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Smith International, Inc. Reports Third Quarter Operating Earnings of $1.01 Per Diluted Share

Posted on: Tuesday, 28 October 2008, 06:00 CDT

Smith International, Inc. (NYSE:SII) today announced record earnings of $209.8 million, or $1.00 per diluted share, for the third quarter of 2008. The results include a non-recurring charge of $4.7 million, reflecting uninsured property losses and clean-up costs associated with hurricanes experienced in the U.S. Gulf Coast area. Excluding non-recurring items, the Company reported net income of $211.9 million, or $1.01 per diluted share. Net of charges, after-tax earnings grew $28.6 million, or 16 percent, on a sequential quarter basis.

During the third quarter of 2008, the Company completed the W-H Energy Services ("W-H") transaction which contributed to the sequential earnings growth. The operations have been reflected in the accompanying results for the period subsequent to the August 25, 2008 closing date. However, if the acquired operations had been included for the entire reporting period, the Company's revenues would have approximated $3.07 billion for the September 2008 quarter.

Revenues for the three months ended September 30, 2008 were $2.85 billion, 14 percent above the second quarter of 2008 and 27 percent higher than the prior year period. Excluding the impact of the acquired operations, consolidated revenues grew eight percent on a sequential quarter basis and were 21 percent higher year-on-year. Net of acquisitions, the majority of the sequential quarter revenue growth was reported in North America, influenced by the seasonal drilling recovery in Canada and higher U.S. distribution sales volumes associated with increased infrastructure investment for unconventional oil and gas projects. Excluding the impact of acquired operations, business revenues in markets outside North America grew five percent, attributable to increased activity levels in key growth markets including the Former Soviet Union (FSU), West Africa and the Latin American region. The sequential revenue comparison was influenced by weather-related work disruptions in the Gulf of Mexico during the month of September which resulted in an estimated $40 million revenue decline and a five-cent reduction in after-tax earnings.

Commenting on the results, Chairman and CEO, Doug Rock stated, "The integration of our August 2008 merger with W-H Energy Services is progressing exceptionally well. The merger was accretive to Smith's third quarter 2008 earnings and will again contribute to earnings growth in this year's fourth quarter. We expect the fourth quarter of 2008 to be another record revenue and earnings quarter for Smith and, as a result, we are increasing our 2008 yearly earnings guidance to $3.83 to $3.88 per share.

"Looking toward 2009, we feel the negative investment sentiment towards the oil and oil service industry is characteristic of panic rather than reason. Oil prices at $60 per barrel are more than six times their 1998 low point and natural gas prices are nearly three and a half times their 1998 low point. There's plenty of profit potential at today's industry price structure, which is why capital will continue to flow into the oil and gas industry in proportionate and available quantities. Today's high oil and gas production depletion rates will assure relatively tight supply and demand balance, even with flat to somewhat negative demand growth."

Margaret Dorman, Executive Vice President and Chief Financial Officer, commented, "We're pleased with the overall operating results for the quarter - particularly the contribution from the W-H Energy operations. Consolidated operating margins were comparable with the June 2008 quarter, as weather-related work disruptions in the U.S. Gulf of Mexico impacted offshore business volumes and resulted in lower M-I SWACO margins. Smith continues to be well-positioned from a financial perspective - our balance sheet is strong and our leverage is at a very manageable level."

As a result of Smith's recent organizational restructuring, business operations are being reported using three operating segments: M-I SWACO, Smith Oilfield and the Distribution segment. The M-I SWACO segment includes our majority-owned joint venture operation which provides drilling and completion fluid systems, solids-control and separation equipment, waste-management services and oilfield production chemicals. The Smith Oilfield operations provide three-cone and diamond drill bits, drilling tubulars, borehole enlargement tools, turbine motors, directional drilling, measurement-while-drilling and logging-while-drilling services, as well as completions, coiled tubing, wireline and drilling related services. The Distribution segment includes the Wilson distribution operations and a majority-owned interest in CE Franklin, Ltd., a publicly-traded Canadian distribution company. All prior periods have been recast to conform to the new segment presentation and Corporate cost allocation methodology.

