<PAGE> 1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
FOR THE QUARTER ENDED JUNE 30, 1994 COMMISSION FILE NUMBER 1-8514
SMITH INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-3822631
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16740 HARDY STREET, HOUSTON, TEXAS 77032
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE
</TABLE>
Registrant's telephone number, including area code (713) 443-3370
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
On June 30, 1994 the registrant had 39,386,334 shares of common stock
outstanding.
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<PAGE> 2
SMITH INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
The condensed financial statements included herein have been prepared by
the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of Management, all
adjustments necessary for a fair statement of the results of operations for the
three and six month periods ended June 30, 1994 and 1993 have been made. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K.
1
<PAGE> 3
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1994 1993
-------- --------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenues.............................................................. $274,172 $102,695
Cost and expenses:
Cost of revenues................................................. 180,982 66,516
Selling expenses................................................. 48,287 18,996
General and administrative expenses.............................. 19,519 10,612
-------- --------
Total costs and expenses............................... 248,788 96,124
-------- --------
Income from continuing operations before interest and taxes........... 25,384 6,571
Interest expense, net................................................. 3,279 2,481
-------- --------
Income from continuing operations before income taxes and minority
interest............................................................ 22,105 4,090
Income tax provision.................................................. 2,530 112
-------- --------
Income from continuing operations before minority interest............ 19,575 3,978
Minority interest..................................................... 3,521 --
-------- --------
Income from continuing operations..................................... 16,054 3,978
Income from discontinued operations (Note 4).......................... -- 73,623
Cumulative effect of change in accounting principle (Note 1).......... -- (1,300)
-------- --------
Net income............................................................ 16,054 76,301
Preferred stock dividends............................................. -- (868)
-------- --------
Net income applicable to common stock................................. $ 16,054 $ 75,433
======== ========
Primary earnings per common share (Note 2):
Income from continuing operations................................ $ .41 $ .08
Income from discontinued operations.............................. -- 2.02
Cumulative effect of change in accounting principle.............. -- (.04)
-------- --------
Net income....................................................... $ .41 $ 2.06
======== ========
Average common and common equivalent shares outstanding............... 38,924 36,597
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1994 1993
-------- -------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenues............................................................... $173,410 $52,741
Cost and expenses:
Cost of revenues.................................................. 115,801 33,736
Selling expenses.................................................. 30,337 10,191
General and administrative expenses............................... 12,249 5,550
-------- -------
Total costs and expenses................................ 158,387 49,477
-------- -------
Income from continuing operations before interest
and taxes............................................................ 15,023 3,264
Interest expense, net.................................................. 2,333 518
-------- -------
Income from continuing operations before income taxes and minority
interest............................................................. 12,690 2,746
Income tax provision................................................... 1,646 95
-------- -------
Income from continuing operations before minority interest............. 11,044 2,651
Minority interest...................................................... 2,579 --
-------- -------
Net income............................................................. 8,465 2,651
Preferred stock dividends.............................................. -- (434)
-------- -------
Net income applicable to common stock.................................. $ 8,465 $ 2,217
======== =======
Net income per common share (Note 2)................................... $ .22 $ .06
======== =======
Average common and common equivalent shares outstanding................ 39,049 36,796
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 10,492 $101,561
Receivables, less allowance of $8,791 in 1994 and $4,995 in
1993 for doubtful accounts................................... 178,750 67,830
Inventories (Note 3).......................................... 174,113 81,654
Prepaid expenses and other.................................... 10,386 4,802
-------- --------
Total current assets................................ 373,741 255,847
-------- --------
RENTAL EQUIPMENT, net of accumulated depreciation of $23,592
