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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
September 27, 1999
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)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 14, 1999, Smith International, Inc. (the "Company" or "Smith")
and Schlumberger Limited ("Schlumberger") formed a drilling fluids venture
pursuant to an Amended and Restated Organization Agreement dated July 14,
1999 (the "Agreement"). The Agreement is by and among the Company, Smith
International Acquisition Corp., M-I Purchase Corporation, M-I L.L.C.
("M-I"), Smith International Canada Ltd., M-I Drilling Fluids Canada, Inc.,
Schlumberger, Schlumberger Technology Corporation, and Schlumberger M-I,
Inc. The Company contributed its M-I operations whereas Schlumberger
contributed its non-U.S. Dowell drilling fluids business, including a cash
equalization payment of approximately $40 million, and paid cash
consideration of $280 million to the Company. Under the terms of the
Agreement, the Company and Schlumberger own 60 percent and 40 percent,
respectively, of the combined operations. This current report on Form 8-K/A
contains pro forma financial information giving effect to the transaction.
ITEM 5. OTHER EVENTS
On July 27, 1999, the United States Department of Justice filed
petitions with the United States District Court in Washington, D.C.
alleging civil and criminal contempt in connection with the formation of
the Company's drilling fluids joint venture. The petitions allege that the
Company and Schlumberger violated a Consent Decree and Final Order issued
in 1994 in United States v. Baroid Corporation. The Company agreed to be
bound by the Consent Decree in connection with the purchase of the majority
ownership interest in M-I which was acquired in April 1994. The Justice
Department's petitions request that the Court rescind the transaction, fine
the Company $100,000 per day for violations under the Consent Decree and
levy an appropriate fine against the Company under the criminal pleading.
The Company has been advised that it has a strongly defensible position as
the transaction did not involve any of Schlumberger's U.S. drilling fluids
assets or businesses, had no significant impact on U.S. business and,
therefore, was not subject to the terms of the Consent Decree. The Company
does not anticipate that the outcome of a hearing on this matter, which is
currently scheduled for mid-November 1999, will have a material adverse
impact on the Company's consolidated financial position or results of
operations.
A copy of the press release announcing these events are filed as
Exhibits 99.1 and 99.2, respectively, and are hereby incorporated herein by
reference.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
Not applicable.
(b) Pro Forma financial information.
In accordance with Item 7(b)(2) of the Form 8-K requirements, the
following Pro Forma information of the Company is attached as a part
of this report:
Unaudited Pro Forma Condensed Statement of Operations for the Year
Ended December 31, 1998.
Unaudited Pro Forma Condensed Statement of Operations for the Six
Months Ended June 30, 1999.
Unaudited Pro Forma Condensed Balance Sheet as of June 30, 1999.
Notes to Pro Forma Condensed Financial Statements.
(c) Exhibits.
2.1 Amended and Restated Organization Agreement dated July 14, 1999
by and among the Company, Smith International Acquisition Corp.,
M-I Purchase Corporation, M-I L.L.C., Smith International Canada
Ltd., M-I Drilling Fluids Canada, Inc., Schlumberger,
Schlumberger Technology Corporation, and Schlumberger MI, Inc. *
99.1 Press Release issued by Registrant dated July 14, 1999. *
99.2 Press Release issued by Registrant dated July 28, 1999. *
* Previously filed.
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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.
Dated: September 27, 1999 By: /s/ NEAL S. SUTTON
---------------------------------------
Neal S. Sutton,
Senior Vice President - Administration,
General Counsel and Secretary
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SMITH INTERNATIONAL, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The Pro Forma Condensed Balance Sheet as of June 30, 1999 and Pro Forma
Condensed Statements of Operations for the year ended December 31, 1998 and for
the six months ended June 30, 1999, give effect to the formation of the drilling
fluids venture combining M-I, a wholly-owned subsidiary of the Company, with
certain drilling fluid operations of Schlumberger outside the United States. On
July 25, 1999, Schlumberger contributed its Dowell drilling fluid operations
outside the United States, including a cash equalization payment of
approximately $40 million, and paid cash consideration of $280 million to the
Company in exchange for a 40 percent interest in the combined operations
(collectively, the "M-I Transaction").
