<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, 1995 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 JUNE 30, 1995 THE REGISTRANT HAD 39,759,806 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 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 six months ended June 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 SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Unaudited)
(In thousands,
except per share data)
<S> <C> <C>
REVENUES................................... $ 405,579 $ 274,172
COSTS AND EXPENSES:
Costs of Revenues........................ 271,246 180,982
Selling Expenses......................... 72,864 48,287
General and Administrative Expenses...... 22,563 19,519
-------- --------
Total Costs and Expenses............ 366,673 248,788
-------- --------
EARNINGS BEFORE INTEREST AND TAXES......... 38,906 25,384
INTEREST EXPENSE, net...................... 5,970 3,279
-------- --------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS................................ 32,936 22,105
INCOME TAX PROVISION....................... 5,249 2,530
-------- --------
INCOME BEFORE MINORITY INTERESTS........... 27,687 19,575
MINORITY INTERESTS......................... 6,758 3,521
-------- --------
NET INCOME................................. $ 20,929 $ 16,054
======== ========
EARNINGS PER COMMON SHARE (Note 2)......... $ .53 $ .41
======== ========
AVERAGE COMMON AND EQUIVALENT
SHARES OUTSTANDING....................... 39,224 38,924
======== ========
</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 JUNE 30,
<TABLE>
<CAPTION>
1995 1994
-------- --------
(Unaudited)
(In thousands,
except per share data)
<S> <C> <C>
REVENUES................................... $ 205,976 $ 173,410
COSTS AND EXPENSES:
Costs of Revenues........................ 137,179 115,801
Selling Expenses......................... 38,216 30,337
General and Administrative Expenses...... 11,123 12,249
--------- ---------
Total Costs and Expenses............ 186,518 158,387
--------- ---------
EARNINGS BEFORE INTEREST AND TAXES......... 19,458 15,023
INTEREST EXPENSE, net...................... 3,076 2,333
--------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS................................ 16,382 12,690
INCOME TAX PROVISION....................... 2,690 1,646
--------- ---------
INCOME BEFORE MINORITY INTERESTS........... 13,692 11,044
MINORITY INTERESTS......................... 3,568 2,579
--------- ---------
NET INCOME................................. $ 10,124 $ 8,465
========= =========
EARNINGS PER COMMON SHARE (Note 2)......... $ .26 $ .22
========= =========
AVERAGE COMMON AND EQUIVALENT
SHARES OUTSTANDING....................... 39,414 39,049
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................. $ 6,880 $ 8,145
Receivables, less allowance of
$8,703 in 1995 and $8,679 in 1994
for doubtful accounts................... 208,308 201,053
Inventories (Note 3)...................... 217,939 201,104
Deferred tax assets, net.................. 1,771 2,161
Prepaid expenses and other................ 16,640 9,133
---------- -----------
Total current assets................... 451,538 421,596
---------- -----------
PLANT AND EQUIPMENT:
Land...................................... 17,119 17,079
Buildings................................. 30,031 29,065
Machinery and equipment................... 233,063 220,953
---------- -----------
280,213 267,097
Less--accumulated depreciation............ 154,394 149,388
---------- -----------
Net plant and equipment................... 125,819 117,709
---------- -----------
OTHER ASSETS................................ 42,984 41,446
GOODWILL (Note 4)........................... 44,362 39,029
---------- -----------
TOTAL ASSETS................................ $ 664,703 $ 619,780
========== ===========
</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>
June 30, December 31,
1995 1994
------------- ------------
(Unaudited)
(in thousands,
except share data)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current
portion of long-term debt (Note 4).......... $ 26,264 $ 15,852
Accounts payable.............................. 64,805 67,873
Accrued payroll costs......................... 26,208 28,232
Income taxes payable.......................... 10,131 6,579
Other......................................... 48,145 45,711
---------- ----------
Total current liabilities................ 175,553 164,247
---------- ----------
LONG-TERM DEBT (Note 4)......................... 119,859 115,000
---------- ----------
OTHER LONG-TERM LIABILITIES..................... 16,224 17,097
---------- ----------
MINORITY INTERESTS (Note 4)..................... 75,488 70,315
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock -
Authorized-60,000,000 shares, $1 par
value; issued and outstanding-
39,759,806 shares in 1995 and
39,432,833 in 1994...................... 39,760 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.................... 275,031 272,483
Accumulated deficit........................... (26,625) (47,554)
Cumulative translation adjustment............. (3,951) (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............... 277,579 253,121
---------- ----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY........ $ 664,703 $ 619,780
========== ==========
</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 SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1995 1994
--------- --------
(Unaudited)
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,929 $ 16,054
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 . . . . . . . . . . . . . . . . 11,643 8,938
