<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number
1-8514
SMITH INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3822631
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
16740 HARDY STREET
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(281) 443-3370
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
The number of shares outstanding of the Registrant's common stock as of
November 8, 1996 was 40,033,198.
<PAGE> 2
INDEX
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Operations -
For the Three and Nine Months Ended September 30, 1996 and 1995 . . . . . . . 3
Consolidated Balance Sheets -
As of September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 11
PART II: OTHER INFORMATION
ITEMS 1 - 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
2
<PAGE> 3
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------
1996 1995 1996 1995
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . . $310,657 $ 229,437 $819,749 $635,016
COSTS AND EXPENSES:
Costs of Revenues . . . . . . . . . . . . . . . . 207,259 152,794 545,119 424,040
Selling Expenses . . . . . . . . . . . . . . . . 51,153 40,808 137,837 113,672
General and Administrative Expenses . . . . . . . 17,508 12,428 46,672 34,991
-------- -------- -------- --------
Total Costs and Expenses . . . . . . . . . . 275,920 206,030 729,628 572,703
-------- -------- -------- --------
EARNINGS BEFORE INTEREST AND TAXES . . . . . . . . 34,737 23,407 90,121 62,313
INTEREST EXPENSE, NET . . . . . . . . . . . . . . . 4,547 3,168 11,350 9,138
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS . . . . . . . . . . . . . . . . . . . . 30,190 20,239 78,771 53,175
INCOME TAX PROVISION . . . . . . . . . . . . . . . 6,629 3,937 17,423 9,186
-------- -------- -------- --------
INCOME BEFORE MINORITY INTERESTS . . . . . . . . . 23,561 16,302 61,348 43,989
MINORITY INTERESTS . . . . . . . . . . . . . . . . 6,957 4,559 16,815 11,317
-------- -------- -------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 16,604 $ 11,743 $ 44,533 $ 32,672
======== ======== ======== ========
EARNINGS PER SHARE (Note 3) . . . . . . . . . . . . $ 0.42 $ 0.30 $ 1.12 $ 0.83
======== ======== ======== ========
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING . . . . . . . . . . 39,925 39,528 39,823 39,322
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 12,790 $ 14,845
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 302,085 230,590
Inventories, net (Note 4) . . . . . . . . . . . . . . . . . . . . . . . 278,339 221,952
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . 5,689 3,925
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . 19,526 13,979
---------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 618,429 485,291
---------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET (Note 5) . . . . . . . . . . . . . . . 180,443 132,499
GOODWILL, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,543 43,925
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,210 41,129
---------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 973,625 $ 702,844
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,396 $ 71,439
Short-term borrowings and current portion of long-term debt (Note 6). . 15,715 25,147
Accrued payroll costs . . . . . . . . . . . . . . . . . . . . . . . . . 35,835 30,922
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . 17,543 11,977
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,582 45,804
---------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 215,071 185,289
---------- -----------
LONG-TERM DEBT (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . 243,768 117,238
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 15,652 15,754
MINORITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,508 83,677
SHAREHOLDERS' EQUITY:
Common stock -
Authorized - 60,000 shares, $1 par value; issued and outstanding -
40,025 and 39,807 in 1996 and 1995, respectively . . . . . . . . . 40,025 39,807
Common stock warrants -
Class C warrants: outstanding - 451 in 1996 and 1995 . . . . . . . . 7,278 7,278
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 277,663 275,432
Retained earnings (Accumulated deficit) . . . . . . . . . . . . . . . . 42,571 (1,962)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . (6,997) (5,755)
Less - treasury securities, at cost (629 common shares
and 451 Class C warrants in 1996 and 1995) . . . . . . . . . . . . (13,914) (13,914)
---------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 346,626 300,886
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . $ 973,625 $ 702,844
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,533 $ 32,672
Adjustments to reconcile net income to net cash provided
by (used in) operating activities, excluding the net effects of
acquisitions:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 23,188 18,382
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,815 11,317
Provision for losses on receivables . . . . . . . . . . . . . . . . . . . . 733 600
Gain on disposal of property, plant and equipment . . . . . . . . . . . . . (2,845) (3,668)
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . (98) 688
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,671) (18,954)
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,228) (13,640)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,368 (13,279)
Other current assets and liabilities . . . . . . . . . . . . . . . . . . . (2,633) (211)
Other non-current assets and liabilities . . . . . . . . . . . . . . . . . (5,530) (7,133)
------- -------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . (4,368) 6,774
------- -----
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . (63,563) (7,781)
Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . (49,792) (24,627)
Proceeds from disposal of property, plant and equipment . . . . . . . . . . . . 8,377 6,751
-------- -------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . (104,978) (25,657)
-------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . 129,782 14,859
Proceeds from exercise of stock options and warrants . . . . . . . . . . . . . 2,446 3,057
Net increase (decrease) in short-term borrowing . . . . . . . . . . . . . . . . (23,516) 8,735
Principal payments of term loan debt . . . . . . . . . . . . . . . . . . . . . (10,000) (10,000)
Contributions from (distributions to) minority interests, net . . . . . . . . . 8,665 (2,520)
------- ------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . 107,377 14,131
------- ------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . (86) 55
------ ------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . (2,055) (4,697)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 14,845 8,145
------ -----
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . $12,790 $ 3,448
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Smith
International, Inc. and subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the audited financial statements
and accompanying notes included in the Company's 1995 Annual Report on Form
10-K.
