<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 September 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
November 8, 2000 was 50,413,729.
<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 Nine Months Ended September 30, 2000
and 1999...................................................... 1
Consolidated Balance Sheets -
As of September 30, 2000 and December 31, 1999................. 2
Consolidated Statements of Cash Flows -
For the Nine Months Ended September 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..................................................................... 15
</TABLE>
<PAGE> 3
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES............................................ $ 718,470 $ 481,541 $ 2,001,131 $ 1,268,258
COSTS AND EXPENSES:
Costs of Revenues................................. 523,118 362,705 1,469,961 939,398
Selling Expenses.................................. 107,060 81,213 302,158 221,911
General and Administrative Expenses............... 34,073 23,284 95,558 65,706
Non-Recurring Items............................... -- (81,378) -- (83,999)
--------- --------- ----------- -----------
Total Costs and Expenses..................... 664,251 385,824 1,867,677 1,143,016
--------- --------- ----------- -----------
INCOME BEFORE INTEREST AND TAXES.................... 54,219 95,717 133,454 125,242
INTEREST EXPENSE, NET............................... 8,554 7,816 26,077 31,188
--------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS... 45,665 87,901 107,377 94,054
INCOME TAX PROVISION................................ 15,131 38,549 36,219 42,044
--------- --------- ----------- -----------
INCOME BEFORE MINORITY INTERESTS.................... 30,534 49,352 71,158 52,010
MINORITY INTERESTS.................................. 10,060 2,492 24,387 1,565
--------- --------- ----------- -----------
NET INCOME.......................................... $ 20,474 $ 46,860 $ 46,771 $ 50,445
========= ========= =========== ===========
EARNINGS PER SHARE:
Basic............................................. $ 0.41 $ 0.96 $ 0.94 $ 1.04
========= ========= =========== ===========
Diluted........................................... $ 0.41 $ 0.95 $ 0.93 $ 1.03
========= ========= =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................. 49,750 48,835 49,550 48,474
Diluted........................................... 50,387 49,471 50,231 49,082
</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>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 33,669 $ 24,127
Receivables, net........................................................... 599,611 474,114
Inventories................................................................ 541,349 497,414
Deferred tax assets, net................................................... 50,283 38,954
Prepaid expenses and other................................................. 26,845 20,171
---------- ----------
Total current assets..................................................... 1,251,757 1,054,780
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET........................................... 395,102 381,082
GOODWILL, NET................................................................ 369,241 349,773
OTHER ASSETS................................................................. 101,668 108,940
---------- ----------
TOTAL ASSETS................................................................. $2,117,768 $1,894,575
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt................ $ 114,965 $ 50,784
Accounts payable........................................................... 263,595 218,551
Accrued payroll costs...................................................... 69,840 62,729
Income taxes payable....................................................... 22,489 17,468
Other...................................................................... 115,094 107,786
---------- ----------
Total current liabilities.............................................. 585,983 457,318
---------- ----------
LONG-TERM DEBT............................................................... 345,896 346,647
DEFERRED TAX LIABILITIES..................................................... 40,852 37,098
OTHER LONG-TERM LIABILITIES.................................................. 15,577 15,037
MINORITY INTERESTS........................................................... 339,622 318,255
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; 50,414 shares
issued in 2000 (49,586 in 1999).......................................... 50,414 49,586
Additional paid-in capital................................................. 381,624 351,397
Retained earnings.......................................................... 384,280 337,509
Cumulative translation adjustments......................................... (18,778) (10,570)
Less - treasury securities, at cost; 656 common shares in 2000 and 1999.... (7,702) (7,702)
----------- -----------
Total shareholders' equity............................................. 789,838 720,220
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $2,117,768 $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>
Nine Months Ended
September 30,
-----------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 46,771 $ 50,445
Adjustments to reconcile net income to net cash provided by operating
activities, excluding the net effects of acquisitions:
Depreciation and amortization................................................... 59,600 56,610
Minority interests.............................................................. 24,387 1,565
Provision for losses on receivables............................................. 2,149 1,216
Gain on disposal of property, plant and equipment............................... (5,234) (5,383)
Foreign currency translation losses............................................. 1,290 662
