<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 June 30, 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 August
8, 2000 was 50,402,881.
<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 and Six Months Ended June 30, 2000 and 1999............. 1
Consolidated Balance Sheets -
As of June 30, 2000 and December 31, 1999.................................... 2
Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 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............................................................................... 16
</TABLE>
<PAGE> 3
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES .................................. $ 657,229 $ 389,695 $1,282,661 $ 786,717
COSTS AND EXPENSES:
Costs of Revenues ....................... 482,894 291,010 946,843 576,693
Selling Expenses ........................ 99,794 70,791 195,098 140,698
General and Administrative Expenses ..... 31,231 21,479 61,485 42,422
Non-Recurring Items ..................... -- -- -- (2,621)
---------- --------- ---------- ---------
Total Costs and Expenses ........... 613,919 383,280 1,203,426 757,192
---------- --------- ---------- ---------
INCOME BEFORE INTEREST AND TAXES ......... 43,310 6,415 79,235 29,525
INTEREST EXPENSE, NET ..................... 8,758 11,297 17,523 23,372
---------- --------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTERESTS ...................... 34,552 (4,882) 61,712 6,153
INCOME TAX PROVISION (BENEFIT) ............ 11,413 (1,455) 21,088 3,495
---------- --------- ---------- ---------
INCOME (LOSS) BEFORE MINORITY INTERESTS ... 23,139 (3,427) 40,624 2,658
MINORITY INTERESTS ........................ 8,165 (406) 14,327 (927)
---------- --------- ---------- ---------
NET INCOME (LOSS) ......................... $ 14,974 $ (3,021) $ 26,297 $ 3,585
========== ========= ========== =========
EARNINGS PER SHARE:
Basic ................................... $ 0.30 $ (0.06) $ 0.53 $ 0.07
========== ========= ========== =========
Diluted ................................. $ 0.30 $ (0.06) $ 0.52 $ 0.07
========== ========= ========== =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................... 49,725 48,421 49,448 48,291
Diluted ................................. 50,363 48,421 50,153 48,852
</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)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 32,630 $ 24,127
Receivables, net ...................................................... 543,040 474,114
Inventories ........................................................... 538,404 497,414
Deferred tax assets, net .............................................. 52,924 38,954
Prepaid expenses and other ............................................ 26,004 20,171
----------- -----------
Total current assets ................................................ 1,193,002 1,054,780
PROPERTY, PLANT AND EQUIPMENT, NET ...................................... 389,169 381,082
GOODWILL, NET ........................................................... 371,128 349,773
OTHER ASSETS ............................................................ 109,992 108,940
----------- -----------
TOTAL ASSETS ............................................................ $ 2,063,291 $ 1,894,575
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt ........... $ 117,886 $ 50,784
Accounts payable ...................................................... 228,564 218,551
Accrued payroll costs ................................................. 61,129 62,729
Income taxes payable .................................................. 20,257 17,468
Other ................................................................. 119,496 107,786
----------- -----------
Total current liabilities ......................................... 547,332 457,318
----------- -----------
LONG-TERM DEBT .......................................................... 354,640 346,647
DEFERRED TAX LIABILITIES ................................................ 43,499 37,098
OTHER LONG-TERM LIABILITIES ............................................. 14,336 15,037
MINORITY INTERESTS ...................................................... 330,929 318,255
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; 50,401 shares
issued in 2000 (49,586 in 1999) ..................................... 50,401 49,586
Additional paid-in capital ............................................ 381,050 351,397
Retained earnings ..................................................... 363,806 337,509
Cumulative translation adjustments .................................... (15,000) (10,570)
Less - treasury securities, at cost; 656 common shares in 2000
and 1999 ............................................................ (7,702) (7,702)
----------- -----------
Total shareholders' equity ........................................ 772,555 720,220
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 2,063,291 $ 1,894,575
=========== ===========
</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>
Six Months Ended
June 30,
--------------------------
2000 1999
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 26,297 $ 3,585
Adjustments to reconcile net income to net cash provided
by (used in) operating activities, excluding the net effects of acquisitions:
Depreciation and amortization ............................................. 39,170 37,257
Minority interests ........................................................ 14,327 (927)
Provision for losses on receivables ....................................... 1,364 643
Gain on disposal of property, plant and equipment ......................... (3,204) (3,578)