Provision for losses on accounts receivable . . . . . . . . . 481 843
Gain on disposal of fixed assets . . . . . . . . . . . . . . . (2,578) (1,065)
Foreign currency translation . . . . . . . . . . . . . . . . . 331 (168)
Change in receivables. . . . . . . . . . . . . . . . . . . . . (6,403) 4,038
Change in inventories . . . . . . . . . . . . . . . . . . . . (15,971) (3,379)
Change in accounts payable . . . . . . . . . . . . . . . . . . (3,866) (9,758)
Changes in other current assets and liabilities. . . . . . . . (4,387) (2,317)
Changes in other noncurrent assets and
liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,570 (8,002)
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . 1,749 5,184
-------- --------
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)
Fixed asset additions . . . . . . . . . . . . . . . . . . . . . . (16,796) (13,738)
Proceeds from disposal of other fixed assets . . . . . . . . . . . 5,125 1,584
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . (19,452) (172,154)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . 14,859 83,500
Net increase in short-term borrowing . . . . . . . . . . . . . . . 10,410 288
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . (10,000) (8,800)
Proceeds from exercise of stock options and warrants . . . . . . . 2,875 605
Distributions to minority interests, net . . . . . . . . . . . . . (1,800) ---
-------- --------
Net cash provided by financing activities . . . . . . . . . . . . 16,344 75,593
-------- --------
Effect of exchange rate changes on cash . . . . . . . . . . . . . 94 308
-------- --------
Decrease in cash and cash equivalents . . . . . . . . . . . . . . (1,265) (91,069)
Cash and cash equivalents at beginning of period . . . . . . . . . 8,145 101,561
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 6,880 $ 10,492
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . $ 7,005 $ 3,006
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . 1,013 1,481
</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 SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK WARRANTS
------------------------- ----------------------- ADDITIONAL ACCUM-
NUMBER NUMBER PAID-IN ULATED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL DEFICIT
----------- ------- ---------- ------ ------------ ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ........... 39,432,833 $39,433 2,525,191 $7,278 $272,483 $(47,554)
Exercise of employee stock options ... 183,401 183 --- --- 1,507 ---
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 ........................... --- --- --- --- --- 20,929
Translation adjustment for the
period ............................ --- --- --- --- --- ---
---------- ------- ---------- ------ -------- --------
Balance, June 30, 1995 ............... 39,759,806 $39,760 451,357 $7,278 $275,031 $(26,625)
========== ======= ========== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
TREASURY SECURITIES
CUMULATIVE ---------------------------------------------------------
TRANSLATION NUMBER OF NUMBER OF
ADJUSTMENT SHARES AMOUNT SHARES AMOUNT
----------- --------- ------ --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ........... $(4,605) (628,583) $(6,636) (451,357) $(7,278)
Exercise of employee stock options ... --- --- --- --- ---
Exercise of common stock warrants
(Note 5) .......................... --- --- --- --- ---
Expiration of common stock warrants
(Note 5) .......................... --- --- --- --- ---
Net income ........................... --- --- --- --- ---
Translation adjustment for the
period ............................ 654 --- --- --- ---
------- -------- ------- -------- -------
Balance, June 30, 1995 ............... $(3,951) (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 as of and for the three and six months
ended June 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 six months ended June 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 six months ended June 30,
1995 and 1994.
3) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------- -------------
($000 omitted)
<S> <C> <C>
Raw Materials................... $ 29,072 $ 24,338
Work in Process................. 37,731 31,805
Finished Goods.................. 162,195 155,420
-------- --------
228,998 211,563
Less: reserve to state certain
domestic inventories ($100,242
in 1995 and $94,339 in 1994)
on a LIFO basis................. (11,059) (10,459)
-------- --------
$217,939 $201,104
======== ========
</TABLE>
9
<PAGE> 10
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 purchase. The Company recorded approximately $2.1
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. 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 June 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 during 1995, 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 three and six months ended June 30, 1995 and 1994 assuming the
acquisitions of M-I, Supradiamant, BHTS and Fremont had been made on January 1,
1995 and 1994 are as follows (dollars in millions except per share amounts):
10
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
1995 1994 1995 1994
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Unaudited pro forma revenues............. $ 207.8 $ 179.8 $ 409.2 $ 362.4
======== ========= ======== ========
Unaudited pro forma income from
continuing operations.................. $ 10.1 $ 8.5 $ 20.9 $ 14.6
======== ========= ======== ========
Unaudited pro forma income from
continuing operations per common share. $ 0.26 $ 0.22 $ 0.53 $ 0.38
======== ========= ======== ========
</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.
