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, 2005
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 [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Registrant's common stock as of November
1, 2005 was 212,390,228.
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, 2005 and 2004 .................................. 1
CONSOLIDATED CONDENSED BALANCE SHEETS
As of September 30, 2005 and December 31, 2004 .......................................................... 2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months ended September 30, 2005 and 2004 ................................................... 3
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS .................................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................... 13
ITEM 3. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES .................................................... 22
ITEM 4. CONTROLS AND PROCEDURES ................................................................................. 22
PART II - OTHER INFORMATION
ITEMS 1-6 ........................................................................................................ 23
SIGNATURES................................................................................................................. 24
EXHIBIT INDEX ............................................................................................................. 25
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,
------------------------------ -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenues................................ $ 1,410,162 $ 1,119,184 $ 4,048,563 $ 3,201,422
Costs and expenses:
Costs of revenues................... 985,558 780,201 2,839,409 2,221,069
Selling expenses..................... 199,972 172,348 575,166 500,890
General and administrative expenses.. 53,217 48,418 159,019 171,250
------------- ------------- ------------- -------------
Total costs and expenses........... 1,238,747 1,000,967 3,573,594 2,893,209
------------- ------------- ------------- -------------
Operating income........................ 171,415 118,217 474,969 308,213
Interest expense........................ 11,001 9,965 32,333 28,803
Interest income......................... (339) (327) (1,143) (981)
------------- ------------- ------------- -------------
Income before income taxes and
minority interests................... 160,753 108,579 443,779 280,391
Income tax provision.................... 51,970 35,129 143,944 90,955
Minority interests...................... 29,279 21,557 86,119 65,216
------------- ------------- ------------- -------------
Net income.............................. $ 79,504 $ 51,893 $ 213,716 $ 124,220
============= ============= ============= =============
Earnings per share:
Basic................................ $ 0.40 $ 0.26 $ 1.06 $ 0.61
Diluted.............................. $ 0.39 $ 0.25 $ 1.05 $ 0.61
Weighted average shares outstanding:
Basic................................ 201,013 202,580 202,063 202,626
Diluted.............................. 203,031 204,848 204,120 205,091
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)
(Unaudited)
September 30, December 31,
2005 2004
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 65,342 $ 53,596
Receivables, net...................................................... 1,113,614 963,622
Inventories, net...................................................... 1,018,724 890,462
Deferred tax assets, net.............................................. 52,111 47,083
Prepaid expenses and other............................................ 72,780 64,869
------------- ------------
Total current assets............................................... 2,322,571 2,019,632
------------- ------------
Property, Plant and Equipment, net....................................... 603,514 576,954
Goodwill, net............................................................ 724,463 713,353
Other Intangible Assets, net............................................. 81,342 68,597
Other Assets............................................................. 134,733 128,242
------------- ------------
Total Assets............................................................. $ 3,866,623 $ 3,506,778
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt........... $ 124,118 $ 211,375
Accounts payable...................................................... 477,307 376,782
Accrued payroll costs................................................. 92,508 89,200
Income taxes payable.................................................. 98,131 91,587
Other................................................................. 135,479 118,413
------------- ------------
Total current liabilities.......................................... 927,543 887,357
------------- ------------
Long-Term Debt........................................................... 555,218 387,798
Deferred Tax Liabilities................................................. 97,157 93,777
Other Long-Term Liabilities.............................................. 86,707 82,352
Minority Interests....................................................... 706,951 654,683
Commitments and Contingencies (Note 16)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000 shares authorized; no shares
issued or outstanding in 2005 or 2004.............................. - -
Common stock, $1 par value; 250,000 shares authorized
(150,000 shares authorized in 2004); 212,385 shares issued in 2005
(105,297 shares issued in 2004, on a pre-split basis).............. 212,385 105,297
Additional paid-in capital........................................... 363,403 432,395
Retained earnings.................................................... 1,138,937 961,574
Accumulated other comprehensive income............................... 9,409 24,404
Less - Treasury securities, at cost; 11,996 common shares in
2005 (4,222 common shares in 2004, on a pre-split basis).......... (231,087) (122,859)
------------- ------------
Total stockholders' equity......................................... 1,493,047 1,400,811
------------- ------------
Total Liabilities and Stockholders' Equity............................... $ 3,866,623 $ 3,506,778
============= ============
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,
---------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 213,716 $ 124,220
Adjustments to reconcile net income to net cash provided by operating
activities, excluding the net effects of acquisitions:
Litigation-related charge.............................................. - 31,439
Depreciation and amortization.......................................... 86,555 79,286
Minority interests..................................................... 86,119 65,216
Deferred income tax benefit............................................ (3,427) (3,747)
Provision for losses on receivables.................................... 2,864 3,349
Gain on disposal of property, plant and equipment...................... (11,805) (7,764)
Gain on sale of investments in unconsolidated subsidiaries............. (5,898) -
Foreign currency translation losses (gains)............................ (80) 2,363
Changes in operating assets and liabilities:
Receivables............................................................ (160,586) (108,189)
Inventories............................................................ (135,807) (93,618)
Accounts payable....................................................... 103,999 41,956
Other current assets and liabilities................................... 16,459 (15,195)
Other non-current assets and liabilities............................... (18,764) (1,835)
----------- -----------
Net cash provided by operating activities............................ 173,345 117,481
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired..................................... (31,702) (45,762)
Purchases of property, plant and equipment............................. (115,645) (75,568)
Proceeds from disposal of property, plant and equipment................ 20,377 15,093
Proceeds from sale of investments in unconsolidated subsidiaries....... 20,496 -
----------- -----------
Net cash used in investing activities................................ (106,474) (106,237)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............................... 132,049 68,770
Principal payments of long-term debt................................... (54,287) (78,946)
Net change in short-term borrowings.................................... 1,757 19,126
Purchases of treasury stock............................................ (108,228) (54,026)
Proceeds from employee stock option exercises.......................... 26,561 48,212
Payment of common stock dividends...................................... (24,316) -
Distributions to minority interest partner............................. (28,000) -
----------- -----------
Net cash provided by (used in) financing activities.................. (54,464) 3,136
----------- -----------
Effect of exchange rate changes on cash.................................. (661) (631)
----------- -----------
Increase in cash and cash equivalents.................................... 11,746 13,749
Cash and cash equivalents at beginning of period......................... 53,596 51,286
----------- -----------
Cash and cash equivalents at end of period............................... $ 65,342 $ 65,035
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................................... $ 39,080 $ 35,766
Cash paid for income taxes............................................... 127,495 69,779
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 applicable 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 2004 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 and 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
From time to time, new accounting pronouncements are issued by the Financial
Accounting Standards Board ("FASB") which are adopted by the Company as of the
specified effective date. The planned adoption of Statement of Financial
Accounting Standards ("SFAS") No. 123r, "Share-Based Payment," is more fully
disclosed in Note 11. Management believes the impact of other recently issued
standards, which are not yet effective, will not have a material impact on the
Company's consolidated condensed financial statements upon adoption.
3. STOCK SPLIT
On July 20, 2005, 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
August 5, 2005 were entitled to the dividend, which was distributed on August
24, 2005.
The September 30, 2005 consolidated condensed balance sheet includes the
reclassification of $106.2 million from additional paid-in capital to the common
stock account, in order to reflect the transaction. Additionally, all prior year
share and option amounts included in the accompanying consolidated condensed
financial statements and related notes have been restated for the effect of the
stock split.
