<PAGE> 1
THIS DOCUMENT IS A COPY OF THE FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
1994 FILED ON NOVEMBER 15, 1994 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP
EXEMPTION.
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 SEPTEMBER 30, 1994 COMMISSION FILE NUMBER 1-8514
SMITH INTERNATIONAL, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3822631
- ------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16740 HARDY STREET, HOUSTON, TEXAS 77032
- ---------------------------------------- -------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE
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 SEPTEMBER 30, 1994 THE REGISTRANT HAD 39,419,764 SHARES OF COMMON
STOCK OUTSTANDING.
<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 nine month periods ended September 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.
2
<PAGE> 3
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1994 1993
-------- --------
(Unaudited)
(In thousands,
except per share data)
<S> <C> <C>
REVENUES................................... $ 455,661 $ 161,734
COST AND EXPENSES:
Cost of Revenues......................... 302,195 103,928
Selling Expenses......................... 80,540 29,617
General and Administrative Expenses...... 30,925 16,033
--------- ---------
Total Costs and Expenses............ 413,660 149,578
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
UNUSUAL ITEM, INTEREST AND TAXES......... 42,001 12,156
UNUSUAL ITEM - LITIGATION SETTLEMENT (Note 6) --- 19,900
INTEREST EXPENSE, net...................... 5,801 2,216
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST 36,200 (9,960)
INCOME TAX PROVISION....................... 4,430 220
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST................. 31,770 (10,180)
MINORITY INTEREST.......................... 6,367 ---
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS... 25,403 (10,180)
INCOME FROM DISCONTINUED OPERATIONS (Note 4) --- 73,623
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Note 1)....................... --- (1,300)
--------- ---------
NET INCOME................................. 25,403 62,143
PREFERRED STOCK DIVIDENDS.................. --- (868)
--------- ---------
NET INCOME APPLICABLE TO COMMON STOCK...... $ 25,403 $ 61,275
========= =========
PRIMARY EARNINGS PER COMMON SHARE (Note 2):
Income (loss) from continuing operations. $ .65 $ (.30)
Income from discontinued operations...... --- 1.97
Cumulative effect of change in accounting
principle.............................. --- (.03)
--------- ---------
Net income............................... $ .65 $ 1.64
========= =========
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING....................... 39,036 37,380
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(Unaudited)
(In thousands,
except per share data)
<S> <C> <C>
REVENUES................................... $ 181,489 $ 59,039
COST AND EXPENSES:
Cost of Revenues......................... 121,213 37,412
Selling Expenses......................... 32,253 10,621
General and Administrative Expenses...... 11,406 5,421
--------- ---------
Total Costs and Expenses............ 164,872 53,454
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
UNUSUAL ITEM, INTEREST AND TAXES......... 16,617 5,585
UNUSUAL ITEM - LITIGATION SETTLEMENT (Note 6) --- 19,900
INTEREST EXPENSE (INCOME), net............. 2,522 (265)
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST 14,095 (14,050)
INCOME TAX PROVISION....................... 1,900 108
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST................. 12,195 (14,158)
MINORITY INTEREST.......................... 2,846 ---
--------- ---------
NET INCOME (LOSS).......................... $ 9,349 $ (14,158)
======== ========
NET INCOME (LOSS) PER COMMON SHARE (Note 2) $ .24 $ (.36)
======== ========
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING....................... 39,267 38,902
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------ -----------
(Unaudited)
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................. $ 7,254 $ 101,561
Receivables, less allowance of
$9,077 in 1994 and $4,995 in 1993
for doubtful accounts................... 185,506 67,830
Inventories (Note 3)...................... 201,236 88,369
Prepaid expenses and other................ 10,760 4,802
---------- -----------
Total current assets................... 404,756 262,562
---------- -----------
RENTAL EQUIPMENT, net of accumulated
depreciation of $24,350 in 1994 and
$23,457 in 1993........................... 17,526 16,908
---------- -----------
PLANT AND EQUIPMENT:
Land...................................... 31,895 888
Buildings................................. 66,765 16,284
Machinery and equipment................... 362,511 136,575
---------- -----------
461,171 153,747
Less--accumulated depreciation............ 361,485 115,938
---------- -----------
Net plant and equipment................... 99,686 37,809
