<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 1995 COMMISSION FILE NUMBER 1-8514
SMITH INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-382263131
(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 September 30, 1995 the registrant had 39,777,607 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 an 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 months ended September 30, 1995 and 1994 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>
1995 1994
-------- --------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
REVENUES............................................................... $635,016 $455,661
COSTS AND EXPENSES:
Costs of Revenues.................................................... 424,040 302,195
Selling Expenses..................................................... 113,672 80,540
General and Administrative Expenses.................................. 34,991 30,925
-------- --------
Total Costs and Expenses..................................... 572,703 413,660
-------- --------
EARNINGS BEFORE INTEREST AND TAXES..................................... 62,313 42,001
INTEREST EXPENSE, net.................................................. 9,138 5,801
-------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS...................... 53,175 36,200
INCOME TAX PROVISION................................................... 9,186 4,430
-------- --------
INCOME BEFORE MINORITY INTERESTS....................................... 43,989 31,770
MINORITY INTERESTS..................................................... 11,317 6,367
-------- --------
NET INCOME............................................................. $ 32,672 $ 25,403
======== ========
EARNINGS PER COMMON SHARE (Note 2)..................................... $ .83 $ .65
======== ========
AVERAGE COMMON AND EQUIVALENT SHARES OUTSTANDING....................... 39,322 39,036
======== ========
</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>
1995 1994
-------- --------
<S> <C> <C>
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
REVENUES............................................................... $229,437 $181,489
COSTS AND EXPENSES:
Costs of Revenues.................................................... 152,794 121,213
Selling Expenses..................................................... 40,808 32,253
General and Administrative Expenses.................................. 12,428 11,406
-------- --------
Total Costs and Expenses..................................... 206,030 164,872
-------- --------
EARNINGS BEFORE INTEREST AND TAXES..................................... 23,407 16,617
INTEREST EXPENSE, net.................................................. 3,168 2,522
-------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS...................... 20,239 14,095
INCOME TAX PROVISION................................................... 3,937 1,900
-------- --------
INCOME BEFORE MINORITY INTERESTS....................................... 16,302 12,195
MINORITY INTERESTS..................................................... 4,559 2,846
-------- --------
NET INCOME............................................................. $ 11,743 $ 9,349
======== ========
EARNINGS PER COMMON SHARE (Note 2)..................................... $ .30 $ .24
======== ========
AVERAGE COMMON AND EQUIVALENT SHARES OUTSTANDING....................... 39,528 39,267
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1994
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 3,448 $ 8,145
Receivables, less allowance of $8,240 in 1995 and $8,679 in 1994
for doubtful accounts.......................................... 221,071 201,053
Inventories (Note 3).............................................. 215,678 201,104
Deferred tax assets, net.......................................... 2,419 2,161
Prepaid expenses and other........................................ 17,127 9,133
-------- --------
Total current assets...................................... 459,743 421,596
-------- --------
PLANT AND EQUIPMENT:
Land.............................................................. 11,343 17,079
Buildings......................................................... 28,928 29,065
Machinery and equipment........................................... 234,989 220,953
-------- --------
275,260 267,097
Less -- accumulated depreciation.................................. 148,882 149,388
-------- --------
Net plant and equipment........................................... 126,378 117,709
-------- --------
OTHER ASSETS........................................................ 44,898 41,446
GOODWILL (Note 4)................................................... 44,149 39,029
-------- --------
TOTAL ASSETS........................................................ $ 675,168 $619,780
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term
debt (Note 4).................................................. $ 29,199 $ 15,852
Accounts payable.................................................. 54,665 67,873
Accrued payroll costs............................................. 29,754 28,232
Income taxes payable.............................................. 11,814 6,579
Other............................................................. 49,108 45,711
-------- --------
Total current liabilities................................. 174,540 164,247
-------- --------
LONG-TERM DEBT (Note 4)............................................. 115,249 115,000
-------- --------
OTHER LONG-TERM LIABILITIES......................................... 16,796 17,097
-------- --------
MINORITY INTERESTS (Note 4)......................................... 79,307 70,315
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock --
Authorized -- 60,000,000 shares, $1 par value; issued and
