<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, 1997
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 7, 1997 was 40,310,108.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Operations -
For the Three and Nine Months Ended September 30, 1997 and 1996 . . . . . . . . . . 1
Consolidated Balance Sheets -
As of September 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . .. . . . . . . . . . . . . . 8
PART II: OTHER INFORMATION
ITEMS 1 - 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
<PAGE> 3
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -------------------------
1997 1996 1997 1996
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . $396,629 $310,657 $1,137,276 $819,749
COSTS AND EXPENSES:
Costs of Revenues . . . . . . . . . . . . . . . 256,589 207,259 742,777 545,119
Selling Expenses . . . . . . . . . . . . . . . 64,003 51,153 181,969 137,837
General and Administrative Expenses . . . . . . 19,192 17,508 58,590 46,672
-------- -------- ---------- --------
Total Costs and Expenses . . . . . . . . . 339,784 275,920 983,336 729,628
-------- -------- ---------- --------
INCOME BEFORE INTEREST AND TAXES . . . . . . . . 56,845 34,737 153,940 90,121
INTEREST EXPENSE, NET . . . . . . . . . . . . . . 6,635 4,547 17,882 11,350
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS . . . . . . . . . . . . . . 50,210 30,190 136,058 78,771
INCOME TAX PROVISION . . . . . . . . . . . . . . 13,412 6,629 35,481 17,423
-------- -------- ---------- --------
INCOME BEFORE MINORITY INTERESTS . . . . . . . . 36,798 23,561 100,577 61,348
MINORITY INTERESTS . . . . . . . . . . . . . . . 9,534 6,957 28,271 16,815
-------- -------- ---------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 27,264 $ 16,604 $ 72,306 $ 44,533
======== ======== ========== ========
EARNINGS PER SHARE . . . . . . . . . . . . . . . $ 0.68 $ 0.42 $ 1.80 $ 1.12
======== ======== ========== ========
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING . . . . . . . . . 40,233 39,925 40,158 39,823
======== ======== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 19,956 $ 25,540
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 389,620 309,062
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 325,033 295,041
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . 8,585 8,979
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . 22,949 26,655
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 766,143 665,277
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . . . . . . . 253,205 205,251
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,753 43,257
GOODWILL, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,952 160,797
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,254,053 $1,074,582
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt . . . . . . $ 77,248 $ 74,983
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,625 106,962
Accrued payroll costs . . . . . . . . . . . . . . . . . . . . . . . . . 54,118 42,836
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . 10,344 19,706
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,498 56,014
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 315,833 300,501
---------- ----------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277,517 228,443
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 23,296 22,361
MINORITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,074 154,741
SHAREHOLDERS' EQUITY:
Preferred Stock, $1 par value; 5,000 shares authorized; no
shares issued or outstanding in 1997 or 1996 . . . . . . . . . . . . . -- --
Common Stock, $1 par value; 60,000 shares authorized; 40,306
shares issued and outstanding in 1997 (40,157 in 1996) . . . . . . . . 40,306 40,157
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 282,448 278,955
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,788 62,482
Cumulative translation adjustments . . . . . . . . . . . . . . .. . . (11,507) (5,356)
Less - treasury securities, at cost; 656 common shares in 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,702) (7,702)
---------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 438,333 368,536
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . $1,254,053 $1,074,582
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,306 $ 44,533
Adjustments to reconcile net income to net cash provided by
(used in) operating activities, excluding the net effects of acquisitions:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . 33,875 23,188
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,271 16,815
Provision for losses on receivables. . . . . . . . . . . . . . . . . . . . . . . . 1,047 733
Gain on disposal of property, plant and equipment. . . . . . . . . . . . . . . . . (1,552) (2,845)
Foreign currency translation losses. . . . . . . . . . . . . . . . . . . . . . . . (72) (98)
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (79,331) (40,671)
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,292) (40,228)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,092) 2,368
