<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
August 31, 1998
Date of Report
(Date of earliest event reported)
SMITH INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 1-8514 95-3822631
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
16740 Hardy Street
Houston, Texas
(Address of principal executive offices)
77032
(Zip Code)
(281) 443-3370
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 5: OTHER EVENTS
On April 30, 1998, the Registrant acquired ("the Acquisition") all of
the equity interests in Wilson Industries, Inc.("Wilson"), a Texas corporation.
The Acquisition has been accounted for as a pooling of interests and the
financial statements included in the Registrant's 1997 Annual Report on Form
10-K ("1997 Form 10-K") have been restated to reflect the Acquisition. Set forth
below is a revised version of "Item 8. Financial Statements and Supplementary
Data" and the financial statement schedule filed in response to "Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K" included in the
1997 Form 10-K.
1
<PAGE> 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
2
<PAGE> 4
SMITH INTERNATIONAL, INC.
INDEX TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants .................................. 4
Restated Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 ........................................ 5
Restated Consolidated Balance Sheets at December 31, 1997 and 1996 ........ 6
Restated Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 .................................. 8
Restated Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ........................................ 9
Notes to Restated Consolidated Financial Statements ....................... 10
</TABLE>
3
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Smith International, Inc.:
We have audited the accompanying restated consolidated balance sheets
of Smith International, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related restated consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. The accompanying consolidated financial
statements reflect a restatement of the Company's previously reported amounts
for the merger with Wilson Industries, Inc. (see Note 2). These restated
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these restated
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the restated consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Smith International, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 30, 1998
4
<PAGE> 6
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS-AS RESTATED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues ............................................. $ 2,167,952 $ 1,651,906 $ 1,270,478
Costs and expenses:
Costs of revenues .................................. 1,515,353 1,179,178 914,603
Selling expenses ................................... 314,533 250,948 206,978
General and administrative expenses ................ 89,120 72,995 56,281
----------- ----------- -----------
Total costs and expenses ........................ 1,919,006 1,503,121 1,177,862
----------- ----------- -----------
Income before interest and taxes ..................... 248,946 148,785 92,616
Interest expense ..................................... 31,175 21,642 16,385
Interest income ...................................... (2,184) (2,602) (2,270)
----------- ----------- -----------
Income before income taxes and minority interests .... 219,955 129,745 78,501
Income tax provision ................................. 59,109 31,615 13,604
----------- ----------- -----------
Income before minority interests ..................... 160,846 98,130 64,897
Minority interests ................................... 39,517 24,833 15,809
----------- ----------- -----------
Net income ........................................... $ 121,329 $ 73,297 $ 49,088
=========== =========== ===========
Earnings per share:
Basic .............................................. $ 2.55 $ 1.55 $ 1.05
=========== =========== ===========
Diluted ............................................ $ 2.52 $ 1.53 $ 1.04
=========== =========== ===========
Weighted average shares outstanding:
Basic .............................................. 47,504 47,252 46,943
=========== =========== ===========
Diluted ............................................ 48,083 47,780 47,283
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
5
<PAGE> 7
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS-AS RESTATED
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 37,109 $ 35,318
Receivables, less allowance for doubtful accounts of $8,730 and
$9,114 in 1997 and 1996, respectively................................... 510,984 388,028
Inventories.............................................................. 467,963 380,229
Deferred tax assets, net................................................. 27,329 10,882
Prepaid expenses and other............................................... 29,968 27,665
---------- ----------
Total current assets................................................... 1,073,353 842,122
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land..................................................................... 24,219 19,794
Buildings................................................................ 57,015 50,771
Rental tools............................................................. 223,784 170,356
Machinery and equipment.................................................. 255,189 204,283
---------- ----------
560,207 445,204
Less - accumulated depreciation.......................................... 247,544 214,048
---------- ----------
Net property, plant and equipment........................................ 312,663 231,156
---------- ----------
OTHER ASSETS, including assets held for sale of
$1,831 and $3,173 in 1997 and 1996, respectively......................... 76,898 53,187
GOODWILL, net of accumulated amortization of $11,451 and $6,043 in 1997
and 1996, respectively................................................... 209,585 160,797
---------- ----------
TOTAL ASSETS................................................................ $1,672,499 $1,287,262
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
6
<PAGE> 8
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY-AS RESTATED
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1996
---- ----
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt ................. $ 91,523 $ 81,483
Accounts payable ............................................................ 204,771 180,209
Accrued payroll costs ....................................................... 56,152 47,045
Income taxes payable ........................................................ 27,003 20,504
Other ....................................................................... 93,923 59,523
----------- -----------
Total current liabilities ................................................. 473,372 388,764
----------- -----------
LONG-TERM DEBT ................................................................ 371,579 260,443
DEFERRED TAX LIABILITIES ...................................................... 16,578 2,059
OTHER LONG-TERM LIABILITIES ................................................... 32,220 26,986
MINORITY INTERESTS ............................................................ 206,705 154,741
COMMITMENTS AND CONTINGENCIES (Note 13) ....................................... -- --
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; 48,216 shares
issued and outstanding in 1997 (48,057 in 1996) ........................... 48,216 48,057
Additional paid-in capital .................................................. 296,222 293,306
Retained earnings ........................................................... 246,809 125,855
Cumulative translation adjustments .......................................... (11,500) (5,247)
Less - treasury securities, at cost; 656 common shares in 1997 and 1996 ..... (7,702) (7,702)
----------- -----------
Total shareholders' equity ................................................ 572,045 454,269
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................... $ 1,672,499 $ 1,287,262
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
7
<PAGE> 9
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - AS RESTATED
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND WARRANT DATA)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK WARRANTS RETAINED
--------------------------- ----------------------- ADDITIONAL EARNINGS
NUMBER NUMBER PAID-IN (ACCUMULATED
OF SHARES AMOUNT OF WARRANTS AMOUNT CAPITAL DEFICIT)
------------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994, as
previously reported ........................... 39,432,833 $ 39,433 2,525,191 $ 7,278 $ 272,483 $ (47,554)
Restatement for business acquired as
a pooling of interests in 1998 ................ 7,900,000 7,900 -- -- 15,034 51,786
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1994, as restated .......... 47,332,833 47,333 2,525,191 7,278 287,517 4,232
Exercise of stock options and stock grants ....... 230,940 230 -- -- 1,908 --
Exercise of common stock warrants ................ 143,572 144 (143,572) -- 1,041 --
Expiration of common stock warrants .............. -- -- (1,930,262) -- -- --
Cash dividends to Wilson shareholders ............ -- -- -- -- -- (382)
Treasury stock purchases of business acquired .... -- -- -- -- (88) --
Net income ....................................... -- -- -- -- -- 49,088
Translation adjustment for the period ............ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 ....................... 47,707,345 $ 47,707 451,357 $ 7,278 $ 290,378 $ 52,938
Exercise of stock options and stock grants ....... 349,233 350 -- -- 3,523 --
Expiration of common stock warrants .............. -- -- (451,357) (7,278) -- --
Purchases of treasury stock ...................... -- -- -- -- -- --
Cash dividends to Wilson shareholders ............ -- -- -- -- -- (380)
Treasury stock purchases of business acquired .... -- -- -- -- (595) --
Net income ....................................... -- -- -- -- -- 73,297
Translation adjustment for the period ............ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 ....................... 48,056,578 $ 48,057 -- $ -- $ 293,306 $ 125,855
Exercise of stock options ........................ 159,021 159 -- -- 3,817 --
Cash dividends to Wilson shareholders ............ -- -- -- -- -- (375)
Treasury stock purchases of business acquired .... -- -- -- -- (901) --
Net income ....................................... -- -- -- -- -- 121,329
Translation adjustment for the period ............ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
48,215,599 $ 48,216 -- $ -- $ 296,222 $ 246,809
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Treasury Securities
