<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, 2000
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 9,
2000 was 50,396,961.
<PAGE> 2
INDEX
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Operations -
For the Three Months Ended March 31, 2000 and 1999.................................. 1
Consolidated Balance Sheets -
As of March 31, 2000 and December 31, 1999.......................................... 2
Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2000 and 1999.................................. 3
Notes to Consolidated Financial Statements.............................................. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................................... 8
ITEM 3. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES........................................ 13
PART II: OTHER INFORMATION
ITEMS 1 - 6.......................................................................................... 14
SIGNATURES................................................................................................ 15
</TABLE>
<PAGE> 3
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES............................................. $625,432 $397,022
COSTS AND EXPENSES:
Costs of Revenues.................................. 463,949 285,683
Selling Expenses................................... 95,304 69,907
General and Administrative Expenses................ 30,254 20,943
Non-Recurring Items................................ -- (2,621)
-------- --------
Total Costs and Expenses...................... 589,507 373,912
-------- --------
INCOME BEFORE INTEREST AND TAXES.................... 35,925 23,110
INTEREST EXPENSE, NET................................ 8,765 12,075
-------- --------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS................................. 27,160 11,035
INCOME TAX PROVISION................................. 9,675 4,950
-------- --------
INCOME BEFORE MINORITY INTERESTS.................... 17,485 6,085
MINORITY INTERESTS................................... 6,162 (521)
-------- --------
NET INCOME .......................................... $ 11,323 $ 6,606
======== =======
EARNINGS PER SHARE:
Basic.............................................. $ 0.23 $ 0.14
======== =======
Diluted............................................ $ 0.23 $ 0.14
======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.............................................. 49,169 48,159
Diluted............................................ 49,930 48,607
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 4
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 31,986 $ 24,127
Receivables, net....................................................... 521,137 474,114
Inventories............................................................ 515,548 497,414
Deferred tax assets, net............................................... 55,705 38,954
Prepaid expenses and other............................................. 25,371 20,171
----------- -----------
Total current assets................................................. 1,149,747 1,054,780
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET....................................... 378,024 381,082
GOODWILL, NET............................................................ 365,017 349,773
OTHER ASSETS............................................................. 109,917 108,940
----------- -----------
TOTAL ASSETS............................................................. $ 2,002,705 $ 1,894,575
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt............ $ 88,920 $ 50,784
Accounts payable....................................................... 223,577 218,551
Accrued payroll costs.................................................. 54,838 62,729
Income taxes payable................................................... 19,911 17,468
Other.................................................................. 100,319 107,786
----------- -----------
Total current liabilities.......................................... 487,565 457,318
----------- -----------
LONG-TERM DEBT........................................................... 382,517 346,647
DEFERRED TAX LIABILITIES................................................. 39,697 37,098
OTHER LONG-TERM LIABILITIES.............................................. 13,848 15,037
MINORITY INTERESTS....................................................... 323,701 318,255
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000 shares authorized; no shares
issued or outstanding in 2000 or 1999................................ -- --
Common stock, $1 par value; 60,000 shares authorized; 50,294 shares
issued in 2000 (49,586 in 1999)...................................... 50,294 49,586
Additional paid-in capital............................................. 375,771 351,397
Retained earnings...................................................... 348,832 337,509
Cumulative translation adjustments..................................... (11,818) (10,570)
Less - treasury securities, at cost; 656 common shares in 2000 and 1999 (7,702) (7,702)
----------- -----------
Total shareholders' equity......................................... 755,377 720,220
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $ 2,002,705 $ 1,894,575
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 5
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 11,323 $ 6,606
Adjustments to reconcile net income to net cash provided
by (used in) operating activities, excluding the net effects of acquisitions:
Depreciation and amortization................................................... 19,434 18,763
Minority interests.............................................................. 6,162 (521)
