect of change in
accounting principle ........................................... $ 0.22 $ 0.30
Earnings per share ............................................... 0.21 0.30
The following schedule summarizes investing activities related to the
current year acquisition included in the consolidated statement of cash flows
(in thousands):
Fair value of tangible and identifiable intangible assets, net of
cash acquired .......................................................... $ 28,607
Goodwill recorded ......................................................... 57,116
Total liabilities assumed ................................................. (7,954)
--------
Cash paid for acquisition of business, net of cash acquired ............... $ 77,769
========
5
4. OTHER CHARGES
During the first quarter of 2002, the Company recognized certain other
charges totaling $7.9 million, or $3.4 million net of tax 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
were paid in 2002.
In the accompanying consolidated condensed statement of operations for
the three months ended March 31, 2002, $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.
5. 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. Unless otherwise noted, all prior year share and
per share amounts included in the financial statements and related notes have
been restated for the effect of the stock split.
6. 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
March 31,
-------------------------
2003 2002
----------- -----------
BASIC EPS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE:
Income before cumulative effect of change in
accounting principle ............................... $ 21,715 $ 28,730
=========== ===========
Weighted average number of common shares
outstanding ........................................ 99,265 98,840
=========== ===========
Basic EPS before cumulative effect of change in
accounting principle............................... $ 0.22 $ 0.29
=========== ===========
DILUTED EPS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE:
Income before cumulative effect of change in
accounting principle ............................... $ 21,715 $ 28,730
=========== ===========
Weighted average number of common shares
outstanding ........................................ 99,265 98,840
Dilutive effect of stock options ..................... 1,002 998
----------- -----------
100,267 99,838
=========== ===========
Diluted EPS before cumulative effect of change in
accounting principle ............................... $ 0.22 $ 0.29
=========== ===========
6
7. 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):
March 31, December 31,
2003 2002
----------- --------------
Raw materials ......................................... $ 57,011 $ 49,880
Work-in-process ....................................... 54,976 54,201
Products purchased for resale ......................... 160,377 155,202
Finished goods ........................................ 411,400 399,252
----------- --------------
683,764 658,535
Reserves to state certain domestic inventories
(FIFO cost of $272,594 and $265,304 in 2003
and 2002, respectively) on a LIFO basis ............. (25,004) (24,047)
----------- --------------
$ 658,760 $ 634,488
=========== ==============
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
March 31, December 31,
2003 2002
----------- --------------
Land .................................................. $ 34,047 $ 33,412
Buildings ............................................. 130,263 125,589
Machinery and equipment ............................... 503,774 506,245
Rental tools .......................................... 283,272 268,134
----------- --------------
951,356 933,380
Less-Accumulated depreciation ......................... 427,670 414,160
----------- --------------
$ 523,686 $ 519,220
=========== ==============
7
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following schedule presents goodwill, net of amortization, on a
segment basis as of March 31, 2003 and December 31, 2002 and the related changes
in the carrying amount of goodwill (in thousands):
Oilfield Distribution
Segment Segment Consolidated
------------- ------------- -------------
Balance as of December 31, 2002 ............. $ 582,786 $ 37,289 $ 620,075
Goodwill acquired ........................... 57,116 -- 57,116
Purchase price and other adjustments ........ 1,710 387 2,097
------------- ------------- -------------
Balance as of March 31, 2003 ................ $ 641,612 $ 37,676 $ 679,288
============= ============= =============
The accompanying consolidated condensed balance sheets as of March 31,
2003 and December 31, 2002 include $66.6 million and $60.1 million of intangible
assets (net of accumulated amortization of $14.8 million and $13.2 million),
respectively, 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.
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
March 31,
-------------------------
2003 2002
----------- -----------
Net income ........................... $ 20,561 $ 28,730
Changes in unrealized fair value
of derivatives, net ................ 406 35
Currency translation adjustments ..... 3,963 (467)
----------- -----------
Comprehensive income ................. $ 24,930 $ 28,298
=========== ===========
As of March 31, 2003, accumulated other comprehensive income in the
accompanying consolidated condensed balance sheet includes $5.3 million of
cumulative currency translation losses and $3.5 million of cumulative pension
liability adjustments, partially offset by $2.7 million of cumulative changes in
the unrealized fair value of derivatives.
