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, 2001
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
411 NORTH SAM HOUSTON PARKWAY, SUITE 600
HOUSTON, TEXAS 77060
(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
10, 2001 was 49,935,351.
2
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months ended June 30, 2001 and 2000......................................... 2
CONSOLIDATED BALANCE SHEETS
As of June 30, 2001 and December 31, 2000................................................................ 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended June 30, 2001 and 2000.......................................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............10
Item 3. Qualitative and Quantitative Market Risk Disclosures...............................................15
PART II - OTHER INFORMATION
Items 1-6..................................................................................................16
SIGNATURES.....................................................................................................17
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
4
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------------
2001 2000 2001 2000
---------- ---------- ------------ ------------
REVENUES .................................. $ 872,389 $ 657,229 $ 1,737,700 $ 1,282,661
COSTS AND EXPENSES:
Costs of Revenues ....................... 613,453 482,894 1,232,675 946,843
Selling Expenses ........................ 128,541 99,794 251,717 195,098
General and Administrative Expenses ..... 35,106 28,532 68,602 56,145
Goodwill Amortization ................... 3,941 2,699 7,772 5,340
---------- ---------- ------------ ------------
Total Costs and Expenses ........ 781,041 613,919 1,560,766 1,203,426
---------- ---------- ------------ ------------
INCOME BEFORE INTEREST AND TAXES .......... 91,348 43,310 176,934 79,235
INTEREST EXPENSE, NET ..................... 10,738 8,758 21,081 17,523
---------- ---------- ------------ ------------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS ............................... 80,610 34,552 155,853 61,712
INCOME TAX PROVISION ...................... 26,087 11,413 50,892 21,088
---------- ---------- ------------ ------------
INCOME BEFORE MINORITY INTERESTS .......... 54,523 23,139 104,961 40,624
MINORITY INTERESTS ........................ 16,841 8,165 33,061 14,327
---------- ---------- ------------ ------------
NET INCOME ................................ $ 37,682 $ 14,974 $ 71,900 $ 26,297
========== ========== ============ ============
EARNINGS PER SHARE:
Basic ................................... $ 0.75 $ 0.30 $ 1.44 $ 0.53
========== ========== ============ ============
Diluted ................................. $ 0.75 $ 0.30 $ 1.42 $ 0.52
========== ========== ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................... 49,910 49,725 49,877 49,448
Diluted ................................. 50,517 50,363 50,505 50,153
The accompanying notes are an integral part of these consolidated
financial statements.
2
5
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value data)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 39,938 $ 36,544
Receivables, net ........................................................... 726,096 654,420
Inventories ................................................................ 646,192 560,027
Deferred tax assets, net ................................................... 27,785 29,462
Prepaid expenses and other ................................................. 38,334 29,550
----------- -----------
Total current assets ............................................... 1,478,345 1,310,003
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET ........................................... 426,951 409,048
GOODWILL, NET ................................................................ 454,464 453,947
OTHER ASSETS ................................................................. 136,034 122,289
----------- -----------
TOTAL ASSETS ................................................................. $ 2,495,794 $ 2,295,287
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt ................ $ 86,266 $ 165,951
Accounts payable ........................................................... 298,488 280,820
Accrued payroll costs ...................................................... 54,742 62,934
Income taxes payable ....................................................... 30,710 23,747
Other ...................................................................... 135,093 109,352
----------- -----------
Total current liabilities .......................................... 605,299 642,804
----------- -----------
LONG-TERM DEBT ............................................................... 494,101 374,716
DEFERRED TAX LIABILITIES ..................................................... 44,405 44,659
OTHER LONG-TERM LIABILITIES .................................................. 42,183 37,945
MINORITY INTERESTS ........................................................... 420,157 377,682
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000 shares authorized; no shares
issued or outstanding in 2001 or 2000 .................................... -- --
Common stock, $1 par value; 150,000 shares authorized; 50,591 shares
issued in 2001 (50,419 in 2000) .......................................... 50,591 50,419
Additional paid-in capital ................................................. 390,223 382,248
Retained earnings .......................................................... 482,209 410,309
Accumulated comprehensive loss ............................................. (25,672) (17,793)
Less - treasury securities, at cost; 656 common shares in 2001 and 2000 .... (7,702) (7,702)
----------- -----------