Provision for losses on receivables............................................. 620 444
Gain on disposal of property, plant and equipment............................... (1,046) (2,045)
Foreign currency translation losses............................................. 77 660
Changes in operating assets and liabilities:
Receivables..................................................................... (30,117) 51,009
Inventories..................................................................... (5,611) 34,559
Accounts payable................................................................ (15,918) (20,547)
Accrued merger and restructuring costs.......................................... -- (16,384)
Other current assets and liabilities............................................ (17,318) (10,309)
Other non-current assets and liabilities........................................ (4,507) (6,940)
---------- ----------
Net cash provided by (used in) operating activities................................. (36,901) 55,295
---------- ----------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired..................................... (30,000) (4,500)
Proceeds from disposal of operations................................................ -- 29,662
Purchases of property, plant and equipment.......................................... (15,639) (13,315)
Proceeds from disposal of property, plant and equipment............................. 3,049 4,001
---------- ----------
Net cash provided by (used in) investing activities................................. (42,590) 15,848
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............................................ 66,658 --
Principal payments of long-term debt................................................ (5,499) (25,313)
Net increase (decrease) in short-term borrowings.................................... 12,847 (13,856)
Proceeds from exercise of stock options............................................. 13,498 714
---------- ----------
Net cash provided by (used in) financing activities................................. 87,504 (38,455)
---------- ----------
Effect of exchange rate changes on cash............................................. (154) (381)
---------- ----------
Increase in cash and cash equivalents............................................... 7,859 32,307
Cash and cash equivalents at beginning of period.................................... 24,127 22,717
---------- ----------
Cash and cash equivalents at end of period.......................................... $ 31,986 $55,024
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest.............................................................. $ 11,944 $ 10,014
Cash paid for income taxes.......................................................... $ 5,599 $ 6,038
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<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 1999 Annual Report on Form 10-K
and other current filings with the Commission.
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. BUSINESS COMBINATION
On January 15, 2000, the Company acquired Texas Mill Supply and
Manufacturing, Inc., a provider of industrial mill and safety products and
management services to the refining, power generation, petrochemical and
chemical markets, for cash consideration of $30.0 million.
The acquisition has been recorded using the purchase method of
accounting and, accordingly, the acquired operations have been included in the
results of operations since the acquisition date. The purchase price was
allocated to the net assets acquired based upon their estimated fair market
values at the date of acquisition. The excess of the purchase price over the
estimated fair value of the net assets has been recorded as goodwill and is
being amortized on a straight-line basis over 20 years.
The balances included in the Consolidated Balance Sheets related to the
acquisition are based upon preliminary information and are subject to change
when additional information concerning final asset and liability valuations is
obtained. Material changes in the preliminary allocations are not anticipated by
management.
The following unaudited pro forma supplemental information presents
consolidated results of operations as if the Company's current and prior year
acquisitions had occurred on January 1, 1999 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues................................................................ $631,446 $569,606
Net income.............................................................. 11,383 2,658
Earnings per share:
Basic............................................................. $ 0.23 $ 0.05
Diluted........................................................... 0.23 0.05
</TABLE>
The unaudited pro forma supplemental information is based on historical
information and does not include estimated cost savings; therefore, it does not
purport to be indicative of the results of operations had the combinations been
in effect at the dates indicated or of future results for the combined entities.
5
<PAGE> 7
The following schedule summarizes investing activities related to the
current year acquisition included in the Consolidated Statements of Cash Flows
(in thousands):
<TABLE>
<S> <C>
Fair value of assets, net of cash acquired............................... $ 37,707
Goodwill recorded........................................................ 18,765
Total liabilities........................................................ (26,472)
--------
Cash paid for acquisition of business, net of cash acquired.............. $ 30,000
========
</TABLE>
3. NON-RECURRING ITEMS
During the first quarter of 1999, 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.