outstanding -- 39,777,607 shares in 1995 and 39,432,833 in
1994.......................................................... 39,778 39,433
Common stock warrants --
Class A warrants: outstanding -- none in 1995; 202,434 in 1994
(Note 5)..................................................... -- --
Class B warrants: outstanding -- none in 1995; 1,871,400 in
1994 (Note 5)................................................. -- --
Class C warrants: outstanding -- 451,357 in 1995 and 1994...... 7,278 7,278
Additional paid-in capital........................................ 275,195 272,483
Accumulated deficit............................................... (14,882) (47,554)
Cumulative translation adjustment................................. (4,179) (4,605)
Less -- treasury securities, at cost (628,583 common shares and
451,357 Class C warrants in 1995 and 1994)..................... (13,914) (13,914)
-------- --------
Total shareholders' equity................................ 289,276 253,121
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............................ $ 675,168 $619,780
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1995 1994
-------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 32,672 $ 25,403
Adjustments to reconcile net income to net cash provided by operating
activities excluding the net effects of the Company's 1995 and 1994
acquisitions (Note 4):
Depreciation and amortization....................................... 18,382 16,578
Provision for losses on accounts receivable......................... 600 1,092
Gain on disposal of fixed assets.................................... (3,668) (2,434)
Foreign currency translation........................................ 688 1,127
Change in receivables............................................... (18,954) (933)
Change in inventories............................................... (13,640) (17,491)
Change in accounts payable.......................................... (13,279) (9,972)
Changes in other current assets and liabilities..................... (211) (5,170)
Changes in other noncurrent assets and liabilities.................. 4,184 (8,637)
-------- ---------
Net cash provided by (used in) operating activities................... 6,774 (437)
-------- ---------
Cash flows from investing activities:
Acquisition of Fremont Chemical Company (Note 4)...................... (2,650) --
Acquisition of Baker Hughes Treatment Services (Note 4)............... (5,131) --
Acquisition of M-I Drilling Fluids L.L.C. (Note 4).................... -- (160,000)
Acquisition of Supradiamant (Note 4).................................. -- (6,363)
Fixed asset additions................................................. (24,627) (17,003)
Proceeds from disposal of fixed assets................................ 6,751 3,254
-------- ---------
Net cash used in investing activities................................. (25,657) (180,112)
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.............................. -- 84,000
Net increase in short-term borrowing.................................. 13,345 1,980
Net increase (decrease) in long-term bank revolver.................... 249 (800)
Proceeds from exercise of stock options and warrants.................. 3,057 1,052
Distributions to minority interests, net.............................. (2,520) --
-------- ---------
Net cash provided by financing activities............................. 14,131 86,232
-------- ---------
Effect of exchange rate changes on cash............................... 55 10
-------- ---------
Decrease in cash and cash equivalents................................. (4,697) (94,307)
Cash and cash equivalents at beginning of period...................... 8,145 101,561
-------- ---------
Cash and cash equivalents at end of period............................ $ 3,448 $ 7,254
======== =========
Supplemental disclosures of cash flow information:
Cash paid for interest................................................ $ 9,354 $ 3,563
Cash paid for income taxes............................................ 2,835 3,417
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY SECURITIES
COMMON STOCK WARRANTS -----------------------------------------
------------------- ------------------ ADDITIONAL ACCUM- CUMULATIVE NUMBER OF
NUMBER OF NUMBER OF PAID-IN ULATED TRANSLATION COMMON NUMBER OF
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT SHARES AMOUNT WARRANTS AMOUNT
--------- ------- --------- ------ -------- -------- ----------- --------- ------- --------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
30,
1994... 39,432,833 $39,433 2,525,191 $7,278 $272,483 $(47,554) $(4,605) (628,583 ) $(6,636) (451,357 ) $(7,278)
Exercise
of
employee
stock
options... 201,202 201 -- -- 1,671 -- -- -- -- -- --
Exercise
of
common
stock
warrants
(Note
5)... 143,572 144 (143,572) -- 1,041 -- -- -- -- -- --
Expiration
of
common
stock
warrants
(Note
5)... -- -- (1,930,262) -- -- -- -- -- -- -- --
Net
income... -- -- -- -- -- 32,672 -- -- -- -- --
Translation
adjustment
for the
period... -- -- -- -- -- -- 426 -- -- -- --
---------- ------- ---------- ------ ------- -------- ------- -------- ------- -------- -------
Balance,
September
30,
1995.. 39,777,607 $39,778 451,357 $7,278 $275,195 $(14,882) $(4,179) (628,583 ) $(6,636) (451,357 ) $(7,278)
========== ======= ========== ====== ======= ======== ======= ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
SMITH INTERNATIONAL, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DATA AS OF AND FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1994 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, 1994. There are no significant changes in the content of those
notes except as discussed below.