----------------------------------------------------------
COMMON STOCK WARRANTS
CUMULATIVE -------------------------- --------------------------
TRANSLATION NUMBER OF NUMBER OF
ADJUSTMENTS SHARES AMOUNT WARRANTS AMOUNT
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994, as
previously reported ........................... $ (4,605) (628,583) $ (6,636) (451,357) $ (7,278)
Restatement for business acquired as
a pooling of interests in 1998 ................ (739) -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1994, as restated .......... (5,344) (628,583) (6,636) (451,357) (7,278)
Exercise of stock options and stock grants ....... -- -- -- -- --
Exercise of common stock warrants ................ -- -- -- -- --
Expiration of common stock warrants .............. -- -- -- -- --
Cash dividends to Wilson shareholders ............ -- -- -- -- --
Treasury stock purchases of business acquired .... -- -- -- -- --
Net income ....................................... -- -- -- -- --
Translation adjustment for the period ............ (1,214) -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 ....................... $ (6,558) (628,583) $ (6,636) (451,357) $ (7,278)
Exercise of stock options and stock grants ....... -- -- -- -- --
Expiration of common stock warrants .............. -- -- -- 451,357 7,278
Purchases of treasury stock ...................... -- (27,271) (1,066) -- --
Cash dividends to Wilson shareholders ............ -- -- -- -- --
Treasury stock purchases of business acquired .... -- -- -- -- --
Net income ....................................... -- -- -- -- --
Translation adjustment for the period ............ 1,311 -- -- -- --
---------- ---------- ---------- ---------- ----------
---------- ----------
Balance, December 31, 1996 ....................... $ (5,247) (655,854) $ (7,702) -- $ --
Exercise of stock options ........................ -- -- -- -- --
Cash dividends to Wilson shareholders ............ -- -- -- -- --
Treasury stock purchases of business acquired .... -- -- -- -- --
Net income ....................................... -- -- -- -- --
Translation adjustment for the period ............ (6,253) -- -- -- --
---------- ---------- ---------- ---------- ----------
$ (11,500) (655,854) $ (7,702) -- $ --
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
8
<PAGE> 10
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS-AS RESTATED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 121,329 $ 73,297 $ 49,088
Adjustments to reconcile net income to net cash
provided by operating activities, excluding the
net effects of purchase acquisitions:
Depreciation and amortization ............................................ 58,553 40,948 33,387
Minority interests ....................................................... 39,517 24,833 15,809
Provision for losses on receivables ...................................... 2,976 2,964 1,486
Provision for LIFO inventory reserves .................................... 3,816 2,151 4,752
Gain on disposal of property, plant and equipment ........................ (7,642) (9,238) (8,465)
Foreign currency translation losses ...................................... 138 62 1,112
Changes in operating assets and liabilities:
Receivables ................................................................ (118,932) (52,305) (35,432)
Inventories, net ........................................................... (83,255) (67,085) (40,819)
Accounts payable ........................................................... 22,036 32,431 16,565
Other current assets and liabilities ....................................... (12,431) 2,283 187
Other non-current assets and liabilities ................................... 12,786 (16,402) (12,943)
--------- --------- ---------
Net cash provided by operating activities .............................. 38,891 33,939 24,727
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired .............................. (80,656) (104,683) (6,131)
Purchases of property, plant and equipment ................................... (113,146) (87,927) (45,430)
Proceeds from disposal of property, plant and equipment ...................... 14,467 18,393 15,814
--------- --------- ---------
Net cash used in investing activities .................................. (179,335) (174,217) (35,747)
Cash flows from financing activities:
Proceeds from issuance of long-term debt ..................................... 367,549 131,900 18,013
Principal payments of long-term debt ......................................... (251,303) (16,669) (12,376)
Net increase in short-term borrowings ........................................ 10,153 36,921 10,285
Proceeds from exercise of stock options and warrants ......................... 1,794 3,873 3,323
Purchases of treasury stock .................................................. (901) (1,661) (88)
Cash dividends to Wilson shareholders ........................................ (375) (380) (382)
Contributions from (distributions to) minority interest partner .............. 16,092 -- (2,520)
--------- --------- ---------
Net cash provided by financing activities .............................. 143,009 153,984 16,255
--------- --------- ---------
Effect of exchange rate changes on cash ........................................ (774) 25 33
--------- --------- ---------
Increase in cash and cash equivalents .......................................... 1,791 13,731 5,268
Cash and cash equivalents at beginning of year ................................. 35,318 21,587 16,319
--------- --------- ---------
Cash and cash equivalents at end of year ....................................... $ 37,109 $ 35,318 $ 21,587
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
9
<PAGE> 11
SMITH INTERNATIONAL, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Smith International, Inc. (the "Company") manufactures and markets
premium products and services to customers in the oil and gas industry. The
consolidated financial statements include the accounts of the Company and all
wholly and majority-owned subsidiaries. Investments in affiliates in which
ownership interest ranges from 20 to 50 percent, and the Company exercises
significant influence over operating and financial policies, are accounted for
on the equity method. All other investments are carried at cost, which does not
exceed the estimated net realizable value of such investments.
All significant intercompany accounts and transactions have been eliminated.
The consolidated financial statements for all periods presented have
been restated to include the accounts of Wilson Industries, Inc. ("Wilson"). On
April 30, 1998, the Company acquired all of the equity interests in Wilson in a
transaction accounted for as a pooling of interests (see Note 2).
Significant Risks and Uncertainties
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosed amounts of contingent assets and liabilities and the reported amounts
of revenues and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with an original maturity of three months or less to be cash equivalents.
Fixed Assets
Fixed assets, consisting of rental equipment and property, plant and
equipment, are stated at cost. The Company computes depreciation on fixed assets
using principally the straight-line method. The estimated useful lives used in
computing depreciation generally range from 20 to 40 years for buildings, 3 to
25 years for machinery and equipment, and 5 to 7 years for rental equipment.
Leasehold improvements are amortized over the lives of the leases or the
estimated useful lives of the improvements, whichever is shorter. For income tax
purposes, accelerated methods of depreciation are used.
Cost of major renewals and betterments are capitalized as fixed assets.
Expenditures for maintenance, repairs and minor improvements are charged to
expense when incurred. When fixed assets are sold or retired, the remaining cost
and related reserves are removed from the accounts and the resulting gain or
loss is included in the Consolidated Statements of Operations.
Valuation of Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out ("FIFO") method for the majority of the
Company's inventories. The remaining inventories are costed under the last-in,
first-out ("LIFO") or average cost methods. Inventory costs consist of
materials, labor and factory overhead.
10
<PAGE> 12
Goodwill
Goodwill, which represents the excess of costs over the fair value of
net assets acquired, is amortized on a straight-line basis over 40 years. The
Company continually evaluates whether subsequent events or circumstances have
occurred that indicate the remaining useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be recoverable.
Management believes that there have been no events or circumstances which
warrant revision to the remaining useful life or which affect the recoverability
of goodwill.
Foreign Currency Translation and Transactions
Gains and losses resulting from balance sheet translation of operations
outside the U.S. where the applicable foreign currency is the functional
currency are included as a separate component of shareholders' equity. Gains and
losses resulting from balance sheet translation of operations outside the U.S.
where the U.S. dollar is the functional currency are included in the
Consolidated Statements of Operations.
All foreign currency transaction gains and losses are recognized
currently in the Consolidated Statements of Operations.
Financial Instruments
The Company enters into various instruments, including derivatives, to
manage interest rate and foreign exchange risks. Derivatives are limited in use
and are not entered into for speculative purposes.
The Company enters into interest rate swaps to manage interest rate
risk on a portion of its long-term borrowings. The differential to be received
or paid is accrued, as interest rates change, and recognized over the life of
the agreement.
The Company enters into foreign exchange contracts to hedge foreign
currency denominated assets or liabilities and currency commitments. Gains and
losses on foreign exchange contracts are recognized currently and are generally
offset by gains or losses on the related assets or liabilities. If the
transaction qualifies as a hedge, the resulting gains and losses are deferred.
Environmental Obligations
Expenditures for environmental obligations that relate to current
operations are expensed or capitalized, as appropriate. Expenditures that relate
to an existing condition caused by past operations and which do not contribute
to current or future revenue generation are expensed. Liabilities are recorded
when remedial efforts are probable and the costs can be reasonably estimated.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes".
