Smith Int'l Misses Badly

Smith International Inc. (SII - Analyst Report) reported its third quarter 2009 results of 7 cents per share versus the Zacks Consensus Estimate of 15 cents and year-earlier earnings of $1.01. The significant fall was due to a challenging North American natural gas market that contributed to continued pricing pressure within the domestic operations of the Distribution and Oilfield segments.

While the results came in significantly below expectations, the company’s PathFinder business and M-I SWACO continued to gain ground. Smith guided towards an increase in M-I SWACO revenue in 2010, driven by a growing number of deepwater rigs and the commercialization of new technologies.

Revenue during the quarter decreased more than 3% sequentially and 34% year-over-year to $1.88 billion, while operating income was down 24% sequentially and 77% year-over-year to $101.3 million. The sequential revenue decline was mainly due to lower revenue in the United States, which was driven by lower pricing, decreased customer spending and significantly reduced offshore activity.

Revenue in markets outside North America was down approximately 2% from the June quarter due to poor offshore drilling activity in the Eastern Hemisphere.

With respect to business segments, M-I SWACO accounted for approximately 53% of total quarterly revenue. The segment’s quarterly revenue totaled $994.6 million, down 27% year-over-year and 2% sequentially. The sequential negative comparison reflected a decrease in offshore rig counts.

The Oilfield segment reported third-quarter revenue of $505.9 million (26.9% of total quarterly revenue), down 3% sequentially and 30% year-over-year. The sequential decrease in revenue was largely driven by poor performance of the U.S. market.

Distribution segment revenue during the quarter totaled $378.5 million (20.1% of total quarterly revenue), down 50% year-over-year and 8% sequentially. The sequential revenue decrease can be attributable to the energy sector operations.

Smith International ended the quarter with cash on hand of $281.5 million and total debt of $2.37 billion (including short-term borrowings of $323 million). The quarter-end total debt-to-capitalization ratio stood at 28.1%.

Smith’s cost control initiatives, growing focus on improving supply chain as well as manufacturing efficiencies and expansion of international business will benefit the company in 2010 and beyond, in our view.