SII Sprott Inc

Smith International, Inc. (NYSE:SII) today announced second quarter income from continuing operations of $32.1 million, or $0.15 per diluted share, after excluding a $7.7 million after-tax charge related to severance and other cost reduction efforts. Reported results for the second quarter of 2009 totaled $24.4 million, or $0.11 cents per diluted share, on revenues of $1.94 billion. On a comparative basis, second quarter 2008 earnings from continuing operations totaled $183.3 million on revenues of $2.49 billion, while first quarter 2009 earnings from continuing operations, net of charges, totaled $114.5 million on revenues of $2.41 billion.

The second quarter financial performance reflects reductions in North American exploration and production spending attributable to unfavorable natural gas fundamentals. Moreover, lower activity levels have contributed to excess industry capacity in the U.S. land drilling market – leading to higher discounting in a number of the Company’s product and service offerings. These factors, combined with the seasonal drilling downturn in Canada, had a significant impact on the quarter’s results.

Consolidated revenues declined 19 percent from the March 2009 period, which compares to a 25 percent reduction in global drilling activity. The revenue decrease was concentrated in the Western Hemisphere market driven by a 31 percent reduction in the U.S. land rig count and, to a lesser extent, the annual break-up in Canada and offshore activity declines in Mexico. Eastern Hemisphere revenues fell five percent from the March period influenced by the timing of offshore projects in the West Africa region. On year-on-year basis, after adjusting for the retained W-H Energy operations, pro forma revenues declined 30 percent versus a 36 percent decline in comparable activity levels.

Commenting on the results, Chief Executive Officer, John Yearwood stated, “Our second quarter results reflect the unprecedented collapse in North American drilling activity which has led to lower volumes and a very competitive pricing environment. While we believe it’s unlikely that natural gas fundamentals will support U.S. activity growth in the back half of 2009, we do believe pricing in our oilfield-related product lines has stabilized. During the quarter we spent a considerable amount of effort right-sizing our U.S. operations while simultaneously expanding our business base in selected markets by offering new technology and providing superior drilling performance. I am very pleased with the overwhelming customer acceptance of our proprietary i-DRILL drilling optimization offering, the start of Pathfinder operations in three new countries and the improved drilling performance from our recently commercialized ONYX drill bit cutter technology.”

Margaret Dorman, Chief Financial Officer, added, “The North American business mix combined with higher debt costs contributed to the sequential decline in profitability levels. Margins in our oilfield-related operations slipped 370 basis points on a sequential quarter basis, translating into decremental margins of 34 percent. While profitability levels in our Eastern Hemisphere operations held up relatively well last quarter, supported by the performance of the M-I SWACO operations – lower volumes and weak pricing in the U.S. market influenced the overall margins. Our working capital performance showed improvement in the second quarter, contributing to just over $300 million of free cash generation. Excess cash was used to repay outstanding borrowings reducing our leverage ratio to 28.9 percent at June 30, 2009.”

M-I SWACO segment revenues were $1.01 billion for the second quarter of 2009, a 13 percent decrease on a sequential basis and 21 percent below the prior year period. Just over half of the sequential quarter revenue reduction was reported in the segment’s North American operations – influenced by lower U.S. land-based activity, a 24 percent decline in U.S. offshore business levels and the seasonal downturn in Canadian drilling. Revenues in markets outside North America fell eight percent below the March quarter impacted by the timing of offshore projects in West Africa and the decline in offshore drilling activity in Mexico.

Smith Oilfield segment revenues were $520.5 million for the three months ended June 30, 2009 - 24 percent lower on a sequential quarter basis and, due to the addition of the W-H operations, 12 percent below the amounts reported in the prior year quarter. The reported sequential period revenue decrease was concentrated in North America – as the lower number of land-based drilling programs impacted demand for tubular products as well as high-margin drill bits, directional services and other drilling-related product offerings. Additionally, increased competitive pricing pressure in the U.S. market impacted the sequential revenue comparison. Smith Oilfield revenues outside North America were seven percent below the March quarter driven by lower sales volumes in the Middle East and West African markets.

The Distribution segment’s second quarter revenues were $410.8 million, 28 percent below the March 2009 quarter and 33 percent lower on a year-on-year basis. Approximately two-thirds of the revenue decline from the prior period resulted from lower customer demand and, to a lesser extent, market pricing for line pipe in the U.S. market. The Distribution segment’s reported decline in sales also reflects the effect of the Canadian spring break-up and the reduction in U.S. land-based drilling projects on maintenance, repair and operating (“MRO”) product sales.

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 10:00 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 John Yearwood. A replay of the conference call will also be available through Tuesday, August 4, 2009, by dialing (888) 843-8996 and entering conference call identification number “24933950”.

