Smith Posts Fourth Quarter, Fiscal Year Results

Smith International announced fourth quarter net income of $20.1 million, or $0.09 per diluted share on revenue of $1.98 billion. In comparison, third quarter of 2009 earnings from continuing operations, net of charges, were $14.8 million or $0.07 per diluted share on revenue of $1.88 billion, while in the comparable prior-year fourth quarter, earnings from continuing operations, net of charges, were $218.6 million on revenue of $3.06 billion.

The Company’s fourth quarter was primarily influenced by increased drilling activity in the North American market coupled with stable prices for the Company’s products and services, and by a significant increase in revenue per rig in Latin America and Africa for both M-I SWACO and the Smith Oilfield segments. The improved North American environment contributed to strong revenue growth in the Distribution segment, as well as in the PathFinder and cased-hole wireline service businesses. Although healthy revenue growth for M-I SWACO and Smith Technologies outside North America helped improve overall profitability, margin expansion was hampered by the current level of pricing in the U.S. market.

Consolidated revenue increased $104.7 million, or 6 percent, from the third quarter of 2009, while worldwide rig count increased by 8%. Approximately half of the sequential revenue increase was generated in North America influenced in large part by a higher level of onshore drilling and completion activity, partially offset by continued weakness in Gulf of Mexico offshore activity and related weather delays. Outside of North America, revenue levels were 5 percent higher as compared to the September 2009 quarter, despite flat sequential rig activity.

For the 2009 fiscal year, Smith revenue was $8.2 billion with income from continuing operations, net of charges, of $181.5 million or $0.81 per diluted share, as compared to the prior year revenue of $10.8 billion and income from continuing operations, net of charges, of $788.7 million or $3.78 per diluted share. Reported net income for the year 2009 was $148.5 million, or $0.66 per diluted share as compared to $767.3 million of earnings and $3.68 per diluted share reported in the prior year.

"Our fourth quarter results reflect improved land activity in North America combined with increased offshore activity in Latin America, Europe and Africa," stated John Yearwood, Chief Executive Officer. "I am very pleased with the continued growth of our PathFinder business which once again outpaced the growth in the U.S. non-vertical rig count. M-I SWACO produced good revenue gains outside of North America and our Distribution segment showed strong sequential revenue growth.

"Consolidated monthly revenues increased during the fourth quarter providing nice momentum as we entered 2010. We are encouraged by this recent improvement in North American activity, however we remain cautious with respect to the sustainability of the current trajectory. With that said, we are optimistic about the projected future growth in deepwater rig activity for our M-I SWACO business and the increased worldwide drilling of new unconventional resources using non-vertical drilling techniques that should benefit our Smith Oilfield segment.

"While the $18.7 million operating loss from our Distribution segment reflects continued sale of high cost inventory and a low level of pricing, we expect a meaningful improvement in these results as we enter 2010 due to the liquidation of the 2008 LIFO inventory during the fourth quarter. We will not be giving guidance for the full year 2010 but we do believe that our first quarter earnings, excluding any non-recurring charges, will be generally in line with market expectations. This near term guidance is based upon our current expectation of sequentially stronger industry activity levels and overall positive demand for many of our oilfield lines of business as well as improved earnings from our Distribution segment."

William Restrepo, Chief Financial Officer, added, "Strong revenue growth in Europe/Africa, Latin America and Canada were the primary drivers of the sequential increase in operating income. Increased land activity in the United States, particularly for Distribution and demand for many of our other products and services resulted in significantly higher revenues but with a more limited impact on our operating income, reflecting the current level of prices in this market.

"We further reduced our working capital in Q4 having decreased inventory by over $127 million and customer receivables by $30 million during the quarter. Our operating cash flow less capital expenditures was approximately $250 million during the quarter, and as a result of our strong liquidity position we were able to reduce our total debt to $2.2 billion at the end of 2009, and our net debt to $1.2 billion. Based upon our current cash balance of $1.0 billion and our undrawn credit facilities of $1.4 billion, we anticipate having sufficient liquidity to meet our working capital and capital spending requirements, as well as to execute on expected acquisitions. In addition, we plan to continue reducing our total outstanding debt during the first half of 2010.

"For 2010, we expect to invest approximately $320 million in net capital expenditures. This forecast could change depending on the market conditions and the opportunities that present themselves throughout the year, particularly to support the growth of PathFinder.

"Lastly, the recent currency devaluation in Venezuela will result in the remeasurement of our Bolivar denominated assets and liabilities at the new exchange rate, resulting in a one-time charge to earnings during the first quarter of 2010. The new foreign exchange regime includes a multiple exchange rate structure and at this point, the Venezuelan regulatory authorities have not provided sufficient clarity on the exchange rates to be applied to the various Bolivar and US dollar positions of our Venezuelan entity. Until more information becomes available, we will be unable to calculate the precise impact of the devaluation on our first quarter results."



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