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, 2002
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 May 9,
2002 was 50,664,435.
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months ended March 31, 2002 and 2001........................................................1
CONSOLIDATED BALANCE SHEETS
As of March 31, 2002 and December 31, 2001................................................................2
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months ended March 31, 2002 and 2001........................................................3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............8
Item 3. Qualitative and Quantitative Market Risk Disclosures...............................................14
PART II - OTHER INFORMATION
Items 1-6..................................................................................................14
SIGNATURES.....................................................................................................15
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
Three Months Ended
March 31,
---------------------
2002 2001
-------- --------
Revenues .............................................. $827,377 $865,311
Costs and expenses:
Costs of revenues ................................... 585,875 619,222
Selling expenses .................................... 131,059 123,176
General and administrative expenses ................. 35,995 33,496
Goodwill amortization ............................... -- 3,831
-------- --------
Total costs and expenses .................... 752,929 779,725
-------- --------
Operating income ...................................... 74,448 85,586
Interest expense, net ................................. 10,016 10,343
-------- --------
Income before income taxes and
minority interests ................................... 64,432 75,243
Income tax provision .................................. 19,645 24,805
-------- --------
Income before minority interests ...................... 44,787 50,438
Minority interests .................................... 16,057 16,220
-------- --------
Net income ............................................ $ 28,730 $ 34,218
======== ========
Basic earnings per share:
Net income .......................................... $ 0.58 $ 0.69
======== ========
Net income, excluding impact of goodwill amortization $ 0.58 $ 0.73
======== ========
Diluted earnings per share:
Net income .......................................... $ 0.58 $ 0.68
======== ========
Net income, excluding impact of goodwill amortization $ 0.58 $ 0.72
======== ========
Weighted average shares outstanding:
Basic ............................................... 49,420 49,844
Diluted ............................................. 49,919 50,439
The accompanying notes are an integral part of these consolidated
financial statements.
1
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value data)
March 31, December 31,
2002 2001
---------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 43,935 $ 44,683
Receivables, net ......................................................... 723,617 752,165
Inventories .............................................................. 644,567 653,151
Deferred tax assets, net ................................................. 32,789 35,414
Prepaid expenses and other ............................................... 39,459 37,618
---------- ----------
Total current assets ............................................. 1,484,367 1,523,031
Property, Plant and Equipment, net ......................................... 490,197 488,497
Goodwill, net .............................................................. 577,124 574,550
Other Assets ............................................................... 163,564 149,750
---------- ----------
Total Assets ............................................................... $2,715,252 $2,735,828
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt .............. $ 133,352 $ 148,693
Accounts payable ......................................................... 262,509 284,502
Accrued payroll costs .................................................... 56,056 81,803
Income taxes payable ..................................................... 43,319 41,143
Other .................................................................... 95,139 109,863
---------- ----------
Total current liabilities ........................................ 590,375 666,004
---------- ----------
Long-Term Debt ............................................................. 534,420 538,842
Deferred Tax Liabilities ................................................... 50,152 40,504
Other Long-Term Liabilities ................................................ 54,469 51,027
Minority Interests ......................................................... 506,240 490,292
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000 shares authorized; no shares
issued or outstanding in 2002 or 2001 .................................. -- --
Common stock, $1 par value; 150,000 shares authorized; 50,649 shares
issued in 2002 (50,594 in 2001) ........................................ 50,649 50,594
Additional paid-in capital ............................................... 392,073 389,989
Retained earnings ........................................................ 591,184 562,454
Accumulated other comprehensive income ................................... (25,180) (24,748)
Less - Treasury securities, at cost; 1,192 common shares ................. (29,130) (29,130)
---------- ----------
Total stockholders' equity ....................................... 979,596 949,159
---------- ----------
Total Liabilities and Stockholders' Equity ................................. $2,715,252 $2,735,828
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
2
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended
March 31,
--------------------------
