<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 March 31, 1999
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 May 12,
1999 was 48,875,640.
<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 Months Ended March 31, 1999 and 1998.................................. 1
Consolidated Balance Sheets -
As of March 31, 1999 and December 31, 1998.......................................... 2
Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1999 and 1998.................................. 3
Notes to Consolidated Financial Statements.............................................. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................ 7
ITEM 3. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES........................................ 12
PART II: OTHER INFORMATION
ITEMS 1 - 6.......................................................................................... 13
SIGNATURES................................................................................................ 14
</TABLE>
<PAGE> 3
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
REVENUES .................................... $ 397,022 $ 578,933
COSTS AND EXPENSES:
Costs of Revenues ......................... 285,683 397,087
Selling Expenses .......................... 69,907 86,550
General and Administrative Expenses ....... 20,943 22,204
Other Non-Recurring Expenses .............. 7,899 --
Gain on Sale .............................. (10,520) --
--------- ---------
Total Costs and Expenses ............. 373,912 505,841
--------- ---------
INCOME BEFORE INTEREST AND TAXES ........... 23,110 73,092
INTEREST EXPENSE, NET ....................... 12,075 9,113
--------- ---------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS ........................ 11,035 63,979
INCOME TAX PROVISION ........................ 4,950 19,314
--------- ---------
INCOME BEFORE MINORITY INTERESTS ........... 6,085 44,665
MINORITY INTERESTS .......................... (521) 11,088
--------- ---------
NET INCOME .................................. $ 6,606 $ 33,577
========= =========
EARNINGS PER SHARE:
Basic ..................................... $ 0.14 $ 0.71
========= =========
Diluted ................................... $ 0.14 $ 0.70
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ..................................... 48,159 47,572
Diluted ................................... 48,607 48,053
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 4
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 55,024 $ 22,717
Receivables, net ...................................................... 367,636 424,054
Inventories, net ...................................................... 428,636 465,705
Deferred tax assets, net .............................................. 48,287 48,509
Prepaid expenses and other ............................................ 34,744 36,170
----------- -----------
Total current assets ................................................ 934,327 997,155
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET ...................................... 361,550 375,236
GOODWILL, NET ........................................................... 286,446 289,242
OTHER ASSETS ............................................................ 99,742 97,355
----------- -----------
TOTAL ASSETS ............................................................ $ 1,682,065 $ 1,758,988
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt ........... $ 331,397 $ 345,253
Accounts payable ...................................................... 124,315 145,338
Accrued payroll costs ................................................. 48,826 46,296
Income taxes payable .................................................. 26,268 32,402
Accrued merger and restructuring costs ................................ 10,305 36,299
Other ................................................................. 93,823 87,712
----------- -----------
Total current liabilities ......................................... 634,934 693,300
----------- -----------
LONG-TERM DEBT .......................................................... 343,510 368,823
DEFERRED TAX LIABILITIES ................................................ 29,687 29,421
OTHER LONG-TERM LIABILITIES ............................................. 24,145 23,903
MINORITY INTERESTS ...................................................... 8,277 9,507
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000 shares authorized; no shares
issued or outstanding in 1999 or 1998 ................................. -- --
Common stock, $1 par value; 60,000 shares authorized; 48,857 shares
issued and outstanding in 1999 (48,793 in 1998) ....................... 48,857 48,793
Additional paid-in capital ............................................ 324,110 323,056
Retained earnings ..................................................... 287,391 280,785
Cumulative translation adjustments .................................... (11,144) (10,898)
Less - treasury securities, at cost; 656 common shares in
1999 and 1998 ....................................................... (7,702) (7,702)
----------- -----------
Total shareholders' equity ........................................ 641,512 634,034
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 1,682,065 $ 1,758,988
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 6,606 $ 33,577
Adjustments to reconcile net income to net cash provided
by (used in) operating activities, excluding the net effects of acquisitions:
Depreciation and amortization ............................................. 18,763 17,002
Minority interests ........................................................ (521) 11,088
Provision for losses on receivables ....................................... 444 494
Gain on disposal of property, plant and equipment ......................... (2,045) (1,732)
Foreign currency translation losses ....................................... 660 205
Changes in operating assets and liabilities:
Receivables ............................................................... 51,009 (18,503)
Inventories, net .......................................................... 34,559 (37,594)
Accounts payable .......................................................... (20,547) (22,727)
Accrued merger and restructuring costs .................................... (16,384) --
Other current assets and liabilities ...................................... (10,309) (12,379)
Other non-current assets and liabilities .................................. (6,940) (12,482)
-------- --------
Net cash provided by (used in) operating activities ........................... 55,295 (43,051)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of business ............................................ 29,662 --
Acquisition of businesses, net of cash acquired ............................... (4,500) (7,300)
Purchases of property, plant and equipment .................................... (13,315) (35,214)
Proceeds from disposal of property, plant and equipment ....................... 4,001 3,871
-------- --------
Net cash provided by (used in) investing activities ........................... 15,848 (38,643)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ...................................... -- 73,722
Principal payments of long-term debt........................................... (25,313) (10,352)
Net decrease in short-term borrowings ......................................... (13,856) (357)
Proceeds from exercise of stock options ....................................... 714 274
Contributions from minority interest partner .................................. -- 4,572
Other ......................................................................... -- (92)
-------- --------
Net cash provided by (used in) financing activities ........................... (38,455) 67,767
-------- --------
Effect of exchange rate changes on cash ....................................... (381) (804)
-------- --------
Increase (decrease) in cash and cash equivalents .............................. 32,307 (14,731)
Cash and cash equivalents at beginning of period .............................. 22,717 37,109
-------- --------
Cash and cash equivalents at end of period .................................... $ 55,024 $ 22,378
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ........................................................ $ 10,014 $ 11,008
Cash paid for income taxes..................................................... $ 6,038 $ 4,292
</TABLE>
The accompanying notes are an integral part of these consolidated 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 (the
"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 1998 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) NON-RECURRING ITEMS
During the quarter, the Company recorded two non-recurring items which
are included in total costs and expenses in the accompanying Consolidated
Statements of Operations. The Company disposed of its industrial bentonite mine
operations located in Greece in exchange for cash consideration of $29.7
million. Operating results for the first quarter of 1999 include a pretax gain
of $10.5 million related to the disposition. Additionally, the Company recorded
charges of $7.9 million in the first quarter of 1999 relating to the write-off
of certain assets and the settlement of a customer receivable.
3) EARNINGS PER SHARE
Basic earnings per share ("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.