in 1994 and $23,457 in 1993...................................... 22,316 20,510
-------- --------
PLANT AND EQUIPMENT:
Land.......................................................... 31,729 1,348
Buildings..................................................... 66,403 18,007
Machinery and equipment....................................... 360,833 138,235
-------- --------
458,965 157,590
Less -- accumulated depreciation.............................. 359,475 115,938
-------- --------
Net plant and equipment....................................... 99,490 41,652
-------- --------
OTHER ASSETS....................................................... 38,660 27,423
GOODWILL (Note 4).................................................. 50,159 2,954
-------- --------
TOTAL ASSETS....................................................... $584,366 $348,386
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt
(Note 4)...................................................... $ 12,646 $ 702
Accounts payable............................................... 48,409 24,763
Accrued payroll and severance related costs.................... 24,494 10,923
Income taxes payable........................................... 7,290 9,484
Other.......................................................... 57,714 34,098
-------- --------
Total current liabilities............................ 150,553 79,970
-------- --------
LONG-TERM DEBT (Note 4)............................................. 110,700 46,000
-------- --------
DEFERRED INCOME TAXES............................................... 4,437 4,563
-------- --------
OTHER LONG-TERM LIABILITIES......................................... 19,210 3,387
-------- --------
MINORITY INTERESTS (Note 4)......................................... 66,881 --
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock --
Authorized -- 60,000,000 shares, $1 par value; issued and
outstanding -- 39,386,334 shares in 1994 and 39,311,447
in 1993................................................. 39,386 39,311
Common stock warrants --
Class A warrants: outstanding -- 225,445 in 1994 and
225,520 in 1993......................................... -- --
Class B warrants: outstanding -- 1,871,705 in 1994 and
1,872,205 in 1993....................................... -- --
Class C warrants: outstanding -- 451,357 in 1994 and
1993.................................................... 7,278 7,278
Additional paid-in capital..................................... 272,112 271,582
Accumulated deficit............................................ (67,379) (83,433)
Cumulative translation adjustment.............................. (4,898) (6,358)
Less-treasury securities, at cost (628,583 common shares and
451,357 Class C warrants in 1994 and 1993).................... (13,914) (13,914)
-------- --------
Total shareholders' equity........................... 232,585 214,466
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............................ $584,366 $348,386
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1994 1993
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations........................... $ 16,054 $ 2,678
Adjustments to reconcile net income to net cash provided by
operating activities excluding the net effects of the
acquisition of M-I Drilling Fluids Company:
Depreciation and amortization.............................. 8,938 7,325
Provision for losses on accounts receivable................ 843 737
Gain on disposal of fixed assets........................... (1,065) (698)
Foreign currency translation............................... (168) 343
Change in receivables...................................... 4,038 13,701
Change in inventories...................................... (3,379) (510)
Change in accounts payable................................. (9,758) (7,188)
Changes in other current assets and liabilities............ (2,317) (2,040)
Changes in other noncurrent assets and liabilities......... (8,002) 863
-------- --------
Subtotal.............................................. 5,184 15,211
Net results of discontinued operations.......................... -- (6,483)
-------- --------
Net cash provided by operating activities....................... 5,184 8,728
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of M-I Drilling Fluids Company (Note 4)............. (160,000) --
Proceeds from sale of DDS business (Note 4)..................... -- 247,703
Expenses paid related to DDS sale............................... -- (35,037)
Fixed asset additions........................................... (13,738) (6,956)
Proceeds from disposal of other fixed assets.................... 1,584 2,899
-------- --------
Net cash provided by (used in) investing activities........ (172,154) 208,609
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................ 83,500 --
Net increase (decrease) in short-term borrowing................. 288 (21,831)
Repayment of long-term debt..................................... (8,800) (67,182)
Proceeds from exercise of stock options and warrants............ 605 157
Dividends on preferred stock.................................... -- (868)
-------- --------
Net cash provided by (used in) financing activities........ 75,593 (89,724)
-------- --------
Effect of exchange rate changes on cash.............................. 308 (147)
-------- --------
Increase (decrease) in cash and cash equivalents..................... (91,069) 127,466
Cash and cash equivalents at beginning of period..................... 101,561 16,249
