e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the Fiscal Year Ended December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
Commission File Number 1-8514
SMITH INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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| Delaware
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95-3822631 |
| (State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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| 411 North Sam Houston Parkway, Suite 600 |
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| Houston, Texas
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77060 |
| (Address of principal executive offices)
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(Zip Code) |
Registrant’s telephone number, including area code (281) 443-3370
Securities Registered Pursuant to Section 12(b) of the Act:
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| Title of Each Class
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Name of Each Exchange on Which Registered |
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| Common Stock, $1.00 par value
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New York Stock Exchange, Inc. |
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Pacific Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes þ No o .
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ .
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 þ No o .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ Accelerated Filero Non-Accelerated Filer o .
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ .
The aggregate market value of the voting stock held by non-affiliates on June 30, 2006 was
$8,819,233,034 (198,318,710 shares at the closing price on the New York Stock Exchange of $44.47).
On June 30, 2006, 213,968,439 shares of common stock were outstanding. For this purpose all shares
held by officers and directors and their respective affiliates are considered to be held by
affiliates, but neither the Registrant nor such persons concede that they are affiliates of the
Registrant.
There were 199,979,284 shares of common stock outstanding, net of shares held in Treasury, on
February 23, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement related to the Registrant’s 2007 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form.
PART I
Item 1. Business
General
Smith International, Inc. (“Smith” or the “Company”) is a leading global provider of premium
products and services to the oil and gas exploration and production industry. 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,
tubulars, 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 was incorporated in the state of California in January 1937 and reincorporated
under Delaware law in May 1983. The Company’s executive offices are headquartered at 411 North Sam
Houston Parkway, Suite 600, Houston, Texas 77060 and its telephone number is (281) 443-3370. The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are made available free of charge on the Company’s Internet website
at www.smith.com as soon as reasonably practicable after the Company has electronically
filed such material with, or furnished it to, the Securities and Exchange Commission. The
Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of
the Audit Committee, Compensation and Benefits Committee and Nominating and Corporate Governance
Committee are also available on the Investor Relations section of the Company’s Internet website.
The Company intends to disclose on its website any amendments or waivers to its Code of Business
Conduct and Ethics that are required to be disclosed pursuant to Item 5.05 of Form 8-K. Printed
copies of these documents are available to stockholders upon request.
The Company’s operations are aggregated into two reportable segments: Oilfield and
Distribution. The Oilfield segment consists of: M-I SWACO, a 60 percent-owned joint venture which
provides drilling and completion fluid systems and services, solids-control and separation
equipment, waste-management services and oilfield production chemicals; Smith Technologies, which
manufactures and sells three-cone drill bits, diamond drill bits and turbine products; and Smith
Services, which manufactures and markets products and services used for drilling, workover, well
completion and well re-entry operations. The Distribution segment consists of one business unit,
Wilson, which markets pipe, valves and fittings as well as mill, safety and other maintenance
products to energy and industrial markets.
Financial information regarding reportable segments and international operations appears in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note
16 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
Information related to business combinations appears in Note 3 of the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K.
Business Operations
Oilfield Segment
M-I SWACO
Fluid Products and Services. M-I SWACO is a leading worldwide provider of drilling, reservoir
drill-in and completion fluid systems, products and engineering services to end users engaged in
drilling oil and natural gas wells. Drilling fluids are used to cool and lubricate the bit during
drilling operations, contain formation pressures, suspend and remove rock cuttings from the hole
and maintain the stability of the wellbore. Engineering services are provided to ensure that the
fluid products are applied effectively to optimize drilling operations. These services include
recommending products and services during the well planning phase; monitoring drilling fluid
properties; recommending adjustments during the drilling phase; and analyzing/benchmarking well
results after completion of the project to improve the efficiencies of future wells.
M-I SWACO offers water-base, oil-base and synthetic-base drilling fluid systems. Water-base
drilling fluids are the world’s most widely utilized systems, having application in both land and
offshore environments. Typically, these systems comprise an engineered blend of weighting
materials used to contain formation pressures, and a broad range of chemical additives, designed to
yield the specific drilling performance characteristics required for a given drilling project.
Oil-base
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drilling fluids, which primarily are used to drill water-sensitive shales, reduce torque and drag and are
widely used in areas where stuck pipe is likely to occur. In certain drilling areas of the world,
oil-base systems exhibit comparably higher penetration rates when compared to water-base systems,
significantly reducing time on location and overall drilling costs. Synthetic-base drilling fluids
are used in drilling environments where oil-base fluids are environmentally prohibited and provide
the performance benefits of oil-base systems. Synthetic-base systems are particularly advantageous
in the deepwater environment. M-I SWACO also provides a comprehensive line of reservoir drill-in
fluids which combine the high performance properties of a premium drilling fluid with minimal
damaging characteristics of a brine completion fluid.
Completion fluids (clear brines) are solids-free, clear-salt solutions with high specific
gravities and are non-damaging to the producing formation. Operators use these specially designed
fluid systems in combination with a comprehensive range of specialty chemicals to control
bottom-hole pressures, while meeting the specific corrosion inhibition, viscosity and fluid loss
requirements necessary during the completion and workover phase of a well. These systems are
specially engineered to maximize well production by minimizing formation damage that can be caused
by solids-laden systems. M-I SWACO provides a complete line of completion fluids products and
services, including low- and high-density brines, specialty chemicals, filtration and chemical
treatment services, wellsite engineering and technical and laboratory support services.
Fluid Competition. The major competitors in the worldwide drilling fluids market, which
approximated $6.0 billion in 2006, are Halliburton Energy Services (a division of Halliburton
Company (“Halliburton”)) and Baker Hughes Drilling Fluids (a division of Baker Hughes, Inc. (“Baker
Hughes”)). While M-I SWACO and these companies supply a majority of the market, the drilling
fluids industry is highly competitive, with a significant number of smaller, locally based
competitors. The major competitors in the worldwide completion fluids market, which approximated
$1.2 billion in 2006, are Baroid Completion Fluids (a division of Halliburton), Tetra Technologies,
Inc., and Baker Hughes.
Generally competition for sales of drilling and completions fluids is based on a number of
factors, including wellsite engineering services, product quality and availability, technical
support, service response and price.
M-I SWACO Drilling Waste Management. M-I SWACO provides services, equipment and engineering
for solids control, pressure control and waste management to the worldwide drilling market.
Solids-control equipment is used to remove drill cuttings from the fluid system, allowing the
drilling fluid to be cleaned and recirculated. Solids are normally separated from the drilling
fluid using one or a combination of the following: balanced elliptical and linear-motion shale
shakers, desanders, desilters, hydroclones, mud cleaners and centrifuges. M-I SWACO designs,
manufactures, sells and rents a comprehensive, proprietary line of this equipment for oil and gas
drilling processes throughout the world. The Company is also a leading manufacturer and supplier
of screens used in solids-control equipment for both oilfield and certain industrial markets. M-I
SWACO complements its product offering by providing engineering and technical support to operators
and drilling contractors from the planning stages of their projects through waste removal and site
remediation.
Operators employ M-I SWACO-manufactured pressure-control equipment to drill in sour-gas and
high-pressure zones. Well killing and high-pressure control drilling chokes, together with related
operating consoles, are used in the drilling process during well kicks and well clean-up and
testing operations. Degassers and mud gas separators are designed to remove and vent entrained
gases, including toxic gases such as hydrogen sulfide and corrosive oxygen, from the drilling mud.
This equipment reduces the risk of dangerous and costly blowouts caused by recirculating mud that
contains natural gas. Key products in M-I SWACO’s pressure control product line include the
Mud D-Gasser® and Super Choke™, both of which hold strong market
positions as do the Super Mud Gas SeparatorÔ and the Super
AutochokeÔ.
With drilling operations expanding into more environmentally sensitive areas, there has been
increased focus on the effective collection, treatment and disposal of waste produced during the
drilling of a well. M-I SWACO provides operators with solutions designed to minimize and treat
drilling waste. The Company provides a suite of waste handling, minimization and management
products and services, including the CleanCut® pneumatic conveyance system for
collection and transportation of drill cuttings related to offshore drilling programs. M-I SWACO
also provides rig vacuum systems for cuttings recovery, high-gravity force drying equipment for
liquid/solid separation and cuttings slurification and re-injection processes for reducing haul-off
waste. In addition, through the Thermal Phase Separation™ process, M-I SWACO provides
operators a proven technology for maximizing the recovery of drilling fluids, while minimizing
wastes. M-I SWACO’s waste treatment services encompass a wide range of activities, including site
assessment, drill cuttings injection, water treatment, pit closure and remediation, bioremediation,
dewatering and thermal processing. The Company has established EnviroCenters®
in Norway, Germany and the United States designed specifically for recovering, treating and
recycling solid and liquid drilling wastes.
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M-I SWACO Drilling Waste Management Competition. M-I SWACO competes with Brandt/Rigtech (a
subsidiary of National Oilwell Varco, Inc. (“National-Oilwell Varco”)) and Derrick/Oil Tools.
Additionally, there are a number of regional suppliers that provide a limited range of equipment
and services tailored for local markets. Competition is based on product availability, equipment
performance, technical support and price.
Oilfield Production Chemicals. M-I SWACO provides a line of oilfield specialty chemicals and
related technical services through its Oilfield Production Chemical division. Oilfield production
chemicals are used to enhance the flow of hydrocarbons from the wellbore by eliminating paraffin,
scale and other byproducts encountered during the production process. Oilfield production
chemicals are also used to protect piping and other equipment associated with the production,
transportation and processing of oil and gas.
Production Chemical Competition. The major competitors in the worldwide oilfield production
chemical market include Baker Petrolite (a division of Baker Hughes), Nalco Energy Services (a
division of Nalco Company) and Champion Technologies, Inc. Generally, competition is based on
product quality, product performance, technical support and price.
Smith Technologies
Products and Services. Smith Technologies is a worldwide leader in the design, manufacture
and marketing of drill bits primarily used in drilling oil and natural gas wells. In addition,
Smith Technologies is a leading provider of downhole turbine drilling products (referred to as
“turbodrills”) and services that enhance the operating performance of petroleum drill bits in
certain applications. Smith Technologies’ product offerings are designed principally for the
premium market segments where faster drilling rates and greater footage drilled provide significant
economic benefits in reducing the total cost of a well.
Smith Technologies designs, manufactures and markets three-cone drill bits for the petroleum
industry, ranging in size from 31/2 to 32 inches in diameter. Three-cone bits work by crushing and
shearing the rock formation as the bit is turned. These three-cone bits comprise two major
components — the body and the cones, which contain different types of pointed structures referred
to as “cutting structures” or “teeth.” The cutting structures are either an integral part of the
steel cone with a hardmetal-applied surface (referred to as “milled tooth”) or made of an inserted
material (referred to as “insert”), which is usually tungsten carbide. The Company also produces
three-cone drill bits in which the tungsten carbide insert is coated with polycrystalline diamond.
In certain formations, bits produced with diamond-enhanced inserts last longer and increase
penetration rates, which substantially decreases overall drilling costs. Smith Technologies is a
leading provider of drill bits utilizing diamond-enhanced insert technology.
In addition, Smith Technologies designs, manufactures and markets diamond drill bits. Diamond
bits consist of a single body made of either a matrix powder alloy or steel. The cutting
structures of diamond bits consist of either polycrystalline diamond cutters, which are brazed on
the bit, or natural or synthetic diamonds, which are impregnated in the bit. These bits, which
range in size from 23/4 to 26 inches in diameter, work by shearing the rock formation with a milling
action as the bit is turned. Smith Technologies has experienced increased demand for rental of
diamond bits as improved designs and manufacturing processes have allowed a diamond bit to be used
to drill multiple wells in certain markets.
Smith Technologies also designs, assembles and markets a comprehensive line of turbodrills and
provides related technical support. Turbodrills, which operate directly above the drill bit, use
the hydraulic energy provided by drilling fluid pumps on the rig floor to deliver torque to and
rotate the drill bit. These proprietary tools are designed to provide faster rates of penetration,
operate in much higher temperature formations, deliver longer downhole life and produce better
wellbore quality than conventional positive displacement drilling motors. The turbine drilling
motor provides operators with cost effective solutions in demanding environments such as horizontal
applications, hard formations and high-temperature zones.
The Company manufactures polycrystalline diamond and cubic boron nitride materials that are
used in the Company’s three-cone and diamond drill bits and other specialized cutting tools. The
Company believes that it is one of the world’s largest manufacturers of polycrystalline diamond for
use in oilfield applications. Smith Technologies also develops and uses patented processes for
applying diamonds to a curved surface which optimize the performance of inserts used in drill bits.
As a result, the Company believes that Smith Technologies enjoys a competitive advantage in both
material cost and technical ability over other drill bit companies. In addition, the Company’s
in-house diamond research, engineering and manufacturing capabilities enhance the Company’s ability
to develop the application of diamond technology across other Smith product lines and into
non-energy markets.
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Competition. Hughes Christensen (a division of Baker Hughes), Security DBS (a division of
Halliburton) and ReedHycalog (a division of Grant Prideco, Inc.) are the three major competitors of
Smith Technologies in the drill bit business. While Smith Technologies and these companies supply
the majority of the worldwide drill bit market, which approximated $2.6 billion in 2006, they
compete with more than 20 companies. Generally, competition for sales of drill bits is based on a
number of factors, including performance, quality, reliability, service, price, technological
advances and breadth of products. The Company believes its quality, reliability and technological
advances provide its products with a competitive advantage.
Smith Services
Products and Services. Smith Services is a leading global provider of technologically
advanced drilling, tubular, fishing, remedial, multilateral and completion products, services and
solutions to the oil and gas drilling industry.
Smith Services’ Drilling Products and Services business provides a broad range of downhole
impact tools for drilling applications as well as numerous other specialized downhole drilling
products and services. Smith Services sells and rents impact drilling tools such as the
Hydra-Jar®Tool and the Accelerator®Tool, which are used to
free stuck drill strings during the drilling process. Additionally, Drilling on Gauge Subs and
Borrox AP Reamers are some of the Company’s tools used by operators for maintaining hole gauge and
quality of the wellbore. Smith Services also offers tubular drill string components, such as drill
collars, subs, stabilizers, kellys and Hevi-WateÔDrillPipe, and provides related
inspection services, including drillstring repair and rebuild services. These components and their
placement in the drillstring are supported by engineering and field technical services in order to
optimize bottom hole management techniques. Through state-of-the-art software, Smith Services aids
the customer in maximizing the life of drillstring components. Rotating control devices for flow
control in underbalanced / managed pressure drilling applications and automatic connection torque
monitoring and control systems are designed and manufactured by Smith Services. Smith Services
also manufactures and markets hole openers and underreamers which are designed to create larger
hole diameters in certain sections of the wellbore. The Company’s patented
Rhino® Reamer, Reamaster®and simultaneous drilling and
hole enlargement system are three examples of products that aid the customer in realizing lower
drilling costs through technology. Through the use of the simultaneous drilling and hole
enlargement system above the drill bit, the operator may drill the main well bore with the bit and
enlarge the diameter of the hole above the drill bit in the same run.
Smith Services’ Fishing and Remedial Services business provides a comprehensive package of
fishing, remedial and thru-tubing services. Fishing operations clear and remove obstructions from a
wellbore that may arise during drilling, completion or workover activities or during a well’s
production phase. This operation requires a wide variety of specialty tools, including fishing
jars, milling tools and casing cutters, all of which are manufactured by Smith Services. These
tools are operated by Company service personnel or sold or rented to third-party fishing companies.
Smith Services provides Wellbore Departure™ Systems through the manufacture of proprietary
casing exit tools which are installed by trained technicians. These systems, which include the
patented Trackmaster® Plus Whipstock System, allow the operator to divert
around obstructions in the main wellbore or reach multiple production zones from the main wellbore
(known as multilateral completions). In addition, Smith Services’ Geotrack™ Whipstock
System mills the casing exit and continues to drill several hundred feet of formation in a
single trip, saving the customer time and reducing their overall drilling costs. The Company also
provides mechanical, hydraulic and explosive pipe-cutting services to remove casing during well or
platform abandonment.
Smith Services’ Completion Systems business specializes in providing fit-for-purpose liner
hanger systems, liner cementing equipment, isolation packers, retrievable and permanent packers,
and drillable bridge and frac plugs. Liner hangers allow strings of casing to be suspended within
the wellbore without having to extend the string all the way to the surface and are also used to
isolate production zones and formations. Most directional and multilateral wells include one or
more hangers due to complex casing programs and need for zonal isolation. Using Smith Services’
Pocket SlipÔ liner hanger system, long or heavy liners can be suspended
with minimal casing distortion and maximum flow-by area. Packers are mechanically or hydraulically
actuated devices which lock into place at specified depths in the well and provide a seal between
zones through expanding-element systems. The devices therefore create isolated zones within the
wellbore to permit either specific formation production or allow for certain operations, such as
cementing or acidizing, to take place without damaging the reservoir. The Smith Services
IsofracÔ packer selectively isolates multiple zones in a single trip to reduce
fracturing job time, while the Long ReachÔ packer facilitates successful liner
deployment in vertical and long reach horizontal wellbores without excessive work string
manipulation. In addition, Smith Services’ top drive cementing manifold eliminates cement
contamination of top drive components by creating a flow path for cement that bypasses the drilling
rig’s top drive assembly.
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Competition. Smith Services’ major competitors in the drilling, remedial, re-entry and
fishing services markets are Weatherford International, Inc. (“Weatherford”), Baker Oil Tools (a
division of Baker Hughes) and numerous small local companies. The main competitors in the liner
hanger and packer markets are Baker Oil Tools, Weatherford and TIW Corporation. The main
competitors in the drilling and fishing jar market and the fishing product and service market are
Weatherford and National-Oilwell Varco. Competition in the drilling and completions sales, rental
and services market is primarily based on performance, quality, reliability, service, price and
response time and, in some cases, breadth of products.
Distribution Segment
Wilson
Products and Services. Wilson is a supply-chain management company which provides products
and services to the energy, refining, petrochemical, power generation and mining industries.
Wilson operates an extensive network of supply branches, service centers and sales offices through
which it markets pipe, valves and fittings as well as mill, safety and other maintenance products,
predominately in the United States and Canada. In addition, Wilson provides warehouse management,
vendor integration and various surplus and inventory management services. The majority of Wilson’s
operations are focused on North American distribution of maintenance, repair and operating supplies
and equipment with the remainder associated with line pipe and automated valve products (including
valve, actuator and control packages).
Approximately 72 percent of Wilson’s 2006 revenues were generated in the energy sector, which
includes exploration and production companies and companies with operations in the petroleum
industry’s pipeline sector. The remainder related to sales in the downstream and industrial
market, including refineries, petrochemical and power generation plants and other energy-focused
operations. Approximately 25 percent of Wilson’s 2006 revenues were reported in Canada,
attributable to the CE Franklin Ltd. operations, a publicly-traded distribution business in which
the Company owns the majority of the outstanding common stock.
Competition. Wilson’s competitors in its energy sector operations include National-Oilwell
Varco, Redman Pipe and Supply Company and a significant number of smaller, locally based
operations. Wilson’s competitors in the downstream and industrial market include Hagemeyer NV,
Ferguson Enterprises, Inc., McJunkin Corporation and W.W. Grainger, Inc. The distribution market
that Wilson participates in is highly competitive. Generally, competition involves numerous
factors, including price, experience, customer service and equipment availability.
Non-U.S. Operations
Sales to oil and gas exploration and production markets outside the United States are a key
strategic focus of Smith’s management. The Company markets its products and services through
subsidiaries, joint ventures and sales agents located in virtually all petroleum-producing areas of
the world, including Canada, Latin America, Europe/Africa, and Middle East/Asia. Approximately 54
percent, 55 percent and 55 percent of the Company’s revenues in 2006, 2005 and 2004, respectively,
were derived from equipment or services sold or provided outside the United States. The Company’s
Distribution operations constitute a significant portion of the consolidated revenue base and are
concentrated in North America which serves to distort the geographic revenue mix of the Company’s
Oilfield segment operations. Excluding the impact of the Distribution operations, approximately 63
percent, 65 percent and 65 percent of the Company’s revenues were generated in non-U.S. markets in
2006, 2005 and 2004, respectively.
Historically, drilling activity outside the United States has been less volatile than
U.S.-based activity as the high cost exploration and production programs outside the United States
are generally undertaken by major oil companies, consortiums and national oil companies. These
entities operate under longer-term strategic priorities than do the independent drilling operators
that are more common in the U.S. market.
Sales and Distribution
Sales and service efforts are directed to end users in the exploration and production
industry, including major and independent oil companies, national oil companies and independent
drilling contractors. The Company’s products and services are primarily marketed through the
direct sales force of each business unit. In certain non-U.S. markets where direct sales efforts
are not practicable, the Company utilizes independent sales agents, distributors or joint ventures.
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Smith maintains field service centers, which function as repair and maintenance facilities for
rental tools, operations for remedial and completion services and a base for the Company’s global
sales force, in all major oil and gas producing regions of the world. The location of these
service centers near the Company’s customers is an important factor in maintaining favorable
customer relations.
Manufacturing
The Company’s manufacturing operations, along with quality control support, are designed to
ensure that all products and services marketed by the Company will meet standards of performance
and reliability consistent with the Company’s reputation in the industry.
Management believes that it generally has sufficient internal manufacturing capacity to meet
anticipated demand for its products and services. During periods of peak demand, certain business
units utilize outside resources to provide additional manufacturing capacity.
Raw Materials
Through its company-owned mines in and outside the United States, M-I SWACO has the capability
to produce a large portion of its requirements for barite and bentonite, which are typically added
to engineered fluid systems. Barite reserves are mined in the United States, the United Kingdom
and Morocco. Bentonite is produced from ore deposits in the U.S. Mining exploration activities
continue worldwide to locate and evaluate ore bodies to ensure deposits are readily available for
production when market conditions dictate. In addition to its own production, M-I SWACO purchases
the majority of its worldwide barite requirement from suppliers outside the United States, mainly
the People’s Republic of China, India and Morocco.
