1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 (I.R.S. Employer
of incorporation or organization) Identification
Number)
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
May 9, 2001 was 50,571,842.
2
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Operations -
For the Three Months Ended March 31, 2001 and 2000...................... 1
Consolidated Balance Sheets -
As of March 31, 2001 and December 31, 2000.............................. 2
Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2001 and 2000...................... 3
Notes to Consolidated Financial Statements.................................. 4
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
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
2001 2000
-------------- --------------
REVENUES............................................ $ 865,311 $ 625,432
COSTS AND EXPENSES:
Costs of Revenues................................. 619,222 463,949
Selling Expenses.................................. 123,176 95,304
General and Administrative Expenses............... 33,496 27,613
Goodwill Amortization............................. 3,831 2,641
-------------- --------------
Total Costs and Expenses..................... 779,725 589,507
-------------- --------------
INCOME BEFORE INTEREST AND TAXES................... 85,586 35,925
INTEREST EXPENSE, NET............................... 10,343 8,765
-------------- --------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS................................ 75,243 27,160
INCOME TAX PROVISION................................ 24,805 9,675
-------------- --------------
INCOME BEFORE MINORITY INTERESTS.................... 50,438 17,485
MINORITY INTERESTS.................................. 16,220 6,162
-------------- --------------
NET INCOME.......................................... $ 34,218 $ 11,323
============== ==============
EARNINGS PER SHARE:
Basic............................................. $ 0.69 $ 0.23
============== ==============
Diluted........................................... $ 0.68 $ 0.23
============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................. 49,844 49,169
Diluted........................................... 50,439 49,930
The accompanying notes are an integral part of these
consolidated financial statements.
1
4
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
March 31, December 31,
2001 2000
------------ --------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 31,330 $ 36,544
Receivables, net........................................................... 735,838 654,420
Inventories................................................................ 610,546 560,027
Deferred tax assets, net................................................... 29,517 29,462
Prepaid expenses and other................................................. 35,039 29,550
------------ --------------
Total current assets..................................................... 1,442,270 1,310,003
------------ --------------
PROPERTY, PLANT AND EQUIPMENT, NET........................................... 416,438 409,048
GOODWILL, NET................................................................ 452,571 453,947
OTHER ASSETS................................................................. 128,144 122,289
------------ --------------
TOTAL ASSETS................................................................. $ 2,439,423 $ 2,295,287
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt................ $ 98,527 $ 165,951
Accounts payable........................................................... 296,622 280,820
Accrued payroll costs...................................................... 43,553 62,934
Income taxes payable....................................................... 34,445 23,747
Other...................................................................... 122,928 109,352
------------ --------------
Total current liabilities.............................................. 596,075 642,804
------------ --------------
LONG-TERM DEBT............................................................... 499,214 374,716
DEFERRED TAX LIABILITIES..................................................... 47,542 44,659
OTHER LONG-TERM LIABILITIES.................................................. 41,066 37,945
MINORITY INTERESTS........................................................... 403,921 377,682
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; 60,000 shares authorized; 50,562 shares
issued in 2001 (50,419 in 2000)........................................ 50,562 50,419
Additional paid-in capital................................................. 388,838 382,248
Retained earnings.......................................................... 444,527 410,309
Accumulated other comprehensive income..................................... (24,620) (17,793)
Less - treasury securities, at cost; 656 common shares in 2001 and 2000.... (7,702) (7,702)
------------ --------------
Total shareholders' equity............................................. 851,605 817,481
------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 2,439,423 $ 2,295,287
============ ==============
The accompanying notes are an integral part of these
consolidated financial statements.
