Smith International, Inc. (NYSE: SII) announced second quarter income from continuing operations of $71.7 million, or $0.29 per diluted share, excluding net after-tax charges. Reported net income for the second quarter of 2010 was $65.1 million, or $0.26 cents per diluted share, on revenues of $2.30 billion. The impact of current quarter charges for transaction costs associated with the proposed merger with Schlumberger and Venezuela currency-related losses were partially offset by a remeasurement gain reported in connection with the purchase of the remaining 65 percent interest in @Balance B.V.

On a comparable basis, second quarter 2010 earnings from continuing operations were more than double those of the second quarter of 2009, which totaled $32.1 million on revenues of $1.94 billion. Sequential quarter earnings from continuing operations, net of charges, increased 54 percent as compared to the $46.5 million on revenues of $2.14 billion reported for the first quarter of 2010.

The Company’s financial performance in the second quarter of 2010 was favorably influenced by the continued expansion of U.S. land drilling activity, which more than offset the impact of the seasonal drilling downturn in Canada.

Consolidated revenues rose 7 percent on a sequential-quarter basis and 18 percent from the comparable prior-year quarter. The increase over the prior period was concentrated in the U.S. market where revenues increased 19 percent as compared to the average M-I SWACO rig count which rose 12 percent. Outside the United States, significant growth reported in the Middle East/Asia region was offset by the impact of the seasonal spring break up on Canadian drilling activity and a moderate decrease in Latin America.

M-I SWACO segment revenues were $1.16 billion for the second quarter of 2010, a 4 percent increase on a sequential basis and 14 percent above the prior-year period. The revenue growth was concentrated in the Eastern Hemisphere, principally in Vietnam, Indonesia, Malaysia and Kuwait. The impact of a 21 percent sequential increase in land-based revenue in the United States was partially offset by the seasonal decline in Canada, lower customer spending in Latin America, and the impact of the deepwater drilling moratorium in the Gulf of Mexico announced in May 2010.

Smith Oilfield segment revenue was $650.2 million for the three months ended June 30, 2010, 13 percent higher on a sequential-quarter basis and 25 percent above that reported in the prior-year quarter. The majority of the increase was derived from the United States where revenue grew by 24 percent sequentially and 29 percent as compared to the second quarter in the prior year. The increase was across all product offerings and was particularly strong in land-based activity. In addition, sequential quarter revenue growth was reported in all other geographic areas except for Canada, which fell due to the seasonal break-up period. Eastern Hemisphere sales volumes were favorably affected by a higher demand for drilling-related products and services as well as drill bit tender deliveries with particularly strong performance in the North Sea, Iraq and West Africa.

The Distribution segment’s second quarter revenues were $490.3 million, 9 percent above the March 2010 quarter and 19 percent higher on a year-on-year basis. Project spending in the United States for line pipe rose over 50 percent from the prior quarter and, together with higher energy sector volumes, more than offset the impact of lower seasonal activity levels from the Canadian operations.

Improved profitability and continued focus on working capital investment allowed the Company to generate $169.1 million in cash flows from operations during the June 2010 quarter, while continuing to moderately decrease its total debt. During the three months ended June 30, 2010, the Company used cash flows from operating activities together with $50.1 million of cash on-hand to fund $112.0 million of net capital expenditures, $75.1 million in acquisition-related investments and $29.8 million in dividends to stockholders.

As indicated in the prior quarter and in response to a continuing favorable industry environment, the Company has increased its expected capital investment for the year, estimating spending to range from $420 million to $450 million. The Company stated that further capital expenditure increases throughout the year are possible and would be implemented in accordance with the terms of the merger agreement between the Company and Schlumberger Limited.

The Company’s revenue attributable to the U.S. Gulf of Mexico represented approximately 6 percent of its consolidated revenue for the year ended December 31, 2009. The majority of revenues derived from drilling operations are generally high-performance services and products deployed in deepwater operations and, as such, the Company continues to redeploy personnel and assets as appropriate to minimize the near-term impact of the moratorium on its operating results. For the third quarter of 2010, the Company expects a $0.04 to $0.06 per share unfavorable impact on earnings due to the current drilling moratorium. At this time, Smith cannot predict what further impact the Deepwater Horizon incident may have on the regulation of offshore oil and gas exploration and development activity, the cost or availability of insurance coverage to cover the risks of such operations, or what actions may be taken by customers of the Company or other industry participants in response to the incident. Increased costs for the operations of the Company’s customers in the U.S. Gulf of Mexico, along with permitting delays, could affect the economics of currently planned activity in the area and demand for their services. A prolonged suspension of drilling activity in the U.S. Gulf of Mexico and resulting new regulations could materially adversely affect the Company's financial condition, results of operations or cash flows.

As previously announced by the parties, the U.S. Department of Justice and the European Commission have both cleared the proposed merger of Smith and Schlumberger Limited without any conditions. The closing of the proposed merger remains subject to approval by Smith stockholders and the satisfaction or waiver of the other closing conditions contained in the merger agreement between the companies. The 2010 annual meeting of stockholders of Smith is scheduled for August 24, 2010, at which meeting stockholders of Smith will consider and vote upon matters including the proposed adoption of the agreement and plan of merger between Smith and Schlumberger. Subject to receipt of approval from Smith stockholders, Schlumberger and Smith expect to close the merger on August 27, 2010.

Smith International, Inc. is a leading supplier of premium products and services to the oil and gas exploration and production industry. The Company employs over 23,000 full-time personnel and operates in over 80 countries around the world.

Certain comments contained in this news release concerning among other things, the Company’s outlook, financial projections and business strategies constitute “forward-looking statements” within the meaning of the federal securities laws. Whenever possible, the Company has identified these forward-looking statements by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “project,” “should” and similar terms. The forward-looking statements are based upon management’s current expectations and beliefs and, although these statements are based upon reasonable assumptions, actual results might differ materially from expected results due to a variety of risk factors including, but not limited to, satisfaction of the closing conditions to the merger between the Company and Schlumberger, the risk that the contemplated merger does not occur, negative effects from the pendency of the merger, the ability to successfully integrate the merged businesses and to realize expected synergies, the risk that we will not be able to retain key employees, expenses of the merger, overall demand for and pricing of the Company’s products and services, general economic and business conditions, the level of oil and natural gas exploration and development activities, our global operations and global economic conditions and activity, political stability of oil-producing countries, finding and development costs of operations, decline and depletion rates for oil and natural gas wells, effects of changes in laws or regulations, including the suspensions and potential drilling moratoriums in the Gulf of Mexico, seasonal weather conditions, industry conditions, including IP infringement litigation, and changes in and the costs of compliance with laws or regulations, many of which are beyond the control of the Company and other risks and uncertainties detailed in our most recent form 10-K and other filings that the Company makes with the Securities and Exchange Commission. The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures. The Company reports its financial results in accordance with generally accepted accounting principles (“GAAP”). However, management believes that certain non-GAAP performance measures and ratios utilized for internal analysis provide financial statement users meaningful comparisons between current and prior period results, as well as important information regarding performance trends. Certain information discussed in this press release could be considered non-GAAP measures. See the Supplementary Data – Schedule III in this release for the corresponding reconciliations to GAAP financial measures for the three-month periods ended June 30, 2010 and 2009 and March 31, 2010, and the six-month periods ended June 30, 2010 and 2009. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results.

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