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 months ended September 30, 1995 and 1994.
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, 1995 and 1994.
3) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
($000 OMITTED)
<S> <C> <C>
Raw Materials.............................................. $ 29,517 $ 24,338
Work in Process............................................ 45,508 31,805
Finished Goods............................................. 151,712 155,420
-------- --------
226,737 211,563
Less: reserve to state certain domestic inventories
($98,436 in 1995 and $94,339 in 1994) on the LIFO
basis.................................................... (11,059) (10,459)
-------- --------
215,678 $201,104
======== ========
</TABLE>
4) ACQUISITIONS
Acquisition of M-I Drilling Fluids L.L.C.
Effective February 28, 1994, the Company acquired a 64% interest in M-I
Drilling Fluids L.L.C. (M-I) from Dresser Industries, Inc. (Dresser) for $160.0
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
$80.0 million of its cash and issuing a note payable to Dresser for $80.0
million. This acquisition was accounted for as a purchase. The Company recorded
approximately $37.3 million of goodwill upon purchase of the 64% interest in
M-I.
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. This acquisition was accounted
for as a
8
<PAGE> 9
SMITH INTERNATIONAL, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DATA AS OF AND FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED.)
purchase. The Company recorded approximately $2.5 million of goodwill in
connection with the purchase of Supradiamant.
Acquisition of Baker Hughes Treatment Services
Effective January 1, 1995, M-I (through its Swaco Geolograph division)
acquired Baker Hughes Treatment Services (BHTS) from Baker Hughes, Inc. for
approximately $5.1 million by borrowing cash under its $20.0 million revolving
line of credit with the Company's existing bank lenders. BHTS is a leading
supplier of waste minimization, product recovery services, water treatment,
downhole injection and reserve pit remediation services to the oilfield
industry. In 1994, BHTS reported revenues of approximately $10.7 million. This
acquisition was accounted for as a purchase.
Acquisition of Fremont Chemical Company
Effective June 23, 1995, M-I (through its Drilling Fluids division)
acquired Fremont Chemical Company (Fremont) for approximately $2.7 million of
which $1.0 million was funded by borrowings under its $20.0 million revolving
line of credit and $1.7 million was funded by the issuance of a 3 year note
payable to the former owners of Fremont. The note is payable quarterly and bears
interest at 8.5 percent. Fremont is the largest supplier of completion fluids in
the Rocky Mountain region of the United States. In 1994, Fremont reported
revenues of approximately $7.2 million. This acquisition was accounted for as a
purchase.
The historical balance sheet of the Company at September 30, 1995 includes
the historical accounts of BHTS and Fremont and certain purchase accounting
adjustments on an estimated basis. Management has not fully evaluated all of the
consequences of the acquisitions of BHTS and Fremont including assessing the
fair market value of the tangible assets acquired and the liabilities incurred
or assumed. Upon completion of these evaluations, 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.
The summarized unaudited pro forma results from continuing operations for
the nine months ended September 30, 1995 and 1994 assuming the acquisitions of
M-I, Supradiamant, BHTS and Fremont had been made on January 1,1994 are as
follows (dollars in millions except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1994
------ ------
<S> <C> <C>
Unaudited pro forma revenues..................................... $638.6 $548.4
====== ======
Unaudited pro forma income from continuing operations............ $ 32.7 $ 23.9
====== ======
Unaudited pro forma income from continuing operations per common
share.......................................................... $ 0.83 $ 0.61
====== ======
</TABLE>
5) CLASS A AND CLASS B WARRANTS
On February 28, 1995, the Company's Class A Warrants and Class B Warrants
expired in accordance with the terms of the respective warrant agreements.