The unaudited consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the interim periods. All
significant intercompany balances and transactions have been eliminated in the
accompanying financial statements. Results for the interim periods are not
necessarily indicative of results for the year.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2) ACQUISITIONS
Anchor Drilling Fluids, A.S.
On June 11, 1996, M-I Drilling Fluids L.L.C. ("M-I Drilling Fluids")
acquired the assets of Anchor Drilling Fluids, A.S. ("Anchor") in exchange for
cash of approximately $105.3 million. The Company utilized $73.4 million of
borrowings under new loan agreements to finance their portion of the purchase
price and retire certain debt assumed in the acquisition. The minority partner
contributed $41.3 million to fund their portion of the acquisition costs, which
is included in Minority Interests in the accompanying Consolidated Balance
Sheet. In connection with the transaction, M-I Drilling Fluids incurred $15.3
million of accounting, legal and other acquisition-related costs.
The Anchor acquisition was recorded using the purchase method of accounting
and, accordingly, the acquired operations have been included in the results of
operations since the acquisition date. The purchase price was allocated to the
net assets acquired based upon their estimated fair market values. The excess
of the purchase price over the estimated fair value of the net assets acquired
amounted to approximately $85.9 million, which has been recorded as goodwill
and is being amortized over 40 years using the straight line method for book
purposes. This allocation is based on preliminary estimates and may be revised
when valuations of the assets acquired and the liabilities assumed are
finalized.
In connection with finalizing the transaction, M-I Drilling Fluids reached
an agreement with the U.S. Department of Justice to modify a 1994 judgment
issued by the U.S. District Court for the District of Columbia. Under a
Divestiture Agreement, M-I Drilling Fluids agreed to hold the acquired assets
of Anchor Drilling Fluids USA, Inc. ("Anchor USA") separate until a sale of
those assets could be made to an acceptable purchaser. On August 27, 1996, M-I
Drilling Fluids sold certain assets and liabilities of Anchor USA to Jordan
Drilling Fluids, Inc. in exchange for cash of $1.0 million. Under the sale
agreement, M-I Drilling Fluids retained a portion of the Anchor USA assets,
primarily accounts receivable, which approximated $8.9 million at the date of
sale. Certain costs associated with the Anchor USA sale, including the loss on
sale of the operations, the losses incurred by those operations during the
holding period and interest expense on the portion of the borrowings used to
finance the purchase, have been included in the acquisition-related costs
discussed above.
6
<PAGE> 7
The summarized unaudited pro forma results from continuing operations
(excluding the results of the Anchor USA operations) for the nine months ended
September 30, 1996 and 1995, assuming the acquisition had been made on January
1, 1996 and 1995, respectively, are as follows (dollars in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
---- ----
<S> <C> <C>
Unaudited pro forma.................................... $ 869,630 $ 714,506
Unaudited pro forma income from continuing ========= =========
operations............................................. $ 44,436 $ 32,822
========= =========
Unaudited pro forma income from continuing
operations per share................................... $ 1.12 $ 0.83
========= =========
</TABLE>
These pro forma results have been prepared for comparative purposes
only and include certain adjustments such as additional depreciation expense
as a result of a step-up in the basis of property, plant and equipment,
additional amortization expense as a result of goodwill and other intangible
assets and increased interest expense on the acquisition-related debt. The pro
forma results do not include estimated consolidation savings; therefore, they
do not purport to be indicative of the results of operations which actually
would have resulted had the combination been in effect on January 1, 1996 or
1995 or of future results of operations for the consolidated entities.
3) EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents include the number of shares issuable upon
exercise of stock options, less the number of shares that could have been
repurchased with the exercise proceeds using the treasury stock method.
The number of shares used in the computation was determined as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of shares outstanding............... 39,370 39,146 39,332 39,005
Common stock equivalents.................................... 555 382 491 317
------ ------ ------ ------
Average common and common equivalent
shares outstanding.......................................... 39,925 39,528 39,823 39,322
====== ====== ====== ======
</TABLE>
7
<PAGE> 8
4) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out ("LIFO") method for substantially all of
the domestic inventories and by the first-in, first-out ("FIFO") method for all
other inventories. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Raw Materials . . . . . . . . . . . . . . . . . . . . . $ 31,329 $ 31,052
Work in Process . . . . . . . . . . . . . . . . . . . . 51,080 40,718
Finished Goods . . . . . . . . . . . . . . . . . . . . 211,780 163,597
-------- --------
294,189 235,367
Reserves to state certain domestic inventories
($113,238 and $99,113 in 1996 and 1995,
respectively) on a LIFO basis . . . . . . . . . . . (15,850) (13,415)
-------- --------
Inventories, net . . . . . . . . . . . . . . . . . . . $ 278,339 $ 221,952
======== ========
</TABLE>
5) PROPERTY, PLANT AND EQUIPMENT, NET
Property, Plant and Equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,620 $ 16,997
Buildings and improvements . . . . . . . . . . . . . . . 38,936 31,199
Machinery and equipment . . . . . . . . . . . . . . . . . 280,166 250,221
-------- --------
336,722 298,417
Less-accumulated depreciation . . . . . . . . . . . . . . (156,279) (165,918)
--------- --------
Net property, plant and equipment . . . . . . . . . . . . $ 180,443 $ 132,499
========= ========
</TABLE>
8
<PAGE> 9
6) DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Current:
Short-term bank borrowings . . . . . . . . . . . . . . . $ 5,313 $ 14,438
Current portion of long-term debt . . . . . . . . . . . . 10,402 10,709
------ ------
15,715 25,147
------ ------
Long-term:
Notes payable . . . . . . . . . . . . . . . . . . . . . . 96,000 46,000
Bank revolver . . . . . . . . . . . . . . . . . . . . . . 80,800 50,400
Term loan . . . . . . . . . . . . . . . . . . . . . . . . 20,000 30,000
Norwegian kroner term loan . . . . . . . . . . . . . . . 49,259 0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 8,111 1,547
----- -----
254,170 127,947
Less current portion of long-term debt . . . . . . . . . (10,402) (10,709)
------- -------
Long-term debt . . . . . . . . . . . . . . . . . . . . . $ 243,768 $ 117,238
======= =======
</TABLE>
On April 4, 1996, the Company and M-I Drilling Fluids entered into new
unsecured revolving line of credit agreements which increased the available
facilities under the Company's domestic line of credit from $65.0 million to
$80.0 million and under the M-I Drilling Fluids line of credit from $20.0
million to $40.0 million. The new credit agreements provide for interest at
rates ranging from LIBOR + 3/8 to LIBOR + 5/8, based upon certain financial
ratios of the Company, and expire in March 2001.
On May 26, 1996, the Company entered into a new $50.0 million
unsecured note agreement with insurance company lenders. Of the total amount,
$30.0 million bears interest at a rate of 7.24 percent and matures on April 2,
2001. The remaining portion bears interest at 7.63 percent and is payable in
six equal installments from April 1, 2001 through April 2, 2006.