The Pro Forma Condensed Statements of Operations are presented as if the
M-I Transaction had occurred on January 1, 1998, whereas the Pro Forma Condensed
Balance Sheet assumes the M-I Transaction occurred on June 30, 1999. The pro
forma condensed financial information is based on the historical financial data
of the Company and the historical financial data of Schlumberger's Dowell
drilling fluids business outside the United States and gives effect to
Schlumberger's contribution under the purchase method of accounting and the
assumptions included in the accompanying notes to the Pro Forma Condensed
Financial Statements.
The pro forma information set forth below is not intended to be indicative
of the results that would have occurred had such transaction been consummated as
of the aforementioned dates, or that may be achieved in the future. In
particular, the pro forma financial statements do not give effect to any cost
reductions, including prior allocations for corporate services and
infrastructure costs, or other potential savings that may be realized by the
Company as a result of the M-I Transaction. Additionally, management has not
fully evaluated all of the consequences of the transaction including assessing
the fair value of assets and liabilities and the total amount of costs that may
be necessary to consolidate and combine the operations. Upon completion of these
evaluations, any additional adjustments will be recorded in accordance with
purchase accounting rules and principles.
This pro forma information should be read in conjunction with the
following:
o Management's Discussion and Analysis of Financial Condition and
Results of Operations and its financial statements and related notes
thereto contained in its Annual Report on Form 10-K for the year ended
December 31, 1998.
o Quarterly Report on Form 10-Q for the period ended March 31, 1999.
o Quarterly Report on Form 10-Q for the period ended June 30, 1999.
o Quarterly Report on Form 8-K dated July 29, 1999.
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SMITH INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Non-U.S.
Smith Dowell Pro Forma
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES ............................................. $2,118,715 $ 257,375 $ -- $2,376,090
COSTS AND EXPENSES:
Cost of Revenues .................................. 1,489,656 189,676 -- 1,679,332
Selling Expenses .................................. 339,097 46,849 -- 385,946
General and Administrative Expenses ............... 82,153 6,438 1,035(a) 89,626
Merger, Restructuring and Other
Non-Recurring Costs ............................. 82,500 -- -- 82,500
---------- ---------- ---------- ----------
Total costs and expenses ........................ 1,993,406 242,963 1,035 2,237,404
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST AND TAXES ..................... 125,309 14,412 (1,035) 138,686
INTEREST EXPENSE, NET ................................ 43,371 -- (21,758)(b) 21,613
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS .... 81,938 14,412 20,723 117,073
INCOME TAX PROVISION ................................. 26,279 3,392 10,973(c) 40,644
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTERESTS ..................... 55,659 11,020 9,750 76,429
MINORITY INTERESTS ................................... 21,590 -- 3,097(d) 24,687
---------- ---------- ---------- ----------
NET INCOME ........................................... $ 34,069 $ 11,020 $ 6,653 $ 51,742
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic ............................................. $ 0.71 $ 1.08
Diluted ........................................... $ 0.70 $ 1.07
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ............................................. 47,909 47,909
Diluted ........................................... 48,341 48,341
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
condensed financial statement.
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SMITH INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Non-U.S.
Smith Dowell Pro Forma
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES .............................................. $ 786,717 $ 113,241 $ -- $ 899,958
COSTS AND EXPENSES:
Cost of Revenues ................................... 576,693 83,097 -- 659,790
Selling Expenses ................................... 140,698 20,833 -- 161,531
General and Administrative Expenses ................ 42,422 2,171 518(a) 45,111
Gain on Sale of Assets ............................. (10,520) -- -- (10,520)
Merger, Restructuring and Other
Non-Recurring Costs .............................. 7,899 -- -- 7,899
---------- ---------- ---------- ----------
Total costs and expenses ......................... 757,192 106,101 518 863,811
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST AND TAXES ...................... 29,525 7,140 (518) 36,147
INTEREST EXPENSE, NET ................................. 23,372 -- (10,879)(b) 12,493
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS ..... 6,153 7,140 10,361 23,655
INCOME TAX PROVISION .................................. 3,495 2,427 3,271(c) 9,193
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTERESTS ...................... 2,658 4,713 7,090 14,461
MINORITY INTERESTS .................................... (927) -- 7,227(d) 6,300
---------- ---------- ---------- ----------
NET INCOME ............................................ $ 3,585 $ 4,713 $ (137) $ 8,161
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic .............................................. $ .07 $ .17
Diluted ............................................ $ .07 $ .17
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .............................................. 48,291 48,291
Diluted ............................................ 48,852 48,852
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
condensed financial statement.