Total shareholders' equity ......................................... 889,649 817,481
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 2,495,794 $ 2,295,287
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
6
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
June 30,
------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 71,900 $ 26,297
Adjustments to reconcile net income to net cash provided by (used in)
operating activities, excluding the net effects of acquisitions:
Depreciation and amortization ......................................... 44,937 39,170
Minority interests .................................................... 33,061 14,327
Provision for losses on receivables ................................... 1,303 1,364
Gain on disposal of property, plant and equipment ..................... (3,302) (3,204)
Foreign currency translation losses ................................... 571 913
Changes in operating assets and liabilities:
Receivables ........................................................... (42,608) (49,792)
Inventories ........................................................... (54,063) (27,234)
Accounts payable ...................................................... (3,517) (16,279)
Other current assets and liabilities .................................. 12,179 11,192
Other non-current assets and liabilities .............................. (9,143) (3,297)
--------- ---------
Net cash provided by (used in) operating activities ..................... 51,318 (6,543)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ......................... (46,396) (40,111)
Purchases of property, plant and equipment .............................. (56,820) (38,825)
Proceeds from disposal of property, plant and equipment ................. 9,264 6,916
Other ................................................................... (1,325) --
--------- ---------
Net cash used in investing activities ................................... (95,277) (72,020)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ................................ 273,724 75,847
Principal payments of long-term debt .................................... (201,899) (9,214)
Net change in short-term borrowings ..................................... (41,838) 3,793
Proceeds from exercise of stock options ................................. 5,455 16,977
Contribution by minority interest partner ............................... 12,000 --
--------- ---------
Net cash provided by financing activities ............................... 47,442 87,403
--------- ---------
Effect of exchange rate changes on cash ................................. (89) (337)
--------- ---------
Increase in cash and cash equivalents ................................... 3,394 8,503
Cash and cash equivalents at beginning of period ........................ 36,544 24,127
--------- ---------
Cash and cash equivalents at end of period .............................. $ 39,938 $ 32,630
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest .................................................. $ 17,450 $ 16,216
Cash paid for income taxes .............................................. $ 37,503 $ 9,799
The accompanying notes are an integral part of these consolidated
financial statements.
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7
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 2000 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 current year presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations," which is effective for business combinations initiated after June
30, 2001. SFAS No. 141 eliminates the pooling-of-interest method of accounting
for business combinations and modifies the application of the purchase
accounting method.
The FASB also issued Statement of Financial Accounting Standards No.
142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," in July 2001 which
addresses financial accounting and reporting for goodwill and other intangible
assets. Under SFAS No. 142, goodwill and some intangibles will no longer be
amortized to earnings but will be tested for impairment. While most provisions
of SFAS No. 142 are effective for the Company beginning January 1, 2002,
goodwill and intangible assets acquired during the remainder of the current
fiscal year will be subject immediately to the provisions of the statement.
Although the Company continues to evaluate the impact of this recently issued
standard, assuming no asset impairment, the adoption of SFAS No. 142 will result
in the elimination of $15.7 million of goodwill amortization expected to be
recognized in fiscal 2001, or $9.2 million net of taxes and minority interests.
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities," effective January 1, 2001. SFAS No. 133 requires that the Company
record derivatives on the balance sheet at fair value and establishes criteria
for designation and effectiveness of hedging relationships. The nature of the
Company's business activities involves the management of various financial and
market risks, including those related to changes in currency exchange rates and
interest rates. The Company occasionally employs derivative financial
instruments such as foreign exchange contracts, foreign exchange options and
interest rate swap contracts to mitigate or eliminate certain of those risks.
The Company does not enter into derivative instruments for speculative purposes.
The adoption of SFAS No. 133 on January 1, 2001 did not have a material
impact on the Company's financial position or results of operations. During the
three-month and six-month periods ended June 30, 2001, the Company recorded the
change in fair market value related to fair value hedges, which included foreign
exchange contracts, to general and administrative expenses in the accompanying
consolidated statement of operations. These amounts were not material.