4. LITIGATION-RELATED CHARGE
During the prior year, the Company recorded litigation-related charges totaling
$31.4 million, or $20.4 million on an after-tax basis. The second quarter 2004
charge, which consisted of an estimated loss provision, legal fees and other
directly related costs, resulted from a complaint which alleged that certain of
the Company's roller cone drill bit designs infringed several of the plaintiff's
U.S. patents. In the accompanying consolidated condensed statement of operations
for the nine months ended September 30, 2004, $28.8 million of the charges are
included in general and administrative expenses and the remainder are recorded
in costs of revenues. The current status of this legal matter is discussed in
Note 16.
4
5. ACQUISITIONS AND DISPOSITIONS
During the nine months ended September 30, 2005, the Company completed four
acquisitions in exchange for aggregate cash consideration of $31.7 million. The
consideration primarily relates to the purchase of certain operating assets of
Tubular Technology, Inc. and associated companies ("TTI") completed in August
2005. The TTI operations, which serve the U.S. Gulf Coast market, provide a full
range of products and services used in connection with the installation of
corrosion-resistant alloy tubulars and also offer proprietary products and
technical services used during the completion-phase of oil and gas wells.
These acquisitions have 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 approximated $10.9 million
and has been recorded as goodwill in the Oilfield Products and Services segment.
The purchase price allocations related to these acquisitions are based on
preliminary information and are subject to change when additional data
concerning final asset and liability valuations is obtained; however, material
changes in the preliminary allocations are not anticipated by management.
Additionally, during the three months ended September 30, 2005, the Company
completed the disposition of certain investments in unconsolidated joint
ventures for aggregate cash proceeds of $20.5 million. The proceeds primarily
relate to the sale of the Company's 50-percent equity interest in the
Sandvik-Smith mining bit joint venture completed in September 2005. These
transactions resulted in an aggregate pre-tax gain of approximately $5.9
million, which has been reflected as a reduction to general and administrative
expenses in the accompanying consolidated condensed statements of operations.
Pro forma results of operations have not been presented because the effect of
these transactions was not material to the Company's consolidated condensed
financial statements.
6. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed using the weighted average number
of common shares outstanding during the period. Diluted EPS gives effect to the
potential dilution of earnings which could have occurred if additional shares
were issued under the treasury stock method. The following schedule reconciles
the income and shares used in the basic and diluted EPS computations (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
BASIC EPS:
Net income....................................................$ 79,504 $ 51,893 $ 213,716 $ 124,220
=========== =========== =========== ===========
Weighted average number of common shares outstanding......... 201,013 202,580 202,063 202,626
=========== =========== =========== ===========
Basic EPS.....................................................$ 0.40 $ 0.26 $ 1.06 $ 0.61
=========== =========== =========== ===========
DILUTED EPS:
Net income....................................................$ 79,504 $ 51,893 $ 213,716 $ 124,220
=========== =========== =========== ===========
Weighted average number of common shares outstanding.......... 201,013 202,580 202,063 202,626
Dilutive effect of stock options and restricted stock units... 2,018 2,268 2,057 2,465
----------- ----------- ----------- -----------
203,031 204,848 204,120 205,091
=========== =========== =========== ===========
Diluted EPS...................................................$ 0.39 $ 0.25 $ 1.05 $ 0.61
=========== =========== =========== ===========
5
7. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the average cost method for the majority of the Company's inventories; however,
a significant portion of the Company's U.S.-based inventories are valued
utilizing the last-in, first-out ("LIFO") method. Inventory costs, consisting of
materials, labor and factory overhead, are as follows (in thousands):
September 30, December 31,
2005 2004
--------------- ---------------
Raw materials............................................................ $ 89,761 $ 78,773
Work-in-process.......................................................... 103,120 81,002
Products purchased for resale............................................ 317,133 252,486
Finished goods........................................................... 583,723 530,657
--------------- ---------------
1,093,737 942,918
Reserves to state certain U.S. inventories (FIFO cost of $393,159 and
$337,080 in 2005 and 2004, respectively) on a LIFO basis............... (75,013) (52,456)
--------------- ---------------
$ 1,018,724 $ 890,462
=============== ===============
During the first nine months of 2005, the Company recorded additional LIFO
reserves of $22.6 million, primarily reflecting the higher cost of steel and
alloy products purchased by the Distribution segment.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
September 30, December 31,
2005 2004
--------------- --------------
Land.................................................................... $ 36,890 $ 35,954
Buildings............................................................... 144,788 147,442
Machinery and equipment................................................. 564,724 555,469
Rental tools............................................................ 431,381 376,043
--------------- --------------
1,177,783 1,114,908
Less-Accumulated depreciation........................................... (574,269) (537,954)
--------------- --------------
$ 603,514 $ 576,954
=============== ==============
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table presents goodwill on a segment basis as of the dates
indicated, as well as changes in the account during the period shown. Beginning
and ending goodwill balances are presented net of accumulated amortization of
$53.6 million.
Oilfield Distribution
Segment Segment Consolidated
------------ ------------- -------------
(in thousands)
Balance as of December 31, 2004...................... $ 675,582 $ 37,771 $ 713,353
Goodwill acquired.................................... 10,859 - 10,859
Purchase price and other adjustments................. 116 135 251
------------ ------------- -------------
Balance as of September 30, 2005..................... $ 686,557 $ 37,906 $ 724,463
============ ============= =============
6
Other Intangible Assets
The Company amortizes other identifiable intangible assets on a straight-line
basis over the periods expected to be benefited, ranging from three to 27 years.
The components of these other intangible assets included in the accompanying
consolidated condensed balance sheets, are as follows (in thousands):
September 30, 2005 December 31, 2004
-------------------------------------- -------------------------------------------
Weighted
Gross Gross Average
Carrying Accumulated Carrying Accumulated Amortization
Amount Amortization Net Amount Amortization Net Period (years)
--------- ------------- -------- ---------- -------------- ----------- --------------
Patents............. $ 43,055 $ 16,322 $ 26,733 $ 42,353 $ 14,532 $ 27,821 15.6
License
agreements........ 29,702 6,405 23,297 26,044 4,420 21,624 10.7
Non-compete
agreements and
trademarks........ 28,158 11,234 16,924 20,772 8,899 11,873 10.1
Customer lists
and contracts.... 17,312 2,924 14,388 9,232 1,953 7,279 10.8
--------- ------------- -------- ---------- -------------- ----------- --------------
$ 118,227 $ 36,885 $ 81,342 $ 98,401 $ 29,804 $ 68,597 12.2
========= ============= ======== ========== ============== =========== ==============
Amortization expense of other intangible assets was $2.5 million and $2.2
million for the three-month periods ended September 30, 2005 and 2004,
respectively, and $7.1 million and $6.6 million for the nine-month periods ended
September 30, 2005 and 2004, respectively. Additionally, estimated future
amortization expense is expected to range between $8.3 million and $12.0 million
per year for the next five fiscal years.
10. DEBT
The following summarizes the Company's outstanding debt (in thousands):
September 30, December 31,
2005 2004
--------------- --------------
Current:
Short-term borrowings...................................................... $ 109,453 $ 107,204
Current portion of long-term debt.......................................... 14,665 104,171
--------------- --------------
$ 124,118 $ 211,375
=============== ==============
Long-Term:
Notes, net of unamortized discounts........................................ $ 386,904 $ 397,213
Revolving credit facilities................................................ 177,000 80,000
Term loans and other....................................................... 5,979 14,756
--------------- --------------
569,883 491,969
Less current portion of long-term debt..................................... (14,665) (104,171)
--------------- --------------
$ 555,218 $ 387,798
=============== ==============
In May 2005, the Company finalized a new $400.0 million revolving credit
facility with a syndicate of nine financial institutions. The new facility
replaced a $400.0 million agreement, which was scheduled to expire in July 2005.
The revolving credit agreement (the "Agreement") allows for the election of
interest at a base rate, or a Eurodollar rate ranging from LIBOR plus 40 to 50
basis points depending on the borrowing levels drawn under the facility. The
Agreement also requires the payment of a quarterly commitment fee of 10 basis
points on the unutilized portion of the facility and compliance with certain
customary covenants, including a 40 percent debt-to-total capitalization
limitation.