-------- --------
Cash and cash equivalents at end of period........................... $ 10,492 $143,715
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................................... $ 3,006 $ 6,227
Cash paid for income taxes........................................... 1,481 1,723
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
COMMON STOCK
WARRANTS
COMMON STOCK ------------------
-------------------- NUMBER ADDITIONAL ACCUM- CUMULATIVE
NUMBER OF PAID-IN ULATED TRANSLATION
OF SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
--------- ------- -------- ------ -------- -------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993...... 39,311,447 $39,311 2,549,082 $7,278 $271,582 $(83,433) $(6,358)
Exercise of employee stock
options....................... 74,312 74 -- -- 522 -- --
Exercise of common stock
warrants...................... 575 1 (575) -- 8 -- --
Net income...................... -- -- -- -- -- 16,054 --
Translation adjustment for the
period........................ -- -- -- -- -- -- 1,460
---------- ------- --------- ------ -------- -------- -------
Balance, June 30, 1994.......... 39,386,334 $39,386 2,548,507 $7,278 $272,112 $(67,379) $(4,898)
========== ======= ========= ====== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
TREASURY SECURITIES
-------------------------------------------
NUMBER
OF NUMBER
COMMON OF
SHARES AMOUNT WARRANTS AMOUNT
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1993...... (628,583) $(6,636) (451,357) $(7,278)
Exercise of employee stock
options....................... -- -- -- --
Exercise of common stock
warrants...................... -- -- -- --
Net income...................... -- -- -- --
Translation adjustment for the
period........................ -- -- -- --
-------- ------- -------- -------
Balance, June 30, 1994.......... (628,583) $(6,636) (451,357) $(7,278)
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 9
SMITH INTERNATIONAL, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DATA WITH RESPECT TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1994 AND 1993 IS UNAUDITED.)
1) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reference is hereby made to the Notes to Consolidated Financial Statements
contained in the financial statements filed on Form 10-K for the year ended
December 31, 1993. There are no significant changes in the content of those
notes except as discussed below.
During the first quarter of 1993, the Company adopted two new accounting
pronouncements: Statement of Financial Accounting Standard (SFAS) No. 106
"Employees' Accounting for Postretirement Benefits other than Pensions" and SFAS
No. 109 "Accounting for Income Taxes". As a result of adopting SFAS No. 106, the
Company recorded the total outstanding liability related to such retiree
benefits of $1.3 million as the cumulative effect of a change in accounting
principle. In connection with the adoption of SFAS No. 109, the Company elected
not to restate prior years' consolidated financial statements and has determined
that the cumulative effect of the change in accounting for income taxes was
insignificant.
Certain reclassifications have been made to the 1993 consolidated financial
statements and notes in order to be consistent with current year presentation.
2) EARNINGS PER SHARE
Earnings per common and common equivalent share has been computed on the
basis of the weighted average number of common and common equivalent shares
outstanding during the three and six month periods ended June 30, 1994 and 1993
after deducting preferred dividends for the three and six months ended June 30,
1993. Earnings per share assuming full dilution is substantially the same as
primary earnings per share as presented for the three and six months ended June
30, 1994 and 1993 except that the income from discontinued operations and net
income for the six months ended June 30, 1993 are $1.89 per common share and
$1.93 per common share on a fully diluted basis, respectively.
3) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------- -----------
($000 OMITTED)
<S> <C> <C>
Raw Materials........................................ $ 24,716 $ 10,965
Work in Process...................................... 28,280 13,105
Finished Goods....................................... 132,265 68,732
-------- --------
185,261 92,802
Less: reserve to state certain domestic inventories
($77,028 in 1994 and $70,597 in 1993) on a
LIFO basis......................................... (11,148) (11,148)
-------- --------
$174,113 $ 81,654
======== ========
</TABLE>
4) DISPOSITIONS AND AQUISITIONS
Sale of Directional Drilling Business
On March 29, 1993, the Company sold its directional drilling systems and
services (DDS) business and certain of its subsidiaries and other affiliates to
Halliburton Company (Halliburton) for 6,857,000 shares of Halliburton common
stock. In April 1993, the Halliburton common stock was sold for approximately
8
<PAGE> 10
$247.7 million. As a result, the Company recorded income from discontinued
operations during the first quarter of 1993 of $73.6 million including the gain
from the sale of the DDS business of $80.1 million. This gain includes
provisions for various fees, expenses and taxes related to the DDS sale. The DDS
business reported revenues of approximately $36.3 million in the first quarter
of 1993. The Company used a portion of the proceeds of the DDS sale to repay
$102.6 million of the Company's debt and acquire additional businesses as
discussed below.