The Company purchases a variety of raw materials for its Smith Technologies and Smith Services
units, including alloy and stainless steel bars, tungsten carbide inserts and forgings. Generally,
the Company is not dependent on any single source of supply for any of its raw materials or
purchased components, and believes that numerous alternative supply sources are available for all
such materials. The Company does not expect any interruption in supply, but there can be no
assurance that there will be no price or supply issues over the long-term. The Company produces
polycrystalline diamond materials in Provo, Utah and Scurelle, Italy for utilization in various
Company products as well as direct customer sales.
Product Development, Engineering and Patents
The Company’s business units maintain product development and engineering departments whose
activities are focused on improving existing products and services and developing new technologies
to meet customer demands for improved drilling performance and environmental-based solutions for
drilling and completion operations. The Company’s primary research facilities are located in
Houston, Texas; Stavanger, Norway; Aberdeen, Scotland; and Florence, Kentucky.
The Company also maintains a drill bit database which records the performance of drill bits
over the last 20 years, including those manufactured by competitors. This database gives the
Company the ability to monitor, among other things, drill bit failures and performance improvements
related to product development. The Company believes this proprietary database gives it a
competitive advantage in the drill bit business.
The Company has historically invested significant resources in research and engineering in
order to provide customers with broader product lines and technologically-advanced products and
services. The Company’s expenditures for research and engineering activities are attributable to
the Company’s Oilfield Products and Services segment and totaled $88.3 million in 2006, $73.6
million in 2005 and $67.2 million in 2004. In 2006, research and engineering expenditures
approximated 1.6 percent of the Company’s Oilfield Products and Services segment revenues.
Although the Company has over 3,900 issued and pending patents and regards its patents and
patent applications as important in the operation of its business, it does not believe that any
significant portion of its business is materially dependent upon any single patent.
Employees
At December 31, 2006, the Company had 17,377 full-time employees throughout the world. Most
of the Company’s employees in the United States are not covered by collective bargaining agreements
except in certain U.S. mining operations of M-I SWACO and several distribution locations of Wilson.
The Company considers its labor relations to be satisfactory.
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Officers of the Registrant
The names and ages of all officers of the Company, all positions and offices with the Company
presently held by each person named and their business experience are stated below. Positions,
unless otherwise specified, are with the Company.
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| Name, Age and Positions |
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Principal Current Occupation and Other Significant Positions Held |
Doug Rock (60)
Chairman of the Board, Chief
Executive Officer, President
and Chief Operating Officer
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Chairman of the Board since
February 1991, elected Chief
Executive Officer in March
1989 and served as President
and Chief Operating Officer
since December 1987. Held
various positions since
joining the Company in June
1974. |
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Malcolm W. Anderson (59)
Senior Vice President,
Human Resources
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Senior Vice President, Human
Resources since December
2006. Joined Company as Vice
President, Human Resources in
May 2004. Vice President
Human Resources at Hewlett
Packard from January 2001 to
April 2004. Vice President
Human Resources at
Weatherford International
Ltd. from April 1996 to
December 2000. |
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Richard E. Chandler, Jr. (50)
Senior Vice President, General
Counsel and Secretary
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Senior Vice President and
Secretary since January 2006
and General Counsel since
August 2005. Joined
predecessor to M-I SWACO in
December 1986 as Vice
President, General Counsel
and Secretary. Named Senior
Vice President –
Administration, General
Counsel and Secretary of M-I
SWACO in January 2004. |
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Margaret K. Dorman (43)
Senior Vice President, Chief
Financial Officer and Treasurer
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Senior Vice President, Chief
Financial Officer and
Treasurer since June 1999.
Joined Company as Director of
Financial Reporting in
December 1995 and named Vice
President, Controller and
Assistant Treasurer in
February 1998. |
|
|
|
Bryan L. Dudman (50)
President, Smith Services
|
|
President, Smith Services
since January 2006. Held
various positions since
joining the Company in
January 1979. Prior to being
named to current position,
served as Senior Vice
President of M-I SWACO’s
Western Hemisphere Operations
since May 1994. |
|
|
|
John J. Kennedy (54)
President and Chief Executive
Officer, Wilson
|
|
President and Chief Executive
Officer, Wilson since June
1999. Held various positions
since joining the Company in
November 1986. Elected Vice
President, Chief Accounting
Officer and Treasurer in
March 1994 and named Senior
Vice President, Chief
Financial Officer and
Treasurer in April 1997. |
|
|
|
Donald McKenzie (57)
President, M-I SWACO
|
|
President of M-I SWACO since
May 2006. Held various
positions since joining the
Company in 1989. Named
Senior Vice President of M-I
SWACO’s Eastern Hemisphere
Operations of M-I SWACO in
April 1994. Appointed Chief
Operating Officer of M-I
SWACO in January 2006. |
|
|
|
Michael D. Pearce (59)
President, Smith Technologies
|
|
President, Smith Technologies
since May 2005. Joined
Company as Vice President
Sales of the Company’s
GeoDiamond Division in April
1995 and named Vice President
Sales of Smith Technologies
in August 1998. |
|
|
|
Peter J. Pintar (48)
Vice President, Corporate
Strategy and Development
|
|
Vice President Corporate
Strategy and Development
since September 2005. Held
various positions at DTE
Energy Company between
October 1997 and August 2005,
including Director –
Corporate Development,
Managing Director – Venture
Capital Investments, and
Director – Investor
Relations. |
|
|
|
Joseph S. Rinando, III (35)
Vice President and Controller
|
|
Vice President and Controller
since April 2006. Joined
Company as Director of
Financial Reporting in May
2003. Served as Audit Manager
for PricewaterhouseCoopers
LLP from July 2000 to June
2002 and Senior Manager from
July 2002 to May 2003. |
|
|
|
Geri D. Wilde (56)
Vice President, Taxes and
Assistant Treasurer
|
|
Vice President, Taxes since
February 1998. Joined
Company as Manager of Taxes
and Payroll of predecessor to
M-I SWACO in December 1986
and named Director of Taxes
and Assistant Treasurer in
April 1997. |
All officers of the Company are elected annually by the Board of Directors. They hold office until
their successors are elected and qualified. There are no family relationships between the officers
of the Company.
8
Item 1A. Risk Factors
This document contains forward-looking statements within the meaning of the Section 21E of the
Securities Exchange Act of 1934, as amended, concerning, among other things, our 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 that we believe 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, and changes in laws or regulations, 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 differ 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, future events or otherwise.
With this in mind, you should consider the risks discussed elsewhere in this report and other
documents we file with the Securities and Exchange Commission from time to time and the following
important factors that could cause our actual results to differ materially from those expressed in
any forward-looking statement made by us or on our behalf.
We are dependent on the level of oil and natural gas exploration and development activities.
Demand for our products and services is dependent upon the level of oil and natural gas
exploration and development activities. The level of worldwide oil and natural gas development
activities is primarily influenced by the price of oil and natural gas, as well as price
expectations. In addition to oil and natural gas prices, the following factors impact
exploration and development activity and may lead to significant changes in worldwide activity
levels:
| |
• |
|
Overall level of global economic growth and activity; |
| |
| |
• |
|
Actual and perceived changes in the supply and demand for oil and natural gas; |
| |
| |
• |
|
Political stability and policies of oil-producing countries; |
| |
| |
• |
|
Finding and development costs of operators; |
| |
| |
• |
|
Decline and depletion rates for oil and natural gas wells; and |
| |
| |
• |
|
Seasonal weather conditions that temporarily curtail drilling operations. |
Changes in any of these factors could adversely impact our financial condition or results
of operations.
There are certain risks associated with conducting business in markets outside of North America.
We are a multinational oilfield service company and generate the majority of our Oilfield
segment revenues in markets outside of North America. Changes in conditions within certain
countries that have historically experienced a high degree of political and/or economic
instability could adversely impact our financial condition or results of operations.
Additional risks inherent in our non-North American business activities include:
| |
• |
|
Changes in political and economic conditions in the countries in which
we operate, including civil uprisings, riots and terrorist acts; |
| |
| |
• |
|
Unexpected changes in regulatory requirements; |
| |
| |
• |
|
Fluctuations in currency exchange rates and the value of the U.S. dollar; |
| |
| |
• |
|
Restrictions on repatriation of earnings or expropriation of property without fair compensation; |
| |
| |
• |
|
Governmental actions that result in the deprivation of contract rights; and |
| |
| |
• |
|
Governmental sanctions. |
9
We operate in a highly technical and competitive environment.
We operate in a highly-competitive business environment. Accordingly, demand for our
products and services is largely dependent on our ability to provide leading-edge,
technology-based solutions that reduce the operator’s overall cost of developing energy assets.
If competitive or other market conditions impact our ability to continue providing
superior-performing product offerings, our financial condition or results of operations could
be adversely impacted.
Our businesses are subject to a variety of governmental regulations.
We are exposed to a variety of federal, state, local and international laws and
regulations relating to matters such as environmental, health and safety, export control,
currency exchange, labor and employment and taxation. These laws and regulations are complex,
change frequently and have tended to become more stringent over time. In the event the scope
of these laws and regulations expand in the future, the incremental cost of compliance could
adversely impact our financial condition or results of operations.
Our industry is experiencing more litigation involving claims of infringement of intellectual
property rights.
Over the past few years, our industry has experienced increased litigation related to the
infringement of intellectual property rights. Although no material matters are pending or
threatened at this time, we, as well as certain of our competitors, have been named as
defendants in various intellectual property matters in the past. These types of claims are
typically costly to defend, involve monetary judgments that, in certain circumstances, are
subject to being enhanced and are often brought in venues which have proved to be favorable to
plaintiffs. If we are served with an intellectual property claim which we are unsuccessful in
defending, it could adversely impact our results of operations and cash flows.
10
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The principal facilities and properties utilized by the Company at December 31, 2006 are shown
in the table below. Generally, the facilities and properties are owned by the Company.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Principal Products Processed |
|
Land |
|
|
Approx. Bldg. Space |
|
| Location |
|
or Manufactured |
|
(Acres) |
|
|
(sq.ft.) |
|
| Oilfield Segment: |
|
|
|
|
|
|
|
|
Houston, Texas |
|
Tubulars, surface and downhole tools, remedial |
|
|
|
|
|
|
|
|
|
|
products, liner hangers, diamond drill bits, |
|
|
|
|
|
|
|
|
|
|
turbodrills, drilling and fishing jars and fishing |
|
|
|
|
|
|
|
|
|
|
tool equipment |
|
|
88 |
|
|
|
873,600 |
|
Houston, Texas |
|
M-I SWACO corporate headquarters and research center |
|
|
18 |
|
|
|
246,000 |
|
Florence, Kentucky |
|
Separator units, mill units, parts, screens and motors |
|
|
6 |
|
|
|
214,000 |
|
Ponca City, Oklahoma |
|
Three-cone drill bits |
|
|
15 |
|
|
|
207,000 |
|
Aberdeen, Scotland |
|
Downhole tools and remedial products |
|
|
10 |
|
|
|
132,000 |
|
Greybull, Wyoming |
|
Bentonite mine and processing |
|
|
8,394 |
|
|
|
110,000 |
|
Saline di Volterra, Italy |
|
Three-cone drill bits |
|
|
11 |
|
|
|
99,900 |
|
Tulsa, Oklahoma |
|
Oilfield and industrial screening products |
|
|
7 |
|
|
|
95,000 |
|
Edinburgh, Scotland |
|
Wire cloth and oilfield screening products |
|
|
3 |
|
|
|
92,450 |
|
Aberdeen, Scotland |
|
Downhole tools |
|
|
10 |
|
|
|
91,000 |
|
Provo, Utah |
|
Synthetic diamond materials |
|
|
5 |
|
|
|
68,300 |
|
Karmoy, Norway |
|
Barite and bentonite processing |
|
|
5 |
|
|
|
51,000 |
|
Greystone, Nevada |
|
Barite mine and processing |
|
|
268 |
|
|
|
50,000 |
|
Macon, Georgia |
|
Separator units and screens |
|
|
1 |
|
|
|
49,000 |
|
Battle Mountain, Nevada |
|
Barite processing |
|
|
23 |
|
|
|
43,000 |
|
Zelmou, Morocco |
|
Barite mine |
|
|
3,954 |
|
|
|
41,000 |
|
Zavalla, Texas |
|
Drilling fluid chemical products |
|
|
33 |
|
|
|
36,000 |
|
Nivellas, Belgium |
|
Separator units, mill units, parts, screens and motors |
|
|
5 |
|
|
|
35,000 |
|
Scurelle, Italy |
|
Diamond drill bits and synthetic diamond materials |
|
|
4 |
|
|
|
31,000 |
|
Spruce Grove, Canada |
|
Drilling fluid processing |
|
|
7 |
|
|
|
30,450 |
|
Amelia, Louisiana |
|
Barite processing |
|
|
26 |
|
|
|
25,000 |
|
Berra, Italy |
|
Solids control equipment |
|
|
4 |
|
|
|
24,929 |
|
Port Fouchon, Louisiana |
|
Drilling fluid storage, processing and distribution |
|
|
11 |
|
|
|
24,600 |
|
Salzweld, Germany |
|
Drilling fluid processing |
|
|
2 |
|
|
|
23,000 |
|
Galveston, Texas |
|
Barite processing |
|
|
6 |
|
|
|
21,000 |
|
Grand Prairie, Canada |
|
Fishing and remedial services |
|
|
4 |
|
|
|
13,959 |
|
Aberdeen, Scotland |
|
Barite and bentonite processing |
|
|
2 |
|
|
|
12,000 |
|
Foss/Aberfeldy, Scotland |
|
Barite mine and processing |
|
|
102 |
|
|
|
10,000 |
|
Mountain Springs, Nevada |
|
Barite mine |
|
|
900 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Segment: |
|
|
|
|
|
|
|
|
|
|
Houston, Texas |
|
Pipe, valves and fittings |
|
|
11 |
|
|
|
198,000 |
|
Tampa, Florida |
|
Pipe, valves and fittings |
|
|
4 |
|
|
|
86,200 |
|
Trainer, Pennsylvania |
|
Pipe, valves and fittings |
|
|
3 |
|
|
|
23,000 |
|
The Company considers its mines and manufacturing and processing facilities to be in good
condition and adequately maintained. The Company also believes its facilities are suitable for
their present and intended purposes and are generally adequate for the Company’s current and
anticipated level of operations.
The Company’s Corporate headquarters is located in a leased office building in Houston, Texas.
The Company leases various other administrative and sales offices, as well as warehouses and
service centers in the United States and other countries in which it conducts business. The
Company believes that it will be able to renew and extend its property leases on terms satisfactory
to the Company or, if necessary, locate substitute facilities on acceptable terms.
11
Item 3. Legal Proceedings
Information relating to various commitments and contingencies, including legal proceedings, is
described in Note 2 and Note 17 of the Consolidated Financial Statements included elsewhere in this
report on Form 10-K and is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The common stock of the Company is traded on several market exchanges, including the New York
Stock Exchange, under the symbol “SII”. The following are the high and low sale prices for the
Company’s common stock as reported on the New York Stock Exchange Composite Tape for the periods
indicated, and adjusted for the two-for-one stock split effective August 24, 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 Common Stock |
|
|
2006 Common Stock |
|
| |
|
Q1 |
|
|
Q2 |
|
|
Q3 |
|
|
Q4 |
|
|
Q1 |
|
|
Q2 |
|
|
Q3 |
|
|
Q4 |
|
High |
|
$ |
32.77 |
|
|
$ |
32.06 |
|
|
$ |
35.23 |
|
|
$ |
39.59 |
|
|
$ |
44.63 |
|
|
$ |
44.35 |
|
|
$ |
45.79 |
|
|
$ |
44.11 |
|
Low |
|
$ |
25.96 |
|
|
$ |
27.92 |
|
|
$ |
31.91 |
|
|
$ |
29.61 |
|
|
$ |
35.66 |
|
|
$ |
36.17 |
|
|
$ |
36.05 |
|
|
$ |
35.89 |
|
On February 23, 2007, the Company had 1,841 common stock holders of record and the last
reported closing price on the New York Stock Exchange Composite Tape was $42.10.
Stock Repurchases
In October 2005, the Company’s Board of Directors approved a new repurchase program that
allows for the purchase of up to 20 million shares of the Company’s common stock, subject to
regulatory issues, market considerations and other relevant factors. During the fourth quarter of
2006, the Company repurchased 0.3 million shares of common stock in the open market at an aggregate
cost, including commissions, of $13.1 million. As of December 31, 2006, the Company has
repurchased 2.7 million shares at an average cost of $38.66 per share under the current program.
The acquired shares have been added to the Company’s treasury stock holdings.
The following table summarizes the Company’s repurchase activity for the three months ended
December 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
|
|
| |
|
Total Number |
|
|
Average |
|
|
Purchased as Part of |
|
|
Number of Shares that |
|
| |
|
of Shares |
|
|
Price Paid |
|
|
Publicly Announced |
|
|
May Yet Be Purchased |
|
Period |
|
Purchased |
|
|
per Share |
|
|
Program |
|
|
Under the Program |
|
October 1 — 31 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
17,581,800 |
|
November 1 — 30 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,581,800 |
|
December 1 — 31 |
|
|
317,587 |
|
|
|
41.21 |
|
|
|
317,587 |
|
|
|
17,264,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4th Quarter 2006 |
|
|
317,587 |
|
|
$ |
41.21 |
|
|
|
317,587 |
|
|
|
17,264,213 |
|
Dividend Program
In February 2005, the Company’s Board of Directors approved a regular quarterly cash dividend
program. The Board of Directors declared dividends of $64.0 million and $48.4 million for the
years ended December 31, 2006 and 2005, respectively.
On February 7, 2007, the Company’s Board of Directors increased the quarterly cash dividend to
$0.10 per share, beginning with the distribution payable April 16, 2007 to stockholders of record
on March 15, 2007. 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 cash flow from
operations, the level of its capital expenditures, compliance with certain debt covenants, future
business prospects and other factors that the Board of Directors deem relevant.
12
Item 6. Selected Financial Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004(a) |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
7,333,559 |
|
|
$ |
5,579,003 |
|
|
$ |
4,419,015 |
|
|
$ |
3,594,828 |
|
|
$ |
3,170,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,344,271 |
|
|
|
1,685,138 |
|
|
|
1,351,939 |
|
|
|
1,075,931 |
|
|
|
918,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,080,081 |
|
|
|
670,561 |
|
|
|
438,764 |
|
|
|
328,747 |
|
|
|
256,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative
effect of change in
accounting principle |
|
|
502,006 |
|
|
|
302,305 |
|
|
|
182,451 |
|
|
|
124,634 |
|
|
|
93,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
before cumulative effect of
change in accounting
principle(b) |
|
|
2.49 |
|
|
|
1.48 |
|
|
|
0.89 |
|
|
|
0.62 |
|
|
|
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,335,475 |
|
|
$ |
4,059,914 |
|
|
$ |
3,506,778 |
|
|
$ |
3,097,047 |
|
|
$ |
2,749,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
800,928 |
|
|
|
610,857 |
|
|
|
387,798 |
|
|
|
488,548 |
|
|
|
441,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
1,986,937 |
|
|
|
1,578,505 |
|
|
|
1,400,811 |
|
|
|
1,235,776 |
|
|
|
1,063,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per
common share(c) |
|
|
0.32 |
|
|
|
0.24 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
The Selected Financial Data above should be read together with the Notes to Consolidated
Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Form 10-K in order to understand factors, such as business
combinations completed during 2006, 2005 and 2004, and unusual items, which may affect the
comparability of the Selected Financial Data.
|
|
|
| (a) |
|
In 2004, the Company recognized a $31.4 million, or $0.10 per share, patent
litigation-related charge. |
| |
| (b) |
|
All fiscal years prior to 2005 have been restated for the impact of a two-for-one stock
dividend distributed on August 24, 2005. |
| |
| (c) |
|
In February 2005, the Company’s Board of Directors approved a regular quarterly cash dividend
program. For additional information regarding the Company’s dividend program, see Part II,
Item 5. “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities” to this Form 10-K. |
13
Item 7. 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 Financial Statements
of the Company and the related notes thereto included elsewhere in this Form 10-K. This discussion
includes forward-looking statements that are subject to risks and uncertainties. Actual results
may differ materially from the statements we make in this section due to a number of factors that
are discussed beginning on page 9.
Company Products and Operations
The Company is a leading global provider of premium products and services to the oil and gas
exploration and production industry. 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, tubulars, 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 eight 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 82 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 close to 60 percent of the Company’s consolidated
revenues were generated in North America during 2006, Smith’s profitability was largely dependent
upon business levels in markets outside of North America. The Distribution segment, which accounts
for approximately 26 percent of consolidated revenues and primarily supports a North American
customer base, serves to distort the geographic revenue mix of the Company. Excluding the impact
of the Distribution segment, 55 percent of the Company’s 2006 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. In 2006, the average worldwide rig count grew 13 percent over the
prior year period influenced, in part, by higher commodity prices which resulted in increased
investment in oil-focused drilling projects in markets outside of North America.
The Company anticipates modest growth in exploration and production spending in 2007 which is
expected to be concentrated in the Eastern Hemisphere regions and, to a lesser extent, in the U.S.
offshore market. Although the long-term outlook for North American land-based drilling activity
is favorable based upon expected growth in worldwide energy consumption, an adverse change in
near-term market fundamentals could cause activity reductions for marginal land-based projects.
There are a number of factors which influence forecasted exploration and production spending.