Foreign currency translation losses ....................................... 913 737
Changes in operating assets and liabilities:
Receivables ............................................................... (49,792) 78,190
Inventories ............................................................... (27,234) 54,170
Accounts payable .......................................................... (16,279) (30,833)
Accrued merger and restructuring costs .................................... -- (33,285)
Other current assets and liabilities ...................................... 11,192 (23,681)
Other non-current assets and liabilities .................................. (3,297) (8,478)
-------- ---------
Net cash provided by (used in) operating activities ........................... (6,543) 73,800
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ............................... (40,111) (285,093)
Proceeds from disposal of operations .......................................... -- 44,218
Purchases of property, plant and equipment .................................... (38,825) (26,591)
Proceeds from disposal of property, plant and equipment ....................... 6,916 8,016
-------- ---------
Net cash used in investing activities ......................................... (72,020) (259,450)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ...................................... 75,847 49,855
Principal payments of long-term debt .......................................... (9,214) (20,966)
Net increase in short-term borrowings ......................................... 3,793 157,232
Proceeds from exercise of stock options ....................................... 16,977 1,171
-------- ---------
Net cash provided by financing activities ..................................... 87,403 187,292
-------- ---------
Effect of exchange rate changes on cash ....................................... (337) 445
-------- ---------
Increase in cash and cash equivalents ......................................... 8,503 2,087
Cash and cash equivalents at beginning of period .............................. 24,127 22,717
-------- ---------
Cash and cash equivalents at end of period .................................... $ 32,630 $ 24,804
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ........................................................ $ 16,216 $ 18,841
Cash paid for income taxes .................................................... $ 9,799 $ 13,766
</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 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 COMBINATIONS
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.
During the second quarter, the Company acquired two operations engaged
primarily in providing drilling fluids and related services in Europe and Latin
America, for cash consideration totaling $10.1 million.
The above acquisitions have been recorded using the purchase method of
accounting and, accordingly, the acquired operations have been included in the
results of operations since their respective acquisition dates. The purchase
price was allocated to the net assets acquired based upon their estimated fair
market values at the dates of acquisition. The excess of the purchase price over
the estimated fair value of the net assets 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
these acquisitions are based upon preliminary information and are subject to
change when additional information concerning final asset and liability
valuations is obtained. Material changes in the preliminary allocations are not
anticipated by management.
The following unaudited pro forma supplemental information presents
consolidated results of operations as if the Company's significant current and
prior year acquisitions had occurred on January 1, 1999 (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues............................................................ $ 1,288,675 $ 1,084,480
Net income (loss)................................................... 26,357 (2,149)
Earnings (loss) per share:
Basic............................................................. $ 0.53 $ ( 0.04)
Diluted........................................................... 0.53 ( 0.04)
</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.
4
<PAGE> 7
The following schedule summarizes investing activities related to the
current year acquisitions included in the Consolidated Statements of Cash Flows
(in thousands):
<TABLE>
<S> <C>
Fair value of assets, net of cash acquired.................................... $ 53,695
Goodwill recorded............................................................. 27,654
Total liabilities assumed..................................................... (41,238)
--------
Cash paid for acquisition of businesses, net of cash acquired................. $ 40,111
========
</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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income (loss) ................... $ 14,974 $ (3,021) $ 26,297 $ 3,585
======== ======== ======== ========
Weighted average number of common
shares outstanding ................ 49,725 48,421 49,448 48,291
-------- -------- -------- --------
Basic EPS ........................... $ 0.30 $ (0.06) $ 0.53 $ 0.07
======== ======== ======== ========
DILUTED EPS:
Net income (loss) ................... $ 14,974 $ (3,021) $ 26,297 $ 3,585
======== ======== ======== ========
Weighted average number of common
shares outstanding ................ 49,725 48,421 49,448 48,291
Dilutive effect of stock options .... 638 -- 705 561
-------- -------- -------- --------
50,363 48,421 50,153 48,852
-------- -------- -------- --------