Acquisitions of A-Z/Grant and Lindsey
On December 22, 1993, the Company acquired the product line assets of A-Z
International, Grant Oilfield Tools and Lindsey Completion Systems (A-Z/Grant
and Lindsey) from Masex Energy Services Group, Inc. for $19.0 million in cash.
A-Z/Grant and Lindsey is a leading provider of downhole tools, remedial services
and liner hangers to the oil and gas industry. This acquisition was accounted
for as a purchase.
The historical balance sheets of the Company at June 30, 1994 and December
31, 1993 includes the historical accounts of A-Z/Grant and Lindsey and certain
purchase accounting adjustments on an estimated basis. Management has not fully
evaluated all of the consequences of the acquisition of A-Z/Grant and Lindsey
including assessing the fair market value of the assets acquired and the total
amount of costs that may be necessary to reorganize their operations. Upon
completion of these evaluations during 1994, any additional adjustments will be
recorded and the excess purchase price over net assets acquired, if any, will be
recorded as goodwill in accordance with purchase accounting rules and
principles.
Acquisition of M-I Drilling Fluids Company
Effective February 28, 1994, the Company acquired a 64% interest in M-I
Drilling Fluids Company (M-I) from Dresser Industries, Inc. (Dresser) for $160
million. M-I was owned 64% by Dresser and 36% by Halliburton prior to the
acquisition. M-I is a leading provider of drilling fluids and systems to the oil
and gas drilling industry. The Company purchased the 64% interest in M-I using
$80 million of its cash and issuing a note payable to Dresser for $80 million
due on August 28, 1994. This acquisition is accounted for as a purchase.
The Company refinanced the Dresser note payable in March 1994 with a $40
million term loan from two of its insurance company lenders and a $65 million
revolving line of credit from a bank group. The term loan bears interest at a
rate of 6.02 percent and is payable over a four year period ending in January
1998. The revolving line of credit is due in March 1997 and bears interest at a
rate ranging from LIBOR + 3/4 percent to LIBOR +1 1/2 percent based upon the
debt-to-total capitalization of the Company.
The historical balance sheet of the Company at June 30, 1994 includes the
historical accounts of M-I and certain purchase accounting adjustments on an
estimated basis. Management has not fully evaluated all of the consequences of
the acquisition of M-I including assessing the fair market value of the assets
acquired and the total amount of costs that may be necessary to reorganize the
operations of M-I. Upon completion of these evaluations during 1994, any
additional adjustments will be recorded and the adjusted excess purchase price
over net assets acquired resulting from the revised allocation of purchase price
will be recorded as revisions to goodwill in accordance with purchase accounting
rules and principles.
9
<PAGE> 11
The summarized unaudited pro forma results from continuing operations for
the three and six month periods ended June 30, 1994 and 1993 assuming the
acquisitions of A-Z/Grant and Lindsey and M-I had been made on January 1, 1994
and 1993 are as follows (dollars in millions except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Unaudited pro forma revenues................ $173.4 $159.3 $349.5 $308.3
====== ====== ====== ======
Unaudited pro forma income from continuing
operations................................ $ 8.5 $ 3.7 $ 14.6 $ 2.6
====== ====== ====== ======
Unaudited pro forma income from continuing
operations per common share............... $ 0.22 $ 0.09 $ 0.38 $ 0.05
====== ====== ====== ======
</TABLE>
Subsequent Event -- Acquisition of Supradiamant
On July 1, 1994, the Company acquired Supradiamant, S.A. (Supradiamant)
from Societe Industrielle de Combustible Nucleaire for approximately $6.3
million in cash from borrowings under our revolving line of credit. Supradiamant
is a leading manufacturer of ultrahard materials, polycrystalline diamond and
cubic boron nitride. In 1993, Supradiamant reported revenues of approximately
$7.0 million.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Smith International, Inc. manufactures and markets a wide range of products
and services used in the drilling of oil and gas wells. The Company historically
has provided technologically advanced drill bits and drilling and completion
products and services to the oil and gas industry.