Principal payments of long-term debt for the twelve-month periods ending
September 30, are as follows (in thousands):
2007..................................................................... $ 157,593
2008..................................................................... 697
2009..................................................................... -
2010..................................................................... 177,037
Thereafter............................................................... 219,891
-------------
$ 555,218
=============
7
11. STOCK-BASED COMPENSATION
Stock Options
The Company's Board of Directors and its stockholders have authorized a
long-term incentive plan, which includes stock options. As of September 30,
2005, 5.6 million shares were issued and outstanding under the stock option
program. 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.
Approximately 268,200 options awarded in 2001 were granted at a strike price
more than five percent below the market value on the date of issuance and, thus,
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 statements of
operations for each of the three-month periods ended September 30, 2005 and
2004, and $0.3 million of related expense for each of the nine-month periods
ended September 30, 2005 and 2004.
Until the January 1, 2006 adoption of SFAS No. 123r, the Company will continue
to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB No. 25") and related interpretations in accounting
for its stock option program. 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,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have approximated the pro forma amounts indicated below (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2005 2004 2005 2004
--------- ----------- ----------- -----------
Net income as reported.................................... $ 79,504 $ 51,893 $ 213,716 $ 124,220
Add: Compensation expense related to stock options
included in reported income, net of related tax
effect.............................................. 68 68 205 205
Less: Total pro forma compensation expense related to
stock options determined under fair value methods,
net of related tax effect........................... (2,413) (2,943) (7,127) (8,830)
--------- ----------- ----------- -----------
Net income, pro forma..................................... $ 77,159 $ 49,018 $ 206,794 $ 115,595
========= =========== =========== ===========
Earnings per share:
As reported:
Basic............................................... $ 0.40 $ 0.26 $ 1.06 $ 0.61
Diluted............................................. 0.39 0.25 1.05 0.61
Pro forma:
Basic............................................... $ 0.38 $ 0.24 $ 1.02 $ 0.57
Diluted............................................. 0.38 0.24 1.01 0.56
Restricted Stock
In addition to stock option awards, the Company's Board of Directors and
stockholders have approved the issuance of restricted stock and restricted stock
units under the long-term incentive plan. Restricted stock units representing
81,008 shares were issued in December 2004 with a grant date market value of
$28.13 per share. Accordingly, compensation expense related to the restricted
stock unit awards, calculated as the difference between the market value on the
date of grant and the par value, is being recognized ratably over the
four-year vesting period and totaled $0.2 million and $0.5 million for the three
and nine-month periods ending September 30, 2005, respectively.
On April 26, 2005, stockholders of the Company approved the issuance of
performance-based restricted stock units ("performance units"). Performance
units representing approximately 296,982 shares have been granted through
8
September 30, 2005; however, the number of shares ultimately issued will be
increased or decreased dependent upon the return on equity levels achieved by
the Company. In accordance with APB No. 25, compensation expense for the
performance units will be determined during the first quarter of 2006 when the
actual number of shares issued to participants is known. Management estimates
compensation expense, based on the stock price and projected return on equity,
and recognizes this amount over the three-year vesting period. Based on the
number of shares expected to be awarded and the current stock price,
compensation expense related to these awards equaled $1.5 million and $2.3
million for the three and nine-month periods ending September 30, 2005,
respectively.
Recent Accounting Pronouncement Related to Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123r, which replaces SFAS No. 123 and
supersedes APB No. 25. This standard, which is effective beginning January 1,
2006, addresses the financial accounting and reporting of share-based payments
to employees, including stock options and restricted stock awards. SFAS No. 123r
requires the recognition of compensation expense, which is measured based on the
grant date fair value of equity awards, generally over the vesting period of the
related award.
The adoption of SFAS No. 123r will result in the recognition of compensation
expense related to all unvested stock options. The Company currently recognizes
compensation expense for its other share-based awards; therefore, the adoption
of SFAS No. 123r will not impact the accounting for these instruments.
Although the Company continues to evaluate the standard and related transition
matters, the adoption of SFAS No. 123r is currently expected to result in the
recognition of approximately $10 million of additional compensation expense
related to stock options during the year ending December 31, 2006. On an
after-tax basis, the adoption of the new standard is expected to reduce earnings
by approximately $7 million.
12. STOCKHOLDERS' EQUITY
Dividend Program
The Company's Board of Directors approved a quarterly cash dividend program for
stockholders during the first quarter of 2005. The accompanying consolidated
condensed statement of cash flows for the nine-month period ended September 30,
2005 reflects dividend payments made during the corresponding period.
While the Company expects distributions under the program to continue at regular
intervals, the level of future dividend payments will be at the discretion of
the Board of Directors and will depend upon the Company's financial condition,
earnings and other factors.
Common Stock Repurchases
During the nine-month period ended September 30, 2005, the Company repurchased
1.9 million shares of common stock at an aggregate cost of $108.2 million,
bringing the total number of shares acquired under the 2001 share buyback
program to 4.8 million at September 30, 2005. The acquired shares have been
added to the Company's treasury stock holdings.
During October 2005, the Company completed the 2001 share repurchase program,
and the Board of Directors approved a new authorization which allows for the
repurchase of up to 20.0 million shares of the Company's common stock, subject
to regulatory issues, market considerations and other relevant factors. Future
repurchases under the program may be executed from time to time in the open
market or in privately negotiated transactions.
13. EMPLOYEE BENEFIT PLANS
The Company maintains various noncontributory defined benefit pension plans
covering certain U.S. and non-U.S. employees. In addition, the Company and
certain subsidiaries have postretirement benefit plans which provide health care
benefits to a limited number of current, and in some cases, future retirees. Net
periodic benefit expense related to the pension and postretirement benefit
plans, on a combined basis, totaled $0.8 million for each of the three-month
periods ended September 30, 2005 and 2004, and $2.4 million for each of the
nine-month periods ended September 30, 2005 and 2004, respectively. Company
contributions to the pension and postretirement benefit plans during 2005 are
expected to total approximately $4.0 million.