Additionally, the Company recorded the change in value related to cash flow
hedges, which included foreign exchange contracts and interest rate swaps, to
accumulated other comprehensive income. During the first six months of 2001,
changes in foreign exchange rates and interest rates resulted in an adjustment
of $2.3 million to accumulated other comprehensive income in the accompanying
consolidated balance sheet. Of this amount, $2.1 million is expected to be
recognized in the statement of operations during the next 12 months, offset by
the effect of changes in the underlying basis of the hedged transactions.
5
8
3. BUSINESS COMBINATIONS
During the six months ended June 30, 2001, the Company completed the
acquisitions of certain businesses for aggregate cash consideration of $46.4
million. The January 2001 acquisition of substantially all of the U.S. net
assets of Van Leeuwen Pipe and Tube Corporation ("Van Leeuwen"), a leading
provider of pipe, valves and fittings to the refining, petrochemical and power
generation industries, accounted for the majority of the current year activity.
This transaction was financed with cash consideration of $41.1 million, borrowed
under a short-term loan facility which was subsequently repaid with proceeds
from the Company's public debt offering (see Note 8).
These acquisitions have been recorded using the purchase method of
accounting and, accordingly, the acquired operations have been included in the
results of operations since the dates of acquisition. 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 acquired has been recorded as goodwill
and is currently being amortized on a straight-line basis over 20 years.
The balances included in the consolidated balance sheet as of June 30,
2001 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, 2000 (in thousands, except
per share amounts):
Six Months Ended
June 30,
-----------------------------
2001 2000
----------- -----------
Revenues.................................................... $ 1,752,941 $ 1,422,054
Net income.................................................. 71,255 26,003
Earnings per share:
Basic............................................. $ 1.43 $ 0.53
Diluted........................................... 1.41 0.52
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.
The following schedule summarizes investing activities related to the
current year acquisitions included in the consolidated statements of cash flows
(in thousands):
Fair value of assets, net of cash acquired................................... $ 76,032
Goodwill recorded............................................................ 5,947
Total liabilities assumed.................................................... (35,583)
----------
Cash paid for acquisition of businesses, net of cash acquired................ $ 46,396
==========
6
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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):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Basic EPS:
Net income ............................. $ 37,682 $ 14,974 $ 71,900 $ 26,297
======== ======== ======== ========
Weighted average number of common
shares outstanding ................... 49,910 49,725 49,877 49,448
======== ======== ======== ========
Basic EPS .............................. $ 0.75 $ 0.30 $ 1.44 $ 0.53
======== ======== ======== ========
Diluted EPS:
Net income ............................. $ 37,682 $ 14,974 $ 71,900 $ 26,297
======== ======== ======== ========
Weighted average number of common
shares outstanding ................... 49,910 49,725 49,877 49,448
Dilutive effect of stock options ....... 607 638 628 705
-------- -------- -------- --------
50,517 50,363 50,505 50,153
======== ======== ======== ========
Diluted EPS ............................ $ 0.75 $ 0.30 $ 1.42 $ 0.52
======== ======== ======== ========
5. COMPREHENSIVE INCOME
Comprehensive income encompasses net income and changes in the
components of accumulated other comprehensive income during the periods
presented. Accumulated other comprehensive income consists of currency
translation adjustments and changes in the unrealized fair value of certain
derivative financial instruments. The Company's comprehensive income is as
follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income ............................. $ 37,682 $ 14,974 $ 71,900 $ 26,297
Changes in unrealized fair value
of derivatives ....................... (287) -- (2,316) --
Currency translation adjustments ....... (765) (3,182) (5,563) (4,430)
-------- -------- -------- --------
Comprehensive income ................... $ 36,630 $ 11,792 $ 64,021 $ 21,867
======== ======== ======== ========
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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):
June 30, December 31,
2001 2000
---------- ------------
Raw materials .................................... $ 50,313 $ 46,923