Diluted EPS ......................... $ 0.30 $ (0.06) $ 0.52 $ 0.07
======== ======== ======== ========
</TABLE>
5
<PAGE> 8
5. COMPREHENSIVE INCOME
The Company's comprehensive income (loss), which encompasses net income
and currency translation adjustments, is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)............................. $ 14,974 $ (3,021) $ 26,297 $ 3,585
Currency translation adjustments.............. (3,182) (1,485) (4,430) (1,731)
-------- -------- -------- --------
Comprehensive income (loss)................... $ 11,792 $ (4,506) $ 21,867 $ 1,854
======== ======== ======== ========
</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>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw materials..................................................... $ 41,157 $ 41,508
Work-in-process................................................... 45,622 43,498
Products purchased for resale..................................... 153,981 118,786
Finished goods.................................................... 327,195 317,054
--------- ---------
567,955 520,846
Reserves to state certain domestic inventories
($268,413 and $227,622 in 2000 and 1999,
respectively) on a LIFO basis................................. (29,551) (23,432)
--------- ---------
$ 538,404 $ 497,414
========= =========
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Land.............................................................. $ 26,265 $ 25,119
Buildings......................................................... 89,258 87,024
Machinery and equipment........................................... 389,350 365,360
Rental tools...................................................... 218,361 219,118
---------- ----------
723,234 696,621
Less-accumulated depreciation..................................... (334,065) (315,539)
---------- ----------
$ 389,169 $ 381,082
========== ==========
</TABLE>
6
<PAGE> 9
8. INDUSTRY SEGMENTS
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 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 Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
2000 1999 2000 1999
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oilfield Products and Services Group........ $ 439,613 $ 292,602 $ 847,493 $ 616,081
Distribution Group.......................... 217,616 97,093 435,168 170,636
--------- ---------- ----------- ---------
$ 657,229 $ 389,695 $ 1,282,661 $ 786,717
========= ========== =========== =========
Income before interest and taxes:
Oilfield Products and Services Group........ $ 41,044 $ 9,052 $ 74,470 $ 32,697
Distribution Group.......................... 3,724 (1,377) 7,603 (3,193)
General corporate........................... (1,458) (1,260) (2,838) (2,600)
Non-recurring items......................... -- -- -- 2,621
--------- ---------- ----------- ---------
$ 43,310 $ 6,415 $ 79,235 $ 29,525
========= ========== =========== =========
</TABLE>
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is provided to assist readers in
understanding the Company's financial performance during the periods presented
and significant trends which may impact the future performance of the Company.
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.
8
<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 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 June 30, Six Months Ended June 30,
--------------------------------------------- ---------------------------------------------
2000 1999 2000 1999
-------------------- --------------------- -------------------- --------------------
Amount % Amount % Amount % Amount %
---------- --- ---------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues by Business Unit:
M-I .................. $ 294,425 45 $ 183,892 47 $ 562,202 44 $ 389,793 49
Smith Bits ........... 75,991 12 54,298 14 151,430 12 114,719 15
Smith Services ....... 69,197 10 54,412 14 133,861 10 111,569 14
Wilson ............... 217,616 33 97,093 25 435,168 34 170,636 22
---------- --- ---------- --- ---------- --- ---------- ---
Total ........ $ 657,229 100 $ 389,695 100 $1,282,661 100 $ 786,717 100
========== === ========== === ========== === ========== ===
Revenues by Area:
U.S .................. $ 328,759 50 $ 186,819 48 $ 626,598 49 $ 368,053 47
Export ............... 30,193 5 22,857 6 57,043 4 48,445 6
Non-U.S .............. 298,277 45 180,019 46 599,020 47 370,219 47
---------- --- ---------- --- ---------- --- ---------- ---
Total ........ $ 657,229 100 $ 389,695 100 $1,282,661 100 $ 786,717 100
========== === ========== === ========== === ========== ===
M-I Average Rig Count:
U.S .................. 1,029 600 964 604
Canada ............... 201 101 309 179
Non-North America .... 899 827 876 873
---------- ---------- ---------- ----------
Total ........ 2,129 1,528 2,149 1,656
========== ========== ========== ==========
</TABLE>
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 increased $110.5 million, or 60 percent, from the second quarter of
1999, and $172.4 million, or 44 percent, from the first six months of 1999.
A significant portion of the increase over the prior year periods is
attributable to the impact of new contracts awarded in the last half of 1999,
which resulted in increased revenues in the United States, Europe/Africa and
Latin America. Formation of the drilling fluids venture with Schlumberger
Limited and increased U.S. drilling activity also contributed to the revenue
growth over the prior year periods. Excluding the impact of incremental revenues
from acquired operations, revenues rose 43 percent and 29 percent from the
second quarter and first six months of 1999, respectively.