9
14. 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,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ------------ ----------- ------------
Net income.................................... $ 79,504 $ 51,893 $ 213,716 $ 124,220
Currency translation adjustments.............. 798 4,362 (12,468) 1,868
Changes in unrealized fair value of
derivatives, net............................ 148 (367) (2,051) (2,405)
Pension liability adjustments................. - - (476) -
----------- ------------ ----------- ------------
Comprehensive income.......................... $ 80,450 $ 55,888 $ 198,721 $ 123,683
=========== ============ =========== ============
Accumulated other comprehensive income in the accompanying consolidated
condensed balance sheet consists of the following (in thousands):
September 30, December 31,
2005 2004
-------------- --------------
Currency translation adjustments....................... $ 15,315 $ 27,783
Unrealized fair value of derivatives................... (2,183) (132)
Pension liability adjustments.......................... (3,723) (3,247)
-------------- --------------
Accumulated other comprehensive income................. $ 9,409 $ 24,404
============== ==============
15. 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
SWACO, Smith Technologies and Smith Services. The Distribution segment includes
the Wilson business unit. The following table presents financial information for
each reportable segment and geographical revenues on a consolidated basis (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues:
Oilfield Products and Services............ $ 1,010,438 $ 816,788 $ 2,889,602 $ 2,360,103
Distribution.............................. 399,724 302,396 1,158,961 841,319
----------- ----------- ----------- -----------
$ 1,410,162 $ 1,119,184 $ 4,048,563 $ 3,201,422
=========== =========== =========== ===========
Revenues by Area:
United States............................. $ 625,167 $ 510,484 $ 1,827,303 $ 1,444,217
Canada.................................... 181,441 112,727 496,397 328,672
----------- ----------- ----------- -----------
North America..................... 806,608 623,211 2,323,700 1,772,889
----------- ----------- ----------- -----------
Latin America............................. 109,829 111,088 339,102 302,194
Europe/Africa............................. 310,357 238,680 865,704 708,153
Middle East............................... 123,084 92,685 350,790 272,488
Far East.................................. 60,284 53,520 169,267 145,698
----------- ----------- ----------- -----------
Non-North America................. 603,554 495,973 1,724,863 1,428,533
----------- ----------- ----------- -----------
$ 1,410,162 $ 1,119,184 $ 4,048,563 $ 3,201,422
=========== =========== =========== ===========
Operating Income:
Oilfield Products and Services............ $ 162,755 $ 112,737 $ 446,487 $ 297,251
Distribution.............................. 13,966 7,388 41,527 16,920
General corporate......................... (5,306) (1,908) (13,045) (5,958)
----------- ----------- ----------- -----------
$ 171,415 $ 118,217 $ 474,969 $ 308,213
=========== =========== =========== ===========
10
16. COMMITMENTS AND CONTINGENCIES
Standby Letters of Credit
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. Certain of these outstanding instruments guarantee
payment to insurance companies with respect to certain liability coverages of
the Company's insurance captive. Excluding the impact of these instruments, for
which $18.1 million of related liabilities are reflected in the accompanying
consolidated condensed balance sheet, the Company was contingently liable for
approximately $48.1 million of standby letters of credit and bid, performance
and surety bonds at September 30, 2005. Management does not expect any material
amounts to be drawn on these instruments.
During the fourth quarter of 2004, the Company obtained a surety bond in the
amount of $43.5 million in connection with its appeal of the U.S. patent
infringement litigation discussed below. After taking into consideration amounts
reflected in the accompanying consolidated condensed balance sheet, the Company
has a contingent liability of up to $17.5 million associated with this
instrument, which includes $1.4 million of interest related to periods
subsequent to September 30, 2005. Management, however, does not expect any
amounts to be drawn on this instrument.
Litigation
Halliburton Energy Services, Inc. v. Smith International, Inc.
In September 2002, the Company was served with a complaint in the U.S. District
Court for the Eastern District of Texas, Sherman Division entitled Halliburton
Energy Services, Inc. v. Smith International, Inc. This lawsuit is a patent
infringement claim alleging that certain roller cone drill bits made by the
Company infringe several U.S. patents owned by Halliburton.
This case was tried in the second quarter of 2004, and the plaintiff was
ultimately awarded $41.1 million, which includes the original jury assessment of
$24.0 million, a subsequent award enhancement, attorney's fees and prejudgment
interest. The Company filed a notice of appeal in the fourth quarter of 2004,
and a ruling from the appellate court is not anticipated until the first quarter
of 2006.
Although an appeal of this ruling is currently underway, the Company is
continuing to pursue other options, including possible settlement of related
claims outstanding. Based on the facts and circumstances and the opinion of
outside counsel, management believes that the amounts recognized by the Company
reflect the best estimate of its potential loss exposure. In the event the
appeal is unsuccessful on all grounds, which management currently believes is
unlikely, the Company would be required to record an additional $16.1 million of
litigation-related costs associated with this matter.
Prior to the trial of the U.S. case, various infringement actions and revocation
proceedings in the U.K. were consolidated in the Patents Court of the High Court
of Justice of England and Wales. This consolidated proceeding is essentially a
U.K. counterpart to the U.S. patent action mentioned above and, as such, the
Company defended the allegations and sought to invalidate the patents involved.
In July 2005, the Patents Court rendered its opinion in the U.K. action, ruling
in favor of Smith. The judge invalidated the plaintiff's patents and awarded
Smith a specified amount of attorney's fees which were recovered from the
plaintiff in the third quarter of 2005.
Rose Dove Egle v. John M. Egle, et al.
In April 1997, the Company acquired all of the equity interests in Tri-Tech
Fishing Services, L.L.C. ("Tri-Tech") in exchange for cash consideration of
approximately $20.4 million (the "Transaction").
In August 1998, the Company was added as a defendant in a First Amended Petition
filed in the 15th Judicial District Court, Parish of Lafayette, Louisiana
entitled Rose Dove Egle v. John M. Egle, et al. In the amended petition, the
plaintiffs alleged that, due to an improper conveyance of ownership interest by
the Tri-Tech majority partner prior to the Transaction, Smith purchased a
portion of its equity interest from individuals who were not legally entitled to
their Tri-Tech shares. The suit was tried in the first quarter of 2004, and a
jury verdict of approximately $4.8 million was rendered in favor of the
plaintiffs. The Company has initiated the appeal process and does not anticipate
a ruling from the appellate court until the second quarter of 2006. Based upon
the facts and circumstances and the opinion of outside legal counsel, management
believes that an unfavorable outcome on this matter is not probable at this
time. Accordingly, the Company has not recognized a loss provision in the
accompanying consolidated condensed financial statements.
11
Other
The Company is a defendant in various other legal proceedings arising in the
ordinary course of business. In the opinion of management, these matters will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
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 SWACO operations, which are
subject to various indemnifications from former owners.
As of September 30, 2005, the Company's environmental reserve totaled $9.4
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 September 30, 2005, 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 2003, the Company took legal action against M-I SWACO's former owners to
clarify certain contractual provisions of the environmental indemnification upon
which approximately $8.3 million of remediation costs properly incurred under
the indemnification remains unpaid. This matter is expected to go to trial
during the first quarter of 2006. In the event that (i) M-I SWACO'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 record an additional charge of up to $23.3 million, impacting
earnings and cash flows in future periods.
12
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 Company's 2004 Annual Report on Form 10-K.
COMPANY PRODUCTS AND OPERATIONS
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 and 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 North
American branch network providing pipe, valves and fittings as well as mill,
safety and other maintenance products.
The Company's operations are largely driven by the level of exploration and
production ("E&P") spending in major energy-producing regions around the world
and the depth and complexity of these projects. Although E&P spending is
significantly influenced by the market price of oil and natural gas, it may also
be affected by supply and demand fundamentals, finding and development costs,
decline and depletion rates, political actions and uncertainties, environmental
concerns, the financial condition of independent E&P companies and the overall
level of global economic growth and activity. In addition, approximately 10
percent of the Company's consolidated revenues relate to the downstream energy
sector, including petrochemical plants and refineries, whose spending is largely
impacted by the general condition of the U.S. economy.
Capital investment by energy companies is largely divided into two markets which
vary greatly in terms of primary business drivers and associated volatility
levels. North American drilling activity is primarily influenced by natural gas
fundamentals, with approximately 85 percent of the current rig count focused on
natural gas finding and development activities. Conversely, drilling in areas
outside of North America is more dependent on crude oil fundamentals, which
influence over three-quarters of international drilling activity. Historically,
business in markets outside of North America has proved to be less volatile as
the high cost E&P programs in these regions are generally undertaken by major
oil companies, consortiums and national oil companies as part of a longer-term
strategic development plan. Although over half of the Company's consolidated
revenues were generated in North America during the third quarter of 2005,
Smith's profitability was largely dependent upon business levels in markets
outside of North America. The Distribution segment, which accounts for
approximately 28 percent of consolidated revenues and primarily supports a North
American customer base, serves to distort the geographic revenue mix of the
Company's Oilfield segment operations. Excluding the impact of the Distribution
operations, 58 percent of the Company's third quarter 2005 revenues were
generated in markets outside of North America.