Work-in-process .................................. 68,063 57,167
Products purchased for resale .................... 185,045 139,591
Finished goods ................................... 367,570 341,117
---------- ----------
670,991 584,798
Reserves to state certain domestic inventories
($334,987 and $273,811 in 2001 and 2000,
respectively) on a LIFO basis .................. (24,799) (24,771)
---------- ----------
$ 646,192 $ 560,027
========== ==========
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
June 30, December 31,
2001 2000
---------- ------------
Land ............................................. $ 26,617 $ 24,683
Buildings ........................................ 93,195 91,432
Machinery and equipment .......................... 425,493 401,624
Rental tools ..................................... 226,235 225,962
---------- ----------
771,540 743,701
Less-accumulated depreciation .................... (344,589) (334,653)
---------- ----------
$ 426,951 $ 409,048
========== ==========
8. DEBT
The following summarizes the Company's outstanding debt (in thousands):
June 30, December 31,
2001 2000
---------- ------------
Current:
Short-term borrowings .......................... $ 59,448 $ 75,394
Current portion of long-term debt .............. 26,818 90,557
---------- ----------
$ 86,266 $ 165,951
========== ==========
Long-Term:
Notes, net of unamortized discounts ............ $ 469,993 $ 259,529
Bank revolvers payable ......................... 31,800 190,386
Term loans and other ........................... 19,126 15,358
---------- ----------
520,919 465,273
Less current portion of long-term debt ......... (26,818) (90,557)
---------- ----------
$ 494,101 $ 374,716
========== ==========
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11
During the first quarter of 2001, the Company completed a public
offering of $250.0 million of 6.75 percent senior notes which mature in February
2011. The Company received net proceeds of $246.7 million from the offering,
which was used to repay short-term borrowings and indebtedness under revolving
credit agreements.
Principal payments of long-term debt for the twelve-month periods
ending subsequent to June 30, 2002 are as follows (in thousands):
2003...................................................................... $ 50,172
2004...................................................................... 10,476
2005...................................................................... 10,476
2006...................................................................... 10,476
Thereafter................................................................ 412,501
----------
$ 494,101
==========
9. 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 and Distribution.
The following table presents financial information for each reportable
segment (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -----------------------------
2001 2000 2001 2000
---------- ---------- ------------ ------------
Revenues:
Oilfield Products and Services....... $ 585,485 $ 439,613 $ 1,166,976 $ 847,493
Distribution......................... 286,904 217,616 570,724 435,168
---------- ---------- ------------ ------------
$ 872,389 $ 657,229 $ 1,737,700 $ 1,282,661
========== ========== ============ ============
Income before interest and taxes:
Oilfield Products and Services....... $ 85,841 $ 41,044 $ 166,242 $ 74,470
Distribution......................... 6,913 3,724 13,684 7,603
General corporate.................... (1,406) (1,458) (2,992) (2,838)
---------- ---------- ------------ ------------
$ 91,348 $ 43,310 $ 176,934 $ 79,235
========== ========== ============ ============
10. SUBSEQUENT EVENT
On July 26, 2001, the Company announced that its Board of Directors had
authorized a stock repurchase plan. The plan allows for the repurchase of up to
five million shares of common stock, subject to regulatory issues, market
considerations and other factors. The program will be executed from time to time
in the open market or in privately negotiated transactions. Repurchased shares
will be added to the Company's existing treasury stock and may be used for
acquisitions or other corporate purposes.
9
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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 and the Consolidated Financial Statements of the
Company and the related notes thereto and the related "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in the
Company's Annual Report on Form 10-K.
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 and separation equipment,
waste-management services, three-cone and diamond drill bits, fishing services,
drilling tools, underreamers, casing exit and multilateral systems, packers and
liner hangers. The Company also offers supply-chain management solutions through
an extensive branch network providing pipe, valves, fittings, mill, safety and
other 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.