Ultimately, any significant deterioration in the global economic environment or prolonged weakness
in commodity prices could affect worldwide drilling activity and demand for our products and
services.
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 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Financial Data: (dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M-I SWACO |
|
$ |
3,573,395 |
|
|
|
49 |
|
|
$ |
2,682,511 |
|
|
|
48 |
|
|
$ |
2,231,884 |
|
|
|
50 |
|
Smith Technologies |
|
|
790,131 |
|
|
|
11 |
|
|
|
601,821 |
|
|
|
11 |
|
|
|
511,410 |
|
|
|
12 |
|
Smith Services |
|
|
1,024,212 |
|
|
|
14 |
|
|
|
694,667 |
|
|
|
12 |
|
|
|
493,045 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
|
5,387,738 |
|
|
|
74 |
|
|
|
3,978,999 |
|
|
|
71 |
|
|
|
3,236,339 |
|
|
|
73 |
|
Wilson |
|
|
1,945,821 |
|
|
|
26 |
|
|
|
1,600,004 |
|
|
|
29 |
|
|
|
1,182,676 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,333,559 |
|
|
|
100 |
|
|
$ |
5,579,003 |
|
|
|
100 |
|
|
$ |
4,419,015 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
$ |
2,009,997 |
|
|
|
27 |
|
|
$ |
1,393,564 |
|
|
|
25 |
|
|
$ |
1,128,294 |
|
|
|
26 |
|
Distribution |
|
|
1,374,732 |
|
|
|
19 |
|
|
|
1,127,142 |
|
|
|
20 |
|
|
|
854,173 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total United States |
|
|
3,384,729 |
|
|
|
46 |
|
|
|
2,520,706 |
|
|
|
45 |
|
|
|
1,982,467 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
|
404,121 |
|
|
|
6 |
|
|
|
313,912 |
|
|
|
6 |
|
|
|
225,629 |
|
|
|
5 |
|
Distribution |
|
|
487,167 |
|
|
|
6 |
|
|
|
399,653 |
|
|
|
7 |
|
|
|
261,923 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Canada |
|
|
891,288 |
|
|
|
12 |
|
|
|
713,565 |
|
|
|
13 |
|
|
|
487,552 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
|
2,973,620 |
|
|
|
41 |
|
|
|
2,271,523 |
|
|
|
41 |
|
|
|
1,882,416 |
|
|
|
43 |
|
Distribution |
|
|
83,922 |
|
|
|
1 |
|
|
|
73,209 |
|
|
|
1 |
|
|
|
66,580 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-North America |
|
|
3,057,542 |
|
|
|
42 |
|
|
|
2,344,732 |
|
|
|
42 |
|
|
|
1,948,996 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
7,333,559 |
|
|
|
100 |
|
|
$ |
5,579,003 |
|
|
|
100 |
|
|
$ |
4,419,015 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
$ |
1,012,295 |
|
|
|
19 |
|
|
$ |
625,384 |
|
|
|
16 |
|
|
$ |
423,648 |
|
|
|
13 |
|
Distribution |
|
|
101,830 |
|
|
|
5 |
|
|
|
64,714 |
|
|
|
4 |
|
|
|
26,513 |
|
|
|
2 |
|
General Corporate |
|
|
(34,044 |
) |
|
|
* |
|
|
|
(19,537 |
) |
|
|
* |
|
|
|
(11,397 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,080,081 |
|
|
|
15 |
|
|
$ |
670,561 |
|
|
|
12 |
|
|
$ |
438,764 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Worldwide Rig Count:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
1,901 |
|
|
|
47 |
|
|
|
1,666 |
|
|
|
47 |
|
|
|
1,417 |
|
|
|
45 |
|
Canada |
|
|
413 |
|
|
|
10 |
|
|
|
408 |
|
|
|
11 |
|
|
|
348 |
|
|
|
11 |
|
Non-North America |
|
|
1,747 |
|
|
|
43 |
|
|
|
1,517 |
|
|
|
42 |
|
|
|
1,377 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,061 |
|
|
|
100 |
|
|
|
3,591 |
|
|
|
100 |
|
|
|
3,142 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Onshore |
|
|
3,523 |
|
|
|
87 |
|
|
|
3,069 |
|
|
|
85 |
|
|
|
2,667 |
|
|
|
85 |
|
Offshore |
|
|
538 |
|
|
|
13 |
|
|
|
522 |
|
|
|
15 |
|
|
|
475 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,061 |
|
|
|
100 |
|
|
|
3,591 |
|
|
|
100 |
|
|
|
3,142 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Commodity Prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil ($/Bbl)(2) |
|
$ |
66.25 |
|
|
|
|
|
|
$ |
56.71 |
|
|
|
|
|
|
$ |
41.47 |
|
|
|
|
|
Natural Gas ($/mcf)(3) |
|
|
6.98 |
|
|
|
|
|
|
|
9.01 |
|
|
|
|
|
|
|
6.18 |
|
|
|
|
|
|
|
|
| (1) |
|
Source: M-I SWACO. |
| |
| (2) |
|
Average daily West Texas Intermediate (“WTI”) spot closing prices, as quoted by NYMEX. |
| |
| (3) |
|
Average daily Henry Hub, Louisiana spot closing prices, as quoted by NYMEX. |
| |
| * |
|
not meaningful |
15
Oilfield 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 is significantly
influenced by exploration and production 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 nine percent of the revenue base. U.S. offshore drilling
accounts for approximately three percent of the worldwide rig count and generally is more
revenue-intensive than land-based projects due to the complex nature of the related drilling
environment. For the year ended December 31, 2006, M-I SWACO reported revenues of $3.6 billion, an
increase of 33 percent over the prior year period. Excluding the impact of acquired operations,
revenues grew 31 percent over the prior year. Approximately two-thirds of the base revenue
increase was generated in markets outside of North America, primarily reflecting new contract
awards and increased customer activity in the Europe/Africa and Middle East offshore markets.
North American base revenues grew 33 percent above the prior year level, largely attributable to
increased investment by exploration and production companies in land-based drilling projects and
the impact of price increases implemented in late 2005. M-I SWACO’s revenues totaled $2.7 billion
for the year ended December 31, 2005, an increase of 20 percent over the prior year period. Over
60 percent of the business growth was generated in the Eastern Hemisphere influenced by an 11
percent increase in corresponding activity levels and the impact of new contract awards. Increased
exploration and production spending in the North American market, driven by the significant
increase in the number of land-based drilling programs and, to a lesser extent, the impact of price
increases initiated throughout 2005 also contributed to the year-over-year revenue improvement.
Smith Technologies designs and manufactures 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. For the year ended December 31, 2006, Smith Technologies reported revenues of
$790.1 million, an increase of 31 percent over the prior year period. The majority of the revenue
increase was reported by the Western Hemisphere operations, influenced by higher U.S. land-based
drilling activity, improved pricing and, to a lesser extent, strong demand for turbine products in
the Latin America market. Revenues generated in the Eastern Hemisphere region increased 30
percent, contributing one-third of the revenue improvement over the prior year period. The
year-over-year increase reflects growth in the Middle East, Former Soviet Union (“FSU”) and the
North Sea area, attributable to new contract awards and improved market penetration. Smith
Technologies reported revenues of $601.8 million for the year ended December 31, 2005, an 18
percent increase over the prior year level. The year-over-year revenue growth resulted from
increased unit sales and rentals of diamond drill bits, as technological advancements in fixed
cutter drill bit manufacturing and design has influenced a shift from roller-cone toward diamond
drill bit product offerings. To a lesser extent, the impact of higher unit pricing and continued
demand for turbine products contributed to the year-over-year revenue improvement.
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
relatively balanced 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 year ended December 31, 2006, Smith Services reported revenues of $1.0 billion,
47 percent above the prior year period. The year-over-year revenue growth was significantly
influenced by increased demand for tubular products in the U.S. market. Excluding the impact of
tubular product sales, which are not highly correlated to drilling activity, business volumes
increased 29 percent above the prior year period. Two-thirds of the core business growth was
reported in North America, reflecting increased customer demand for premium remedial product and
service lines. The revenue growth in markets outside of North America was, again, driven by
increased demand for remedial product offerings, primarily in the Middle East, North Sea and FSU
regions. Smith Services reported revenues of $694.7 million for the year ended December 31, 2005,
a 41 percent increase over the amount reported in 2004. Excluding the effect of acquired
operations, revenues increased 34 percent influenced by higher worldwide exploration and production
spending levels. The majority of the base revenue growth was generated in North America, as
increased activity levels impacted tubular product sales, which were twice the level reported in
the prior year. Approximately one-third of the year-over-year base revenue growth was reported in
markets outside of North America, driven by strong demand for remedial product and service lines in
the Middle East and North Sea markets.
16
Operating Income
Operating income for the Oilfield segment was $1.0 billion, or 18.8 percent of revenues, for
the 2006 fiscal year period. The segment operating margins were 3.1 percentage points above the
prior year level with incremental operating income approximating 28 percent of revenues. The
operating margin growth was predominantly driven by increased business volumes, but was also favorably impacted by
an improved business
mix and pricing initiatives. To a lesser extent, the margin improvement was
influenced by improved general and administrative cost coverage. On an absolute dollar basis,
fiscal 2006 operating income increased $386.9 million over the prior year, largely attributable to
the impact of a 35 percent increase in business volumes on gross profit, mitigated by higher
variable-based operating expenses, including investment in personnel and infrastructure to support
the expanding business operations. For the year ended December 31, 2005, Oilfield operating income
was $625.4 million, or 15.7 percent of revenues. The year-over-year comparison to 2004 was
impacted by litigation-related charges, including $5.6 million and $31.4 million in 2005 and 2004,
respectively. Excluding the impact of these charges, segment operating margins increased 1.8
percentage points above the 2004 level. The year-over-year operating margin expansion primarily
reflects reduced operating expenses as a percentage of revenues associated with improved fixed cost
coverage in the sales and administrative functions. Gross margins improved slightly reflecting the
impact of increased fixed cost absorption in the segment’s manufacturing operations and higher unit
pricing, partially offset by a combination of an unfavorable shift in business mix and rising
commodity costs. Fiscal 2005 operating income increased $175.9 million over the 2004 period, net
of the litigation-related charges. The growth in operating income was attributable to the impact
of higher business volumes on gross profit, partially offset by higher variable-based operating
expenses associated with the expanding business base.
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 approximately 96 percent of Wilson’s 2006 revenues generated
in those markets. Moreover, approximately 28 percent of Wilson’s revenues relate to sales to the
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. For the year ended December 31, 2006,
Wilson reported revenues of $1.9 billion, 22 percent above the prior year. Two-thirds of the
revenue growth was generated by the upstream energy operations, reflecting higher spending by
exploration and production companies associated with increased North American drilling and
completion activity and the impact of new contract awards. Industrial and downstream sales volumes
grew 13 percent, influenced by increased customer spending related to line pipe projects. Wilson
reported revenues totaling $1.6 billion for the year ended December 31, 2005, an increase of 35
percent from the 2004 fiscal year. Approximately three-quarters of the revenue growth was
generated in the upstream energy operations reflecting higher spending by exploration and
production companies associated with increased North American drilling and completion activity, the
impact of new contract awards and strong demand for tubular products. Industrial and downstream
sales volumes grew 17 percent above 2004 levels, influenced by increased spending levels for line
pipe and maintenance and repair projects primarily in the engineering and construction and
petrochemical customer base.
Operating Income
Operating income for the Distribution segment in fiscal 2006 was $101.8 million, or 5.2
percent of revenues. The operating margin improvement of 1.2 percentage points reflects lower
operating expenses as a percentage of revenues and, to a lesser extent, gross margin expansion.
Incremental operating income was 11 percent of revenues, with the majority of the growth
attributable to the energy sector operations, influenced by increased coverage of fixed sales and
administrative costs. On an absolute dollar basis, segment operating income was $37.1 million
above the amount reported in 2005, impacted by a 22 percent increase in revenue volumes on the
segment’s reported gross profit, partially offset by higher variable-based operating expenses. For
the year ended December 31, 2005, operating income for the Distribution segment was $64.7 million,
or four percent of revenues. Distribution operating results increased $38.2 million over the
amount reported in 2004, equating to incremental operating income of nine percent of revenues.
Incremental operating income was driven by the energy sector operations reflecting increased
coverage of fixed sales and administrative costs. The lower expense ratio more than offset
deterioration in gross profit margins associated with increased tubular product costs and a higher
mix of project and export orders, which typically generate lower comparable margins.
17
Consolidated Discussion
For the periods indicated, the following table summarizes the consolidated results of
operations of the Company and presents these results as a percentage of total revenues (dollars in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Revenues |
|
$ |
7,333,559 |
|
|
|
100 |
|
|
$ |
5,579,003 |
|
|
|
100 |
|
|
$ |
4,419,015 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,344,271 |
|
|
|
32 |
|
|
|
1,685,138 |
|
|
|
30 |
|
|
|
1,351,939 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,264,190 |
|
|
|
17 |
|
|
|
1,014,577 |
|
|
|
18 |
|
|
|
913,175 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,080,081 |
|
|
|
15 |
|
|
|
670,561 |
|
|
|
12 |
|
|
|
438,764 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
62,967 |
|
|
|
1 |
|
|
|
44,446 |
|
|
|
1 |
|
|
|
38,762 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(2,982 |
) |
|
|
— |
|
|
|
(1,692 |
) |
|
|
— |
|
|
|
(1,300 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interests |
|
|
1,020,096 |
|
|
|
14 |
|
|
|
627,807 |
|
|
|
11 |
|
|
|
401,302 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
326,674 |
|
|
|
4 |
|
|
|
202,743 |
|
|
|
4 |
|
|
|
129,721 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
191,416 |
|
|
|
3 |
|
|
|
122,759 |
|
|
|
2 |
|
|
|
89,130 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
502,006 |
|
|
|
7 |
|
|
$ |
302,305 |
|
|
|
5 |
|
|
$ |
182,451 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 versus 2005
Consolidated revenues increased to $7.3 billion for the year ended December 31, 2006, 31
percent above the prior year period. The majority of the year-over-year revenue growth was
reported in the Oilfield segment attributable to a combination of higher worldwide drilling
activity, a favorable product and business mix and, to a lesser extent, improved pricing.
On a geographic basis, two-thirds of the revenue improvement was generated in the Western
Hemisphere market, which accounted for the majority of the
year-over-year increase in drilling activity levels.
The year-over-year revenue growth was also driven by
the strength in the Company’s international operations which reported
a 33 percent increase in revenues.
Gross profit totaled $2.3 billion, or 32 percent of revenues, two percentage points above the
gross profit margins generated in the comparable prior year period. Although the margin expansion
was largely driven by the impact of increased sales volumes on fixed manufacturing and service
infrastructure costs, an improved business mix and product pricing also had a favorable effect. On
an absolute dollar basis, gross profit was $659.1 million above the prior year period primarily
reflecting the increased sales volumes in the Oilfield operations.
Operating expenses, consisting of selling, general and administrative expenses increased
$249.6 million from the amount reported in the prior year; however, as a percentage of revenues
decreased 95 basis points. Improved fixed cost average in the sales and administrative functions
accounted for the operating expense percentage decline. The majority of the absolute dollar
increase was attributable to variable costs directly associated with the improved business volumes,
including increased investment in personnel and infrastructure. To a lesser extent, increased
employee profit-sharing amounts directly attributable to the reported profitability levels,
incremental operating expenses of acquired operations and stock-based compensation expense also
contributed to the year-over-year operating expense growth.
Net interest expense, which represents interest expense less interest income, totaled $60.0
million in 2006. Net interest expense increased $17.2 million from the prior year reflecting
higher average debt levels in 2006 due to borrowings related to the financing of several
acquisitions and, to a lesser extent, an increase in variable interest rates.
18
The effective tax rate approximated 32 percent, partially impacted by the settlement of a U.S.
tax audit that resulted in the release of certain deferred tax reserves during the second quarter
of 2006. Excluding the tax settlement, the effective rate was comparable to the level reported in
the prior year, but below 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 totaled $191.4 million in 2006, a
$68.7 million increase from the prior year. The year-over-year increase primarily reflects the
higher profitability of the M-I SWACO joint venture and, to a lesser extent, improved earnings
reported by CE Franklin Ltd.
2005 versus 2004
Consolidated revenues increased to $5.6 billion for the year ended December 31, 2005, 26
percent above the prior year period. The majority of the year-over-year dollar variance was
reported in the Oilfield segment primarily attributable to higher worldwide drilling activity. On
a geographic basis, two-thirds of the revenue improvement was generated in North America impacted
by a combination of increased land-based drilling activity, strong demand for tubular products and
improved pricing. Increased business volumes in markets outside North America also contributed to
the year-over-year revenue variance, reflecting higher customer spending levels and the impact of
new contract awards.
Gross profit totaled $1.7 billion, or 30 percent of revenues, less than one percentage point
below the gross profit margins generated in 2004. The modest decline in gross profit margins
reflects 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 also contributed to the reduction in consolidated gross profit
margins. On an absolute dollar basis, gross profit was $333.2 million above the prior year period
primarily reflecting the increased sales volumes in the Oilfield operations.
Operating expenses, consisting of selling, general and administrative expenses, increased
$101.4 million from the amount reported in the 2004 fiscal year. The year-over-year operating
expense variance was impacted by litigation-related charges, including $5.6 million recorded in
2005 and $28.8 million recognized during 2004, related to the settlement, legal fees and other
costs directly associated with a patent infringement case. Excluding the litigation-related
charges, operating expenses increased $124.6 million on an absolute dollar basis, but decreased two
percentage points from the prior year period, as a percentage of revenues. The majority of the
absolute dollar increase was attributable to variable costs directly associated with the improved
business volumes, including increased investment in personnel and infrastructure. To a lesser
extent, increased employee profit-sharing amounts directly attributable to the reported
profitability levels and stock-based compensation expense associated with restricted stock awards
also contributed to the year-over-year operating expense growth.
Net interest expense, which represents interest expense less interest income, totaled $42.8
million in 2005. Net interest expense increased $5.3 million from the 2004 level reflecting higher
average debt levels between the periods and, to a lesser extent, an increase in variable interest
rates.
The effective tax rate approximated 32 percent, which was comparable to the level reported in
2004, 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 totaled $122.8 million in 2005, a
$33.6 million increase from 2004. The year-over-year increase primarily reflects the higher
profitability of the M-I SWACO joint venture and, to a lesser extent, improved earnings reported by
CE Franklin Ltd.
19
Liquidity and Capital Resources
General
At December 31, 2006, cash and cash equivalents equaled $80.4 million. During 2006, the
Company generated $287.2 million of cash flows from operations, which is $67.8 million above the
amount reported in 2005. Increased profitability levels experienced by the Company were offset by
higher working capital investment required to support the significant increase in business volumes.
In 2006, cash flows used in investing activities totaled $470.9 million, primarily consisting
of amounts required to fund capital expenditures and acquisitions. The Company invested $257.7
million in property, plant and equipment, net of cash proceeds associated with certain asset
disposals, as well as, funds received related to property insurance claims. Acquisition funding,
which primarily related to the purchase of Specialised Petroleum Services Group Limited and Epcon
Offshore AS, resulted in cash outflows of $226.7 million in 2006.
Projected
net capital expenditures for 2007 are expected to approximate $285 million. The
modest increase in planned investment year-over-year is associated with growth in spending for the rental equipment fleet to support market
expansion efforts in the United States and certain key international regions. The majority of the 2007 capital spending
consists of investment for routine additions of rental tool and manufacturing equipment to support
the Company’s operations and maintenance of the Company’s capital equipment base.
Cash flows provided by financing activities totaled $199.5 million in 2006. Due to the higher
business volumes, which impacted the required investment in working capital, cash flows from
operations were not sufficient to fund investing activities, repurchases under the Company’s stock
buyback program and dividend payments. This resulted in incremental borrowings of $346.8 million
financed by the issuance of publicly-traded debt instruments and, to a lesser extent, the
negotiation of foreign-currency denominated term loans with two financial institutions.
The Company’s primary internal source of liquidity is cash flow generated from operations.
Cash flow generated from 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 December 31, 2006, the Company had $235.0 million of capacity available under its
U.S. revolving credit facilities for future operating, investing or financing needs. The Company
also has revolving credit facilities in place outside of the United States, which are generally
used to fund local operating needs. At the end of fiscal 2006, the Company had available borrowing
capacity of $112.7 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 December 31, 2006, 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.
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.
During 2005, the Company’s Board of Directors approved a quarterly cash dividend program. On
February 7, 2007, the Company’s Board of Directors increased the quarterly cash dividend to $0.10
per share. The current annualized payout of approximately $80 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.
20
In October 2005, the Company’s Board of Directors authorized a share repurchase program that
allows for the purchase of up to 20 million shares of the Company’s common stock, subject to
regulatory issues, market considerations and other relevant factors. As of December 31, 2006, the
Company had 17.3 million shares remaining under the current authorizations. Future repurchases
under the program may be executed from time to time in the open market or in privately negotiated
transactions and will be funded with cash flows from operations or amounts available under existing
credit facilities.
The Company believes that it has sufficient existing manufacturing capacity to meet current
demand for its products and services. Additionally, inflation has had a modest impact on the
Company’s financial results in the three most recent fiscal years, with the Company experiencing a
slight escalation in wages, transportation costs, as well as, petrochemical, steel and other
commodity prices during 2006. The Company expects to be able to continue to offset the impact of
cost inflation going forward through productivity gains and price increases.
The Company has not engaged in off-balance sheet financing arrangements through special
purpose entities, and the consolidation of the Company’s minority ownership positions would not
result in an increase in reported leverage ratios. The Company has no contractual arrangements in
place that could result in the issuance of additional shares of the Company’s common stock at a
future date other than the Company’s stock-based compensation program, which is discussed in Note
1, “Summary of Significant Accounting Policies,” and Note 15, “Long-Term Incentive Compensation.”