11
<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 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.
12
<PAGE> 13
FIRST SIX MONTHS OF 1995 COMPARED TO FIRST SIX 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 Six Months Ended June 30,
----------------------------------------
1995 1994
----------------- ------------------
Amount % Amount %
-------- ----- -------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Breakdown by Product Group:
M-I Drilling Fluids................. $ 254.8 63% $ 146.9 54%
Smith Tool.......................... 81.2 20 73.4 26
Smith Drilling and Completions...... 53.4 13 43.7 16
Smith Diamond Technology............ 16.2 4 10.2 4
------- ---- ------- ----
Total................. $ 405.6 100% $ 274.2 100%
======= ==== ======= ====
Breakdown by Areas:
U.S................................. $ 166.6 41% $ 124.4 45%
Export.............................. 25.2 6 26.8 10
Non-U.S............................. 213.8 53 123.0 45
------- ---- ------- ----
Total................. $ 405.6 100% $ 274.2 100%
======= ==== ======= ====
Average Active Rig Count:
U.S................................ 693 746
Canada............................. 238 236
Non-North America.................. 756 744
----- -----
Total................. 1,687 1,726
===== =====
</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 $107.9 million from $146.9 million in the first six months of
1994 to $254.8 million in the first six months of 1995, due primarily to an
additional two months of revenues reported in the first six months of 1995. In
addition, revenues increased approximately $32.5 million or 14.6% over the same
period in 1994 due primarily to revenues associated with the acquisition of
BHTS 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 $7.8 million or 10.6% from $73.4 million in the
first six months of 1994 to $81.2 million in the first six months of 1995 due
primarily to higher sales volume in the United States, Latin America, Italy and
Germany.
13
<PAGE> 14
SMITH DRILLING AND COMPLETIONS
The Smith Drilling and 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 and Completions Services revenues increased $9.7 million or
22.2% from $43.7 in the first six months of 1994 to $53.4 in the first six
months of 1995. The increase was primarily due to sales volume activity in
Latin America, the Middle East, Canada and the United States.
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 $6.0 million or 58.8% from $10.2 million in
the first six months of 1994 to $16.2 million in the first six months of 1995.
The increase was primarily due to revenues associated with Supradiamant, which
was acquired in July 1994, and higher sales in the United States, the Middle
East and Latin America.
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,
------------------------------------
1995 1994
---------------- -----------------
Amount % Amount %
-------- ----- -------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Revenues............................. $ 405.6 100% $ 274.2 100%
------- ---- ------- ----
Costs and Expenses:
Costs of revenues.................. 271.2 67 181.0 66
Selling expenses................... 72.9 18 48.3 18
General and administrative expenses 22.6 6 19.5 7
------ ---- ------- ----
Total costs and expenses....... 366.7 91 248.8 91
------ ---- ------- ----
Earnings before interest and taxes... 38.9 9 25.4 9
Interest expense, net................ 6.0 1 3.3 1
------- ---- ------- ----
Income before taxes and minority
interests.......................... 32.9 8 22.1 8
Income tax provision................. 5.2 1 2.5 1
------- ---- ------- ----
Income before minority interests..... 27.7 7 19.6 7
Minority interests................... 6.8 2 3.5 1
------- ---- ------- ----
Net income........................... $ 20.9 5% $ 16.1 6%
======= ==== ======= ====
</TABLE>
14
<PAGE> 15
Total revenues increased by $131.4 million from $274.2 million in the
first six months of 1994 to $405.6 million in the first six 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 Smith Tool and Geodiamond drill
bits and Smith Drilling and Completions products and services in the United
States, Latin America and the Middle East.