During the first half of the current fiscal year, the average worldwide
rig count reached the highest level reported in the last 15 years. The majority
of the worldwide activity improvement has been attributable to increased U.S.
natural gas drilling due, in part, to higher commodity prices. After reaching
levels in excess of $9 per thousand British thermal units ("Btu") during late
2000 and early 2001, natural gas prices weakened in the second quarter and have
since declined further, currently equaling approximately $3 per thousand Btu. To
date, the decrease in the price of natural gas has not had a significant impact
on the level of U.S. drilling activity. Although a substantial slowdown in the
major global economies could impact energy demand and have an adverse effect on
the Company's financial results; the moderate decline in U.S. drilling activity
currently anticipated is not expected to have a significant impact on demand for
the Company's products and services.
10
13
RESULTS OF OPERATIONS
Segment Discussion
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 segment consists of three business units:
M-I, Smith Bits and Smith Services. The Distribution segment includes the Wilson
business unit. The revenue information below has been summarized by business
unit in order to provide additional information in analyzing the Company's
operations (dollars in thousands).
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- -------------------------------------------
2001 2000 2001 2000
----------------- ----------------- -------------------- -------------------
Amount % Amount % Amount % Amount %
--------- --- --------- --- ----------- --- ----------- ---
Revenues:
M-I............................ $ 392,403 45 $ 294,425 45 $ 784,672 45 $ 562,202 44
Smith Bits..................... 101,695 12 75,991 12 204,482 12 151,430 12
Smith Services................. 91,387 10 69,197 10 177,822 10 133,861 10
--------- --- --------- --- ----------- --- ----------- ---
Oilfield Products and Services 585,485 67 439,613 67 1,166,976 67 847,493 66
Wilson......................... 286,904 33 217,616 33 570,724 33 435,168 34
--------- --- --------- --- ----------- --- ----------- ---
Total.................. $ 872,389 100 $ 657,229 100 $ 1,737,700 100 $ 1,282,661 100
========= === ========= === =========== === =========== ===
Revenues by Area:
United States.................. $ 468,434 54 $ 328,759 50 $ 892,984 51 $ 626,598 49
Export......................... 32,262 4 30,193 5 68,714 4 57,043 4
Non-United States.............. 371,693 42 298,277 45 776,002 45 599,020 47
--------- --- --------- --- ----------- --- ----------- ---
Total.................. $ 872,389 100 $ 657,229 100 $ 1,737,700 100 $ 1,282,661 100
========= === ========= === =========== === =========== ===
Income Before Interest and Taxes:
Oilfield Products and Services. $ 85,841 15 $ 41,044 9 $ 166,242 14 $ 74,470 9
Distribution................... 6,913 2 3,724 2 13,684 2 7,603 2
General corporate.............. (1,406) * (1,458) * (2,992) * (2,838) *
--------- --- --------- --- ----------- --- ----------- ---
Total.................. $ 91,348 10 $ 43,310 7 $ 176,934 10 $ 79,235 6
========= === ========= === =========== === =========== ===
* not meaningful
Oilfield Products and Services Segment
Revenues
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, separation, pressure control, rig instrumentation and waste management.
M-I's revenues increased $98.0 million, or 33 percent, from the second quarter
of 2000 and $222.5 million, or 40 percent, from the first six months of 2000.
The revenue growth from the prior year comparable periods is attributable to the
approximate 28 percent increase in worldwide drilling activity and, to a lesser
extent, acquisitions and improvements in product and service pricing. After
excluding the effect of acquisitions, M-I's revenues in the second quarter of
2001 were 25 percent above the prior year period. The majority of the base
business revenue increase was reported in the United States and Europe/Africa.
11
14
Smith Bits manufactures and sells three-cone and diamond drill bits
primarily for use in the oil and gas industry. Smith Bits' revenues rose $25.7
million, or 34 percent, from the second quarter 2000 and $53.1 million, or 35
percent, from the first six months of 2000. During the same periods, petroleum
bit revenues, including three-cone and diamond bits, rose 37 percent and 38
percent, respectively, compared to an approximate 28 percent increase in the M-I
worldwide rig count. While revenues increased in all geographic areas over
amounts reported in the prior year quarter, the majority of the growth between
the current and prior year periods is attributable to the higher drilling
activity levels in the United States, Europe/Africa and Latin America.