Other current assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . 7,626 (2,633)
Other non-current assets and liabilities . . . . . . . . . . . . . . . . . . . . . (7,233) (5,530)
-------- --------
Net cash provided by (used in) operating activities. . . . . . . . . . . . . . . . . . 21,553 (4,368)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired. . . . . . . . . . . . . . . . . . . . (53,440) (63,563)
Property, plant and equipment additions. . . . . . . . . . . . . . . . . . . . . . . . (56,370) (49,792)
Proceeds from disposal of property, plant and equipment. . . . . . . . . . . . . . . . 4,626 8,377
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . (105,184) (104,978)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . 242,189 129,782
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (188,964) (10,000)
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . 3,952 (23,516)
Proceeds from exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . 1,665 2,446
Contributions from minority interest partner, net. . . . . . . . . . . . . . . . . . . 19,440 8,665
-------- --------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . 78,282 107,377
-------- --------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . . . . (235) (86)
-------- --------
Decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . (5,584) (2,055)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . 25,540 14,845
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . $ 19,956 $ 12,790
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,004 $ 9,506
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,264 $ 12,903
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<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 1996 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
On April 16, 1997 the Company acquired all of the interest in Tri-Tech
Fishing Services, L.L.C., a supplier of fishing and other downhole remedial
products and services to the U.S. Gulf Coast region. On May 1, 1997, M-I
L.L.C. ("M-I"), acquired the assets of Branath Oilfield Services, Inc., a
supplier of solids control equipment to the Canadian oil and gas industry. The
Company also acquired certain other assets and operations during 1997. The
1997 acquisitions were purchased in exchange for total consideration of $58.4
million, which includes cash payments and amounts of contingent consideration,
if any, determinable at the date of acquisition. The above acquisitions have
generally been financed with borrowings against available lines of credit.
The acquisitions have been recorded using the purchase method of
accounting and, accordingly, the acquired operations have been included in the
results of operations since their respective acquisition dates. The purchase
price was allocated to the net assets acquired based upon their estimated fair
market values at the dates of acquisition. The excess of the purchase price
over the estimated fair value of the net assets acquired amounted to
approximately $31.3 million, which has been recorded as goodwill.
The balances included in the Consolidated Balance Sheets related to
these acquisitions are based upon preliminary information and are subject to
change when additional information concerning final asset and liability
valuations is obtained. Material changes in the preliminary allocations are
not anticipated by management.
The unaudited pro forma supplemental information for the nine months
ended September 30, 1996 and 1997 is presented below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $1,150,899 $ 926,618
Net income . . . . . . . . . . . . . . . . . . $ 73,223 $ 45,510
Earnings per share . . . . . . . . . . . . . . $ 1.82 $ 1.14
</TABLE>
4
<PAGE> 7
The unaudited pro forma supplemental information is based on
historical information and does not include estimated cost savings; therefore,
it does not purport to be indicative of the results of operations had the
combinations been in effect at the dates indicated or of future results for the
combined entities.
The following schedule summarizes investing activities related to
current year acquisitions included in the Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997 (in thousands):
<TABLE>
<S> <C>
Fair value of assets, net of cash acquired . . . . . . . . $37,798
Goodwill recorded . . . . . . . . . . . . . . . . . . . . . 31,266
Less: Total liabilities assumed . . . . . . . . . . . . . (15,624)
-------
Acquisition of businesses, net of cash acquired . . . . . . $53,440
=======
</TABLE>
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>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average number of shares outstanding . . . 39,637 39,370 39,586 39,332
Common stock equivalents . . . . . . . . . . . . . 596 555 572 491
------ ------ ------ ------
Average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . 40,233 39,925 40,158 39,823
====== ====== ====== ======
</TABLE>
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 U.S.