Certain comments contained in this news release and today’s scheduled conference call concerning among other things, our outlook, financial projections and business strategies 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 “anticipate,” “believe,” “could,” “estimate,” “expect,” “project,” “should” and similar terms. 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 and services, general economic and business conditions, the level of oil and natural gas exploration and development activities, global economic growth and activity, political stability of oil-producing countries, finding and development costs of operations, decline and depletion rates for oil and natural gas wells, seasonal weather conditions, industry conditions, and changes in laws or regulations, many of which are beyond the control of the Company. 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, 2008 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 periods ended June 30, 2009 and March 31, 2009 and the six-month period ended June 30, 2009. 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.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

  Three Months Ended June 30,   March 31,   2009     2008     2009  

Revenues

$

1,944,289

   

$

2,494,158

   

$

2,411,479

    Costs and expenses: Costs of revenues 1,415,259 1,686,706 1,719,177 Selling, general and administrative expenses   395,726       417,685       450,624  

Total costs and expenses

 

1,810,985

     

2,104,391

     

2,169,801

    Operating income 133,304 389,767 241,678   Interest expense 42,803 16,244 27,524 Interest income   (729 )     (752 )     (358 )  

Income before income taxes and noncontrolling interests

91,230

374,275

214,512

  Income tax provision   27,957       121,555       70,318     Net income 63,273 252,720 144,194  

Noncontrolling interests in net income of subsidiaries

 

38,887

     

69,447

     

47,259

 

Net income attributable to Smith

$

24,386

   

$

183,273

   

$

96,935

    Earnings per share attributable to Smith: Basic $ 0.11     $ 0.91     $ 0.44   Diluted $ 0.11     $ 0.91     $ 0.44     Weighted average shares outstanding: Basic   219,307       200,938       219,201   Diluted   220,245       202,284       219,603  

SMITH INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

  Six Months Ended June 30,   2009     2008  

Revenues

$

4,355,768

   

$

4,865,156

    Costs and expenses: Costs of revenues 3,134,436 3,276,220 Selling, general and administrative expenses   846,350       820,362  

Total costs and expenses

 

3,980,786

     

4,096,582

    Operating income 374,982 768,574   Interest expense 70,327 32,545 Interest income   (1,087 )     (1,648 )  

Income before income taxes and noncontrolling interests

305,742

737,677

  Income tax provision   98,275       238,846     Net income 207,467 498,831  

Noncontrolling interests in net income of subsidiaries

 

86,146

     

140,567

 

Net income attributable to Smith

$

121,321

   

$

358,264

    Earnings per share attributable to Smith: Basic $ 0.55     $ 1.78   Diluted $ 0.55     $ 1.77     Weighted average shares outstanding: Basic   219,254       200,873   Diluted   219,925       202,169  

SMITH INTERNATIONAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands)

(Unaudited)

        June 30,

2009

  December 31,

2008

    Current Assets: Cash and cash equivalents $ 224,184 $ 162,508 Receivables, net 1,740,161 2,253,477 Inventories, net 2,120,929 2,367,166 Other current assets     241,130     303,233 Total current assets     4,326,404     5,086,384   Property, Plant and Equipment, net 1,866,301 1,844,036   Goodwill and Other Assets     3,915,938     3,885,804 Total assets   $ 10,108,643   $ 10,816,224     Current Liabilities: Short-term borrowings $ 404,885 $ 1,366,296 Accounts payable 598,924 979,000 Other current liabilities     389,383     588,136 Total current liabilities     1,393,192     2,933,432   Long-Term Debt 2,051,474 1,440,525   Other Long-Term Liabilities 613,733 581,958  

Stockholders’ Equity(a)

6,050,244 5,860,309               Total liabilities and stockholders’ equity   $ 10,108,643   $ 10,816,224

NOTE (a): Due to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 160,cumulative undistributed earnings related to noncontrolling interests in consolidated subsidiaries(formerly referred to as minority interests) is now reflected as a component of stockholders’ equity.The December 31, 2008 information has also been recast to reflect the adoption of SFAS No. 160.

SMITH INTERNATIONAL, INC.

SUPPLEMENTARY DATA – SCHEDULE I

(In thousands)

(Unaudited)

   

 

Three Months Ended Six Months Ended June 30,   March 31, June 30,     2009     2008     2009     2009     2008       REVENUE DATA  

Consolidated:

United States $ 772,535 $ 1,145,960 $ 1,089,540 $ 1,862,075 $ 2,158,639 Canada     133,612       146,453       192,284       325,896       380,878   North America     906,147       1,292,413       1,281,824       2,187,971       2,539,517     Latin America 227,499 244,543 276,107 503,606 471,520 Europe/Africa 510,689 646,527 539,815 1,050,504 1,243,019 Middle East/Asia     299,954       310,675       313,733       613,687       611,100   Non-North America     1,038,142       1,201,745       1,129,655       2,167,797       2,325,639                                   Total   $ 1,944,289     $ 2,494,158     $ 2,411,479     $ 4,355,768     $ 4,865,156       Non-Distribution:                               North America   $ 518,725     $ 708,807     $ 736,234     $ 1,254,959     $ 1,418,090     Latin America 223,820 237,597 270,565 494,385 457,878 Europe/Africa 498,734 629,139 528,728 1,027,462 1,209,328 Middle East/Asia     292,204       303,027       306,210       598,414       596,201   Non-North America     1,014,758       1,169,763       1,105,503       2,120,261       2,263,407                                   Total   $ 1,533,483     $ 1,878,570     $ 1,841,737     $ 3,375,220     $ 3,681,497     SEGMENT DATA (b)   Revenues: M-I SWACO $ 1,013,016 $ 1,285,754 $ 1,159,337 $ 2,172,353 $ 2,514,183 Smith Oilfield     520,467       592,816       682,400       1,202,867       1,167,314                                   Subtotal     1,533,483       1,878,570       1,841,737       3,375,220       3,681,497                                  

Distribution

    410,806       615,588       569,742       980,548       1,183,659                                   Total   $ 1,944,289     $ 2,494,158     $ 2,411,479     $ 4,355,768     $ 4,865,156     Operating Income: M-I SWACO $ 121,325 $ 212,294 $ 147,508 $ 268,833 $ 420,092 Smith Oilfield     47,622       162,864       105,765       153,387       325,870                                   Subtotal     168,947       375,158       253,273       422,220       745,962                                   Distribution     (9,799 )     36,518       15,521       5,722       66,402                                   General corporate (25,844 ) (21,909 ) (27,116 ) (52,960 ) (43,790 )                                 Total   $ 133,304     $ 389,767     $ 241,678     $ 374,982     $ 768,574  

NOTE (b): During 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. All periods shown have been recast to conform to the current segment reporting structure.

SMITH INTERNATIONAL, INC.

SUPPLEMENTARY DATA – SCHEDULE II

(In thousands)

(Unaudited)

    Three Months Ended Six Months Ended June 30,   March 31, June 30,     2009   2008   2009   2009   2008 OTHER DATA(c)       Operating Income: Smith ownership interest $ 85,825 $ 305,104 $ 180,264 $ 266,089 $ 597,574 Noncontrolling ownership interest     47,479     84,663     61,414     108,893     171,000 Total   $ 133,304   $ 389,767   $ 241,678   $ 374,982   $ 768,574   Depreciation and Amortization: Smith ownership interest $ 78,596 $ 39,533 $ 78,434 $ 157,030 $ 80,010 Noncontrolling ownership interest     13,116     12,285     12,661     25,777     24,409 Total   $ 91,712   $ 51,818   $ 91,095   $ 182,807   $ 104,419     Gross Capital Spending: Smith ownership interest $ 62,542 $ 67,995 $ 85,762 $ 148,304 $ 125,726 Noncontrolling ownership interest     10,087     20,979     11,339     21,426     37,278 Total   $ 72,629   $ 88,974   $ 97,101   $ 169,730   $ 163,004    

Net Capital Spending(d):

Smith ownership interest $ 47,020 $ 56,478 $ 64,429 $ 111,449 $ 101,133 Noncontrolling ownership interest     9,305     20,680     10,275     19,580     35,681 Total   $ 56,325   $ 77,158   $ 74,704   $ 131,029   $ 136,814

NOTE (c): The Company derives a significant portion of its revenues and earnings from M-I SWACO and other majority-owned operations. Consolidated operating income, depreciation and amortization and capital spending amounts have been separated between the Company’s portion and the noncontrolling interests’ portion in order to aid in analyzing the Company’s financial results.

 

NOTE (d): 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)

    Operating Income Diluted Earnings per Share

Three Months Ended

    Six Months Ended

Three Months Ended

Six Months Ended June 30,   March 31, June 30, June 30,   March 31, June 30,       2009     2009       2009     2009     2009     2009   GAAP Consolidated Basis $ 133,304 $ 241,678 $ 374,982 $ 0.11 $ 0.44 $ 0.55   Add Back Charges: M-I SWACO 2,983 19,301 22,284 0.01 0.03 0.04   Smith Oilfield 8,593 12,359 20,952 0.03 0.04 0.06   Distribution 1,265 651 1,916 - - 0.01   General Corporate 160 2,481 2,641 - 0.01 0.01                                         Non-GAAP Consolidated Basis   $ 146,305   $ 276,470     $ 422,775   $ 0.15   $ 0.52   $ 0.67  

NOTE: Management believes that it is important to highlight certain charges included within operating income to assist financial statement users with comparisons between current and prior period results.  During the three-month periods ended June 30, 2009 and March 31, 2009, the Company incurred severance-related costs of approximately $12.5 million and $31.0 million, respectively, primarily reflecting reductions in North American personnel levels.  The three-month periods ended June 30, 2009 and March 31, 2009 include other non-recurring costs of $0.5 million and $3.8 million, respectively, associated with facility closures and derivative-related contract losses.  The above costs were included within selling, general and administrative expenses.  There were no charges in the comparable 2008 periods.