Gain on sale and other non-recurring items, net of tax.......................... -- (45,810)
Changes in operating assets and liabilities:
Receivables..................................................................... (108,550) 27,274
Inventories..................................................................... (31,275) 69,154
Accounts payable................................................................ 18,848 (18,190)
Accrued merger and restructuring costs.......................................... -- (33,285)
Other current assets and liabilities............................................ 25,914 (33,772)
Other non-current assets and liabilities........................................ (5,238) (6,497)
--------- ---------
Net cash provided by operating activities........................................... 28,662 63,989
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired..................................... (40,111) (300,593)
Proceeds from disposal of operations................................................ -- 44,218
Proceeds from sale of minority ownership interest in M-I............................ -- 321,000
Purchases of property, plant and equipment.......................................... (66,779) (42,060)
Proceeds from disposal of property, plant and equipment............................. 11,757 13,431
--------- ---------
Net cash provided by (used in) investing activities................................. (95,133) 35,996
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............................................ 83,062 49,855
Principal payments of long-term debt................................................ (25,214) (87,231)
Net change in short-term borrowings................................................. 913 (58,606)
Proceeds from exercise of stock options............................................. 17,564 2,685
Distributions to minority interest partners......................................... -- (1,440)
--------- ---------
Net cash provided by (used in) financing activities................................. 76,325 (94,737)
--------- ---------
Effect of exchange rate changes on cash............................................. (312) 324
--------- ---------
Increase in cash and cash equivalents............................................... 9,542 5,572
Cash and cash equivalents at beginning of period.................................... 24,127 22,717
--------- ---------
Cash and cash equivalents at end of period.......................................... $ 33,669 $ 28,289
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.............................................................. $ 26,044 $ 29,276
Cash paid for income taxes.......................................................... $ 15,746 $ 27,946
</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.
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 of 2000, 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 sheet as of September
30, 2000 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>
Nine Months Ended
September 30,
-------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenues................................................................ $2,007,145 $1,613,573
Net income (loss)....................................................... 46,831 (4,399)
Earnings (loss) per share:
Basic............................................................. $ 0.95 $ (0.09)
Diluted........................................................... 0.93 (0.09)
</TABLE>
As discussed in Note 3, the Company recognized an after-tax,
non-recurring gain of $45.0 million, or $0.91 per share, which is excluded from
the 1999 unaudited pro forma supplemental information. 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 combination been in effect at the date 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
In the first quarter of 1999, the Company recorded a non-recurring net
gain of $2.6 million ($0.2 million after-tax) related to a combination of a gain
on disposal of an industrial bentonite mining operation offset by unrelated
charges to write-off certain assets and settle a customer receivable. During the
third quarter of 1999, the Company recognized a non-recurring gain of $81.4
million ($45.0 million after-tax) associated with the sale of a minority
ownership interest in M-I in accordance with the provisions of Staff Accounting
Bulletin No. 51.
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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic EPS:
Net income ................................................... $20,474 $46,860 $46,771 $50,445
======= ======= ======= =======
Weighted average number of common
shares outstanding ......................................... 49,750 48,835 49,550 48,474
------- ------- ------- -------
Basic EPS .................................................... $ 0.41 $ 0.96 $ 0.94 $ 1.04
======= ======= ======= =======
Diluted EPS:
Net income ................................................... $20,474 $46,860 $46,771 $50,445
======= ======= ======= =======
Weighted average number of common
shares outstanding ......................................... 49,750 48,835 49,550 48,474
Dilutive effect of stock options ............................. 637 636 681 608
------- ------- ------- -------
50,387 49,471 50,231 49,082
------- ------- ------- -------
Diluted EPS................................................... $ 0.41 $ 0.95 $ 0.93 $ 1.03
======= ======= ======= =======
</TABLE>
5
<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 Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net income .................................... $ 20,474 $ 46,860 $ 46,771 $50,445
Currency translation adjustments............... (3,778) 2,380 (8,208) 649
-------- -------- -------- -------
Comprehensive income........................... $ 16,696 $ 49,240 $ 38,563 $51,094
======== ======== ======== =======