4. 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>
Three Months Ended
March 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
BASIC EPS
Net income......................................................... $11,323 $6,606
======= ======
Weighted average number of common
shares outstanding............................................... 49,169 48,159
------- ------
Basic EPS.......................................................... $ 0.23 $ 0.14
======= ======
DILUTED EPS
Net income......................................................... $11,323 $6,606
======= ======
Weighted average number of common
shares outstanding............................................... 49,169 48,159
Dilutive effect of stock options................................... 761 448
------- ------
49,930 48,607
Diluted EPS........................................................ $ 0.23 $ 0.14
======= ======
</TABLE>
6
<PAGE> 8
5. COMPREHENSIVE INCOME
The Company's comprehensive income, which encompasses net income and
currency translation adjustments, is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Net income......................................................... $ 11,323 $ 6,606
Currency translation adjustments................................... (1,248) (246)
-------- -------
Comprehensive income............................................... $ 10,075 $ 6,360
======== =======
</TABLE>
6. 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,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 43,408 $ 41,508
Work-in-process................................................... 42,964 43,498
Products purchased for resale..................................... 138,054 118,786
Finished goods.................................................... 315,352 317,054
----------- -----------
539,778 520,846
Reserves to state certain domestic inventories
($238,775 and $227,622 in 2000 and 1999,
respectively) on a LIFO basis................................. (24,230) (23,432)
----------- -----------
$515,548 $ 497,414
=========== ===========
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Land.............................................................. $ 25,279 $ 25,119
Buildings......................................................... 87,640 87,024
Machinery and equipment........................................... 372,393 365,360
Rental tools...................................................... 219,336 219,118
----------- -----------
704,648 696,621
Less-accumulated depreciation.....................................
(326,624) (315,539)
----------- -----------
$378,024 $381,082
=========== ===========
</TABLE>
7
<PAGE> 9
8. INDUSTRY SEGMENTS
The Company manufactures and markets premium products and services to
the oil and gas exploration and production, the petrochemical industry and other
industrial markets. The Company has two reportable segments: Oilfield Products
and Services Group and Distribution Group.
The following table presents financial information for each reportable
segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
-------------- ---------------
Revenues:
<S> <C> <C>
Oilfield Products and Services Group.............................. $ 407,880 $ 323,479
Distribution Group................................................ 217,552 73,543
-------------- ---------------
$ 625,432 $ 397,022
============== ===============
Income before interest and taxes:
Oilfield Products and Services Group.............................. $ 33,426 $ 23,645
Distribution Group................................................ 3,879 (1,816)
General corporate................................................. (1,380) (1,340)
Non-recurring items (See Note 2).................................. -- 2,621
-------------- ---------------
$ 35,925 $ 23,110
============== ===============
March 31, December 31,
Total Assets: 2000 1999
-------------- ---------------
Oilfield Products and Services Group.............................. $ 1,520,081 $ 1,499,735
Distribution Group................................................ 360,944 281,970
General corporate................................................. 121,680 112,870
-------------- ---------------
$ 2,002,705 $ 1,894,575
============== ===============
</TABLE>
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is provided to assist readers in understanding the
Company's financial performance during the periods presented and significant
trends which may impact the future performance of the Company. The following
discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and the related notes thereto included elsewhere in
this Form 10-Q.
The Company manufactures and markets premium products and services to
the oil and gas exploration and production industry, the petrochemical industry
and other industrial markets. 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 and 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 of and demand for 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.
9
<PAGE> 11
RESULTS OF OPERATIONS
Revenues
The Company markets its products and services throughout the world
through four business units which are aggregated into two reportable segments.
The Oilfield Products and Services Group consists of three business units: M-I
L.L.C., Smith Bits and Smith Services. The Distribution Group includes the
Wilson business unit. The business and revenue information below has been
summarized by business unit in order to provide additional information in
analyzing the Company's operations. Additional financial information regarding
reportable segments appears below in "Segment Results" and in Note 8 of the
Notes to Consolidated Financial Statements included elsewhere in this Form 10-Q.
