SII Sprott Inc

Smith International, Inc. (NYSE: SII) announced second quarter income from continuing operations of $71.7 million, or $0.29 per diluted share, excluding net after-tax charges. Reported net income for the second quarter of 2010 was $65.1 million, or $0.26 cents per diluted share, on revenues of $2.30 billion. The impact of current quarter charges for transaction costs associated with the proposed merger with Schlumberger and Venezuela currency-related losses were partially offset by a remeasurement gain reported in connection with the purchase of the remaining 65 percent interest in @Balance B.V.

On a comparable basis, second quarter 2010 earnings from continuing operations were more than double those of the second quarter of 2009, which totaled $32.1 million on revenues of $1.94 billion. Sequential quarter earnings from continuing operations, net of charges, increased 54 percent as compared to the $46.5 million on revenues of $2.14 billion reported for the first quarter of 2010.

The Company’s financial performance in the second quarter of 2010 was favorably influenced by the continued expansion of U.S. land drilling activity, which more than offset the impact of the seasonal drilling downturn in Canada.

Consolidated revenues rose 7 percent on a sequential-quarter basis and 18 percent from the comparable prior-year quarter. The increase over the prior period was concentrated in the U.S. market where revenues increased 19 percent as compared to the average M-I SWACO rig count which rose 12 percent. Outside the United States, significant growth reported in the Middle East/Asia region was offset by the impact of the seasonal spring break up on Canadian drilling activity and a moderate decrease in Latin America.

M-I SWACO segment revenues were $1.16 billion for the second quarter of 2010, a 4 percent increase on a sequential basis and 14 percent above the prior-year period. The revenue growth was concentrated in the Eastern Hemisphere, principally in Vietnam, Indonesia, Malaysia and Kuwait. The impact of a 21 percent sequential increase in land-based revenue in the United States was partially offset by the seasonal decline in Canada, lower customer spending in Latin America, and the impact of the deepwater drilling moratorium in the Gulf of Mexico announced in May 2010.

Smith Oilfield segment revenue was $650.2 million for the three months ended June 30, 2010, 13 percent higher on a sequential-quarter basis and 25 percent above that reported in the prior-year quarter. The majority of the increase was derived from the United States where revenue grew by 24 percent sequentially and 29 percent as compared to the second quarter in the prior year. The increase was across all product offerings and was particularly strong in land-based activity. In addition, sequential quarter revenue growth was reported in all other geographic areas except for Canada, which fell due to the seasonal break-up period. Eastern Hemisphere sales volumes were favorably affected by a higher demand for drilling-related products and services as well as drill bit tender deliveries with particularly strong performance in the North Sea, Iraq and West Africa.

The Distribution segment’s second quarter revenues were $490.3 million, 9 percent above the March 2010 quarter and 19 percent higher on a year-on-year basis. Project spending in the United States for line pipe rose over 50 percent from the prior quarter and, together with higher energy sector volumes, more than offset the impact of lower seasonal activity levels from the Canadian operations.

Improved profitability and continued focus on working capital investment allowed the Company to generate $169.1 million in cash flows from operations during the June 2010 quarter, while continuing to moderately decrease its total debt. During the three months ended June 30, 2010, the Company used cash flows from operating activities together with $50.1 million of cash on-hand to fund $112.0 million of net capital expenditures, $75.1 million in acquisition-related investments and $29.8 million in dividends to stockholders.

As indicated in the prior quarter and in response to a continuing favorable industry environment, the Company has increased its expected capital investment for the year, estimating spending to range from $420 million to $450 million. The Company stated that further capital expenditure increases throughout the year are possible and would be implemented in accordance with the terms of the merger agreement between the Company and Schlumberger Limited.