</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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Raw materials ....................................................... $ 43,102 $ 41,508
Work-in-process ..................................................... 55,179 43,498
Products purchased for resale ....................................... 149,696 118,786
Finished goods ...................................................... 324,540 317,054
--------- ---------
572,517 520,846
Reserves to state certain domestic inventories
($275,016 and $227,622 in 2000 and 1999,
respectively) on a LIFO basis ................................... (31,168) (23,432)
--------- ---------
$ 541,349 $ 497,414
========= =========
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Land..................................................................... $ 26,471 $ 25,119
Buildings................................................................ 90,357 87,024
Machinery and equipment.................................................. 398,972 365,360
Rental tools............................................................. 223,162 219,118
--------- ---------
738,962 696,621
Less-accumulated depreciation............................................ (343,860 (315,539)
--------- ---------
$ 395,102 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oilfield Products and Services Group.. $ 485,760 $ 326,272 $1,333,253 $ 942,353
Distribution Group ................... 232,710 155,269 667,878 325,905
---------- ---------- ---------- ----------
$ 718,470 $ 481,541 $2,001,131 $1,268,258
========== ========== ========== ==========
Income before interest and taxes:
Oilfield Products and Services Group.. $ 51,343 $ 14,893 $ 125,813 $ 47,590
Distribution Group ................... 4,231 788 11,834 (2,405)
General corporate .................... (1,355) (1,342) (4,193) (3,942)
Non-recurring items (See Note 3) ..... -- 81,378 -- 83,999
---------- ---------- ---------- ----------
$ 54,219 $ 95,717 $ 133,454 $ 125,242
========== ========== ========== ==========
</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 September 30, Nine Months Ended September 30,
------------------------------------------ ------------------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount %
-------- --- -------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues by Business Unit:
M-I ........................ $326,446 45 $211,644 44 $ 888,648 44 $ 601,437 47
Smith Bits ................. 84,018 12 59,720 12 235,448 12 174,439 14
Smith Services ............. 75,296 10 54,908 12 209,157 10 166,477 13
Wilson ..................... 232,710 33 155,269 32 667,878 34 325,905 26
-------- --- -------- --- ---------- --- ---------- ---
Total .............. $718,470 100 $481,541 100 $2,001,131 100 $1,268,258 100
======== === ======== === ========== === ========== ===
Revenues by Area:
U.S ........................ $358,935 50 $226,071 47 $ 985,533 49 $ 594,124 47
Export ..................... 28,240 4 21,585 4 85,283 4 70,030 6
Non-U.S .................... 331,295 46 233,885 49 930,315 47 604,104 47
-------- --- -------- --- ---------- --- ---------- ---
Total .............. $718,470 100 $481,541 100 $2,001,131 100 $1,268,258 100
======== === ======== === ========== === ========== ===
M-I Average Rig Count:
U.S........................ 1,130 768 1,020 659
Canada..................... 304 218 307 192
Non-North America.......... 967 802 906 849
-------- -------- ---------- ----------
Total.............. 2,401 1,788 2,233 1,700
======== ======== ========== ==========
</TABLE>
M-I ("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 $114.8 million, or 54 percent, from the third quarter
of 1999 and $287.2 million, or 48 percent, from the first nine months of 1999.
Revenues were favorably impacted by an increase in deepwater drilling activity
in the United States and Europe/Africa by major and national oil companies.
Offshore projects, which accounted for over one-half of M-I Fluids' third
quarter revenues, generate higher revenues than land-based projects due to the
complex nature of offshore drilling environments. Although the impact of
deepwater drilling projects accounted for the largest proportion of the
increase, higher land-based drilling activity and new contracts awarded during
the last half of 1999 also contributed to the revenue variance over the third
quarter of 1999. On a year-to-date basis, the revenue increase also reflects the
formation of the drilling fluids venture with Schlumberger Limited in July 1999.
Excluding the impact of incremental revenues from the acquired operations,
revenues for the first nine months of 2000 rose 39 percent over the comparable
period of the prior year.
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 $24.3 million, or 41 percent, from the third quarter of 1999, and
$61.0 million, or 35 percent, from the first nine months of 1999. The majority
of the revenue
9
<PAGE> 12
growth over the prior year quarter is attributable to the 34 percent increase in
worldwide drilling activity, which resulted in higher unit sales of three-cone
and diamond bits. On a combined basis, sales of three-cone and diamond bits
grew in excess of the level of market activity, which also impacted the
period-to-period results. The revenue increases were reported across all
geographic areas, with the majority of the growth concentrated in North America
where demand for three-cone and diamond bits has been favorably impacted by
higher natural gas and crude oil prices.
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 $20.4 million, or 37 percent, from
the third quarter of 1999, and $42.7 million, or 26 percent, from the first nine
months of 1999. The revenue increases over the prior year periods are primarily
attributable to higher demand for fishing and remedial products and services,
directional drilling and inspection services and tubular products in the United
States and, to a lesser extent, Canada.