The following schedule reconciles the income and shares used in the basic and
diluted EPS computations (in thousands, except per share data):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
BASIC EPS
Net income ................................... $ 6,606 $33,577
======= =======
Weighted average number of common
shares outstanding ......................... 48,159 47,572
------- -------
Basic EPS .................................... $ 0.14 $ 0.71
======= =======
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------
<S> <C> <C>
DILUTED EPS
Net income ......................................... $ 6,606 $33,577
======= =======
Weighted average number of common
shares outstanding ............................... 48,159 47,572
Dilutive effect of stock options ................... 448 481
------- -------
48,607 48,053
------- -------
Diluted EPS ........................................ $ 0.14 $ 0.70
======= =======
</TABLE>
4) COMPREHENSIVE INCOME
The Company's comprehensive income, which encompasses net income and
currency translation adjustments, is as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Net income ............................. $ 6,606 $ 33,577
Currency translation adjustments ....... (246) (1,470)
-------- --------
Comprehensive income ................... $ 6,360 $ 32,107
======== ========
</TABLE>
5) 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, consisting of
materials, labor and factory overhead, are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
<S> <C> <C>
Raw materials .................................... $ 41,818 $ 43,612
Work-in-process .................................. 48,225 57,913
Products purchased for resale .................... 67,042 72,444
Finished goods ................................... 294,622 313,597
--------- ---------
451,707 487,566
Reserves to state certain domestic inventories
($214,542 and $221,653 in 1999 and 1998,
respectively) on a LIFO basis ................ (23,071) (21,861)
--------- ---------
Inventories, net ................................. $ 428,636 $ 465,705
========= =========
</TABLE>
5
<PAGE> 8
6) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
<S> <C> <C>
Land ................................... $ 24,069 $ 27,019
Buildings .............................. 74,511 72,560
Machinery and equipment ................ 339,883 348,131
Rental tools ........................... 211,063 211,871
--------- ---------
649,526 659,581
Less-accumulated depreciation .......... (287,976) (284,345)
--------- ---------
Property, plant and equipment, net...... $ 361,550 $ 375,236
========= =========
</TABLE>
7) LITIGATION
On October 29, 1996, the Company was served with a complaint in the
U.S. District Court entitled Rock Bit International, Inc. v. Smith
International, Inc. This lawsuit is a patent infringement dispute alleging that
drill bits made by the Company infringe a U.S. patent owned by Rock Bit
International ("RBI") which was issued on September 8, 1992. RBI alleges that
the Company infringes its patent by making and selling certain three-cone rock
bits having cutting structures covered by the claims of RBI's patent. The
Company commenced discovery in late 1997 and continued through late 1998.
The Company is vigorously contesting this lawsuit and believes that it does not
infringe the RBI patent and that the patent is invalid.
8) SUBSEQUENT EVENTS
Short-term borrowings at March 31, 1999 include the discounted value of
a $265.0 million non-interest bearing promissory note to Halliburton Company
which matured and was paid in full on April 28, 1999. The Company utilized
borrowings under existing credit facilities and entered into a new promissory
note with a bank to fund the outstanding note balance. Loans under the new
promissory note have maturities less than six months and carry an interest rate
of LIBOR + 30 basis points. Additionally, the Company negotiated a committed
$165.0 million revolving credit facility with a bank group for use in the event
loans can not be funded under the promissory note. No amounts have been borrowed
under the facility, which expires no later than December 31, 1999 and includes
an annual commitment fee of 0.15 percent of the unutilized facility.
6
<PAGE> 9
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.
The following discussion 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, packers and liner hangers. The Company also operates an
extensive network of supply branches through which it markets pipe, valves,
fittings and other capital and expendable maintenance products.
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. Drilling activity levels are
primarily influenced by energy prices but may also be affected by expectations
related to the worldwide supply for crude oil and natural gas, finding and
development costs, decline and depletion rates, political actions and
uncertainties, environmental concerns, capital expenditure plans of exploration
and production companies and the overall level of global economic growth and
activity.
The Company's results for the first quarter were impacted by the
continuing decline in U.S. drilling activity which decreased 20 percent from the
average rig count levels experienced in the fourth quarter of 1998. Moreover,
the North American rig count has deteriorated further in the second quarter and
is currently 34 percent below the average drilling activity levels reported in
the first quarter of 1999. Although the majority of the decline in North
American activity is due to the annual spring break-up in Canada, the U.S. rig
count has reached all-time record lows and is currently 8 percent below first
quarter 1999 activity levels. To date, the recovery in crude oil prices, which
have increased approximately 40 percent from the first quarter 1999 average, has
not significantly impacted worldwide drilling activity. Although the long-term
outlook for exploration and production activity is favorable based upon expected
growth in worldwide energy consumption, several factors have, and may continue
to, impact activity levels on a short-term basis. OPEC Ministers approved
production cuts late in the first quarter of 1999 which are intended to address
the worldwide supply imbalance. If production levels are not reduced, management
believes the oversupply in the market could continue to adversely impact demand
for the Company's products and services. Additionally, major and independent oil
companies, on which the Company relies for a large portion of its revenues,
previously announced planned reductions in capital spending levels due to the
weakness in crude oil prices. The recent recovery in the price of oil is not
expected to increase spending by these customers and may not influence their
spending decisions until prices are sustained for a prolonged period of time.
7
<PAGE> 10
RESULTS OF OPERATIONS
REVENUES
Although the Company provides products to the petrochemical industry
and certain industrial markets, the majority of the Company's revenues are
derived from sales to the oil and gas exploration and production industry. The
Company 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 (in thousands, except rig
count information).
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------------------
1999 1998
-------------------------------------
Amount % Amount %
--------------- -----------------
<S> <C> <C> <C> <C>
Revenues by Business Unit:
M-I Fluids................................... $ 177,870 45 $ 230,228 40
M-I SWACO.................................... 28,031 7 36,693 6
Smith Bits................................... 60,421 15 90,887 16
Smith Drilling & Completions................. 57,157 14 84,522 15
Wilson Supply................................ 73,543 19 136,603 23
---------- --- ----------- ---
Total................................ $ 397,022 100 $ 578,933 100
========== === =========== ===
Revenues by Area:
U.S.......................................... $ 181,234 46 $ 292,429 51
Export....................................... 28,517 7 40,666 7
Non-U.S...................................... 187,271 47 245,838 42
---------- --- ----------- ---
Total................................ $ 397,022 100 $ 578,933 100
========== === =========== ===
Average Active Rig Count:
U.S.......................................... 552 966
Canada....................................... 290 459
Non-North America............................ 620 811
---------- -----------
Total................................ 1,462 2,236
========== ===========
</TABLE>
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 decreased $52.4 million, or 23 percent, over
the first quarter of 1998. The revenue decline from the prior year related to
lower volumes associated with the impact of weak oil prices on worldwide
activity levels. On a geographic basis, the majority of the decrease was
reported in the U.S. and Latin America which resulted from the activity declines
and, to a lesser extent, the completion of several large projects in the first
quarter of 1999.
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's revenues decreased $8.7 million, or 24 percent, from the
first quarter of 1998. The quarter-to-quarter revenue decline related primarily
to decreased demand for fluid processing equipment and services which was
partially offset by incremental revenues from acquired operations. The lower
revenues were reported in the U.S. and Latin America which experienced
significant declines in activity levels from the prior year.
8
<PAGE> 11
SMITH BITS
Smith Bits manufactures and sells three-cone and diamond bits primarily
for use in the oil and gas industry. The unit's MegaDiamond and Supradiamant
subsidiaries manufacture polycrystalline diamond and cubic boron nitride
materials which are used in drill bits and in other specialized cutting tools.
Smith Bits' revenues decreased $30.5 million, or 34 percent, over the first
quarter of 1998. Over half of the revenue decline related to lower North
American activity levels which resulted in decreased unit sales of petroleum
three-cone bits. The favorable product mix and sales of larger-size diamond bits
partially offset the impact of the decline in unit sales.
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 decreased
$27.4 million, or 32 percent, from the first quarter of 1998. A majority of the
revenue decline was reported in the U.S. and Europe/Africa which related to
lower volumes associated with decreased activity levels in these areas. On a
product basis, over half of the revenue decline resulted from lower tubular
sales and decreased demand for remedial products and services.
WILSON SUPPLY
Wilson Supply markets pipe, valves, fittings and other capital and
expendable maintenance products to the petroleum and petrochemical industries
primarily through an extensive network of U.S. supply branches. Wilson Supply's
revenues decreased $63.1 million, or 46 percent, over the first quarter of 1998.
On a geographic basis, the majority of the revenue decline was reported in the
U.S. which was adversely impacted by the decline in activity levels. Decreased
branch sales combined with lower tubular revenues resulting from volume declines
and increased competitive pricing pressures accounted for the majority of the
revenue variance.