BUSINESS OUTLOOK
The Company's business is highly dependent on the general economic environment
in the United States and other major world economies, which impact energy
consumption and the resulting demand for our products and services. Current
supply and demand fundamentals are closely balanced, which should support
modestly higher exploration and production spending. However, crude oil and
natural gas prices have risen dramatically during the past year and recently
reached historically high levels due, in part, to market instability in certain
geographic regions and weather-related supply disruptions in the U.S. Gulf of
Mexico. Further escalation in commodity prices could adversely affect global
economic expansion efforts as well as the level of worldwide drilling activity
that drives demand for our products and services.
13
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 concerning, among other things,
the Company's outlook, financial projections and business strategies, all of
which are subject to risks, uncertainties and assumptions. These forward-looking
statements are identified by their use of terms such as "anticipate," "believe,"
"could," "estimate," "expect," "project" and similar terms. These statements are
based on certain assumptions and analyses made by the Company that it believes
are appropriate under the circumstances. Such statements are subject to, among
other things, general economic and business conditions, the level of oil and
natural gas exploration and development activities, global economic growth and
activity, political stability of oil-producing countries, finding and
development costs of operations, decline and depletion rates for oil and natural
gas wells, seasonal weather conditions, industry conditions, changes in laws or
regulations and other risk factors outlined in the Company's Form 10-K for the
fiscal year ended December 31, 2004, many of which are beyond the control of the
Company. Should one or more of these risks or uncertainties materialize, or
should the assumptions prove incorrect, actual results may vary materially from
those expected, estimated or projected. Our management believes these
forward-looking statements are reasonable. However, you should not place undue
reliance on these forward-looking statements, which are based only on our
current expectations. Forward-looking statements speak only as of the date they
are made, and we undertake no obligation to publicly update or revise any of
them in light of new information or future events.
14
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 SWACO, Smith
Technologies 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.
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------ -------------------------------------------
2005 2004 2005 2004
------------------- -------------------- -------------------- --------------------
Amount % Amount % Amount % Amount %
------------ --- ------------ --- ------------- --- ------------ ---
FINANCIAL DATA: (dollars in
thousands)
REVENUES:
M-I SWACO......................... $ 677,609 48 $ 565,366 51 $ 1,956,126 48 $ 1,634,708 51
Smith Technologies................ 154,451 11 126,805 11 434,356 11 373,330 12
Smith Services.................... 178,378 13 124,617 11 499,120 12 352,065 11
------------ --- ------------ --- ------------- --- ------------ ---
Oilfield Products and Services.. 1,010,438 72 816,788 73 2,889,602 71 2,360,103 74
Wilson............................ 399,724 28 302,396 27 1,158,961 29 841,319 26
------------ --- ------------ --- ------------- --- ------------ ---
Total........................ $ 1,410,162 100 $ 1,119,184 100 $ 4,048,563 100 $ 3,201,422 100
============ === ============ === ============= === ============ ===
GEOGRAPHIC REVENUES:
United States:
Oilfield Products and Services.... $ 342,871 24 $ 285,523 26 $ 1,004,891 25 $ 826,050 26
Distribution...................... 282,296 20 224,961 20 822,412 20 618,167 19
------------ --- ------------ --- ------------- --- ------------ ---
Total United States.......... 625,167 44 510,484 46 1,827,303 45 1,444,217 45
------------ --- ------------ --- ------------- --- ------------ ---
Canada:
Oilfield Products and Services.... 79,702 6 53,084 5 216,277 5 152,198 5
Distribution...................... 101,739 7 59,643 5 280,120 7 176,474 5
------------ --- ------------ --- ------------- --- ------------ ---
Total Canada................. 181,441 13 112,727 10 496,397 12 328,672 10
------------ --- ------------ --- ------------- --- ------------ ---
Non-North America:
Oilfield Products and Services.... 587,865 42 478,181 43 1,668,434 41 1,381,855 43
Distribution...................... 15,689 1 17,792 1 56,429 2 46,678 2
------------ --- ------------ --- ------------- --- ------------ ---
Total Non-North America...... 603,554 43 495,973 44 1,724,863 43 1,428,533 45
------------ --- ------------ --- ------------- --- ------------ ---
Total Revenue............. $ 1,410,162 100 $ 1,119,184 100 $ 4,048,563 100 $ 3,201,422 100
============ === ============ === ============= === ============ ===
OPERATING INCOME:
Oilfield Products and Services.... $ 162,755 16 $ 112,737 14 $ 446,487 15 $ 297,251 13
Distribution...................... 13,966 3 7,388 2 41,527 4 16,920 2
General Corporate................. (5,306) * (1,908) * (13,045) * (5,958) *
------------ --- ------------ --- ------------- --- ------------ ---
Total..................... $ 171,415 12 $ 118,217 11 $ 474,969 12 $ 308,213 10
============ === ============ === ============= === ============ ===
MARKET DATA:
AVERAGE WORLDWIDE RIG COUNT: (1)
United States..................... 1,714 50 1,475 50 1,635 50 1,390 49
Canada............................ 423 12 311 11 376 12 328 11
Non-North America................. 1,287 38 1,146 39 1,255 38 1,124 40
------------ --- ------------ --- ------------- --- ------------ ---
Total..................... 3,424 100 2,932 100 3,266 100 2,842 100
============ === ============ === ============= === ============ ===
Onshore........................... 2,903 85 2,478 85 2,754 84 2,380 84
Offshore.......................... 521 15 454 15 512 16 462 16
------------ --- ------------ --- ------------- --- ------------ ---
Total..................... 3,424 100 2,932 100 3,266 100 2,842 100
============ === ============ === ============= === ============ ===
AVERAGE COMMODITY PRICES:
Crude Oil ($/Bbl) (2)............. $ 63.12 $ 43.83 $ 55.28 $ 39.03
Natural Gas ($/mcf) (3)........... $ 9.27 $ 5.32 $ 7.41 $ 5.55
(1) Source: M-I SWACO.
(2) Average weekly West Texas Intermediate ("WTI") spot closing prices.
(3) Average weekly composite spot U.S. wellhead prices.
* not meaningful
15
Oilfield Products and Services Segment
Revenues
M-I SWACO primarily provides drilling and completion fluid systems, engineering
and technical services to the oil and gas industry. Additionally, these
operations provide oilfield production chemicals and manufacture and market
equipment and services used for solids-control, particle separation, pressure
control, rig instrumentation and waste-management. M-I SWACO's operations are
significantly influenced by spending in markets outside of North America, which
contributes approximately two-thirds of the unit's revenues, and by its exposure
to the U.S. offshore market, which constitutes approximately nine percent of the
revenue base. U.S. offshore drilling programs, which account for approximately
four percent of the worldwide rig count, are generally more revenue-intensive
than land-based projects due to the complex nature of the related drilling
environment. M-I SWACO's revenues totaled $677.6 million for the third quarter
of 2005, 20 percent above the prior year period. The majority of the revenue
increase was generated in markets outside of North America, where revenues grew
21 percent influenced by a 12 percent increase in the underlying activity level.
The year-over-year improvement in non-North American revenues also reflects
increased customer spending in the North Sea, new contract awards in the Middle
East and West Africa and strong demand for drilling waste management products
and services. North American revenues, which accounted for one-third of the
improvement, were 18 percent above the prior year level primarily attributable
to increased exploration and production spending on land-based drilling
programs. For the nine-month period, M-I SWACO reported revenues of
approximately $2.0 billion, a 20 percent increase over the amount reported in
the first nine months of 2004. The majority of the revenue growth was again
reported in markets outside of North America, primarily the North Sea, Middle
East and West Africa regions, reflecting higher activity levels and, to a lesser
extent, new contract awards and increased investment by major and international
exploration and production companies. Higher North American land-based drilling
activity also contributed to the revenue improvement.