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................... $28,730 $34,218
Adjustments to reconcile net income to net cash provided by (used in) operating
activities, excluding the net effects of acquisitions:
Depreciation and amortization ............................................... 21,024 22,170
Minority interests .......................................................... 16,057 16,220
Provision for losses on receivables ......................................... 5,549 711
Gain on disposal of property, plant and equipment ........................... (1,676) (427)
Foreign currency translation (gains) losses ................................. (140) 385
Changes in operating assets and liabilities:
Receivables ................................................................. 21,820 (51,531)
Inventories ................................................................. 7,881 (15,992)
Accounts payable ............................................................ (21,993) (5,237)
Other current assets and liabilities ........................................ (33,254) 305
Other non-current assets and liabilities .................................... (4,593) (1,737)
------- -------
Net cash provided by (used in) operating activities ........................... 39,405 (915)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ............................... -- (41,096)
Purchases of property, plant and equipment .................................... (25,746) (28,440)
Proceeds from disposal of property, plant and equipment ....................... 4,001 3,295
------- -------
Net cash used in investing activities ......................................... (21,745) (66,241)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ...................................... 593 248,828
Principal payments of long-term debt .......................................... (14,413) (165,075)
Net change in short-term borrowings ........................................... (5,943) (38,492)
Proceeds from exercise of stock options ....................................... 1,525 4,737
Contributions from minority interest partners ................................. -- 12,000
------- -------
Net cash provided by (used in) financing activities ........................... (18,238) 61,998
------- -------
Effect of exchange rate changes on cash ....................................... (170) (56)
------- -------
Decrease in cash and cash equivalents ......................................... (748) (5,214)
Cash and cash equivalents at beginning of period .............................. 44,683 36,544
------- -------
Cash and cash equivalents at end of period .................................... $43,935 $31,330
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ........................................................ $18,275 $14,216
Cash paid for income taxes .................................................... $ 9,459 $ 9,534
The accompanying notes are an integral part of these consolidated
financial statements.
3
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 2001 Annual Report on Form 10-K
and other current filings with the Commission.
The unaudited consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the interim periods. All significant
intercompany balances and transactions have been eliminated in the accompanying
financial statements. Results for the interim periods are not necessarily
indicative of results for the year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations," which is required to be adopted
by the Company no later than January 1, 2003. SFAS No. 143 addresses the
financial accounting and reporting for retirement obligations and costs
associated with tangible long-lived assets. The Company is currently reviewing
the provisions of SFAS No. 143 to determine the standard's impact, if any, on
its financial statements upon adoption.
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The adoption of SFAS No. 144
did not impact the Company's financial position or results of operations.
The Company has also adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which addresses financial accounting and reporting for
goodwill and other intangible assets. Effective January 1, 2002, goodwill and
some intangibles are no longer amortized to earnings but are tested for
impairment under SFAS No. 142. During the first quarter of 2002, the Company
completed the transitional impairment test required by the standard, the results
of which did not impact the Company's financial position or results of
operations. If SFAS No. 142 had been adopted effective January 1, 2001, goodwill
amortization of $3.8 million, or $2.2 million net of taxes and minority
interests, for the quarter ended March 31, 2001 would not have been recognized.
3. NON-RECURRING CHARGES
During the first quarter of 2002, the Company recognized special
charges totaling $7.9 million, or $3.4 million net of taxes and minority
interests. The accompanying financial statements include a $4.3 million
charge for estimated losses on receivables in Argentina attributable to recent
economic events. The provision was necessitated by recent Argentinean
legislation, which requires the Company to settle certain U.S.
dollar-denominated transactions in pesos. The remainder of the charge relates
to restructuring efforts undertaken in response to activity-level declines,
the primary component of which is severance costs incurred in connection
with employee terminations.
From a presentation standpoint, $5.8 million of the charges are
included in general and administrative expenses, $1.7 million are reflected
in selling expenses and the remainder are recorded in cost of revenues.
4
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.
Certain outstanding employee stock options were not included in the computation
of diluted earnings per common share as the exercise price was greater than the
average market price for the Company's stock during the corresponding period.