This standard requires an asset and liability approach for financial accounting
and income tax reporting based on enacted tax rates.
Revenue Recognition
The Company's revenues are composed of product sales and rental,
service and other revenues. The Company recognizes product sales revenues upon
delivery to the customer. Rental, service and other revenues are recorded when
such services are performed.
11
<PAGE> 13
Minority Interests
The Company records minority interests expense which primarily
represents the portion of the earnings of M-I L.L.C. ("M-I") applicable to the
36 percent minority interest partner. In addition, minority interests includes
income and expense associated with the minority interest ownership positions in
other joint ventures.
Employee Benefits
The Company accounts for postretirement benefits in accordance with
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". This standard requires the cost of postretirement benefits to be
recognized over the employee service periods.
The provisions of SFAS No. 87, "Employers' Accounting for Pensions",
require an additional minimum liability to be recognized for a defined benefit
plan to the extent that the accumulated pension benefit obligation exceeds the
fair value of pension plan assets and any accrued pension liabilities. An
offsetting intangible asset is recorded in the amount of the additional minimum
liability, not to exceed the amount of any unrecognized prior service costs and
any unrecognized transition obligation. Amounts exceeding the unrecognized prior
service costs and unrecognized transition obligation are reflected in other
current liabilities in the Consolidated Balance Sheets.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130 "Reporting Comprehensive Income" effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and displaying comprehensive income and its components. Had SFAS No.
130 been adopted as of December 31, 1997, the primary adjustment required to
disclose net income on a comprehensive income basis would have related to
changes in the cumulative translation adjustment amounts reported.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal periods beginning after
June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded and measured at its fair
value. The statement requires that changes in fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. The impact of
adopting SFAS No. 133 has not yet been quantified but is not expected to have a
material impact upon the Company's financial condition or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. ACQUISITIONS
Acquisition of Anchor Drilling Fluids, A.S.
On June 11, 1996, M-I acquired the assets of Anchor Drilling Fluids,
A.S. ("Anchor") in exchange for cash of approximately $105.3 million. Anchor is
a Stavanger, Norway based operation which is principally engaged in providing
drilling fluid products and services to the offshore oil and gas industry. 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 purchase price and retire certain debt, which is included in
Minority Interests in the accompanying Consolidated Balance Sheets.
12
<PAGE> 14
Acquisition of The Red Baron (Oil Tools Rental) Ltd.
On October 9, 1996, the Company acquired all of the outstanding shares
of The Red Baron (Oil Tools Rental) Ltd. ("Red Baron") in exchange for cash and
notes payable of approximately $40.3 million. Red Baron is an Aberdeen, Scotland
based supplier of fishing and other downhole remedial products and services to
the oil and gas industry.
Acquisition of Tri-Tech Fishing Services, L.L.C.
On April 16, 1997, the Company acquired all of the equity interests in
Tri-Tech Fishing Services, L.L.C. ("Tri-Tech") in exchange for consideration
totaling approximately $20.4 million. Tri-Tech is a supplier of fishing and
other downhole remedial products and services to the U.S. Gulf Coast area.
Acquisition of Fleming Oilfield Services, Ltd.
On October 16, 1997, the Company acquired all of the outstanding shares
of Fleming Oilfield Services, Ltd. ("Fleming") in exchange for cash of
approximately $17.3 million. Fleming is a Calgary, Alberta based supplier of
drilling fluids products and services to the Canadian oil and gas industry.
Other Purchase Acquisitions
In 1997, the Company has completed the acquisitions of eight other
operations for an aggregate purchase price of $43.0 million. Additionally,
several other acquisitions were completed in 1996 and 1995 in exchange for
consideration of $6.2 million and $7.8 million, respectively. These acquisitions
have generally been financed with cash, new term loans or borrowings against
available lines of credit.
The above 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
$54.2 million in 1997 and $119.6 million in 1996, which has been recorded as
goodwill.
The balances included in the Consolidated Balance Sheets related to the
current year 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 following unaudited pro forma supplemental information presents
consolidated results of operations as if the Company's current and prior year
acquisitions accounted under the purchase method had occurred at the earliest
date presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
---- ----
(UNAUDITED)
<S> <C> <C>
Revenues.................................... $ 1,613,145 $ 1,295,063
Net income.................................. $ 105,875 $ 65,711
Earnings per share :
Basic................................. $ 2.23 $ 1.39
Diluted............................... $ 2.20 $ 1.38
</TABLE>
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.
13
<PAGE> 15
Acquisition of Wilson Industries, Inc.
On April 30, 1998, the Company merged with Wilson, a Houston, Texas
based provider of products and services to the international petroleum and
petrochemical industries. In connection with the merger, the Company issued a
total of 7.9 million of its shares in exchange for all of the outstanding shares
of common stock of Wilson. The transaction has been accounted for as a pooling
of interests and, accordingly, the financial statements for all periods
presented have been restated to include the accounts of Wilson.
Wilson adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" on January 1, 1995 in compliance with the
reporting rules for non-public companies. In connection with the acquisition,
the Company conformed reporting for SFAS No. 106 to the requirements for public
companies which increased Wilson's historical net income for the year ended
December 31, 1995 by $3.3 million. During the periods presented, certain
reclassification entries were necessary in order to conform Wilson's method of
accounting to the Company's method. Other adjustments to conform Wilson's
accounting policies are immaterial and will be accounted for on a prospective
basis.
The revenues and net income amounts included in the accompanying
Statements of Operations are disclosed in the following table with Wilson's
amounts for the periods prior to the merger presented separately:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Smith......... $ 1,563,144 $ 1,156,658 $ 874,544
Wilson........ 604,808 495,248 395,934
============== ============== ==============
Combined...... 2,167,952 1,651,906 1,270,478
============== ============== ==============
Net Income:
Smith......... 102,351 64,444 45,592
Wilson........ 18,978 8,853 3,496
-------------- -------------- --------------
Combined...... 121,329 73,297 49,088
============== ============== ==============
</TABLE>
Cash Flow Disclosures
The following schedule summarizes investing activities related to
current year acquisitions included in the Consolidated Statements of Cash Flows:
<TABLE>
<S> <C>
Fair value of assets, net of cash acquired of $1,958.................. $55,861
Goodwill recorded..................................................... 54,196
Less: Total liabilities assumed...................................... (29,401)
-------
Cash paid for acquisition of businesses, net of cash acquired......... $80,656
=======
</TABLE>
3. EARNINGS PER COMMON SHARE
During 1997, the Company adopted SFAS No. 128 "Earnings per Share". The
Statement is effective for financial statements for both interim and fiscal
periods ending after December 15, 1997 and requires restatement of all
prior-period earnings per share ("EPS") data. SFAS No. 128, which conforms the
U.S. method of computing EPS with international accounting standards, requires
dual presentation of basic and diluted EPS data. Basic EPS is computed using the
weighted average number of common shares outstanding during the period. Diluted
EPS gives effect to the potential dilution of earnings which could have occurred
if additional shares were issued for stock option exercises under the treasury
stock method. For purposes of the EPS computation, the 7.9 million shares issued
in connection with the Wilson acquisition have been treated as if they had been
issued and outstanding for all periods presented.