8
11. STOCK-BASED COMPENSATION
The Company's Board of Directors and its stockholders have authorized
an employee stock option plan. As of March 31, 2003, 6.0 million shares were
issued and outstanding under the program and an additional 3.3 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 five 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 of related expense in the accompanying
consolidated condensed statement of operations for the three month period ended
March 31, 2003.
The Company continues to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," 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.
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 (in thousands, except
per share data):
Three Months Ended
March 31,
--------------------------
2003 2002
----------- -----------
Net income, as reported ............................. $ 20,561 $ 28,730
Add: Stock-based compensation expense included in
reported income, net of related tax effect ...... 68 --
Less: Total stock-based compensation expense
determined under the Black-Scholes option-pricing
model, net of related tax effect ................ (2,347) (1,896)
----------- -----------
Pro forma net income ................................ $ 18,282 $ 26,834
=========== ===========
Earnings per share:
As reported:
Basic ........................................... $ 0.21 $ 0.29
Diluted ......................................... 0.21 0.29
Pro forma:
Basic ........................................... $ 0.18 $ 0.27
Diluted ......................................... 0.18 0.27
In addition to the stock option program described above, the Company
maintains a stock grant program. The stock grants are issued at par value and
are subject to a four-year cliff-vesting schedule. Compensation expense,
calculated as the difference between the market value on the date of grant and
the exercise price, is being recognized ratably over the vesting period and
resulted in the inclusion of $0.2 million and $0.1 million of related expense in
the accompanying consolidated condensed statements of operations for the three
month periods ended March 31, 2003 and 2002, respectively.
9
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
March 31,
--------------------------
2003 2002
----------- -----------
Revenues:
Oilfield Products and Services ..... $ 603,560 $ 592,870
Distribution ....................... 205,277 234,507
----------- -----------
$ 808,837 $ 827,377
=========== ===========
Operating Income:
Oilfield Products and Services ..... $ 68,933 $ 75,939
Distribution ....................... (4,099) 68
General corporate .................. (1,680) (1,559)
----------- -----------
$ 63,154 $ 74,448
=========== ===========
13. COMMITMENTS AND CONTINGENCIES
Standby Letters of Credit and Guarantees
In the normal course of business with customers, vendors and others,
the Company is contingently liable for performance under standby letters of
credit and bid, performance and surety bonds which totaled approximately $75.0
million at March 31, 2003. Management does not expect any material amounts to be
drawn on these instruments. The Company has also provided guarantees for loans
related to certain joint ventures accounted for by the equity method of
accounting. As the net assets of the joint ventures are available to satisfy
obligations as they become due, management believes the likelihood is remote
that the Company will be required to make payments related to these agreements.
The Company's estimated maximum exposure under these contingent guarantees was
approximately $12.0 million as of March 31, 2003.
Environmental
The Company routinely establishes and reviews the adequacy of reserves
for estimated future environmental clean-up costs for properties currently or
previously operated by the Company.
In connection with most business acquisitions, the Company obtains
contractual indemnifications from the seller related to environmental matters.
These indemnifications generally provide for the reimbursement of environmental
clean-up costs incurred by the Company for events occurring or circumstances
existing prior to the purchase date, whether the event or circumstance was known
or unknown at that time. A substantial portion of the Company's total
environmental exposure is associated with its M-I operations, which are subject
to various indemnifications from former owners.
As of March 31, 2003, the Company has established an environmental
reserve of approximately $12.5 million. This amount reflects the future
undiscounted estimated exposure related to identified properties, without regard
to indemnifications from former owners. While actual future environmental costs
may differ from estimated liabilities recorded at March 31, 2003, the Company
does not believe that these differences will have a material impact on the
Company's financial position or results of operations, subject to the
indemnifications in place. During the first quarter of 2003, the Company
initiated legal action against M-I's former owners to address issues associated
with certain provisions of the environmental indemnification provided. In the
event that i) M-I's former owners and other parties to indemnification
agreements with the Company do not fulfill their obligations, and ii) costs
incurred to remediate the identified properties reach estimated maximum exposure
limits, the Company would be required to establish additional environmental
reserves of up to $25.0 million, impacting earnings and cash flows in future
periods.