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,
------------------------
2002 2001
--------- ---------
Basic EPS:
Net income............................. $ 28,730 $ 34,218
========= =========
Weighted average number of common
shares outstanding................... 49,420 49,844
========= =========
Basic EPS.............................. $ 0.58 $ 0.69
========= =========
Diluted EPS:
Net income............................. $ 28,730 $ 34,218
========= =========
Weighted average number of common
shares outstanding................... 49,420 49,844
Dilutive effect of stock options....... 499 595
--------- ---------
49,919 50,439
========= =========
Diluted EPS............................ $ 0.58 $ 0.68
========= =========
5. COMPREHENSIVE INCOME
Comprehensive income includes net income and changes in the components
of accumulated other comprehensive income during the periods presented. The
Company's comprehensive income is as follows (in thousands):
Three Months Ended
March 31,
------------------------
2002 2001
--------- ---------
Net income............................................ $ 28,730 $ 34,218
Changes in unrealized fair value of derivatives, net.. 35 (2,029)
Currency translation adjustments...................... (467) (4,798)
--------- ---------
Comprehensive income.................................. $ 28,298 $ 27,391
========= =========
As of March 31, 2002, accumulated other comprehensive income in the
accompanying consolidated balance sheet includes $23.3 million of cumulative
currency translation losses, $1.0 million of cumulative changes in unrealized
fair value of derivatives and $0.9 million of cumulative pension liability
adjustments.
5
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):
March 31, December 31,
2002 2001
--------- -----------
Raw materials ...................................... $ 48,096 $ 50,821
Work-in-process .................................... 60,345 65,008
Products purchased for resale ...................... 159,153 154,787
Finished goods ..................................... 402,119 406,143
--------- ---------
669,713 676,759
Reserves to state certain U.S. inventories
($305,040 in 2002 and $300,868 in 2001,
respectively) on a LIFO basis .................... (25,146) (23,608)
--------- ---------
$ 644,567 $ 653,151
========= =========
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
March 31, December 31,
2002 2001
--------- -----------
Land................................................ $ 30,595 $ 28,390
Buildings........................................... 101,164 100,888
Machinery and equipment............................. 485,959 482,045
Rental tools........................................ 246,862 243,913
--------- ---------
864,580 855,236
Less-Accumulated depreciation....................... 374,383 366,739
--------- ---------
$ 490,197 $ 488,497
========= =========
6
8. INDUSTRY SEGMENTS
The Company manufactures and markets premium products and services to
the oil and gas exploration and production industry, the petrochemical industry
and other industrial markets. The Company aggregates its operations into 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,
------------------------------------
2002 2001
----------------- -----------------
Revenues:
Oilfield Products and Services....... $ 592,870 $ 581,491
Distribution......................... 234,507 283,820
----------------- -----------------
$ 827,377 $ 865,311
================= =================
Operating income:
Oilfield Products and Services....... $ 75,939 $ 80,401
Distribution......................... 68 6,771
General corporate.................... (1,559) (1,586)
----------------- -----------------
$ 74,448 $ 85,586
================= =================
March 31, December 31,
2002 2001
----------------- -----------------
Goodwill:
Oilfield Products and Services....... $ 540,083 $ 537,509
Distribution......................... 37,041 37,041
----------------- -----------------
$ 577,124 $ 574,550
================= =================
The change in goodwill during the first quarter of 2002 reflects
revisions to preliminary purchase price allocations.
9. CONTINGENCIES
The Company is a party to various legal and environmental matters
arising in the ordinary course of business. In the opinion of management,
after considering established reserves and contractual indemnifications
obtained, these matters are not expected to have a material adverse effect
on the Company's consolidated financial position or results of operations.
In the unlikely event that the parties providing the environmental
indemnifications do not fulfill their obligations, such event could result
in the recognition of up to $25.0 million in additional environmental
exposure, impacting earnings and cash flows in future periods.
7
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. This 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 and petrochemical industries 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, valve, tool, 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.
The year-over-year decline in the worldwide rig count relates to lower
North American activity levels, particularly in the United States. Drilling
activity in the U.S. market is primarily influenced by natural gas fundamentals,
as over 80 percent of the U.S. rig count is currently natural gas-directed.
After bottoming in late March 2002, activity levels in the United States have
increased eight percent due, in part, to declining natural gas production and a
strengthening U.S. economy. The long-term outlook for exploration and production
activity is favorable based upon expected growth in worldwide energy
consumption; however, several factors including political and regional
instabilities, commodity prices, oil and natural gas storage levels and the
global economic environment could impact activity levels on a short-term basis.
Management also believes the increasing complexity of drilling programs has
resulted in a shift in exploration and production spending toward value-added,
technology-based products, which reduce operators' overall drilling costs. The
Company continues to focus on investing in the development of technology-based
products that considerably improve the drilling process through increased
efficiency and rates of penetration and reduced formation damage. Management
believes the overall savings realized by the use of the Company's premium
products, such as polycrystalline diamond drill bits, diamond-enhanced
three-cone drill bits and synthetic drilling fluids, compensate for the higher
costs of these products over their non-premium counterparts.