Additionally, price increases for petroleum drill bits and recent product
introductions also contributed to the revenue increase from the comparable 2000
periods.
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 $22.2 million, or 32 percent, from
the second quarter of 2000 and $44.0 million, or 33 percent, from the first six
months of 2000. Excluding the impact of the directional operations sold in early
2001, revenues were 39 percent above prior year levels on both a quarter and
year-to-date basis. The base business revenue growth reflects the impact of the
higher worldwide exploration and production activity levels, new contract awards
and improved pricing. The majority of the revenue increase was reported in the
United States, Latin America and the Middle East with significant year-over-year
revenue growth across all product and service groups. Increased demand for
drilling products and services, primarily tubular and inspection-related
revenues, contributed over half of the base revenue growth.
Income Before Interest and Taxes
Income before interest and taxes for the Oilfield Products and Services
segment rose $44.8 million, or 109 percent, from the second quarter of 2000 and
$91.8 million, or 123 percent, from the first six months of 2000. These
increases reflect the impact of the significant revenue growth as well as the
improvement in operating margins. On a quarter and six-month basis, operating
margins for the oilfield operations increased by over five percentage points due
primarily to the expansion in gross profit margins. The gross profit margins
were favorably impacted by the higher sales and production volumes, pricing and,
to a lesser extent, a favorable shift in sales mix. The balance of the operating
margin improvement is attributable to the impact of higher revenue levels on
sales and administrative support expenses.
Distribution Segment
Revenues
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 $69.3 million, or 32 percent, from the second quarter of 2000
and $135.6 million, or 31 percent, from the first six months of 2000. After
excluding the effect of the Van Leeuwen operations, acquired in January 2001,
revenues were 12 percent and 13 percent, respectively, above the comparable
prior year periods. Over 80 percent of the base revenue growth was reported in
the United States where Wilson's energy branches were favorably impacted by the
higher exploration and production levels.
Income Before Interest and Taxes
Wilson's income before interest and taxes increased $3.2 million, or 86
percent, from the second quarter of 2000 and $6.1 million, or 80 percent, from
the first six months of 2000. The majority of this growth is attributable to the
approximate one percentage point improvement in operating margins due to
increased fixed cost coverage in the operating expense line. The effect of
improved gross margins in the U.S. energy branches in the current year periods
was impacted by the higher proportion of industrial and downstream revenues,
which traditionally generate lower gross profit margins.
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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):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ------------------------------------------
2001 2000 2001 2000
----------------- ----------------- ------------------- -------------------
Amount % Amount % Amount % Amount %
---------- --- ---------- --- ------------ --- ----------- ---
Revenues........................ $ 872,389 100 $ 657,229 100 $ 1,737,700 100 $ 1,282,661 100
---------- --- ---------- --- ------------ --- ----------- ---
Gross profit.................... 258,936 30 174,335 26 505,025 29 335,818 26
Operating expenses.............. 167,588 20 131,025 20 328,091 19 256,583 20
---------- --- ---------- --- ------------ --- ----------- ---
Income before interest and taxes 91,348 10 43,310 6 176,934 10 79,235 6
Interest expense, net........... 10,738 1 8,758 1 21,081 1 17,523 1
---------- --- ---------- --- ------------ --- ----------- ---
Income before income
taxes and minority interests.. 80,610 9 34,552 5 155,853 9 61,712 5
Income tax provision............ 26,087 3 11,413 2 50,892 3 21,088 2
---------- --- ---------- --- ------------ --- ----------- ---
Income before minority
interests..................... 54,523 6 23,139 3 104,961 6 40,624 3
Minority interests.............. 16,841 2 8,165 1 33,061 2 14,327 1
---------- --- ---------- --- ------------ --- ----------- ---
Net income...................... $ 37,682 4 $ 14,974 2 $ 71,900 4 $ 26,297 2
========== === ========== === ============ === =========== ===
Consolidated revenues increased $215.2 million, or 33 percent, from the
second quarter of 2000 and $445.0 million, or 35 percent, from the first six
months of 2000. Approximately 70 percent of the revenue improvement over the
prior year periods is attributable to base business growth. After excluding the
effect of acquired operations and the sale of Smith Services' directional
business, consolidated revenues were 23 percent above the second quarter of
2000. The year-to-year increase in revenues is attributable to the higher
drilling activity levels as well as improved pricing for the oilfield
operations' products and services. On a geographic basis, the majority of the
increase was generated in the United States and Europe/Africa.