During 1995, prior to expiration, 143,449 Class A Warrants and 123 Class B
Warrants were exercised and converted into 143,572 shares of the Company's
common stock. The Company received approximately $1.2 million in connection with
the exercise and conversion of these warrants.
9
<PAGE> 10
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 Company has recently
acquired businesses which enabled the Company to pursue its strategic growth
objective and expand its product and services offerings to its customers. On
February 28, 1994, the Company acquired a 64% majority interest in M-I Drilling
Fluids L.L.C. (M-I), an acknowledged world leader in drilling fluid systems,
from Dresser Industries, Inc. On July 1, 1994, the Company acquired
Supradiamant, S.A. (Supradiamant), a leading manufacturer of diamond products,
to strengthen the Company's Megadiamond product line. Effective January 1, 1995,
the Company's M-I subsidiary acquired Baker Hughes Treatment Services (BHTS) as
an expansion of the Swaco Geolograph division of M-I Drilling Fluids L.L.C.
Effective June 23, 1995, the Company's M-I subsidiary acquired Fremont Chemical
Company (Fremont), the largest supplier of completion fluids in the Rocky
Mountain region of the United States in order to expand the Drilling Fluids
division of M-I Drilling Fluids L.L.C. These acquisitions complement the
Company's existing core products forming a more complete package of expendable
products to the oil and gas drilling and production industry.
FIRST NINE MONTHS OF 1995 COMPARED TO FIRST NINE MONTHS OF 1994
RESULTS OF OPERATIONS
REVENUES
The products manufactured and the services provided by the Company fall
into four product 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,
---------------------------------------
1995 1994
---------------- ----------------
AMOUNT % AMOUNT %
------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Breakdown by Product Group:
M-I Drilling Fluids.................................. $402.1 63% $258.7 57%
Smith Tool........................................... 124.7 20 113.2 25
Smith Drilling & Completions......................... 83.1 13 67.2 15
Smith Diamond Technology............................. 25.1 4 16.6 3
------- -------
Total........................................ $635.0 100% $455.7 100%
======== === ======== ===
Breakdown by Areas:
U.S.................................................. $262.2 41% $200.3 44%
Export............................................... 37.0 6 42.5 9
Non-U.S.............................................. 335.8 53 212.9 47
-------- --------
Total........................................ $635.0 100% $455.7 100%
======== === ======== ===
Average Active Rig Count:
U.S.................................................. 710 758
Canada............................................... 231 249
Non-North America.................................... 755 735
------- -------
Total........................................ 1,696 1,742
======== ========
</TABLE>
M-I DRILLING FLUIDS
The M-I Drilling Fluids product group provides drilling fluids systems,
products and technical services to end users engaged in drilling oil, natural
gas and geothermal wells worldwide. M-I was acquired by the Company on February
28, 1994. The consolidated revenues attributable to M-I Drilling Fluids
increased
10
<PAGE> 11
$143.4 million from $258.7 million in the first nine months of 1994 to $402.1
million in the first nine months of 1995, due primarily to an additional two
months of revenues reported in the first nine months of 1995. In addition,
revenues increased approximately $68.0 million or 20.4% over the same period in
1994 due primarily to revenues associated with the acquisitions of BHTS and
Fremont and higher sales volume in Latin America, the United States, Germany and
Norway.
SMITH TOOL
The Smith Tool product group manufactures and sells three-cone drill bits
used in the oil and gas drilling industry and in mining applications. Smith Tool
revenues increased $11.5 million or 10.2% from $113.2 million in the first nine
months of 1994 to $124.7 million in the first nine months of 1995 due primarily
to higher sales volume in the United States, Latin America, Germany and Italy.
SMITH DRILLING & COMPLETIONS
The Smith Drilling & Completions product group manufactures and markets
downhole drilling tools and tubular drill string components and provides related
drilling and completion services for drilling oil and gas wells. Drilling &
Completions revenues increased $15.9 million or 23.7% from $67.2 million in the
first nine months of 1994 to $83.1 million in the first nine months of 1995. The
increase was primarily due to higher sales volumes in Latin America, the United
States, the Middle East and Canada.