8
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 discussion 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,
----------------------------------------------
2002 2001
--------------------- ----------------------
Amount % Amount %
------------- ---- ------------- -----
Revenues:
M-I..................................................... $ 396,656 48 $ 392,269 45
Smith Bits.............................................. 89,478 11 102,787 12
Smith Services.......................................... 106,736 13 86,435 10
------------ ---- ------------- ----
Oilfield Products and Services........................ 592,870 72 581,491 67
Distribution............................................ 234,507 28 283,820 33
------------ ---- ------------- ----
Total........................................... $ 827,377 100 $ 865,311 100
============ ==== ============= ====
Revenues by Area:
United States........................................... $ 391,948 47 $ 424,550 49
Canada.................................................. 88,219 11 126,103 15
Non-North America....................................... 347,210 42 314,658 36
------------ ---- ------------- ----
Total........................................... $ 827,377 100 $ 865,311 100
============ ==== ============= ====
Operating Income:
Oilfield Products and Services.......................... $ 75,939 13 $ 80,401 14
Distribution............................................ 68 * 6,771 2
General corporate....................................... (1,559) * (1,586) *
------------ ---- ------------- ----
Total........................................... $ 74,448 9 $ 85,586 10
============ ==== ============= ====
Three Months Ended March 31,
--------------------------------------------
2002 % 2001 %
----------- ----- ----------- -----
M-I Average Worldwide Rig Count:
United States........................................... 877 39 1,313 46
Canada.................................................. 386 17 488 17
Non-North America....................................... 1,001 44 1,026 37
----------- ---- ----------- ----
Total........................................... 2,264 100 2,827 100
=========== ==== =========== ====
*not meaningful
9
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 reported revenues in the first quarter of 2002 of $396.7 million, an
increase of $4.4 million from the first quarter of 2001. Incremental revenues
from acquisitions completed in 2001 offset the effect of the decline in drilling
activity from the prior year period. After excluding the impact of acquired
operations, M-I's revenues in the first quarter of 2002 were seven percent below
the prior year period, compared to a corresponding 20 percent decrease in the
M-I worldwide rig count. The decline in base business revenues was attributable
primarily to a reduction in offshore U.S. shelf-based drilling programs and
lower Latin American activity levels, primarily Venezuela, Argentina and Brazil.
M-I's base operation revenues compared favorably to the activity level decline
due, in part, to an increase in revenues from the U.S. deepwater market and from
new customer contracts in the Middle East region.
Smith Bits manufactures and sells three-cone and diamond drill bits
primarily for use in the oil and gas industry. Smith Bits' revenues of $89.5
million in the first quarter of 2002 were $13.3 million, or 13 percent, below
the first quarter of 2001. Excluding the effect of the mining bit operations
contributed to an unconsolidated venture in the fourth quarter of 2001, revenues
declined eight percent from the prior year quarter. The base business revenue
reduction was driven by a 30 percent decline in the North American rig count,
which impacted demand for petroleum three-cone drill bits. Smith Bits reported
several, large international export sales in the Eastern Hemisphere during the
first quarter of 2002, which partially offset the lower North American revenue
base.
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 were $106.7 million in the first quarter of
2002, an increase of $20.3 million, or 23 percent, from the first quarter of
2001. Incremental revenues from operations acquired in the last half of 2001
contributed substantially all of the year-over-year improvement, with base
business revenues increasing two percent over the previous year period.
Increased tubular sales related to an alliance with a drill pipe manufacturer
accounted for the majority of the year-over-year organic growth. The base
business revenue increase also reflects the impact of higher sales of completion
products and services, which rose approximately 30 percent from the prior year
quarter due to new contracts and higher demand in markets outside the United
States.
Operating Income
Operating income for the Oilfield Products and Services segment
decreased $4.5 million, or six percent, from the first quarter of 2001. The
variance results from the inclusion of a $7.0 million non-recurring charge
during the first quarter of 2002, primarily related to establishing bad debt
provisions in Argentina and recording employee termination costs. The impact of
the charge was partially offset by lower goodwill amortization associated with
the adoption of SFAS No. 142. Excluding the effect of the charge and goodwill
amortization, adjusted operating income declined $0.9 million from the prior
year period to $82.9 million. On an adjusted basis, operating margins were 14
percent of revenues in the first quarter of 2002, which is relatively consistent
with the year ago period.