---------- -----------
OTHER ASSETS................................ 38,733 28,253
GOODWILL (Note 4)........................... 49,911 2,954
---------- -----------
TOTAL ASSETS................................ $ 610,612 $ 348,486
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 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 (Notes 4 and 5) $ 14,322 $ 702
Accounts payable........................... 54,161 24,763
Accrued payroll and severance related costs 28,178 10,923
Income taxes payable....................... 6,969 9,484
Other...................................... 51,969 34,198
---------- ----------
Total current liabilities............. 155,599 80,070
---------- ----------
LONG-TERM DEBT (Notes 4 and 5)............... 119,200 46,000
---------- ----------
DEFERRED INCOME TAXES........................ 4,403 4,563
---------- ----------
OTHER LONG-TERM LIABILITIES.................. 18,990 3,387
---------- ----------
MINORITY INTERESTS (Note 4).................. 69,558 ---
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock -
Authorized-60,000,000 shares, $1 par
value; issued and outstanding-
39,419,764 shares in 1994 and
39,311,447 in 1993................... 39,420 39,311
Common stock warrants -
Class A warrants: outstanding-208,952
in 1994 and 225,520 in 1993............ --- ---
Class B warrants: outstanding-1,871,701
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................. 272,525 271,582
Accumulated deficit........................ (58,030) (83,433)
Cumulative translation adjustment.......... (4,417) (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............ 242,862 214,466
---------- ----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY..... $ 610,612 $ 348,486
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1994 1993
-------- --------
(unaudited)
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations......... $ 25,403 $(11,480)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities excluding the
net effects of the acquisitions of M-I Drilling
Fluids Company and Supradiamant:
Depreciation and amortization.................... 16,578 9,021
Provision for losses on accounts receivable...... 1,092 743
Gain on disposal of fixed assets................. (2,434) (1,029)
Foreign currency translation..................... 1,127 547
Change in receivables............................ (933) 14,986
Change in inventories............................ (17,491) 2,837
Change in accounts payable....................... (9,972) (11,370)
Changes in other current assets and liabilities.. (5,170) 2,688
Changes in other noncurrent assets and
liabilities.................................... (8,637) 916
-------- --------
Subtotal.................................... (437) 7,859
Net results of discontinued operations............... --- (6,483)
-------- --------
Net cash provided by (used in) operating activities.. (437) 1,376
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of M-I Drilling Fluids Company (Note 4).. (160,000) ---
Acquisition of Supradiamant (Note 4)................. (6,363) ---
Proceeds from sale of DDS business (Note 4).......... --- 247,703
Expenses paid related to DDS sale.................... --- (38,312)
Fixed asset additions................................ (17,003) (9,331)
Proceeds from disposal of other fixed assets......... 3,254 3,896
-------- --------
Net cash provided by (used in) investing activities.. (180,112) 203,956
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............. 92,000 ---
Net increase (decrease) in short-term borrowing...... 1,980 (32,818)
Repayment of long-term debt.......................... (8,800) (67,182)
Proceeds from exercise of stock options and warrants. 1,052 204
Purchase of treasury stock........................... --- (366)
Dividends on preferred stock......................... --- (868)
-------- --------
Net cash provided by (used in) financing activities.. 86,232 (101,030)
-------- --------
Effect of exchange rate changes on cash.............. 10 (194)
-------- --------
Increase (decrease) in cash and cash equivalents..... (94,307) 104,108
Cash and cash equivalents at beginning of period..... 101,561 16,249
-------- --------
Cash and cash equivalents at end of period........... $ 7,254 $120,357
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................... $ 3,563 $ 6,739
Cash paid for income taxes........................... 3,417 1,802
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK WARRANTS
------------------ --------------------- ADDITIONAL ACCUM- CUMULATIVE
NUMBER NUMBER PAID-IN ULATED TRANSLATION
OF SHARES AMOUNT OF 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....................... 91,245 91 --- --- 815 --- ---
EXERCISE OF COMMON STOCK
WARRANTS...................... 17,072 18 (17,072) --- 128 --- ---
NET INCOME...................... --- --- --- --- --- 25,403 ---
TRANSLATION ADJUSTMENT FOR THE
PERIOD........................ --- --- --- --- --- --- 1,941