The decline in worldwide oil and gas drilling activity which occurred in
1992 caused the Company to reassess its future strategy from both a business
portfolio and financial flexibility standpoint. Management concluded that the
sale of the Company's directional drilling systems and services (DDS) business
was in the best long-term interest of the Company's shareholders. This
conclusion resulted in the sale of the DDS business to Halliburton Company in
March 1993 for $247.7 million in cash.
The proceeds of the DDS sale have enabled the Company to pursue its
strategic growth objective and reduce its debt burden. The Company used $102.6
million of the cash proceeds to repay debt of the Company. In addition several
key acquisitions have been accomplished as part of the Company's strategic
program. The purchase of the product line assets of A-Z International, Grant Oil
Tools, and Lindsey Completion Systems in December 1993 will enhance the
Company's Smith Drilling and Completion Services division. On February 28, 1994,
the Company acquired a 64% majority interest in M-I Drilling Fluids Company, an
acknowledged world leader in drilling fluid systems, from Dresser Industries,
Inc. On July 1, 1994, the Company acquired Supradiamant, S.A., a leading
manufacturer of diamond products, to strengthen the Company's Megadiamond
product line. These acquisitions complement the Company's existing core products
in forming one of the more complete packages of expendable products to the oil
and gas drilling and production industry.
FIRST SIX MONTHS OF 1994 COMPARED TO FIRST SIX MONTHS OF 1993
RESULTS OF OPERATIONS
Revenues
The products manufactured and the services provided by the Company fall
into three product and service groups that are marketed throughout the world.
The following table sets forth the amounts and percentages of revenues by major
product group and area, as well as average rig count data:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------
1994 1993
--------------- ---------------
AMOUNT % AMOUNT %
------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Breakdown by Product Group:
Drill Bits........................................ $ 83.6 30% $ 75.8 74%
Drilling Fluids................................... 146.9 54 -- --
Drilling and Completion Services.................. 43.7 16 26.9 26
------ --- ------ ---
Total........................................ $274.2 100% $102.7 100%
====== === ====== ===
Breakdown by Areas:
Domestic.......................................... $124.4 45% $ 44.4 43%
Export............................................ 26.8 10 13.0 13
International operations.......................... 123.0 45 45.3 44
------ --- ------ ---
Total........................................ $274.2 100% $102.7 100%
====== === ====== ===
Average Active Rig Count:
Domestic.......................................... 746 681
Canada............................................ 236 169
International (excluding Canada).................. 744 771
------ ------
Total........................................ 1,726 1,621
====== ======
</TABLE>
11
<PAGE> 13
DRILL BITS
Drill bit revenues are generated from the sale of petroleum drill bits and
mining bits. Petroleum drill bit revenues increased $7.4 million or 11.0% from
$67.4 million in the first six months of 1993 to $74.8 million in the first six
months of 1994 due primarily to higher sales in Canada and the United States
resulting from the increase in drilling activity and increased sales in the
Middle East and Far East. These increases were partially offset by reduced sales
in Europe/Africa due to lower drilling activity. Mining bit revenues increased
$0.4 million or 4.8% from $8.4 million in 1993 to $8.8 million in 1994 due to
higher sales in Europe/Africa and Canada partially offset by reduced sales in
Latin America.
DRILLING FLUIDS
Drilling Fluids revenues represents four month's operations related to the
recently acquired M-I Drilling Fluids business. Drilling Fluids revenues
increased approximately $18.9 million or 12.9% over the same period in 1993 due
primaily to increased revenues in North America.