Gross profit, computed as revenues less costs of revenues, increased
by $41.2 million from $93.2 million in the first six months of 1994 to $134.4
million in the first six months of 1995. The increase was due primarily to the
additional two months of M-I operations, and the acquisitions of Supradiamant
and BHTS. In addition, the increase in gross profit reflected incremental
profit due to higher sales volumes in United States, Latin America and the
Middle East.
Operating expenses, consisting of selling expenses, and general and
administrative expenses, increased by $27.7 million from $67.8 million in the
first six months of 1994 to $95.5 million in the first six 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 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 24.7% in 1994 to
23.5% in 1995.
Interest expense increased by $2.4 million from $4.4 million in 1994
to $6.8 million in 1995 due primarily to higher debt levels to fund the
acquisitions of M-I, Supradiamant and BHTS and working capital requirements.
Interest income decreased $0.3 million from $1.1 million in 1994 to $0.8
million due primarily to reduced short-term investment funds as these funds
were used in the acquisitions.
The tax provision increased by $2.7 million from $2.5 million in 1994
to $5.2 million in 1995. The increased tax provision primarily represents
foreign taxes on the higher level of earnings.
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 $3.3 million from $3.5 million in 1994 to $6.8 million in 1995
due to higher M-I earnings as a result of the additional two months of M-I
operations.
15
<PAGE> 16
SECOND QUARTER OF 1995 COMPARED TO SECOND QUARTER OF 1994
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
----------------------------------------
1995 1994
----------------- -----------------
Amount % Amount %
-------- ----- -------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Breakdown by Product Group:
M-I Drilling Fluids................. $ 132.4 64% $ 109.5 63%
Smith Tool.......................... 38.6 19 35.8 21
Smith Drilling and Completions...... 27.2 13 23.1 13
Smith Diamond Technology............ 7.8 4 5.0 3
------- ---- ------- ----
Total................. $ 206.0 100% $ 173.4 100%
======= ==== ======= ====
Breakdown by Areas:
U.S................................. $ 84.3 41% $ 79.3 46%
Export.............................. 13.9 7 16.3 9
Non-U.S............................. 107.8 52 77.8 45
------- ---- ------- ----
Total................. $ 206.0 100% $ 173.4 100%
======= ==== ======= ====
Average Active Rig Count:
U.S................................. 677 732
Canada.............................. 146 173
Non-North America................... 761 739
----- -----
Total................. 1,584 1,644
===== =====
</TABLE>
M-I DRILLING FLUIDS
M-I Drilling Fluids revenues increased $22.9 million, or 20.9%, from
$109.5 million in the second quarter of 1994 to $132.4 million in the second
quarter of 1995. The increase was due primarily to revenues associated with
the acquisition of BHTS and higher sales volume in Latin America, the United
States, Germany and the United Kingdom.
SMITH TOOL
Smith Tool revenues increased $2.8 million or 7.8% from $35.8 million
in the second quarter of 1994 to $38.6 million in the second quarter of 1995
due primarily to higher sales volume in the United States and Latin America.
SMITH DRILLING AND COMPLETIONS
Drilling and Completions revenues increased $4.1 million or 17.7% from
$23.1 million in the second quarter of 1994 to $27.2 million in the second
quarter of 1995. The increase was primarily due to higher sales volumes in
Latin America and the Middle East. In addition, sales volumes increased in
the United States, Canada and the United Kingdom.
SMITH DIAMOND TECHNOLOGY
Smith Diamond Technology revenues increased by $2.8 million or 56.0%
from $5.0 million in the second quarter of 1994 to $7.8 million in the second
quarter of 1995, primarily due to revenues associated with Supradiamant, which
was acquired in July 1994. In addition, sales volumes increased in Latin
America, West Africa, the Middle East and the Far East.