14
<PAGE> 16
The following schedule reconciles the income and shares used in the
basic and diluted EPS computations (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BASIC EPS
Net income ........................... $121,329 $ 73,297 $ 49,088
======== ======== ========
Weighted average number of common
shares outstanding ................. 47,504 47,252 46,943
-------- -------- --------
Basic EPS ............................ $ 2.55 $ 1.55 $ 1.05
======== ======== ========
1997 1996 1995
-------- -------- --------
DILUTED EPS
Net income ........................... $121,329 $ 73,297 $ 49,088
======== ======== ========
Weighted average number of common
shares outstanding ................. 47,504 47,252 46,943
Dilutive effect of stock options ..... 579 528 340
-------- -------- --------
48,083 47,780 47,283
-------- -------- --------
Diluted EPS .......................... $ 2.52 $ 1.53 $ 1.04
======== ======== ========
</TABLE>
4. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Raw materials ................................. $ 35,845 $ 31,284
Work-in-process ............................... 79,080 50,518
Products purchased for resale ................. 91,159 75,989
Finished goods ................................ 284,753 241,496
--------- ---------
490,837 399,287
Reserves to state certain U.S. inventories
($191,448 in 1997 and $155,365 in 1996)
on a LIFO basis ............................. (22,874) (19,058)
--------- ---------
$ 467,963 $ 380,229
========= =========
</TABLE>
15
<PAGE> 17
5. DEBT
The following summarizes the Company's outstanding debt at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CURRENT:
Short-term borrowings.................................................. $61,010 $ 49,178
Current portion of long-term debt...................................... 30,513 32,305
------- --------
Short-term borrowings and current portion of long-term debt.......... 91,523 81,483
------- --------
LONG-TERM:
Notes:
7% Senior Notes maturing September 2007 with an effective interest
rate of 7.07%. Interest payable semi-annually (presented net of
unamortized discount of $1,009)........................................ 148,991 --
Notes payable to insurance companies maturing between 1998 and 2006.
Interest payable quarterly or semi-annually at rates ranging from 6.02%
to 9.83%............................................................... 100,889 116,000
7.7% senior secured notes maturing July 2007. Principal due in equal
annual installments of $7.1 million beginning July 2001. Interest
payable semi-annually.................................................. 50,000 --
Bank revolvers payable:
$120.0 million revolving note expiring December 2002. Interest payable
quarterly at base rate (8.50% at December 31, 1997) or adjusted
Eurodollar interbank rate, as defined (6.24% at December 31, 1997)
and described below.................................................... 10,600 55,000
M-I L.L.C. $80.0 million revolving note expiring December 2002.
Interest payable quarterly at base rate (8.50% at December 31, 1997)
or adjusted Eurodollar interbank rate, as defined (6.20% at December 31,
1997) and described below............................................. 37,000 37,200
$40.0 million revolving credit facility expiring July 2000 and
various other facilities. Interest payable quarterly at alternate
base rate or Eurodollar rate (7.24% at December 31, 1997) as defined 15,300 32,000
and described below....................................................
Term Loans:
320.0 million Norwegian Krone term loan facility with a bank group.
Principal due in semi-annual installments of 32.0 million Krone through
December 2000, remainder due March 2001.
Interest payable semi-annually at a Eurokrone rate (4.55% at 30,498 44,626
December 31, 1997), ranging from NIBOR + 3/8 to NIBOR + 3/4............
Other 8,814 7,922
--------- ---------
402,092 292,748
Less current portion of long-term debt................................. (30,513) (32,305)
--------- ---------
Long-term debt......................................................... $371,579 $ 260,443
========= =========
</TABLE>
16
<PAGE> 18
Principal payments of long-term debt for years subsequent to 1998 are
as follows:
<TABLE>
<S> <C>
1999................................. $ 20,942
2000................................. 36,242
2001................................. 57,027
2002................................. 58,845
Thereafter........................... 198,523
---------
$ 371,579
=========
</TABLE>
The Company's short-term borrowings consist of amounts outstanding
under short-term lines of credit and a short-term loan. Certain subsidiaries of
the Company have unsecured short-term line of credit facilities with banks
aggregating approximately $49 million. At December 31, 1997, approximately $20
million of additional borrowing capacity was available under these facilities.
These lines of credit had a weighted average interest rate of 11 percent and 12
percent at December 31, 1997 and 1996, respectively. The remainder of the
balance relates to a short-term loan with a bank which carries interest at 7.5
percent and is scheduled to mature on March 31, 1998.
Additionally, the Company has $200.0 million of unsecured revolving
credit agreements at December 31, 1997. These agreements provide for the
election of interest at a base rate or a Eurodollar rate ranging from LIBOR +
1/4 to LIBOR + 5/8 and require the payment of a quarterly commitment fee ranging
from .09 percent to .20 percent of the unutilized credit facility. The interest
and commitment fee percentages are determined based upon the senior debt rating
of the Company, as defined. As of December 31, 1997 the borrowing capacity under
these lines of credit approximated $152 million.
Wilson entered into a revolving credit facility with various lenders
and issued $50.0 million of senior secured notes in 1997. These agreements are
secured by substantially all of Wilson's receivables and inventories. The
revolving credit facility provides for up to $40.0 million of borrowing capacity
based upon the available borrowing base, as defined. Additionally, the credit
agreement allows for the election of interest at a alternate base rate, as
defined, or Eurodollar rate ranging from LIBOR + 3/4 to LIBOR + 1 1/4 and
requires the payment of a quarterly commitment fee ranging from 0.2 percent to
0.25 percent of the unutilized facility. The interest and commitment fee
percentages are determined based upon Wilson's funded debt to total capital
ratio, as defined. As of December 31, 1997, the borrowing capacity under the
Wilson credit facility approximated $23.8 million.
During 1997 the Company completed a public debt offering for $150.0
million of unsecured 7% Senior Notes. The Notes are redeemable by the Company,
in whole or in part, at any time prior to maturity at a redemption price equal
to accrued interest plus the greater of the principal amount or the present
value of the remaining principal and interest payments.
The Company was in compliance with all of its loan covenants under the
various loan indentures at December 31, 1997 and 1996. The indentures relating
to its long-term debt contain certain covenants restricting the payment of cash
dividends to the Company's common shareholders based on net income and operating
cash flow formulas, as defined. Excluding amounts paid by Wilson to its
shareholders, no dividends have been paid or declared since the first quarter of
1986.
Interest paid during the years ended December 31, 1997, 1996 and 1995
amounted to $27.3 million, $20.3 million and $16.6 million, respectively.
6. FINANCIAL INSTRUMENTS
Interest Rate Contracts
From time to time the Company enters into interest rate swaps with the
intent of managing the exposure to interest rate risk. Interest rate swaps are
contractual agreements between two parties for the exchange of interest payments
on a notional principal amount and agreed upon fixed or floating rates, for
defined time periods.
17
<PAGE> 19
At December 31, 1997 and 1996, the Company had notional principal
amounts of interest rate swaps on outstanding debt of $80.5 million and $90.6
million, respectively. Gains and losses from interest rate swaps are recognized
currently in the Consolidated Statements of Operations. All swap agreements,
which are hedges against certain debt obligations, are classified as for
"purposes other than trading" under the provisions of SFAS No. 119.
In the unlikely event that the counterparty fails to perform under the
contract, the Company bears the credit risk that payments due to the Company may
not be made.
Foreign Currency Contracts and Options
From time to time, the Company enters into spot and forward contracts
as a hedge against foreign currency denominated assets and liabilities and
currency commitments. Market value gains and losses on such forward contracts
are recognized currently, and the resulting amounts generally offset foreign
exchange gains or losses on the related accounts. Gains or losses on contracts
are deferred if the transaction qualifies as a hedge. At December 31, 1997 and
1996, foreign exchange contracts outstanding totaled $20.9 million and $17.3
million, respectively.
The Company also purchases foreign exchange option contracts to hedge
certain operating exposures. Premiums paid under these contracts are expensed
over the life of the option contract. Gains arising on these options are
recognized at the time the options are exercised. The Company had $12.0 million
and $12.3 million of foreign exchange option contracts outstanding at December
31, 1997 and 1996, respectively.
Fair Value
<TABLE>
<CAPTION>
1997 1996
-------------------------- ---------------------------
Recorded Fair Recorded Fair
Value Value Value Value
---------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Long-term debt............................................ $ 402,092 $ 404,087 $ 292,748 $ 295,759
Interest rate swaps....................................... -- (1,239) -- (482)
</TABLE>
The fair value of the remaining financial instruments, including cash
and cash equivalents, receivables, payables, short-term debt and foreign
currency contracts, approximates the carrying value due to the short-term nature
of these instruments.