Smith Technologies designs, manufactures and sells three-cone drill bits,
diamond drill bits and turbines for use in the oil and gas industry. Due to the
nature of its product offerings, revenues for these operations typically
correlate more closely to the rig count than any of the Company's other
businesses. Moreover, Smith Technologies has the highest North American revenue
exposure of the Oilfield segment units. Smith Technologies reported revenues of
$154.5 million for the quarter ended September 30, 2005, 22 percent above
amounts reported in the comparable prior year period. The year-over-year
comparison was impacted by the inclusion of several large international export
orders in the third quarter of 2005. Excluding export orders, revenues were
approximately 18 percent above the level reported in the prior year quarter,
influenced by the increase in worldwide activity levels. The majority of the
year-over-year growth was reported in North America, reflecting higher customer
demand for diamond drill bits due, in part, to technological advancements in
drill bit manufacturing and design. Approximately one-third of the base revenue
growth was generated in markets outside North America, with increased customer
spending in Latin America and the Far East accounting for the majority of the
variance. For the nine-month period, Smith Technologies reported revenues of
$434.4 million, a 16 percent improvement over the comparable period of 2004. The
majority of the revenue growth was generated in North America, largely
attributable to the higher land-based drilling activity. Improved diamond drill
bit designs and, to a lesser extent, increased pricing also contributed to the
overall revenue growth.
Smith Services manufactures and markets products and services used in the oil
and gas industry for drilling, work-over, well completion and well re-entry.
Revenues for Smith Services are evenly distributed between North America and the
international markets and are heavily influenced by the complexity of drilling
projects, which drive demand for a wider range of its product offerings. For the
quarter ended September 30, 2005, Smith Services' revenues totaled $178.4
million, 43 percent above the prior year period. The year-over-year revenue
growth was influenced by a higher level of tubular product orders in the current
period and incremental revenues from acquisitions. Excluding the impact of
acquisitions and tubular sales, which are not highly correlated to drilling
activity, base business revenues were approximately 28 percent above the prior
year period influenced by the increase in worldwide E&P spending levels. The
majority of the core business growth was generated in markets outside North
America, primarily the North Sea and Middle East, reflecting increased customer
demand for remedial product and service lines. For the first nine months of
2005, Smith Services reported revenues of $499.1 million, a 42 percent
improvement from the comparable prior year period. Excluding the impact of
tubular sales volumes and incremental revenues from acquisitions, base revenues
were approximately 25 percent above the level reported in the first nine months
of 2004. The revenue improvement reflects higher sales across all core product
lines, driven by the general increase in global exploration and production
spending levels. The majority of the base revenue growth was reported in markets
outside North America, influenced by continued strong demand for remedial
product and service lines.
16
Operating Income
Operating income for the Oilfield Products and Services segment was $162.8
million, or 16.1 percent of revenues, for the three months ended September 30,
2005. Segment operating margins were 2.3 percentage points above the prior year
period reflecting reduced operating expenses as a percentage of revenues and, to
a lesser extent, gross margin expansion. Gross margin improvement reflects the
effect of higher sales volumes on fixed cost coverage and, to a lesser extent,
improved unit pricing. On an absolute dollar basis, third quarter 2005 operating
income increased $50.0 million, primarily reflecting the impact of higher
revenue volumes on gross profit, partially offset by growth in variable-based
operating expenses, including additional field engineering support personnel.
For the nine-month period, Oilfield operating income was $149.2 million above
the comparable prior year period. The year-to-date comparison was impacted by
recognition of a $31.4 million litigation-related charge in the second quarter
of 2004. Excluding the impact of the prior year charge, nine-month operating
income was $117.8 million above the comparable 2004 period, attributable to the
impact of higher revenue volumes on the segment's reported gross profit,
partially offset by growth in variable-based operating expenses associated with
the expanding business base. Segment operating margins, exclusive of the prior
year litigation-related charge, were 1.6 percentage points above the first nine
months of 2004, reflecting increased coverage of fixed sales and administrative
costs as gross margins were relatively comparable period-to-period.
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. The segment has the
most significant North American revenue exposure of any of the Company's
operations with 96 percent of Wilson's third quarter 2005 revenues generated in
those markets. Moreover, approximately 30 percent of Wilson's revenues relate to
sales to the industrial and downstream energy sector, including petrochemical
plants and refineries, whose spending is largely influenced by the general state
of the U.S. economic environment. Additionally, certain customers in this sector
utilize petroleum products as a base material and, accordingly, are adversely
impacted by increases in crude oil and natural gas prices. Distribution revenues
were $399.7 million for the third quarter of 2005, 32 percent above the
comparable prior year period. The year-over-year revenue growth was reported by
the energy sector operations, influenced by increased North American activity
levels, new contract awards and, to a lesser extent, additional line pipe
project spending in the midstream market. Industrial and downstream revenues
were comparable with the prior year as the impact of higher tubular sales was
offset by reduced customer spending in the refining and engineering and
construction markets. In the first nine months of 2005, Wilson reported revenues
totaling $1.2 billion, an increase of 38 percent from the first nine months of
2004. Three-quarters of the revenue variance from the prior year period was
generated by the upstream energy operations, reflecting higher North American
activity levels, the impact of new contract awards and, to a lesser extent,
strong demand for tubular products.
Operating Income
Operating income for the Distribution segment was $14.0 million, or 3.5 percent
of revenues, for the quarter ended September 30, 2005. Segment operating income
increased $6.6 million above the amount reported in the prior year period,
equating to incremental operating margins of seven percent. Incremental
operating income was driven by year-over-year improvement reported in the energy
sector operations attributable to increased coverage of fixed sales and
administrative costs. The lower expense ratio more than offset deterioration in
gross profit margins associated with higher tubular product costs and an
increased proportion of lower-margin project business. On a year-to-date basis,
Distribution operating margins improved 1.6 percentage points, again, reflecting
the impact of lower operating expenses as a percentage of revenues. On an
absolute dollar basis, segment operating income was $24.6 million above the
amount reported in the first nine months of 2004. The operating income variance
reflects the impact of higher revenue volumes on the segment's reported gross
profit, partially offset by growth in variable-based operating expenses.
17
Consolidated Results
For the periods indicated, the following table summarizes the results of
operations 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,
--------------------------------------- ------------------------------------
2005 2004 2005 2004
------------------- ----------------- ---------------- -----------------
Amount % Amount % Amount % Amount %
------------ --- ----------- --- ----------- --- ----------- ---
Revenues......................... $ 1,410,162 100 $ 1,119,184 100 $ 4,048,563 100 $ 3,201,422 100
Gross profit..................... 424,604 30 338,983 30 1,209,154 30 980,353 31
Operating expenses............... 253,189 18 220,766 19 734,185 18 672,140 21
------------ --- ----------- --- ----------- --- ----------- ---
Operating income................. 171,415 12 118,217 11 474,969 12 308,213 10
Interest expense................. 11,001 1 9,965 1 32,333 1 28,803 1
Interest income.................. (339) - (327) - (1,143) - (981) -
------------ --- ----------- --- ----------- --- ----------- ---
Income before income taxes and
minority interests............ 160,753 11 108,579 10 443,779 11 280,391 9
Income tax provision............. 51,970 4 35,129 3 143,944 4 90,955 3
Minority interests............... 29,279 2 21,557 2 86,119 2 65,216 2
------------ --- ----------- --- ----------- --- ----------- ---
Net income....................... $ 79,504 5 $ 51,893 5 $ 213,716 5 $ 124,220 4
============ === =========== === =========== === =========== ===
Consolidated revenues were $1.4 billion for the third quarter of 2005, an
increase of 26 percent over the prior year period. Two-thirds of the revenue
growth was attributable to increased demand for Oilfield segment product
offerings. Oilfield segment revenues grew 24 percent year-over-year with the
majority of the increase generated in markets outside North America, reflecting
higher activity levels and, to a lesser extent, the impact of new contract
awards and additional customer spending primarily in the North Sea and Middle
East regions. The Distribution operations, influenced by a combination of strong
demand for tubular products, increased North American drilling and completion
activity and new contract awards, reported a 32 percent increase from the prior
year quarter and contributed one-third of the consolidated revenue improvement.