Gross profit rose $84.6 million, or 49 percent, from the second quarter
of 2000 and $169.2 million, or 50 percent, from the first six months of 2000.
Higher revenue levels together with improved oilfield operation gross margins
accounted for the gross profit increases from the 2000 levels. Consolidated
gross profit margins were 30 percent in the second quarter of 2001 and 29
percent on a year-to-date basis, an increase of four percentage points and three
percentage points, respectively, over the prior year periods. The improvement is
attributable to the Oilfield Products and Services segment reflecting primarily
the effect of higher sales and production volumes and product and service
pricing improvements.
Operating expenses, consisting of selling, general and administrative
expenses, increased $36.6 million from the second quarter of 2000 and $71.5
million from the first six months of 2000. The majority of the overall operating
expense increase is attributable to the growth in base revenue volumes, which
contributed to a 16 percent increase in personnel levels. Incremental expenses
associated with acquired operations since June 30, 2000 also contributed to the
increase, and collectively accounted for over one-third of the increase over the
prior year periods. Operating expenses as a percentage of revenues declined one
percentage point from the first half of 2000 reflecting higher fixed cost
coverage related to the overall sales and administrative functions.
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Net interest expense, which represents interest expense less interest income,
was $2.0 million above the second quarter of 2000 and $3.6 million above the
first six months of 2000. The increase reflects the addition of $107.8 million
in outstanding debt during the twelve-month period, which was incurred primarily
in connection with acquisitions completed in the fourth quarter of 2000 and the
first quarter of 2001.
The effective tax rate approximated 33 percent for the first six months
of 2001, which is below the prior year rate and the U.S. statutory rate. The
effective tax rate in 2001 is lower than 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 Company properly
consolidates the pre-tax income related to the minority partner's share of U.S.
partnership earnings but excludes the related tax provision. The current period
effective rate is below the prior period rate as a result primarily of a
favorable shift in the geographic mix of pre-tax income and the impact of higher
pre-tax income on certain non-deductible expenses.
Minority interests reflect the portion of the results of majority-owned
operations which are applicable to the minority interest partners. Minority
interests increased $8.7 million from the second quarter of 2000 and $18.7
million from the first six months of 2000 as a result of the improved
profitability of the M-I joint venture.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents totaled $39.9 million at June 30, 2001, an
increase of $3.4 million from December 31, 2000. Cash flows provided by
operations were $51.3 million in the first six months of 2001, which is $57.8
million above the amount reported in the comparable period in 2000. This
improvement reflects the higher profitability levels; however, cash flows from
operations were not sufficient to fund capital expenditure and acquisition needs
resulting in borrowings of $30.0 million during the first six months of 2001.
Cash flows utilized in investing activities equaled $95.3 million
consisting of $47.6 million of investments in net property, plant and equipment
and $47.7 million for acquisitions and other investing activities. On January
31, 2001, the Company acquired substantially all of the U.S. net assets of Van
Leeuwen Pipe and Tube Corporation for cash consideration of $41.1 million.
Additionally, the Company completed other acquisitions in the second quarter of
2001 for combined cash consideration of $5.3 million. Management continues to
evaluate opportunities to acquire products or businesses complementary to the
Company's operations. These acquisitions, if they arise, may involve the use of
cash or, depending upon the size and terms of the acquisition, may require debt
or equity financing.
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. In February 2001, the Company completed a public
offering of $250.0 million of 6.75 percent senior notes which was used to repay
short-term borrowings and the majority of the Company's indebtedness under
revolving credit agreements. The Company's revolving lines of credit facilities,
which are available for operating and financing needs, had additional borrowing
capacity of $202.9 million at June 30, 2001. 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.