inventories and by the first-in, first-out ("FIFO") method for all other
inventories. Inventory costs, consisting of materials, labor and factory
overhead, are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . . . . . $ 29,616 $ 30,614
Work-in-process . . . . . . . . . . . . . . . . . . . . . 69,777 45,985
Finished goods . . . . . . . . . . . . . . . . . . . . . 242,330 233,139
-------- --------
341,723 309,738
Reserves to state certain domestic inventories
($136,822 and $117,360 in 1997 and 1996,
respectively) on a LIFO basis . . . . . . . . . . . . (16,690) (14,697)
-------- --------
Inventories, net . . . . . . . . . . . . . . . . . . . . $325,033 $295,041
======== ========
</TABLE>
5
<PAGE> 8
5) PROPERTY, PLANT AND EQUIPMENT, NET
Property, Plant and Equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,570 $ 17,880
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . 41,925 40,170
Machinery and equipment . . . . . . . . . . . . . . . . . . . 366,392 305,491
--------- --------
428,887 363,541
Less-accumulated depreciation . . . . . . . . . . . . . . . . (175,682) (158,290)
--------- --------
Net property, plant and equipment . . . . . . . . . . . . . . $ 253,205 $205,251
========= ========
</TABLE>
6) DEBT
The following summarizes the Company's outstanding debt (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Current:
Short-term bank borrowings . . . . . . . . . . . . . . . . . $ 50,294 $ 49,178
Current portion of long-term debt . . . . . . . . . . . . . . 26,954 25,805
-------- --------
77,248 74,983
-------- --------
Long-term:
$150 million 7% Notes, net of unamortized discount of $1,035. 148,965 --
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . 100,889 116,000
Bank revolvers payable . . . . . . . . . . . . . . . . . . . 6,500 92,200
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . 46,945 44,626
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,172 1,422
-------- --------
304,471 254,248
Less current portion of long-term debt. . . . . . . . . . . . (26,954) (25,805)
-------- --------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . $277,517 $228,443
======== ========
</TABLE>
On April 8, 1997, the Company and M-I amended their revolving line of
credit agreements increasing the amounts available under the Company's and M-I's
U.S. lines from $120.0 million to $200.0 million. The new credit agreements
expire in March 2002 and carry generally the same terms and covenants.
On September 15, 1997, the Company completed a public debt offering for
$150.0 million of 7% Senior Notes (the "7% Notes") due September 15, 2007. The
7% Notes are senior unsecured obligations of the Company and are redeemable by
the Company in whole or in part at any time. Interest on the 7% Notes is payable
semi-annually on March 15 and September 15. The net proceeds of the offering
were used to repay amounts outstanding under the Company's and M-I's bank
revolvers.
Principal payments of long-term debt on a calendar year basis are as
follows: 1998 - $31.7 million; 1999 - $21.5 million; 2000 - $21.5 million; 2001
- - $50.3 million and thereafter - $174.1 million.
6
<PAGE> 9
7) SUBSEQUENT EVENTS
Subsequent to September 30, 1997, the Company finalized the acquisition
of Fleming Oilfield Services, Ltd. ("Fleming"). Fleming is a supplier of
drilling fluid products and services to the Canadian oil and gas industry. The
transaction, which is expected to be accounted for as a purchase, was financed
with borrowings under a new term loan.
8) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per
Share" effective for fiscal periods ending after December 15, 1997. This
standard revises the method of computing weighted average shares used in the
earnings per share calculation. The impact of adopting SFAS 128 is not expected
to have a material impact upon the Company's reported earnings per share
amounts.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting
Comprehensive Income" effective for fiscal years beginning after December 15,
1997. This statement establishes standards for the reporting and displaying of
comprehensive income and its components. Had SFAS No. 130 been adopted as of
September 30, 1997, the primary adjustment required to disclose net income on a
comprehensive income basis would have related to changes in cumulative
translation adjustment amounts reported.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is provided to assist readers in
understanding the Company's financial performance during the periods presented
and significant trends which may impact the future performance of the Company.
It should be read in conjunction with the Consolidated Financial Statements of
the Company and the related notes thereto.
The Company's primary business is the manufacture and sale of premium
products and services to the oil and gas industry's exploration and production
sectors. The Company provides a comprehensive line of technologically-advanced
products and engineering services, including drilling and completion fluid
systems, solids control equipment, waste management services, three-cone drill
bits, diamond drill bits, fishing services, drilling tools, underreamers,
sidetracking systems and liner hangers.
The Company's worldwide operations are largely driven by the level of
exploration and production activity in major energy producing areas and the
depth and drilling conditions of these projects. The level of worldwide
drilling activity is influenced by the prices of oil and natural gas but may
also be affected by political actions and uncertainties, environmental
concerns, capital expenditure plans of exploration and production companies and
the overall level of global economic growth and activity.