For the periods indicated, the following table summarizes the results
of the Company and presents these results as a percentage of total revenues
(dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------------------------
1999 1998
---------------------------------------------
Amount % Amount %
---------------------------------------------
<S> <C> <C> <C> <C>
Revenues.............................................. $ 397,022 100 $ 578,933 100
---------- -----------
Gross profit.......................................... 111,339 28 181,846 31
Operating expenses.................................... 88,229 22 108,754 19
---------- -- ----------- --
Income before interest and taxes...................... 23,110 6 73,092 12
Interest expense, net................................. 12,075 3 9,113 1
---------- -- ----------- --
Income before income taxes and
minority interests................................... 11,035 3 63,979 11
Income tax provision.................................. 4,950 1 19,314 3
---------- -- ----------- --
Income before minority interests...................... 6,085 2 44,665 8
Minority interests.................................... (521) - 11,088 2
---------- -- ----------- --
Net income............................................ $ 6,606 2 $ 33,577 6
========== == =========== ==
</TABLE>
9
<PAGE> 12
Total revenues for the first quarter of 1999 decreased $181.9 million,
or 31 percent, from the prior year quarter. Oil prices remained weak throughout
the majority of the quarter effecting drilling activity levels across all
geographic regions. Over 60 percent of the revenue decrease was reported in the
U.S. and related to the impact of a 46 percent decline in land-based drilling
activity, which is generally more sensitive to energy price levels.
Additionally, low commodity prices have resulted in decreased demand for the
Company's products and services outside the U.S., particularly Latin America and
Europe/Africa. If drilling activity remains at or below current levels,
management believes reduced customer spending may continue to impact reported
revenues in future periods.
Gross profit declined $70.5 million, or 39 percent, as compared to the
first quarter of 1998. Gross profit as a percentage of revenues decreased from
31 percent in the first quarter of the prior year to 28 percent in the first
quarter of 1999. The variance in gross profit margins related primarily to the
impact of the lower revenues on fixed cost coverage, as decreased manufacturing
volumes and rental equipment utilization contributed to the overall decline. If
revenues and related volumes decrease further, gross margins in future periods
could be adversely impacted. Additionally, although product pricing has had a
minimal impact on the reported margins to date; industry conditions have created
increased price competition in the markets in which the Company participates,
the effect of which may negatively impact the gross profit line.
Operating expenses, consisting of selling expenses, general and
administrative expenses and other non-recurring items, decreased $20.5 million,
or 19 percent, over the first quarter of 1998. The quarter-to-quarter variance
primarily related to decreased variable costs associated with lower revenues,
with over half of the reduction attributable to a decline in employee headcount
levels occurring in the last half of 1998. The remainder of the variance related
to the gain on sale of an industrial mining operation which was partially offset
by the recognition of a non-recurring charge for asset write-offs and the
settlement of a customer receivable.
Net interest expense, which represents interest expense less interest
income, increased $3.0 million, or 33 percent, from the first quarter of 1998.
Inclusion of notional interest on the $265.0 million non-interest bearing note
issued in connection with the purchase of the minority ownership interest in M-I
accounted for the increase. Increased repayments of borrowings under revolving
credit facilities partially offset the impact of the recorded notional interest
The effective tax rate for the first quarter of 1999 approximated 45
percent, which is an increase from the 30 percent rate reported in the
comparable period of the prior year and higher than the U.S. statutory rate. The
rate exceeded both the prior year effective rate and the statutory rate due
primarily to the inclusion of non-deductible costs associated with the sale of
one of the Company's mining operations. Additionally, the impact of acquiring
the minority interest ownership in M-I also contributed to the increase from the
prior year quarter. Prior to acquiring the minority interest ownership in M-I,
the Company properly consolidated the pretax income related to the former
minority interest partner's share of U.S. partnership earnings but excluded the
related taxes.
Minority interests reflect the portion of the results of majority-owned
operations which are applicable to the minority interest partners. For the prior
year period, minority interests amounts primarily represent the share of M-I
profits associated with the former minority partner's interest in those
operations. Minority interests decreased $11.6 million from the first quarter of
1998 due to the impact of acquiring Halliburton's ownership interest in M-I.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $32.3 million during the three
month period and equaled $55.0 million at March 31, 1999. The Company's
operations generated $55.3 million of cash flows in the first quarter of 1999
which is a $98.3 million increase over the amounts reported in the comparable
period of the prior year. The effect of the decline in drilling activity on
operations favorably impacted working capital levels, with decreased inventory
and receivables accounting for the increased operating cash flow from the first
quarter of 1998. Cash flows from operations were sufficient to fund capital
expenditures and acquisition requirements resulting in repayments of borrowings
under available facilities.
10
<PAGE> 13
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. Various revolving line of credit facilities, which are
available for operating and financing needs had additional borrowing capacity of
$178.6 million, at March 31, 1999. Subsequent to quarter-end, the Company repaid
obligations under a short-term note by utilizing a portion of the available
credit facility and entering into a promissory note with a bank. The promissory
note is supported by a new $165.0 million revolving credit facility which is
currently undrawn. The Company believes funds generated from operations, amounts
available under existing credit facilities and external sources of liquidity,
including the anticipated proceeds from the Schlumberger Limited
("Schlumberger") transaction discussed below will be sufficient to finance
capital expenditures and working capital needs of the existing operations for
the foreseeable future.
On October 29, 1996, the Company was served with a complaint in the
U.S. District Court entitled Rock Bit International, Inc. v. Smith
International, Inc. This lawsuit is a patent infringement dispute alleging that
drill bits made by the Company infringe a U.S. patent owned by Rock Bit
International ("RBI") which was issued on September 8, 1992. RBI alleges that
the Company infringes its patent by making and selling certain three-cone rock
bits having cutting structures covered by the claims of RBI's patent. The
Company commenced discovery in late 1997 and continued through late 1998. The
Company is vigorously contesting this lawsuit and believes that it does not
infringe the RBI patent and that the patent is invalid.
The Company is currently negotiating the combination of its drilling
fluids and supply distribution operations under separate joint venture
arrangements. The combination of the M-I and Schlumberger Dowell Drilling Fluid
operations is subject to U.S. Department of Justice approval which, as of the
current date, has not been obtained. Under this joint venture arrangement,
Schlumberger will contribute certain assets and pay cash consideration of $280.0
million to the Company in exchange for a 40 percent ownership interest in the
combined operations. The Company is also negotiating the combination of the
Wilson Supply and certain Conemsco, Inc. ("Conemsco") operations to form an
oilfield distribution and supply joint venture in which the Company would own
the majority interest. Under this joint venture arrangement, which is not
expected to be finalized until completion of the Schlumberger transaction, the
Company may be required to pay cash consideration in order to purchase a portion
of Conemsco's ownership interest. Although there are no assurances as to whether
either of these transactions will be ultimately consummated, in the event these
are completed, future cash outlays may be required to combine and consolidate
the previously separate operations. Aside from the potential transactions
discussed above, management continues to evaluate opportunities to acquire
products or businesses complimentary to the Company's operations. These
acquisitions, if they arise, may involve the use of cash or, depending upon the
size and terms of the acquisition, may require debt or equity financing.
NEW ACCOUNTING AND REGULATORY PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", effective for fiscal periods
beginning after June 15, 1999. This standard 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 133 has not yet been quantified but is not
expected to have a material impact upon the Company's financial position or
results of operations.
In the first quarter of 1999, the Company adopted Statement of Position
98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities". The
statement requires costs of start-up activities and organization costs to be
expensed as incurred. The adoption did not have a material adverse impact on the
Company's financial position or results of operations.
11
<PAGE> 14
YEAR 2000
The Company continues to implement modifications to its business
systems in order to achieve Year 2000 date conversion compliance without an
effect on customers or business operations.