2
5
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
------------------------
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 34,218 $ 11,323
Adjustments to reconcile net income to net cash provided by operating
activities, excluding the net effects of acquisitions:
Depreciation and amortization................................................... 22,170 19,434
Minority interests.............................................................. 16,220 6,162
Provision for losses on receivables............................................. 711 620
Gain on disposal of property, plant and equipment............................... (427) (1,046)
Foreign currency translation losses............................................. 385 77
Changes in operating assets and liabilities:
Receivables..................................................................... (51,531) (30,117)
Inventories..................................................................... (15,992) (5,611)
Accounts payable................................................................ (5,237) (15,918)
Other current assets and liabilities............................................ 305 (17,318)
Other non-current assets and liabilities........................................ (1,737) (4,507)
---------- ----------
Net cash used in operating activities............................................... (915) (36,901)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired..................................... (41,096) (30,000)
Purchases of property, plant and equipment.......................................... (28,440) (15,639)
Proceeds from disposal of property, plant and equipment............................. 3,295 3,049
---------- ----------
Net cash used in investing activities............................................... (66,241) (42,590)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............................................ 248,828 66,658
Principal payments of long-term debt................................................ (165,075) (5,499)
Net change in short-term borrowings................................................. (38,492) 12,847
Proceeds from exercise of stock options............................................. 4,737 13,498
Contribution by minority interest partner........................................... 12,000 --
---------- ----------
Net cash provided by financing activities........................................... 61,998 87,504
---------- ----------
Effect of exchange rate changes on cash............................................. (56) (154)
---------- ----------
Increase (decrease) in cash and cash equivalents.................................... (5,214) 7,859
Cash and cash equivalents at beginning of period.................................... 36,544 24,127
---------- ----------
Cash and cash equivalents at end of period.......................................... $ 31,330 $ 31,986
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.............................................................. $ 14,216 $ 11,944
Cash paid for income taxes.......................................................... $ 9,534 $ 5,599
The accompanying notes are an integral part of these
consolidated financial statements.
3
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 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 PRONOUNCEMENT
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.
Fair value hedges are used to manage the Company's exposure to
unanticipated changes in the fair value of a recognized asset or liability, or
an unrecognized firm commitment. Derivatives that are used to hedge recognized
assets or liabilities are not formally designated as fair value hedges, and all
changes in fair value are recognized in earnings as offsets to changes in the
fair value of the underlying assets or liabilities. Derivatives used to hedge an
unrecognized firm commitment are formally designated as fair value hedges, with
changes in fair value recognized in earnings and offset by changes in fair value
of the firm commitment.
Cash flow hedges are used to manage the Company's exposure to
unanticipated changes in future cash flows due to changes in foreign exchange
rates and interest rates. Derivatives that are used to hedge foreign denominated
future cash flows and changes in interest rates are formally designated as cash
flow hedges. To the extent effective, changes in fair value are recorded as a
component of accumulated other comprehensive income until the hedged
transactions occur and are recognized in earnings.
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
first quarter of 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 quarter of 2001, changes in foreign exchange rates and
interest rates resulted in an adjustment of $2.0 million to accumulated other
comprehensive income in the accompanying consolidated balance sheet. This amount
is expected to be recognized in the statement of operations during the next
twelve months, offset by the effect of changes in the underlying basis of the
hedged transactions.
4
7
3. BUSINESS COMBINATION
On January 31, 2001, the Company acquired 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. The 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). In
connection with the transaction, Wilson also agreed to acquire certain of the
seller's inventory, which will be liquidated in the normal course of business.
These inventories were purchased in exchange for a non-interest bearing note,
recorded in the accompanying financial statements at the discounted value, which
matures in January 2003.
This acquisition has been recorded using the purchase method of
accounting and, accordingly, the acquired operations have been included in the
results of operations since the date 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 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 March 31,
2001 related to this acquisition are based upon preliminary information and are
subject to change when additional information concerning final asset and
liability valuations is obtained. Material changes in the preliminary
allocations are not anticipated by management.