SMITH DIAMOND TECHNOLOGY
The Smith Diamond Technology product group manufactures and markets shear
bits featuring cutters made of polycrystalline diamond (PDC) or natural diamonds
at its Geodiamond division. Smith Diamond Technology also manufactures PDC's and
cubic boron nitride at its Megadiamond and Supradiamant subsidiaries. These
ultrahard materials are used in the business unit's diamond drill bits and in
other specialized cutting tools. The revenues of Smith Diamond Technology
increased $8.5 million or 51.2% from $16.6 million in the first nine months of
1994 to $25.1 million in the first nine months of 1995. The increase was
primarily due to revenues associated with Supradiamant, which was acquired in
July 1994, and higher sales in Latin America, the United Kingdom, the United
States, and the Middle East.
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,
---------------------------------------
1995 1994
---------------- ----------------
AMOUNT % AMOUNT %
------ --- ------ ---
<S> <C> <C> <C> <C>
Revenues................................................ $635.0 100% $455.7 100%
------ --- ------ ---
Costs and Expenses:
Costs of revenues..................................... 424.0 67 302.2 66
Selling expenses...................................... 113.7 18 80.6 18
General and administrative expenses................... 35.0 5 30.9 7
------ --- ------ ---
Total costs and expenses...................... 572.7 90 413.7 91
------ --- ------ ---
Earnings before interest and taxes...................... 62.3 10 42.0 9
Interest expense, net................................... 9.1 2 5.8 1
------ --- ------ ---
Income before income taxes and minority interests....... 53.2 8 36.2 8
Income tax provision.................................... 9.2 1 4.4 1
------ --- ------ ---
Income before minority interests........................ 44.0 7 31.8 7
Minority interests...................................... 11.3 2 6.4 1
------ --- ------ ---
Net income.............................................. $ 32.7 5% $ 25.4 6%
====== === ====== ===
</TABLE>
11
<PAGE> 12
Total revenues increased by $179.3 million from $455.7 million in the first
nine months of 1994 to $635.0 million in the first nine months of 1995. The
increase was primarily related to the additional revenues associated with the
previously discussed business acquisitions. In addition, revenues increased due
to higher sales of the Company's M-I drilling fluids systems, Smith Tool and
Geodiamond drill bits and Smith Drilling & Completions products and services in
Latin America, the United States, and the Middle East.
Gross profit, computed as revenues less costs of revenues, increased by
$57.5 million from $153.5 million in the first nine months of 1994 to $211.0
million in the first nine months of 1995 due primarily to the aforementioned
acquisitions. In addition, the increase in gross profit reflected incremental
profit due to higher sales volumes in Latin America, the United States, and the
Middle East.
Operating expenses, consisting of selling expenses, and general and
administrative expenses, increased by $37.2 million from $111.5 million in the
first nine months of 1994 to $148.7 million in the first nine months of 1995 due
primarily to the additional expenses associated with the recently acquired
companies and increased variable costs related to the higher revenue levels. In
addition, the Company incurred costs related to the establishment of the Smith
Diamond Technology product group and the start up of M-I operations in Colombia.
These factors were partially offset by higher foreign currency exchange gains.
Operating expenses as a percentage of revenues decreased from 24.5% in 1994 to
23.4% in 1995.
Net interest expense, which represents interest expense less interest
income, increased by $3.3 million from $5.8 million in 1994 to $9.1 million in
1995 due primarily to higher debt levels to fund the acquisitions of M-I,
Supradiamant, BHTS, Fremont and working capital requirements.
The tax provision increased by $4.8 million from $4.4 million in 1994 to
$9.2 million in 1995. The increased tax provision primarily represents foreign
taxes on the higher level of earnings associated with the aforementioned
acquisitions.
Minority interests represents the share of M-I profits associated with the
36% minority interest in the operations of M-I and other minority interests from
investments in other joint ventures held by M-I. Minority interests increased by
$4.9 million from $6.4 million in 1994 to $11.3 million in 1995 due to higher
M-I earnings and of the additional two months of M-I operations in 1995.