16
<PAGE> 17
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
--------------------------------------
1995 1994
----------------- -----------------
Amount % Amount %
-------- ----- -------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Revenues............................. $ 206.0 100% $ 173.4 100%
------- ---- ------- ----
Costs and Expenses:
Costs of revenues.................. 137.2 67 115.8 67
Selling expenses................... 38.2 19 30.3 17
General and administrative expenses 11.1 5 12.3 7
------- ---- ------- ----
Total costs and expenses.... 186.5 91 158.4 91
------- ---- ------- ----
Earnings before interest and taxes... 19.5 9 15.0 9
Interest expense, net................ 3.1 1 2.3 1
------- ---- ------- ----
Income before taxes and minority
interests.......................... 16.4 8 12.7 8
Income tax provision................. 2.7 1 1.6 1
------- ---- ------- ----
Income before minority interests..... 13.7 7 11.1 7
Minority interests................... 3.6 2 2.6 2
------- ---- ------- ----
Net Income........................... $ 10.1 5% $ 8.5 5%
======= ==== ======= ====
</TABLE>
Total revenues increased by $32.6 million or 18.8% from $173.4 million
in the second quarter of 1994 to $206.0 million in the second quarter of 1995
due primarily to high sales volumes in Latin America. In addition, sales
volumes were higher in the United States for M-I, Smith Tool and Smith Drilling
and Completions. Smith Drilling and Completions and Smith Diamond Technology
also reported higher sales volumes in the Middle East.
Gross profit, computed as revenues less costs of revenues, increased
by $11.2 million or 19.4% from $57.6 million in the second quarter of 1994 to
$68.8 million in the second quarter of 1995. The increase primarily reflects
incremental profit on the higher sales volume in Latin America, the United
States and the Middle East.
Operating expenses, consisting of selling expenses and general and
administrative expenses, increased by $6.7 million or 15.7% from $42.6 million
in the second quarter of 1994 to $49.3 million in the second quarter of 1995
due primarily to the additional expenses associated with the acquisitions of
Supradiamant and BHTS and increased variable costs related to the higher
revenue levels. In addition, the Company incurred costs of approximately $0.8
million related to the establishment of the Smith Diamond 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 24.6% in 1994 to 23.9% in 1995.
Interest expense increased by $1.0 million from $2.6 million in 1994
to $3.6 million in 1995 due primarily to higher debt levels to fund the
acquisitions of Supradiamant and BHTS and working capital requirements.
Interest income increased by $0.2 million from $0.3 million in 1994 to $0.5
million in 1995 due to higher interest rates on short-term investments.
The tax provision increased by $1.1 million from $1.6 million in 1994
to $2.7 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 $1.0 million from $2.6 million in 1994 to $3.6 million in 1995 due
to the higher M-I earnings from operations.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at June 30, 1995 totalled $6.9 million or
a decrease of $1.2 million from the company's cash position at December 31,
1994. The Company's current ratio remained constant at 2.57 to 1.
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 June 30, 1995 of $9.1 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 June 30, 1995 of $12.3
million. The Company's international borrowing facilities total approximately
$19.2 million at June 30, 1995. The Company had borrowing capacity under its
international credit facilities at June 30, 1995 of approximately $2.4 million.
The Company's M-I subsidiary also has borrowing capacity under its international
credit facilities at June 30, 1995 of approximately $6.0 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.
18
<PAGE> 19
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 26, 1995, shareholders
of the Company elected directors and ratified the appointment of auditors by
the votes shown below.
<TABLE>
<CAPTION>
Agenda Item For Withheld Abstain
----------- --- -------- -------
<S> <C> <C> <C>
Election of directors:
James R. Gibbs 34,683,332 2,738 67,295
Jerry W. Neely 33,586,584 1,079,486 1,164,043
</TABLE>
<TABLE>
<CAPTION>
Agenda Item For Against Abstain
----------- --- ------- -------
<S> <C> <C> <C>
Ratify Auditors 34,678,284 22,817 49,526
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
19
<PAGE> 20
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 14, 1995
<PAGE> 21
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 6,880
<SECURITIES> 0
<RECEIVABLES> 208,308
<ALLOWANCES> 8,703
<INVENTORY> 217,939
<CURRENT-ASSETS> 451,538
<PP&E> 280,213
<DEPRECIATION> 154,394
<TOTAL-ASSETS> 664,703
<CURRENT-LIABILITIES> 175,553
<BONDS> 119,859
<COMMON> 39,760
0
0
<OTHER-SE> 237,819
<TOTAL-LIABILITY-AND-EQUITY> 664,703
<SALES> 405,579
<TOTAL-REVENUES> 405,579
<CGS> 271,246
<TOTAL-COSTS> 271,246
<OTHER-EXPENSES> 95,427
<LOSS-PROVISION> 481
<INTEREST-EXPENSE> 5,970
<INCOME-PRETAX> 32,936
<INCOME-TAX> 5,249
<INCOME-CONTINUING> 20,929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,929
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
</TABLE>