The Company’s revenue attributable to the U.S. Gulf of Mexico represented approximately 6 percent of its consolidated revenue for the year ended December 31, 2009. The majority of revenues derived from drilling operations are generally high-performance services and products deployed in deepwater operations and, as such, the Company continues to redeploy personnel and assets as appropriate to minimize the near-term impact of the moratorium on its operating results. For the third quarter of 2010, the Company expects a $0.04 to $0.06 per share unfavorable impact on earnings due to the current drilling moratorium. At this time, Smith cannot predict what further impact the Deepwater Horizon incident may have on the regulation of offshore oil and gas exploration and development activity, the cost or availability of insurance coverage to cover the risks of such operations, or what actions may be taken by customers of the Company or other industry participants in response to the incident. Increased costs for the operations of the Company’s customers in the U.S. Gulf of Mexico, along with permitting delays, could affect the economics of currently planned activity in the area and demand for their services. A prolonged suspension of drilling activity in the U.S. Gulf of Mexico and resulting new regulations could materially adversely affect the Company's financial condition, results of operations or cash flows.

As previously announced by the parties, the U.S. Department of Justice and the European Commission have both cleared the proposed merger of Smith and Schlumberger Limited without any conditions. The closing of the proposed merger remains subject to approval by Smith stockholders and the satisfaction or waiver of the other closing conditions contained in the merger agreement between the companies. The 2010 annual meeting of stockholders of Smith is scheduled for August 24, 2010, at which meeting stockholders of Smith will consider and vote upon matters including the proposed adoption of the agreement and plan of merger between Smith and Schlumberger. Subject to receipt of approval from Smith stockholders, Schlumberger and Smith expect to close the merger on August 27, 2010.

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 23,000 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, effects of changes in laws or regulations, including the suspensions and potential drilling moratoriums in the Gulf of Mexico, 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 June 30, 2010 and 2009 and March 31, 2010, and the six-month periods ended June 30, 2010 and 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,   2010     2009     2010  

Revenue

$

2,296,063

   

$

1,944,289

   

$

2,137,811

    Costs and expenses: Costs of revenue 1,637,394 1,415,259 1,546,631 Selling, general and administrative expenses   467,216       395,726       466,301  

Total costs and expenses

 

2,104,610

     

1,810,985

     

2,012,932

    Operating income 191,453 133,304 124,879   Interest expense 36,917 42,803 37,722 Interest income   (890 )     (729 )     (678 )  

Income before income taxes and

  noncontrolling interests

155,426

91,230

87,835

  Income tax provision   50,229       27,957       41,239     Net income 105,197 63,273 46,596  

Noncontrolling interests in net income

  of subsidiaries

 

40,123

     

38,887

     

35,055

 

Net income attributable to Smith

$

65,074

   

$

24,386

   

$

11,541

    Earnings per share attributable to Smith: Basic $ 0.26     $ 0.11     $ 0.05   Diluted $ 0.26     $ 0.11     $ 0.05     Weighted average shares outstanding: Basic   248,539       219,307       248,360   Diluted   250,333       220,245       249,761  

SMITH INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

  Six Months Ended June 30,   2010   2009

Revenues

$

4,433,874

   

$

4,355,768

    Costs and expenses: Costs of revenues 3,184,025 3,134,436 Selling, general and administrative expenses   933,517       846,350  

Total costs and expenses

 

4,117,542

     

3,980,786

    Operating income 316,332 374,982   Interest expense 74,639 70,327 Interest income   (1,568 )     (1,087 )  

Income before income taxes and

  noncontrolling interests

243,261

305,742

  Income tax provision   91,468       98,275     Net income 151,793 207,467  

Noncontrolling interests in net income

  of subsidiaries

 

75,178

     

86,146

 

Net income attributable to Smith

$

76,615

   

$

121,321

    Earnings per share attributable to Smith: Basic $ 0.31     $ 0.55   Diluted $ 0.31     $ 0.55     Weighted average shares outstanding: Basic   248,450       219,254   Diluted   250,059       219,925  

SMITH INTERNATIONAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands)

(Unaudited)