On July 26, 2001, the Company announced that its Board of Directors had
authorized a stock repurchase plan. The plan allows for the repurchase of up to
five million shares of common stock, subject to regulatory issues, market
considerations and other factors. Share repurchases, if they arise, will be
financed with cash on-hand or borrowings under existing credit facilities.
NEW ACCOUNTING AND REGULATORY PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations," which is effective for business combinations initiated after June
30, 2001. SFAS No. 141 eliminates the pooling-of-interest method of accounting
for business combinations and modifies the application of the purchase
accounting method.
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17
The FASB also issued Statement of Financial Accounting Standards No.
142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," in July 2001 which
addresses financial accounting and reporting for goodwill and other intangible
assets. Under SFAS No. 142, goodwill and some intangibles will no longer be
amortized to earnings but will be tested for impairment. While most provisions
of SFAS No. 142 are effective for the Company beginning January 1, 2002,
goodwill and intangible assets acquired during the remainder of the current
fiscal year will be subject immediately to the provisions of the statement.
Although the Company continues to evaluate the impact of this recently issued
standard, assuming no asset impairment, the adoption of SFAS No. 142 will result
in the elimination of $15.7 million of goodwill amortization expected to be
recognized in fiscal 2001, or $9.2 million net of taxes and minority interests.
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities," effective January 1, 2001. SFAS No. 133 requires that the Company
record derivatives on the balance sheet at fair value and establishes criteria
for designation and effectiveness of hedging relationships. The nature of the
Company's business activities involves the management of various financial and
market risks, including those related to changes in currency exchange rates and
interest rates. The Company occasionally employs derivative financial
instruments such as foreign exchange contracts, foreign exchange options and
interest rate swap contracts to mitigate or eliminate certain of those risks.
The Company does not enter into derivative instruments for speculative purposes.
The adoption of SFAS No. 133 on January 1, 2001 did not have a material
impact on the Company's financial position or results of operations. During the
three-month and six-month periods ended June 30, 2001, the Company recorded the
change in fair market value related to fair value hedges, which included foreign
exchange contracts, to general and administrative expenses in the accompanying
consolidated statement of operations. These amounts were not material.
Additionally, the Company recorded the change in value related to cash flow
hedges, which included foreign exchange contracts and interest rate swaps, to
accumulated other comprehensive income. During the first six months of 2001,
changes in foreign exchange rates and interest rates resulted in an adjustment
of $2.3 million to accumulated other comprehensive income in the accompanying
consolidated balance sheet. Of this amount, $2.1 million is expected to be
recognized in the statement of operations during the next 12 months, offset by
the effect of changes in the underlying basis of the hedged transactions.
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.
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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
At the Annual Meeting of Shareholders on May 22, 2001, shareholders of
the Company elected all nominated directors, ratified the Company's appointment
of auditors, approved an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock to 150
million shares, and approved amendments to the Smith International, Inc. Stock
Plan for Outside Directors by the votes shown below.
For Withheld Abstain
------------ ----------- ------------
Election of directors:
James R. Gibbs.................. 39,280,989 4,536 7,412,745
Jerry W. Neely.................. 39,213,513 72,012 7,480,221
For Against Abstain
------------ ----------- ------------
Approval of amendment to increase
the number of authorized shares
of common stock................. 33,801,634 2,869,522 22,578
For Against Abstain
------------ ----------- ------------
Approval of amendment to Stock Plan
for Outside Directors........... 42,254,614 4,383,136 55,984
For Against Abstain
------------ ----------- ------------
Ratification of auditors............. 46,626,205 52,479 15,050
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated April 18, 2001, reporting under
"Item 5. Other Events," related to a press release announcing the
Company's results for the three months ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITH INTERNATIONAL, INC.
Registrant
Date: August 13, 2001 By: /s/ Douglas L. Rock
--------------------------- ----------------------------------------
Douglas L. Rock
Chairman of the Board, Chief Executive
Officer, President and
Chief Operating Officer
Date: August 13, 2001 By: /s/ Margaret K. Dorman
--------------------------- ----------------------------------------
Margaret K. Dorman
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
17