Smith Reports Q1 Results, Reduces N. American Personnel by 14%

Smith International announced first quarter earnings of $96.9 million, or $0.44 per diluted share, on revenues of $2.41 billion. The results include a $34.8 million charge, primarily reflecting employee separation costs associated with a 14 percent reduction in North American personnel levels. After excluding the impact of the charge, the Company reported income from continuing operations of $114.5 million, or $0.52 per diluted share.

Reflecting a sharp decline in drilling activity associated with the global economic slowdown, first quarter 2009 earnings from continuing operations declined 35 percent from the year-ago period in which the Company's net income totaled $175.0 million, or 87 cents per diluted share. The results compare to fourth quarter 2008 earnings from continuing operations of $218.6 million, or $1.00 per diluted share, which has been adjusted to exclude the impact of a derivative contract-related loss. The sequential quarter earnings deterioration was driven by a 34 percent reduction in North American activity levels and, to a lesser extent, the sale of certain non-core W-H Energy operations which contributed after-tax earnings of $9.6 million, or five cents per diluted share, in the December 2008 period.

Consolidated revenues were two percent above the prior year period and 21 percent lower on a sequential quarter basis. The revenue growth over the prior year stemmed from the addition of the W-H Energy operations which masked the decline in North American business volumes. From a pro forma perspective, revenues were seven percent below the March 2008 period -- comparing favorably to the 16 percent reduction in related activity levels. Sequentially, the majority of the revenue decline was concentrated in North America driven by weakened demand for line pipe and other tubular products, reduced sales in the Distribution segment's upstream customer base and lower volumes and pricing across a number of oilfield-related product and service offerings. Revenues outside North America decreased nine percent from the December period influenced by reduced sales volumes in the Former Soviet Union ("FSU") and, to a lesser extent, a decline in offshore activity levels in the North Sea region.

Commenting on the results, Chief Executive Officer, John Yearwood stated, "We believe the North American business environment will continue to be challenging until natural gas fundamentals support more favorable commodity prices for our customers. With this in mind, we have responded quickly to the unprecedented rate of decline in drilling activity by reducing our workforce, minimizing discretionary spending, re-negotiating product input pricing and eliminating non-essential capital investment while successfully expanding our capabilities to provide performance-focused drilling solutions. We believe fundamentals should improve over the coming quarters, which provide a favorable long-term outlook for our industry -- and our business in particular -- as customers seek to enhance the value of their upstream spending programs."

Margaret Dorman, Chief Financial Officer, added, "We're pleased with the overall operating results, especially after considering the severe contraction in global activity levels experienced during the quarter. Adjusted operating margins for our oilfield operations declined to 15.5 percent in the period -- 370 basis points below the December quarter reflecting sequential decremental margins of 36 percent. The financial position of the Company improved during the quarter, reflecting the successful refinancing of the W-H bridge loan borrowings and continuing focus on working capital management."

The M-I SWACO segment's first quarter revenues totaled $1.16 billion, 11 percent below the December 2008 quarter and six percent lower on a year-on-year basis. Deepwater revenue volumes, which grew nine percent over the December period influenced by increased demand for premium fluid offerings in the Latin America region, impacted the sequential revenue comparison. On a sequential quarter basis, reduced activity in several key land-based markets, including the United States and the Former Soviet Union, combined with seasonal weakness in the North Sea contributed to the period-to-period decline.

Smith Oilfield segment revenues were $682.4 million for the three months ended March 2009 - 29 percent lower on a sequential quarter basis and, due to the addition of the W-H operations, 19 percent above the amounts reported in the prior year period. The sequential revenue decline was concentrated in the North American market impacted by the 34 percent reduction in activity levels and the sale of certain W-H business operations. Excluding the impact of the divested operations, revenues declined 22 percent on a sequential quarter basis. The period-to-period decline reflects lower drill bit volumes, reduced demand for directional, tubular and other downhole service offerings as well as modest pricing erosion in the U.S. market.

The Distribution segment reported revenues of $569.7 million for the first quarter of 2009, a 28 percent decrease from the December period and comparable with the prior year quarter. The sequential revenue decline was reported in the North American energy sector operations reflecting reduced upstream capital project spending for line pipe products and associated pricing weakness. Additionally, energy sector sales volumes were adversely impacted by the drop in North American completion activity during the quarter resulting in lower customer spending for maintenance, repair and operating ("MRO") supplies.