THIRD QUARTER OF 1995 COMPARED TO THIRD QUARTER OF 1994
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1995 1994
---------------- ----------------
AMOUNT % AMOUNT %
------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Breakdown by Product Group:
M-I Drilling Fluids.................................. $147.3 64% $111.7 62%
Smith Tool........................................... 43.5 19 39.8 22
Smith Drilling & Completions......................... 29.7 13 23.6 13
Smith Diamond Technology............................. 8.9 4 6.4 3
------ --- ------ ---
Total........................................ $229.4 100% $181.5 100%
====== === ====== ===
Breakdown by Areas:
U.S.................................................. $ 95.6 42% $ 75.9 42%
Export............................................... 11.8 5 15.7 9
Non-U.S.............................................. 122.0 53 89.9 49
------ --- ------ ---
Total........................................ $229.4 100% $181.5 100%
====== === ====== ===
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1995 1994
---------------- -----------------
AMOUNT % AMOUNT %
------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Average Active Rig Count:
U.S.................................................. 746 783
Canada............................................... 221 277
Non-North America.................................... 758 717
------ ------
Total........................................ 1,725 1,777
====== ======
</TABLE>
M-I DRILLING FLUIDS
M-I Drilling Fluids revenues increased $35.6 million, or 31.9%, from $111.7
million in the third quarter of 1994 to $147.3 million in the third quarter of
1995. The increase was due primarily to revenues associated with the acquisition
of BHTS and Fremont and higher sales volume in Latin America and the United
States.
SMITH TOOL
Smith Tool revenues increased $3.7 million or 9.3% from $39.8 million in
the third quarter of 1994 to $43.5 million in the third quarter of 1995 due
primarily to higher sales volume in the United States, Latin America, West
Africa/Nigeria and Germany partially offset by lower drilling activity in
Canada.
SMITH DRILLING & COMPLETIONS
Smith Drilling & Completions revenues increased $6.1 million or 25.8% from
$23.6 million in the third quarter of 1994 to $29.7 million in the third quarter
of 1995. The increase was primarily due to higher sales volumes in the United
States, Latin America, the Middle East and Norway.
SMITH DIAMOND TECHNOLOGY
Smith Diamond Technology revenues increased by $2.5 million or 39.1% from
$6.4 million in the third quarter of 1994 to $8.9 million in the third quarter
of 1995, primarily due to higher drilling activity in Latin America, the United
Kingdom, the Far East and higher sales volumes in the United States.
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 THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1995 1994
-------------- --------------
AMOUNT % AMOUNT %
------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues..................................................... $229.4 100% $181.5 100%
------ --- ------ ---
Costs and Expenses:
Costs of revenues.......................................... 152.8 67 121.2 67
Selling expenses........................................... 40.8 18 32.3 18
General and administrative expenses........................ 12.4 5 11.4 6
------ --- ------ ---
Total costs and expenses........................... 206.0 90 164.9 91
------ --- ------ ---
Earnings before interest and taxes........................... 23.4 10 16.6 9
Interest expense, net........................................ 3.2 1 2.5 1
------ --- ------ ---
Income before income taxes and minority interests............ 20.2 9 14.1 8
Income tax provision......................................... 3.9 2 1.9 1
------ --- ------ ---
Income before minority interests............................. 16.3 7 12.2 7
Minority interests........................................... 4.6 2 2.9 2
------ --- ------ ---
Net income................................................... $ 11.7 5% $ 9.3 5%
====== === ====== ===
</TABLE>
Total revenues increased by $47.9 million or 26.4% from $181.5 million in
the third quarter of 1994 to $229.4 million in the third quarter of 1995 due
primarily to high sales volumes in Latin America and the United States. In
addition, sales increased as a result of the acquisitions of BHTS and Fremont by
M-I.
Gross profit, computed as revenues less costs of revenues, increased by
$16.3 million or 27.0% from $60.3 million in the third quarter of 1994 to $76.6
million in the third quarter of 1995. The increase primarily reflects
incremental profit on the higher sales volume in Latin America and the United
States.
Operating expenses, consisting of selling expenses and general and
administrative expenses, increased by $9.5 million or 21.7% from $43.7 million
in the third quarter of 1994 to $53.2 million in the third quarter of 1995 due
primarily to the additional expenses associated with the acquisitions of BHTS
and Fremont and increased variable costs related to the higher revenue levels.
In addition, the Company incurred costs related to the continuing establishment
of the Smith Diamond Technology product group. These factors were partially
offset by higher foreign currency exchange gains. Operating expenses as a
percentage of revenues decreased from 24.1% in 1994 to 23.2% in 1995.