9
<PAGE> 12
Smith Bits manufactures and sells three-cone and diamond drill 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
increased $21.7 million, or 40 percent, from the second quarter of 1999, and
$36.7 million, or 32 percent, from the first six months of 1999. The substantial
increase in drilling activity in North America from prior year levels, in
response to higher natural gas and crude oil prices, resulted in higher demand
for the Company's petroleum bits and accounted for a majority of the increase in
revenues. On a combined basis, revenues for petroleum three-cone and diamond
bits grew 45 and 36 percent over the prior year quarter and year-to-date levels,
respectively.
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 increased $14.8 million, or 27 percent, from
the second quarter of 1999, and $22.3 million, or 20 percent, from the first six
months of 1999. Improvement in North American activity levels, particularly in
the U.S. Gulf Coast area, accounted for the increases in revenues from the 1999
periods. All product groups experienced revenue growth with stronger demand for
directional drilling, inspection and fishing services and tubular products
contributing the majority of the increases over the prior year periods.
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 $120.5 million, or 124 percent, from the second quarter of
1999, and $264.5 million, or 155 percent, from the first six months of 1999. The
majority of the increase over prior year levels is attributed to the
acquisitions of the ConEmsco and Texas Mill Supply operations. The divestiture
of Wilson's Oil Country Tubular Goods operations in mid-1999 partially offset
the increase. Excluding the impact of acquired and divested operations, revenues
were 38 percent above second quarter 1999 levels, and 33 percent over comparable
year-to-date levels, due to increased line pipe and other product sales in the
energy sector.
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 June 30, Six Months Ended June 30,
---------------------------------------- --------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount %
--------- --- -------- --- ---------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .......................... $ 657,229 100 $389,695 100 $1,282,661 100 $786,717 100
--------- -------- ---------- --------
Gross profit ...................... 174,335 26 98,685 25 335,818 26 210,024 27
Operating expenses ................ 131,025 20 92,270 23 256,583 20 183,120 23
Non-recurring items ............... -- -- -- -- -- -- (2,621) --
--------- --- -------- --- ---------- --- -------- ---
Income before interest and taxes .. 43,310 6 6,415 2 79,235 6 29,525 4
Interest expense, net ............. 8,758 1 11,297 3 17,523 1 23,372 3
--------- --- -------- --- ---------- --- -------- ---
Income (loss) before income
taxes and minority interests .... 34,552 5 (4,882) (1) 61,712 5 6,153 1
Income tax provision (benefit) .... 11,413 2 (1,455) -- 21,088 2 3,495 1
--------- --- -------- --- ---------- --- -------- ---
Income (loss) before minority
interests ....................... 23,139 3 (3,427) (1) 40,624 3 2,658 --
Minority interests ................ 8,165 1 (406) -- 14,327 1 (927) --
--------- --- -------- --- ---------- --- -------- ---
Net income (loss) ................. $ 14,974 2 $ (3,021) (1) $ 26,297 2 $ 3,585 --
========= === ======== === ========== === ======== ===
</TABLE>
10
<PAGE> 13
Total revenues for the current year periods increased $267.5 million,
or 69 percent, from the second quarter of 1999, and $495.9 million, or 63
percent, over the first six months of 1999. Incremental revenues from acquired
operations accounted for 48 percent and 57 percent of the revenue increase over
the second quarter and first six months of 1999, respectively. Base business
revenue increases over the prior year periods are primarily attributable to the
impact of new contracts awarded in the last half of 1999 and improved worldwide
drilling activity levels. While the significant portion of the rig count and
revenue growth has been concentrated in North America, the Company experienced
revenue increases across all geographic areas from 1999 levels.
Gross profit increased $75.7 million from the second quarter of 1999,
and $125.8 million from the first six months of 1999. Gross profit margins
improved in both the Oilfield Products and Services and the Distribution
segments as increased fixed cost coverage and a favorable shift in sales mix
more than offset the impact of competitive pricing pressures. Consolidated gross
margins rose one percent from the prior year quarter, but declined slightly on a
year-to-date basis because of the increasing proportion of Distribution revenues
to total Company revenues.