            June 30,

2010

  December 31,

2009

  Current Assets: Cash and cash equivalents $ 497,660 $ 988,346 Receivables, net 1,930,784 1,791,498 Inventories, net 1,880,623 1,820,355 Other current assets       254,609     215,037 Total current assets       4,563,676     4,815,236   Property, Plant and Equipment, net 1,972,242 1,923,465   Goodwill and Other Assets       4,044,813     4,000,714 Total assets     $ 10,580,731   $ 10,739,415     Current Liabilities: Short-term borrowings $ 316,549 $ 358,768 Accounts payable 693,556 589,748 Other current liabilities       541,951     462,273 Total current liabilities       1,552,056     1,410,789   Long-Term Debt 1,481,927 1,814,254   Other Long-Term Liabilities 655,045 684,442   Stockholders’ Equity       6,891,703     6,829,930 Total liabilities and stockholders’ equity     $ 10,580,731   $ 10,739,415

SMITH INTERNATIONAL, INC.

SUPPLEMENTARY DATA – SCHEDULE I

(In thousands)

(Unaudited)

  Three Months Ended Six Months Ended June 30,   March 31, June 30,   2010     2009     2010     2010     2009       REVENUE DATA   Consolidated: United States $ 995,703 $ 772,535 $ 838,432 $ 1,834,135 $ 1,862,075 Canada   177,344       133,612       227,713       405,057       325,896   North America   1,173,047       906,147       1,066,145       2,239,192       2,187,971     Latin America 261,762 227,499 270,809 532,571 503,606 Europe/Africa 558,782 510,689 541,454 1,100,236 1,050,504 Middle East/Asia   302,472       299,954       259,403       561,875       613,687   Non-North America   1,123,016       1,038,142       1,071,666       2,194,682       2,167,797                                 Total $ 2,296,063     $ 1,944,289     $ 2,137,811     $ 4,433,874     $ 4,355,768       Non-Distribution:                             North America $ 703,110     $ 518,725     $ 634,694     $ 1,337,804     $ 1,254,959     Latin America 259,090 223,820 267,170 526,260 494,385 Europe/Africa 548,444 498,734 530,835 1,079,279 1,027,462 Middle East/Asia   295,107       292,204       253,322       548,429       598,414   Non-North America   1,102,641       1,014,758       1,051,327       2,153,968       2,120,261                                 Total $ 1,805,751     $ 1,533,483     $ 1,686,021     $ 3,491,772     $ 3,375,220     SEGMENT DATA   Revenues: M-I SWACO $ 1,155,600 $ 1,013,016 $ 1,111,190 $ 2,266,790 $ 2,172,353 Smith Oilfield   650,151       520,467       574,831       1,224,982       1,202,867                                 Subtotal   1,805,751       1,533,483       1,686,021       3,491,772       3,375,220                                 Distribution   490,312       410,806       451,790       942,102       980,548                                 Total $ 2,296,063     $ 1,944,289     $ 2,137,811     $ 4,433,874     $ 4,355,768     Operating Income: M-I SWACO $ 132,589 $ 121,325 $ 120,404 $ 252,993 $ 268,833 Smith Oilfield   80,987       47,622       56,548       137,535       153,387                                 Subtotal   213,576       168,947       176,952       390,528       422,220                                 Distribution   13,599       (9,799 )     4,702       18,301       5,722                                 General corporate   (35,722 )     (25,844 )     (56,775 )     (92,497 )     (52,960 )                                         Total $ 191,453     $ 133,304     $ 124,879     $ 316,332     $ 374,982  

SMITH INTERNATIONAL, INC.