The following table presents revenue and average rig count information
for the periods shown (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------
2000 1999
---------------------------------------------
Amount % Amount %
---------------------------------------------
<S> <C> <C> <C> <C>
Revenues by Business Unit:
M-I L.L.C.................................... $ 267,777 43 $205,901 52
Smith Bits................................... 75,439 12 60,421 15
Smith Services............................... 64,664 10 57,157 14
Wilson....................................... 217,552 35 73,543 19
---------- --- --------- ---
Total................................ $ 625,432 100 $ 397,022 100
========== === ========= ===
Revenues by Area:
U.S.......................................... $ 297,839 48 $ 181,234 46
Export....................................... 26,850 4 28,517 7
Non-U.S...................................... 300,743 48 187,271 47
---------- --- --------- ---
Total................................ $ 625,432 100 $ 397,022 100
========== === ========= ===
M-I L.L.C. Average Rig Count:
U.S.............................................. 901 620
Canada........................................... 425 269
Non-North America................................ 935 922
--------- --------
Total.................................... 2,261 1,811
========= ========
</TABLE>
M-I L.L.C. ("M-I") provides drilling and completion fluid systems,
engineering and technical services to the oil and gas industry through its M-I
Fluids division. M-I's SWACO division manufactures and markets equipment and
services for solids control, pressure control, rig instrumentation and waste
management. M-I's revenues for the first quarter of 2000 increased $61.9
million, or 30 percent, from the same period in 1999, due to the impact of
increased deepwater drilling activity, new contracts awarded during the last
half of 1999 and formation of the drilling fluids venture with Schlumberger
Limited ("Schlumberger"). Excluding the impact of incremental revenues from the
acquired operations, M-I's revenues for the current period were 16 percent
higher than in the comparable quarter of 1999. The majority of the base business
revenue growth related to higher sales of synthetic fluids and engineering
services, primarily in the U.S. Gulf Coast area.
Smith Bits manufactures and sells three-cone and diamond bits primarily
for use in the oil and gas industry. The unit also manufactures polycrystalline
diamond and cubic boron nitride materials which are used in drill bits and in
other specialized cutting tools. Smith Bits' revenues for the three months ended
March 31, 2000 increased $15.0 million, or
10
<PAGE> 12
25 percent, from the same period in 1999. Increased drilling activity in North
America and new product introductions resulted in higher demand for the
Company's petroleum bits and accounted for a majority of the revenue
improvement.
Smith Services manufactures and markets products and services used in
the oil and gas industry for drilling, workover, well completion and well
re-entry. Smith Services' revenues for the first quarter of 2000 increased $7.5
million, or 13 percent, from 1999 levels. Higher demand for inspection services
and tubular goods in North America due to higher drilling and production
activity accounted for the majority of the improvement from the prior year
quarter.
Wilson markets pipe, valves, fittings, mill, safety and other
maintenance products to energy and industrial markets, primarily through an
extensive network of supply branches in the United States and Canada. Wilson's
revenues increased $144.0 million, or 196 percent, from the amounts reported for
the three months ended March 31, 1999. Acquisitions completed during the prior
twelve-month period accounted for the majority of the revenue growth over the
first quarter of 1999. Improvement in the base business operations also
contributed to the increase over the prior year quarter as, excluding the impact
of operations acquired and divested, Wilson's revenues were 28 percent above
first quarter 1999 levels. Base business revenues improved due to the effect of
increased U.S. activity levels on branch and line pipe sales.