Distribution Segment
Revenues
Wilson markets pipe, valve, tool, 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 reported revenues in the
first quarter of 2002 of $234.5 million, a decrease of $49.3 million, or 17
percent, from the first quarter of 2001. The majority of the revenue decline was
related to the C.E. Franklin Ltd. operations, which were impacted by lower
Canadian activity levels and the completion of a large customer contract in the
second half of 2001. The balance of the revenue decrease is attributable to
Wilson's U.S. operations, where reported sales declined ten percent from the
prior year quarter due to reduced drilling and completion activity, and lower
customer spending in the refining and petrochemical markets.
10
Operating Income
Wilson's operating income decreased $6.7 million from the first quarter
of 2001. The decline in operating income from the prior year period reflects the
impact of the 17 percent decrease in revenues and, to a lesser extent, $0.9
million of employee severance and restructuring costs incurred during the
quarter. After excluding charges and goodwill amortization from the respective
quarters, adjusted operating margins declined two percentage points from the
prior year level primarily as a result of the impact of lower revenue levels on
coverage of sales and administrative support costs.
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,
---------------------------------------------------
2002 2001
----------------------- ----------------------
Amount % Amount %
----------- -------- -------- --------
Revenues ....................... $827,377 100 $865,311 100
-------- -------- -------- --------
Gross profit ................... 241,502 29 246,089 28
Operating expenses ............. 167,054 20 160,503 18
-------- -------- -------- --------
Operating income ............... 74,448 9 85,586 10
Interest expense, net .......... 10,016 1 10,343 1
-------- -------- -------- --------
Income before income
taxes and minority interests . 64,432 8 75,243 9
Income tax provision ........... 19,645 2 24,805 3
-------- -------- -------- --------
Income before minority interests 44,787 6 50,438 6
Minority interests ............. 16,057 2 16,220 2
-------- -------- -------- --------
Net income ..................... $ 28,730 4 $ 34,218 4
======== ======== ======== ========
Consolidated revenues declined $37.9 million, or four percent, from the
first quarter of 2001. The revenue decrease from the prior year quarter was
concentrated in the Western Hemisphere attributable to the 28 percent reduction
in drilling activity. Incremental revenues from operations acquired in the
second half of 2001 partially offset the impact of the activity decline.
Excluding the effect of acquired and divested operations, consolidated revenues
decreased ten percent from the prior year quarter and compared to a 20 percent
decline in the M-I worldwide rig count between the periods. Base business
revenue growth in the Eastern Hemisphere regions, which, on a combined basis
grew at twice the rate of the underlying market, also mitigated the impact of
the revenue decrease in the Western Hemisphere.
Gross profit decreased $4.6 million, or two percent, from the first
quarter of 2001. The gross profit decline is attributable to the
period-to-period reduction in Distribution segment revenues, which was partially
offset by higher sales volumes and gross profits in the Oilfield Products and
Services segment. Consolidated gross profit margins equaled 29 percent in the
first quarter of 2002, an increase of one percentage point over the prior year
level. The gross margin improvement reflects a higher proportion of oilfield
operation revenues to total consolidated revenues and, to a lesser extent, a
favorable shift in revenue mix within the distribution operations.
Operating expenses, consisting of selling, general and administrative
expenses, increased $6.6 million from the first quarter of 2001. First quarter
2002 operating expenses include $7.5 million of non-recurring charges recognized
primarily for estimated receivable write-downs in Argentina and employee
termination costs. On a comparable
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basis, excluding non-recurring charges and $3.8 million of goodwill
amortization from the first quarter of 2001, operating expenses increased $2.9
million from the year ago quarter. The period-to-period increase is attributable
to incremental operating expenses associated with 15 businesses acquired in
2001, and was partially offset by reduced employee incentive provisions. After
excluding charges and goodwill amortization, operating expenses as a percentage
of revenues increased one percentage point from the prior year level, reflecting
the effect of the base business revenue decline on fixed cost coverage related
to the overall sales and administrative functions.
Net interest expense, which represents interest expense less interest
income, equaled $10.0 million in the first quarter of 2002, which is $0.3
million below the first quarter of 2001. While average debt levels increased
approximately $93.4 million from the prior year period in connection with the
financing of acquisitions in 2001, the effect of higher borrowing levels was
more than offset by a decline in interest rates.
