Smith Earnings Up 17% in Q4 2007

Smith International, Inc. announced fourth quarter net income of $167.0 million, or 83 cents per share, on revenues of $2.3 billion. The Company's fourth quarter after-tax earnings were 17 percent above the comparable prior-year period which had earnings of $143.0 million, or 71 cents per share, on revenues of $2.0 billion. On a full-year basis, Smith reported sales of $8.76 billion with resulting earnings of $647.1 million, or $3.20 per diluted share – a 29 percent profitability improvement over the prior fiscal year.

Consolidated revenues were two percent above the amounts reported in the third quarter of 2007, reflecting reasonably flat global activity levels period-to-period. The sequential revenue improvement was associated with the Oilfield segment operations, which generated sequential revenue growth of five percent - supported by higher offshore revenue volumes and continued expansion in the Eastern Hemisphere markets. Consolidated results were in-line with amounts reported for the September 2007 quarter as the profitability associated with incremental Eastern Hemisphere business volumes was offset by the impact of activity declines in the shallow U.S. offshore market and, to a lesser extent, weather and other issues related to several start-up projects in Mexico. On a combined basis, these factors contributed to a $7.9 million reduction in net income in the December 2007 quarter.

Commenting on the results, Chairman and CEO, Doug Rock stated, "Fourth quarter revenues and earnings set records for Smith, but margins failed to improve. During the quarter, the reduction of working jack-up rigs in the U.S. Gulf Coast along with a curtailment of premium tubular demand in a flat U.S. drilling market caused a decline in Smith Services revenues and margins. Additionally, flooding in Villahermosa, Mexico and new contract start-ups in Mexico contributed to a slight reduction in M-I SWACO margins. However, strong non-North American markets, as evidenced by our 28 percent fourth quarter 2007 year-on-year revenue gain in the Eastern Hemisphere and Latin American markets, demonstrate our 2008 growth potential which should lead to another record year. As a result, we feel that a reasonable expectation for full year 2008 earnings per share for Smith is in the $3.70 to $3.80 range."

Margaret Dorman, Chief Financial Officer, added, "The results for the Company were on the lower-end of our fourth quarter expectations. Smith's Oilfield segment revenues improved five percent over the September 2007 quarter and related after-tax earnings grew two percent – despite the fact that offshore activity levels were down five percent sequentially and the overall drilling market was flat. Lower revenue volumes and the inclusion of costs to relocate our U.S. distribution center resulted in reduced Distribution segment earnings – influencing the consolidated results. On a fiscal year basis, Smith's Oilfield segment revenues grew 23 percent and earnings improved more than 30 percent – supported by 100 basis points of year-over-year margin expansion. We expect Oilfield margins will improve from current levels, particularly as activity in the Eastern Hemisphere shows further expansion in the back half of the year."

M-I SWACO's fourth quarter revenues totaled $1.19 billion, seven percent above the September 2007 quarter and 22 percent higher on a year-on-year basis. The improvement over the third quarter of 2007 reflects eight percent growth in offshore revenue volumes influenced by spending in the North Sea, Middle East and U.S. deepwater markets. On a product basis, over 80 percent of the growth was generated outside the company's traditional drilling fluid product lines, evidencing increased demand for environmental equipment in Europe/Africa and continued expansion of the Wellbore Assurance operations in the Eastern Hemisphere region. The unit's sequential results were impacted by weather and start-up issues associated with several land-based drilling programs in Mexico and, to a lesser extent, continued deterioration in the shallow U.S. offshore market.

Smith Technologies reported revenues of $267.1 million, three percent above the third quarter of 2007 and 11 percent higher on a year-on-year basis. The sequential revenue comparison reflects strong performance of the North American three-cone drill bit operations reflecting increased market penetration and, to a lesser extent, improved product pricing. Additionally, increased diamond bit export sales volumes in the Eastern Hemisphere market, influenced by new contract awards and the timing of customer projects, also contributed to the sequential revenue improvement. After excluding the impact of export orders, revenues were modestly above the third quarter of 2007 and were 12 percent higher than the prior year quarter.

Smith Services' fourth quarter revenues totaled $312.9 million, slightly below the September 2007 period and 18 percent above the year-ago level. The decline in the number of jack-up rigs operating in the Gulf of Mexico contributed to a 15 percent sequential reduction in offshore revenue volumes – adversely impacting revenues and operating earnings. Compared to the third quarter of 2007, lower premium tubular sales and, to a lesser extent, reduced demand for drilling and remedial service offerings in the U.S. Gulf Coast market accounted for the period-to-period revenue decline. Sequentially, tubular volumes declined three percent as higher shipments of drill pipe products in the U.S. market partially offset lower sales of drill collars and other premium tubular offerings.

Distribution segment revenues were $526.9 million, six percent below the third quarter of 2007 and three percent higher on a year-on-year basis. The majority of the sequential revenue decline was experienced in North America, reflecting lower line pipe demand in the upstream energy sector. To a lesser extent, the inclusion of a large engineering and construction order in the third quarter of 2007 which did not recur in the December period contributed to lower business volumes in the Europe/Africa market.