Principal payments of long-term debt on a calendar year basis are as
follows:
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,464
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,005
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,914
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,980
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,405
-------
$ 243,768
=======
</TABLE>
9
<PAGE> 10
7) CASH FLOW INFORMATION
Net cash provided by operating activities reflects cash payments for
interest and income taxes as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1995
---- ----
<S> <C> <C>
Income taxes.......................................... $ 12,903 $ 2,835
Interest.............................................. $ 9,506 $ 9,354
</TABLE>
The following schedule summarizes investing activities related to current
year acquisitions (in thousands):
<TABLE>
<S> <C>
Fair value of assets, net of cash acquired of $5,535.......... $82,812
Goodwill recorded............................................. 86,967
Less: Total liabilities assumed............................... (68,302)
Less: Minority interest partner's contribution................ (37,914)
--------
Cash paid for acquisition of businesses, net of cash acquired $63,563
=======
</TABLE>
8) SUBSEQUENT EVENT
Subsequent to September 30, 1996, the Company acquired The Red Baron (Oil
Tools Rental) Limited, a Scottish company, in a transaction which is expected
to be accounted for as a purchase. The Red Baron is a supplier of fishing and
other downhole remedial products and services to the oil and gas industry. The
purchase price of approximately $40 million was funded through a combination of
available cash and the issuance of notes payable to the sellers.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Management's Discussion and Analysis of Financial Condition and Results of
Operations is the Company's discussion of its financial performance and of
significant trends which may impact the future performance of the Company. It
should be read in conjunction with the financial statements of the Company and
the related notes thereto.
The Company manufactures and supplies a wide range of products and services
to the worldwide oil and gas drilling and production and mining industries.
The Company's revenues are derived from sales of drilling and completion fluid
systems, solids control equipment, drill bits, downhole drilling tools and
tubular drill string components in addition to providing drilling and
completion services to the oil and gas industry.
The Company operates in the global oil and gas services market and can be
significantly impacted by fluctuations in exploration and drilling activity in
the major energy producing areas. While exploration and drilling activity is
primarily influenced by oil and natural gas prices, it may be affected by
political actions and uncertainties, environmental concerns, capital
expenditure plans of customers and the overall level of global economic growth
and activity.
RESULTS OF OPERATIONS
REVENUES
The Company operates through four business units which market the
products manufactured and provide services throughout the world. The following
table sets forth the amounts and percentages of revenues by business unit and
by area, as well as average rig count data (in thousands, except rig count
information):
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------- ------------------------------------
1996 1995 1996 1995
Amount % Amount % Amount % Amount %
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown by Business Unit:
M-I Drilling Fluids.......... $ 206,058 66 $ 147,293 64 $ 533,005 65 $ 402,084 63
Smith Tool................... 51,399 17 43,511 19 143,120 17 124,742 20
Smith Drilling & Completions. 38,020 12 29,735 13 102,594 13 83,114 13
Smith Diamond Technology..... 15,180 5 8,898 4 41,030 5 25,076 4
---------- --- ---------- --- ---------- --- ---------- ---
Total................ $ 310,657 100 $ 229,437 100 $ 819,749 100 $ 635,016 100
========== === ========== === ========== === ========== ===
Breakdown by Area:
U.S. ........................ $ 113,920 37 $ 95,566 42 $ 326,062 40 $ 262,186 41
Export....................... 19,836 6 11,835 5 50,408 6 37,009 6
Non-U.S. .................... 176,901 57 122,036 53 443,279 54 335,821 53
---------- --- ---------- --- ---------- --- ---------- ---
Total................ $ 310,657 100 $ 229,437 100 $ 819,749 100 $ 635,016 100
========== === ========== === ========== === ========== ===
Average Active Rig Count:
U.S. ........................ 802 746 757 710
Canada....................... 275 221 254 231
Non-North America............ 801 758 792 755
---------- ---------- ---------- ----------
Total 1,878 1,725 1,803 1,696
========== ========== ========== ==========
</TABLE>
11
<PAGE> 12
REVENUES BY BUSINESS UNITS
M-I Drilling Fluids
The M-I Drilling Fluids operation provides drilling fluids systems,
solids control equipment, products and technical services to end users engaged
in drilling oil, natural gas and geothermal wells worldwide. M-I Drilling
Fluids revenues increased $58.8 million, or 40 percent, over the third quarter
of 1995 and $130.9 million, or 33 percent, from the first nine months of 1995.
The majority of the revenue increases over the third quarter of the prior year
relate to the incremental revenues associated with the Anchor acquisition and
the increased level of deep water drilling activity in the U.S. Gulf Coast
area. Strong international revenue growth, primarily in Europe/Africa region
which benefited not only from the addition of the Anchor operations but also
from increased drilling activity, contributed to the majority of the increase
over the first nine months of 1995.