The Company's business systems are comprised of a mix of off-the-shelf
and internally-developed systems that vary greatly in size, complexity and
technical architecture. The Company's Year 2000 task force has performed a
complete review of all systems and has finalized the identification of the
critical and non-critical components within five defined groups. The necessary
changes in computer instructional code continue to be made by upgrading the
off-the-shelf software in which the application was created. Year 2000
compliance for the majority of the Company's enterprise applications was
achieved with the Oracle 10.7 implementation in the first quarter of 1998. The
Company continues to install new applications and upgrade existing ones in order
to bring applications for international locations into compliance and migration
or replacement plans are in place for systems that are not currently Year 2000
compliant. As of March 31, 1999 all of the Company's critical systems were Year
2000 compliant and the Company expects all non-critical systems will be
compliant by the third quarter of 1999. At March 31, 1999, the Company estimates
that the implementation and testing process for both Information Technology
("IT") and non-IT systems was over 85 percent complete.
During 1998, the Company communicated with major suppliers, financial
institutions and others with whom it does business to address their compliance
efforts and the Company's exposure in the event of the failure of these efforts.
The Company has validated the responses received and is in the final stage of
collecting additional vendor information as warranted. The Company has
determined that the majority of its suppliers and financial institutions are
Year 2000 compliant. However, in the event of non-compliance of any of these
suppliers or financial institutions, a written contingency program has been
developed. Management continues to believe that non-compliance by the Company's
suppliers is insignificant but failure of its financial institutions could have
a material effect on the Company's financial position or results of operations.
The estimated costs related to achieving Year 2000 compliance are not
expected to have a material impact on the Company's financial condition or
results of operations. All expenditures related to the Year 2000 initiative will
be funded with cash flows from operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
The Company is exposed to certain market risks arising from
transactions that are entered into in the normal course of business. These
risks, which are primarily related to interest rate changes and fluctuations in
foreign exchange rates, are not considered to be material to the Company. During
the reporting period, no events or transactions have occurred which would
materially change the information disclosed in the Company's Annual Report on
Form 10-K.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) Material Contracts.
10.1 Amendment to Loan Agreement and Interest Rate Agreement dated
August 31, 1998, by and among M-I LLC and Chase Bank of Texas,
National Association (formerly known as Texas Commerce Bank
National Association), a national banking association,
individually and as Agent, and the other financial parties
thereto.
10.2 Amendment to Loan Agreement dated August 31, 1998, by and
among the Company and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National
Association), a national banking association, individually and
as Agent, and the other financial institutions parties
thereto.
10.3 Amendment to Loan Agreement dated December 31, 1998, by and
among the Company and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National
Association), a national banking association, individually and
as Agent, and the other financial institutions parties hereto.
(27) Financial Data Schedules.
27.1 Financial Data Schedule for the three month period ended March
31, 1999.
27.2 Restated Financial Data Schedule for the three month period
ended March 31, 1998
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated January 7, 1999,
reporting under "Item 5. Other Events", related to a press release
announcing the Company's outlook for the fourth quarter of 1998.
The Registrant filed a Form 8-K dated February 4, 1999,
reporting under "Item 5. Other Events", related to a press release
announcing 1998 fiscal year results.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITH INTERNATIONAL, INC.
Registrant
Date: May 15, 1999 By: /s/ Douglas L. Rock
-------------------- -------------------------------
Douglas L. Rock
Chairman of the Board, Chief Executive
Officer, President and Chief Operating
Officer
Date: May 15, 1999 By: /s/ John J. Kennedy
-------------------- -------------------------------
John J. Kennedy
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
14
<PAGE> 17
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Amendment to Loan Agreement and Interest Rate Agreement dated
August 31, 1998, by and among M-I LLC and Chase Bank of Texas,
National Association (formerly known as Texas Commerce Bank
National Association), a national banking association,
individually and as Agent, and the other financial parties
thereto.
10.2 Amendment to Loan Agreement dated August 31, 1998, by and
among the Company and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National
Association), a national banking association, individually and
as Agent, and the other financial institutions parties
thereto.
10.3 Amendment to Loan Agreement dated December 31, 1998, by and
among the Company and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National
Association), a national banking association, individually and
as Agent, and the other financial institutions parties hereto.
27.1 Financial Data Schedule for the three month period ended March
31, 1999.
27.2 Restated Financial Data Schedule for the three month period
ended March 31, 1998
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO LOAN AGREEMENT
AND INTEREST RATE AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT AND INTEREST RATE AGREEMENT
("Amendment") dated as of August 31, 1998 (the "Amendment Effective Date") is
made and entered into by and among M-I L.L.C. (the "Borrower"), a Delaware
limited liability company, the banking institutions (each, together with its
successors and assigns, a "Bank" and collectively, the "Banks") from time to
time a party to the Loan Agreement (as hereinafter defined), as amended by this
Amendment, ABN AMRO BANK N.V., HOUSTON AGENCY and DEN NORSKE BANK AS, as
Co-Agents (in such capacity, together with their successors in such capacity,
collectively called the "Co-Agents") and CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION (formerly known as Texas Commerce Bank National Association), a
national banking association, as agent for the Banks (in such capacity,
together with its successors in such capacity, the "Agent").
RECITALS:
WHEREAS, the Borrower, the Banks, the Co-Agents, and the Agent are
parties to a Loan Agreement dated as of April 4, 1996, as amended by
instruments dated April 8, 1997 and December 23, 1997 (the "Loan Agreement");
and
WHEREAS, certain provisions regarding interest rates in respect of the
obligations of the Borrower under the Loan Agreement have been gathered in that
certain Interest Rate Agreement (the "Interest Rate Agreement")
attached as Schedule 1 to the Loan Agreement; and
WHEREAS, the Borrower, the Banks, the Co-Agents, and the Agent have
agreed, on the terms and conditions herein set forth, that the Loan Agreement
and Interest Rate Agreement be amended in certain respects;
NOW, THEREFORE, IT IS AGREED:
Section 1. Definitions. Terms used herein which are defined in the
Loan Agreement shall have the same meanings when used herein unless otherwise
provided herein.
Section 2. Amendments to the Loan Agreement. On and after the
Amendment Effective Date, the Loan Agreement shall be amended as follows:
1
<PAGE> 2
(a) The Loan Agreement is hereby amended to delete each reference to
Halliburton therein.
(b) The definition of "Guaranties" set forth in Section 1.1 of the
Loan Agreement is hereby amended to read in its entirety as follows:
Guaranties means that certain guaranty dated August 31, 1998
executed Smith in favor of the Agent, as it may from time to time be
amended, modified, restated or supplemented.
(c) Section 2.3(a) of the Loan Agreement is hereby amended to read in
its entirety as follows:
(a) The Borrower shall pay to the Agent for the account of each
Bank commitment fees for the period from the Effective Date to and
including the Termination Date at a rate per annum equal to the
Commitment Fee Percentage (as defined in the Smith International
Facility). Such commitment fees shall be computed (on the basis of the
actual number of days elapsed in a year composed of 360 days) on each
day and shall be based on the excess of (x) the aggregate amount of
each Bank's Loan Commitment for such day over (y) the aggregate unpaid
principal balance of such Bank's Note on such day. Accrued commitment
fees through each Quarterly Date prior to the Termination Date shall
be payable on the third (3rd) Business Day after such Quarterly Date.
Any accrued and unpaid commitment fees shall be due and payable on the
Termination Date.