10
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, the notes thereto and the related "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in the Company's 2002
Annual Report on Form 10-K.
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 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, oilfield production chemicals, three-cone drill bits,
diamond drill bits, turbine products, 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, valves, fittings and mill, 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 increase in the worldwide rig count relates to
higher North American activity levels, driven by a 22 percent increase in
land-based drilling programs. Drilling activity in the United States and Canada
is heavily influenced by natural gas fundamentals, as approximately 80 percent
of the North American rig count is currently natural gas-directed. A combination
of declining production and higher weather-related demand has reduced U.S.
natural gas storage levels to nearly 40 percent below the five-year average,
which has favorably impacted commodity prices and North American drilling
activity. Activity levels in markets outside of North America, which are
primarily influenced by crude oil fundamentals, have remained relatively
consistent with the prior year and are forecasted to show modest improvement
throughout the remainder of 2003. While worldwide activity levels are currently
above the average reported in the first quarter of 2002, various factors,
including political and regional instabilities, oil and natural gas storage
levels, commodity prices and depletion rates, will likely influence drilling
activity 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 reduced 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.
11
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 March 31,
-----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
Amount % Amount %
------------ ------------ ------------ ------------
Financial Data:
Revenues:
M-I .................................. $ 416,289 52 $ 396,656 48
Smith Bits ........................... 92,239 11 89,478 11
Smith Services ....................... 95,032 12 106,736 13
------------ ------------ ------------ ------------
Oilfield Products and Services ..... 603,560 75 592,870 72
Distribution ......................... 205,277 25 234,507 28
------------ ------------ ------------ ------------
Total ........................ $ 808,837 100 $ 827,377 100
============ ============ ============ ============
Revenues by Area:
United States ........................ $ 367,315 45 $ 391,948 47
Canada ............................... 86,281 11 88,219 11
Non-North America .................... 355,241 44 347,210 42
------------ ------------ ------------ ------------
Total ........................ $ 808,837 100 $ 827,377 100
============ ============ ============ ============
Operating Income:
Oilfield Products and Services ....... $ 68,933 11 $ 75,939 13
Distribution ......................... (4,099) -- 68 --
General corporate .................... (1,680) * (1,559) *
------------ ------------ ------------ ------------
Total ........................ $ 63,154 8 $ 74,448 9
============ ============ ============ ============
Market Data:
M-I Average Worldwide Rig Count:
United States ........................ 1,052 42 877 39
Canada ............................... 455 18 386 17
Non-North America .................... 1,008 40 1,001 44
------------ ------------ ------------ ------------
Total ........................ 2,515 100 2,264 100
============ ============ ============ ============
*not meaningful
12
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,
and it manufactures and markets equipment and services for solids-control,
separation, pressure control, rig instrumentation and waste-management through
its M-I SWACO division. M-I also provides a complete line of oilfield specialty
chemicals and related technical services through its Oilfield Production
Chemical division, acquired in January 2003. 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 March 31, 2003, M-I's
revenues totaled $416.3 million, five percent above the prior year quarter. The
year-over-year variance was largely attributable to incremental revenues from
acquisitions completed during the past 12-month period, primarily the Dynea
Oilfield Chemical transaction finalized on January 29, 2003. Excluding the
impact of acquisitions, revenues increased one percent above the prior year
quarter reflecting new contract awards and increased customer activity in
certain Eastern Hemisphere markets, primarily the Commonwealth of Independent
States and West Africa. Western Hemisphere revenues were slightly below the
prior year as the effect of a reduced number of U.S. offshore drilling programs
and lower activity levels in certain areas of Latin America was partially offset
by incremental revenues associated with increased North American land-based
drilling activity.
Smith Bits designs, manufactures and sells three three-cone drill bits,
diamond drill bits and turbines for use in the oil and gas industry. Smith Bits
reported revenues of $92.2 million for the first quarter of 2003, an increase of
three percent from the comparable prior year period. The period-to-period
comparison was affected by the sale of several large Eastern Hemisphere export
orders during the prior year quarter, which did not recur in the first quarter
of 2003, as well as the acquisition of two business operations during the latter
half of 2002. Excluding the impact of these items, Smith Bits' revenues
increased approximately five percent over the prior year period, attributable to
improved North American 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 March 31, 2003, Smith Services' revenues
totaled $95.0 million, 11 percent below the prior year quarter. The majority of
the year-over-year revenue decline related to the more than 40 percent reduction
in demand for tubular products in the United States, primarily drill pipe. The
remainder of the decline relates to reduced customer spending for completion
products and services in certain markets in Latin America and West Africa.