For the first nine months of 2005, consolidated revenues were $4.0 billion, 26
percent above the comparable 2004 period, with Oilfield segment business volumes
contributing the majority of the revenue growth. Oilfield segment revenues rose
22 percent over amounts reported in the prior year period with the increase
relatively balanced between North American and non-North American markets. The
revenue improvement reflects higher global activity levels and increased
customer spending.
Gross profit totaled $424.6 million for the third quarter, 25 percent above the
prior year period. Gross profit increased $85.6 million over the prior year
quarter, primarily reflecting higher sales volumes in the Oilfield operations
associated with improved worldwide activity levels. Gross profit margins for the
third quarter of 2005 were 30 percent of revenues, consistent with the margins
reported in the comparable prior year period. For the nine-month period, gross
profit totaled $1.2 billion, or 30 percent of revenues, one percentage point
below the gross profit margins reported in the comparable prior year period. The
gross margin deterioration reflects the impact of an increased proportion of
Distribution segment sales, which historically generate lower margins than the
Oilfield operations. To a lesser extent, gross profit margin deterioration
reported in the Distribution segment, which was influenced by higher tubular
product costs and an increased proportion of lower-margin project business, also
contributed to the deterioration in consolidated gross profit margins. On an
absolute dollar basis, gross profit was $228.8 million above the nine-month
period ended September 30, 2004, largely attributable to increased sales volumes
in the Oilfield operations.
Operating expenses, consisting of selling, general and administrative expenses,
increased $32.4 million on an absolute dollar basis; however, as a percentage of
revenues, decreased one percentage point from the prior year quarter. Improved
fixed cost coverage in the sales and administrative functions accounted for the
operating expense percentage decline. The majority of the absolute dollar
increase was attributable to variable-related costs associated with the improved
business volumes, including investment in personnel and infrastructure to
support the expanding business base. To a lesser extent, increased employee
profit-sharing amounts directly attributable to the higher profitability levels
contributed to the period-to-period increase. On a year-to-date basis, operating
expenses increased $62.0 million. Operating expenses in the first nine months of
2004 included a $28.8 million litigation-related charge. Excluding the prior
year charge, operating expenses increased on an absolute dollar basis associated
with the improved business volumes; however, as a percentage of revenues,
decreased two percentage points from the comparable prior year period.
18
Net interest expense, which represents interest expense less interest income,
equaled $10.7 million in the third quarter of 2005. Net interest expense
increased $1.0 million and $3.4 million from the prior year quarter and first
nine months of 2004, respectively. The variance in both periods reflects higher
average debt levels and, to a lesser extent, an increase in variable interest
rates.
The effective tax rate for the third quarter and first nine months of 2005
approximated 32 percent, which was comparable to the level reported in the prior
year periods but below the U.S. statutory rate. The effective tax rate was lower
than the U.S. statutory rate due to the impact of M-I SWACO's U.S. partnership
earnings for which the minority partner is directly responsible for its related
income taxes. The Company properly consolidates the pretax income related to the
minority partner's share of U.S. partnership earnings but excludes the related
tax provision.
Minority interests reflect the portion of the results of majority-owned
operations which are applicable to the minority interest partners. Minority
interests was $7.7 million and $20.9 million above amounts reported in the prior
year quarter and first nine months of 2004, respectively, due to the higher
profitability of the M-I SWACO joint venture and, to a lesser extent, improved
earnings reported by CE Franklin Ltd.
LIQUIDITY AND CAPITAL RESOURCES
General
At September 30, 2005, cash and cash equivalents equaled $65.3 million. During
the first nine months of 2005, the Company generated $173.3 million of cash
flows from operations as compared to the $117.5 million generated in the
comparable prior year period. The improvement in cash generated from operations
was attributable to increased profitability levels.
During the first nine months of 2005, cash flows used in investing activities
totaled $106.5 million, consisting of amounts required to fund capital
expenditures and, to a lesser extent, acquisitions. The Company invested $95.3
million in property, plant and equipment, net of cash proceeds arising from
certain asset disposals. Acquisition funding, which primarily related to the
purchase of certain operating assets of Tubular Technology, Inc., resulted in
cash outflows of $31.7 million in the first nine months of 2005. Cash used for
investing activities during the first nine months of 2005 was comparable with
amounts reported in the prior year period as the higher level of capital
spending in the current period, reflecting additional investment in rental tool
equipment associated with increased drilling activity, was largely offset by
proceeds from the sale of investments in unconsolidated joint ventures and, to a
lesser extent, the impact of lower acquisition funding period-to-period.
Cash flows used in financing activities totaled $54.5 million for the first nine
months of 2005. Although cash generated from operations was sufficient to fully
fund investing activities, the higher level of share purchases under a stock
buyback program and dividend payments resulted in incremental borrowings of
$79.5 million under existing credit facilities.
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
September 30, 2005, the Company had $177.0 million drawn and $4.5 million of
letters of credit issued under its U.S. revolving credit facilities, resulting
in $218.5 million of capacity available for future operating or investing needs.
The Company also has revolving credit facilities in place outside of the United
States, which are generally used to finance local operating needs. At September
30, 2005, the Company had available borrowing capacity of $71.5 million under
the non-U.S. borrowing facilities.
The Company's 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 September 30, 2005, 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 by 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.
19
During the first quarter of 2005, the Company's Board of Directors initiated a
cash dividend program for stockholders. The projected annual payout of
approximately $49 million is expected to be funded with cash flows from
operations and, if necessary, amounts available under existing credit
facilities. The level of future dividend payments will be at the discretion of
the Company's Board of Directors and will depend upon the Company's financial
condition, earnings, cash flows, compliance with certain debt covenants and
other relevant factors.
Subsequent to the balance sheet date, the Company has repurchased $6.8 million
of its common stock in the open market and completed the buyback program
authorized by the Board of Directors in 2001. During October 2005, the Company's
Board of Directors authorized a new share buyback program which allows for the
repurchase of up to 20.0 million shares of the Company's common stock, subject
to regulatory issues, market considerations and other relevant factors. Future
repurchases will be funded with cash flows from operations or amounts available
under existing credit facilities.
Management continues to evaluate opportunities to acquire products or businesses
complementary to the Company's operations. Additional 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
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. Certain of these outstanding instruments guarantee
payment to insurance companies with respect to certain liability coverages of
the Company's insurance captive. Excluding the impact of these instruments, for
which $18.1 million of related liabilities are reflected in the accompanying
consolidated condensed balance sheet, the Company was contingently liable for
approximately $48.1 million of standby letters of credit and bid, performance
and surety bonds at September 30, 2005. Management does not expect any material
amounts to be drawn on these instruments.
During the fourth quarter of 2004, the Company obtained a surety bond in the
amount of $43.5 million in connection with its appeal of the U.S. patent
infringement litigation discussed below. After taking into consideration amounts
reflected in the accompanying consolidated condensed balance sheet, the Company
has a contingent liability of up to $17.5 million associated with this
instrument, which includes $1.4 million of interest related to periods
subsequent to September 30, 2005. Management, however, does not expect any
amounts to be drawn on this instrument.
Litigation
Halliburton Energy Services, Inc. v. Smith International, Inc.
In September 2002, the Company was served with a complaint in the U.S. District
Court for the Eastern District of Texas, Sherman Division entitled Halliburton
Energy Services, Inc. v. Smith International, Inc. This lawsuit is a patent
infringement claim alleging that certain roller cone drill bits made by the
Company infringe several U.S. patents owned by Halliburton.