SUPPLEMENTARY DATA – SCHEDULE II

(In thousands)

(Unaudited)

  Three Months Ended Six Months Ended June 30,   March 31, June 30,   2010   2009   2010   2010   2009 OTHER DATA(a)       Operating Income: Smith ownership interest $ 139,904 $ 85,825 $ 76,718 $ 216,622 $ 266,089

Noncontrolling ownership interest

  51,549     47,479     48,161     99,710     108,893 Total $ 191,453   $ 133,304   $ 124,879   $ 316,332   $ 374,982   Depreciation and Amortization: Smith ownership interest $ 82,121 $ 78,596 $ 79,790 $ 161,911 $ 157,030 Noncontrolling ownership interest   14,305     13,116     14,294     28,599     25,777 Total $ 96,426   $ 91,712   $ 94,084   $ 190,510   $ 182,807     Gross Capital Spending:

Smith ownership interest

$ 119,361 $ 62,542 $ 85,333 $ 204,694 $ 148,304 Noncontrolling ownership interest   15,960     10,087     10,847     26,807     21,426 Total $ 135,321   $ 72,629   $ 96,180   $ 231,501   $ 169,730     Net Capital Spending (b): Smith ownership interest $ 98,475 $ 47,020 $ 73,033 $ 171,508 $ 111,449 Noncontrolling ownership interest   13,505     9,305     9,809     23,314     19,580 Total $ 111,980   $ 56,325   $ 82,842   $ 194,822   $ 131,029

NOTE (a): 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 (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 Six Months Ended June 30,   March 31, June 30,   2010     2009   2010   2010     2009 Operating Income :     GAAP Consolidated Basis $ 191,453 $ 133,304 $ 124,879 $ 316,332 $ 374,982   Adjustments for Charges (Gains): M-I SWACO 8,058 2,983 12,809 20,867 22,284   Smith Oilfield - 8,593 - - 20,952   Distribution - 1,265 - - 1,916   General Corporate 6,746 160 26,722 33,468 2,641                               Non-GAAP Consolidated Basis $ 206,257     $ 146,305   $ 164,410   $ 370,667     $ 422,775                                 Net Income Attributable to Smith : GAAP Consolidated Basis $ 65,074 $ 24,386 $ 11,541 $ 76,615 $ 121,321   Adjustments for Charges (Gains): Transaction-related costs 17,661 - 15,298 32,959 -   Venezuelan currency-related losses 6,340 - 19,709 26,049 -   Gain on @Balance B.V. transaction (17,384 ) - - (17,384 ) -   Severance and restructuring costs - 7,677 - - 23,662  

Market-to-market charge on interest rate contract

-

-

-

-

1,612

                              Non-GAAP Consolidated Basis $ 71,691     $ 32,063   $ 46,548   $ 118,239     $ 146,595                                 Diluted Earnings per Share : GAAP Consolidated Basis $ 0.26 $ 0.11 $ 0.05 $ 0.31 $ 0.55   Adjustments for Charges (Gains): M-I SWACO 0.02 0.01 0.04 0.06 0.04   Smith Oilfield - 0.03 - - 0.06   Distribution - - - - 0.01   General Corporate 0.01 - 0.10 0.11 0.01                               Non-GAAP Consolidated Basis $ 0.29     $ 0.15   $ 0.19   $ 0.48     $ 0.67

NOTE: Management believes that it is important to highlight certain charges and gains included within operating income to assist financial statement users with comparisons between current and prior periods. For the three-month periods ended June 30, 2010 and March 31, 2010, the Company incurred $23.0 million and $15.4 million, respectively, in expenses associated with the proposed combination of the Company and Schlumberger and $0.7 million and $1.1 million, respectively, in other business combination related charges. During second quarter 2010, the Venezuelan government modified its practices with respect to certain U.S. dollar based billings indicating it would settle such commitments at 2.6 rather than 4.3 Venezuelan Bolivar Fuertes per U.S. dollar. This change reduced the U.S. dollar value of receivables outstanding as of March 31, 2010, resulting in a pre-tax loss of $11.9 million in the second quarter of 2010. In the first quarter of 2010, the Company incurred $23.0 million in charges associated with the revaluation of its Venezuelan Bolivar Fuertes denominated net asset position. The Company recognized a pre-tax gain of $20.8 million in the second quarter of 2010, as a result of remeasuring its previously held equity interest in @Balance. Amounts reported in the 2009 periods relate primarily to employee severance associated with the reduction in U.S. personnel levels.