Operating Income
Operating income for the Oilfield Products and Services segment was
$68.9 million, a nine percent decline from the prior year quarter. Segment
operating margins were 11.4 percent for the first quarter of 2003, 1.4
percentage points below the level reported in the prior year quarter. The
year-over-year decline in segment operating income primarily reflected inclusion
of higher operating expenses, partially offset by increased gross profit
attributable to the improved revenue volumes. Incremental expenses related to
five operations acquired over the past 12-month period, higher costs associated
with U.S. medical and casualty insurance programs and increased employee
profit-sharing accruals accounted for the reported operating expense increase.
The year-over-year comparison was also impacted by the recognition of $7.0
million in charges, primarily related to receivable write-downs in Argentina and
employee termination costs, in the first quarter of 2002 which did not recur.
Excluding the effect of these charges, operating margins declined 2.6 percentage
points from the prior year quarter.
13
Distribution Segment
Revenues
Wilson markets pipe, valves, fittings and mill, 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 $205.3 million for the first quarter of 2003, 12 percent
below the prior year quarter. Over 70 percent of the revenue variance was
reported in Wilson's U.S. industrial and downstream operations attributable to
lower spending on major maintenance programs and projects by engineering and
construction, refining and petrochemical customers. To a lesser extent, the
year-over-year revenue comparison was impacted by reduced tubular product sales
in Canada as certain customers now purchase tubular goods directly from the
manufacturer.
Operating Income
Operating income for the Distribution segment decreased $4.2 million
from the amount reported in the first quarter of 2002. The operating income
variance reflects lower gross profit associated with the reported revenue
decline, partially offset by a reduction in variable-based operating expenses.
As a percentage of revenues, operating income decreased two percentage points
from the prior year quarter, as lower sales volumes impacted coverage of fixed
sales and administrative support costs.
14
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 March 31,
----------------------------------------------------------
2003 2002
--------------------------- --------------------------
Amount % Amount %
------------ --------- ------------ ---------
Revenues ......................................................... $ 808,837 100 $ 827,377 100
------------ --------- ------------ ---------
Gross profit ..................................................... 238,343 29 241,502 29
Operating expenses ............................................... 175,189 21 167,054 20
------------ --------- ------------ ---------
Operating income ................................................. 63,154 8 74,448 9
Interest expense, net ............................................ 9,692 1 10,016 1
------------ --------- ------------ ---------
Income before income taxes, minority interests and cumulative
effect of change in accounting principle ....................... 53,462 7 64,432 8
Income tax provision ............................................. 16,840 2 19,645 2
------------ --------- ------------ ---------
Income before minority interests and cumulative effect of
change in accounting principle .................................. 36,622 5 44,787 6
Minority interests ............................................... 14,907 2 16,057 2
------------ --------- ------------ ---------
Income before cumulative effect of change in accounting
principle ....................................................... 21,715 3 28,730 4
Cumulative effect of change in accounting principle .............. (1,154) -- -- --
------------ --------- ------------ ---------
Net income ....................................................... $ 20,561 3 $ 28,730 4
============ ========= ============ =========
Consolidated revenues were $808.8 million for the first quarter of
2003, two percent below the prior year period. The year-over-year comparison was
impacted by the inclusion of revenues from five acquisitions completed during
the prior 12-month period. Excluding the impact of acquired operations, base
revenues fell five percent from the first quarter of 2002, with revenue declines
experienced in both the Oilfield and Distribution segments. Approximately 70
percent of the base revenue decline was reported in the Distribution operations
associated with a significant decline in customer spending levels in the
industrial and downstream market. The base revenue reduction in the Oilfield
segment resulted from lower demand for tubular goods in the United States and a
reduction in the level of Eastern Hemisphere export orders, partially offset by
incremental revenues associated with improved North American activity levels.