The following unaudited pro forma supplemental information presents
consolidated results of operations as if the Company's significant current and
prior year acquisitions had occurred on January 1, 2000 (in thousands, except
per share amounts):
Three Months Ended
March 31,
-------------------------------------
2001 2000
----------------- -----------------
Revenues............................................ $ 880,552 $ 695,460
Net income.......................................... 33,573 11,371
Earnings per share:
Basic..................................... $ 0.67 $ 0.23
Diluted................................... 0.67 0.23
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
acquired Van Leeuwen operations included in the Consolidated Statements of Cash
Flows (in thousands):
Fair value of assets, net of cash acquired.......... $ 75,095
Goodwill recorded................................... 1,965
Total liabilities assumed........................... (35,964)
-----------
Cash paid for acquisition of businesses,
net of cash acquired................................ $ 41,096
===========
5
8
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
March 31,
-------------------------------------
2001 2000
----------------- -----------------
BASIC EPS:
Net income....................................... $ 34,218 $ 11,323
================= =================
Weighted average number of common
shares outstanding......................... 49,844 49,169
----------------- -----------------
Basic EPS........................................ $ 0.69 $ 0.23
================= =================
DILUTED EPS:
Net income....................................... $ 34,218 $ 11,323
================= =================
Weighted average number of common
shares outstanding......................... 49,844 49,169
Dilutive effect of stock options................. 595 761
----------------- -----------------
50,439 49,930
----------------- -----------------
Diluted EPS...................................... $ 0.68 $ 0.23
================= =================
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 the unrealized fair value of certain derivative
financial instruments. The Company's comprehensive income is as follows (in
thousands):
Three Months Ended
March 31,
-------------------------------------
2001 2000
----------------- -----------------
Net income....................................... $ 34,218 $ 11,323
Change in unrealized fair value of derivatives... (2,029) --
Currency translation adjustments................. (4,798) (1,248)
----------------- -----------------
Comprehensive income............................. $ 27,391 $ 10,075
================= =================
6
9
6. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out ("LIFO") method for the majority of the
Company's inventories. The remaining inventories are costed under the first-in,
first-out ("FIFO") or average cost methods. Inventory costs, consisting of
materials, labor and factory overhead, are as follows (in thousands):
March 31, December 31,
2001 2000
-------------- --------------
Raw materials..................................................... $ 50,223 $ 46,923
Work-in-process................................................... 59,083 57,167
Products purchased for resale..................................... 177,004 139,591
Finished goods.................................................... 349,063 341,117
-------------- --------------
635,373 584,798
Reserves to state certain domestic inventories
($320,054 and $273,811 in 2001 and 2000,
respectively) on a LIFO basis................................. (24,827) (24,771)
--------------- -------------
$ 610,546 $ 560,027
============== =============
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
March 31, December 31,
2001 2000
-------------- --------------
Land.............................................................. $ 27,305 $ 24,683
Buildings......................................................... 92,490 91,432
Machinery and equipment........................................... 412,504 401,624
Rental tools...................................................... 220,832 225,962
-------------- --------------
753,131 743,701
Less-accumulated depreciation..................................... (336,693) (334,653)
-------------- --------------
$ 416,438 $ 409,048
============== ==============
7
10
8. DEBT
The following summarizes the Company's outstanding debt (in thousands):
March 31, December 31,
2001 2000
--------------- --------------
Current:
Short-term borrowings................................. $ 36,902 $ 75,394
Current portion of long-term debt..................... 61,625 90,557
--------------- -------------
$ 98,527 $ 165,951
=============== =============
Long-Term:
Notes, net of unamortized discounts................... $ 478,383 $ 259,529
Bank revolvers payable................................ 60,388 190,386
Term loans and other.................................. 22,068 15,358
--------------- -------------
560,839 465,273
Less current portion of long-term debt............... (61,625) (90,557)
--------------- -------------
$ 499,214 $ 374,716
=============== =============
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 March 31, 2001 are as follows (in thousands):
2003.................................................................... $ 52,006
2004.................................................................... 10,476
2005.................................................................... 10,476
2006.................................................................... 10,476
Thereafter.............................................................. 415,780
-----------
$ 499,214
===========
8
11
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
March 31,
-------------------------------
2001 2000
------------- ---------------
Revenues:
Oilfield Products and Services................. $ 581,491 $ 407,880
Distribution................................... 283,820 217,552
------------- --------------
$ 865,311 $ 625,432
============= ==============
Income before interest and taxes:
Oilfield Products and Services................. $ 80,401 $ 33,426
Distribution................................... 6,771 3,879
General corporate.............................. (1,586) (1,380)
------------- --------------
$ 85,586 $ 35,925
============= ==============
9
12
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, as well as 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 2000 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.