DRILLING AND COMPLETION SERVICES
Drilling and completion services revenues increased $16.8 million or 62.5%
from $26.9 million in the first six months of 1993 to $43.7 million in the first
six months of 1994. The higher revenue levels were primarily due to the
acquisition of the A-Z/Grant and Lindsey product lines and increased sales
volumes in the United States and Colombia.
For the periods indicated, the following table summarizes certain operating
results of the Company and presents results as a percentage of total revenues:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------
1994 1993
--------------- ---------------
AMOUNT % AMOUNT %
------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues............................................... $274.2 100% $102.7 100%
------ --- ------ ---
Costs and Expenses:
Cost of revenues.................................. 181.0 66 66.5 65
Selling expenses.................................. 48.3 18 19.0 19
General and administrative expenses............... 19.5 7 10.6 10
------ --- ------ ---
Total costs and expenses..................... 248.8 91 96.1 94
------ --- ------ ---
Income from continuing operations before interest and
taxes................................................ 25.4 9 6.6 6
Interest expense, net.................................. 3.3 1 2.5 2
------ --- ------ ---
Income from continuing operations before taxes and
minority interest.................................... 22.1 8 4.1 4
Income tax provision................................... 2.5 1 0.1 --
------ --- ------ ---
Income from continuing operations before minority
interest............................................. 19.6 7 4.0 4
Minority interest...................................... 3.5 1 -- --
------ --- ------ ---
Income from continuing operations...................... $ 16.1 6% $ 4.0 4%
====== === ====== ===
</TABLE>
Total revenues increased by $171.5 million from $102.7 million in the first
six months of 1993 to $274.2 million in the first six months of 1994. The
increase primarily reflects the acquisitions of M-I and A-Z/Grant and Lindsey.
In addition, revenues increased due to higher North American drilling activity,
increased drill bit sales in the Middle East and Far East and increased drilling
and completion services volume in the United States and Colombia. These factors
were partially offset by a decrease in revenues due to lower drilling activity
in the Europe/Africa region.
12
<PAGE> 14
Gross profit increased by $57.0 million from $36.2 million in 1993 to $93.2
million in 1994. The increase was due primarily to the acquisitions of M-I and
A-Z/Grant and Lindsey, higher volumes in Canada and the United States and lower
operating costs in the United States.
Operating expenses, consisting of selling expenses and general and
administrative expenses, increased from $29.6 million in 1993 to $67.8 million
in 1994 due primarily to the additional expenses associated with the newly
acquired companies and increased variable costs related to the higher revenue
levels partially offset by lower legal expenses. Operating expenses as a
percentage of revenues decreased from 28.8% in 1993 to 24.7% in 1994.
Interest expense increased $0.8 million between periods due to increased
interest expense resulting from higher debt levels and decreased interest income
from reduced short-term investments as these funds were used for its
acquisitions.
The tax provision of $2.5 million in 1994 consists primarily of foreign
taxes on income. The increase between periods was due primarily to taxes on
foreign earnings of M-I.
Minority interest principally represents the 36% minority interest in the
earnings of M-I.
SECOND QUARTER OF 1994 COMPARED TO SECOND QUARTER OF 1993
RESULTS OF OPERATIONS
Revenues
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
------------------------------------
1994 1993
--------------- ---------------
AMOUNT % AMOUNT %
------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Breakdown by Product Group:
Drill Bits........................................ $ 40.8 24% $ 37.5 71%
Drilling Fluids................................... 109.5 63 -- --
Drilling and Completion Services.................. 23.1 13 15.2 29
------ --- ------ ---
Total........................................ $173.4 100% $ 52.7 100%
====== === ====== ===
Breakdown by Areas:
Domestic.......................................... $ 79.3 46% $ 23.3 44%
Export............................................ 16.3 9 7.3 14
International operations.......................... 77.8 45 22.1 42
------ --- ------ ---
Total........................................ $173.4 100% $ 52.7 100%
====== === ====== ===
Average Active Rig Count:
Domestic.......................................... 732 648
Canada............................................ 173 124
International (excluding Canada).................. 739 777
------ ------
Total........................................ 1,644 1,549
====== ======
</TABLE>
DRILL BITS
Drill bit revenues are generated from the sale of petroleum drill bits and
mining bits. Petroleum drill bit revenues increased $3.1 million or 9.3% from
$33.2 million in the second quarter of 1993 to $36.3 million in the second
quarter of 1994 due primarily to higher sales in Canada and the United States
resulting from the increase in drilling activity. These increases were partially
offset by reduced sales in the North Sea region due to lower drilling activity.