---------- ------- --------- ------ -------- -------- -------
BALANCE, SEPTEMBER 30, 1994..... 39,419,764 $39,420 2,532,010 $7,278 $272,525 $(58,030) $(4,417)
========== ======= ========= ====== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
TREASURY SECURITIES
-------------------------------------------
NUMBER OF NUMBER OF
COMMON SHARES AMOUNT WARRANTS AMOUNT
------------- ------ --------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<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, SEPTEMBER 30, 1994..... (628,583) $(6,636) (451,357) $(7,278)
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
SMITH INTERNATIONAL, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All data with respect to the three and nine months
ended September 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 nine month periods ended September 30, 1994
and 1993 after deducting preferred dividends for the nine months ended
September 30, 1993. Earnings per share assuming full dilution is substantially
the same as primary earnings per share as presented for the three and nine
months ended September 30, 1994 and 1993. As the Company incurred a net loss
applicable to common stock for the three months ended September 30, 1993, the
equivalent shares are antidilutive for that period and, therefore, are not
added to the average shares outstanding when calculating the loss per common
share.
3) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- -------------
($000 omitted)
<S> <C>
Raw Materials................... $ 22,996 $ 10,965
Work in Process................. 32,193 13,551
Finished Goods.................. 158,095 75,001
-------- --------
213,284 99,517
Less: reserve to state certain
domestic inventories($95,284
in 1994 and $77,312 in 1993)
on a LIFO basis................. (12,048) (11,148)
-------- --------
$201,236 $ 88,369
======== ========
</TABLE>
9
<PAGE> 10
4) DISPOSITIONS AND ACQUISITIONS
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 $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 sheet of the Company at December 31, 1993
included the historical accounts of A-Z/Grant and Lindsey and certain purchase
accounting adjustments on an estimated basis. During the third quarter of
1994, the Company revised its valuation of the tangible assets acquired and
other costs necessary to reorganize the operations of A-Z/Grant and Lindsey.
The Company has restated its December 31, 1993 balance sheet for such revisions
by increasing inventories by $6.7 million, other assets by $0.8 million and
other liabilities by $0.1 million and decreasing rental equipment, net by $3.6
million and plant and equipment, net by $3.8 million.
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.
10
<PAGE> 11
The historical balance sheet of the Company at September 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 tangible 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 tangible 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.
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. Supradiamant is a leading manufacturer of
ultrahard materials, polycrystalline diamond and cubic boron nitride. In 1993,
Supradiamant reported revenues of approximately $7.0 million. Summarized
unaudited pro forma results from continuing operations of Supradiamant for the
three and nine month periods ended September 30, 1993 and 1994 are not
significant to the Company.
The historical balance sheets of the Company at September 30, 1994
includes the historical accounts of Supradiamant and certain purchase
accounting adjustments on an estimated basis. Management has not fully
evaluated all of the consequences of the acquisition of Supradiamant including
assessing the fair market value of the tangible 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 tangible assets acquired, if
any, will be recorded as goodwill in accordance with purchase accounting rules
and principles.
The summarized unaudited pro forma results from continuing
operations for the three and nine month periods ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Unaudited pro forma revenues............. $ 181.5 $ 174.1 $ 531.0 $ 482.4
======== ======== ======== ========
Unaudited pro forma income (loss) from
continuing operations.................. $ 9.3 $ (12.6) $ 23.9 $ (9.5)
======== ======== ======== ========
Unaudited pro forma income (loss) from
continuing operations per common share. $ 0.24 $ (0.32) $ 0.61 $ (0.28)
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
5) DEBT
In July 1994, M-I established a $20 million revolving line of credit
with the Company's existing bank lenders. The revolving line of credit expires
in July 1995 and bears interest at LIBOR + 3/4 percent. M-I Drilling Fluids
Company has borrowing capacity under this domestic line of credit at September
30, 1994 of $20 million. The Company has guaranteed its proportional 64%
interest of the M-I Drilling Fluids Company line of credit or approximately
$12.8 million.