7. INCOME TAXES
The geographical sources of income before income taxes and minority
interests for the three years ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income before income taxes and minority interests:
U.S ............................................................... $141,418 $ 78,698 $ 58,102
Non-U.S ........................................................... 78,537 51,047 20,399
-------- -------- --------
Total ............................................................. $219,955 $129,745 $ 78,501
======== ======== ========
</TABLE>
18
<PAGE> 20
The income tax provision is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ------ -----
<S> <C> <C> <C>
Current -
U.S. ........................................... $ 28,636 $ 14,081 $ 3,130
Non-U.S. ....................................... 27,143 18,276 10,748
State........................................... 2,277 1,582 1,399
------ -------- -------
58,056 33,939 15,277
------ -------- -------
Deferred -
U.S. .......................................... (3,393) (2,753) (711)
Non-U.S. ....................................... 4,446 429 (962)
-------- -------- -------
1,053 (2,324) (1,673)
-------- -------- --------
Income tax provision.............................. $ 59,109 $ 31,615 $13,604
======== ======== =======
</TABLE>
Deferred taxes are principally attributable to timing differences
related to depreciation expense and net operating loss ("NOL") and tax credit
carryforwards. In 1997, 1996 and 1995, the Company reported the tax benefit of
operating loss carryforwards as a reduction in the provision for income taxes in
accordance with SFAS No. 109.
The consolidated effective tax rate (as a percentage of income before
income taxes and minority interests) is reconciled to the U.S. Federal Statutory
rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
U.S. Federal statutory tax rate............................... 35.0% 35.0% 35.0%
Utilization of U.S. net operating
loss and credit carryforwards............................... (5.0) (8.2) (17.4)
Minority interest's share of U.S. partnership earnings........ (5.4) (5.0) (6.8)
Permanent differences......................................... 1.7 2.0 2.4
State taxes, net.............................................. 1.2 1.3 1.8
Non-U.S. tax provisions which vary from the
U.S. rate/non-U.S. losses with no
tax benefit realized........................................ (0.3) 0.4 3.6
Other items, net.............................................. (0.3) (1.1) (1.3)
------- ------- -------
Effective tax rate.......................................... 26.9% 24.4% 17.3%
======= ======= ======
</TABLE>
19
<PAGE> 21
The components of deferred taxes at December 31 are as follows:
<TABLE>
<CAPTION>
NET
1997 1996 CHANGE
-------- -------- --------
<S> <C> <C> <C>
Deferred tax liabilities attributed to the excess of net book basis over
remaining tax basis (principally depreciation):
U.S ............................................................................ $(14,018) $(11,319) $ (2,699)
Non-U.S ........................................................................ (11,124) (9,789) (1,335)
-------- -------- --------
Total deferred tax liabilities ................................................... (25,142) (21,108) (4,034)
-------- -------- --------
Deferred tax assets attributed to
net operating loss and tax credit
carryforwards:
U.S ............................................................................ 10,265 23,986 (13,721)
Non-U.S ........................................................................ 27,095 27,860 (765)
Other deferred tax assets (principally accrued liabilities not deductible until
paid):
U.S ............................................................................ 29,293 21,698 7,595
Non-U.S ........................................................................ 5,910 7,980 (2,070)
-------- -------- --------
Subtotal ..................................................................... 72,563 81,524 (8,961)
Valuation allowance ................................................................ (35,412) (48,805) 13,393
-------- -------- --------
Subtotal deferred tax assets ..................................................... 37,151 32,719 4,432
-------- -------- --------
Net deferred tax assets .......................................................... $ 12,009 $ 11,611 $ 398
======== ======== ========
Balance sheet presentation:
Deferred tax assets, net ......................................................... $ 27,329 $ 10,882
Other assets ..................................................................... 1,765 2,788
Other current liabilities ........................................................ (507) --
Deferred tax liabilities ......................................................... (16,578) (2,059)
-------- --------
Net deferred tax assets ....................................................... $ 12,009 $ 11,611
======== ========
</TABLE>
For U.S. tax reporting purposes, the Company utilized all cumulative
NOL and investment and other business credits available during 1997. At December
31, 1997, alternative minimum tax credits of $10.3 million, with no expiration,
are available to reduce future U.S. income taxes.
Income taxes paid during the years ended December 31, 1997, 1996 and
1995 amounted to $49.3 million, $20.9 million and $6.6 million, respectively.
The Company has provided additional taxes for the anticipated
repatriation of certain earnings of its non-U.S. subsidiaries. Undistributed
earnings above the amounts upon which additional taxes have been provided, which
approximated $38.2 million at December 31, 1997, are intended to be permanently
invested by the Company. It is not practicable to determine the amount of
applicable taxes that would be incurred if any of such earnings were
repatriated.
20
<PAGE> 22
8. CAPITAL STOCK
Common stock warrants
All outstanding common stock warrants, which allowed for conversion
into shares of the Company's common stock, were exercised or expired during 1995
and 1996. In 1995, approximately $1.2 million was received upon the exercise of
143,572 warrants into an equivalent number of common shares. No common stock
warrants were outstanding at December 31, 1997 or 1996.
9. STOCKHOLDERS' RIGHTS PLAN
During 1990, the Company adopted a Stockholders' Rights Plan ("Rights
Plan"). As part of the Rights Plan, the Company's Board of Directors declared a
dividend of one preferred stock purchase right ("Right") for each share of the
Company's common stock outstanding on June 29, 1990. The Board also authorized
the issuance of one such Right for each share of the Company's common stock
issued after June 29, 1990 until the occurrence of certain events.
Each Right entitles the holder thereof (except an Acquiring Person) to
purchase, at an exercise price of $50, shares of the Company's common stock
having a market value of twice the Right's exercise price. The Rights are
exercisable upon the occurrence of certain events related to a person acquiring
or announcing the intention to acquire beneficial ownership of 20 percent or
more of the Company's common stock. The Rights are not exercisable in the event
the Company's common stock is acquired pursuant to a Qualifying Offer, as
defined in the Rights Plan. In addition, if the Company is involved in a merger
or other business combination transaction, or sells 50 percent or more of its
assets or earning power to another entity, each Right will entitle its holder to
purchase, at the Right's then current exercise price, shares of common stock of
such other entity having a value of twice the Right's exercise price.
The Rights are subject to redemption at the option of the Board of
Directors at a price of $0.01 per Right until the occurrence of certain events.
The Rights currently trade with the Company's common stock, have no voting or
dividend rights and expire on June 19, 2000.
10. EMPLOYEE STOCK OPTIONS
As of December 31, 1997, the Company had outstanding stock options
granted under the 1989 Long-Term Incentive Compensation Plan ("1989 Plan").
Options are generally granted at fair market values on the date of grant with
matters such as vesting periods and expiration of options determined on a
grant-by-grant basis. The options, exercisable at various dates through December
2007, are conditioned upon continued employment.
During 1997, all options remaining under the 1982 Stock Option Plan
were exercised or forfeited. No further options may be granted under this Plan.
The Company has adopted the reporting standards of SFAS No. 123 ("SFAS
123") "Accounting for Stock-Based Compensation". SFAS 123, which was effective
for fiscal years beginning after December 15, 1995, established financial
accounting and reporting standards for stock-based employee compensation plans
and for transactions in which equity instruments are issued to non-employees for
the acquisition of goods and services. SFAS 123 required, among other things,
that compensation cost be calculated for fixed stock options at the grant date
by determining fair value using an option-pricing model. The Company has the
option of recognizing the compensation cost over the vesting period as an
expense in the Consolidated Statements of Operations or making pro forma
disclosures in the notes to the financial statements.