Smith Tool
The Smith Tool business unit manufactures and sells three-cone drill
bits used in the oil and gas drilling industry and in mining applications.
Smith Tool revenues increased $7.9 million and $18.4 million, or 18 percent and
15 percent, from the third quarter of 1995 and first nine months of 1995,
respectively. Increased unit sales of the business unit's premium drill bits,
which has been favorably impacted by the introduction of the new Magnum(TM) Bit
line, and heightened worldwide drilling activity contributed to the increase.
On a geographic basis, increased demand for Smith Tool products in the U.S and
in the Europe/Africa region accounted for the majority of the growth over the
prior year.
Smith Drilling & Completions
The Smith Drilling & Completions business unit 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 $8.3 million, or 28 percent,
from the third quarter of 1995 and $19.5 million, or 23 percent, from the first
nine months of 1995. The increase is primarily attributable to higher levels
of re-entry drilling activity in the U.S. Gulf Coast and increased demand for
products and services in international markets, particularly Latin America.
Smith Diamond Technology
The Smith Diamond Technology business unit 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. Smith Diamond
Technology revenues increased $6.3 million and $16.0 million, or 71 percent and
64 percent, from the third quarter 1995 and first nine months of 1995,
respectively. The increased revenues result from higher unit sales of the
business unit's drill bits which increased over 50 percent from the third
quarter of 1995. On a geographic basis, increased demand in the Latin America
region, which was positively impacted by the introduction of new products and
increased market activity, accounted for the majority of the increase over the
prior year.
12
<PAGE> 13
For the periods indicated, the following table summarizes the operating
results of the Company and presents results as a percentage of total revenues:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
1996 1995 1996 1995
Amount % Amount % Amount % Amount %
--------- --- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $310,657 100 $229,437 100 $819,749 100 $635,016 100
-------- -------- -------- -------
Gross profit...................... 103,398 33 76,643 33 274,630 34 210,976 33
Operating expenses................ 68,661 22 53,236 23 184,509 23 148,663 23
--------- -- ---------- -- -------- -- --------- --
Earnings before interest and
taxes........................... 34,737 11 23,407 10 90,121 11 62,313 10
Interest expense, net............. 4,547 2 3,168 1 11,350 2 9,138 2
--------- -- --------- -- --------- -- --------- --
Income before income taxes and
minority interests.............. 30,190 9 20,239 9 78,771 9 53,175 8
Income tax provision.............. 6,629 2 3,937 2 17,423 2 9,186 1
--------- -- --------- -- --------- -- --------- --
Income before minority interests.. 23,561 7 16,302 7 61,348 7 43,989 7
Minority interests................ 6,957 2 4,559 2 16,815 2 11,317 2
--------- -- ---------- -- --------- -- --------- --
Net income........................ $ 16,604 5 $ 11,743 5 $ 44,533 5 $ 32,672 5
========= == ========== == ========= == ========= ==
</TABLE>
Total revenues for the third quarter of 1996 increased approximately
$81.2 million, or 35 percent, over the same quarter in the prior year. The
increase over the comparable quarter in the prior year relates to the addition
of the Anchor operations and the higher level of worldwide drilling activity.
The significant increase in international revenues resulted in the Company's
non-U.S. revenues as a percentage of total revenues increasing from 58 percent
in the third quarter of 1995 to 63 percent in the third quarter of 1996.
Revenues for the first nine months of 1996 increased $184.7 million, or 29
percent, over the comparable period in 1995. Increased worldwide drilling
activity, particularly in the U.S., Europe/Africa, and Latin America markets,
and the inclusion of the Anchor operations contributed to the increase over the
first nine months of 1995.
Gross profit increased by $26.8 million, or 35 percent, from the third
quarter of 1995 and $63.7 million, or 30 percent, from the first nine months of
1995. As a percentage of revenues, margins were comparable to the third
quarter of 1995 and increased from 33 percent for the first nine months of 1995
to 34 percent for the same period in 1996. The gross profit increase over the
prior year's results is primarily attributable to the significant revenue
growth.
Operating expenses, increased $15.4 million and $35.8 million from the
third quarter and first nine months of 1995, respectively; however, as a
percentage of revenues, operating expenses decreased to 22 percent, which is a
slight decrease from the 23 percent reported in the third quarter of 1995, and
is comparable on a year-to-year basis. The increase in absolute dollars
primarily relates to increased selling costs associated with the higher revenues
and the incremental operating costs associated with the Anchor operations for
which no amounts were included the prior year.