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 March 31,
-------------------------------------------------
2001 2000
----------------------- -----------------------
Amount Percent Amount Percent
---------- --------- ---------- ---------
Revenues:
M-I.................................. $ 392,269 45 $ 267,777 43
Smith Bits........................... 102,787 12 75,439 12
Smith Services....................... 86,435 10 64,664 10
---------- --------- ---------- ---------
Oilfield Products and Services. 581,491 67 407,880 65
Wilson............................... 283,820 33 217,552 35
---------- --------- ---------- ---------
Total........................ $ 865,311 100 $ 625,432 100
========== ========= ========== =========
Revenues by Area:
United States........................ $ 424,550 49 $ 297,839 48
Export............................... 36,452 4 26,850 4
Non-United States.................... 404,309 47 300,743 48
---------- --------- ---------- ---------
Total........................ $ 865,311 100 $ 625,432 100
========== ========= ========== =========
Percent of Percent of
Revenues Revenues
---------- ----------
Income Before Interest and Taxes:
Oilfield Products and Services....... $ 80,401 14 $ 33,426 8
Distribution......................... 6,771 2 3,879 2
General Corporate.................... (1,586) * (1,380) *
---------- ---------- ---------- ----------
Total........................ $ 85,586 10 $ 35,925 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 $124.5 million, or 46 percent, from the first quarter
of 2000. The revenue growth over the prior year quarter reflects the impact of
the expansion in market activity, acquisitions and improvements in pricing for
M-I's products and services. Excluding the impact of operations acquired in the
fourth quarter of 2000, revenues were 37 percent above the amounts reported in
the prior year quarter, which compares to a 30 percent increase in the average
M-I worldwide rig count between periods. M-I reported base business
11
14
revenue growth in all geographic areas with the majority of the overall increase
attributable to higher activity levels in the United States and Europe/Africa.
Smith Bits manufactures and sells three-cone and diamond drill bits
primarily for use in the oil and gas industry. Smith Bits' revenues for the
three months ended March 31, 2001 were $27.3 million, or 36 percent, above
amounts reported in the comparable 2000 period, with the significant improvement
in worldwide drilling activity favorably influencing demand for petroleum drill
bits. Revenues generated from the sale of both the petroleum three-cone and
diamond bits outpaced the 30 percent increase in the average M-I worldwide rig
count between periods. On a combined basis, petroleum three-cone and diamond bit
revenues grew 40 percent over prior year levels, reflecting the impact primarily
of higher sales volumes, improved pricing and recent product introductions. On a
geographic basis, approximately three-quarters of the revenue increase from
period-to-period was reported in the United States and Europe/Africa.
Smith Services manufactures and markets products and services used in
the oil and gas industry for drilling, workover, well completion and well
re-entry. Smith Services' revenues for the current period were $21.8 million, or
34 percent, above amounts reported in the first quarter of 2000. The revenue
increase primarily reflects the impact of higher activity levels in the Western
Hemisphere, improved pricing and new contract awards during the past twelve
months. The divestiture of the directional operations at the beginning of 2001
partially offset the period-to-period increase in revenue. After excluding the
impact of the divested operations, Smith Services' revenues were 39 percent
above prior year quarter amounts. Smith Services reported revenue growth across
all product groups with increased drilling-related revenues, including tubulars
and inspection and machine shop services, accounting for over 60 percent of the
increase from the prior year period.
Income Before Interest and Taxes
Income before interest and taxes for the Oilfield Products and Services
segment increased $47.0 million, or 141 percent, from the first quarter of 2000.
The increase reflects the combined effect of higher revenues and operating
margins. Operating margins for the oilfield operations rose six percentage
points from the prior year quarter, to 14 percent of revenues. The majority of
the increase in operating margins is attributable to improved gross margins
reflecting the impact of improved pricing, higher production volumes and
improved coverage of fixed costs. The remainder of the improvement reflects
primarily the impact of the leverage 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 $66.3 million, or 30 percent, from the first quarter of 2000.