Operating expenses, consisting of selling, general and administrative
expenses, increased $38.8 million from the second quarter of 1999, and $73.5
million from the first six months of 1999. As a percentage of revenue, however,
operating expenses decreased three percentage points from the second quarter and
first half of 1999. Over half of the absolute dollar variance is attributable
to incremental costs associated with acquired operations. The remaining
increase is primarily due to variable-related expenses associated with the
revenue increase, including personnel additions and increased profit-sharing
amounts attributable to the reported profitability levels.
Net interest expense, which represents interest expense less interest
income, decreased $2.5 million from the second quarter of 1999, and $5.8 million
from the first half of 1999. 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 subsequent acquisitions and general working capital needs, which
increased as a result of the revenue growth experienced by the Company.
The effective tax rate for the first six months of 2000 approximated
34 percent, which is lower than both the prior year's rate and the U.S.
statutory rate. The current year effective tax rate is below the U.S. statutory
rate due to the impact of M-I's U.S. partnership earnings for which the minority
partner is directly responsible for their related income taxes. The effective
tax rate was below the prior year rate due primarily to the impact in 1999 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. Minority
interest increased $8.6 million over the second quarter of 1999 and $14.3
million over the first six months of 1999. The increase is primarily
attributable to the sale of a 40 percent interest in the M-I operations which
occurred in July 1999.
11
<PAGE> 14
Segment Results
The following table presents financial information for each reportable
segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oilfield Products and Services Group........ $ 439,613 $ 292,602 $ 847,493 $ 616,081
Distribution Group.......................... 217,616 97,093 435,168 170,636
--------- --------- ----------- ---------
$ 657,229 $ 389,695 $ 1,282,661 $ 786,717
========= ========= =========== =========
Income before interest and taxes:
Oilfield Products and Services Group........ $ 41,044 $ 9,052 $ 74,470 $ 32,697
Distribution Group.......................... 3,724 (1,377) 7,603 (3,193)
General corporate........................... (1,458) (1,260) (2,838) (2,600)
Non-recurring items......................... -- -- -- 2,621
--------- --------- ----------- ---------
$ 43,310 $ 6,415 $ 79,235 $ 29,525
========= ========= =========== =========
</TABLE>
Oilfield Products and Services Group revenues increased $147.0 million,
or 50 percent, from the second quarter of 1999, and $231.4 million, or 38
percent, from the first six months 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 $32.0 million and
$41.8 million, respectively, from 1999 quarter and six-month levels. For the
three-month and six-month periods ended June 30, 2000, income before interest
and taxes was nine percent of revenues versus three percent and five percent,
respectively, for the comparable prior year periods. These improvements are
primarily attributable to the impact of higher volumes on fixed cost coverage.
Distribution Group revenues increased $120.5 million, or 124 percent,
from the second quarter of 1999, and $264.5 million, or 155 percent, from the
first half of 1999. Incremental revenues generated by the acquired operations
and higher exploration activity in North America accounted for the increases
over the prior year periods. The divestiture of Wilson's OCTG operations in
mid-1999 partially offset the increases. Income before interest and taxes for
the three-month and six-month periods ended June 30, 2000, increased $5.1
million and $10.8 million, respectively, from the prior year levels. Higher
revenues and a favorable shift in product mix accounted for the majority of the
favorable variances from the 1999 periods.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $8.5 million from year-end 1999 and
equaled $32.6 million at June 30, 2000. The Company's operations used $6.5
million of cash flows in the first six months of 2000, as compared to providing
$73.8 million in the first six months of 1999. In the first six months 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 2000, the Company acquired Texas Mill Supply and Manufacturing,
Inc. for $30.0 million and two operations which market drilling fluids and
related services for a total of $10.1 million. In addition, the Company invested
$31.9 million in property, plant and equipment, net of proceeds, during the
six-month period. Financing activities during the period provided $87.4 million
of cash flows, consisting of $70.4 million of borrowings under credit facilities
and $17.0 million in proceeds received on the exercise of stock options.
12
<PAGE> 15
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 lines of credit facilities, which
are available for operating and financing needs, had additional borrowing
capacity of $99.6 million at June 30, 2000. In addition, the Company has filed a
shelf registration statement, which was declared effective July 21, 2000, with
the Securities and Exchange Commission under which it may offer - common stock,
debt securities, and units consisting of any combination of these securities.
