Smith International Inc. (SII) on Thursday posted a steep decline in third-quarter profit, largely reflecting continued pricing pressure in the U.S. operations of the Distribution and Smith Oilfield segments, and said it anticipates more favorable industry environment during 2010 with increased activity.
The Houston, Texas-based company's third-quarter net income plunged to $43.7 million from $282.9 million a year ago. Net income attributable to Smith was $7.04 million or $0.03 per share, compared to $209.8 million or $1.00 per share in the prior-year quarter.
The company said its third-quarter results were primarily influenced by unfavorable economic fundamentals in the North American natural gas market that contributed to continued pricing pressure within the U.S. operations of the Distribution and Smith Oilfield segments. Line pipe, drilling-related tubular offerings, as well as fishing and remedial services were particularly affected during the quarter.
On a non-GAAP basis, net income attributable to Smith dived to $14.8 million or $0.07 per share from $211.9 million or $1.01 per share in the same quarter of last year.
On average, 22 analysts polled by Thomson Reuters expected the company to post earnings of $0.15 per share. Analysts' estimates typically exclude special items.
Quarterly revenues declined to $1.88 billion from the previous year's revenues of $2.85 billion, and fell shy of thirteen Wall Street analysts' consensus revenue estimate of $1.91 billion.
The company added that the modest seasonal recovery of drilling activity in Canada, sequential quarter revenue growth in Latin America and the solid performance of M-I SWACO were not sufficient to mitigate the revenue and margin deterioration experienced during the third quarter of 2009.
Commenting on the results, Chief Executive Officer, John Yearwood stated, "Our operating results for the third quarter reflected a challenging U.S. environment but displayed signs of stabilization towards the end of the quarter. M-I SWACO continued its remarkable success in deepwater contract awards, winning approximately 75 percent of the total fluids contract values awarded over the first three quarters of 2009."
Due to strong customer demand and excellent drilling results, Smith's PathFinder business continued to execute on its planned international expansion. Directional drilling, measurement-while-drilling and logging-while-drilling service revenue grew at a double digit percentage, exceeding the growth rate of the U.S. non-vertical rig count.
The company's M-I SWACO segment generated third-quarter revenue of $994.6 million, down 27% from $1.36 billion a year ago. Segment operating income decreased to $118.3 million from $217.0 million in the same quarter of last year.
The Smith Oilfield segment posted revenues of $505.9 million, a decline of 30%, compared to $724.2 million reported in the previous year. Operating income for this segment fell to $36.6 million from $188.2 million last year.
Distribution segment revenue totaled $378.5 million in the third quarter of 2009, down 50% percent from the comparable prior-year quarter. This segment incurred an operating loss of $20.9 million, compared to operating income of $61.7 million in the corresponding quarter of the previous year.
For the nine-month period, the company reported net income attributable to Smith of $128.4 million or $0.58 per share, compared to $568.1 million or $2.77 per share in the year-earlier period.
Year-to-date, non-GAAP net income plummeted to $161.4 million or $0.73 per share from $570.1 million or $2.78 per share in the comparable period of fiscal 2008.
Revenues for the nine months ended September 30, 2009 were $6.23 billion, compared to $7.71 billion reported in the same period of last year.
Looking ahead, the company expects a more favorable industry environment during 2010 with increased activity as compared to current levels. Smith also projects M-I SWACO revenue to grow, both domestically and internationally, driven by an increase in deepwater rigs and commercialization of new technologies. The Smith Oilfield segment is expected to benefit as PathFinder continues to gain ground, with expected higher growth rates than what we achieved during the third quarter of 2009.
Further, the company said Distribution's revenue performance in 2010 would depend on demand for infrastructure and economic recovery in the United States. Even at current activity levels, "we anticipate significant improvement in our Distribution segment results starting next year," the company added.
Among Smith's rivals, Houston, Texas-based Baker Hughes Inc. (BHI) is scheduled to release its third-quarter results on November 4, with analysts projecting earnings of $0.35 per share on revenues of $2.25 billion.
Another peer, Halliburton Co. (HAL) reported a sharp decline in third-quarter profit that totaled $262 million or $0.29 per share, compared to $672 million or $0.74 per share in the year-ago quarter, largely hurt by continued pricing pressures in North America. Quarterly revenue dropped 3% to $3.59 billion from $4.85 billion reported in the previous year.
Yet another competitor, Schlumberger Ltd. (SLB) reported third-quarter net income of $787 million or $0.65 per share, down from $1.526 billion or $1.25 per share last year, reflecting a sharp decline in revenues from Oilfield Services and WesternGeco segments. Revenues fell to $5.43 billion from $7.26 billion in the prior year quarter.
Smith International's shares, which have been trading between $18.23 and $35.87 in the past 52 weeks, closed Wednesday's trading session at $30.00.
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