##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 1-8514
 SMITH INTERNATIONAL, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    95-3822631(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)16740 East Hardy Road
    
    77032Houston, Texas
    
    (Zip Code)(Address of principal executive offices)
 Registrants telephone number, including area code (281) 443-3370
 Securities Registered Pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $1.00 par value
    
    New York Stock Exchange, Inc.Preferred Share Purchase Rights
    
    New York Stock Exchange, Inc.
 Securities registered pursuant to Section 12(g) of the Act: None
 þ o
 o þ
 þ o
 o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    8Item 1B. Unresolved Staff Comments
    
    
    10Item 2. Properties
    
    
    10Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11PART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    11Item 6. Selected Financial Data
    
    
    12Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 8. Financial Statements and Supplementary Data
    
    
    24Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
    
    
    54Item 9A. Controls and Procedures
    
    
    54Item 9B. Other Information
    
    
    54PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    55Item 11. Executive Compensation
    
    
    55Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    55Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    55Item 14. Principal Accountant Fees and Services
    
    
    55PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    56EX-10.7EX-10.11EX-10.14EX-10.19EX-21.1EX-23.1EX-31.01EX-31.02EX-32.01




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PART I
 
 Item 1. Business
 General
   www.smith.com
   Business Operations
 M-I SWACO Segment
   2




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Smith Oilfield Segment
     Hevi-Wate
 3




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Distribution Segment
    Non-U.S. Operations
  4




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Sales and Distribution
   Manufacturing
   Raw Materials
   Product Development, Engineering and Patents
  5




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Employees
  6




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Officers of the Registrant
  Name
and Age
    
    Principal Current Occupation and Other Significant Positions HeldDoug Rock (62)
    
    Chairman of the Board, since February 1991; Special Executive Advisor to the Chief
Executive Officer, since January 2009; Chief Executive Officer, President and Chief
Operating Officer,
March 1989 to December 2008; Joined the Company in June 1974.John Yearwood (49)
    
    Chief Executive Officer, President and Chief Operating Officer, since January 2009;
Executive Vice President and President of Smith Completion and Production, August 2008 to
December 2008; Member of the Board, since December 2006; Senior Advisor to the Chief
Executive Officer of Schlumberger, March 2006 to May 2008; Various positions at
Schlumberger (most recently, President  North and South America, Oilfield Services),
September 1980 to March 2006; Joined the Company as an employee in August 2008.Margaret K. Dorman (45)
    
    Executive Vice President, Chief Financial Officer and Treasurer, since August 2008; Senior
Vice President, Chief Financial Officer and Treasurer, June 1999 to July 2008; Joined the
Company in December 1995.Malcolm W. Anderson (61)
    
    Senior Vice President, Human Resources, since December 2006; Vice President, Human
Resources, May 2004 to November 2006; Vice President Human Resources of Hewlett-Packard
Company, January 2001 to April 2004; Joined the Company in May 2004.Richard E. Chandler, Jr. (52)
    
    Senior Vice President and Secretary, since January 2006; General Counsel, since August 2005;
Senior Vice President  Administration, General Counsel and Secretary of M-I SWACO, January
2004 to July 2005; Vice President, General Counsel and Secretary of M-I SWACO, December
1986 to December 2003; Joined predecessor to M-I SWACO in December 1986.Bryan L. Dudman (52)
    
    Executive Vice President and President, Smith Drilling and Evaluation, since August 2008;
President, Smith Services, January 2006 to August 2008; Senior Vice President Western
Hemisphere Operations of M-I SWACO, May 1994 to December 2005; Joined the Company in
January 1979.John J. Kennedy (56)
    
    President and Chief Executive Officer of Wilson, since June 1999; Joined the Company in
November 1986.Christopher I.S. Rivers (54)
    