Contractual Obligations, Commitments and Contingencies
Contractual Obligations
The following table summarizes the Company’s debt maturities, estimated interest on fixed rate
long-term debt and future minimum payments under non-cancelable operating leases having initial
terms in excess of one year as of December 31, 2006 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Amount of Commitment Expiration per Period |
| |
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
| |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt maturities |
|
$ |
1,088,632 |
|
|
$ |
287,704 |
|
|
$ |
67,801 |
|
|
$ |
432,311 |
|
|
$ |
300,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on fixed rate
long-term debt |
|
|
245,065 |
|
|
|
39,983 |
|
|
|
62,700 |
|
|
|
50,944 |
|
|
|
91,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease commitments |
|
|
191,862 |
|
|
|
54,524 |
|
|
|
68,396 |
|
|
|
32,178 |
|
|
|
36,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,525,559 |
|
|
$ |
382,211 |
|
|
$ |
198,897 |
|
|
$ |
515,433 |
|
|
$ |
429,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the normal course of business, the Company enters into lease agreements with cancellation
provisions as well as agreements with initial terms of less than one year. The costs related to
these leases have been reflected in rent expense, which totaled $127.1 million in 2006, but have
been appropriately excluded from the future minimum payments presented in the table above. Amounts
related to commitments under capital lease agreements, as well as pension and other postretirement
obligations, were immaterial for the periods presented.
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 which
reinsure certain liability coverages of the Company’s insurance captive. Excluding the impact of
these instruments, for which $19.4 million of related liabilities are reflected in the accompanying
consolidated balance sheet, the Company was contingently liable for approximately $78.3 million of
standby letters of credit and bid, performance and surety bonds at December 31, 2006. Management
does not expect any material amounts to be drawn on these instruments.
Insurance
The Company maintains insurance coverage for various aspects of its business and operations.
The Company has elected to retain a portion of losses that occur through the use of deductibles and
retentions under its insurance programs. Amounts in excess of the self-insured retention levels
are fully insured to limits believed appropriate for the Company’s operations. Self-insurance
accruals are based on claims filed and an estimate for claims incurred but not reported. While
management believes that amounts accrued in the accompanying consolidated financial statements are
adequate for expected liabilities arising from the Company’s portion of losses, estimates of these
liabilities may change as circumstances develop.
21
Litigation
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 appealed the
verdict and does not anticipate a ruling until the third quarter of 2007. 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 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.
As of December 31, 2006, the Company’s environmental reserve totaled $8.4 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 December 31, 2006, the Company does not believe that
these differences will have a material impact on the Company’s financial position or results of
operations.
22
Critical Accounting Policies and Estimates
The discussion and analysis of financial condition and results of operations are based upon
the Company’s consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. The Company evaluates its estimates on an on-going basis, based on historical
experience and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following describes significant judgments and estimates used in the
preparation of its consolidated financial statements:
Allowance for doubtful accounts. The Company extends credit to customers and other parties in
the normal course of business. Management regularly reviews outstanding receivables and provides
for estimated losses through an allowance for doubtful accounts. In evaluating the level of
established reserves, management makes judgments regarding the parties’ ability to make required
payments, economic events and other factors. As the financial condition of these parties change,
circumstances develop or additional information becomes available, adjustments to the allowance
for doubtful accounts may be required.
Inventory reserves. The Company has made significant investments in inventory to service its
customers around the world. On a routine basis, the Company uses judgments in determining the
level of reserves required to state inventory at the lower of cost or market. Management’s
estimates are primarily influenced by technological innovations, market fundamentals and the
physical condition of products. Changes in these or other factors may result in adjustments to
the carrying value of inventory.
Goodwill. The Company has acquired a number of operations during the past decade, which has
resulted in the recording of a material amount of goodwill. Under SFAS No. 142, “Goodwill and
Other Intangible Assets,” the Company is required to perform an annual goodwill impairment
evaluation, which is largely influenced by future cash flow projections. Estimating future cash
flows of the Company’s operations requires management to make judgments about future operating
results and working capital requirements. Although the majority of the goodwill relates to the
Company’s Oilfield operations, $40.7 million of goodwill relates to Distribution transactions.
Changes in cash flow assumptions or other factors that negatively impact the fair value of the
operations would influence the evaluation and may result in the determination that a portion of
the goodwill is impaired when the annual analysis is performed.
Self-Insurance. The Company maintains insurance coverage for various aspects of its business and
operations. The Company retains a portion of losses that occur through the use of deductibles
and retentions under self-insurance programs. Management regularly reviews estimates of reported
and unreported claims and provides for losses through insurance reserves. As claims develop and
additional information becomes available, adjustments to loss reserves may be required.
Income taxes. Deferred tax assets and liabilities are recognized for differences between the
book basis and tax basis of the net assets of the Company. In providing for deferred taxes,
management considers current tax regulations, estimates of future taxable income and available
tax planning strategies. In certain cases, management has established reserves to reduce
deferred tax assets to estimated realizable value. If tax regulations, operating results or the
ability to implement tax planning strategies vary, adjustments to the carrying value of deferred
tax assets and liabilities may be required.
Environmental Obligations. The Company records liabilities for environmental obligations when
remedial efforts are probable and the costs can be reasonably estimated. Management’s estimates
are based on currently enacted laws and regulations. As more information becomes available or
environmental laws and regulations change, such liabilities may be required to be adjusted.
Additionally, in connection with acquisitions, the Company generally obtains indemnifications
from the seller related to environmental matters. If the indemnifying parties do not fulfill
their obligations, adjustments of recorded amounts may be required.
23
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting
Standards Board (“FASB”) that are adopted by the Company as of the specified effective date.
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting
and disclosure requirements for uncertainty in tax positions. FIN 48 requires a two-step approach
to evaluate tax positions and determine if they should be recognized in the financial statements.
This approach involves recognizing any tax positions that are “more likely than not” to occur and
then measuring those positions to determine if they are recognizable in the financial statements.
The provisions of FIN 48 are effective and the Company will adopt the interpretation in the first
quarter of 2007. Based on our evaluation as of December 31, 2006, we do not expect the adoption of
FIN 48 to have a material impact on our consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). Effective December 31,
2006, SFAS 158 requires recognition of the funded status of an entity’s defined benefit pension and
other postretirement benefit plans as an asset or liability in the Company’s consolidated balance
sheet. Subsequent changes to the funded status are to be recognized through stockholders’ equity
as a component of comprehensive income. In addition, for fiscal years ending after December 15,
2008, SFAS 158 requires the adoption of certain provisions related to the measurement date of
obligations and assets used to calculate the funded status. The December 31, 2006 adoption of the
recognition provisions of SFAS 158 did not have a material impact on the Company’s consolidated
financial position or results of operations. We do not expect the remaining elements of the
Statement to have a material impact on our consolidated financial statements.
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 financial statements upon
adoption.
24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from changes in interest rates and foreign exchange
rates and enters into various hedging transactions to mitigate these risks. The Company does not
use financial instruments for trading or speculative purposes. See Note 10, “Financial
Instruments,” to the Consolidated Financial Statements for additional discussion of hedging
instruments.
The Company’s exposure to interest rate changes is managed through the use of a combination of
fixed and floating rate debt and by entering into interest rate contracts, from time to time, on a
portion of its long-term borrowings. The Company had no interest rate contracts outstanding as of
December 31, 2006 and 2005. At December 31, 2006, 35 percent of the Company’s long-term debt
carried a variable interest rate. Management believes that significant interest rate changes will
not have a material near-term impact on the Company’s future earnings or cash flows.
The Company’s exposure to changes in foreign exchange rates is managed primarily through the
use of forward exchange contracts. These contracts increase or decrease in value as foreign
exchange rates change, to protect the value of the underlying transactions denominated in foreign
currencies. All currency contracts are components of the Company’s hedging program and are entered
into for the sole purpose of hedging an existing or anticipated currency exposure. The gains and
losses on these contracts offset changes in the value of the related exposures. The terms of these
contracts generally do not exceed two years. As of December 31, 2006, the notional amounts of fair
value hedge contracts and cash flow hedge contracts outstanding were $126.9 million and $20.8
million, respectively, and the fair value was less than the notional amount of these contracts by
$0.2 million. As of December 31, 2005, the notional amount of fair value hedge contracts and cash
flow hedge contracts outstanding were $99.8 million and $40.4 million, respectively, and the fair
value was less than the notional amount of these contracts by $1.7 million. In some areas, where
hedging is not cost effective, the Company addresses foreign currency exposure utilizing working
capital management.
The Company utilizes a “Value-at-Risk” (“VAR”) model to determine the maximum potential
one-day loss in the fair value of its foreign exchange sensitive financial instruments. The VAR
model estimates were made assuming normal market conditions and a 95 percent confidence level. The
Company’s VAR computations are based on the historical price movements in various currencies (a
“historical” simulation) during the year. The model includes all of the Company’s foreign exchange
derivative contracts. Anticipated transactions, firm commitments and assets and liabilities
denominated in foreign currencies, which certain of these instruments are intended to hedge, were
excluded from the model. The VAR model is a risk analysis tool and does not purport to represent
actual losses in fair value that will be incurred by the Company, nor does it consider the
potential effect of favorable changes in market factors. The estimated maximum potential one-day
loss in fair value of currency sensitive instruments, calculated using the VAR model, was not
material to the Company’s financial position or results of operations.
25
Item 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rule 13a — 15(f) under the Securities Exchange Act
of 1934. The Company’s internal control over financial reporting is designed to provide
reasonable, not absolute, assurance to the Company’s management and board of directors regarding
the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable, not absolute, assurance with respect to financial statement preparation and
presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over
financial reporting based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that the Company’s internal control over financial reporting was effective as
of December 31, 2006.
Management’s assessment of the effectiveness of internal control over financial reporting as of
December 31, 2006 has been audited by Deloitte & Touche LLP, the independent registered public
accounting firm who also audited the Company’s consolidated financial statements. The Deloitte &
Touche LLP attestation report on management’s assessment of the Company’s internal control over
financial reporting appears on page 27 of this Annual Report on Form 10-K.
| |
|
|
|
|
/s/ Doug Rock
|
|
/s/ Margaret K. Dorman |
|
|
|
|
Margaret K. Dorman
|
|
|
Chairman of the Board and
|
|
Senior Vice President, |
|
|
Chief Executive Officer
|
|
Chief Financial Officer and Treasurer |
|
|
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Smith International, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Smith International, Inc. and subsidiaries (the
“Company”) maintained effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on
the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of
December 31, 2006, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended December 31, 2006 of the Company and our report dated February 28, 2007
expressed an unqualified opinion on those financial statements and financial statement schedule and
included an explanatory paragraph regarding the Company’s adoption of new accounting standards.
DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2007
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Smith International, Inc.:
We have audited the accompanying consolidated balance sheets of Smith International, Inc. and
subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of
the three years in the period ended December 31, 2006. Our audits also included the financial
statement schedule listed in Part IV, Item 15 (a) (2). These financial statements and the financial
statement schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Smith International, Inc. and subsidiaries as of December 31, 2006 and
2005, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2006, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards (“SFAS”) No. 123r, “Share-Based Payment” as of January 1, 2006 and
SFAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans” as
of December 31, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 28, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness
of the Company’s internal control over financial reporting and an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2007
28
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
80,379 |
|
|
$ |
62,543 |
|
Receivables, net (Note 1) |
|
|
1,592,230 |
|
|
|
1,200,289 |
|
Inventories, net |
|
|
1,457,371 |
|
|
|
1,059,992 |
|
Deferred tax assets, net |
|
|
51,070 |
|
|
|
48,467 |
|
Prepaid expenses and other |
|
|
89,977 |
|
|
|
65,940 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,271,027 |
|
|
|
2,437,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net |
|
|
887,044 |
|
|
|
665,389 |
|
|
|
|
|
|
|
|
|
|
Goodwill, net |
|
|
867,647 |
|
|
|
737,048 |
|
|
|
|
|
|
|
|
|
|
Other Intangible Assets, net |
|
|
141,140 |
|
|
|
78,779 |
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
168,617 |
|
|
|
141,467 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
5,335,475 |
|
|
$ |
4,059,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt |
|
$ |
287,704 |
|
|
$ |
133,650 |
|
Accounts payable |
|
|
654,215 |
|
|
|
479,206 |
|
Accrued payroll costs |
|
|
154,756 |
|
|
|
108,419 |
|
Income taxes payable |
|
|
130,339 |
|
|
|
91,303 |
|
Other |
|
|
152,454 |
|
|
|
120,575 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,379,468 |
|
|
|
933,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
800,928 |
|
|
|
610,857 |
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities |
|
|
143,124 |
|
|
|
107,838 |
|
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities |
|
|
102,904 |
|
|
|
86,853 |
|
|
|
|
|
|
|
|
|
|
Minority Interests |
|
|
922,114 |
|
|
|
742,708 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 17) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
Preferred stock, $1 par value; 5,000 shares authorized; no shares
issued or outstanding in 2006 or 2005 |
|
|
— |
|
|
|
— |
|
Common stock, $1 par value; 250,000 shares authorized; 214,947
shares issued in 2006 (213,270 shares issued in 2005) |
|
|
214,947 |
|
|
|
213,270 |
|
Additional paid-in capital |
|
|
442,155 |
|
|
|
383,695 |
|
Retained earnings |
|
|
1,653,480 |
|
|
|
1,215,483 |
|
Accumulated other comprehensive income |
|
|
23,227 |
|
|
|
6,901 |
|
Less – Treasury securities, at cost; 15,031 common shares in 2006
(12,301 common shares in 2005) |
|
|
(346,872 |
) |
|
|
(240,844 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
1,986,937 |
|
|
|
1,578,505 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity |
|
$ |
5,335,475 |
|
|
$ |
4,059,914 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
29
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues |
|
$ |
7,333,559 |
|
|
$ |
5,579,003 |
|
|
$ |
4,419,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
4,989,288 |
|
|
|
3,893,865 |
|
|
|
3,067,076 |
|
Selling expenses |
|
|
969,825 |
|
|
|
786,668 |
|
|
|
685,272 |
|
General and administrative expenses |
|
|
294,365 |
|
|
|
227,909 |
|
|
|
227,903 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
6,253,478 |
|
|
|
4,908,442 |
|
|
|
3,980,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,080,081 |
|
|
|
670,561 |
|
|
|
438,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
62,967 |
|
|
|
44,446 |
|
|
|
38,762 |
|
Interest income |
|
|
(2,982 |
) |
|
|
(1,692 |
) |
|
|
(1,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
|
1,020,096 |
|
|
|
627,807 |
|
|
|
401,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
326,674 |
|
|
|
202,743 |
|
|
|
129,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
191,416 |
|
|
|
122,759 |
|
|
|
89,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
502,006 |
|
|
$ |
302,305 |
|
|
$ |
182,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.51 |
|
|
$ |
1.50 |
|
|
$ |
0.90 |
|
Diluted |
|
|
2.49 |
|
|
|
1.48 |
|
|
|
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
200,252 |
|
|
|
201,651 |
|
|
|
202,664 |
|
Diluted |
|
|
202,008 |
|
|
|
204,522 |
|
|
|
205,138 |
|
The accompanying notes are an integral part of these financial statements.
30
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
502,006 |
|
|
$ |
302,305 |
|
|
$ |
182,451 |
|
Adjustments to reconcile net income to net cash provided
by operating activities, excluding the net effects of
acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
191,416 |
|
|
|
122,759 |
|
|
|
89,130 |
|
Depreciation and amortization |
|
|
150,384 |
|
|
|
117,722 |
|
|
|
106,493 |
|
Share-based compensation expense |
|
|
27,280 |
|
|
|
5,947 |
|
|
|
684 |
|
Increase in LIFO inventory reserves |
|
|
18,942 |
|
|
|
22,144 |
|
|
|
28,177 |
|
Provision for losses on receivables |
|
|
7,578 |
|
|
|
4,216 |
|
|
|
3,846 |
|
Deferred income tax provision (benefit) |
|
|
3,737 |
|
|
|
10,636 |
|
|
|
(1,764 |
) |
Foreign currency translation losses |
|
|
3,376 |
|
|
|
1,213 |
|
|
|
1,790 |
|
Gain on disposal of property, plant and equipment |
|
|
(18,893 |
) |
|
|
(14,812 |
) |
|
|
(10,592 |
) |
Equity earnings, net of dividends received |
|
|
(9,247 |
) |
|
|
(10,420 |
) |
|
|
(5,217 |
) |
Gain on sale of operations |
|
|
(6,473 |
) |
|
|
(5,898 |
) |
|
|
— |
|
Patent litigation-related charges |
|
|
— |
|
|
|
5,640 |
|
|
|
31,439 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(364,834 |
) |
|
|
(243,882 |
) |
|
|
(153,066 |
) |
Inventories |
|
|
(412,748 |
) |
|
|
(197,204 |
) |
|
|
(167,879 |
) |
Accounts payable |
|
|
161,111 |
|
|
|
105,832 |
|
|
|
61,669 |
|
Patent litigation-related payments |
|
|
— |
|
|
|
(31,040 |
) |
|
|
(6,039 |
) |
Other current assets and liabilities |
|
|
57,699 |
|
|
|
40,292 |
|
|
|
27,292 |
|
Other non-current assets and liabilities |
|
|
(24,126 |
) |
|
|
(15,996 |
) |
|
|
(6,240 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
287,208 |
|
|
|
219,454 |
|
|
|
182,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
|
(226,727 |
) |
|
|
(81,328 |
) |
|
|
(72,350 |
) |
Purchases of property, plant and equipment |
|
|
(308,470 |
) |
|
|
(177,845 |
) |
|
|
(111,449 |
) |
Proceeds from disposal of property, plant and equipment |
|
|
35,743 |
|
|
|
26,426 |
|
|
|
20,679 |
|
Proceeds from settlement of property insurance claims |
|
|
15,026 |
|
|
|
— |
|
|
|
— |
|
Proceeds from sale of operations |
|
|
13,504 |
|
|
|
20,496 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(470,924 |
) |
|
|
(212,251 |
) |
|
|
(163,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
803,635 |
|
|
|
187,804 |
|
|
|
68,858 |
|
Principal payments of long-term debt |
|
|
(426,557 |
) |
|
|
(57,592 |
) |
|
|
(85,832 |
) |
Net change in short-term borrowings |
|
|
(30,299 |
) |
|
|
14,478 |
|
|
|
54,114 |
|
Debt issuance costs |
|
|
(4,744 |
) |
|
|
— |
|
|
|
— |
|
Purchases of common stock under Repurchase Program |
|
|
(102,894 |
) |
|
|
(117,820 |
) |
|
|
(92,002 |
) |
Payment of
common stock dividends |
|
|
(60,074 |
) |
|
|
(36,353 |
) |
|
|
— |
|
Net proceeds related to long-term incentive awards |
|
|
20,393 |
|
|
|
39,847 |
|
|
|
61,016 |
|
Distributions to minority interest partner |
|
|
— |
|
|
|
(28,000 |
) |
|
|
(23,200 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
199,460 |
|
|
|
2,364 |
|
|
|
(17,046 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
2,092 |
|
|
|
(620 |
) |
|
|
302 |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
17,836 |
|
|
|
8,947 |
|
|
|
2,310 |
|
Cash and cash equivalents at beginning of year |
|
|
62,543 |
|
|
|
53,596 |
|
|
|
51,286 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
80,379 |
|
|
$ |
62,543 |
|
|
$ |
53,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
62,161 |
|
|
$ |
44,217 |
|
|
$ |
38,158 |
|
Cash paid for income taxes |
|
|
291,981 |
|
|
|
177,697 |
|
|
|
111,568 |
|
The accompanying notes are an integral part of these financial statements.
