SII Sprott Inc

Smith International, Inc. (NYSE: SII) today announced first quarter income from continuing operations of $46.5 million, or $0.19 per diluted share, excluding pre-tax charges of $23.0 million and $16.5 million related to the Venezuelan currency devaluation and transaction related costs, respectively. Reported net income for the first quarter was $11.5 million, or $0.05 per diluted share, on revenue of $2.14 billion. On a comparative basis, first quarter 2009 earnings from continuing operations, after excluding charges, were $114.5 million, or $0.52 per diluted share, on revenue of $2.41 billion, while in the fourth quarter of 2009, earnings from continuing operations were $20.1 million, or $0.09 per diluted share, on revenue of $1.98 billion.

Increased drilling activity in the North American market was the primary driver of the improved results and was broad-based, resulting in revenue increases in nearly all of the Company’s lines of business. Smith’s oilfield-related businesses contributed a 22% sequential improvement in North America revenue. M-I SWACO gained 23% while Smith Oilfield improved by 21% sequentially. Driving the quarterly revenue gains in Smith Oilfield segment were drill bits and motors, as well as higher revenue from the cased-hole wireline and borehole enlargement services. The Distribution segment contributed significantly to the sequential improvement in both revenue and operating income as it continues to experience higher volume in its energy sector operations and better margins in part reflecting more favorable LIFO inventory cost impact.

Consolidated revenue increased $154.0 million, or 8 percent, from the fourth quarter of 2009, while the M-I SWACO worldwide rig count increased by 10%. Nearly all of the sequential revenue increase was generated in North America, influenced by a higher level of onshore drilling and completion activity. Outside of North America, revenue was in line with the December 2009 quarter compared to a 2% sequential increase in rig activity.

Inventory balances were relatively unchanged as compared to the prior quarter reflecting increased inventories in M-I SWACO offset by reductions in Distribution. Receivables increased by approximately $126.5 million owing to the higher activity and revenue level. The Company generated $53.0 million of operating cash flow in the first quarter as compared to $367.2 million in the prior quarter.

The Company deployed $370.1 million of cash during the quarter to reduce debt and $29.8 million to pay dividends. An additional $82.8 million and $8.8 million were invested in the Company for net capital expenditures and acquisitions during the quarter, respectively. Total debt was reduced during the quarter to $1.8 billion.

As a result of the more favorable industry environment, the Company has increased its capital expenditure expectation for the year by approximately 15%. The Company indicated that further capital expenditure increases throughout the year are likely and will be implemented in accordance with the terms of the merger agreement between the Company and Schlumberger.

Smith International, Inc. is a leading supplier of premium products and services to the oil and gas exploration and production industry. The Company employs over 22,000 full-time personnel and operates in over 80 countries around the world.

Certain comments contained in this news release concerning among other things, the Company’s outlook, financial projections and business strategies constitute “forward-looking statements” within the meaning of the federal securities laws. 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 current 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 risk factors including, but not limited to, satisfaction of the closing conditions to the merger between the Company and Schlumberger, the risk that the contemplated merger does not occur, negative effects from the pendency of the merger, the ability to successfully integrate the merged businesses and to realize expected synergies, the risk that we will not be able to retain key employees, expenses of the merger, 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, our global operations and global economic conditions 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, including IP infringement litigation, and changes in and the costs of compliance with laws or regulations, many of which are beyond the control of the Company and other risks and uncertainties detailed in our most recent form 10-K and other filings that the Company makes with the Securities and Exchange Commission. The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

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 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 March 31, 2010 and 2009 and December 31, 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 March 31, December 31,     2010   2009   2009  

Revenue

 

$

2,137,811

   

$

2,411,479

   

$

1,983,767

    Costs and expenses: Costs of revenue 1,546,631 1,719,177 1,454,759 Selling, general and administrative expenses     466,301       450,624       406,206    

Total costs and expenses

   

2,012,932

     

2,169,801

     

1,860,965

    Operating income 124,879 241,678 122,802   Interest expense 37,722 27,524 39,471 Interest income     (678 )     (358 )     (842 )  

Income before income taxes and noncontrolling interests

87,835

214,512

84,173

  Income tax provision     41,239       70,318       23,157     Net income 46,596 144,194 61,016  

Noncontrolling interests in net income of subsidiaries

   

35,055

     

47,259

     

40,903

   

Net income attributable to Smith

 

$

11,541

   

$

96,935

   

$

20,113

    Earnings per share attributable to Smith: Basic   $ 0.05     $ 0.44     $ 0.09   Diluted   $ 0.05     $ 0.44     $ 0.09     Weighted average shares outstanding:

Basic

    248,360       219,301       231,500   Diluted     249,761       219,603       232,763                      

SMITH INTERNATIONAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

            March 31,

2010

        December 31,

2009

    Current Assets: Cash and cash equivalents $ 547,775 $ 988,346 Receivables, net 1,917,994 1,791,498 Inventories, net 1,823,950 1,820,355 Other current assets               216,440           215,037 Total current assets               4,506,159           4,815,236   Property, Plant and Equipment, net 1,921,950 1,923,465   Goodwill and Other Assets               3,974,603           4,000,714 Total assets             $ 10,402,712         $ 10,739,415     Current Liabilities: Short-term borrowings $ 486,360 $ 358,768 Accounts payable 666,422 589,748 Other current liabilities               442,140           462,273 Total current liabilities               1,594,922           1,410,789   Long-Term Debt 1,316,589 1,814,254   Other Long-Term Liabilities 658,472 684,442   Stockholders’ Equity               6,832,729           6,829,930 Total liabilities and stockholders’ equity             $ 10,402,712         $ 10,739,415                                          

SMITH INTERNATIONAL, INC.