At September 30, 1994, the Company has borrowing capacity under its
domestic and international lines of credit of approximately of $41.8 million
and $6.9 million, respectively, for a total borrowing capacity of $48.7
million.
6) LITIGATION MATTERS
In September 1993, the Company agreed to settle a class action civil
lawsuit pending in the federal district court in Houston. The Company recorded
a special charge of $19.9 million, which is presented as an unusual item in the
accompanying 1993 consolidated statements of operations, to cover the cost of
the settlement and related estimated legal fees and other costs and expenses.
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. On December 22, 1993, the Company purchased the product line assets
of A- Z International, Grant Oil Tools, and Lindsey Completion Systems. 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.
12
<PAGE> 13
FIRST NINE MONTHS OF 1994 COMPARED TO FIRST NINE 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 Nine Months Ended September 30,
---------------------------------------
1994 1993
Amount % Amount %
------ --- ------- ----
(dollars in millions)
<S> <C> <C> <C> <C>
Breakdown by Product Group:
Drill Bits.......................... $ 129.8 29% $ 118.6 73%
Drilling Fluids..................... 258.7 57 --- --
Drilling and Completion Services.... 67.2 14 43.1 27
------- ---- ------- ----
Total................. $ 455.7 100% $ 161.7 100%
======= ==== ======= ====
Breakdown by Areas:
Domestic............................ $ 200.3 44% $ 71.5 44%
Export.............................. 42.5 9 21.8 14
International operations............ 212.9 47 68.4 42
------- ---- ------- ----
Total................. $ 455.7 100% $ 161.7 100%
======= ==== ======= ====
Average Active Rig Count:
Domestic............................ 758 719
Canada.............................. 249 172
International (excluding Canada).... 735 771
----- -----
Total................. 1,742 1,662
======= =======
</TABLE>
DRILL BITS
Drill bit revenues are generated from the sale of petroleum
drill bits and mining bits. Petroleum drill bit revenues increased $10.3
million or 9.7% from $106.2 million in the first nine months of 1993 to $116.5
million in the first nine months of 1994 due primarily to higher sales in
Canada and the United States resulting from the increase in drilling activity,
the acquisition of Supradiamant and increase sales in the Far East. These
increases were partially offset by reduced sales in Europe/Africa. Mining bit
revenues increased $0.9 million or 7.3% from $12.4 million in 1993 to $13.3
million in 1994 due to higher sales in Europe/Africa and Latin America.
DRILLING FLUIDS
Drilling Fluids revenues represents seven month's operations
related to the recently acquired M-I Drilling Fluids business. Drilling Fluids
revenues increased approximately $23.6 million or 10.0% over the same period in
1993 due primarily to increased revenues in North America, the Far East and
Canada.
DRILLING AND COMPLETION SERVICES
Drilling and completion services revenues increased $24.1
million or 55.9% from $43.1 million in the first nine months of 1993 to $67.2
million in the first nine 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. These increases
were partially offset by reduced sales in the Middle East.
13
<PAGE> 14
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 Nine Months Ended September 30,
--------------------------------------
1994 1993
----------------- -----------------
Amount % Amount %
-------- ----- -------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Revenues............................. $ 455.7 100% $ 161.7 100%
------- ---- ------- ----
Costs and Expenses:
Cost of revenues................... 302.2 66 103.9 64
Selling expenses................... 80.6 18 29.6 18
General and administrative expenses 30.9 7 16.1 10
------- ---- ------- ----
Total costs and expenses..... 413.7 91 149.6 92
------ ---- ------- ----
Income from continuing operations
before unusual item, interest and
taxes.............................. 42.0 9 12.1 8
Unusual item - litigation settlement --- -- 19.9 12
Interest expense, net................ 5.8 1 2.2 2
------- ---- ------- ----
Income (loss) from continuing
operations before taxes and
minority interest................... 36.2 8 (10.0) (6)
Income tax provision................. 4.4 1 0.2 -
------- ---- ------- ----
Income (loss) from continuing
operations before minority interest. 31.8 7 (10.2) (6)
Minority interest.................... 6.4 1 --- -
------- ---- ------- ----
Income (loss) from continuing
operations......................... $ 25.4 6% $ (10.2) (6)%
======= ==== ======= ====
</TABLE>
Total revenues increased by $294.0 million from $161.7 million in the
first nine months of 1993 to $455.7 million in the first nine months of 1994.