RESULTS OF OPERATIONS
REVENUES
Smith International operates through five business units which market
the Company's products and services throughout the world. The following table
presents revenue and average rig count information for the periods shown.
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------------------
1997 1996 1997 1996
--------------------------------- -----------------------------------
Amount % Amount % Amount % Amount %
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues by Business Unit:
M-I Fluids . . . . . . . . . . . $ 215,120 54 $ 184,089 59 $ 635,935 56 $ 475,023 58
M-I SWACO. . . . . . . . . . . . 34,089 9 21,969 7 93,499 8 57,982 7
Smith Tool . . . . . . . . . . . 65,215 16 51,399 17 183,256 16 143,120 17
Smith Drilling & Completions . . 62,196 16 38,020 12 167,090 15 102,594 13
Smith Diamond Technology . . . . 20,009 5 15,180 5 57,496 5 41,030 5
----------- --- ---------- --- ---------- --- --------- ---
Total. . . . . . . . . . $ 396,629 100 $ 310,657 100 $1,137,276 100 $ 819,749 100
========== === ========== === ========== === ========= ===
Revenues by Area:
U.S. . . . . . . . . . . . . . . $ 159,215 40 $ 113,920 37 $ 447,674 39 $ 326,062 40
Export . . . . . . . . . . . . . 24,968 6 19,836 6 70,176 6 50,408 6
Non-U.S. . . . . . . . . . . . . 212,446 54 176,901 57 619,426 55 443,279 54
---------- --- ---------- --- ---------- --- --------- ---
Total. . . . . . . . . . $ 396,629 100 $ 310,657 100 $1,137,276 100 $ 819,749 100
========== === ========== === ========== === ========= ===
Average Active Rig Count:
U.S. . . . . . . . . . . . . . . 992 802 927 757
Canada . . . . . . . . . . . . . 398 275 350 254
Non-North America. . . . . . . . 811 801 811 792
---------- ---------- ---------- ---------
Total. . . . . . . . . . 2,201 1,878 2,088 1,803
========== ========== ========== =========
</TABLE>
8
<PAGE> 11
M-I FLUIDS
M-I Fluids, a division of M-I L.L.C. ("M-I"), provides drilling fluid
and completion fluid systems, engineering and technical services to the oil and
gas industry. M-I Fluids revenues increased $31.0 million, or 17 percent, over
the third quarter of 1996 due to the higher level of deep-water drilling
activity in the U.S. Gulf Coast area. For the nine month period, M-I Fluids
revenues increased $160.9 million, or 34 percent, from the comparable period of
the prior year. The majority of the revenue growth over the first nine months
of 1996 relates to the higher U.S. activity levels and incremental revenues
associated with the Anchor Drilling Fluids A.S. ("Anchor") operations acquired
in June 1996.
M-I SWACO
M-I SWACO, a division of M-I, manufactures and markets equipment and
services for solids control, pressure control, rig instrumentation and waste
management. M-I SWACO revenues increased $12.1 million and $35.5 million from
the third quarter and first nine months of 1996, respectively. The revenue
growth related to increased market penetration in Latin America, higher
activity levels in the U.S. and the addition of the Branath Oilfield Services
operations in Canada.
SMITH TOOL
Smith Tool manufactures and sells three-cone bits for use in the oil
and gas industry and in mining applications. Smith Tool revenues increased
$13.8 million from the third quarter of 1996 and $40.1 million from the first
nine months of 1996. The majority of the revenue growth related to higher unit
sales and a favorable shift in the sales mix to the Magnum(TM) line of premium
bits introduced in the third quarter of 1996. On a geographical basis, higher
drilling activity in North America coupled with increased sales in the Middle
and Far East accounted for the year-over-year revenue growth.
SMITH DRILLING & COMPLETIONS
Smith Drilling & Completions manufactures and markets products and
services used in the oil and gas industry for drilling, workover, well
completion and well re-entry. Smith Drilling & Completions' revenues increased
$24.2 million, or 64 percent, over the third quarter of 1996 and $64.5 million,
or 63 percent, from the first nine months of 1996. The majority of the
increase is attributable to the incremental revenues associated with The Red
Baron (Oil Tools Rental) Ltd.'s ("Red Baron") and the Tri-Tech Fishing
Services, L.L.C.'s operations, which were acquired in October 1996 and April
1997, respectively. Higher levels of re-entry drilling activity in the U.S.