The Company may offer these securities in one or more offerings with a total
initial offering price of up to $250.0 million. 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.
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.
13
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
On June 8, 2000, the Company's Board of Directors adopted a stockholder
rights plan. The rights plan provides for a dividend distribution of one
preferred stock purchase right for each outstanding share of common stock to
stockholders of record on June 20, 2000. Each right entitles the holder to
purchase from the Company at any time on or after the distribution date (as
defined) and prior to the occurrence of a triggering event (as defined)
one-hundredth of a share of the junior participating preferred stock at an
exercise price of $350, subject to adjustment. The rights are exercisable
beginning on the distribution date, which is the earlier of ten business days
after the date on which:
|X| there is a public announcement that a person or group of
affiliated or associated persons has acquired, or obtained the
right to acquire, beneficial ownership of 20 percent or more of
the outstanding shares of the Company's common stock; or
|X| a person commences a tender offer or exchange offer that would
result in a person or group beneficially owning 20 percent or more
of the outstanding shares of the Company's common stock.
If any person or group becomes an acquiring person, except pursuant to
a qualifying offer, including a tender offer or an exchange offer for all
outstanding shares of common stock at a price and on terms determined by at
least a majority of Smith's independent directors to be at a price that is fair
to the stockholders and otherwise in the Company's best interests and the best
interests of its stockholders, then each right will thereafter entitle the
holder to receive, upon exercise, a number of shares of common stock, or cash,
property or other securities of the Company, having a value equal to two times
the exercise price of the right, except that any rights beneficially owned by
the acquiring person shall be null and void. Additionally, at any time after the
date a person becomes an acquiring person, or a triggering event occurs,
including an event under which the Company is acquired in a merger or other
business combination transaction, other than a qualifying offer, in which Smith
is not the surviving corporation, or the Company sells or transfers 50% or more
of its assets or earning power, each right, other than rights previously voided,
will entitle its holder to purchase, at the right's then current exercise price,
shares of common stock of the acquiring person having a value of twice the
right's exercise price.
Until the distribution date, the rights will be evidenced by the common
stock certificates, and the surrender or transfer of any certificates for common
stock will also constitute the surrender or transfer of the rights associated
with that common stock. The rights are not exercisable until the distribution
date and will expire on June 8, 2010, unless the Company redeems them earlier.
The exercise price and the number of shares of junior participating preferred
stock or other securities issuable upon exercise of the rights are subject to
adjustment from time-to-time to prevent dilution. The Company will generally be
entitled to redeem the rights at $.01 per right at any time until the tenth
business day, subject to extension, after a person becomes an acquiring person.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
14
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders on April 28, 2000, shareholders
of the Company elected directors and ratified the Company's appointment of
auditors by the votes shown below.
<TABLE>
<CAPTION>
Agenda Item For Withheld Abstain
----------- ----------------- ---------------- ----------------
<S> <C> <C>
Election of directors:
Benjamin F. Bailar................. 44,117,808 1,000,036 --
Douglas L. Rock.................... 44,172,809 945,035 --
</TABLE>
<TABLE>
<CAPTION>
Agenda Item For Against Abstain
----------- ----------------- ---------------- ----------------
<S> <C> <C>
Ratification of auditors................ 45,089,954 8,004 19,886
</TABLE>
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 and six-month periods
ended June 30, 2000.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated April 26, 2000, reporting
under "Item 5. Other Events," related to a press release
announcing the Registrant's first quarter results.
The Registrant filed a Form 8-K dated June 15, 2000, reporting
under "Item 5. Other Events," related to replacement of the
existing stockholders rights plan.
15
<PAGE> 18
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: August 11, 2000 By: /s/ Douglas L. Rock
--------------------------- -----------------------------------
Douglas L. Rock
Chairman of the Board, Chief
Executive Officer, President and
Chief Operating Officer
Date: August 11, 2000 By: /s/ Margaret K. Dorman
--------------------------- -----------------------------------
Margaret K. Dorman
Senior Vice President and Chief
Financial Officer
(Principal Accounting Officer)
16
<PAGE> 19
EXHIBIT INDEX
(27) Financial Data Schedules.
27.1 Financial Data Schedule for the three-month and six-month periods
ended June 30, 2000.
