Smith International Reports Record Earnings of $68.1 Million

Smith International, Inc. (NYSE: SII) announced second quarter net income of $68.1 million, or 67 cents per share, on revenues of $1.35 billion. The results compare favorably on both a year-over-year and sequential quarter basis, driven by continued growth in global exploration and production spending. Results for the second quarter of 2004, which included a 20-cent after-tax charge related to a patent infringement suit, were $27.5 million, or 27 cents per share, on revenues of $1.06 billion. On a sequential quarter basis, the Company reported solid earnings and revenue growth despite the impact of the annual downturn in Canadian drilling activity. The 57 percent decline in Canadian activity levels resulted in the loss of higher-margin product revenues, contributing to a 12-cent per share reduction in Canadian earnings compared to the March 2005 quarter. Excluding the impact of the Canadian operations, revenues rose 12 percent over the first quarter of 2005 while earnings increased 30 percent between the comparable periods.

Consolidated revenues grew 27 percent over the prior year quarter and five percent on a sequential quarter basis. Increased customer spending in the U.S. land-based market and, to a lesser extent, improved pricing accounted for the majority of the year-over-year revenue growth. Business volumes in areas outside the United States grew 26 percent -- more than twice the rate of increase in associated drilling activity -- influenced by new contract awards and increased market penetration in the North Sea, West Africa and the Middle East regions. On a sequential basis, increased sales of base-oil drilling fluids in the Eastern Hemisphere and higher U.S. tubular demand more than offset the revenue decline in Canada associated with the annual spring break-up.

M-I SWACO's second quarter revenues totaled $660.0 million, seven percent above the first quarter of 2005 and 20 percent higher on a year-over-year basis. The sequential revenue improvement was generated in the Eastern Hemisphere markets where revenues increased 16 percent -- significantly outpacing the three percent growth in underlying activity levels. The revenue increase was concentrated in Europe/Africa and the Middle East influenced by new contract awards and increased activity in these markets. Western Hemisphere revenues were comparable with the March 2005 quarter, effected by the seasonal downturn in Canadian drilling activity which adversely impacted the unit's overall business mix. Compared to the prior year period, the majority of the revenue growth was generated outside of North America, reflecting higher drilling activity and new contract awards in the North Sea and Middle East regions. To a lesser extent, increased customer spending in the North American land-based market also contributed to the year-over-year revenue improvement.

Smith Technologies' second quarter revenues totaled $137.7 million, three percent lower on a sequential quarter basis and 14 percent above the June 2004 period. The unit's sequential results were significantly impacted by the seasonal weakness in Canada. Compared to the first quarter of 2005, lower Canadian revenues were largely offset by increased demand for diamond drill bit products, improved pricing and the inclusion of several large Eastern Hemisphere export orders. On a year-over-year basis, the revenue improvement was largely generated in markets outside of North America, primarily the Middle East and Latin America. Non-North American revenues increased 23 percent over the prior year quarter influenced by accelerating demand for diamond drill bit products.

Smith Services' revenues totaled $171.4 million, 15 percent above the first quarter of 2005 and 47 percent higher on a year-over-year basis. The reported revenue growth was partially impacted by increased tubular sales volumes in the United States, including the HEVI-WATE(TM) product line. Excluding tubular sales, sequential quarter revenues increased nine percent -- driven by strong demand for remedial product and service lines in markets outside of North America. On a geographic basis, the majority of the core business growth over the March 2005 quarter was reported in the North Sea and Middle East regions. On a year-over-year basis, the higher business volumes reflect solid growth across all core product and service lines -- influenced, in part, by the introduction of products and services into new geographic markets. To a lesser extent, higher demand for tubular products and the impact of acquired operations contributed to the year-over-year revenue growth.

Wilson reported revenues of $381.2 million, a modest improvement over the first quarter's levels and 38 percent above the prior year period. On a sequential quarter basis, increased energy sector sales volumes related to higher U.S. drilling and completion activity were mostly offset by the impact of the seasonal downturn in Canada. Compared to the prior year period, the majority of the revenue growth was reported by the upstream and midstream operations benefiting from higher North American activity levels. Increased industrial sector project spending, primarily by the engineering and construction customer base, also contributed to the year-over-year revenue improvement.

Commenting on the results, Chairman and CEO, Doug Rock stated, "With the return of Canadian activity from the break-up plus the realization of recent price increases, we look for margin acceleration in the second half of the year. As a result, we're increasing Smith's 2005 calendar year guidance to $1.40 to $1.45 per share, after taking into consideration the stock split announced last week."

Loren Carroll, Executive Vice President, also noted that, "We're pleased with the results, especially since the second quarter is typically weak due to the seasonal downturn in Canada. In the June quarter, we benefited from our strong exposure to markets outside of North America and, looking forward, we believe that we'll continue to profit from a strengthening global business environment. We're also impressed with the level of cash flow we've been able to generate so far this cycle. During the quarter, we accelerated purchases under our share buyback program acquiring $48 million of stock without increasing our leverage."

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