Consolidated Results
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>
Three Months Ended March 31,
-----------------------------------------------------
2000 1999
------------------------- -------------------------
Amount % Amount %
-------------- --------- -------------- --------
<S> <C> <C> <C> <C>
Revenues.............................................. $ 625,432 100 $ 397,022 100
--------- ---------
Gross profit.......................................... 161,483 26 111,339 28
Operating expenses.................................... 125,558 20 90,850 23
Non-recurring items................................... - - (2,621) (1)
--------- --- --------- ---
Income before interest and taxes...................... 35,925 6 23,110 6
Interest expense, net................................. 8,765 1 12,075 3
--------- --- --------- ---
Income before income taxes and
minority interests................................... 27,160 5 11,035 3
Income tax provision.................................. 9,675 2 4,950 1
--------- --- --------- ---
Income before minority interests...................... 17,485 3 6,085 2
Minority interests.................................... 6,162 1 (521) -
--------- --- --------- ---
Net income............................................ $ 11,323 2 $ 6,606 2
========= === ========= ===
</TABLE>
11
<PAGE> 13
Total revenues for the first quarter of 2000 increased $228.4 million,
or 58 percent, from the prior year period. Approximately two-thirds of the
revenue increase was attributable to incremental revenues related to
distribution and drilling fluid operations acquired within the past twelve
months. After excluding the impact of acquired and divested operations, base
revenues were 19 percent above amounts reported in the first quarter of 1999.
The base revenue improvement is primarily attributable to increased demand for
the Company's products and services in North America related to improved
activity levels and, to a lesser extent, new product introductions. Base
revenues outside of North America also increased due, in part, to the impact of
drilling fluid contracts awarded in the last half of 1999.
Gross profit increased $50.1 million from the first quarter of 1999 as
a result of the increased revenue volumes. As a percentage of revenues, gross
profit declined 2 percentage points from the prior year quarter. The decline in
gross profit margins is related to the growth in the distribution revenues,
which traditionally generate lower margins than the Company's oilfield products
and services operations. Although gross profit margin declines were not
experienced in either of the segments; changes in the revenue mix, as evidenced
by the increase in distribution revenues from 19 percent of total revenues in
the 1999 period to 35 percent in the first quarter of 2000, led to the overall
margin decline.
Operating expenses, consisting of selling, general and administrative
expenses, increased $34.7 million from the prior year quarter; however, on a
percentage of revenue basis, decreased 3 percentage points. Over two-thirds of
the dollar variance is attributable to incremental costs associated with
operations acquired during the past twelve months. To a lesser extent,
increased variable costs related to the higher revenue volumes contributed to
the period-to-period increase.
Net interest expense, which represents interest expense less interest
income, decreased $3.3 million from the 1999 period. Proceeds from the sale of
an interest in M-I in July 1999 were used to repay outstanding indebtedness,
resulting in the interest expense reduction. This reduction was partially offset
by increased borrowings to finance acquisitions and higher activity-related
working capital requirements.
The effective tax rate for the first quarter of 2000 approximated 36
percent, which is a decrease from the 45 percent rate reported in the same
period of the prior year and is comparable to the U.S. statutory rate. The
effective tax rate was below the prior year rate due to the impact in the prior
year period of non-deductible costs associated with the sale of one of the
Company's mining operations.
Minority interests reflect the portion of the results of majority-owned
operations which are applicable to the minority interest partners. Subsequent to
March 31, 1999, the Company sold a 40 percent ownership interest in M-I to
Schlumberger. The majority of the increase period-to-period results from the
minority interest sale.
12
<PAGE> 14
Segment Results
The following table presents financial information for each reportable
segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Revenues:
Oilfield Products and Services Group.............................. $ 407,880 $ 323,479
Distribution Group................................................ 217,552 73,543
-------------- ---------------
$ 625,432 $ 397,022
============== ===============
Income before interest and taxes:
Oilfield Products and Services Group.............................. $ 33,426 $ 23,645
Distribution Group................................................ 3,879 (1,816)
General corporate................................................. (1,380) (1,340)
Non-recurring items............................................... 2,621
--
-------------- ---------------
$ 35,925 $ 23,110
============== ===============
</TABLE>
Oilfield Products and Services Group revenues increased $84.4 million,
or 26 percent, from the first quarter of 1999, reflecting primarily the increase
in exploration and production activity in North America and incremental revenues
generated by the acquired drilling fluid operations. Income before interest and
taxes for the Oilfield Products and Services Group increased $9.8 million, or 41
percent, from the comparable 1999 period. The increase is attributable primarily
to the impact of higher revenues and improved fixed cost coverage.