31
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2006, 2005 and 2004
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Treasury Securities |
|
|
|
|
| |
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Common Stock |
|
|
Total |
|
| |
|
Number of |
|
|
|
|
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Number of |
|
|
|
|
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
Balance, January 1, 2004 |
|
|
102,720,306 |
|
|
$ |
102,720 |
|
|
$ |
371,438 |
|
|
$ |
779,123 |
|
|
$ |
11,625 |
|
|
|
(2,384,108 |
) |
|
$ |
(29,130 |
) |
|
$ |
1,235,776 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
182,451 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
182,451 |
|
Currency translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,963 |
|
|
|
— |
|
|
|
— |
|
|
|
14,963 |
|
Changes in unrealized fair value of derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,471 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,471 |
) |
Minimum pension liability adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
287 |
|
|
|
— |
|
|
|
— |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
182,451 |
|
|
|
12,779 |
|
|
|
— |
|
|
|
— |
|
|
|
195,230 |
|
Purchases of common stock under Repurchase Program |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,807,600 |
) |
|
|
(92,002 |
) |
|
|
(92,002 |
) |
Exercise of
stock options and non-employee equity awards |
|
|
2,560,347 |
|
|
|
2,561 |
|
|
|
60,273 |
|
|
|
— |
|
|
|
— |
|
|
|
(30,758 |
) |
|
|
(1,727 |
) |
|
|
61,107 |
|
Vesting of restricted stock |
|
|
16,000 |
|
|
|
16 |
|
|
|
684 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
105,296,653 |
|
|
|
105,297 |
|
|
|
432,395 |
|
|
|
961,574 |
|
|
|
24,404 |
|
|
|
(4,222,466 |
) |
|
|
(122,859 |
) |
|
|
1,400,811 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
302,305 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
302,305 |
|
Currency translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,635 |
) |
|
|
— |
|
|
|
— |
|
|
|
(14,635 |
) |
Changes in unrealized fair value of derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,044 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,044 |
) |
Minimum pension liability adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(824 |
) |
|
|
— |
|
|
|
— |
|
|
|
(824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
302,305 |
|
|
|
(17,503 |
) |
|
|
— |
|
|
|
— |
|
|
|
284,802 |
|
Purchases of common stock under Repurchase Program |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,198,800 |
) |
|
|
(117,820 |
) |
|
|
(117,820 |
) |
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(48,396 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(48,396 |
) |
Exercise of
stock options and non-employee equity awards |
|
|
1,749,605 |
|
|
|
1,749 |
|
|
|
51,542 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
53,291 |
|
Vesting of restricted stock |
|
|
34,632 |
|
|
|
35 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,276 |
) |
|
|
(165 |
) |
|
|
(130 |
) |
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
5,947 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,947 |
|
Two-for-one common stock split (Note 12) |
|
|
106,188,814 |
|
|
|
106,189 |
|
|
|
(106,189 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5,875,386 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
213,269,704 |
|
|
|
213,270 |
|
|
|
383,695 |
|
|
|
1,215,483 |
|
|
|
6,901 |
|
|
|
(12,300,928 |
) |
|
|
(240,844 |
) |
|
|
1,578,505 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
502,006 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
502,006 |
|
Currency translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12,407 |
|
|
|
— |
|
|
|
— |
|
|
|
12,407 |
|
Changes in unrealized fair value of derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,425 |
|
|
|
— |
|
|
|
— |
|
|
|
2,425 |
|
Minimum pension liability adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
857 |
|
|
|
— |
|
|
|
— |
|
|
|
857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
502,006 |
|
|
|
15,689 |
|
|
|
— |
|
|
|
— |
|
|
|
517,695 |
|
Impact of SFAS 158 adoption (Note 1 and 13) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
637 |
|
|
|
— |
|
|
|
— |
|
|
|
637 |
|
Purchases of common stock under Repurchase Program |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,656,987 |
) |
|
|
(102,894 |
) |
|
|
(102,894 |
) |
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(64,009 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(64,009 |
) |
Exercise of stock options and non-employee equity awards |
|
|
1,376,213 |
|
|
|
1,376 |
|
|
|
31,180 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,556 |
|
Vesting of restricted stock |
|
|
300,834 |
|
|
|
301 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(73,163 |
) |
|
|
(3,134 |
) |
|
|
(2,833 |
) |
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
27,280 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
214,946,751 |
|
|
$ |
214,947 |
|
|
$ |
442,155 |
|
|
$ |
1,653,480 |
|
|
$ |
23,227 |
|
|
|
(15,031,078 |
) |
|
$ |
(346,872 |
) |
|
$ |
1,986,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
32
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts are expressed in thousands, unless otherwise noted)
1. Summary of Significant Accounting Policies
Basis of Presentation
Smith International, Inc. (“Smith” or the “Company”) provides premium products and services to
the oil and gas exploration and production industry. The accompanying consolidated financial
statements were prepared in accordance with accounting principles generally accepted in the United
States and all applicable financial statement rules and regulations of the Securities and Exchange
Commission (the “Commission”). Management believes the consolidated financial statements present
fairly the financial position, results of operations and cash flows of the Company as of the dates
indicated.
The consolidated financial statements include the accounts of the Company and all wholly and
majority-owned subsidiaries, after the elimination of all significant intercompany accounts and
transactions. Investments in affiliates in which ownership interest ranges from 20 to 50 percent,
and the Company exercises significant influence over operating and financial policies, are
accounted for on the equity method. All other investments are carried at cost, which does not
exceed the estimated net realizable value of such investments.
Stock Split
In July 2005, the Company’s Board of Directors approved a two-for-one stock split, which was
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. Unless otherwise noted,
the 2004 share and earnings per share amounts included in the accompanying consolidated financial
statements and related notes have been restated for the effect of the stock split.
Use of Estimates
Preparation of financial statements in conformity with accounting principles generally
accepted in the United States 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. Management believes the most
significant estimates and assumptions are associated with the valuation of accounts receivable,
inventories, goodwill and deferred taxes as well as the determination of liabilities related to
environmental obligations and self-insurance programs. 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 financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased with an original
maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts to provide for receivables which may
ultimately be uncollectible. Reserves are determined in light of a number of factors including
customer specific conditions, economic events and the Company’s historical loss experience. At
December 31, 2006 and 2005, the allowance for doubtful accounts was $16.7 million and $13.9
million, respectively.
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, certain of the Company’s
U.S.-based inventories are valued utilizing the last-in, first-out (“LIFO”) method. Inventory
costs consist of materials, labor and factory overhead.
33
Fixed Assets
Fixed assets, consisting of rental equipment and property, plant and equipment, are stated at
cost, net of accumulated depreciation. The Company computes depreciation on fixed assets using
principally the straight-line method; however, for income tax purposes, accelerated methods of
depreciation are used. The estimated useful lives used in computing depreciation generally range
from 20 to 40 years for buildings, three to 25 years for machinery and equipment, and five to ten
years for rental equipment. Leasehold improvements are amortized over the initial lease term or
the estimated useful lives of the improvements, whichever is shorter. Depreciation expense for the
years ended December 31, 2006, 2005 and 2004 was $129.6 million, $106.8 million and $96.9 million,
respectively.
Costs of major renewals and betterments are capitalized as fixed assets; however, expenditures
for maintenance, repairs and minor improvements are charged to expense when incurred. When fixed
assets are sold or retired, the remaining cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is included in the consolidated statement of
operations.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the fair value of net assets acquired. Recorded
goodwill balances are not amortized but, instead, are evaluated for impairment annually or more
frequently if circumstances indicate that an impairment may exist. The goodwill valuation, which
is prepared during the first quarter of each calendar year, is largely influenced by projected
future cash flows and, therefore, is significantly impacted by estimates and judgments.
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 generally consist of patents, license agreements, non-compete agreements,
trademarks and customer lists and contracts.
Impairment of Long-Lived Assets
Management reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If an evaluation is
required, the estimated undiscounted future cash flows associated with the asset will be compared
to the asset’s carrying amount to determine if an impairment exists.
Environmental Obligations
Expenditures for environmental obligations that relate to current operations are expensed or
capitalized, as appropriate. Liabilities are recorded when environmental clean-up efforts are
probable and their cost is reasonably estimated, and are adjusted as further information is
obtained. Such estimates are based on currently enacted laws and regulations and are not
discounted to present value.
Liabilities Related to Self-Insurance Programs
The Company is self-insured for certain casualty and employee medical insurance liabilities of
its U.S. operations. Expenditures for casualty and medical claims are recorded when incurred after
taking into consideration recoveries available under stop-loss insurance policies. Additionally,
reserves are established to provide for the estimated cost of settling known claims as well as
medical and casualty exposures projected to have been incurred but not yet reported.
Foreign Currency Translation and Transactions
Gains and losses resulting from balance sheet translation of operations outside the United
States where the applicable foreign currency is the functional currency are included as a component
of accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting
from balance sheet translation of operations outside the United States where the U.S. dollar is the
functional currency are included in the consolidated statements of operations.
Gains and losses resulting from foreign currency transactions, excluding cash flow hedges
discussed below, are recognized currently in the consolidated statements of operations.
34
Financial Instruments
The nature of the Company’s business activities involves the management of various financial
and market risks, including those related to changes in currency exchange rates and interest rates.
The Company utilizes derivative financial instruments such as foreign exchange contracts, foreign
exchange options and interest rate contracts to mitigate or eliminate certain of those risks. The
Company does not enter into derivative instruments for speculative purposes.
The Company records changes in fair market value related to fair value hedges, which includes
foreign exchange contracts, to general and administrative expenses in the consolidated statements
of operations. Changes in value related to cash flow hedges, which includes foreign exchange
contracts, foreign exchange options and interest rate swaps, are recorded in accumulated other
comprehensive income and are recognized in the consolidated statement of operations when the hedged
item affects earnings.
Income Taxes
The Company accounts for income taxes using an asset and liability approach for financial
accounting and income tax reporting based on enacted tax rates. Deferred tax assets are reduced by
a valuation allowance when it is more likely than not that some portion, or all, of the deferred
tax assets will not be realized.
Revenue Recognition
The Company’s revenues, which are composed of product, rental, service and other revenues, are
generally subject to contractual arrangements which specify price and general terms and conditions.
The Company recognizes product revenues, net of applicable provisions for returns, when title and
the related risk of loss transfers to the customer. Rental, service and other revenues are
recorded when such services are performed and collectibility is reasonably assured.
Minority Interests
The Company records minority interest expense which reflects the portion of the earnings of
majority-owned operations which are applicable to the minority interest partners. The minority
interest amount primarily represents the share of the M-I SWACO profits associated with the
minority partner’s 40 percent interest in those operations. To a lesser extent, minority interests
include the portion of CE Franklin Ltd. and United Engineering Services LLC earnings applicable to
the respective minority shareholders.
Long-term Incentive Compensation
The Company’s Board of Directors and its stockholders have authorized a long-term incentive
plan for the benefit of key employees. Although the Plan provides for the issuance of various
stock-based awards, the Compensation Committee has elected to issue restricted stock units and,
prior to December, 2005, stock option awards.
Restricted stock units are considered compensatory awards and compensation expense related to
these units is recognized over the established vesting period in the accompanying consolidated
financial statements.
Accounting for the stock option program however, was impacted by the mandatory adoption of
Statement of Financial Accounting Standards (“SFAS”) No. 123r, “Share-Based Payment,” (“SFAS No.
123r”) on January 1, 2006. In connection with the implementation, we utilized the modified
prospective method; and, accordingly, results for prior periods have not been restated. Prior to
January 1, 2006, companies could 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. Accordingly, for fiscal periods prior to January 1, 2006,
the Company has elected to make pro forma footnote disclosures rather than recognizing the related
compensation expense for stock option awards in the consolidated financial statements.
35
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):
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
Net income, as reported |
|
$ |
302,305 |
|
|
$ |
182,451 |
|
Add: Stock-based compensation expense included in reported income,
net of related tax effect |
|
|
3,952 |
|
|
|
444 |
|
Less: Total stock-based compensation expense determined
under fair value methods, net of related tax effect |
|
|
(13,056 |
) |
|
|
(11,364 |
) |
|
|
|
|
|
|
|
Net income, pro forma |
|
$ |
293,201 |
|
|
$ |
171,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
As reported: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.50 |
|
|
$ |
0.90 |
|
Diluted |
|
|
1.48 |
|
|
|
0.89 |
|
Pro forma: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.45 |
|
|
$ |
0.85 |
|
Diluted |
|
|
1.43 |
|
|
|
0.84 |
|
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting
Standards Board (“FASB”) that are adopted by the Company as of the specified effective date.
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and
disclosure requirements for uncertainty in tax positions. FIN 48 requires a two-step approach to
evaluate tax positions and determine if they should be recognized in the financial statements.
This approach involves recognizing any tax positions that are “more likely than not” to occur and
then measuring those positions to determine if they are recognizable in the financial statements.
The provisions of FIN 48 are effective and the Company will adopt the interpretation in the first
quarter of 2007. Based on our evaluation as of December 31, 2006, we do not expect the adoption of
FIN 48 to have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and
132(R)” (“SFAS 158”). Effective December 31, 2006, SFAS 158 requires recognition of the funded
status of an entity’s defined benefit pension and other postretirement benefit plans as an asset or
liability in the Company’s consolidated balance sheet. Subsequent changes to the funded status are
to be recognized through stockholders’ equity as a component of comprehensive income. In addition,
for fiscal years ending after December 15, 2008, SFAS 158 requires the adoption of certain
provisions related to the measurement date of obligations and assets used to calculate the funded
status. The December 31, 2006 adoption of the recognition provisions of SFAS 158 did not have a
material impact on the Company’s consolidated financial position or results of operations. We do
not expect the remaining elements of the Statement to have a material impact on our consolidated
financial statements.
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 financial statements upon
adoption.
2. Patent Litigation
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 was a patent infringement claim alleging that certain roller cone
drill bits made by the Company infringed several U.S. patents owned by Halliburton. The case was
tried in the second quarter of 2004, and the Company recorded a litigation-related charge based on
management’s best estimate of its potential exposure. This 2004 charge, which consisted of an
estimated loss provision, legal fees and other directly related costs, totaled $31.4 million, or
$20.4 million on an after-tax basis.
In December 2005, the Company reached final settlement with Halliburton regarding all
outstanding drill bit patent litigation matters. In connection with the settlement, the Company
recorded an additional $5.6 million litigation-related charge, or $3.7 million on an after-tax
basis, which included legal fees and other costs directly associated with the settlement.
36
3. Business Combinations
During 2006, the Company completed seven acquisitions in exchange for aggregate cash
consideration of $226.7 million and the assumption of certain liabilities. The 2006
transactions primarily consist of the following:
On February 23, 2006, M-I SWACO acquired Epcon Offshore AS (“Epcon”) in exchange for cash
consideration of approximately $44.9 million. Epcon, based in Porsgrunn, Norway, is a global
provider of proprietary water treatment technology designed to optimize the removal of
hydrocarbons from water generated during the oil and gas production process.
On August 3, 2006, M-I SWACO acquired Specialised Petroleum Services Group Limited (“SPS”) in
exchange for cash consideration of approximately $165.4 million. SPS, based in Aberdeen,
Scotland, is a global provider of patented well-bore clean-up products and engineering services
used to remove debris from the wellbore to facilitate improved well production.
The excess of the purchase price over the estimated fair value of the net assets acquired
amounted to $129.3 million, which has been recorded as goodwill in the accompanying consolidated
balance sheet. Based on the structure of the transactions, the majority of the goodwill related to
the 2006 acquisitions is not expected to be deductible for tax purposes. The purchase price
allocation related to the 2006 acquisitions is based on preliminary information and is 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.
During 2005, the Company completed six acquisitions in exchange for aggregate cash
consideration of $81.3 million and the assumption of certain liabilities. The 2005 transactions
primarily consist of the following:
On August 17, 2005, Smith Services acquired certain operating assets of Tubular Technology, Inc.
and associated companies for cash consideration of $23.2 million. The acquired operations
provide a full range of products and services used during 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, primarily to customers in the U.S. Gulf
Coast region.
On November 1, 2005, Smith Services acquired certain operating assets of Nunez Oil Field Pipe,
Ltd. and associated companies for cash consideration of $41.4 million. The acquired companies
rent and repair premium drill pipe, drill collars, and blow-out preventers and perform machine
shop and related inspection services in the United States.
The excess of the purchase price over the estimated fair value of the net assets acquired
amounted to $23.4 million, which has been recorded as goodwill in the accompanying consolidated
balance sheet.
During 2004, the Company completed six acquisitions in exchange for aggregate cash
consideration of $49.2 million and the assumption of certain liabilities. In addition, cash
payments of $23.2 million were made during the year to former shareholders of businesses acquired
in 2002 to fund amounts due under earn-out arrangements and repay seller-financed notes. The 2004
transactions primarily consist of the following:
On January 31, 2004, M-I SWACO acquired certain specialty chemical assets of Fortum Oil and Gas
OY for cash consideration of $11.4 million. The acquired operations, formerly based in Finland,
manufacture and market specialty chemical products which improve hydrocarbon flow rates.
On July 31, 2004, Smith Services acquired certain operating assets of CanFish Services for cash
consideration of $17.5 million. The acquired operations provide fishing, milling, casing exit,
pipe recovery and related wireline services in the United States and Canada.
The excess of the purchase price over the estimated fair value of the net assets acquired
amounted to $15.9 million and has been recorded as goodwill in the accompanying consolidated
balance sheet.
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. Pro forma results of operations have
not been presented because the effect of these acquisitions was not material to the Company’s
consolidated financial statements.
37
The following schedule summarizes investing activities related to 2006, 2005 and 2004
acquisitions included in the consolidated statements of cash flows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Fair value of tangible and identifiable intangible assets, net of
cash acquired |
|
$ |
171,125 |
|
|
$ |
68,597 |
|
|
$ |
44,103 |
|
Goodwill acquired |
|
|
129,278 |
|
|
|
23,444 |
|
|
|
15,860 |
|
Payments to former shareholders of businesses acquired |
|
|
— |
|
|
|
— |
|
|
|
23,162 |
|
Total liabilities assumed |
|
|
(73,676 |
) |
|
|
(10,713 |
) |
|
|
(10,775 |
) |
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
$ |
226,727 |
|
|
$ |
81,328 |
|
|
$ |
72,350 |
|
|
|
|
|
|
|
|
|
|
|
4. Business Dispositions
From time to time, the Company divests of select business operations. During the years ended
December 31, 2006 and 2005, the Company completed the disposition of its ownership interest in
certain Oilfield operations in exchange for aggregate cash consideration of $13.5 million and $20.5
million, respectively. These transactions resulted in an aggregate pre-tax gain of approximately
$6.5 million and $5.9 million for the year’s ended December 31, 2006, and 2005, respectively. The
impact of these dispositions has been reflected as a reduction in general and administrative
expenses in the accompanying consolidated statements of operations for the respective periods.
After taking into consideration taxes and minority interests, the transactions impacted net income
by $3.2 million and $3.7 million for the years ended December 31, 2006 and 2005, respectively.
5. Earnings Per Share
Basic earnings per share (“EPS”) is computed using the weighted average number of common
shares outstanding during the period. Diluted EPS gives effect to the potential dilution of
earnings which could have occurred if additional shares were issued for stock option and restricted
stock awards under the treasury stock method. An immaterial number of stock awards, which were
issued at exercise prices in excess of the year-end stock price, were excluded from the 2004 and
2006 calculations as the instruments would have an anti-dilutive effect on the calculation. The
following schedule reconciles the income and shares used in the basic and diluted EPS computations
(in thousands, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
502,006 |
|
|
$ |
302,305 |
|
|
$ |
182,451 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
200,252 |
|
|
|
201,651 |
|
|
|
202,664 |
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
2.51 |
|
|
$ |
1.50 |
|
|
$ |
0.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
502,006 |
|
|
$ |
302,305 |
|
|
$ |
182,451 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
200,252 |
|
|
|
201,651 |
|
|
|
202,664 |
|
Dilutive effect of stock options and restricted stock units |
|
|
1,756 |
|
|
|
2,871 |
|
|
|
2,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,008 |
|
|
|
204,522 |
|
|
|
205,138 |
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
2.49 |
|
|
$ |
1.48 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
6. Inventories
Inventories consist of the following at December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
117,812 |
|
|
$ |
86,961 |
|
Work-in-process |
|
|
147,543 |
|
|
|
111,399 |
|
Products purchased for resale |
|
|
291,882 |
|
|
|
303,307 |
|
Finished goods |
|
|
993,676 |
|
|
|
632,925 |
|
|
|
|
|
|
|
|
|
|
|
1,550,913 |
|
|
|
1,134,592 |
|
|
|
|
|
|
|
|
|
|
Reserves to state certain U.S. inventories
(FIFO cost of $559,943 and $386,643 in
2006 and 2005, respectively) on a LIFO basis |
|
|
(93,542 |
) |
|
|
(74,600 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,457,371 |
|
|
$ |
1,059,992 |
|
|
|
|
|
|
|
|
During 2006, the Company recorded additional LIFO reserves of $18.9 million, primarily related
to the revaluation of on-hand inventories to current standards, largely reflecting higher
manufacturing costs in the Oilfield segment.
38
7. Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Land |
|
$ |
55,138 |
|
|
$ |
37,753 |
|
Buildings |
|
|
181,419 |
|
|
|
153,467 |
|
Machinery and equipment |
|
|
717,761 |
|
|
|
587,808 |
|
Rental tools |
|
|
597,468 |
|
|
|
472,913 |
|
|
|
|
|
|
|
|
|
|
|
1,551,786 |
|
|
|
1,251,941 |
|
Less-Accumulated depreciation |
|
|
(664,742 |
) |
|
|
(586,552 |
) |
|
|
|
|
|
|
|
|
|
$ |
887,044 |
|
|
$ |
665,389 |
|
|
|
|
|
|
|
|
8. 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 |
|
Balance as of December 31, 2004 |
|
$ |
675,582 |
|
|
$ |
37,771 |
|
|
$ |
713,353 |
|
Goodwill acquired |
|
|
23,444 |
|
|
|
— |
|
|
|
23,444 |
|
Purchase price and other adjustments |
|
|
116 |
|
|
|
135 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
699,142 |
|
|
|
37,906 |
|
|
|
737,048 |
|
Goodwill acquired |
|
|
126,964 |
|
|
|
2,314 |
|
|
|
129,278 |
|
Purchase price and other adjustments |
|
|
890 |
|
|
|
431 |
|
|
|
1,321 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
$ |
826,996 |
|
|
$ |
40,651 |
|
|
$ |
867,647 |
|
|
|
|
|
|
|
|
|
|
|
Other Intangible Assets
The components of other intangible assets at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
| |
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Average |
|
| |
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Amortization |
|
| |
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Period |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(years) |
|
Patents |
|
$ |
101,269 |
|
|
$ |
19,547 |
|
|
$ |
81,722 |
|
|
$ |
43,191 |
|
|
$ |
16,938 |
|
|
$ |
26,253 |
|
|
|
13.8 |
|
License
agreements |
|
|
31,231 |
|
|
|
10,661 |
|
|
|
20,570 |
|
|
|
29,308 |
|
|
|
7,181 |
|
|
|
22,127 |
|
|
|
10.5 |
|
Non-compete
agreements and
trademarks |
|
|
33,421 |
|
|
|
15,662 |
|
|
|
17,759 |
|
|
|
29,150 |
|
|
|
12,414 |
|
|
|
16,736 |
|
|
|
9.0 |
|
Customer lists
and contracts |
|
|
29,403 |
|
|
|
8,314 |
|
|
|
21,089 |
|
|
|
17,282 |
|
|
|
3,619 |
|
|
|
13,663 |
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
195,324 |
|
|
$ |
54,184 |
|
|
$ |
141,140 |
|
|
$ |
118,931 |
|
|
$ |
40,152 |
|
|
$ |
78,779 |
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of other intangible assets was $20.3 million, $10.4 million and $9.1
million for the years ended December 31, 2006, 2005 and 2004, respectively. Additionally,
estimated future amortization expense is expected to range between $12.4 million and $26.9 million
per year for the next five fiscal years.