The increase primarily reflects the acquisitions of M-I, A-Z/Grant and Lindsey
and Supradiamant. In addition, revenues increased due to higher North American
drilling activity, increased drill bit sales in the 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 and the Middle East.
Gross profit increased by $95.7 million from $57.8 million in 1993 to
$153.5 million in 1994. The increase was due primarily to the acquisitions of
M-I, A-Z/Grant and Lindsey and Supradiamant, 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 $45.7 million in 1993 to $111.5 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 28.3% in 1993 to 24.5% in 1994.
During September 1993, the Company agreed to settle a class action
civil lawsuit and recorded a charge of $19.9 million related to such settlement
and related legal fees and expenses. This amount is presented as an unusual
item in the accompanying 1993 consolidated statements of operations.
Interest expense increased $3.6 million between periods due to
increased interest expense resulting from higher debt levels and higher
interest rates as well as decreased interest income from reduced short-term
investments as these funds were used for the Company's acquisitions.
14
<PAGE> 15
The tax provision of $4.4 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.
THIRD QUARTER OF 1994 COMPARED TO THIRD QUARTER OF 1993
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
----------------------------------------
1994 1993
---------------- -----------------
Amount % Amount %
-------- ---- -------- ----
(dollars in millions)
<S> <C> <C> <C> <C>
Breakdown by Product Group:
Drill Bits.......................... $ 46.2 25% $ 42.8 73%
Drilling Fluids..................... 111.7 62 --- --
Drilling and Completion Services.... 23.6 13 16.2 27
------- --- ------- ---
Total................. $ 181.5 100% $ 59.0 100%
======= === ======= ===
Breakdown by Areas:
Domestic............................ $ 75.9 42% $ 27.1 46%
Export.............................. 15.7 9 8.8 15
International operations............ 89.9 49 23.1 39
------- --- ------- ---
Total................. $ 181.5 100% $ 59.0 100%
======= === ======= ===
Average Active Rig Count:
Domestic............................ 783 795
Canada.............................. 277 169
International (excluding Canada).... 717 768
------- -------
Total................. 1,777 1,732
======= =======
</TABLE>
DRILL BITS
Petroleum drill bit revenues increased $2.9 million or 7.5% from $38.7
million in the third quarter of 1993 to $41.6 million in the third quarter of
1994 due primarily to higher sales in Canada resulting from the increase in
drilling activity and the acquisition of Supradiamant. These increases were
partially offset by reduced sales in the Europe/Africa region due to lower
drilling activity. Mining bit revenues increased $0.5 million or 12.2% from
$4.1 million in the third quarter of 1993 to $4.6 million in the third quarter
of 1994 due to higher sales in Europe/Africa and Canada.
DRILLING FLUIDS
Drilling Fluids revenues represents the third quarter's operations
related to the recently acquired M-I Drilling Fluids business. Drilling Fluids
revenues increased approximately $4.6 million or 4.3% over the third quarter of
1993 due primarily to increased revenues in the Far East, Canada and Latin
America.
DRILLING AND COMPLETION SERVICES
Drilling and completion services revenues increased $7.4 million or
45.7% from $16.2 million in the third quarter of 1993 to $23.6 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 the United States and Colombia.