Mining bit revenues increased $0.2 million or 4.7% from $4.3 million in the
second quarter of 1993 to $4.5 million in the second quarter of 1994 due to
higher sales in Europe/Africa and Canada.
13
<PAGE> 15
DRILLING FLUIDS
Drilling Fluids revenues represents the second quarter's operations related
to the recently acquired M-I Drilling Fluids business. Drilling Fluids revenues
increased approximately $10.8 million or 10.9% over the second quarter of 1993
due primarily to increased revenues in North America.
DRILLING AND COMPLETION SERVICES
Drilling and completion services revenues increased $7.9 million or 52.0%
from $15.2 million in the second quarter of 1993 to $23.1 million in the second
quarter of 1994. The higher revenue levels were primarily due to the acquisition
of the A-Z/Grant and Lindsey product lines and increased sales volumes in
Colombia and the U.S. partially offset by reduced revenues in France and Africa.
For the periods indicated, the following table summarizes certain operating
results of the Company and presents results as a percentage of total revenues:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
------------------------------------
1994 1993
--------------- ---------------
AMOUNT % AMOUNT %
------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues............................................... $173.4 100% $ 52.7 100%
------ --- ------ ---
Costs and Expenses:
Cost of revenues.................................. 115.8 67 33.7 64
Selling expenses.................................. 30.3 17 10.2 20
General and administrative expenses............... 12.3 7 5.5 10
------ --- ------ ---
Total costs and expenses..................... 158.4 91 49.4 94
------ --- ------ ---
Income from continuing operations before interest and
taxes................................................ 15.0 9 3.3 6
Interest expense, net.................................. 2.3 1 0.5 1
------ --- ------ ---
Income from continuing operations before taxes and
minority interest.................................... 12.7 8 2.8 5
Income tax provision................................... 1.6 1 0.1 --
------ --- ------ ---
Income from continuing operations before minority
interest............................................. 11.1 7 2.7 5
Minority interest...................................... 2.6 2 -- --
------ --- ------ ---
Income from continuing operations...................... $ 8.5 5% $ 2.7 5%
====== === ====== ===
</TABLE>
Total revenues increased by $120.7 million from $52.7 million in the second
quarter of 1993 to $173.4 million in the second quarter of 1994. The increase
primarily reflects the acquisitions of M-I and A-Z/Grant and Lindsey. In
addition, revenues increased due to higher North American drilling activity and
increased drilling and completion services revenues in Colombia and the U.S.
partially offset by reduced revenues in France and Africa.
Gross profit increased by $38.6 million from $19.0 million in 1993 to $57.6
million in 1994. The increase was due primarily to the acquisitions of M-I and
A-Z/Grant and Lindsey, increased volumes in Canada and the United States and
higher volumes in Colombia.
Operating expenses, consisting of selling expenses and general and
administrative expenses, increased from $15.7 million in 1993 to $42.6 million
in 1994 due primarily to the additional expenses associated with the newly
acquired companies and increased variable costs related to the higher revenue
levels partially offset by lower legal expenses. Operating expenses as a
percentage of revenues decreased from 29.8% in 1993 to 24.6% in 1994.
Interest expense increased $1.8 million between periods due to increased
interest expense resulting from higher debt levels and decreased interest income
from reduced short-term investments as these funds were used for its
acquisitions.