39
9. Debt
The following summarizes the Company’s outstanding debt at December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Current: |
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
89,307 |
|
|
$ |
122,174 |
|
Current portion of long-term debt |
|
|
198,397 |
|
|
|
11,476 |
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt |
|
$ |
287,704 |
|
|
$ |
133,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term: |
|
|
|
|
|
|
|
|
Notes: |
|
|
|
|
|
|
|
|
6.0% Senior Notes maturing June 2016 with an effective interest rate of 6.11%.
Interest payable semi-annually (presented net of unamortized discount of $293) |
|
$ |
274,707 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
6.75% Senior Notes maturing February 2011 with an effective interest rate of 6.83%.
Interest payable semi-annually (presented net of unamortized discount of $368 and
$486 in 2006 and 2005, respectively) |
|
|
219,632 |
|
|
|
219,514 |
|
|
|
|
|
|
|
|
|
|
7.0% Senior Notes maturing September 2007 with an effective interest rate of 7.07%.
Interest payable semi-annually (presented net of unamortized discount of $69 and
$173 in 2006 and 2005, respectively) |
|
|
149,931 |
|
|
|
149,827 |
|
|
|
|
|
|
|
|
|
|
7.7% Senior Notes maturing July 2007. Principal due in equal annual installments
of $7.1 million. Interest payable semi-annually |
|
|
7,143 |
|
|
|
14,285 |
|
|
|
|
|
|
|
|
|
|
Bank revolvers payable: |
|
|
|
|
|
|
|
|
$275 million revolving note expiring May 2010. Interest payable quarterly at base
rate (8.25% at December 31, 2006) or Eurodollar rate, as defined
(5.78% at December 31, 2006) and described below |
|
|
119,000 |
|
|
|
205,100 |
|
|
|
|
|
|
|
|
|
|
M-I SWACO $125 million revolving note expiring May 2010. Interest payable
quarterly at base rate (8.25% at December 31, 2006) or Eurodollar rate, as defined
(5.78% at December 31, 2006) and described below |
|
|
41,500 |
|
|
|
27,600 |
|
|
|
|
|
|
|
|
|
|
Term Loans: |
|
|
|
|
|
|
|
|
M-I SWACO £80 million term loan payable to a financial institution. Principal due in
semi-annual installments of £6.7 million through December 2012. Interest payable
at Eurocurrency rate of LIBOR plus 35 basis points (5.70% at December 31, 2006) |
|
|
157,686 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
M-I SWACO €27.5 million term loan payable to a financial institution.
Principal due in semi-annual installments of €5.5 million through December
2008. Interest payable at Eurocurrency rate of LIBOR plus 45 basis points
(3.87% at December 31, 2006) |
|
|
28,868 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
858 |
|
|
|
6,007 |
|
|
|
|
|
|
|
|
|
|
|
999,325 |
|
|
|
622,333 |
|
Less-Current portion of long-term debt |
|
|
(198,397 |
) |
|
|
(11,476 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
800,928 |
|
|
$ |
610,857 |
|
|
|
|
|
|
|
|
Principal payments of long-term debt for years subsequent to 2007 are as follows:
| |
|
|
|
|
2008 |
|
$ |
41,724 |
|
2009 |
|
|
26,077 |
|
2010 |
|
|
186,601 |
|
2011 |
|
|
245,710 |
|
Thereafter |
|
|
300,816 |
|
|
|
|
|
|
|
$ |
800,928 |
|
|
|
|
|
40
Short-term borrowings consist of amounts outstanding under lines of credit and short-term
notes. Certain subsidiaries of the Company have unsecured credit facilities with non-U.S. banks
aggregating $202.0 million with $112.7 million of additional borrowing capacity available under
these facilities at December 31, 2006. These borrowings had a weighted average interest rate of
7.6 percent and 7.0 percent at December 31, 2006 and 2005, respectively.
Additionally, the Senior Notes maturing in the third quarter of 2007 are classified as current
indebtedness and account for the majority of the current portion of long-term debt at December 31,
2006.
In addition to the credit facilities discussed above, the Company has a $400 million unsecured
revolving credit facility provided by a syndicate of nine financial institutions. The revolving
credit agreement (the “Agreement”) allows for the election of interest at a base rate, or a
Eurodollar rate ranging from LIBOR plus 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. As of December 31,
2006, the Company had $160.5 million drawn and $4.5 million of letters of credit issued under the
facility, resulting in additional borrowing capacity of $235.0 million.
The 6.0 percent, 6.75 percent and 7.0 percent Senior Notes (the “Public Notes”) are unsecured
obligations of the Company issued under an Indenture dated September 8, 1997. The Indenture
contains no financial covenants, nor any restrictions related to the payment of cash dividends to
common stockholders. The Company’s Public Notes are redeemable by the Company, in whole or in
part, at any time prior to maturity at a redemption price equal to accrued interest plus the
greater of the principal amount or the present value of the remaining principal and interest
payments.
During 2006, the Company entered into two foreign currency denominated term loans (the “Term
Loans”) to provide local financing for the Epcon and SPS transactions. The Term Loans are
unsecured and require compliance with certain customary covenants, including debt-to-total
capitalization and debt-to-EBITDA limitations. The Term Loans can be prepaid, in whole or in
part, without penalty subject to required notice periods and compliance with minimum prepayment
amounts.
The Company was in compliance with its loan covenants under the various loan
indentures, as amended, at December 31, 2006.
10. Financial Instruments
Foreign Currency Contracts
The Company enters into spot and forward contracts as a hedge against foreign currency
denominated assets and liabilities and foreign currency commitments. The term of these contracts
generally do not exceed two years. For fair value hedges, realized and unrealized gains and losses
are recognized currently through earnings, and the resulting amounts generally offset foreign
exchange gains or losses on the related accounts. The Company recognized expense of approximately
$5.9 million, $4.4 million and $2.4 million in 2006, 2005 and 2004, respectively, related to net
realized and unrealized losses on fair value hedge contracts. Gains or losses on designated cash
flow hedge contracts are deferred to accumulated other comprehensive income and recognized in the
consolidated statement of operations when the hedged item affects earnings. The Company recognized
expense of $1.6 million and $0.9 million in 2006 and 2005, respectively, and earnings of $4.2
million in 2004, related to cash flow hedge contracts. As of December 31, 2006, the notional
amounts of fair value hedge contracts and cash flow hedge contracts outstanding were $126.9 million
and $20.8 million, respectively, and the fair value was less than the notional amount of these
contracts by $0.2 million. As of December 31, 2005, the notional amount of fair value hedge
contracts and cash flow hedge contracts outstanding were $99.8 million and $40.4 million,
respectively, and the fair value was less than the notional amount of these contracts by $1.7
million.
Fair Value of Other Financial Instruments
The recorded and fair values of long-term debt at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
|
Recorded |
|
Fair |
|
Recorded |
|
Fair |
| |
|
Value |
|
Value |
|
Value |
|
Value |
Long-term Debt |
|
$ |
999,325 |
|
|
$ |
1,015,062 |
|
|
$ |
622,333 |
|
|
$ |
646,013 |
|
The fair value of publicly-traded long-term debt was primarily determined using quoted market
prices. The fair value of the remaining financial instruments, including cash and cash
equivalents, receivables, payables and short-term and bank borrowings, approximates the carrying
value due to the nature of these instruments.
41
11. Income Taxes
The geographical sources of income before income taxes and minority interests for the three
years ended December 31, 2006 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Income before income taxes and minority interests: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
443,453 |
|
|
$ |
225,207 |
|
|
$ |
119,770 |
|
Non-United States |
|
|
576,643 |
|
|
|
402,600 |
|
|
|
281,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,020,096 |
|
|
$ |
627,807 |
|
|
$ |
401,302 |
|
|
|
|
|
|
|
|
|
|
|
The income tax provision is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
127,964 |
|
|
$ |
62,243 |
|
|
$ |
47,651 |
|
Non-United States |
|
|
183,695 |
|
|
|
124,881 |
|
|
|
82,781 |
|
State |
|
|
11,278 |
|
|
|
4,983 |
|
|
|
1,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,937 |
|
|
|
192,107 |
|
|
|
131,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
2,308 |
|
|
|
8,073 |
|
|
|
(2,116 |
) |
Non-United States |
|
|
1,289 |
|
|
|
2,349 |
|
|
|
925 |
|
State |
|
|
140 |
|
|
|
214 |
|
|
|
(573 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,737 |
|
|
|
10,636 |
|
|
|
(1,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
326,674 |
|
|
$ |
202,743 |
|
|
$ |
129,721 |
|
|
|
|
|
|
|
|
|
|
|
The consolidated effective tax rate (as a percentage of income before income taxes and
minority interests is reconciled to the U.S. federal statutory tax rate as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
|
2004 |
U.S. federal statutory tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Minority partners’ share of U.S. partnership earnings |
|
|
(2.6 |
) |
|
|
(2.5 |
) |
|
|
(2.9 |
) |
Non-deductible expenses |
|
|
0.9 |
|
|
|
1.1 |
|
|
|
1.0 |
|
Benefit of extraterritorial income exclusion and
manufacturer’s production exclusion |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
|
(0.7 |
) |
State taxes, net |
|
|
1.1 |
|
|
|
0.8 |
|
|
|
0.1 |
|
Non-U.S. tax provisions which vary from the U.S.
rate/non-U.S. losses with no tax benefit realized |
|
|
(1.3 |
) |
|
|
(0.9 |
) |
|
|
(0.6 |
) |
Change in valuation allowance |
|
|
— |
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Other items, net |
|
|
(0.6 |
) |
|
|
(0.3 |
) |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
32.0 |
% |
|
|
32.3 |
% |
|
|
32.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
42
The components of deferred taxes at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Deferred tax liabilities attributed to the excess of net book
basis over remaining tax basis (principally depreciation
and amortization): |
|
|
|
|
|
|
|
|
United States |
|
$ |
(99,443 |
) |
|
$ |
(85,724 |
) |
Non-United States |
|
|
(84,244 |
) |
|
|
(55,691 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(183,687 |
) |
|
|
(141,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets attributed to net operating loss and tax
credit carryforwards: |
|
|
|
|
|
|
|
|
United States |
|
|
— |
|
|
|
651 |
|
Non-United States |
|
|
18,395 |
|
|
|
14,181 |
|
|
|
|
|
|
|
|
|
|
Other deferred tax assets (principally accrued liabilities
not deductible until paid and inventory reserves): |
|
|
|
|
|
|
|
|
United States |
|
|
76,298 |
|
|
|
67,201 |
|
Non-United States |
|
|
15,160 |
|
|
|
9,081 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
109,853 |
|
|
|
91,114 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(16,232 |
) |
|
|
(12,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
93,621 |
|
|
|
78,166 |
|
|
|
|
|
|
|
|
| |
Net deferred tax liabilities |
|
$ |
(90,066 |
) |
|
$ |
(63,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet presentation: |
|
|
|
|
|
|
|
|
Deferred tax assets, net |
|
$ |
51,070 |
|
|
$ |
48,467 |
|
Other assets |
|
|
8,822 |
|
|
|
4,649 |
|
Income taxes payable |
|
|
(6,834 |
) |
|
|
(8,527 |
) |
Deferred tax liabilities |
|
|
(143,124 |
) |
|
|
(107,838 |
) |
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(90,066 |
) |
|
$ |
(63,249 |
) |
|
|
|
|
|
|
|
At December 31, 2006, the accompanying consolidated financial statements include $18.4 million
of deferred tax assets associated with operating loss carryforwards in tax jurisdictions outside
the United States. Although a significant portion of these losses will carryforward indefinitely
and are available to reduce future tax liabilities of the respective foreign entity, management
currently believes that the majority of these assets will not be realized and has, accordingly,
established a $16.2 million valuation reserve. The $3.3 million increase from the prior year-end
valuation reserve reflects the impact of changes in currency exchange rates, additional reserves
established incident to purchase accounting for acquisitions, the expiration of operating loss
carryforwards and changes in the anticipated realizability of certain foreign deferred tax assets.
The Company has provided additional taxes for the anticipated repatriation of certain earnings
of its non-U.S. subsidiaries. Undistributed earnings above the amounts upon which additional taxes
have been provided, which approximated $291.1 million at December 31, 2006, are intended to be
permanently invested by the Company. It is not practicable to determine the amount of applicable
taxes that would be incurred if any of such earnings were repatriated.
The American Jobs Creation Act of 2004 (the “Act”), which was enacted during the fourth
quarter of 2004, created a temporary incentive for U.S. corporations to repatriate accumulated
earnings of non-U.S. subsidiaries by providing an 85 percent deduction for certain dividends
from controlled foreign corporations. During the fourth quarter of 2005, the Company completed its
evaluation of the provisions of the new tax law and potential repatriations. Approximately
$18.9 million of non-U.S. earnings were repatriated pursuant to the Act, resulting in the
recognition of net tax benefits totaling $1.0 million in 2005.
43
12. Stockholders’ Equity
Dividend Program
In February 2005, the Company’s Board of Directors approved a regular quarterly cash dividend
program. The Board of Directors declared dividends of $64.0 million, or $0.32 per share, and $48.4
million, or $0.24 per share, for the years ended December 31, 2006 and 2005, respectively.
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 cash flow from operations, the
level of its capital expenditures, compliance with certain debt covenants, its future business
prospects and other factors that the Board of Directors deem relevant.
Stock Split
On July 21, 2005, the Company’s Board of Directors approved a two-for-one stock split, which
was 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.
Common Stock Repurchases
In October 2005, the Company’s Board of Directors approved a share repurchase program that
allows for the purchase of up to 20 million shares of the Company’s common stock, subject to
regulatory issues, market considerations and other relevant factors. The Company has purchased
$102.9 million, $117.8 million and $92.0 million of common stock during 2006, 2005, and 2004,
respectively, under the existing and a previously authorized repurchase program (collectively the
“Repurchase Programs”). As of December 31, 2006, approximately 17.3 million shares remained
available for purchase under the current program which may be executed from time to time in the
open market. Common stock obtained by the Company through the Repurchase Programs has been added
to the Company’s treasury stock holdings.
In addition, certain participants in the long-term incentive plans surrender shares of common
stock in order to satisfy tax withholding obligations. The Company acquired an immaterial number
of shares in the prior three year period which have been added to the Company’s treasury stock
holdings and may be used in the future for acquisitions or other corporate purposes. These shares
are not considered acquisitions under the Company’s Repurchase Programs.
Stockholder Rights Plan
On June 8, 2000, the Company adopted a Stockholder Rights Plan (the “Rights Plan”). As part
of the Rights Plan, the Company’s Board of Directors declared a dividend of one junior
participating preferred stock purchase right (“Right”) for each share of the Company’s common stock
outstanding on June 20, 2000. The Board also authorized the issuance of one such Right for each
share of the Company’s common stock issued after June 20, 2000 until the occurrence of certain
events.
The Rights are exercisable upon the occurrence of certain events related to a person (an
“Acquiring Person’) acquiring or announcing the intention to acquire beneficial ownership of 20
percent or more of the Company’s common stock. In the event any person becomes an Acquiring Person,
each holder (except an Acquiring Person) will be entitled to purchase, at an effective exercise
price of $87.50, subject to adjustment, shares of common stock having a market value of twice the
Right’s exercise price. The Acquiring Person will not be entitled to exercise these Rights. In
addition, if at any time after a person has become an Acquiring Person, the Company is involved in
a merger or other business combination transaction, or sells 50 percent or more of its assets or
earning power to another entity, each Right will entitle its holder to purchase, at an effective
exercise price of $87.50, subject to adjustment, shares of common stock of such other entity having
a value of twice the Right’s exercise price. After a person or group becomes an Acquiring Person,
but before an Acquiring Person owns 50% or more of the Company’s common stock, the Board may
extinguish the Rights by exchanging one share of common stock, or an equivalent security, for each
Right, other than Rights held by the Acquiring Person.
In the event the Rights become exercisable and sufficient shares of the Company’s common stock
are not authorized to permit the exercise of all outstanding Rights, the Company is required under
the Rights Plan to take all necessary action including, if necessary, seeking stockholder approval
to obtain additional authorized shares.
The Rights are subject to redemption at the option of the Board of Directors at a price of
one-quarter of a cent per Right until the occurrence of certain events. The Rights currently trade
with Smith common stock, have no voting or dividend rights and expire on June 8, 2010.
44
Accumulated Other Comprehensive Income
Accumulated other comprehensive income in the accompanying consolidated balance sheets
consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Currency translation adjustments |
|
$ |
25,555 |
|
|
$ |
13,148 |
|
Unrealized fair value of derivatives |
|
|
249 |
|
|
|
(2,176 |
) |
Pension liability adjustments |
|
|
(2,577 |
) |
|
|
(4,071 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
23,227 |
|
|
$ |
6,901 |
|
|
|
|
|
|
|
|
Approximately $0.4 million of the unrealized fair value of derivatives is expected to be
recognized as after-tax expense during the fiscal year ending December 31, 2007.
13. Retirement Plans
Defined Contribution Plans
The Company established the Smith International, Inc. 401(k) Retirement Plan (the “Smith
Plan”) for the benefit of all eligible employees. Employees may voluntarily contribute a
percentage of their compensation, as defined, to the Smith Plan. The Company makes basic,
retirement and, in certain cases, discretionary matching contributions to each participant’s
account under the Smith Plan. Participants receive a basic match on contributions to the Smith
Plan of up to 11/2 percent of qualified compensation and a retirement contribution ranging from two
percent to six percent of qualified compensation. In addition, the Board of Directors may provide
discretionary profit-sharing contributions based upon financial performance to participants who are
employed by the Company on December 31.
Through September 30, 2004, eligible employees of Wilson International, Inc. (the “Wilson
employees”) participated in the Smith Plan. Effective October 1, 2004, the Company established the
Wilson 401(k) Retirement Plan (the “Wilson Plan”) and transferred account balances of the Wilson
employees into this plan from the Smith Plan. Employees may voluntarily contribute a percentage of
their compensation, as defined, to the Wilson Plan. Wilson makes matching contributions to each
participant’s account ranging from 1/4 percent to six percent of qualified compensation. In
addition, the Board of Directors may provide discretionary profit-sharing contributions based upon
financial performance to participants who are employed by Wilson on December 31.
M-I SWACO has a company Profit-Sharing and Savings Plan (the “M-I Retirement Plan”) under
which participating employees may voluntarily contribute a percentage of their compensation, as
defined. At its discretion, M-I SWACO may make basic, matching and in certain cases, discretionary
matching contributions to each participant’s account under the M-I Retirement Plan. Participants
are eligible to receive a basic contribution equal to three percent of qualified compensation, and
a full match on employee contributions of up to 11/2 percent of qualified compensation. In addition,
the Board of Directors may provide discretionary profit-sharing contributions based upon financial
performance to participants who are employed by M-I SWACO on December 31.
The Company recognized expense totaling $50.5 million, $37.8 million, and $34.0 million in
2006, 2005 and 2004, respectively, related to Company contributions to the plans.
Certain of the Company’s subsidiaries sponsor various defined contribution plans. The
Company’s contributions under these plans for each of the three years in the period ended December
31, 2006 were immaterial.
Deferred Compensation Plans
The Company maintains Supplemental Executive Retirement Plans (“SERP”), non-qualified,
deferred compensation programs, for the benefit of officers and certain other eligible employees of
the Company. Participants may contribute up to 100 percent of cash compensation, on a pre-tax
basis, as defined. Plan provisions allow for retirement and matching contributions, similar to
those provided under the Company’s defined contribution programs, and, in certain cases, an
interest contribution in order to provide a yield on short-term investments equal to 120 percent of
the long-term applicable federal rate, as defined.
In the event of insolvency or bankruptcy, plan assets are available to satisfy the claims of
all general creditors of the Company. Accordingly, the accompanying consolidated balance sheets
reflect the aggregate participant balances as both an asset and a liability of the Company. As of
December 31, 2006 and 2005, $59.3 million and $50.7 million, respectively, are included in other
assets with a corresponding amount recorded in other long-term liabilities.
During the years ended December 31, 2006, 2005 and 2004, Company contributions to the plans
totaled $1.9 million, $2.5 million and $2.6 million, respectively.
45
14. Employee Benefit Plans
The Company currently maintains various defined benefit pension plans covering certain U.S.
and non-U.S. employees. Future benefit accruals and the addition of new participants under the
U.S. plans were frozen prior to 1998.
The Company and certain subsidiaries have postretirement benefit plans which provide health
care benefits to a limited number of current, and in certain cases, future retirees. Individuals
who elect to contribute premiums are eligible to participate in the Company’s medical and
prescription drug programs, with certain limitations. In addition to premiums, the retiree is
responsible for deductibles and any required co-payments and is subject to annual and lifetime
dollar spending caps.