21
<PAGE> 23
The Company continues to apply APB Opinion 25 and related
Interpretations in accounting for the Plan. Accordingly, no compensation cost
has been recognized in the accompanying consolidated financial statements for
its stock option plan. Had the Company elected to apply the accounting standards
of SFAS 123, the Company's net income and earnings per share would have
approximated the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C> <C>
Net income As reported $121,329 $73,297 $49,088
Pro forma $120,040 $72,811 $48,991
Earnings per share As reported:
Basic
Diluted $ 2.55 $ 1.55 $ 1.05
$ 2.52 $ 1.53 $ 1.04
Pro forma:
Basic
Diluted $ 2.53 $ 1.54 $ 1.04
$ 2.50 $ 1.52 $ 1.04
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model which resulted in a
weighted-average fair value of $18.68, $12.37 and $7.50 for grants made during
the years ended December 31, 1997, 1996 and 1995, respectively. The following
assumptions were used for option grants in 1997, 1996 and 1995, respectively;
dividend yield of 1.5 percent, 1.6 percent and 1.0 percent; expected volatility
of 19 percent, 23 percent and 38 percent, risk-free interest rates of 5.7
percent, 6.2 percent and 6.9 percent and an expected life of six years. The
compensation expense included in the above pro forma net income may not be
indicative of amounts to be included in future periods as the fair value of
options granted prior to 1995 was not determined.
A summary of the Company's stock option plans as of December 31, 1997,
1996 and 1995, and changes during those years is presented below:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise
Under Option Price
---------------------- ----------------------
<S> <C> <C>
Outstanding at December 31, 1994.................... 1,377,075 $ 11.22
Options granted...................................... 225,485 16.82
Options forfeited.................................... (13,574) 11.62
Options exercised.................................... (228,940) 9.35
--------
Outstanding at December 31, 1995.................... 1,360,046 12.43
Options granted...................................... 252,670 40.79
Options forfeited.................................... (1,290) 17.88
Options exercised.................................... (348,408) 11.13
--------
Outstanding at December 31, 1996..................... 1,263,018 18.46
Options granted...................................... 284,500 69.06
Options forfeited.................................... (19,335) 18.03
Options exercised.................................... (159,021) 11.39
--------
Outstanding at December 31, 1997..................... 1,369,162 $ 29.79
</TABLE>
22
<PAGE> 24
The number of outstanding fixed stock options exercisable at December
31, 1996 and 1995 was 481,606 and 494,889, respectively. These options had a
weighted average exercise price of $12.13 and $11.56 at December 31, 1996 and
1995, respectively. The following summarizes information about fixed stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Range of Exercise Average Average Average
Prices Number Remaining Exercise Number Exercise
Outstanding Contractual Life Price Exercisable Price
- ------------------- ------------ ------------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
$ 8.38 - $10.31 183,335 5.4 $ 9.21 183,335 $ 9.21
$12.56 - $17.88 655,412 6.5 14.36 424,858 14.11
$22.50 - $41.13 245,915 8.9 40.83 62,314 40.53
$69.06 284,500 9.9 69.06 -- --
--------- --- ------ ------- ------
1,369,162 7.3 $29.79 670,507 $15.22
========= === ====== ======= ======
</TABLE>
At December 31, 1997, there were 173,916 shares of common stock
reserved under the 1989 Plan for the future granting of stock options, awarding
of additional restricted stock options and/or awarding of additional Stock
Appreciation Rights.
11. EMPLOYEE BENEFITS
Pension Plans
The Company has pension plans in the U.S. and the United Kingdom
("U.K."). In 1987, Smith and Wilson amended their defined benefit plans to
freeze all future benefit accruals and prohibit the addition of any new
participants. At that time, the plans covered substantially all full-time U.S.
employees of the respective companies. Due to the freezing of the plans, no
material contributions were made to the plans for any period presented. Although
M-I sponsors certain defined benefit plans, most of the M-I employees are not
covered by a pension plan.
During 1997, a decision was made to terminate the U.K. pension plan and
replace it with a defined contribution plan. All current and future obligations
to plan participants are expected to be settled in 1998.
The following tables detail the components of pension expense for the
three years ended December 31, 1997, the funded status of the plans and major
assumptions used to determine these amounts:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost............................... $ 323 $ 311 $ 286
Interest cost.............................. 1,586 1,476 1,405
Actual return on plan assets............... (2,966) (2,948) (1,917)
Net total of other components.............. 1,409 1,812 913
------ ------ ------
Net periodic pension cost.................. $ 352 $ 651 $ 687
====== ====== ======
</TABLE>
23
<PAGE> 25
Reconciliation of Funded Status of the Plan:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................ $23,983 $19,639
======= =======
Accumulated benefit obligation........................... $24,154 $19,762
======= =======
Projected benefit obligation............................. $25,347 $20,868
Plan assets at fair value................................ 25,475 21,039
------- -------
Plan assets in excess of projected
benefit obligation...................................... $ 128 $ 171
Unrecognized prior service cost.......................... 46 32
Unrecognized net gain ................................... (254) (683)
Unrecognized net obligation remaining.................... 775 969
Additional minimum liability............................. (1,283) (1,529)
------- -------
Pension liability recorded in accompanying
Balance Sheet........................................... $ (588) $(1,040)
======= =======
Weighted-average assumed discount rate..................... 6.7% - 8.0% 7.5% - 9.0%
Rate of compensation increases in the U.K. (none in the
U.S. due to freezing of benefits).......................... 6.5% 7.0%
Weighted-average expected long-term rate of return on
Plan assets................................................ 8.0% - 9.0% 8.0% - 9.0% 8.5% - 9.0%
</TABLE>
The Company has several other pension plans covering certain U.S. and
non-U.S. employees as well as a pension plan covering directors. Pension
expense, total accumulated plan benefits and net assets available for benefits
for these plans were not material at and for the periods ended December 31,
1997, 1996 or 1995.
Retirement Plans
The Company established the Smith International, Inc. 401(k) Retirement
Plan (the "Plan") for the benefit of all eligible employees. Employees may
voluntarily contribute up to 12 percent of compensation, as defined, to the
Plan. The Company makes retirement, matching and, in certain cases,
discretionary matching contributions to each participant's account under the
Plan. Participants receive a full match of the first 1 1/2 percent of their
contributions along with a retirement contribution ranging from 2 percent to 6
percent of their qualified compensation. In addition, the Company may provide
discretionary matching contributions to participants who are employed by the
Company on December 31. The Company's contributions to the Plan totaled
approximately $6.9 million, $4.9 million and $3.9 million in 1997, 1996 and
1995, respectively.
M-I has a Company Profit-Sharing and Savings Plan (the "M-I Plan")
under which participating employees may defer up to 12 percent of their
compensation, as defined. Under the terms of the M-I Plan, qualified employees
are eligible to receive basic, matching and profit-sharing contributions with
the approval of the Employee Benefits Committee, and in certain instances, the
Board of Directors. Participants are eligible to receive a basic contribution
equal to 3 percent of qualified compensation, and a full match of the first 1
1/2 percent of their contributions. Further, effective January 1, 1996, the
Board of Directors approved an additional profit-sharing match of up to 2 1/2
percent of participant's voluntary contributions. Total contributions under the
M-I Plan approximated $5.0 million in 1997, $4.2 million in 1996 and $2.2
million in 1995.
Certain of the Company's subsidiaries sponsor various defined
contribution plans. The Company's contributions under these plans for each of
the three years in the period ended December 31, 1997 were immaterial.
24
<PAGE> 26
Postretirement Benefit Plans
The Company and its subsidiaries provide certain health care benefits
for retired employees. Many of the employees who retire from the Company are
eligible for these benefits.
The Smith International, Inc. Retiree Medical Plan ("Smith Medical
Plan") provides postretirement medical benefits to retirees and their spouses.
The retiree medical plan has an annual limitation (a "cap") on the dollar amount
of the Company's portion of the cost of benefits incurred by retirees under the
Plan. The remaining cost of benefits in excess of the cap is the responsibility
of the participants. The cap will be adjusted annually for inflation, which is
currently assumed to be 4 percent.
M-I provides retiree medical coverage to eligible retirees and their
dependents under the M-I Drilling Fluids Retiree Medical Plan ("M-I Medical
Plan"). Eligibility for inclusion in that plan; however, was closed as of
January 1, 1994, to the majority of M-I's employees. M-I contributes to the cost
of the benefits under this plan; however, these costs are reviewed annually for
inflation, and limited to a maximum 5 percent increase in M-I's contribution per
year. Any costs in excess of M-I's maximum contribution are the responsibility
of the retiree or their dependents.