15
<PAGE> 16
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 September 30,
----------------------------------------
1994 1993
----------------- -------------------
Amount % Amount %
-------- ----- -------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Revenues............................. $ 181.5 100% $ 59.0 100%
------- ---- ------- ----
Costs and Expenses:
Cost of revenues................... 121.2 67 37.4 63
Selling expenses................... 32.3 18 10.6 18
General and administrative expenses 11.4 6 5.4 9
------- ---- ------- ----
Total costs and expenses..... 164.9 91 53.4 90
------- ---- ------- ----
Income from continuing operations
before unusual item, interest and
taxes.............................. 16.6 9 5.6 10
Unusual item - litigation settlement. --- -- 19.9 34
Interest expense (income), net....... 2.5 1 (0.2) 1
------- ---- ------- ----
Income (loss) from continuing
operations before taxes and
minority interest.................. 14.1 8 (14.1) (24)
Income tax provision................. 1.9 1 0.1 -
------- ---- ------- ----
Income (loss) from continuing
operations before minority interest 12.2 7 (14.2) (24)
Minority interest.................... 2.9 2 --- -
------- ---- ------- ----
Income (loss) from continuing
operations......................... $ 9.3 5% $ (14.2) (24)%
======= ==== ======= ====
</TABLE>
Total revenues increased by $122.5 million from $59.0 million in the
third quarter of 1993 to $181.5 million in the third quarter of 1994. The
increase primarily reflects the acquisitions of M-I, A-Z/Grant and Lindsey and
Supradiamant. In addition, revenues increased due to higher North American
drilling activity and increased drilling and completion services revenues in
the United States and Colombia.
Gross profit increased by $38.7 million from $21.6 million in 1993 to
$60.3 million in 1994. The increase was due primarily to the acquisitions of
M-I, A-Z/Grant and Lindsey and Supradiamant, 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 $16.0 million in 1993 to $43.7 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 27.1% in 1993 to 24.1% in 1994.
During September 1993, the Company's agreed to settle a class action
civil lawsuit and recorded a charge of $19.9 million related to such settlement
and related legal fees and expenses. This amount is presented as an unusual
item in the accompanying 1993 consolidated statements of operations.
Interest expense increased $2.7 million between periods due to
increased interest expense resulting from higher debt levels and higher
interest rates as well as decreased interest income from reduced short-term
investments as these funds were used for the Company's acquisitions.
The tax provision of $1.9 million in 1994 consists primarily of
foreign taxes on income. The increase between periods was due primarily to
foreign taxes on foreign earnings of M-I.
Minority interest principally represents the 36% minority interest in
the earnings of M-I.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at September 30, 1994, totaled $7.3
million or a decrease of $94.3 million from the Company's cash position at
December 31, 1993. The Company's current ratio also decreased to 2.60 to 1 at
September 30, 1994 from 3.28 to 1 at December 31, 1993. The decrease in cash
and the current ratio was due primarily to the acquisitions 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 and Supradiamant, S.A.
from Societe Industrielle de Combustible Nucleaire for approximately $6.3
million in cash.
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 September
30, 1994 of approximately $21.8 million.
In July 1994, M-I established a $20 million revolving line of credit
with the Company's existing bank lenders. The revolving line of credit expires
in July 1995 and bears interest at LIBOR +3/4 percent. M-I Drilling Fluids
Company has borrowing capacity under this domestic line of credit at September
30, 1994 of $20 million. The Company has guaranteed its proportional 64%
interest of the M-I Drilling Fluids Company line of credit or approximately
$12.8 million.
The Company also has various international borrowing facilities
totaling approximately $14.3 million. The Company has borrowing capacity under
its international credit facilities at September 30, 1994 of approximately $6.9
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.
17
<PAGE> 18
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27 - Financial Data Schedule
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.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITH INTERNATIONAL, INC.
(Registrant)
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: November 14, 1994
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 7,254
<SECURITIES> 0
<RECEIVABLES> 185,506
<ALLOWANCES> 9,077
<INVENTORY> 201,236
<CURRENT-ASSETS> 404,756
<PP&E> 503,047
<DEPRECIATION> 385,835
<TOTAL-ASSETS> 610,612
<CURRENT-LIABILITIES> 155,599
<BONDS> 119,200
<COMMON> 39,420
0
0
<OTHER-SE> 203,442
<TOTAL-LIABILITY-AND-EQUITY> 610,612
<SALES> 455,661
<TOTAL-REVENUES> 455,661
<CGS> 302,195
<TOTAL-COSTS> 302,195
<OTHER-EXPENSES> 111,465
<LOSS-PROVISION> 1,092
<INTEREST-EXPENSE> 5,801
<INCOME-PRETAX> 36,200
<INCOME-TAX> 4,430
<INCOME-CONTINUING> 25,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,403
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
</TABLE>
