Smith Reports Solid Financial Results for Fourth Quarter

Smith International has announced fourth quarter earnings of $199.2 million, or $0.91 per diluted share, on revenues of $3.06 billion. The results include a non-cash charge of $19.4 million after-tax, reflecting a loss on an interest rate derivative contract. After excluding the impact of the charge, the Company reported income from continuing operations of $218.6 million, or $1.00 per diluted share.

Consolidated revenues increased 33 percent over the $2.30 billion level reported in December 2007 quarter. Excluding the impact of the charge, after-tax earnings grew $51.6 million, or 31 percent, over the comparable prior year quarter.

The Company reported sequential revenue growth of seven percent, reflecting the inclusion of a full quarter of the W-H Energy operations acquired in August 2008. The revenue growth was concentrated in the U.S. onshore market, reflecting increased sales associated with the W-H business lines as well as higher demand for line pipe and other tubular product offerings. Eastern Hemisphere revenues declined two percent due to the strengthening of the U.S. dollar relative to the local North Sea currencies in which a large proportion of business is transacted. Assuming the W-H operations had been included as of July 1, 2008, pro forma revenues declined approximately one percent on a sequential quarter basis.

For the 2008 fiscal year, Smith reported sales of $10.77 billion with earnings of $767.3 million, or $3.68 per diluted share. Income from continuing operations for the 2008 fiscal period totaled $788.7 million, or $3.78 per diluted share, a 23 percent improvement in year-on-year profitability levels.

Commenting on the results, Chief Executive Officer, John Yearwood stated, "We reported solid results in the fourth quarter influenced by the financial contribution of the legacy W-H business lines and strong year-on-year performance of our operations in the U.S., Africa and Latin America. It was the first complete quarter following the W-H acquisition and we are very pleased with the financial results as well as the operational strength of the acquired companies and the status of our integration efforts."

"The 2009 business outlook involves a significant amount of uncertainty resulting from the global economic downturn and extremely tight credit markets. While adjusting our cost structure to match activity levels will be a priority in 2009, we will also continue our long term strategy of developing new technologies to match the expansion of our product and service capabilities in order to ensure that we exit the downturn in a stronger competitive position."

Margaret Dorman, Chief Financial Officer, added, "We believe the deteriorating business conditions experienced today will soon highlight that Smith has one of the best cash flow downturn profiles in our industry. Over the coming quarters, we would expect to generate significant free cash flow as the business contracts -- which should lead to a rapid de-leveraging of our balance sheet."

The M-I SWACO segment's fourth quarter revenues totaled $1.30 billion, four percent below the September 2008 quarter and 10 percent higher on a year-on-year basis. M-I's Eastern Hemisphere revenue base declined six percent from the third quarter's level influenced by the strengthening of the U.S. dollar relative to the local European currencies in which a large proportion of business is transacted. The sequential revenue decline was also attributable to the slowdown in the number of land-based drilling programs operating in the United States and Russia -- which resulted in lower demand for base fluid and environmental product offerings.

The Smith Oilfield segment reported revenues of $957.3 million, 32 percent higher on a sequential quarter basis and 65 percent above the December 2007 period. The sequential and year-on-year revenue improvement primarily reflected inclusion of a full quarter of the W-H Energy operations. To a lesser extent, increased drill pipe shipments for U.S. land-based programs and continued market expansion of our completion product offerings in the Eastern Hemisphere region also contributed to the sequential reported growth. Excluding the impact of acquisitions, base business revenues grew four percent on both a sequential quarter and year-on-year basis.

The Distribution segment reported record revenues of $794.2 million, evidencing four percent sequential and 51 percent year-on-year top-line growth. The sequential revenue improvement was influenced by the energy sector operations which grew 12 percent over the September 2008 quarter. The period-to-period increase reflects higher line pipe and other operating supplies for customers associated with unconventional drilling programs. Lower capital project sales volumes in the U.S. downstream business operations, driven by reduced demand for tubular product offerings, influenced the reported revenue growth.