Although Wilson provides postretirement medical coverage to eligible
retirees and their spouses, new employees have not been eligible for inclusion
under this program since February 1987. Eligible individuals are able to
continue primary medical coverage under Wilson's group insurance programs until
reaching the age of 65 at which time such coverage becomes secondary for
participants electing to remain in the program. Participating retirees are
required to contribute a portion of the insurance premiums under the program
with Wilson responsible for any costs in excess of those contributions.
The following table sets forth the plans' unfunded status reconciled
with the amount shown in the Company's Consolidated Balance Sheets at December
31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
- Retirees......................................... $ (9,981) $(8,050)
- Actives.......................................... (9,594) (7,681)
Plan assets at fair value............................. -- --
--------- ---------
Accumulated postretirement
benefit obligation in excess of
plan assets........................................ (19,575) (15,731)
Unrecognized net loss (gain) and
prior service cost................................. 2,705 (582)
-------- --------
Accrued postretirement
benefit obligation................................. $(16,870) $(16,313)
======== ========
</TABLE>
Postretirement benefit expense recognized in the Consolidated
Statements of Operations for the three years ended December 31, 1997, is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost ........................... $ 235 $ 239 $ 211
Interest cost on accumulated
postretirement benefit obligation
and other ............................ 1,208 1,149 1,137
Net amortization ....................... (6) (60) 91
------- ------- -------
Postretirement benefit expense ......... $ 1,437 $ 1,328 $ 1,439
======= ======= =======
</TABLE>
25
<PAGE> 27
The health care cost trend rate assumption can have a significant
effect on the amounts reported. For measurement purposes, the Plans assume a 5.0
to 8.1 percent annual rate of increase in the per capita cost of covered health
care benefits for 1997. The Smith Medical Plan rate was assumed to gradually
decrease to 5.0 percent for 2000 whereas the Wilson Medical Plan was assumed to
ultimately decrease to 5.2 percent for 2020. Rates for both Plans are assumed to
remain at that level thereafter. An increase of one percentage point in the
health care cost trend rate would increase the accumulated postretirement
benefit obligation by $2.5 million and the aggregate of the service and interest
cost components of the postretirement benefit expense by $0.2 million.
The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation for 1997 and 1996 ranged from 6.7 to 7.0
percent and 7.5 to 8.0 percent, respectively.
12. INDUSTRY SEGMENTS AND INTERNATIONAL OPERATIONS
The Company operates primarily in one industry segment, the petroleum
services segment. The products and services of the petroleum services segment
are primarily used in the drilling of oil and gas wells. No single customer
represented in excess of 10 percent of total revenues during any of the years
presented.
The following table presents financial information about non-U.S. and
U.S. operations and export sales:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
United States:
Domestic ............................................ $1,147,244 $ 882,265 $ 703,633
Export .............................................. 142,213 118,884 91,352
North Sea/Europe ...................................... 298,094 256,135 177,930
Latin America ......................................... 210,409 153,540 112,587
Other ................................................. 369,992 241,082 184,976
========== ========== ==========
$2,167,952 $1,651,906 $1,270,478
========== ========== ==========
Income before interest and taxes:
United States........................................ $ 125,419 81,108 $ 52,793
North Sea/Europe..................................... 45,552 29,627 15,243
Latin America........................................ 37,515 22,296 21,307
Other................................................ 65,722 37,363 23,083
========== ========== ==========
$ 274,208 $ 170,394 $ 112,426
========== ========== ==========
Identifiable assets:
United States........................................ $ 898,732 $ 660,113 $ 587,900
North Sea/Europe..................................... 324,497 322,377 103,629
Latin America........................................ 166,030 138,988 87,322
Other................................................ 283,240 165,784 102,286
========== ========== ==========
$1,672,499 $1,287,262 $ 881,137
========== ========== =========
</TABLE>
General corporate expenses have been excluded from income before
interest and taxes in the table above. Results of operations as reported in the
accompanying consolidated financial statements include general corporate
expenses of $25.3 million in 1997, $21.6 million in 1996 and $19.8 million in
1995.
26
<PAGE> 28
Transfers between geographic areas, which are eliminated upon
consolidation, are excluded from the above presentation. These transfers are
recorded by the Company and its subsidiaries based on their various intercompany
pricing agreements. U.S. sales to affiliates amounted to $213.4 million, $174.5
million and $126.1 million in 1997, 1996 and 1995, respectively. Non-U.S. sales
to affiliates approximated $136.5 million, $93.0 million and $58.2 million in
1997, 1996 and 1995, respectively.
The Company's revenues are derived principally from uncollateralized
sales to customers in the oil and gas industry. This industry concentration has
the potential to impact the Company's exposure to credit risk, either positively
or negatively, because customers may be similarly affected by changes in
economic or other conditions. The creditworthiness of this customer base is
strong, and the Company has not experienced significant credit losses on such
receivables.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company routinely enters into operating and capital leases for
certain of its facilities and equipment. Amounts related to assets under capital
lease were immaterial for the periods presented. Rent expense totaled $20.2
million, $16.2 million and $14.9 million in 1997, 1996 and 1995, respectively.
Future minimum payments under all non-cancelable operating leases
having initial terms of one year or more are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- ------------ -------
<S> <C>
1998............................................... $16,927
1999............................................... 13,778
2000............................................... 8,863
2001............................................... 6,978
2002............................................... 5,744
Thereafter......................................... 33,459
-------
$85,749
=======
</TABLE>
Year 2000
The Company is currently in the process of identifying, evaluating and
implementing modifications to its business systems in order to achieve Year 2000
date conversion compliance without an effect on customers or business
operations. The Company expects that all of its enterprise business systems will
be Year 2000 compliant by mid-1999, with the majority of the systems expected to
be in compliance by the end of 1998. Most of the necessary changes in computer
instructional code can be made by upgrading the off-the-shelf software in which
the application was created. Subsequent to year end, the Company's systems were
upgraded to Oracle version 10.7 which brought most of the Company's enterprise
applications into compliance. The Company does not believe that the necessary
changes for the remaining systems will require any significant level of external
resources, or that failure to implement the proposed changes for the remaining
systems would have a material effect on the Company's consolidated financial
position or results of operations.
The Company has not yet determined the complete status of Year 2000
compliance of its suppliers and financial institutions or what additional costs,
if any, might be required by the Company. Management believes that
non-compliance by the Company's suppliers will not have a material effect.
However, the failure of its financial institutions to become Year 2000 compliant
could have a material effect on the Company's consolidated financial position or
results of operations.
27
<PAGE> 29
Litigation
The Company is a defendant in various legal proceedings arising in the
ordinary course of business. In the opinion of management, these matters will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is involved in several actions relating to alleged
liability in connection with the U.S. Environmental Protection Agency's ("EPA")
National Priorities List ("NPL") sites:
Sheridan. On March 31, 1987, the Sheridan Site Committee (the
"Committee") filed a claim on behalf of itself and 59 potentially responsible
parties ("PRPs") at the Sheridan Disposal Services site in Hempstead, Texas, a
NPL site. The claim was based on the Company's alleged liability to the
claimants for "contribution and potential cost recovery for administrative and
remedial work" expenses incurred and to be incurred by them in connection with
the Sheridan Disposal site. On August 28, 1987, the Company reached a settlement
and agreed to pay its allocable share of response costs incurred by the
Committee, such share to be limited to the lesser of $3.0 million or 2.93
percent of actual response costs. Based upon an EPA Record of Decision ("ROD"),
total remediation costs are estimated to be approximately $28 million. On this
basis, the Company's share would be $0.8 million.