Distribution Group revenues increased $144.0 million, or 196 percent,
from the three months ended March 31, 1999. Incremental revenues generated by
the acquired operations and higher exploration activity in North America
accounted for the increase over the prior year quarter. The divestiture of
Wilson's OCTG operations in mid-1999 partially offset the increase. Income
before interest and taxes for the group increased $5.7 million from the prior
year period. This increase reflects primarily the impact of higher revenues and
improved gross profit margins.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $7.9 million from year-end 1999 and
equaled $32.0 million at March 31, 2000. The Company's operations used $36.9
million of cash flows in the first quarter of 2000, as compared to providing
$55.3 million in the first quarter of 1999. In the first quarter of 2000, the
effect of the increase in activity on operations resulted in higher working
capital requirements, primarily accounts receivable and inventories, in contrast
to the prior year quarter where declining activity favorably impacted these
working capital accounts.
During the first quarter of 2000, the Company acquired Texas Mill
Supply and Manufacturing, Inc. for $30.0 million and invested $12.6 million in
property, plant and equipment, net of proceeds. Financing activities during the
period provided $87.5 million of cash flows, consisting of $74.0 million of
borrowings under credit facilities and $13.5 million in proceeds received on the
exercise of stock options.
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 $121.1 million at March 31, 2000. The Company believes funds generated from
operations, amounts available under existing credit facilities and external
sources of liquidity will be sufficient to finance capital expenditures and
working capital needs of the existing operations for the foreseeable future.
13
<PAGE> 15
NEW ACCOUNTING AND REGULATORY PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities," which, as amended, is effective for fiscal
periods beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded and
measured at its fair value. SFAS No. 133 requires that changes in fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company is currently quantifying the effect of adopting SFAS No. 133 on
its financial statements.
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.
14
<PAGE> 16
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) None.
(27) Financial Data Schedules.
27.1 Financial Data Schedule for the three month period ended
March 31, 2000.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated March 22, 2000,
reporting under "Item 5. Other Events", related to a press
release announcing the Company's outlook for the first quarter
of 2000.
15
<PAGE> 17
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, 2000 By: /s/ Douglas L. Rock
----------------------------- -----------------------------------------
Douglas L. Rock
Chairman of the Board, Chief Executive
Officer, President and Chief Operating
Officer
Date: May 15, 2000 By: /s/ Margaret K. Dorman
----------------------------- -----------------------------------------
Margaret K. Dorman
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
16
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(10) None.
(27) Financial Data Schedules.
27.1 Financial Data Schedule for the three month period
ended March 31, 2000.
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 31,986
<SECURITIES> 0
<RECEIVABLES> 531,339
<ALLOWANCES> 10,202
<INVENTORY> 515,548
<CURRENT-ASSETS> 1,149,747
<PP&E> 704,648
<DEPRECIATION> 326,624
<TOTAL-ASSETS> 2,002,705
<CURRENT-LIABILITIES> 487,565
<BONDS> 382,517
0
0
<COMMON> 50,294
<OTHER-SE> 705,083
<TOTAL-LIABILITY-AND-EQUITY> 2,002,705
<SALES> 625,432
<TOTAL-REVENUES> 625,432
<CGS> 463,949
<TOTAL-COSTS> 463,949
<OTHER-EXPENSES> 124,938
<LOSS-PROVISION> 620
<INTEREST-EXPENSE> 8,765
<INCOME-PRETAX> 27,160
<INCOME-TAX> 9,675
<INCOME-CONTINUING> 17,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,323
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
</TABLE>