The M-I SWACO segment's third quarter revenues totaled $1.36 billion, six percent above the June 2008 quarter and 23 percent higher on a year-on-year basis. The sequential revenue growth was attributable to the increased number of land-based drilling programs in Canada, the FSU and the Central U.S. - which resulted in incremental demand for base fluid products. The growth in M-I's land-based business operations was partially offset by a reduction in offshore sales volumes. Offshore revenues declined modestly from the June 2008 quarter as increased spending in the West Africa region was more than offset by a 19 percent reduction in U.S. deepwater revenues associated with weather-related work disruptions in the Gulf of Mexico.

The Smith Oilfield segment reported revenues of $724.2 million, 22 percent higher on a sequential quarter basis and 26 percent above the September 2007 period. The sequential and year-on-year revenue improvement was attributable to the addition of the W-H Energy operations. Excluding the impact of acquired operations, base business revenues outside the United States grew 11 percent over the June 2008 quarter, influenced by the seasonal drilling recovery in Canada and strong growth in the North Sea and key Latin American markets. Lower sales of drill pipe and premium tubular goods in the U.S. market, which declined 47 percent on a sequential quarter basis, more than offset the impact of business expansion outside the United States. After excluding the impact of acquisitions and tubular sales, which are expected to improve in the fourth quarter of 2008, sequential quarter revenues increased six percent. The period-to-period improvement primarily reflects seven percent growth in drill bit business volumes and, to a lesser extent, increased demand for fishing and remedial service offerings.

The Distribution segment reported record revenues of $760.9 million, evidencing 24 percent sequential and 36 percent year-on-year top-line growth. The sequential revenue improvement was primarily attributable to the energy sector operations which grew 30 percent over the June 2008 quarter. The period-to-period increase reflects strong demand for line pipe and other operating supplies associated with increased activity and new infrastructure investment in the U.S. market and, to a lesser extent, the seasonal drilling recovery in Canada which favorably impacted the level of drilling and completion activity.

Smith International, Inc. is one of the largest global providers of products and services used by operators during the drilling, completion and production phases of oil and natural gas development activities. The Company will host a conference call today beginning at 11:00 a.m. Central to review the quarterly results. Participants may join the conference call by dialing (800) 233-1182 and requesting the Smith International call hosted by Doug Rock. A replay of the conference call will also be available through Tuesday, November 4, 2008, by dialing (888) 843-8996 and entering conference call identification number 22866210.

Certain comments contained in this news release and today's scheduled conference call concerning the anticipated financial results of the Company constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Whenever possible, the Company has identified these "forward-looking" statements by words such as "believe,""encouraged,""expect,""expected,""should" and similar phrases. The forward-looking statements are based upon management's expectations and beliefs and, although these statements are based upon reasonable assumptions, actual results might differ materially from expected results due to a variety of factors including, but not limited to, overall demand for and pricing of the Company's products, changes in the level of oil and natural gas exploration and development, and variations in global business and economic conditions. The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. For a discussion of additional risks and uncertainties that could impact the Company's results, review the Smith International, Inc. Annual Report on Form 10-K for the year ended December 31, 2007 and other filings of the Company with the Securities and Exchange Commission.

Non-GAAP Financial Measures. The Company reports its financial results in accordance with generally accepted accounting principles ("GAAP"). However, management believes that certain non-GAAP performance measures and ratios utilized for internal analysis provide financial statement users meaningful comparisons between current and prior period results, as well as important information regarding performance trends. Certain information discussed in this press release and in the scheduled conference call could be considered non-GAAP measures. See the Supplementary Data - Schedule III in this release for the corresponding reconciliations to GAAP financial measures for the three-month period ended September 30, 2008 and the nine-month periods ended September 30, 2008 and 2007. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results.