The following tables disclose the changes in benefit obligations and plan assets during the
periods presented and reconcile the funded status of the plans to the amounts included in the
accompanying consolidated balance sheets:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Plans |
|
|
Postretirement Benefit Plans |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Changes in benefit obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at beginning of year |
|
$ |
46,631 |
|
|
$ |
41,569 |
|
|
$ |
10,070 |
|
|
$ |
10,742 |
|
Service cost |
|
|
3,111 |
|
|
|
2,787 |
|
|
|
267 |
|
|
|
242 |
|
Interest cost |
|
|
2,456 |
|
|
|
2,142 |
|
|
|
538 |
|
|
|
548 |
|
Plan participants’ contributions |
|
|
— |
|
|
|
— |
|
|
|
624 |
|
|
|
692 |
|
Actuarial loss (gain) |
|
|
(1,349 |
) |
|
|
1,092 |
|
|
|
(565 |
) |
|
|
(96 |
) |
Plan termination |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,215 |
) |
Benefits paid |
|
|
(861 |
) |
|
|
(959 |
) |
|
|
(875 |
) |
|
|
(843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at end of year |
|
$ |
49,988 |
|
|
$ |
46,631 |
|
|
$ |
10,059 |
|
|
$ |
10,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
38,993 |
|
|
$ |
34,932 |
|
|
$ |
— |
|
|
$ |
— |
|
Actual return on plan assets |
|
|
3,797 |
|
|
|
2,009 |
|
|
|
— |
|
|
|
— |
|
Employer contributions |
|
|
4,464 |
|
|
|
3,011 |
|
|
|
251 |
|
|
|
151 |
|
Plan participants’ contributions |
|
|
— |
|
|
|
— |
|
|
|
624 |
|
|
|
692 |
|
Actuarial loss/(gain) |
|
|
(1,777 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Benefits paid |
|
|
(861 |
) |
|
|
(959 |
) |
|
|
(875 |
) |
|
|
(843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
44,616 |
|
|
$ |
38,993 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Funded status |
|
$ |
(5,372 |
) |
|
$ |
(7,638 |
) |
|
$ |
(10,059 |
) |
|
$ |
(10,070 |
) |
Unrecognized net actuarial loss (gain) |
|
|
* |
|
|
|
8,647 |
|
|
|
* |
|
|
|
(2,321 |
) |
Unrecognized prior service cost |
|
|
* |
|
|
|
43 |
|
|
|
* |
|
|
|
— |
|
Unrecognized net transition obligation |
|
|
* |
|
|
|
— |
|
|
|
* |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(5,372 |
) |
|
$ |
1,052 |
|
|
$ |
(10,059 |
) |
|
$ |
(12,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
$ |
34 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Other long-term liabilities |
|
|
(5,406 |
) |
|
|
(4,638 |
) |
|
|
(10,059 |
) |
|
|
(12,391 |
) |
Deferred taxes |
|
|
* |
|
|
|
1,619 |
|
|
|
* |
|
|
|
— |
|
Accumulated
other comprehensive income (“AOCI”) |
|
|
* |
|
|
|
4,071 |
|
|
|
* |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(5,372 |
) |
|
$ |
1,052 |
|
|
$ |
(10,059 |
) |
|
$ |
(12,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts in
AOCI: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss(gain) |
|
$ |
4,396 |
|
|
$ |
* |
|
|
$ |
(1,906 |
) |
|
$ |
* |
|
Prior service costs |
|
|
88 |
|
|
|
* |
|
|
|
— |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
4,484 |
|
|
$ |
* |
|
|
$ |
(1,906 |
) |
|
$ |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental effect of adopting SFAS 158: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in assets |
|
$ |
(1,271 |
) |
|
$ |
* |
|
|
$ |
— |
|
|
$ |
* |
|
(Increase) decrease in liabilities |
|
|
(1,523 |
) |
|
|
* |
|
|
|
2,932 |
|
|
|
* |
|
(Increase) decrease in deferred taxes |
|
|
754 |
|
|
|
* |
|
|
|
(1,026 |
) |
|
|
* |
|
Decrease in minority interests |
|
|
771 |
|
|
|
* |
|
|
|
— |
|
|
|
* |
|
(Increase) decrease in AOCI |
|
|
1,269 |
|
|
|
* |
|
|
|
(1,906 |
) |
|
|
* |
|
|
|
|
| * |
|
Due to the adoption of SFAS 158, the pension and postretirement benefit plan disclosures are not comparable on a
year-to-year basis. See Note 1, “Recent Accounting Pronouncements” for additional discussion of SFAS 158. |
46
Net Periodic Benefit Expense
Net periodic benefit expense and the weighted average assumptions used to determine the net
benefit expense for the fiscal years ended December 31, and the projected benefit obligation at
December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Plans |
|
|
Postretirement Benefit Plans |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Components of net periodic benefit
expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
3,111 |
|
|
$ |
2,787 |
|
|
$ |
2,355 |
|
|
$ |
267 |
|
|
$ |
242 |
|
|
$ |
233 |
|
Interest cost |
|
|
2,456 |
|
|
|
2,142 |
|
|
|
2,181 |
|
|
|
538 |
|
|
|
548 |
|
|
|
643 |
|
Return on plan assets |
|
|
(2,365 |
) |
|
|
(2,292 |
) |
|
|
(2,050 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of prior service cost |
|
|
11 |
|
|
|
11 |
|
|
|
82 |
|
|
|
— |
|
|
|
(91 |
) |
|
|
(365 |
) |
Amortization of loss (gain) |
|
|
818 |
|
|
|
706 |
|
|
|
355 |
|
|
|
(87 |
) |
|
|
(130 |
) |
|
|
(172 |
) |
Plan termination |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,467 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense (income) |
|
$ |
4,031 |
|
|
$ |
3,354 |
|
|
$ |
2,923 |
|
|
$ |
718 |
|
|
$ |
(3,898 |
) |
|
$ |
339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
Expected return on plan assets |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
Expected return on plan assets |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Additional Pension Plan Information
In determining the expected return on plan assets, the Company considers the investment mix,
the historical market performance and economic and other indicators of future performance. The
Company primarily utilizes a mix of common stock and fixed income index funds to generate asset
returns comparable with the general market. The investment mix of pension assets at December 31 is
summarized in the following table:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
Common stock and related index funds |
|
|
47 |
% |
|
|
46 |
% |
Fixed income securities and related index funds |
|
|
40 |
|
|
|
41 |
|
Real estate |
|
|
6 |
|
|
|
6 |
|
Money market funds |
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
For pension plans with accumulated benefit obligations in excess of plan assets, the following
table sets forth the projected and accumulated benefit obligations and the fair value of plan
assets at December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
Projected benefit obligation |
|
$ |
49,988 |
|
|
$ |
46,631 |
|
Accumulated benefit obligation |
|
|
49,988 |
|
|
|
46,631 |
|
Plan assets at fair value |
|
|
44,616 |
|
|
|
38,993 |
|
Estimated future benefit payments based on projected future service are expected to range
between $1.0 million and $1.5 million a year for the next five years and approximate $12.6 million
for the five-year period ending December 31, 2016. Company contributions to the pension plans
during 2007 are expected to be comparable with 2006 contribution levels.
Additional Postretirement Benefit Plan Information
The assumed health care cost trend rates used to determine the projected postretirement
benefit obligation at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
Health care cost trend rate for current year |
|
|
12 |
% |
|
|
10 |
% |
Rate that the cost trend rate gradually declines (ultimate trend rate) |
|
|
5 |
% |
|
|
5 |
% |
Year that the rate reaches the ultimate trend rate |
|
|
2016 |
|
|
|
2010 |
|
47
A one-percentage point change in assumed health care cost trend rates would have the following
effects on the benefit obligations and the aggregate of the service and interest cost components of
the postretirement benefits expense:
| |
|
|
|
|
|
|
|
|
| |
|
One-Percentage- |
|
One-Percentage- |
| |
|
Point Increase |
|
Point Decrease |
Effect on total service and interest cost |
|
$ |
1 |
|
|
$ |
(60 |
) |
Effect on accumulated postretirement benefit obligation |
|
|
97 |
|
|
|
(612 |
) |
Estimated future benefit payments based on projected future service are expected to range
between $0.5 million and $0.6 million a year for the next five years and approximately $3.3 million
for the five-year period ending December 31, 2016. Company contributions to the postretirement
benefit plans during 2007 are expected to be comparable to the 2006 levels.
15. Long-Term Incentive Compensation
As of December 31, 2006, the Company had outstanding restricted stock and stock option awards
granted under the 1989 Long-Term Incentive Compensation Plan (the “Plan”). As of December 31,
2006, 1,857,308 shares were authorized for future issuance pursuant to the Plan.
Restricted Stock Units
The restricted stock program consists of a combination of performance-based restricted stock
units (“performance-based units”) and time-based restricted stock units (“time-based units”). The
number of performance-based units issued under the program, which can range from zero to 115
percent of the target units granted, is solely dependent upon the return on equity achieved by the
Company in the fiscal year subsequent to the award. A summary of the Company’s restricted stock
program is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| |
|
Time-based Awards |
|
|
Performance-based Awards |
|
|
Restricted |
|
| |
|
No. of |
|
|
Fair |
|
|
No. of |
|
|
Fair |
|
|
Stock |
|
| |
|
Units |
|
|
Value(a) |
|
|
Units |
|
|
Value(a) |
|
|
Units |
|
Outstanding at
December 31, 2005 |
|
|
239,340 |
|
|
$ |
34.00 |
|
|
|
1,264,251 |
(b) |
|
$ |
36.28 |
|
|
|
1,503,591 |
|
Granted |
|
|
370,344 |
|
|
|
43.00 |
|
|
|
564,348 |
|
|
|
43.04 |
|
|
|
934,692 |
|
Forfeited |
|
|
(10,101 |
) |
|
|
34.58 |
|
|
|
(37,147 |
) |
|
|
37.62 |
|
|
|
(47,248 |
) |
Vested |
|
|
(75,031 |
) |
|
|
30.55 |
|
|
|
(225,803 |
) |
|
|
29.68 |
|
|
|
(300,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2006 |
|
|
524,552 |
|
|
$ |
40.84 |
|
|
|
1,565,649 |
|
|
$ |
39.64 |
|
|
|
2,090,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Reflects the weighted average grant-date fair value. |
| |
| (b) |
|
Reflects achievement of performance criteria for awards granted prior to December 2006. |
The total intrinsic value of restricted stock units vested during the years ended
December 31, 2006, 2005, and 2004 was $12.5 million, $1.2 million, and $0.9 million, respectively.
In addition, restrictions on approximately 710,138 performance-based units and 150,434 time-based
units outstanding at December 31, 2006 are expected to lapse during the 2007 fiscal year.
Stock Options
Stock 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. A summary of the Company’s stock
option program is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
Shares |
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
| |
|
Under |
|
|
Average |
|
|
Remaining |
|
|
Intrinsic Value |
|
| |
|
Option |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
(in thousands) |
|
Outstanding at December 31, 2005 |
|
|
4,751,824 |
|
|
$ |
18.37 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
12,378 |
|
|
|
38.79 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(73,421 |
) |
|
|
21.37 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,339,400 |
) |
|
|
17.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
3,351,381 |
|
|
$ |
18.78 |
|
|
|
6.2 |
|
|
$ |
74,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006 |
|
|
2,582,906 |
|
|
$ |
17.58 |
|
|
|
5.9 |
|
|
$ |
60,674 |
|
The total intrinsic value of options exercised during the years ended December 31, 2006, 2005,
and 2004 was $34.3 million, $48.7 million, and $74.9 million, respectively.
48
The Company used an open form (lattice) model to determine the fair value of options granted,
and accordingly, calculate the share-based compensation expense. The fair value and assumptions
used are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
|
2004 |
Fair value of stock options granted |
|
$ |
11.92 |
|
|
$ |
8.53 |
|
|
$ |
8.92 |
|
Expected life of option (years) |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Expected stock volatility |
|
|
31.0 |
% |
|
|
31.0 |
% |
|
|
31.0 |
% |
Expected dividend yield |
|
|
0.8 |
% |
|
|
0.8 |
% |
|
|
N/A |
|
Risk-free interest rate |
|
|
4.3 |
% |
|
|
3.9 |
% |
|
|
3.6 |
% |
Expected volatilities are based on both historical volatility of the company’s stock price and
implied volatility of exchange-traded options on the company’s stock. The expected life of options
is based on historical data for options granted by the company after 1994. The risk-free rates
are based on yields available at the time of grant on U.S. Treasury bonds for maturities consistent
with the expected life assumption.
Share-based Compensation Expense
Compensation expense for stock options and time-based units is recognized over the four-year
vesting period. For performance-based units, compensation expense is recognized over the
three-year vesting period.
Prior to the adoption of SFAS No. 123r, compensation expense for the performance-based units
was calculated as the difference between the market value and the exercise price. After adoption of
SFAS No. 123r, compensation expense for the performance-based units and time-based units is based
on the grant-date fair value. Share-based compensation expense, consisting of restricted stock
unit and stock option awards, for the year ended December 31, 2006 was $27.3 million and, net of
taxes and minority interests, was $17.5 million. For the years ended December 31, 2005 and 2004,
compensation expense related to restricted stock unit awards totaled $5.7 million and $0.3 million,
respectively.
The total unrecognized share-based compensation expense, consisting of restricted stock and
stock options, for awards outstanding as of December 31, 2006 was $74.2 million or approximately
$44.6 million, net of taxes and minority interests, which will be recognized over a
weighted-average period of 2.6 years.
16. Industry Segments and International Operations
The Company provides premium products and services to the oil and gas exploration and
production industry. The Company aggregates its operations into two reportable segments: Oilfield
and Distribution. The Oilfield segment consists of three business units: M-I SWACO, which
provides drilling and completion fluid systems and services, solids-control and separation
equipment, waste-management services and oilfield production chemicals; Smith Technologies, which
designs, manufactures and sells three-cone drill bits, diamond drill bits and turbine products; and
Smith Services, which manufactures and markets products and services used for drilling, workover,
well completion and well re-entry operations. The principal markets for the Oilfield segment
include all major oil and gas-producing regions of the world, with approximately 55 percent of
revenues generated in markets outside of North America. Oilfield segment customers primarily
include major multi-national, independent and national, or state-owned, oil companies.
The Distribution segment consists of one business unit, Wilson, which markets pipe, valves,
fittings and mill, safety and other maintenance products to energy and industrial markets. The
Distribution segment has the most significant North American exposure of any of the Company’s
operations with approximately 96 percent of revenues derived in the United States and Canada.
Approximately two-thirds of Wilson’s revenues are generated from customers in the energy sector,
which includes major multi-national and independent oil companies, pipeline companies and contract
drilling companies. The remainder relates to sales in the downstream and industrial markets, which
primarily includes refineries, petrochemical and power generation plants.
The Company’s revenues are derived principally from uncollateralized customer sales. The
significant energy industry concentration has the potential to impact the Company’s exposure to
credit risk, either positively or negatively, because customers may be similarly affected by
changes in economic or other conditions. The creditworthiness of the Company’s customer base is
strong, with limited credit losses experienced on such receivables.
49
The following table presents financial information for each reportable segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
$ |
5,387,738 |
|
|
$ |
3,978,999 |
|
|
$ |
3,236,339 |
|
Distribution |
|
|
1,945,821 |
|
|
|
1,600,004 |
|
|
|
1,182,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,333,559 |
|
|
$ |
5,579,003 |
|
|
$ |
4,419,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
$ |
1,012,295 |
|
|
$ |
625,384 |
|
|
$ |
423,648 |
|
Distribution |
|
|
101,830 |
|
|
|
64,714 |
|
|
|
26,513 |
|
General corporate |
|
|
(34,044 |
) |
|
|
(19,537 |
) |
|
|
(11,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,080,081 |
|
|
$ |
670,561 |
|
|
$ |
438,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
$ |
292,073 |
|
|
$ |
173,510 |
|
|
$ |
108,773 |
|
Distribution |
|
|
5,153 |
|
|
|
2,354 |
|
|
|
2,428 |
|
General corporate |
|
|
11,244 |
|
|
|
1,981 |
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
308,470 |
|
|
$ |
177,845 |
|
|
$ |
111,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
$ |
144,335 |
|
|
$ |
110,160 |
|
|
$ |
98,258 |
|
Distribution |
|
|
4,840 |
|
|
|
6,435 |
|
|
|
7,209 |
|
General corporate |
|
|
1,209 |
|
|
|
1,127 |
|
|
|
1,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
150,384 |
|
|
$ |
117,722 |
|
|
$ |
106,493 |
|
|
|
|
|
|
|
|
|
|
|
Total Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield |
|
$ |
4,474,401 |
|
|
$ |
3,356,112 |
|
|
$ |
2,905,850 |
|
Distribution |
|
|
737,445 |
|
|
|
596,867 |
|
|
|
493,434 |
|
General corporate |
|
|
123,629 |
|
|
|
106,935 |
|
|
|
107,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,335,475 |
|
|
$ |
4,059,914 |
|
|
$ |
3,506,778 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents consolidated revenues by region:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
United States |
|
$ |
3,384,729 |
|
|
$ |
2,520,706 |
|
|
$ |
1,982,467 |
|
Canada |
|
|
891,288 |
|
|
|
713,565 |
|
|
|
487,552 |
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
4,276,017 |
|
|
|
3,234,271 |
|
|
|
2,470,019 |
|
|
|
|
|
|
|
|
|
|
|
Latin America |
|
|
543,844 |
|
|
|
452,349 |
|
|
|
424,053 |
|
Europe/Africa |
|
|
1,605,559 |
|
|
|
1,188,038 |
|
|
|
961,755 |
|
Middle East/Asia |
|
|
908,139 |
|
|
|
704,345 |
|
|
|
563,188 |
|
|
|
|
|
|
|
|
|
|
|
Non-North America |
|
|
3,057,542 |
|
|
|
2,344,732 |
|
|
|
1,948,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,333,559 |
|
|
$ |
5,579,003 |
|
|
$ |
4,419,015 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents net property, plant and equipment by region:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
United States |
|
$ |
458,273 |
|
|
$ |
353,370 |
|
|
$ |
306,505 |
|
Canada |
|
|
48,510 |
|
|
|
43,908 |
|
|
|
34,603 |
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
506,783 |
|
|
|
397,278 |
|
|
|
341,108 |
|
|
|
|
|
|
|
|
|
|
|
Latin America |
|
|
67,377 |
|
|
|
53,911 |
|
|
|
50,208 |
|
Europe/Africa |
|
|
230,607 |
|
|
|
156,632 |
|
|
|
133,290 |
|
Middle East/Asia |
|
|
82,277 |
|
|
|
57,568 |
|
|
|
52,348 |
|
|
|
|
|
|
|
|
|
|
|
Non-North America |
|
|
380,261 |
|
|
|
268,111 |
|
|
|
235,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
887,044 |
|
|
$ |
665,389 |
|
|
$ |
576,954 |
|
|
|
|
|
|
|
|
|
|
|
The Company’s expenditures for research and engineering activities are attributable to the
Company’s Oilfield segment and totaled $88.3 million in 2006, $73.6 million
in 2005 and $67.2 million in 2004.
50
17. Commitments and Contingencies
Leases
The Company routinely enters into operating and capital leases for certain of its facilities
and equipment. Amounts related to assets under capital lease were immaterial for the periods
presented. Rent expense totaled $127.1 million, $102.1 million, and $94.8 million in 2006, 2005,
and 2004, respectively.
Future minimum payments under non-cancelable operating leases having initial terms of one year
or more are as follows:
| |
|
|
|
|
| |
|
Amount |
|
2007 |
|
$ |
54,524 |
|
2008 |
|
|
40,798 |
|
2009 |
|
|
27,598 |
|
2010 |
|
|
20,757 |
|
2011 |
|
|
11,421 |
|
2012-2016 |
|
|
23,309 |
|
Thereafter |
|
|
13,455 |
|
|
|
|
|
|
|
$ |
191,862 |
|
|
|
|
|
In the normal course of business, the Company enters into lease agreements with cancellation
provisions as well as agreements with initial terms of less than one year. The costs related to
these leases have been reflected in rent expense but have been appropriately excluded from the
future minimum payments presented above.
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 which
reinsure certain liability coverages of the Company’s insurance captive. Excluding the impact of
these instruments, for which $19.4 million of related liabilities are reflected in the accompanying
consolidated balance sheet, the Company was contingently liable for approximately $78.3 million of
standby letters of credit and bid, performance and surety bonds at December 31, 2006. Management
does not expect any material amounts to be drawn on these instruments.
Insurance
The Company maintains insurance coverage for various aspects of its business and operations.
The Company has elected to retain a portion of losses that occur through the use of deductibles and
retentions under its insurance programs. Amounts in excess of the self-insured retention levels
are fully insured to limits believed appropriate for the Company’s operations. Self-insurance
accruals are based on claims filed and an estimate for claims incurred but not reported. While
management believes that amounts accrued in the accompanying consolidated financial statements are
adequate for expected liabilities arising from the Company’s portion of losses, estimates of these
liabilities may change as circumstances develop.
Litigation
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 appealed the
verdict and does not anticipate a ruling until the third quarter of 2007. 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 financial statements.
51
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.
As of December 31, 2006, the Company’s environmental reserve totaled $8.4 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 December 31, 2006, the Company does not believe that
these differences will have a material impact on the Company’s financial position or results of
operations.