This case was tried in the second quarter of 2004, and the plaintiff was
ultimately awarded $41.1 million, which includes the original jury assessment of
$24.0 million, a subsequent award enhancement, attorney's fees and prejudgment
interest. The Company filed a notice of appeal in the fourth quarter of 2004,
and a ruling from the appellate court is not anticipated until the first quarter
of 2006.
Although an appeal of this ruling is currently underway, the Company is
continuing to pursue other options, including possible settlement of related
claims outstanding. Based on the facts and circumstances and the opinion of
outside counsel, management believes that the amounts recognized by the Company
reflect the best estimate of its potential loss exposure. In the event the
appeal is unsuccessful on all grounds, which management currently believes is
unlikely, the Company would be required to record an additional $16.1 million of
litigation-related costs associated with this matter.
Prior to the trial of the U.S. case, various infringement actions and revocation
proceedings in the U.K. were consolidated in the Patents Court of the High Court
of Justice of England and Wales. This consolidated proceeding is essentially a
U.K. counterpart to the U.S. patent action mentioned above and, as such, the
Company defended the allegations and sought to invalidate the patents involved.
In July 2005, the Patents Court rendered its opinion in the U.K. action, ruling
in favor of Smith. The judge invalidated the plaintiff's patents and awarded
Smith a specified amount of attorney's fees which were recovered from the
plaintiff in the third quarter of 2005.
20
Rose Dove Egle v. John M. Egle, et al.
In April 1997, the Company acquired all of the equity interests in Tri-Tech
Fishing Services, L.L.C. ("Tri-Tech") in exchange for cash consideration of
approximately $20.4 million (the "Transaction").
In August 1998, the Company was added as a defendant in a First Amended Petition
filed in the 15th Judicial District Court, Parish of Lafayette, Louisiana
entitled Rose Dove Egle v. John M. Egle, et al. In the amended petition, the
plaintiffs alleged that, due to an improper conveyance of ownership interest by
the Tri-Tech majority partner prior to the Transaction, Smith purchased a
portion of its equity interest from individuals who were not legally entitled to
their Tri-Tech shares. The suit was tried in the first quarter of 2004, and a
jury verdict of approximately $4.8 million was rendered in favor of the
plaintiffs. The Company has initiated the appeal process and does not anticipate
a ruling from the appellate court until the second quarter of 2006. Based upon
the facts and circumstances and the opinion of outside legal counsel, management
believes that an unfavorable outcome on this matter is not probable at this
time. Accordingly, the Company has not recognized a loss provision in the
accompanying consolidated condensed financial statements.
Other
The Company is a defendant in various other legal proceedings arising in the
ordinary course of business. In the opinion of management, these matters will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
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 SWACO operations, which are
subject to various indemnifications from former owners.
As of September 30, 2005, the Company's environmental reserve totaled $9.4
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 September 30, 2005, 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 2003, the Company took legal action against M-I SWACO's former owners to
clarify certain contractual provisions of the environmental indemnification upon
which approximately $8.3 million of remediation costs properly incurred under
the indemnification remains unpaid. This matter is expected to go to trial
during the first quarter of 2006. In the event that (i) M-I SWACO'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 record an additional charge of up to $23.3 million, impacting
earnings and cash flows in future periods.
21
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 ongoing 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 2004
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
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123r, "Share-Based
Payment" ("SFAS No. 123r"), which replaces SFAS No. 123 "Accounting for
Stock-Based Compensation," and supersedes Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees." This standard, which is
effective beginning January 1, 2006, addresses the financial accounting and
reporting of share-based payments to employees, including stock options and
restricted stock awards. SFAS No. 123r requires the recognition of compensation
expense, which is measured based on the grant date fair value of equity awards,
generally over the vesting period of the related award.
The adoption of SFAS No. 123r will result in the recognition of compensation
expense related to all unvested stock options. The Company currently recognizes
compensation expense for its other share-based awards; therefore, the adoption
of SFAS No. 123r will not impact the accounting for these instruments.
Although the Company continues to evaluate the standard and related transition
matters, the adoption of SFAS No. 123r is currently expected to result in the
recognition of approximately $10 million of additional compensation expense
related to stock options during the year ending December 31, 2006. On an
after-tax basis, the adoption of the new standard is expected to reduce earnings
by approximately $7 million.
From time to time, new accounting pronouncements are issued by 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 condensed 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 2004 Annual Report on Form
10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to provide
reasonable assurances 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 and have determined that such disclosure
controls and procedures are effective as of the end of the period covered by
this report.
There has been no change in the Company's internal control over financial
reporting during the quarter ended September 30, 2005 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the third quarter of 2005, the Company repurchased 0.7 million
shares of common stock at an aggregate cost of $39.5 million bringing the total
number of shares acquired under the 2001 share buyback program to 4.8 million at
September 30, 2005. The acquired shares have been added to the Company's
treasury stock holdings.
A summary of the Company's repurchase activity for the three months ended
September 30, 2005 is as follows:
Total Number of Number of Shares
Total Number Average Shares Purchased as that May Yet Be
of Shares Price Paid Part of Publicly Purchased Under the
Period Purchased per Share Announced Program Program
-------------------------- ------------ ---------- ------------------- -------------------
July 1 - July 31 - $ - - 933,600
August 1 - August 31* 467,800 67.51 467,800 465,800
September 1 - September 30 243,600 32.35 243,600 222,200
------- ---------- ------- -------
3rd Quarter 2005 711,400 $ 55.47 711,400 222,200
* Repurchases during August were made prior to the two-for-one stock split,
which was effective August 24, 2005. The Number of Shares that May Yet Be
Purchased Under the Program was not impacted by the stock split.
During October 2005, the Company completed the 2001 share repurchase
program, and the Board of Directors approved a new authorization which allows
for the repurchase of up to 20.0 million shares of the Company's common stock,
subject to regulatory issues, market considerations and other relevant factors.
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
Exhibits designated with an "*" are filed, and with an "**" furnished, as an
exhibit to this Quarterly Report on Form 10-Q. Exhibits previously filed, as
indicated below, are incorporated by reference.
3.1 Restated Certificate of Incorporation of the Company, dated July 26,
2005. Filed as Exhibit 3.4 to the Company's report on Form 10-Q for
the quarter ended June 30, 2005 and incorporated herein by
reference.
3.2 Restated Bylaws of the Company. Filed as Exhibit 3.3 to the
Company's report on Form 10-K for the year ended December 31, 2004
and incorporated herein by reference.
31.1* Certification of Chief Executive Officer 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.
31.2* Certification of Chief Financial Officer 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.
32.1** Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
23
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 9, 2005 By: /s/ Doug Rock
----------------------------------------------
Doug Rock
Chairman of the Board, Chief Executive Officer,
President and Chief Operating Officer
(principal executive officer)
Date: November 9, 2005 By: /s/ Margaret K. Dorman
---------------------------------------
Margaret K. Dorman
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
24
EXHIBIT INDEX
Exhibits designated with an "*" are filed, and with an "**" furnished, as an
exhibit to this Quarterly Report on Form 10-Q. Exhibits previously filed, as
indicated below, are incorporated by reference.
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of the Company, dated July 26,
2005. Filed as Exhibit 3.4 to the Company's report on Form 10-Q for
the quarter ended June 30, 2005 and incorporated herein by
reference.
3.2 Restated Bylaws of the Company. Filed as Exhibit 3.3 to the
Company's report on Form 10-K for the year ended December 31, 2004
and incorporated herein by reference.
31.1* Certification of Chief Executive Officer 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.
31.2* Certification of Chief Financial Officer 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.
32.1** Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
25