Gross profit totaled $238.3 million for the first quarter of 2003,
approximately one percent below the prior year period. The decrease in gross
profit reflects the lower sales volumes experienced in the Company's
Distribution segment. Gross profit margins for the period were 29 percent of
revenues, comparable with the levels reported in the prior year quarter due, in
part, to a favorable shift in revenue mix. The impact of the increased
proportion of consolidated revenues generated in the Oilfield segment, which
traditionally generate higher gross profit margins than the Distribution
operations, served to offset the minimal margin deterioration reported in the
Oilfield segment.
15
Operating expenses, consisting of selling, general and administrative
expenses, increased $8.1 million from the prior year period. Over half of the
variance relates to incremental expenses associated with operations acquired
during the past 12-month period. To a lesser extent, higher costs associated
with U.S. medical and casualty insurance programs and increased employee
profit-sharing amounts resulting from reported profitability levels contributed
to the period-to-period increase. The reported increase in operating expenses
was impacted by the inclusion of $7.5 million of charges, primarily for
receivable write-offs in Argentina and employee termination costs recognized in
the prior year period which did not recur.
Net interest expense, which represents interest expense less interest
income, equaled $9.7 million in the first quarter of 2003. Net interest expense
decreased $0.3 million from the prior year period as excess cash flow was
utilized to repay outstanding borrowings under revolving credit facilities,
resulting in a $35.0 million reduction in average debt levels.
The effective tax rate for the first quarter approximated 32 percent,
which 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 increased one
percentage point above the first quarter of 2002, reflecting the lower
proportion of M-I U.S. partnership earnings and, to a lesser extent, an
unfavorable shift in the geographic mix of pre-tax income toward higher 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 $1.2 million below amounts reported in the prior year quarter due
to the lower profitability reported in the M-I operations.
The cumulative effect of change in accounting principle represents the
impact of adopting Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations," which was effective January 1,
2003.
LIQUIDITY AND CAPITAL RESOURCES
General
At March 31, 2003, cash and cash equivalents equaled $43.9 million. For
the first quarter of 2003, the Company's operations utilized $30.0 million of
cash flow which compared to the $39.4 million generated in the prior year
period. The current year improvement in North American activity levels has
resulted in higher working capital levels, particularly the required investment
in accounts receivable and inventories, in contrast to the prior year quarter
when declining activity favorably impacted these working capital accounts.
During the first quarter of 2003, cash flows used in investing
activities totaled $94.0 million, consisting of amounts required to fund
acquisitions and, to a lesser extent, capital expenditures. During the period,
the Company acquired the oilfield chemical assets of Dynea International in
exchange for cash consideration of $77.8 million. The Company also invested
$16.2 million in property, plant and equipment, net of cash proceeds arising
from certain asset disposals. The level of cash used for investing activities
increased from the prior year period, with the variance related to current year
acquisition funding.
In the first three months of 2003, cash flows from operations were not
sufficient to fund investing activities, resulting in a $76.8 million increase
in outstanding debt levels. Cash flows provided by financing activities, which
totaled $81.1 million for the three months ended March 31, 2003, were also
impacted by proceeds from the exercise of stock options, which equaled $4.3
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 levels and working capital requirements. Capacity under revolving
credit agreements is also available, if necessary, to fund operating or
investing activities. As of March 31, 2003, the Company had $344.4 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 March 31, 2003, borrowing capacity of $42.8
million was available under the non-U.S. borrowing facilities.
16
External sources of liquidity include debt and equity financing in the
public capital markets, if needed. The Company carries an investment-grade
credit rating with recognized rating agencies, generally providing the Company
with access to debt markets. The Company's overall borrowing capacity is, in
part, dependent on maintaining compliance with financial covenants under the
various credit agreements. As of March 31, 2003, the Company was well within the
covenant compliance thresholds under its various loan indentures, as amended,
providing the ability to access available borrowing capacity. 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.
Commitments and Contingencies
Standby Letters of Credit and Guarantees
In the normal course of business with customers, vendors and others,
the Company is contingently liable for performance under standby letters of
credit and bid, performance and surety bonds which totaled approximately $75.0
million at March 31, 2003. Management does not expect any material amounts to be
drawn on these instruments. The Company has also provided guarantees for loans
related to certain joint ventures accounted for by the equity method of
accounting. As the net assets of the joint ventures are available to satisfy
obligations as they become due, management believes the likelihood is remote
that the Company will be required to make payments related to these agreements.