The tax provision for the first quarter of 2002 equaled $19.6 million,
or 31 percent on an effective tax rate basis, which is below the prior year rate
and the U.S. statutory rate. The effective tax rate 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 effective tax rate in the first quarter of 2002 declined two
percentage points from prior year period rate of 33 percent, reflecting a
favorable shift in the pre-tax income to lower rate jurisdictions and the impact
of no longer amortizing non-deductible goodwill.
Minority interests reflect the portion of the results of majority-owned
operations, which are applicable to the minority interest partners. Minority
interests decreased $0.2 million from the first quarter of 2001 due to the lower
profitability of the M-I joint venture partially offset by the impact of
acquiring a majority interest in United Engineering Services in the second half
of 2001.
LIQUIDITY AND CAPITAL RESOURCES
General
At March 31, 2002, cash and cash equivalents equaled $43.9 million.
Cash flows provided by operations totaled $39.4 million in the first quarter of
2002 compared to the $0.9 million utilized in the prior year period. The
improvement in cash generated from operations was driven by the reduced
investment in working capital, primarily accounts receivable and inventories.
Cash flows used in investing activities in the first quarter of 2002
totaled $21.7 million, consisting of investments in property, plant and
equipment, net of cash proceeds arising from certain asset disposals. In the
first quarter of 2002, cash generated from operations exceeded cash used in
investing activities, resulting in a $19.7 million reduction of short-term
borrowings and amounts outstanding under revolving credit agreements.
The Company's primary internal source of liquidity is cash flow
generated from operations. Cash flow generated by operations is primarily
influenced by the level of worldwide drilling activity, which affects
profitability levels and working capital requirements. Capacity under revolving
credit agreements is also available, if necessary, to fund operating or
investing activities. As of March 31, 2002, the Company had $125.8 million of
funds available under various revolving credit facilities in the United States
for future operating or investing needs. The U.S. revolving credit facilities,
which expire in December 2002, are expected to be renegotiated in the second
quarter of 2002. The Company also has revolving credit facilities in place
outside the United States, which are generally used to finance local operating
needs. At March 31, 2002, borrowing capacity of $53.3 million was available
under the non-U.S. borrowing facilities.
External sources of liquidity include debt and equity financing in the
public capital markets, if needed. Management 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.
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.
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Contingencies
The Company is a party to various legal and environmental matters
arising in the ordinary course of business. In the opinion of management, after
considering established reserves and contractual indemnifications obtained,
these matters are not expected to have a material adverse effect on the
Company's consolidated financial position or results of operations. In the
unlikely event that the parties providing the environmental indemnifications do
not fulfill their obligations, such event could result in the recognition of up
to $25.0 million in additional environmental exposure, impacting earnings and
cash flows in future periods.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations," which is required to be adopted
by the Company no later than January 1, 2003. SFAS No. 143 addresses the
financial accounting and reporting for retirement obligations and costs
associated with tangible long-lived assets. The Company is currently reviewing
the provisions of SFAS No. 143 to determine the standard's impact, if any, on
its financial statements upon adoption.
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The adoption of SFAS No. 144
did not impact the Company's financial position or results of operations.
The Company has also adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which addresses financial accounting and reporting for
goodwill and other intangible assets. Effective January 1, 2002, goodwill and
some intangibles are no longer amortized to earnings but are tested for
impairment under SFAS No. 142. During the first quarter of 2002, the Company
completed the transitional impairment test required by the standard, the results
of which did not impact the Company's financial position or results of
operations. If SFAS No. 142 had been adopted effective January 1, 2001, goodwill
amortization of $3.8 million, or $2.2 million net of taxes and minority
interests, for the quarter ended March 31, 2001 would not have been recognized.
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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.
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
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K dated January 31, 2002,
reporting under "Item 5. Other Events," related to a press release
announcing the Company's results for the fourth quarter of 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: May 15, 2002 By: /s/ Douglas L. Rock
-------------------------------- ---------------------
Douglas L. Rock
Chairman of the Board, Chief
Executive Officer, President
and Chief Operating Officer
Date: May 15, 2002 By: /s/ Margaret K. Dorman
-------------------------------- --------------------------------
Margaret K. Dorman
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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