Gulf Coast area also contributed to the growth over the prior year.
SMITH DIAMOND TECHNOLOGY
Smith Diamond Technology manufactures and markets shear bits featuring
cutters made of polycrystalline diamond ("PDC") or natural diamond at its
GeoDiamond division. Smith Diamond Technology also manufactures PDC and cubic
boron nitride at its MegaDiamond and Supradiamant subsidiaries. These
ultrahard materials are used in the Company's three-cone and diamond drill
bits and in other specialized cutting tools. Smith Diamond Technology revenues
increased $4.8 million, or 32 percent, over the third quarter of 1996 and $16.5
million, or 40 percent, from the first nine months of 1996. Higher unit sales
in Latin America, Europe/Africa and the Far East related to increased market
penetration, higher activity levels and expansion into new markets, accounted
for the year-over-year revenue growth.
9
<PAGE> 12
For the periods indicated, the following table summarizes the results
of the Company and presents these results as a percentage of total revenues:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------- ------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $396,629 100 $310,657 100 $1,137,276 100 $819,749 100
-------- -------- ---------- --------
Gross profit....................... 140,040 35 103,398 33 394,499 35 274,630 34
Operating expenses................. 83,195 21 68,661 22 240,559 21 184,509 23
-------- --- -------- --- ---------- --- -------- ---
Income before interest and taxes... 56,845 14 34,737 11 153,940 14 90,121 11
Interest expense, net.............. 6,635 2 4,547 2 17,882 2 11,350 2
-------- --- -------- --- ---------- --- -------- ---
Income before income taxes and
minority interests................ 50,210 12 30,190 9 136,058 12 78,771 9
Income tax provision............... 13,412 3 6,629 2 35,481 3 17,423 2
-------- --- -------- --- ---------- --- -------- ---
Income before minority interests... 36,798 9 23,561 7 100,577 9 61,348 7
Minority interests................. 9,534 2 6,957 2 28,271 3 16,815 2
-------- --- -------- --- ---------- --- -------- ---
Net income......................... $ 27,264 7 $ 16,604 5 $ 72,306 6 $ 44,533 5
======== === ======== === ========== === ======== ===
</TABLE>
Total revenues increased $86.0 million, or 28 percent, from the prior
year quarter and $317.5 million, or 39 percent, over the first nine months of
1996 as the Company experienced growth across all business units and geographic
areas. Over half of the quarter-to-quarter revenue increase was reported in the
U.S. which benefited from higher drilling activity levels, particularly
deepwater and re-entry activity in the U.S. Gulf Coast area, and the impact of
acquired operations. Higher U.S. revenues combined with the addition of the
Anchor and Red Baron operations, which had significant operations in the
Eastern Hemisphere, contributed the majority of the increase for the nine month
period. Non-U.S. revenues continue to account for a significant portion of the
Company's operations and approximated 61 percent of total revenues for the
first nine months of 1997 compared to 60 percent of total revenues for the
first nine months of 1996.
Gross profit as a percentage of revenues increased from 33 percent in
the third quarter of the prior year to 35 percent in the third quarter of 1997.
The quarter-to-quarter improvement in gross profit margins resulted from higher
volumes and the impact of price increases enacted during the year. For the
nine month period, gross profit as a percentage of revenues increased from 34
percent in 1996 to 35 percent in 1997. Higher volumes, price increases and the
favorable impact of acquired operations contributed to the margin improvement
for the nine month period.
Operating expenses, consisting of selling expenses and general and
administrative expenses, increased $14.5 million over the third quarter of 1996
and $56.1 million from the first nine months of 1996; however, as a percentage
of revenues, operating expenses were reduced in excess of 1 percentage point
over the comparable periods of 1996. The dollar variance over the comparable
periods of the prior year, relates to increased variable costs attributable to
the higher revenues and, to a lesser extent, incremental costs associated with
acquired operations.