Operating Industries. Under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (the "Superfund Act"), the EPA has been
conducting various activities at the Operating Industries, Inc. ("OII") site, an
NPL disposal site located in Monterey Park, California. On June 14, 1988, the
United States District Court entered an order approving a Stipulation and
Agreement to Compromise and Settle EPA's claim against the Company (the "OII
Settlement Agreement"). Under the OII Settlement Agreement, the Company agreed
to pay its allocable share of total future site response costs at the OII site,
which is limited to the lesser of $5.0 million or 0.65 percent of future site
response costs.
Actual remediation of the OII Site is likely to extend for a number of
years after a final remedy is selected for the site. The EPA issued the ROD with
respect to the OII Site, estimating remediation costs of $300 million. The
Company is presently unable to determine the amount it may ultimately have to
contribute to the OII site pursuant to the OII Settlement Agreement. This amount
will range from approximately $150,000 that the Company has already paid to the
$5.0 million at which the Company's liability is capped under the OII Settlement
Agreement.
Chemform. The Company operated a business and held a leasehold interest
in property located in Pompano Beach, Florida (the "Chemform Site") between May
14, 1976 and March 16, 1979, at which time the Company sold the business and
assigned the lease. The EPA placed the Chemform Site on the NPL on October 4,
1989. On September 22, 1992, the EPA issued the ROD for a portion of the
Chemform Site. The ROD selected a "No Action with Monitoring" alternative,
requiring groundwater to be monitored quarterly for at least one year. Although
the Company and two other PRPs completed four quarters of groundwater
monitoring, the Florida Department of Environmental Protection ("Florida DEP")
requested additional monitoring. The Company and two other PRPs performed the
additional monitoring and are presently conducting discussions with the EPA and
the Florida DEP regarding what, if any, additional monitoring work will be
required. The final scale of any monitoring work is not yet known. It is also
not yet known whether any groundwater remediation work will thereafter be
required.
On September 16, 1993, the EPA issued the ROD for the remainder of the
Chemform Site, which addressed site-related soil contamination. The ROD
determined that no further action was necessary to address Operable Unit Two at
the site; however, the Florida DEP requested that additional soil be removed at
the Chemform Site. The Company and the two other PRPs performed the soil removal
requested under the oversight of the Florida DEP and has provided a Technical
Memorandum summarizing this action to the EPA and the Florida DEP. The Company
has not received any written response from either the EPA or the Florida DEP. In
April 1996, the Company and the other PRPs received a letter from the EPA
demanding approximately $0.8 million in response and oversight costs. The
Company and the other PRP's are contesting this claim and are requesting
additional information. As the EPA still retains jurisdiction over the Chemform
Site, it is possible that additional issues may arise which would require
further resolution, including the claim by the EPA for payment of past oversight
or response costs incurred. The Company intends to scrutinize and, if necessary,
vigorously contest any such claims made by the EPA.
28
<PAGE> 30
At December 31, 1997, the remaining recorded liability for estimated
future clean-up costs for the sites discussed above as well as properties
currently or previously owned or leased by the Company was $3.2 million. As
additional information becomes available, the Company may be required to provide
for additional environmental clean-up costs for Superfund sites and for
properties currently or previously owned or leased by the Company. However, the
Company believes that none of its clean-up obligations will result in
liabilities having a material adverse effect on the Company's consolidated
financial position or results of operations.
14. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 490,355 $ 527,867 $ 561,854 $ 587,876 $ 2,167,952
========== ========== ========== ========== ============
Gross profit............................. $ 143,788 $ 158,228 $ 168,128 $ 182,455 $ 652,599
========== ========== ========== ========== ============
Net income............................... $ 24,798 $ 28,133 $ 32,394 $ 36,004 $ 121,329
========== ========== ========== ========== ============
Basic earnings per share................. $ 0.52 $ 0.59 $ 0.68 $ 0.76 $ 2.55
========== ========== ========== ========== ============
Diluted earnings per share............... $ 0.52 $ 0.59 $ 0.67 $ 0.75 $ 2.52
========== ========== ========== ========== ============
1996 FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ ----
Revenues................................. $ 349,167 $ 389,566 $ 441,140 $ 472,033 $ 1,651,906
=========== =========== ========== ========== ============
Gross profit............................. $ 98,103 $ 109,802 $ 125,328 $ 139,495 $ 472,728
=========== =========== ========== ========== ============
Net income............................... $ 14,169 $ 17,019 $ 19,367 $ 22,742 $ 73,297
=========== =========== ========== ========== ============
Basic earnings per share................. $ 0.30 $ 0.36 $ 0.41 $ 0.48 $ 1.55
=========== =========== ========== ========== ============
Diluted earnings per share............... $ 0.30 $ 0.36 $ 0.40 $ 0.47 $ 1.53
=========== =========== ========== ========== ============
</TABLE>
15. SUBSEQUENT EVENTS (UNAUDITED)
Merger and Restructuring Charge
In the second quarter of 1998, the Company recorded a $55 million
charge related to the acquisition and integration of the Wilson operations and
various restructuring efforts. A deferred tax benefit associated with the merger
and restructuring charge was also recorded during that period and totaled $14
million.
In connection with the Wilson acquisition, the Company recorded merger
costs of approximately $30 million which consisted of transaction costs,
including accounting, legal and investment banking costs, and amounts to
consolidate and integrate the Wilson operations. The consolidation and
integration portion of the charge consists of severance costs for Wilson
personnel, including payments under "change of control" agreements,
consolidation and relocation of Wilson manufacturing operations and the
write-down of assets which are impaired or have no future value.
Additionally, in order to lower costs and remain competitive,
management committed to several initiatives to restructure its worldwide
operations. The restructuring component of the charge is expected to total $25
million with a significant portion of this amount related to the closure of the
Company's Supradiamant France facility and relocation of the manufacturing
operations. The charge also includes amounts related to the combination of the
Smith Tool and Smith Diamond Technology business units and the elimination of
duplicate sales and management cost structures throughout the world. The
remainder of the charge relates to management's evaluation of business
conditions in the oil and gas industry and includes costs to reduce the
workforce to appropriate levels and write-down assets which are impaired or have
no future value.
29
<PAGE> 31
Purchase of Minority Interest Ownership in M-I
On August 21, 1998, the Company announced the signing of a definitive
agreement to acquire Halliburton Company's 36 percent ownership interest in M-I
L.L.C. The transaction is expected to close in August 1998. The purchase
consideration of $265 million is being financed with a non-interest bearing
promissory note to the former owners which is due 240 days after the transaction
closes.
30
<PAGE> 32
ITEM 7 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
<TABLE>
<S> <C>
Restated financial statement schedule for the years ended December 31,
1997, 1996 and 1995:
Report of Independent Public Accountants on Financial Statement Schedule.... 32
Schedule II - Valuation and Qualifying Accounts and Reserves--As restated.... 33
</TABLE>
31
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Smith International, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the restated consolidated balance sheets of Smith International, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related restated
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997, included in this
Form 8-K, and have issued our report thereon dated April 30, 1998. Our audits
were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The restated financial statement schedule
listed in Part IV, Item 14 for Smith International, Inc. and subsidiaries is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic restated financial statements. This restated financial statement
schedule has been subjected to the auditing procedures applied in the audits of
the basic restated financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic restated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
April 30, 1998
32
<PAGE> 34
SCHEDULE II
SMITH INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES-AS RESTATED
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO AT END
OF YEAR EXPENSE WRITE-OFFS OTHER OF YEAR
---------- --------- ---------- ----- -------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended--December 31, 1997............... $ 9,114 $ 2,976 $ (3,385) $ 25(a) $ 8,730
Year Ended--December 31, 1996............... $ 8,514 $ 2,964 $ (2,798) $ 434(a) $ 9,114
Year Ended--December 31, 1995............... $ 10,703 $ 1,486 $ (3,675) - $ 8,514
</TABLE>
(a) Amounts represent accounts receivable reserves related to acquisitions
made by the Company during the years presented.
33
<PAGE> 35
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 hereunto duly authorized.
SMITH INTERNATIONAL, INC.
/s/ NEAL S. SUTTON
--------------------------------------
By: Neal S. Sutton
Senior Vice President - Administration,
General Counsel and Secretary
Date: August 28, 1998
34