(c) A new Section 7.10 is hereby added to the Loan Agreement, such new
Section to read in its entirety as follows:
7.10 Year 2000. Any reprogramming required to permit the proper
functioning, in and following the year 2000, of (i) the Borrower's and
any of its Material Subsidiaries' computer systems and (ii) material
equipment, in the aggregate, containing embedded microchips (including
systems and equipment supplied by others or with which the Borrower's
and any of its Material Subsidiaries' systems interface) and the
testing of all such systems and equipment will be completed by June
30, 1999. The cost to the Borrower and its Material Subsidiaries of
such reprogramming and testing and of reasonably foreseeable
consequences of year 2000 to the Borrower and its Material
Subsidiaries (including, without limitation, reprogramming errors and
failure of others' systems or equipment, excluding the Borrower's
third party suppliers and financial institutions) will not result in
an Event of Default or a Material Adverse Effect. Except for such of
the reprogramming referred to in the preceding sentence as may be
necessary, the computer and management systems of the Borrower and its
Material Subsidiaries are and, with ordinary course upgrading and
maintenance, will continue for the term of this Agreement to be,
sufficient to permit the Borrower and its Material Subsidiaries to
conduct their business without a Material Adverse Effect.
2
<PAGE> 3
Section 3. Amendments to the Interest Rate Agreement. On and after the
Amendment Effective Date, the Interest Rate Agreement shall be amended as
follows:
(a) A new definition of "Eurodollar Margin Percentage" is hereby added
to Section 1 of the Interest Rate Agreement, such new definition to read in its
entirety as follows:
Eurodollar Margin Percentage means, with respect to any Loan, the
"Eurodollar Margin Percentage" then in effect under the terms of the
Smith International Facility pursuant to the Interest Rate and Foreign
Currency Agreement (as defined in the Smith International Facility).
(b) The definition of "Eurodollar Rate" contained in Section 1 of the
Interest Rate Agreement is hereby amended to read in its entirety as follows:
Eurodollar Rate means for any day a rate per annum equal to the
lesser of (a) the sum of (1) the Eurodollar Interbank Rate in effect
on the first day of the Interest Period for the applicable Eurodollar
Rate Borrowing plus (2) the Eurodollar Margin Percentage from time to
time in effect and (b) the Ceiling Rate. Each Eurodollar Rate is
subject to adjustments for reserves, insurance assessments and other
matters as provided for in Section 2.3 hereof.
Section 4. Limitations. The amendments set forth herein are limited
precisely as written and shall not be deemed to (a) be a consent to, or waiver
or modification of, any other term or condition of the Loan Agreement or any of
the other Loan Documents, or (b) except as expressly set forth herein,
prejudice any right or rights which the Banks may now have or may have in the
future under or in connection with the Loan Agreement, the Loan Documents or
any of the other documents referred to therein. Except as expressly modified
hereby or by express written amendments thereof, the terms and provisions of
the Loan Agreement, the Notes, and any other Loan Documents or any other
documents or instruments executed in connection with any of the foregoing are
and shall remain in full force and effect. In the event of a conflict between
this Amendment and any of the foregoing documents, the terms of this Amendment
shall be controlling.
Section 5. Payment of Expenses. The Borrower agrees, whether or not
the transactions hereby contemplated shall be consummated, to reimburse and
save the Co-Agents, the Agent and the Bank(s) harmless from and against
liability for the payment of all reasonable substantiated out-of-pocket costs
and expenses arising in connection with the preparation, execution, delivery
and enforcement of, or the preservation of any rights under this Amendment,
including, without limitation, the reasonable fees and expenses of any local or
other counsel for the Agent, and all stamp taxes (including interest and
penalties, if any), recording taxes and fees, filing taxes and fees, and other
similar charges which may be payable in respect of, or in respect of any
modification of,
3
<PAGE> 4
the Loan Agreement and the other Loan Documents. The provisions of this Section
shall survive the termination of the Loan Agreement and the repayment of the
Loans.
Section 6. Governing Law. This Amendment and the rights and
obligations of the parties hereunder and under the Loan Agreement shall be
construed in accordance with and be governed by the laws of the State of Texas
and the United States of America.
Section 7. Descriptive Headings, etc. The descriptive headings of the
several Sections of this Amendment are inserted for convenience only and shall
not be deemed to affect the meaning or construction of any of the provisions
hereof.
Section 8. Entire Agreement. This Amendment and the documents referred
to herein represent the entire understanding of the parties hereto regarding
the subject matter hereof and supersede all prior and contemporaneous oral and
written agreements of the parties hereto with respect to the subject matter
hereof, including, without limitation, any commitment letters regarding the
transactions contemplated by this Amendment.
Section 9. Counterparts. This Amendment may be executed in any number
of counterparts and by different parties on separate counterparts and all of
such counterparts shall together constitute one and the same instrument.
Complete sets of counterparts shall be lodged with the Borrower and the Agent.
Section 10. Amended Definitions. As used in the Loan Agreement
(including all Exhibits thereto) and all other instruments and documents
executed in connection therewith, on and subsequent to the Amendment Effective
Date the term (i) "Agreement" shall mean the Loan Agreement as amended by this
Amendment, and (ii) references to any and all other Loan Documents shall mean
such documents as amended as contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective duly authorized offices as
of the date first above written.
M-I L.L.C.
By: /s/ C.I.S. RIVERS
-------------------------------------
Name: C.I.S. Rivers
-----------------------------------
Title: Vice President, C.F.O. and
Treasurer
----------------------------------
4
<PAGE> 5
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, as the Agent and as a Bank
By: /s/ MONA M. FOCH
-------------------------------------
Name: Mona M. Foch
-----------------------------------
Title: Managing Director
----------------------------------
5
<PAGE> 6
ABN AMRO BANK N.V., HOUSTON AGENCY,
as Co-Agent and as a Bank
By: ABN AMRO North America, Inc.,
as agent
By: /s/ STUART MURRAY
---------------------------------
Name: Stuart Murray
-------------------------------
Title: Vice President
------------------------------
By: /s/ JAMIE A. CONN
---------------------------------
Name: Jamie A. Conn
-------------------------------
Title: Vice President
------------------------------
6
<PAGE> 7
DEN NORSKE BANK AS,
as Co-Agent and as a Bank
By: /s/ MORTEN BJORNSEN
-------------------------------------
Name: Morten Bjornsen
-----------------------------------
Title: Senior Vice President
----------------------------------
By: /s/ BYRON L. COOLEY
-------------------------------------
Name: Byron L. Cooley
-----------------------------------
Title: Senior Vice President
----------------------------------
7
<PAGE> 8
BANK OF AMERICA
By: /s/ CLAIRE LIU
-------------------------------------
Name: Claire Liu
-----------------------------------
Title: Managing Director
----------------------------------
8
<PAGE> 9
WELLS FARGO BANK, N.A.
By: /s/ FRANK W. SCHAGEMAN
-------------------------------------
Name: Frank W. Schageman
-----------------------------------
Title: Vice President
----------------------------------
9
<PAGE> 10
UNION BANK OF CALIFORNIA N.A.
By: /s/ ANDREW G. EWING, JR.
-------------------------------------
Name: Andrew G. Ewing, Jr.
-----------------------------------
Title: Vice President
----------------------------------
10
<PAGE> 11
BANK OF NEW YORK
By: /s/ HELEN L. SARRO
-------------------------------------
Name: Helen L. Sarro
-----------------------------------
Title: Assistant Vice President
----------------------------------
11
<PAGE> 12
FIRST UNION NATIONAL BANK (successor
to Corestates Bank, N.A.)
By: /s/ ROBERT R. WETTEROFF
-------------------------------------
Name: Robert R. Wetteroff
-----------------------------------
Title: Senior Vice President
----------------------------------
12
<PAGE> 1
EXHIBIT 10.2
AMENDMENT TO LOAN AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT ("Amendment") dated as of August 31,
1998 (the "Amendment Effective Date") is made and entered into by and among
SMITH INTERNATIONAL, INC. (the "Borrower"), a Delaware corporation, the banking
institutions (each, together with its successors and assigns, a "Bank" and
collectively, the "Banks") from time to time a party to the Loan Agreement (as
hereinafter defined), as amended by this Amendment, ABN AMRO BANK N.V., HOUSTON
AGENCY and DEN NORSKE BANK AS, as Co-Agents (in such capacity, together with
their successors in such capacity, collectively called the "Co-Agents") and
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce
Bank National Association), a national banking association, as agent for the
Banks (in such capacity, together with its successors in such capacity, the
"Agent").