Financial highlights follow:

SMITH INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended ----------------------------------- September 30, June 30, ----------------------- 2008 2007 2008 ---------------------------------------------------------------------- Revenues $2,849,311 $2,245,059 $2,494,158 ---------------------------------------------------------------------- Costs and expenses: Costs of revenues 1,942,513 1,516,153 1,686,706 Selling, general and administrative expenses 463,717 378,569 417,685 ---------------------------------------------------------------------- Total costs and expenses 2,406,230 1,894,722 2,104,391 ---------------------------------------------------------------------- Operating income 443,081 350,337 389,767 Interest expense 24,169 17,103 16,244 Interest income (732) (1,152) (752) ---------------------------------------------------------------------- Income before income taxes and minority interests 419,644 334,386 374,275 Income tax provision 136,765 106,579 121,555 Minority interests 73,036 60,974 69,447 ---------------------------------------------------------------------- Net income $ 209,843 $ 166,833 $ 183,273 ---------------------------------------------------------------------- Earnings per share: Basic $ 1.00 $ 0.83 $ 0.91 ---------------------------------------------------------------------- Diluted $ 1.00 $ 0.83 $ 0.91 ---------------------------------------------------------------------- Weighted average shares outstanding: Basic 208,857 200,070 200,938 ---------------------------------------------------------------------- Diluted 210,216 202,078 202,284 ----------------------------------------------------------------------

SMITH INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Nine Months Ended September 30, --------------------------------- 2008 2007 ---------------------------------------------------------------------- Revenues $ 7,714,467 $ 6,467,156 ---------------------------------------------------------------------- Costs and expenses: Costs of revenues 5,218,733 4,365,739 Selling, general and administrative expenses 1,284,079 1,087,503 ---------------------------------------------------------------------- Total costs and expenses 6,502,812 5,453,242 ---------------------------------------------------------------------- Operating income 1,211,655 1,013,914 Interest expense 56,714 53,242 Interest income (2,380) (2,811) ---------------------------------------------------------------------- Income before income taxes and minority interests 1,157,321 963,483 Income tax provision 375,611 300,569 Minority interests 213,603 182,870 ---------------------------------------------------------------------- Net income $ 568,107 $ 480,044 ---------------------------------------------------------------------- Earnings per share: Basic $ 2.79 $ 2.40 ---------------------------------------------------------------------- Diluted $ 2.77 $ 2.38 ---------------------------------------------------------------------- Weighted average shares outstanding: Basic 203,554 200,184 ---------------------------------------------------------------------- Diluted 204,862 201,891 ----------------------------------------------------------------------

SMITH INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) September 30, December 31, 2008 2007 ---------------------------------------------------------------------- Current Assets: Cash and cash equivalents $ 192,101 $ 158,267 Receivables, net 2,434,048 1,750,561 Inventories, net 2,226,379 1,658,172 Other current assets 229,983 160,735 ---------------------------------------------------------------------- Total current assets 5,082,511 3,727,735 ---------------------------------------------------------------------- Property, Plant and Equipment, net 1,829,606 1,105,880 Goodwill and Other Assets 3,834,090 1,228,265 ---------------------------------------------------------------------- Total Assets $ 10,746,207 $ 6,061,880 ---------------------------------------------------------------------- Current Liabilities: Short-term borrowings $ 1,356,155 $ 139,481 Accounts payable 989,760 655,413 Other current liabilities 546,659 378,406 ---------------------------------------------------------------------- Total current liabilities 2,892,574 1,173,300 ---------------------------------------------------------------------- Long-Term Debt 1,442,945 845,624 Other Long-Term Liabilities 627,162 317,286 Minority Interests 1,295,802 1,130,773 Stockholders' Equity 4,487,724 2,594,897 ---------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 10,746,207 $ 6,061,880 ----------------------------------------------------------------------