Approximately one-half of the increase is attributable to the acquisition of the
U.S. operations of Van Leeuwen Pipe and Tube Corporation ("Van Leeuwen"),
effective February 1, 2001. After excluding the effect of the Van Leeuwen
operations, revenues were 16 percent above levels reported in the first quarter
of 2000. The majority of the base revenue increase related to the higher
exploration and production levels in North America, which favorably impacted
Wilson's energy branches. Higher customer spending associated with plant
maintenance benefited Wilson's industrial sector operations and contributed to
the period-to-period revenue growth.
Income Before Interest and Taxes
Wilson's income before interest and taxes increased $2.9 million, or 75
percent, from the prior year period, reflecting primarily the growth in
revenues. As a percentage of revenue, operating margins improved slightly from
the prior year level as a result of improved coverage of fixed operating
expenses.
12
15
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 March 31,
-----------------------------------------------------
2001 2000
------------------------- ------------------------
Percent of Percent of
Amount Revenues Amount Revenues
---------- ---------- ---------- ----------
Revenues.............................. $ 865,311 100 $ 625,432 100
---------- ---------- ---------- ----------
Gross profit.......................... 246,089 28 161,483 26
Operating expenses.................... 160,503 18 125,558 20
---------- ---------- ---------- ----------
Income before interest and taxes...... 85,586 10 35,925 6
Interest expense, net................. 10,343 1 8,765 1
---------- ---------- ---------- ----------
Income before income taxes
and minority interests.............. 75,243 9 27,160 5
Income tax provision.................. 24,805 3 9,675 2
---------- ---------- ---------- ----------
Income before minority interests...... 50,438 6 17,485 3
Minority interests.................... 16,220 2 6,162 1
---------- ---------- ---------- ----------
Net income............................ $ 34,218 4 $ 11,323 2
========== ========== ========== ==========
Consolidated revenues were $239.9 million, or 38 percent, above levels
reported in the first quarter of 2000. The revenue growth from the prior year
period is attributable primarily to the impact of higher worldwide exploration
and production activity levels, acquisitions and improved pricing in the
oilfield operations. The Company reported revenue increases in all geographic
regions, with approximately three-quarters of the increase generated in the
United States and Europe/Africa. After excluding the impact of acquired and
divested operations, revenues in the first quarter of 2001 were 30 percent above
levels reported in the first quarter of 2000.
Gross profit increased $84.6 million, or 52 percent, from the prior
year quarter. The period-to-period increase in gross profit reflects the effect
of the higher revenues, as well as improved gross profit margins in the
Company's oilfield operations. Consolidated gross margins rose over two
percentage points from the first quarter of 2000, to 28 percent of revenues, as
a result of higher sales and production volumes and price increases implemented
over the past year. On a consolidated basis, the effect of the gross margin
improvement in the Oilfield Products and Services segment was partially offset
by the impact of the acquired Van Leeuwen distribution operations which generate
lower gross profit margins.
Operating expenses, consisting of selling, general and administrative
expenses, increased $34.9 million from the first quarter of 2000. The majority
of the increase related to higher base revenue volumes, which grew 30 percent
over the prior year and contributed to 18 percent growth in personnel levels.
The variance between periods also reflects the incremental costs associated with
acquisitions completed subsequent to March 31, 2000, which collectively
accounted for over one-third of the overall increase in operating expenses.
Operating expenses as a percentage of revenues declined two percentage points
from the prior year quarter reflecting the leverage of higher revenues on the
Company's overall sales and administrative expenses.
13
16
Net interest expense, which represents interest expense less interest
income, increased $1.6 million from the first quarter of 2000. The majority of
the variance is attributable to the $126.3 million increase in outstanding debt
from March 31, 2000, which relates primarily to acquisitions completed within
the last twelve months.