RECITALS:
WHEREAS, the Borrower, the Banks, the Co-Agents, and the Agent are
parties to a Loan Agreement dated as of April 4, 1996, as amended by
instruments dated April 8, 1997 and December 23, 1997 (the "Loan Agreement");
and
WHEREAS, the Borrower, the Banks, the Co-Agents, and the Agent have
agreed, on the terms and conditions herein set forth, that the Loan Agreement
be amended in certain respects;
NOW, THEREFORE, IT IS AGREED:
Section 1. Definitions. Terms used herein which are defined in the
Loan Agreement shall have the same meanings when used herein unless otherwise
provided herein.
Section 2. Amendments to the Loan Agreement. On and after the
Amendment Effective Date, the Loan Agreement shall be amended as follows:
(a) The phrase "in each case, without duplication" is hereby
added to the end of the definition of "Interest Coverage Ratio" set forth in
Section 1.1 of the Loan Agreement.
(b) Section 7.3(a) of the Loan Agreement is hereby amended to
read in its entirety as follows:
(a) Debt to Total Capitalization Ratio - a Debt to Total
Capitalization Ratio of not greater than (i) 55% for the period from
the date hereof through December 31, 1998, (ii) 52.5% for the period
from January 1, 1999 through March 31, 1999, (iii) 50% for the period
from April 1, 1999 through June 30, 1999, (iv) 47.5% for the period
from July 1, 1999 through September 30, 1999 and (iv) 45% at all times
thereafter.
(c) A new Section 7.12 is hereby added to the Loan Agreement,
such new Section to read in its entirety as follows:
<PAGE> 2
7.12 Year 2000. Any reprogramming required to permit the
proper functioning, in and following the year 2000, of (i) the
Borrower's and any of its Material Subsidiaries' computer systems and
(ii) material equipment, in the aggregate, containing embedded
microchips (including systems and equipment supplied by others or with
which the Borrower's and any of its Material Subsidiaries' systems
interface) and the testing of all such systems and equipment will be
completed by June 30, 1999. The cost to the Borrower and its Material
Subsidiaries of such reprogramming and testing and of reasonably
foreseeable consequences of year 2000 to the Borrower and its Material
Subsidiaries (including, without limitation, reprogramming errors and
failure of others' systems or equipment, excluding the Borrower's
third party suppliers and financial institutions) will not result in
an Event of Default or a Material Adverse Effect. Except for such of
the reprogramming referred to in the preceding sentence as may be
necessary, the computer and management systems of the Borrower and its
Material Subsidiaries are and, with ordinary course upgrading and
maintenance, will continue for the term of this Agreement to be,
sufficient to permit the Borrower and its Material Subsidiaries to
conduct their business without a Material Adverse Effect.
Section 3. Limitations. The amendments set forth herein are limited
precisely as written and shall not be deemed to (a) be a consent to, or waiver
or modification of, any other term or condition of the Loan Agreement or any of
the other Loan Documents, or (b) except as expressly set forth herein,
prejudice any right or rights which the Banks may now have or may have in the
future under or in connection with the Loan Agreement, the Loan Documents or
any of the other documents referred to therein. Except as expressly modified
hereby or by express written amendments thereof, the terms and provisions of
the Loan Agreement, the Notes, and any other Loan Documents or any other
documents or instruments executed in connection with any of the foregoing are
and shall remain in full force and effect. In the event of a conflict between
this Amendment and any of the foregoing documents, the terms of this Amendment
shall be controlling.
Section 4. Payment of Expenses. The Borrower agrees, whether or not
the transactions hereby contemplated shall be consummated, to reimburse and
save the Co-Agents, the Agent and the Bank(s) harmless from and against
liability for the payment of all reasonable substantiated out-of-pocket costs
and expenses arising in connection with the preparation, execution, delivery
and enforcement of, or the preservation of any rights under this Amendment,
including, without limitation, the reasonable fees and expenses of any local or
other counsel for the Agent, and all stamp taxes (including interest and
penalties, if any), recording taxes and fees, filing taxes and fees, and other
similar charges which may be payable in respect of, or in respect of any
modification of, the Loan Agreement and the other Loan Documents. The
provisions of this Section shall survive the termination of the Loan Agreement
and the repayment of the Loans.
Section 5. Governing Law. This Amendment and the rights and
obligations of the parties hereunder and under the Loan Agreement shall be
construed in accordance with and be governed by the laws of the State of Texas
and the United States of America.
Section 6. Descriptive Headings, etc. The descriptive headings of the
several Sections of this Amendment are inserted for convenience only and shall
not be deemed to affect the meaning or construction of any of the provisions
hereof.
2
<PAGE> 3
Section 7. Entire Agreement. This Amendment and the documents referred
to herein represent the entire understanding of the parties hereto regarding
the subject matter hereof and supersede all prior and contemporaneous oral and
written agreements of the parties hereto with respect to the subject matter
hereof, including, without limitation, any commitment letters regarding the
transactions contemplated by this Amendment.
Section 8. Counterparts. This Amendment may be executed in any number
of counterparts and by different parties on separate counterparts and all of
such counterparts shall together constitute one and the same instrument.
Complete sets of counterparts shall be lodged with the Borrower and the Agent.
Section 9. Amended Definitions. As used in the Loan Agreement
(including all Exhibits thereto) and all other instruments and documents
executed in connection therewith, on and subsequent to the Amendment Effective
Date the term (i) "Agreement" shall mean the Loan Agreement as amended by this
Amendment, and (ii) references to any and all other Loan Documents shall mean
such documents as amended as contemplated hereby.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SECTION 26.02
THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE
PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF
TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective duly authorized offices as
of the date first above written.
SMITH INTERNATIONAL, INC.
By: /s/ J. KENNEDY
--------------------------------------
Name: J. Kennedy
------------------------------------
Title: Chief Financial Officer
-----------------------------------
3
<PAGE> 4
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, as the Agent and as a Bank
By: /s/ MONA M. FOCH
--------------------------------------
Name: Mona M. Foch
------------------------------------
Title: Managing Director
-----------------------------------
4
<PAGE> 5
ABN AMRO BANK N.V., HOUSTON AGENCY,
as Co-Agent and as a Bank
By: ABN AMRO North America, Inc.,
as agent
By: /s/ STUART MURRAY
---------------------------------
Name: Stuart Murray
-------------------------------
Title: Vice President
------------------------------
By: /s/ JAMIE A. CONN
---------------------------------
Name: Jamie A. Conn
-------------------------------
Title: Vice President
------------------------------
5
<PAGE> 6
DEN NORSKE BANK AS,
as Co-Agent and as a Bank
By: /s/ MORTEN BJORNSEN
--------------------------------------
Name: Morten Bjornsen
------------------------------------
Title: Senior Vice President
-----------------------------------
By: /s/ BYRON L. COOLEY
--------------------------------------
Name: Byron L. Cooley
------------------------------------
Title: Senior Vice President
-----------------------------------
6
<PAGE> 7
BANK OF AMERICA
By: /s/ CLAIRE LIU
--------------------------------------
Name: Claire Liu
------------------------------------
Title: Managing Director
-----------------------------------
7
<PAGE> 8
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By: /s/ FRANK W. SCHAGEMAN
--------------------------------------
Name: Frank W. Schageman
------------------------------------
Title: Vice President
-----------------------------------
8
<PAGE> 9
UNION BANK OF CALIFORNIA N.A.
By: /s/ ANDREW G. EWING, JR.