SMITH INTERNATIONAL, INC. SUPPLEMENTARY DATA - SCHEDULE I (In thousands) (Unaudited) Three Months Ended ----------------------------------- September 30, June 30, ----------------------- 2008 2007 2008 ---------------------------------------------------------------------- REVENUE DATA Consolidated: United States $1,335,158 $1,017,936 $1,145,960 Canada 242,231 195,330 146,453 ---------------------------------------------------------------------- North America $1,577,389 $1,213,266 $1,292,413 ---------------------------------------------------------------------- Latin America 260,381 208,193 244,543 Europe/Africa 696,551 534,012 646,527 Middle East/Asia 314,990 289,588 310,675 ---------------------------------------------------------------------- Non-North America 1,271,922 1,031,793 1,201,745 ====================================================================== Total $2,849,311 $2,245,059 $2,494,158 ---------------------------------------------------------------------- Non-Distribution: ---------------------------------------------------------------------- North America $ 851,575 $ 690,115 $ 708,807 ---------------------------------------------------------------------- Latin America 250,015 204,625 237,597 Europe/Africa 679,871 508,549 629,139 Middle East/Asia 306,981 282,398 303,027 ---------------------------------------------------------------------- Non-North America 1,236,867 995,572 1,169,763 ====================================================================== Total $2,088,442 $1,685,687 $1,878,570 ---------------------------------------------------------------------- SEGMENT DATA(a) Revenues: M-I SWACO $1,364,269 $1,110,542 $1,285,754 Smith Oilfield 724,173 575,145 592,816 ---------------------------------------------------------------------- Sub-total 2,088,442 1,685,687 1,878,570 ====================================================================== Distribution 760,869 559,372 615,588 ====================================================================== Total $2,849,311 $2,245,059 $2,494,158 ---------------------------------------------------------------------- Operating Income: M-I SWACO $ 217,016 $ 183,172 $ 212,294 Smith Oilfield 188,168 162,174 162,864 ---------------------------------------------------------------------- Sub-total 405,184 345,346 375,158 ====================================================================== Distribution 61,734 25,208 36,518 ====================================================================== General corporate (23,837) (20,217) (21,909) ====================================================================== Total $ 443,081 $ 350,337 $ 389,767 ---------------------------------------------------------------------- Nine Months Ended September 30, ----------------------- 2008 2007 ---------------------------------------------------------------------- REVENUE DATA Consolidated: United States $3,493,797 $2,966,486 Canada 623,109 571,172 ---------------------------------------------------------------------- North America $4,116,906 $3,537,658 ---------------------------------------------------------------------- Latin America 731,901 529,744 Europe/Africa 1,939,570 1,525,025 Middle East/Asia 926,090 874,729 ---------------------------------------------------------------------- Non-North America 3,597,561 2,929,498 ====================================================================== Total $7,714,467 $6,467,156 ---------------------------------------------------------------------- Non-Distribution: ---------------------------------------------------------------------- North America $2,269,665 $2,033,628 ---------------------------------------------------------------------- Latin America 707,893 517,960 Europe/Africa 1,889,199 1,458,720 Middle East/Asia 903,182 851,978 ---------------------------------------------------------------------- Non-North America 3,500,274 2,828,658 ====================================================================== Total $5,769,939 $4,862,286 ---------------------------------------------------------------------- SEGMENT DATA(a) Revenues: M-I SWACO $3,878,452 $3,232,150 Smith Oilfield 1,891,487 1,630,136 ---------------------------------------------------------------------- Sub-total 5,769,939 4,862,286 ====================================================================== Distribution 1,944,528 1,604,870 ====================================================================== Total $7,714,467 $6,467,156 ---------------------------------------------------------------------- Operating Income: M-I SWACO $ 637,108 $ 535,812 Smith Oilfield 514,038 461,130 ---------------------------------------------------------------------- Sub-total 1,151,146 996,942 ====================================================================== Distribution 128,136 75,824 ====================================================================== General corporate (67,627) (58,852) ====================================================================== Total $1,211,655 $1,013,914 ---------------------------------------------------------------------- NOTE (a): During the third quarter of 2008, the Company revised its segment reporting in connection with the inclusion of the W-H Energy Services operations to reflect three segments: M-I SWACO; Smith Oilfield and Distribution. In connection with this change, the Company no longer allocates corporate costs to the operating segments. Results for all periods prior to the third quarter of 2008 have been recast to conform to the current segment reporting structure.