The Company's estimated maximum exposure under these contingent guarantees was
approximately $12.0 million as of March 31, 2003.
Environmental
The Company routinely establishes and reviews the adequacy of reserves
for estimated future environmental clean-up costs for properties currently or
previously operated by the Company.
In connection with most business acquisitions, the Company obtains
contractual indemnifications from the seller related to environmental matters.
These indemnifications generally provide for the reimbursement of environmental
clean-up costs incurred by the Company for events occurring or circumstances
existing prior to the purchase date, whether the event or circumstance was known
or unknown at that time. A substantial portion of the Company's total
environmental exposure is associated with its M-I operations, which are subject
to various indemnifications from former owners.
As of March 31, 2003, the Company has established an environmental
reserve of approximately $12.5 million. This amount reflects the future
undiscounted estimated exposure related to identified properties, without regard
to indemnifications from former owners. While actual future environmental costs
may differ from estimated liabilities recorded at March 31, 2003, the Company
does not believe that these differences will have a material impact on the
Company's financial position or results of operations, subject to the
indemnifications in place. During the first quarter of 2003, the Company
initiated legal action against M-I's former owners to address issues associated
with certain provisions of the environmental indemnification provided. In the
event that i) M-I's former owners and other parties to indemnification
agreements with the Company do not fulfill their obligations, and ii) costs
incurred to remediate the identified properties reach estimated maximum exposure
limits, the Company would be required to establish additional environmental
reserves of up to $25.0 million, impacting earnings and cash flows in future
periods.
17
Critical Accounting Policies and Estimates
The discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated condensed 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 2002 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.
Recent Accounting Pronouncements
On January 1, 2003, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement
Obligations," which addresses the financial accounting and reporting for
retirement obligations and costs associated with tangible long-lived assets.
SFAS No. 143 requires that liabilities for asset retirement obligations be
recognized during the periods incurred rather than when expended. The Company's
asset retirement obligations principally relate to the removal of leasehold
improvements upon exiting certain leased properties, primarily associated with
the M-I operations. Upon adoption, the Company recognized a charge of $2.5
million, or $1.2 million after tax and minority interests, to reflect the
cumulative amount of expense which was required to be recognized as of January
1, 2003. This amount has been recorded as a cumulative effect of change in
accounting principle in the accompanying consolidated condensed statement of
operations. Additionally, the Company recorded a $3.7 million long-term
liability at the adoption date reflecting the present value of projected future
asset retirement obligations. The differential of $1.2 million, which primarily
represents the associated capitalized retirement costs, will be charged to
earnings over the remaining leasehold period. Neither the amount charged to
earnings in the first quarter of 2003 nor the pro forma effect for the three
months ended March 31, 2002 (assuming adoption of SFAS No. 143 as of January 1,
2002) were significant to net income or earnings per share amounts.
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.
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 which are
primarily related to interest rate changes and fluctuations in foreign exchange
rates. 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.
18
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
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 March 31, 2003. All filings were reported under "Item 5. Other
Events" and disclosed the following:
1. Form 8-K dated January 29, 2003 relating to a press
release announcing the acquisition of the oilfield
chemical operations of Dynea International.
2. Form 8-K dated January 30, 2003 relating to a press
release announcing the Company's results for the
quarter and year ended December 31, 2002.
19
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: May 15, 2003 By: /s/ DOUG ROCK
------------------------------ --------------------------------
Doug Rock
Chairman of the Board, Chief
Executive Officer, President and
Chief Operating Officer
Date: May 15, 2003 By: /s/ MARGARET K. DORMAN
------------------------------- -------------------------------
Margaret K. Dorman
Senior Vice President,
Chief Financial Officer and
Treasurer
(Principal Accounting Officer)
20
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: May 15, 2003 /s/ DOUG ROCK
--------------------------------- -----------------------------------
Doug Rock
Chairman of the Board, Chief
Executive Officer, President and
Chief Operating Officer
21
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: May 15, 2003 /s/ MARGARET K. DORMAN
---------------------------- -------------------------------------
Margaret K. Dorman
Senior Vice President,
Chief Financial Officer and Treasurer
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.