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SMITH INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Smith Pro Forma
Historical Adjustments Pro Forma
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $24,804 $ 321,000(a) $ 25,804
(320,000)(b)
Receivables, net .............................................. 389,419 -- 389,419
Inventories, net .............................................. 456,771 40,535(a) 497,306
Deferred tax assets, net ...................................... 56,452 8,635(a) 65,087
Prepaid expenses and other .................................... 29,217 746(a) 29,963
------------ ------------ ------------
Total current assets ........................................ 956,663 50,916 1,007,579
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET .............................. 377,656 13,403(a) 391,059
GOODWILL, NET ................................................... 304,934 41,404(a) 346,338
OTHER ASSETS .................................................... 108,012 -- 108,012
------------ ------------ ------------
TOTAL ASSETS .................................................... $ 1,747,265 $ 105,723 $ 1,852,988
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt ... $ 253,922 $ (207,922)(b) $ 46,000
Accounts payable and accrued liabilities ..................... 303,852 50,975(a) 354,827
Income taxes payable .......................................... 19,228 40,000(a) 59,228
------------ ------------ ------------
Total current liabilities ................................. 577,002 (116,947) 460,055
------------ ------------ ------------
LONG-TERM DEBT .................................................. 429,532 (112,078)(b) 317,454
DEFERRED TAX LIABILITIES ........................................ 32,038 -- 32,038
OTHER LONG-TERM LIABILITIES ..................................... 23,446 -- 23,446
MINORITY INTERESTS .............................................. 23,602 290,900(a) 314,502
SHAREHOLDERS' EQUITY:
Common Stock .................................................. 49,442 -- 49,442
Additional paid-in capital .................................... 348,164 -- 348,164
Retained earnings ............................................. 284,370 43,848(a) 328,218
Cumulative translation adjustments ............................ (12,629) -- (12,629)
Less - treasury securities, at cost ........................... (7,702) -- (7,702)
------------ ------------ ------------
Total shareholders' equity ................................ 661,645 43,848 705,493
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 1,747,265 $ 105,723 $ 1,852,988
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this unaudited pro
forma condensed financial statement.
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NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
GENERAL
The following notes set forth the assumptions used in preparing the pro
forma financial statements. The pro forma adjustments are based on estimates
made by management using information currently available.
In accordance with preparation requirements under Regulation S-X, the Pro
Forma Condensed Statements of Operations do not include the impact of
non-recurring charges or credits and related tax effects that result directly
from the transaction, which will be ultimately recognized by the Company. The
non-recurring gain associated with the transaction, which is net of estimated
transaction-related costs and taxes, is expected to approximate $45 million.
PRO FORMA ADJUSTMENTS
NOTE (1) PRO FORMA ADJUSTMENTS TO THE CONDENSED STATEMENTS OF OPERATIONS
(a) To record amortization of goodwill associated with the transaction over 40
years.
(b) To eliminate interest expense as if cash received had been used to retire
outstanding debt.
(c) To record income tax provision at the U.S. statutory rate.
(d) To record minority interest expense associated with Schlumberger's
ownership interest in the combined operations.
NOTE (2) PRO FORMA ADJUSTMENTS TO THE CONDENSED BALANCE SHEET
(a) To record the M-I Transaction, transaction costs and the estimated gain
(net of transaction-related costs and income taxes). The contribution by
Schlumberger is reflected using the purchase method of accounting.
(b) To record application of cash received to retire outstanding debt.
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