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 $77.4 million from the third quarter of 1999 and $342.0
million from the first nine months of 1999. The revenue increase over the third
quarter of 1999 related to a combination of internal growth and the impact of
the Texas Mill Supply acquisition, which was completed in January 2000. The
improvement in base business revenues was primarily due to higher sales in the
energy sector, which benefited from the continued strengthening in North
American drilling and production operations. On a year-to-date basis, the
majority of the revenue growth is attributable to the acquired ConEmsco and
Texas Mill Supply operations, with the balance of the increase resulting from
higher U.S. exploration and production activity. Excluding the impact of
acquired operations, base business revenues were 26 percent above the third
quarter of 1999 and 29 percent over comparable year-to-date levels.
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 September 30, Nine Months Ended September 30,
----------------------------------------- ---------------------------------------
2000 1999 2000 1999
------------------- ------------------ ----------------- ------------------
Amount % Amount % Amount % Amount %
-------- --- -------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ................................. $718,470 100 $481,541 100 $2,001,131 100 $1,268,258 100
Gross profit ............................. 195,352 27 118,836 25 531,170 27 328,860 26
Operating expenses ....................... 141,133 20 104,497 22 397,716 20 287,617 23
Non-recurring items ...................... -- -- (81,378) (17) -- -- (83,999) (7)
-------- --- -------- --- ---------- --- ---------- ---
Income before interest and taxes ......... 54,219 7 95,717 20 133,454 7 125,242 10
Interest expense, net .................... 8,554 1 7,816 2 26,077 2 31,188 3
-------- --- -------- --- ---------- --- ---------- ---
Income before income taxes
and minority interests ................. 45,665 6 87,901 18 107,377 5 94,054 7
Income tax provision ..................... 15,131 2 38,549 8 36,219 2 42,044 3
-------- --- -------- --- ---------- --- ---------- ---
Income before minority
interests .............................. 30,534 4 49,352 10 71,158 3 52,010 4
Minority interests ....................... 10,060 1 2,492 -- 24,387 1 1,565 --
-------- --- -------- --- ---------- --- ---------- ---
Net income ............................... $ 20,474 3 $ 46,860 10 $ 46,771 2 $ 50,445 4
======== === ======== === ========== === ========== ===
</TABLE>
10
<PAGE> 13
Consolidated revenues increased $236.9 million, or 49 percent, from the
third quarter of 1999, and $732.9 million, or 58 percent, over the first nine
months of 1999. The revenue growth from the prior year quarter is primarily
attributable to base business operations which benefited from improved
exploration and production activity levels and the impact of drilling fluid
contracts awarded in the last half of 1999. For the nine month period, the
majority of the revenue growth was attributable to the base operations which
experienced revenue growth of 34 percent over the prior year period. Demand for
the Company's products and services increased across all geographic areas from
prior year levels, with the majority of the revenue growth reported in the
United States, Europe/Africa and Latin America.
Gross profit increased $76.5 million from the third quarter of 1999,
and $202.3 million from the first nine months of 1999. The improvements in gross
profit reflect the significant increase in revenues as well as higher gross
profit margins in both the Oilfield Products and Services and the Distribution
segments. Consolidated gross margins rose two percentage points from the third
quarter of 1999 due to the impact of higher sales volumes on fixed cost
coverage, increased absorption in the Company's manufacturing operations and
price increases instituted during 2000. On a year-to-date basis, gross margins
increased six-tenths of a percentage point over the prior year as improved fixed
cost coverage was partially offset by the higher proportion of Distribution
revenues to total Company revenues.
Operating expenses, consisting of selling, general and administrative
expenses, increased $36.6 million from the third quarter of 1999, and $110.1
million from the first nine months of 1999. Operating expenses as a percentage
of revenues declined two percentage points from the prior year quarter and three
percentage points from the first nine months of 1999 reflecting higher fixed
cost coverage related to the overall sales and administrative functions. The
absolute dollar increase over the third quarter of 1999 is primarily related to
higher variable-related expenses associated with the revenue increase, including
personnel additions and increased profit-sharing amounts attributable to the
reported profitability levels. The majority of the operating expense increase
for the nine-month period related to incremental costs of the acquired
operations, with the remainder due to higher variable-related expenses
associated with the revenue increase.
In the first quarter of 1999, the Company recorded a non-recurring net
gain of $2.6 million ($0.2 million after-tax) related to the sale of an
industrial bentonite mining operation which was offset by unrelated charges to
write-off certain assets and settle a customer receivable. During the third
quarter of 1999, the Company recognized a non-recurring gain of $81.4 million
($45.0 million after-tax) associated with the sale of a minority ownership
interest in M-I.