18. Quarterly Information (Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Year |
| |
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,682,121 |
|
|
$ |
1,738,263 |
|
|
$ |
1,914,184 |
|
|
$ |
1,998,991 |
|
|
$ |
7,333,559 |
|
Gross profit |
|
|
526,603 |
|
|
|
545,013 |
|
|
|
618,213 |
|
|
|
654,442 |
|
|
|
2,344,271 |
|
Net income |
|
|
107,216 |
|
|
|
118,833 |
|
|
|
132,925 |
|
|
|
143,032 |
|
|
|
502,006 |
|
EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.53 |
|
|
|
0.59 |
|
|
|
0.66 |
|
|
|
0.72 |
|
|
|
2.51 |
|
Diluted |
|
|
0.53 |
|
|
|
0.59 |
|
|
|
0.66 |
|
|
|
0.71 |
|
|
|
2.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,288,198 |
|
|
$ |
1,350,203 |
|
|
$ |
1,410,162 |
|
|
$ |
1,530,440 |
|
|
$ |
5,579,003 |
|
Gross profit |
|
|
385,412 |
|
|
|
399,138 |
|
|
|
424,604 |
|
|
|
475,984 |
|
|
|
1,685,138 |
|
Net income |
|
|
66,152 |
|
|
|
68,060 |
|
|
|
79,504 |
|
|
|
88,589 |
|
|
|
302,305 |
|
EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.33 |
|
|
|
0.34 |
|
|
|
0.40 |
|
|
|
0.44 |
|
|
|
1.50 |
|
Diluted |
|
|
0.32 |
|
|
|
0.33 |
|
|
|
0.39 |
|
|
|
0.44 |
|
|
|
1.48 |
|
52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. Our management, with the participation of
our principal executive and financial officers, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (“Exchange Act”)) as of December 31, 2006. Based upon that evaluation, our
principal executive and financial officers concluded that as of December 31, 2006, our disclosure
controls and procedures were effective to ensure that information required to be disclosed by us in
reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and
reported within the time periods specified in the Commission’s rules and forms, and (2) accumulated
and communicated to our management, including our principal executive and financial officers, to
allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There has been no change in the
Company’s internal control over financial reporting during the quarter ended December 31, 2006 that
has materially affected, or is reasonably likely to materially affect, the Company’s internal
controls over financial reporting.
Design and evaluation of internal control over financial reporting. Management’s Report on
Internal Control over Financial Reporting and the Report of the Independent Registered Public
Accounting Firm thereon are set forth in Part II, Item 8 of this report on Form 10-K and are
incorporated herein by reference.
Item 9B. Other Information
Director Indemnity Agreements. Effective February 28, 2007, the Company’s Board of Directors
approved a standard form of indemnification agreement for non-employee directors of the registrant,
which the Company has entered into with each such director. These agreements require us to
indemnify each non-employee director and to advance expenses on behalf of each such director to the
fullest extent permitted by applicable law. These agreements shall be in addition to any other
rights each non-employee director may be entitled to under the Company’s Restated Certificate of
Incorporation, Restated Bylaws and applicable law. A copy of the form of indemnity agreement for
directors has been attached to this Form 10-K as Exhibit 10.28.
53
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information concerning the directors is set forth following the caption “PROPOSAL 1: ELECTION
OF DIRECTORS” in the Company’s definitive proxy statement to be filed no later than 120 days after
the end of the fiscal year covered by this Form 10-K (the “Proxy Statement”), which information is
incorporated herein by reference. Information concerning our executive officers and Code of Ethics
are set forth in Item 1 appearing in Part I of this Form 10-K. Information concerning compliance
with Section 16(a) of the Exchange Act is set forth following the caption “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.
Information concerning the Corporate Governance of the Company is set forth following the
caption “CORPORATE GOVERNANCE” in the Proxy Statement and is incorporated herein by reference.
Item 11. Executive Compensation
Information for this item is set forth following the captions “EXECUTIVE COMPENSATION” and
“CORPORATE GOVERNANCE” in the Company’s Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information for this item is set forth following the captions “STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS”, “Stock Ownership of Directors and Executive Officers” and “Equity Compensation
Plan Information” in the Company’s Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information for this item is set forth following the captions “Certain Relationships and
Related Transactions” and “CORPORATE GOVERNANCE” in the Company’s Proxy Statement and is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information for this item is set forth following the captions “Fees Paid to Deloitte & Touche
LLP” and “Services Provided by Deloitte & Touche LLP” in the Company’s Proxy Statement and is
incorporated herein by reference.
54
PART IV
Item 15. Exhibits and Financial Statement Schedules
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Page |
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Reference |
(a)(1)
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Financial statements included in this report: |
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Management’s Report on Internal Control Over Financial Reporting
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26 |
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Reports of Independent Registered Public Accounting Firm
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27 |
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Consolidated Balance Sheets at December 31, 2006 and 2005
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29 |
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Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004
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30 |
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Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004
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31 |
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Consolidated Statements of Stockholders’ Equity and Comprehensive Income
for the years ended December 31, 2006, 2005 and 2004
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32 |
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Notes to Consolidated Financial Statements
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33 |
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(2)
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Financial Statement Schedule II-Valuation and Qualifying Accounts and Reserves
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58 |
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All other schedules have been omitted since the required information is not present or not
present in amounts sufficient to require submission of the schedule or because the information
required is included in the consolidated financial statements or notes thereto.
| (3) |
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Exhibits |
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Exhibits designated with an “*” are filed, and with an “**” are furnished, as an exhibit to
this Annual Report on Form 10-K. Exhibits designated with a “+” are identified as
management contracts or compensatory plans or arrangements. Exhibits previously filed as
indicated below are incorporated by reference. |
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3.1
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—
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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. |
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3.2
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—
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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. |
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4.1
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—
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Rights Agreement, dated as of June 8, 2000, between the Company and First Chicago Trust
Company of New York, as Rights Agent. Filed as Exhibit 4.1 to the Company’s report on
Form 8-A, dated June 15, 2000, and incorporated herein by reference. |
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4.2
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—
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Amendment to Rights Agreement dated June 8, 2000, by and among the Company and First
Chicago Trust Company of New York and effective as of October 1, 2001. Filed as Exhibit
4.1 to the Company’s report on Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference. |
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4.3
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—
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Amendment No. 2 to Rights Agreement by and among the Company and EquiServe Trust
Company, N.A. and effective as of December 31, 2002. Filed as Exhibit 4.3 to the
Company’s report on Form 10-K for the year ended December 31, 2002 and incorporated
herein by reference. |
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4.4
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—
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Form of Indenture between the Company and The Bank of New York, as Trustee. Filed as
Exhibit 4.1 to the Company’s Registration Statement on Form S-3 dated August 22, 1997
and incorporated herein by reference. |
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4.5
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—
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Form of Senior Note due 2007. Filed as Exhibit 4.2 to Amendment No. 1 to the Company’s
Registration Statement on Form S-3 dated September 9, 1997 and incorporated herein by
reference. |
55
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4.6
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—
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Form of Senior Note due 2011. Filed as Exhibit 4.1 to the Company’s report on Form 8-K
dated February 13, 2001 and incorporated herein by reference. |
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4.7
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—
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Form of Senior Note due 2016. Filed as Exhibit 4.1 to the Company’s report on Form 8-K
dated June 12, 2006 and incorporated herein by reference. |
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10.1+
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—
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Smith International, Inc. 1989 Long-Term Incentive Compensation Plan, as amended and
restated effective January 1, 2005. Filed as Exhibit 10.1 to the Company’s report on
Form 8-K dated April 26, 2005 and incorporated herein by reference. |
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10.2+
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—
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First Amendment to the Smith International, Inc. 1989 Long-Term Incentive Compensation
Plan as amended and restated effective January 1, 2005, dated June 16, 2005. Filed as
Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended June 30, 2005 and
incorporated herein by reference. |
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10.3+*
|
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—
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Second Amendment to the Smith International, Inc. 1989 Long-Term Incentive Compensation
Plan as amended and restated effective January 1, 2005, dated October 17, 2006. |
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10.4+
|
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—
|
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Smith International, Inc. Form of Nonstatutory Option Agreement as amended December
2005. Filed as Exhibit 10.3 to the Company’s report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference. |
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10.5+*
|
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—
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Smith International, Inc. Form of Nonstatutory Option Agreement as amended December 2006. |
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10.6+
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—
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Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December
2005. Filed as Exhibit 10.4 to the Company’s report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference. |
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10.7+*
|
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—
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Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December
2006. |
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10.8+
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—
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Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement as
amended December 2005. Filed as Exhibit 10.5 to the Company’s report on Form 10-K for
the year ended December 31, 2005 and incorporated herein by reference. |
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10.9+*
|
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—
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Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement as
amended December 2006. |
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10.10+
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—
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Smith International, Inc. Stock Plan for Outside Directors, as amended and restated
effective January 1, 2005. Filed as Exhibit 10.2 to the Company’s report on Form 8-K
dated April 20, 2005 and incorporated herein by reference. |
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10.11+*
|
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—
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Director Compensation Summary of Smith International, Inc. effective January 1, 2007. |
|
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10.12+
|
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—
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Smith International, Inc. Supplemental Executive Retirement Plan, as amended to date.
Filed as Exhibit 10.1 to the Company’s report on Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference. |
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10.13+*
|
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—
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Smith International, Inc. Amended and Restated Post-2004 Supplemental Executive
Retirement Plan effective as of January 1, 2006. |
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10.14+
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—
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Smith International, Inc. Executive Officer Annual Incentive Plan effective as of
January 1, 2006. Filed as Exhibit 10.1 to the Company’s report on Form 8-K dated April
25, 2006 and incorporated herein by reference. |
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10.15+*
|
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—
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First Amendment to the Smith International, Inc. Executive Officer Annual Incentive Plan
effective as of January 1, 2006, dated October 17, 2006. |
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10.16+
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—
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Employment Agreement dated December 10, 1987 between the Company and Douglas L. Rock.
Filed as Exhibit 10.11 to the Company’s report on Form 10-K for the year ended December
31, 1993 and incorporated herein by reference. |
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10.17+
|
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—
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Employment Agreement dated as of
January 5, 2006 between the Company and Richard A. Werner. Filed as Exhibit 10.14 to the Company’s report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference. |
56
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10.18+
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—
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Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Douglas L. Rock. Filed as Exhibit 10.11 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
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10.19+
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—
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Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Neal S. Sutton. Filed as Exhibit 10.12 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
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10.20+
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—
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Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Richard A. Werner. Filed as Exhibit 10.13 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
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10.21+
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—
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Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Loren K. Carroll. Filed as Exhibit 10.14 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
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10.22+
|
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—
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Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Margaret K. Dorman. Filed as Exhibit 10.15 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
|
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10.23+
|
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—
|
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Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
John J. Kennedy. Filed as Exhibit 10.16 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
|
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10.24+
|
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—
|
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Change-of-Control Employment Agreement dated May 15, 2005 between the Company and
Michael Pearce. Filed as Exhibit 10.1 to the Company’s report on Form 8-K dated May 15,
2005 and incorporated herein by reference. |
|
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10.25+
|
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—
|
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Form of Change-of-Control Employment Agreement as of April 2006. Filed as Exhibit 10.2
to the Company’s report on Form 8-K dated April 25, 2006 and incorporated herein by
reference. |
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10.26+
|
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—
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Form of Employment Agreement for Advisors as of April 2006. Filed as Exhibit 10.3 to
the Company’s report on Form 8-K dated April 25, 2006 and incorporated herein by
reference. |
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10.27
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—
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Credit Agreement dated as of May 5, 2005 among the Company and M-I L.L.C., the Lenders
From Time to Time Party Thereto and Comerica Bank, as Administrative Agent, ABN AMRO
Bank N.V., as Syndication Agent, Den Norske Bank ASA, as Documentation Agent, and Calyon
New York Branch and RBS Securities Corporation, as Co-Lead Arrangers and Joint
Bookrunners. Filed as Exhibit 10.1 to the Company’s report on Form 10-Q for the quarter
ended March 31, 2005 and incorporated herein by reference. |
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10.28+*
|
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—
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Form of Director Indemnification Agreement as of February 28, 2007. |
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21.1
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—
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Subsidiaries of the Company. Filed as Exhibit 21.1 to the Company’s report on Form 10-K
for the year ended December 31, 2002 and incorporated herein by reference. |
|
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23.1*
|
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—
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Consent of Independent Registered Public Accounting Firm. |
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31.1*
|
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—
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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. |
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31.2*
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—
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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. |
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32.1**
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—
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
57
SCHEDULE II
SMITH INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
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Balance at |
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Charged |
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Balance |
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Beginning |
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to |
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at End |
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of Year |
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Expense |
|
Write-offs |
|
of Year |
Allowance for doubtful accounts: |
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|
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|
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|
|
Year ended December 31, 2006 |
|
$ |
13,884 |
|
|
$ |
7,578 |
|
|
$ |
(4,753 |
) |
|
$ |
16,709 |
|
Year ended December 31, 2005 |
|
|
12,558 |
|
|
|
4,216 |
|
|
|
(2,890 |
) |
|
|
13,884 |
|
Year ended December 31, 2004 |
|
|
12,135 |
|
|
|
3,846 |
|
|
|
(3,423 |
) |
|
|
12,558 |
|
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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| |
|
SMITH INTERNATIONAL, INC. |
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February 28, 2007
|
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By:
|
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/s/ Doug Rock |
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Doug Rock |
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|
Chief Executive Officer, |
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President and Chief Operating Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities on the date
indicated:
| |
|
|
|
|
/s/ Doug Rock
(Doug Rock)
|
|
Chairman of the Board,
Chief Executive Officer, President and
Chief Operating Officer (principal
executive officer)
|
|
February 28, 2007 |
|
|
|
|
|
/s/ Margaret K. Dorman
(Margaret K. Dorman)
|
|
Senior Vice President,
Chief Financial Officer
and Treasurer (principal financial
and accounting officer)
|
|
February 28, 2007 |
|
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|
|
/s/ G. Clyde Buck
(G. Clyde Buck)
|
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Director
|
|
February 28, 2007 |
|
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|
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/s/ Loren K. Carroll
(Loren K. Carroll)
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|
Director
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|
February 28, 2007 |
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/s/ Dod A. Fraser
(Dod A. Fraser)
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Director
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February 28, 2007 |
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|
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/s/ James R. Gibbs
(James R. Gibbs)
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Director
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February 28, 2007 |
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/s/ R obert Kelley
(Robert Kelley)
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Director
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|
February 28, 2007 |
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|
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/s/ Jerry w. Neely
(Jerry W. Neely)
|
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Director
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|
February 28, 2007 |
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|
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/s/ John Yearwood
(John Yearwood)
|
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Director
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|
February 28, 2007 |
59
Exhibit Index
Exhibits designated with an “*” are filed, and with an “**” are furnished, as an exhibit to
this Annual Report on Form 10-K. Exhibits designated with a “+” are identified as
management contracts or compensatory plans or arrangements. 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. |
|
|
|
|
|
4.1
|
|
—
|
|
Rights Agreement, dated as of June 8, 2000, between the Company and First Chicago Trust
Company of New York, as Rights Agent. Filed as Exhibit 4.1 to the Company’s report on
Form 8-A, dated June 15, 2000, and incorporated herein by reference. |
|
|
|
|
|
4.2
|
|
—
|
|
Amendment to Rights Agreement dated June 8, 2000, by and among the Company and First
Chicago Trust Company of New York and effective as of October 1, 2001. Filed as Exhibit
4.1 to the Company’s report on Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference. |
|
|
|
|
|
4.3
|
|
—
|
|
Amendment No. 2 to Rights Agreement by and among the Company and EquiServe Trust
Company, N.A. and effective as of December 31, 2002. Filed as Exhibit 4.3 to the
Company’s report on Form 10-K for the year ended December 31, 2002 and incorporated
herein by reference. |
|
|
|
|
|
4.4
|
|
—
|
|
Form of Indenture between the Company and The Bank of New York, as Trustee. Filed as
Exhibit 4.1 to the Company’s Registration Statement on Form S-3 dated August 22, 1997
and incorporated herein by reference. |
|
|
|
|
|
4.5
|
|
—
|
|
Form of Senior Note due 2007. Filed as Exhibit 4.2 to Amendment No. 1 to the Company’s
Registration Statement on Form S-3 dated September 9, 1997 and incorporated herein by
reference. |
|
|
|
|
|
4.6
|
|
—
|
|
Form of Senior Note due 2011. Filed as Exhibit 4.1 to the Company’s report on Form 8-K
dated February 13, 2001 and incorporated herein by reference. |
|
|
|
|
|
4.7
|
|
—
|
|
Form of Senior Note due 2016. Filed as Exhibit 4.1 to the Company’s report on Form 8-K
dated June 12, 2006 and incorporated herein by reference. |
|
|
|
|
|
10.1+
|
|
—
|
|
Smith International, Inc. 1989 Long-Term Incentive Compensation Plan, as amended and
restated effective January 1, 2005. Filed as Exhibit 10.1 to the Company’s report on
Form 8-K dated April 26, 2005 and incorporated herein by reference. |
|
|
|
|
|
10.2+
|
|
—
|
|
First Amendment to the Smith International, Inc. 1989 Long-Term Incentive Compensation
Plan as amended and restated effective January 1, 2005, dated June 16, 2005. Filed as
Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended June 30, 2005 and
incorporated herein by reference. |
|
|
|
|
|
10.3+*
|
|
—
|
|
Second Amendment to the Smith International, Inc. 1989 Long-Term Incentive Compensation
Plan as amended and restated effective January 1, 2005, dated October 17, 2006. |
|
|
|
|
|
10.4+
|
|
—
|
|
Smith International, Inc. Form of Nonstatutory Option Agreement as amended December
2005. Filed as Exhibit 10.3 to the Company’s report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference. |
|
|
|
|
|
10.5+*
|
|
—
|
|
Smith International, Inc. Form of Nonstatutory Option Agreement as amended December 2006. |
|
|
|
|
|
10.6+
|
|
—
|
|
Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December
2005. Filed as Exhibit 10.4 to the Company’s report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference. |
60
| |
|
|
|
|
10.7+*
|
|
—
|
|
Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December
2006. |
|
|
|
|
|
10.8+
|
|
—
|
|
Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement as
amended December 2005. Filed as Exhibit 10.5 to the Company’s report on Form 10-K for
the year ended December 31, 2005 and incorporated herein by reference. |
|
|
|
|
|
10.9+*
|
|
—
|
|
Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement as
amended December 2006. |
|
|
|
|
|
10.10+
|
|
—
|
|
Smith International, Inc. Stock Plan for Outside Directors, as amended and restated
effective January 1, 2005. Filed as Exhibit 10.2 to the Company’s report on Form 8-K
dated April 20, 2005 and incorporated herein by reference. |
|
|
|
|
|
10.11+*
|
|
—
|
|
Director Compensation Summary of Smith International, Inc. effective January 1, 2007. |
|
|
|
|
|
10.12+
|
|
—
|
|
Smith International, Inc. Supplemental Executive Retirement Plan, as amended to date.
Filed as Exhibit 10.1 to the Company’s report on Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference. |
|
|
|
|
|
10.13+*
|
|
—
|
|
Smith International, Inc. Amended and Restated Post-2004 Supplemental Executive
Retirement Plan effective as of January 1, 2006. |
|
|
|
|
|
10.14+
|
|
—
|
|
Smith International, Inc. Executive Officer Annual Incentive Plan effective as of
January 1, 2006. Filed as Exhibit 10.1 to the Company’s report on Form 8-K dated April
25, 2006 and incorporated herein by reference. |
|
|
|
|
|
10.15+*
|
|
—
|
|
First Amendment to the Smith International, Inc. Executive Officer Annual Incentive Plan
effective as of January 1, 2006, dated October 17, 2006. |
|
|
|
|
|
10.16+
|
|
—
|
|
Employment Agreement dated December 10, 1987 between the Company and Douglas L. Rock.
Filed as Exhibit 10.11 to the Company’s report on Form 10-K for the year ended December
31, 1993 and incorporated herein by reference. |
|
|
|
|
|
10.17+
|
|
—
|
|
Employment Agreement dated as of January 5, 2006 between the Company and Richard A.
Werner. Filed as Exhibit 10.14 to the Company’s report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference. |
|
|
|
|
|
10.18+
|
|
—
|
|
Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Douglas L. Rock. Filed as Exhibit 10.11 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
|
|
|
|
|
10.19+
|
|
—
|
|
Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Neal S. Sutton. Filed as Exhibit 10.12 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
|
|
|
|
|
10.20+
|
|
—
|
|
Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Richard A. Werner. Filed as Exhibit 10.13 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
|
|
|
|
|
10.21+
|
|
—
|
|
Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Loren K. Carroll. Filed as Exhibit 10.14 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
|
|
|
|
|
10.22+
|
|
—
|
|
Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Margaret K. Dorman. Filed as Exhibit 10.15 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
|
|
|
|
|
10.23+
|
|
—
|
|
Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
John J. Kennedy. Filed as Exhibit 10.16 to the Company’s report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. |
61
| |
|
|
|
|
10.24+
|
|
—
|
|
Change-of-Control Employment Agreement dated May 15, 2005 between the Company and
Michael Pearce. Filed as Exhibit 10.1 to the Company’s report on Form 8-K dated May 15,
2005 and incorporated herein by reference. |
|
|
|
|
|
10.25+
|
|
—
|
|
Form of Change-of-Control Employment Agreement as of April 2006. Filed as Exhibit 10.2
to the Company’s report on Form 8-K dated April 25, 2006 and incorporated herein by
reference. |
|
|
|
|
|
10.26+
|
|
—
|
|
Form of Employment Agreement for Advisors as of April 2006. Filed as Exhibit 10.3 to
the Company’s report on Form 8-K dated April 25, 2006 and incorporated herein by
reference. |
|
|
|
|
|
10.27
|
|
—
|
|
Credit Agreement dated as of May 5, 2005 among the Company and M-I L.L.C., the Lenders
From Time to Time Party Thereto and Comerica Bank, as Administrative Agent, ABN AMRO
Bank N.V., as Syndication Agent, Den Norske Bank ASA, as Documentation Agent, and Calyon
New York Branch and RBS Securities Corporation, as Co-Lead Arrangers and Joint
Bookrunners. Filed as Exhibit 10.1 to the Company’s report on Form 10-Q for the quarter
ended March 31, 2005 and incorporated herein by reference. |
|
|
|
|
|
10.28+*
|
|
—
|
|
Form of Director Indemnification Agreement as of February 28, 2007. |
|
|
|
|
|
21.1
|
|
—
|
|
Subsidiaries of the Company. Filed as Exhibit 21.1 to the Company’s report on Form 10-K
for the year ended December 31, 2002 and incorporated herein by reference. |
|
|
|
|
|
23.1*
|
|
—
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
|
|
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. |
62