SUPPLEMENTARY DATA – SCHEDULE I

(In thousands)

(Unaudited)

  Three Months Ended March 31, December 31,                         2010           2009           2009   REVENUE DATA   Consolidated: United States $ 838,432 $ 1,089,540 $ 743,802 Canada                         227,713               192,284               167,197   North America                         1,066,145               1,281,824               910,999     Latin America 270,809 276,107 267,825 Europe/Africa 541,454 539,815 533,672 Middle East/Asia                         259,403               313,733               271,271   Non-North America                         1,071,666               1,129,655               1,072,768                                                     Total                       $ 2,137,811             $ 2,411,479             $ 1,983,767       Non-Distribution:                                                 North America                       $ 634,694             $ 736,234             $ 520,703     Latin America 267,170 270,565 262,925 Europe/Africa 530,835 528,728 525,721 Middle East/Asia                         253,322               306,210               264,333   Non-North America                         1,051,327               1,105,503               1,052,979                                                     Total                       $ 1,686,021             $ 1,841,737             $ 1,573,682     SEGMENT DATA   Revenue: M-I SWACO $ 1,111,190 $ 1,159,337 $ 1,057,353 Smith Oilfield                         574,831               682,400               516,329                                                     Subtotal                         1,686,021               1,841,737               1,573,682                                                     Distribution                         451,790               569,742               410,085                                                     Total                       $ 2,137,811             $ 2,411,479             $ 1,983,767     Operating Income: M-I SWACO $ 120,404 $ 147,508 $ 129,205 Smith Oilfield                         56,548               105,765               39,058                                                     Subtotal                         176,952               253,273               168,263                                                     Distribution                         4,702               15,521               (18,729 )                                                   General corporate                         (56,775 )             (27,116 )             (26,732 )                                                   Total                       $ 124,879             $ 241,678             $ 122,802                                

 

SMITH INTERNATIONAL, INC.

SUPPLEMENTARY DATA – SCHEDULE II

(In thousands)

(Unaudited)

  Three Months Ended March 31, December 31,             2010           2009           2009 OTHER DATA(a)   Operating Income: Smith ownership interest $ 76,718 $ 180,264 $ 72,723 Noncontrolling ownership interest             48,161             61,414             50,079 Total           $ 124,879           $ 241,678           $ 122,802   Depreciation and Amortization: Smith ownership interest $ 79,790 $ 78,434 $ 78,230 Noncontrolling ownership interest             14,294             12,661             13,522 Total           $ 94,084           $ 91,095           $ 91,752     Gross Capital Spending: Smith ownership interest $ 85,333 $ 85,762 $ 99,054 Noncontrolling ownership interest             10,847             11,339             16,906 Total           $ 96,180           $ 97,101           $ 115,960     Net Capital Spending (b): Smith ownership interest $ 73,033 $ 64,429 $ 80,661 Noncontrolling ownership interest             9,809             10,275             12,565 Total           $ 82,842           $ 74,704           $ 93,226

 

NOTE (a): The Company derives a significant portion of its revenue 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 (b): 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 March 31, December 31,           2010     2009     2009

Operating Income:

GAAP Consolidated Basis $ 124,879 $ 241,678 $ 122,802   Add Back Charges: M-I SWACO 12,809 19,301 -   Smith Oilfield - 12,359 -   Distribution - 651 -   General Corporate 26,722 2,481 -                         Non-GAAP Consolidated Basis         $ 164,410     $ 276,470     $ 122,802                        

Net Income Attributable to Smith:

GAAP Consolidated Basis $ 11,541 $ 96,935 $ 20,113   Add Back Charges: Venezuelan currency devaluation 19,709 - -   Transaction-related costs 15,298 - -  

Severance-related and facility closure costs

-

15,985

-

  Derivative contract-related loss - 1,612 -                         Non-GAAP Consolidated Basis         $ 46,548     $ 114,532     $ 20,113                        

Diluted Earnings per Share:

GAAP Consolidated Basis $ 0.05 $ 0.44 $ 0.09   Add Back Charges: M-I SWACO 0.04 0.03 -   Smith Oilfield - 0.04 -   Distribution - - -   General Corporate 0.10 0.01 -                         Non-GAAP Consolidated Basis         $ 0.19     $ 0.52     $ 0.09

 

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 periods. During the three-month period ended March 31, 2010, the Company incurred a $23.0 million charge associated with the revaluation of its Venezuelan Bolivar Fuertes denominated net asset position. Additionally, in the period, the Company incurred $15.4 million in expenses associated with the proposed combination of the Company and Schlumberger and $1.1 million in other business combination related charges. During the three-month period ended March 31, 2009, the Company incurred $32.3 million in severance-related charges and a $2.5 million loss on an interest rate derivative contract.