Net interest expense increased $1.4 million and $2.2 million over the
third quarter and first nine months of 1995, respectively. The increase over
the third quarter of the prior year relates primarily to the higher level of
borrowings required to finance the Anchor acquisition. To a lesser extent,
borrowings required to finance general working capital needs, which have
increased as a result of the significant growth experienced by the Company,
have contributed to the higher net interest expense amounts.
13
<PAGE> 14
The Company's effective tax rate for both the third quarter and first
nine months of 1996 approximated 22 percent, which is higher than the rate for
the comparable periods in the prior year and lower than the U.S. statutory
rate. The effective rate increase from the prior year relates primarily to
full utilization of U.S. alternative minimum tax net operating loss
carryforwards during 1995. The effective rate was lower than the statutory
rate, due primarily to the utilization of U.S. regular net operating loss
carryforwards during the current year.
Minority interests represent the share of M-I Drilling Fluids profits
associated with the minority interest partner in the M-I Drilling Fluids
operation as well as minority interests in investments in other joint ventures
held by M-I Drilling Fluids. Minority interests increased by $2.4 million and
$5.5 million from the third quarter and first nine months of 1995, respectively.
The increase is due primarily to the higher level of M-I Drilling Fluids
earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong at September 30,
1996. Working capital at September 30, 1996 increased $103.4 million, or 34
percent, from December 31, 1995. During the nine months ended September 30,
1996, cash required to support the Company's operations exceeded cash generated
internally by approximately $4.4 million.
The Company's primary internal source of liquidity is cash flow
generated from operations. External sources of liquidity include debt and, if
needed, equity financing. The Company has domestic and international borrowing
facilities for operating and financing needs. The Company had a $80.0 million
revolving line of credit facility with a bank group and approximately $30.0
million of international borrowing facilities with various foreign banks. The
Company had approximately $45.5 million of funds available for borrowings under
these facilities. Additionally, the M-I Drilling Fluids revolving line of
credit facility of $40.0 million had approximately $10.5 million of funds
available for borrowing. 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 October 9, 1996, the Company finalized the acquisition of The Red
Baron (Oil Tools Rental) Limited in a transaction which is expected to be
accounted for as a purchase. The purchase price was funded through a
combination of available cash and the issuance of notes payable to the sellers.
Aside from this acquisition, management regularly evaluates opportunities to
acquire products or businesses complementary to the Company's operations.
These acquisitions, if they arise, may involve the use of cash or, depending on
the size and terms of the transaction, may require debt or equity financing.
14
<PAGE> 15
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
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The registrant filed a Form 8-K/A dated June 11, 1996, reporting under
"Item 7. Financial Statements and Exhibits" the financial statements of
businesses acquired, pro forma financial information and exhibits related to
the acquisition of Anchor Drilling Fluids, A.S.
15
<PAGE> 16
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
Date: November 13, 1996 By: /s/ Douglas L. Rock
-----------------------------------
Douglas L. Rock
Chairman of the Board, Chief Executive
Officer, President and Chief Operating
Officer
Date: November 13, 1996 By: /s/ Loren K. Carroll
-----------------------------------
Loren K. Carroll
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 12,790
<SECURITIES> 0
<RECEIVABLES> 308,710
<ALLOWANCES> 6,625
<INVENTORY> 278,339
<CURRENT-ASSETS> 618,429
<PP&E> 336,722
<DEPRECIATION> 156,279
<TOTAL-ASSETS> 973,625
<CURRENT-LIABILITIES> 215,071
<BONDS> 243,768
<COMMON> 40,025
0
0
<OTHER-SE> 306,601
<TOTAL-LIABILITY-AND-EQUITY> 973,625
<SALES> 819,749
<TOTAL-REVENUES> 819,749
<CGS> 545,119
<TOTAL-COSTS> 545,119
<OTHER-EXPENSES> 184,509
<LOSS-PROVISION> 733
<INTEREST-EXPENSE> 11,350
<INCOME-PRETAX> 78,771
<INCOME-TAX> 17,423
<INCOME-CONTINUING> 44,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,533
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
</TABLE>