Net interest expense, which represents interest expense less interest
income, increased $2.1 million and $6.5 million from the third quarter and
first nine months of 1996, respectively. The increase relates to the higher
level of borrowings to fund business acquisitions and finance general working
capital needs, which increased as a result of the revenue growth experienced by
the Company.
10
<PAGE> 13
The Company's effective tax rate for the third quarter and first nine
months of 1997 approximated 27 percent and 26 percent, respectively, 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 over the prior year
relates primarily to increased profitability in tax jurisdictions with higher
statutory rates. The effective rate was lower than the statutory rate, due
primarily to the utilization of U.S. net operating loss carryforwards and
alternative minimum tax credits.
Minority interests represent the share of M-I's profits associated
with the 36 percent minority partner's interest in those operations and, to a
lesser extent, minority interests in investments in other joint ventures held
by M-I. Minority interests increased $2.6 million and $11.5 million from the
third quarter and first nine months of 1996 due to the increased profitability
of the M-I operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong at September 30,
1997. During the first nine months of 1997 working capital increased $86
million, or 23 percent.
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 U.S. and non-U.S. borrowing
facilities for operating and financing needs. During April 1997, the Company
and M-I amended their revolving line of credit agreements increasing available
borrowing capacity to $200 million. During September 1997, the Company
completed a public debt offering for $150.0 million of senior notes and used the
net proceeds to repay the majority of the borrowings outstanding under revolving
line of credit facilities. As a result, the Company had approximately $192
million of funds available under its $200 million and other long-term revolving
line of credit facilities at September 30, 1997. Additionally, the Company had
approximately $54 million of non-U.S. short-term borrowing facilities with
various banks which had available borrowing capacity of $35 million. The
Company believes funds generated from operations, cash on hand and amounts
available under existing credit facilities will be sufficient to finance capital
expenditures and other working capital needs for the foreseeable future.
Subsequent to September 30, 1997 the Company acquired Fleming Oilfield
Services, Ltd. The transaction, which is expected to be accounted for as a
purchase, was funded with borrowings under a new term loan. During the first
nine months of 1997 the Company has completed several other acquisitions and
management intends to continue evaluating 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 acquisition, may require debt or equity financing.
11
<PAGE> 14
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
(4) Instruments defining the rights of security holders,
including indentures
4.1 Form of Proposed Indenture Between Smith International,
Inc. and The Bank of New York, as Trustee. Filed as
Exhibit 4.1 to the Company's Registration Statement on
Form S-3 dated August 22, 1997 and incorporated herein
by reference.
4.2 Form of Note. Filed as Exhibit 4.2 to Amendment No. 1
to the Company's Registration Statement on Form S-3
dated September 9, 1997 and incorporated herein by
reference.
(27) Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
12
<PAGE> 15
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 14, 1997 By: /s/ Douglas L. Rock
----------------------- --------------------------------------
Douglas L. Rock
Chairman of the Board, Chief Executive
Officer, President and Chief Operating
Officer
Date: November 14, 1997 By: /s/ John J. Kennedy
----------------------- -------------------------------------
John J. Kennedy
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
13
<PAGE> 16
INDEX TO EXHIBITS
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 19,956
<SECURITIES> 0
<RECEIVABLES> 395,571
<ALLOWANCES> 5,951
<INVENTORY> 325,033
<CURRENT-ASSETS> 766,143
<PP&E> 428,887
<DEPRECIATION> 175,682
<TOTAL-ASSETS> 1,254,053
<CURRENT-LIABILITIES> 315,833
<BONDS> 277,517
0
0
<COMMON> 40,306
<OTHER-SE> 398,027
<TOTAL-LIABILITY-AND-EQUITY> 1,254,053
<SALES> 1,137,276
<TOTAL-REVENUES> 1,137,276
<CGS> 742,777
<TOTAL-COSTS> 742,777
<OTHER-EXPENSES> 240,559
<LOSS-PROVISION> 1,047
<INTEREST-EXPENSE> 17,882
<INCOME-PRETAX> 136,058
<INCOME-TAX> 35,481
<INCOME-CONTINUING> 72,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,306
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.80
</TABLE>