The effective tax rate for the first quarter of 2001 approximated 33
percent, which is below the prior year quarter 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 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 $10.1 million from the first quarter of 2000 due primarily
to the improved profitability of the M-I operations.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents totaled $31.3 million at March 31, 2001, a
decrease of $5.2 million from the prior year-end. The Company's operations used
$0.9 million in the first quarter of 2001, as the impact of increased
profitability levels were offset by higher investments in working capital
accounts, primarily inventory and receivables. Cash flows from operations were
not sufficient to fund capital expenditure and acquisition needs resulting in
borrowings of $45.3 million during the quarter.
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. 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. During the first quarter of 2001, the Company
completed a public debt offering for $250.0 million of 6.75 percent senior notes
and used the net proceeds from the offering to repay short-term borrowings and
the majority of the Company's indebtedness under revolving credit agreements. As
a result, the Company had additional borrowing capacity of $195.1 million at
March 31, 2001 under various revolving lines of credit facilities, which is
available for operating and financing needs. 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 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.
14
17
Fair value hedges are used to manage the Company's exposure to
unanticipated changes in the fair value of a recognized asset or liability, or
an unrecognized firm commitment. Derivatives that are used to hedge recognized
assets or liabilities are not formally designated as fair value hedges, and all
changes in fair value are recognized in earnings as offsets to changes in the
fair value of the underlying assets or liabilities. Derivatives used to hedge an
unrecognized firm commitment are formally designated as fair value hedges, with
changes in fair value recognized in earnings and offset by changes in fair value
of the firm commitment.
Cash flow hedges are used to manage the Company's exposure to
unanticipated changes in future cash flows due to changes in foreign exchange
rates and interest rates. Derivatives that are used to hedge foreign denominated
future cash flows and changes in interest rates are formally designated as cash
flow hedges. To the extent effective, changes in fair value are recorded as a
component of accumulated other comprehensive income until the hedged
transactions occur and are recognized in earnings.
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
first quarter of 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 quarter of 2001, changes in foreign exchange rates and
interest rates resulted in an adjustment of $2.0 million to accumulated other
comprehensive income in the accompanying consolidated balance sheet. This amount
is expected to be recognized in the statement of operations during the next
twelve 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.
15
18
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
10.1 Amendment to Loan Agreement dated January 17, 2001, by and among
the Company and the Chase Manhattan Bank (successor by merger to
Chase Bank of Texas, National Association), individually and as
Agent, and the other financial parties thereto.
(b) Reports on Form 8-K
The Registrant filed reports on Form 8-K during the quarterly
period ended March 31, 2001. All filings were reported under
"Item 5, Other Events" and disclosed the following:
1. Form 8-K dated January 22, 2001 relating to press releases
announcing the acquisition of (a) the drilling fluids and
solids control assets of Bolland & Cia; (b) Emerson's Sweco
Division, which manufactures, markets and services specialty
separation equipment; and (c) a definitive agreement to
acquire substantially all of the net assets of Van Leeuwen
Pipe and Tube Corporation.
2. Form 8-K dated January 31, 2001 relating to a press release
announcing the Company's results for the three months and the
year ended December 31, 2000.
3. Form 8-K dated February 2, 2001 relating to a press release
announcing the acquisition of the U.S. net assets of Van
Leeuwen Pipe and Tube Corporation.
4. Form 8-K dated February 16, 2001 relating to completion of an
offering of $250 million of 6.75 percent senior notes due
2011.
5. Form 8-K dated March 26, 2001 relating to a press release
announcing the Company's financial outlook for the first
quarter of 2001.
16
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITH INTERNATIONAL, INC.
Registrant
Date: May 14, 2001 By: /s/ Douglas L. Rock
------------------------------ -------------------------------
Douglas L. Rock
Chairman of the Board, Chief Executive
Officer, President and Chief Operating
Officer
Date: May 14, 2001 By: /s/ Margaret K. Dorman
------------------------------ ------------------------------
Margaret K. Dorman
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
17
20
EXHIBIT INDEX
EXHIBIT NUMBER TITLE OF DOCUMENT
-------------- -----------------
Ex 10.1 Amendment to Loan Agreement