14
<PAGE> 16
The tax provision of $1.6 million in 1994 consists primarily of foreign
taxes on income. The increase between periods was due primarily to taxes on
foreign earnings of M-I.
Minority interest principally represents the 36% minority interest in the
earnings of M-I.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at June 30, 1994, totalled $10.5 million or a
decrease of $91.1 million from the Company's cash position at December 31, 1993.
The Company's current ratio also decreased to 2.48 to 1 at June 30, 1994 from
3.20 to 1 at December 31, 1993. The decrease in cash and the current ratio was
due primarily to the acquisition of the 64% interest in M-I Drilling Fluids
Company for $160 million using $80 million of its cash and issuing a note
payable to Dresser for $80 million.
The Company refinanced the Dresser note payable in March 1994 with a $40
million term loan from two of its insurance company lenders and a $65 million
revolving line of credit from a bank group. The term loan bears interest at a
rate of 6.02 percent and is payable over a four year period ending in January
1998. The revolving line of credit expires in March 1997 and bears interest at a
rate ranging from LIBOR + 3/4 percent to LIBOR +1 1/2 percent based upon the
debt-to-total capitalization of the Company. The Company has borrowing capacity
under its domestic line of credit at June 30, 1994 of approximately $30.3
million.
The Company also has various international borrowing facilities totalling
approximately $11.9 million. The Company has borrowing capacity under its
international credit facilities at June 30, 1994 of approximately $8.3 million.
The Company expects to be able to meet its ongoing working capital and capital
expenditure requirements from existing cash on hand, operating cash flows and
existing credit facilities.
On July 1, 1994, the Company acquired Supradiamant, S.A. (Supradiamant)
from Societe Industrielle de Combustible Nucleaire for approximately $6.3
million in cash from borrowings under our revolving line of credit. Supradiamant
is a leading manufacturer of ultrahard materials, polycrystalline diamond and
cubic boron nitride.
15
<PAGE> 17
SMITH INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders on April 27, 1994, shareholders of
the Company elected directors, ratified the appointment of auditors and
approved increasing the number of shares available under the Company's 1989
Long-Term Incentive Compensation Plan from 1,000,000 to 2,500,000 by the
votes shown below.
<TABLE>
<CAPTION>
AGENDA ITEM FOR WITHHELD
----------------------------------------------- --------- --------
<S> <C> <C>
Election of directors:
Benjamin F. Bailar........................ 33,482,715 415,263
Douglas L. Rock........................... 32,060,585 1,837,393
H. Moak Rollins........................... 33,477,562 420,416
</TABLE>
<TABLE>
<CAPTION>
AGENDA ITEM FOR AGAINST ABSTAIN NON-VOTE
----------------------------------- --------- -------- ------- --------
<S> <C> <C> <C> <C>
Ratify Auditors.................... 32,604,009 1,237,186 56,783 -0-
Amend Long-Term Incentive
Compensation Plan................ 23,629,631 5,887,980 297,733 4,082,634
</TABLE>
ITEM 5. OTHER INFORMATION
On August 8, 1994, the Company filed with the Securities and Exchange
Commission a Form 10-K/A which amended its Form 10-K for the year ended
December 31, 1993 to revise the Pro Forma Financial Information relating to
the acquisitions of M-I and A-Z/Grant and Lindsey.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during 1994:
Form 8-K dated March 2, 1994; Item 2.
Form 8-K/A Amendment No. 1 dated May 13, 1994;
Form 8-K/A Amendment No. 2 dated August 8, 1994.
16
<PAGE> 18
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SMITH INTERNATIONAL, INC.
-------------------------------------
(Registrant)
By: /s/ DOUGLAS L. ROCK
----------------------------------
DOUGLAS L. ROCK
Chairman of the Board and
Chief Executive Officer
By: /s/ LOREN K. CARROLL
----------------------------------
LOREN K. CARROLL
Executive Vice President and
Chief Financial Officer
Dated: August 12, 1994
17