Net interest expense, which represents interest expense less interest
income, increased by $0.7 million from $2.5 million in 1994 to $3.2 million in
1995 due primarily to higher debt levels to fund the acquisitions of BHTS and
Fremont and working capital requirements.
The tax provision increased by $2.0 million from $1.9 million in 1994 to
$3.9 million in 1995. The tax provision primarily represents foreign taxes on
income. The increase was due primarily to the higher level of earnings,
principally of M-I.
Minority interests represents the share of M-I profits associated with the
36% minority interest in the earnings of M-I and other minority interests from
investments in other joint ventures held by M-I. Minority interests increased by
$1.7 million from $2.9 million in 1994 to $4.6 million in 1995 due to the higher
M-I earnings from operations.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at September 30, 1995 totalled $3.4 million or
a decrease of $4.7 million from the company's cash position at December 31,
1994. The Company's current ratio increased to 2.63 to 1 at September 30, 1995
from 2.57 to 1 at December 31, 1994.
Effective June 23, 1995, M-I acquired Fremont (through its Drilling Fluids
division) for $2.7 million of which $1.0 million was funded by borrowings under
M-I's $20.0 million revolving line of credit and $1.7 million was funded by the
issuance of a 3 year note payable to the former owners of Fremont. The note is
payable quarterly and bears interest at 8.5 percent. In addition, on January 1,
1995, M-I (through its Swaco Geolograph division) acquired BHTS for $5.1
million. This acquisition was funded by borrowing cash under its $20.0 million
revolving line of credit with the Company's existing bank lenders. The revolving
line of credit expires in July, 1996 and bears interest at LIBOR +5/8 percent.
M-I has borrowing capacity under this domestic line of credit at September 30,
1995 of $7.0 million. The Company has guaranteed its proportional 64% interest
of the M-I line of credit or approximately $12.8 million.
The Company also had domestic and international borrowing facilities for
operating and financing needs. Under the Company's $65.0 million revolving line
of credit, the Company has borrowing capacity at September 30, 1995 of $16.8
million. The Company's and M-I's combined international borrowing facilities
total approximately $20.2 million at September 30, 1995. The Company and M-I had
borrowing capacity under their international credit facilities at September 30,
1995 of approximately $2.5 million and $8.3 million, respectively. The Company
has guaranteed its proportional 64% interest of the M-I lines of credit or
approximately $10.1 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 February 28, 1995, the Company's Class A Warrants and Class B Warrants
expired in accordance with the terms of the respective warrant agreements.
During 1995, prior to expiration, 143,449 class A Warrants and 123 Class B
Warrants were exercised and converted into 143,572 shares of the Company's
common stock. The Company received approximately $1.2 million in connection with
the exercise and conversion of these warrants.
15
<PAGE> 16
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
None.
16
<PAGE> 17
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: __________________________
DOUGLAS L. ROCK
Chairman of the Board and
Chief Executive Officer
By: __________________________
LOREN K. CARROLL
Executive Vice President and
Chief Financial Officer
Dated: November 14, 1995
17
<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
Chairman of the Board and
Chief Executive Officer
By: /s/ LOREN K. CARROLL
Executive Vice President and
Chief Financial Officer
Dated: November 14, 1995
18
<PAGE> 19
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 3,448
<SECURITIES> 0
<RECEIVABLES> 221,071
<ALLOWANCES> 8,240
<INVENTORY> 215,678
<CURRENT-ASSETS> 459,743
<PP&E> 275,260
<DEPRECIATION> 148,882
<TOTAL-ASSETS> 675,168
<CURRENT-LIABILITIES> 174,540
<BONDS> 115,249
<COMMON> 39,778
0
0
<OTHER-SE> 249,498
<TOTAL-LIABILITY-AND-EQUITY> 675,168
<SALES> 635,016
<TOTAL-REVENUES> 635,016
<CGS> 424,040
<TOTAL-COSTS> 424,040
<OTHER-EXPENSES> 148,663
<LOSS-PROVISION> 600
<INTEREST-EXPENSE> 9,138
<INCOME-PRETAX> 53,175
<INCOME-TAX> 9,186
<INCOME-CONTINUING> 32,672
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,672
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
</TABLE>