Net interest expense, which represents interest expense less interest
income, increased $0.7 million from the third quarter of 1999 due to higher
borrowings to finance general working capital needs, which increased as a result
of the revenue growth experienced by the Company. Interest expense decreased
$5.1 million from the first nine months of 1999 due to the reduction in July
1999 of outstanding indebtedness with the proceeds from the sale of an interest
in M-I. This reduction was partially offset by increased borrowings to finance
general working capital needs.
The effective tax rate for the first nine months of 2000 approximated
34 percent, which is lower than both the prior year's rate and the U.S.
statutory rate. The effective tax rate in 2000 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 sales of a minority ownership interest
in M-I and a mining operation.
Minority interests reflect the portion of the results of majority-owned
operations which are applicable to the minority interest partners. Minority
interest increased $7.6 million over the third quarter of 1999 and $22.8 million
over the first nine 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.
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<PAGE> 14
Segment Results
The following table presents financial information for each reportable
segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oilfield Products and Services Group $485,760 $326,272 $1,333,253 $ 942,353
Distribution Group ................. 232,710 155,269 667,878 325,905
-------- -------- ---------- ----------
$718,470 $481,541 $2,001,131 $1,268,258
======== ======== ========== ==========
Income before interest and taxes:
Oilfield Products and Services Group $ 51,343 $ 14,893 $ 125,813 $ 47,590
Distribution Group ................. 4,231 788 11,834 (2,405)
General corporate .................. (1,355) (1,342) (4,193) (3,942)
Non-recurring items ................ -- 81,378 -- 83,999
-------- -------- ---------- ----------
$ 54,219 $ 95,717 $ 133,454 $ 125,242
======== ======== ========== ==========
</TABLE>
Oilfield Products and Services Group revenues increased $159.5 million,
or 49 percent, from the third quarter of 1999, and $390.9 million, or 41
percent, from the first nine months of 1999, reflecting the increase in
exploration and production activity and new contract awards. Incremental
revenues generated by the acquired drilling fluid operations also contributed to
the revenue growth from the first nine months of 1999. Income before interest
and taxes for the Oilfield Products and Services Group increased $36.5 million
and $78.2 million, respectively, from 1999 quarter and nine-month levels. For
the three-month and nine-month periods ended September 30, 2000, income before
interest and taxes was eleven and nine percent of revenues, respectively, versus
five percent of revenues for the comparable prior year periods. Higher sales and
production volumes in the current year periods have resulted in improved fixed
cost coverage and absorption of manufacturing costs.
Distribution Group revenues increased $77.4 million from the third
quarter of 1999, and $342.0 million from the first nine months of 1999. Base
business revenues were 26 percent above the third quarter of 1999 and 29 percent
over comparable year-to-date levels due to the higher exploration and
production activity. Income before interest and taxes for the three-month and
nine-month periods ended September 30, 2000, increased $3.4 million and $14.2
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 $9.5 million during the nine-month
period to $33.7 million at September 30, 2000. The Company's operations provided
$28.7 million of cash flows in the first nine months of 2000, a decrease of
$35.3 million from the comparable prior year period. In the first nine 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
$55.0 million in property, plant and equipment, net of proceeds, during the nine
month period. Financing activities during the period provided $76.3 million of
cash flows, consisting of $58.7 million of borrowings under credit facilities
and $17.6 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 lines of credit facilities, which
are available for operating and financing needs, had additional borrowing
capacity of $117.4 million at September 30, 2000. In addition, the
12
<PAGE> 15
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 completing its evaluation of the impact of SFAS No. 133 on
its financial statements and does not anticipate that the application of this
statement will have a material impact on its financial position or results of
operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
The Company is exposed to certain market risks arising from
transactions that are entered into in the normal course of business. These
risks, which are primarily related to interest rate changes and fluctuations in
foreign exchange rates, are not considered to be material to the Company. During
the reporting period, no events or transactions have occurred which would
materially change the information disclosed in the Company's Annual Report on
Form 10-K.
13
<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 and nine-month
periods ended September 30, 2000.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated July 25, 2000, reporting
under "Item 5. Other Events," related to a press release
announcing the Registrant's second quarter results.
14
<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: November 13, 2000 By: /s/ DOUGLAS L. ROCK
-------------------------------- -----------------------------------
Douglas L. Rock
Chairman of the Board, Chief Executive
Officer, President and Chief Operating
Officer
Date: November 13, 2000 By: /s/ MARGARET K. DORMAN
-------------------------------- -----------------------------------
Margaret K. Dorman
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
15
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule for the three-month and nine-month
periods ended September 30, 2000.
</TABLE>
16