-------------------------------------
Name: Andrew G. Ewing, Jr.
------------------------------------
Title: Vice President
-----------------------------------
9
<PAGE> 10
BANK OF NEW YORK
By: /s/ HELEN L. SARRO
-------------------------------------
Name: Helen L. Sarro
------------------------------------
Title: Assistant Vice President
-----------------------------------
10
<PAGE> 11
FIRST UNION NATIONAL BANK (successor
to Corestates Bank, N.A.)
By: /s/ ROBERT R. WETTEROFF
-------------------------------------
Name: Robert R. Wetteroff
------------------------------------
Title: Senior Vice President
-----------------------------------
11
<PAGE> 1
EXHIBIT 10.3
AMENDMENT TO LOAN AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT ("Amendment") dated as of December
31, 1998 (the "Amendment Effective Date") is made and entered into by and among
SMITH INTERNATIONAL, INC. (the "Borrower"), a Delaware corporation, the banking
institutions (each, together with its successors and assigns, a "Bank" and
collectively, the "Banks") from time to time a party to the Loan Agreement (as
hereinafter defined), as amended by this Amendment, ABN AMRO BANK N.V., HOUSTON
AGENCY and DEN NORSKE BANK AS, as Co-Agents (in such capacity, together with
their successors in such capacity, collectively called the "Co-Agents") and
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce
Bank National Association), a national banking association, as agent for the
Banks (in such capacity, together with its successors in such capacity, the
"Agent").
RECITALS:
WHEREAS, the Borrower, the Banks, the Co-Agents, and the Agent are
parties to a Loan Agreement dated as of April 4, 1996, as heretofore amended
(the "Loan Agreement"); and
WHEREAS, the Borrower, the Banks, the Co-Agents, and the Agent have
agreed, on the terms and conditions herein set forth, that the Loan Agreement
be amended in certain respects;
NOW, THEREFORE, IT IS AGREED:
Section 1. Definitions. Terms used herein which are defined in the
Loan Agreement shall have the same meanings when used herein unless otherwise
provided herein.
Section 2. Amendments to the Loan Agreement. On and after the
Amendment Effective Date, the Loan Agreement shall be amended as follows:
(a) Exhibit H to the Loan Agreement is hereby amended to be identical
to Exhibit A attached hereto.
(b) The definition of "EBITDA" set forth in Section 1.1 of the Loan
Agreement is hereby amended to read in its entirety as follows:
EBITDA shall mean, without duplication, for any period the
sum of (a) Net Income after taxes and (b) the sum of (i) Interest
Expense for such period, (ii) income taxes deducted in determining
such Net Income, (iii) amortization of goodwill and other non-cash
expenses and intangibles (including, without limitation, deferred
financing costs and debt discount) deducted in determining such Net
Income, (iv) depreciation, depletion and obsolescence of
1
<PAGE> 2
Property, in each case, determined in accordance with GAAP and (v) the
following items, to the extent they were charged during the applicable
period for which EBITDA is calculated hereunder:
<TABLE>
<S> <C>
Inventory Writedown $ 14,900,000
Asset Impairment $ 9,800,000
Fixed and Other Asset
Writedown $ 9,200,000
</TABLE>
(c) The definition of "Investment" set forth in Section 1.1 of the
Loan Agreement is hereby amended to read in its entirety as follows:
Investment shall mean the purchase or other acquisition of any
securities or Indebtedness of, or the making of any loan, advance,
transfer of Property or capital contribution to, or the incurring of
any liability, contingently or otherwise, in respect of the
Indebtedness of, any Person. "Investments" shall not include (i)
deposits with financial institutions available for withdrawal on
demand or (ii) the creation of Accounts in the ordinary course of
business or (iii) investments in the equity interests of Subsidiaries
(other than CE Franklin, a Canadian public company).
(d) Section 7.3(a) of the Loan Agreement is hereby amended to read in
its entirety as follows:
(a) Debt to Total Capitalization Ratio - a Debt to Total
Capitalization Ratio of not greater than (i) 55% as of December 31,
1998, (ii) 52.5% for the period from January 1, 1999 through March 31,
1999, (iii) 50% for the period from April 1, 1999 through June 30,
1999, (iv) 47.5% for the period from July 1, 1999 through September
30, 1999 and (iv) 45% at all times thereafter; provided, however that
if the Borrower shall cease to own all of the equity interests in and
to M-I, then the Debt to Total Capitalization Ratio required hereby
shall automatically be revised to be 40% at all times thereafter.
(e) Section 8.1 of the Loan Agreement is hereby amended to read in its
entirety as follows:
8.1 Indebtedness. Create, incur, suffer or permit to exist, or
assume or guarantee, directly or indirectly, or become or remain
liable with respect to any Indebtedness which constitutes Borrowed
Money Indebtedness, whether direct, indirect, absolute, contingent or
otherwise, except (subject to Section 7.3 hereof) the following:
(a) Borrowed Money Indebtedness of the Borrower and its
Subsidiaries outstanding on December 31, 1998 and described on
Exhibit H hereto or disclosed to the Agent in the financial
statements delivered on or prior to such date pursuant to Section
7.2 hereof;
(b) Borrowed Money Indebtedness evidenced by the Notes
(including contingent liabilities under the Guaranty);
2
<PAGE> 3
(c) Borrowed Money Indebtedness evidenced by the M-I Drilling
Facility (including contingent liabilities of the Borrower with
respect thereto);
(d) Borrowed Money Indebtedness of any Subsidiary owing to the
Borrower or another wholly-owned Subsidiary and Borrowed Money
Indebtedness of Borrower owing to any Subsidiary, provided such
Borrowed Money Indebtedness is expressly subordinated, in a manner
reasonably acceptable to the Agent, to the payment in full of all
Obligations of Borrower under the Loan Documents;
(e) contingent liabilities incurred by M-I by with respect to
performance letters of credit and bid and performance bonds
required by M-I in support of contracts entered into by M-I in the
ordinary course of its business (or guaranties of such contingent
liabilities by the Borrower);
(f) Borrowed Money Indebtedness of Wilson Industries, Inc.
(which may be assumed by the Borrower in connection with the
release of the security interests securing such Borrowed Money
Indebtedness, the Banks acknowledging that for a period of one (1)
Business Day after such assumption such Borrowed Money
Indebtedness shall continue to be secured) an aggregate amount not
to exceed $50,000,000 in the aggregate;
(g) other Borrowed Money Indebtedness of the Borrower or any
of its Subsidiaries in an aggregate principal amount at any one
time outstanding up to but not exceeding, at any one time
outstanding, fifteen percent (15%) of Tangible Net Worth of the
Borrower, and
(h) obligations under any interest rate swap agreement,
interest rate cap agreement or similar arrangement entered into
between the Borrower and any Bank for the purpose of reducing
Borrower's exposure to interest rate risk and not for speculative
purposes.
(f) Section 8.7 of the Loan Agreement is hereby amended to read in its
entirety as follows:
8.7. Investments. Make any Investment, or make any commitment to
make any such Investment, except Permitted Investments.
Notwithstanding the foregoing, the Borrower and its Subsidiaries may
make Investments, in addition to Permitted Investments, on or after
March 31, 1999 which do not exceed, in the aggregate, $40,000,000, in
the form of loans to CE Wilson Company, a to-be-formed Subsidiary of
the Borrower (and CE Wilson Company may, in turn, loan up to
$8,000,000, in the aggregate,to the owner of the minority interests in
and to CE Wilson Company). To the extent loans to CE Wilson Company
are funded by Loans hereunder, the Revolving Loan Commitments shall be
reduced (pro rata among the Banks) on a dollar-for-dollar basis.