SMITH INTERNATIONAL, INC. SUPPLEMENTARY DATA - SCHEDULE II (In thousands) (Unaudited) Three Months Ended Nine Months Ended -------------------------- September 30, June 30, September 30, ----------------- --------------------- 2008 2007 2008 2008 2007 ---------------------------------------------------------------------- OTHER DATA Operating Income(b): Smith ownership interest $353,297 $274,390 $305,104 $ 950,871 $ 789,883 Minority partner ownership interest 89,784 75,947 84,663 260,784 224,031 ---------------------------------------------------------------------- Total $443,081 $350,337 $389,767 $1,211,655 $1,013,914 ---------------------------------------------------------------------- Depreciation and Amortization(b): Smith ownership interest $ 56,531 $ 37,828 $ 39,533 $ 136,541 $ 107,615 Minority partner ownership interest 12,798 11,686 12,285 37,207 33,846 ---------------------------------------------------------------------- Total $ 69,329 $ 49,514 $ 51,818 $ 173,748 $ 141,461 ---------------------------------------------------------------------- Gross Capital Spending(b): Smith ownership interest $ 85,720 $ 61,518 $ 67,995 $ 211,446 $ 194,575 Minority partner ownership interest 19,100 18,924 20,979 56,378 53,955 ---------------------------------------------------------------------- Total $104,820 $ 80,442 $ 88,974 $ 267,824 $ 248,530 ---------------------------------------------------------------------- Net Capital Spending(b) (c): Smith ownership interest $ 68,341 $ 51,989 $ 56,478 $ 169,474 $ 164,089 Minority partner ownership interest 17,586 18,277 20,680 53,267 50,553 ---------------------------------------------------------------------- Total $ 85,927 $ 70,266 $ 77,158 $ 222,741 $ 214,642 ---------------------------------------------------------------------- NOTE (b): The Company derives a significant portion of its revenues and earnings from M-I SWACO and other joint venture operations. Consolidated operating income, depreciation and amortization and capital spending amounts have been separated between the Company's portion and the minority partners' portion in order to aid in analyzing the Company's financial results. NOTE (c): Net capital spending reflects the impact of proceeds from lost-in-hole and fixed asset equipment sales.

SMITH INTERNATIONAL, INC. SUPPLEMENTARY DATA - SCHEDULE III RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended -------------------------- September 30, June 30, September 30, ----------------- ------------------ 2008 2007 2008 2008 2007 ---------------------------------------------------------------------- Consolidated Net Income: GAAP consolidated net income $209,843 $166,833 $183,273 $568,107 $480,044 Hurricane-related costs 2,035 - - 2,035 - R&D tax credit and other tax adjustments - - - - (7,467) ---------------------------------------------------------------------- Non-GAAP consolidated net income $211,878 $166,833 $183,273 $570,142 $472,577 ---------------------------------------------------------------------- Diluted Earnings per Share: GAAP diluted earnings per share $ 1.00 $ 0.83 $ 0.91 $ 2.77 $ 2.38 Hurricane-related costs 0.01 - - 0.01 - R&D tax credit and other tax adjustments - - - - (0.04) ---------------------------------------------------------------------- Non-GAAP diluted earnings per share $ 1.01 $ 0.83 $ 0.91 $ 2.78 $ 2.34 ----------------------------------------------------------------------

Source: Business Wire

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