(g) Section 8.9 of the Loan Agreement is hereby amended to read in its
entirety as follows:
3
<PAGE> 4
8.9. Subsidiaries. Form, create or acquire a Subsidiary without
giving written notice to the Agent promptly thereafter. The Borrower
has heretofore notified the Banks of its intention to form a new
Subsidiary under the laws of Delaware to be named CE Wilson (of which
the Borrower will initially own 80% of the equity interests), and the
Borrower has also heretofore notified the Banks of the intention of
said CE Wilson Company to acquire more than 50% of the equity
interests in and to CE Franklin, a Canadian public company. The Banks
agree that CE Franklin shall not be considered to be a "Subsidiary" of
the Borrower for purposes of Articles 7 or 8 of this Agreement so long
as the Borrower and its Subsidiaries do not make any further
investments in CE Franklin without the prior written consent of the
Majority Banks.
Section 3. Consent to Transfer of Equity Interest in M-I. The Banks
hereby consent to the transfer to Schlumberger, Inc. of a forty percent (40%)
equity interest in and to M-I so long as the lenders under the M-I Drilling
Facility shall have consented thereto.
Section 4. Limitations. The amendments set forth herein are limited
precisely as written and shall not be deemed to (a) be a consent to, or waiver
or modification of, any other term or condition of the Loan Agreement or any of
the other Loan Documents, or (b) except as expressly set forth herein,
prejudice any right or rights which the Banks may now have or may have in the
future under or in connection with the Loan Agreement, the Loan Documents or
any of the other documents referred to therein. Except as expressly modified
hereby or by express written amendments thereof, the terms and provisions of
the Loan Agreement, the Notes, and any other Loan Documents or any other
documents or instruments executed in connection with any of the foregoing are
and shall remain in full force and effect. In the event of a conflict between
this Amendment and any of the foregoing documents, the terms of this Amendment
shall be controlling.
Section 5. Payment of Expenses. The Borrower agrees, whether or not
the transactions hereby contemplated shall be consummated, to reimburse and
save the Co-Agents, the Agent and the Bank(s) harmless from and against
liability for the payment of all reasonable substantiated out-of-pocket costs
and expenses arising in connection with the preparation, execution, delivery
and enforcement of, or the preservation of any rights under this Amendment,
including, without limitation, the reasonable fees and expenses of any local or
other counsel for the Agent, and all stamp taxes (including interest and
penalties, if any), recording taxes and fees, filing taxes and fees, and other
similar charges which may be payable in respect of, or in respect of any
modification of, the Loan Agreement and the other Loan Documents. The
provisions of this Section shall survive the termination of the Loan Agreement
and the repayment of the Loans.
Section 6. Governing Law. This Amendment and the rights and
obligations of the parties hereunder and under the Loan Agreement shall be
construed in accordance with and be governed by the laws of the State of Texas
and the United States of America.
Section 7. Descriptive Headings, etc. The descriptive headings of the
several Sections of this Amendment are inserted for convenience only and shall
not be deemed to affect the meaning or construction of any of the provisions
hereof.
4
<PAGE> 5
Section 8. Entire Agreement. This Amendment and the documents referred
to herein represent the entire understanding of the parties hereto regarding
the subject matter hereof and supersede all prior and contemporaneous oral and
written agreements of the parties hereto with respect to the subject matter
hereof, including, without limitation, any commitment letters regarding the
transactions contemplated by this Amendment.
Section 9. Counterparts. This Amendment may be executed in any number
of counterparts and by different parties on separate counterparts and all of
such counterparts shall together constitute one and the same instrument.
Complete sets of counterparts shall be lodged with the Borrower and the Agent.
Section 10. Amended Definitions. As used in the Loan Agreement
(including all Exhibits thereto) and all other instruments and documents
executed in connection therewith, on and subsequent to the Amendment Effective
Date the term (i) "Agreement" shall mean the Loan Agreement as amended by this
Amendment, and (ii) references to any and all other Loan Documents shall mean
such documents as amended as contemplated hereby.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE []26.02
THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE
PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF
TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective duly authorized offices as
of the date first above written.
Exhibit A -- Revised Exhibit H
SMITH INTERNATIONAL, INC.
By: /s/ JOHN KENNEDY
-------------------------------------
Name: John Kennedy
-----------------------------------
Title: C.F.O.
----------------------------------
5
<PAGE> 6
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, as the Agent and as a Bank
By: /s/ MONA M. FOCH
-------------------------------------
Name: Mona M. Foch
-----------------------------------
Title: Managing Director
----------------------------------
6
<PAGE> 7
ABN AMRO BANK N.V., HOUSTON AGENCY,
as Co-Agent and as a Bank
By: ABN AMRO North America, Inc.,
as agent
By: /s/ W. BRYAN CHAPMAN
-------------------------------------
Name: W. Bryan Chapman
-----------------------------------
Title: Group Vice President
----------------------------------
By: /s/ ALLEN V. POOLE
-------------------------------------
Name: Allen V. Poole
-----------------------------------
Title: Senior Vice President
----------------------------------
7
<PAGE> 8
DEN NORSKE BANK AS,
as Co-Agent and as a Bank
By: /s/ MORTEN BJORNSEN
-------------------------------------
Name: Morten Bjornsen
-----------------------------------
Title: Senior Vice President
----------------------------------
By: /s/ J. MORTEN KREUTZ
-------------------------------------
Name: J. Morten Kreutz
-----------------------------------
Title:
----------------------------------
8
<PAGE> 9
BANK OF AMERICA, NT & SA
By: /s/ PAUL L. COLON
-------------------------------------
Name: Paul L. Colon
-----------------------------------
Title: Vice President
----------------------------------
9
<PAGE> 10
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By: /s/ FRANK SCHAGEMAN
-------------------------------------
Name: Frank Schageman
-----------------------------------
Title: Vice President & Senior
Relationship Manager
----------------------------------
10
<PAGE> 11
UNION BANK OF CALIFORNIA N.A.
By: /s/ J. SCOTT JESSUP
-------------------------------------
Name: J. Scott Jessup
-----------------------------------
Title: Vice President
----------------------------------
11
<PAGE> 12
BANK OF NEW YORK
By: /s/ HELEN L. SARRO
-------------------------------------
Name: Helen L. Sarro
-----------------------------------
Title: Vice President
----------------------------------
12
<PAGE> 13
FIRST UNION NATIONAL BANK (successor
to Corestates Bank, N.A.)
By: /s/ ROBERT R. WETTEROFF
-------------------------------------
Name: Robert R. Wetteroff
-----------------------------------
Title: Senior Vice President
----------------------------------
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 55,024 28,739
<SECURITIES> 0 0
<RECEIVABLES> 378,509 535,092
<ALLOWANCES> 10,873 6,101
<INVENTORY> 428,636 505,557
<CURRENT-ASSETS> 934,327 1,123,970
<PP&E> 649,526 588,965
<DEPRECIATION> 287,976 258,475
<TOTAL-ASSETS> 1,682,065 1,757,538
<CURRENT-LIABILITIES> 634,934 438,253
<BONDS> 343,510 444,340
0 0
0 0
<COMMON> 48,857 48,237
<OTHER-SE> 592,655 556,432
<TOTAL-LIABILITY-AND-EQUITY> 1,682,065 1,757,538
<SALES> 397,022 578,933
<TOTAL-REVENUES> 397,022 578,933
<CGS> 285,683 397,087
<TOTAL-COSTS> 285,683 397,087
<OTHER-EXPENSES> 88,229 108,754
<LOSS-PROVISION> 444 494
<INTEREST-EXPENSE> 12,075 9,113
<INCOME-PRETAX> 11,035 63,979
<INCOME-TAX> 4,950 19,314
<INCOME-CONTINUING> 6,606 33,577
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,606 33,577
<EPS-PRIMARY> 0.14 0.71
<EPS-DILUTED> 0.14 0.70
</TABLE>