    President and Chief Executive Officer of M-I SWACO, since January 2009; Chief Operating
Officer of M-I SWACO, October 2008 to December 2008; Executive Vice President Product
Segments of M-I SWACO, April 2006 to September 2008; Vice President Eastern Hemisphere of
M-I SWACO, January 2005 to March 2006; Senior Vice President Finance and Chief Financial
Officer of M-I SWACO, March 1994 to December 2004; Joined predecessor to the Company in
July 1977.Michael D. Pearce (61)
    
    Executive Vice President since August 2008; President, Smith Technologies, since May 2005;
Vice President, Sales, Smith Technologies, August 1998 to April 2005; Joined the Company in
April 1995.Peter J. Pintar (50)
    
    Vice President Corporate Strategy and Development, since September 2005; Various positions
at
DTE Energy Company, including Director, Corporate Development; Managing Director, Venture
Capital Investments; and Director, Investor Relations, October 1997 to August 2005; Joined
the Company in September 2005.Lee A. Turner (61)
    
    Vice President QHSE, since January 2009; Vice President QHSE of M-I SWACO, January 2005 to
December 2008; Vice President HSE of Yukos EP, December 2003 to December 2004;
Various positions at Schlumberger, September 1983 to November 2003; Joined M-I SWACO in
January 2005.Geraldine D. Wilde (58)
    
    Vice President, Taxes and Assistant Treasurer, since February 1998; Joined predecessor to
M-I SWACO in December 1986.
  7




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Item 1A. Risk Factors
   The significant deterioration in the global business environment and related factors could
adversely impact our financial condition and results of operations.
   The current financial and credit market environment may impact our ability to finance our
business operations and may limit our ability to expand our business through acquisition.
    8




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Smith is dependent on the level of oil and natural gas exploration and development activities.
  
    
    overall level of global economic growth and activity;
    
    actual and perceived changes in the supply of and demand for oil and natural gas;
    
    political stability and policies of oil-producing countries;
    
    finding and development costs of operators;
    
    decline and depletion rates for oil and natural gas wells; and
    
    seasonal weather conditions that temporarily curtail drilling operations.
  A significant portion of Smiths revenue is derived in markets outside of North America.
  
    
    changes in political and economic conditions in the countries in which Smith
operates, including civil uprisings, riots and terrorist acts;
    
    unexpected changes in regulatory requirements affecting oil and natural gas
exploration and development activities;
    
    fluctuations in currency exchange rates and the value of the U.S. dollar;
    
    restrictions on repatriation of earnings or expropriation of property without fair
compensation;
    
    governmental actions that result in the deprivation of contract or proprietary
rights in the countries in which Smith operates; and
    
    governmental sanctions.
 Smith operates in a highly technical and competitive environment.
  Regulatory compliance costs and liabilities could adversely impact Smiths earnings and cash
available for operations.
  9




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Smiths industry is experiencing more litigation involving claims of infringement of
intellectual property rights.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
       United
    
    
    
    
    
    South
    
    
    
    
    
    Middle East /Segment
    
    States
    
    Canada
    
    America
    
    Europe
    
    Asia
    
    TotalM-I SWACO:Manufacturing
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    6Barite or bentonite mines
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    5Ore, drilling fluid and production
chemical processing
    
    
    6
    
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    10Smith Oilfield:Manufacturing
    
    
    8
    
    
    
    
    
    
    
    2
    
    
    
    4
    
    
    
    2
    
    
    
    16Distribution:Distribution centers
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
 10




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Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
  2007 Common Stock
    
    2008 Common StockQ1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4High
    
    $
    48.41
    
    
    $
    60.34
    
    
    $
    74.00
    
    
    $
    75.34
    
    
    $
    74.68
    
    
    $
    82.72
    
    
    $
    85.52
    
    
    $
    55.93Low
    
    $
    36.01
    
    
    $
    48.84
    
    
    $
    56.78
    
    
    $
    59.16
    
    
    $
    53.49
    
    
    $
    66.42
    
    
    $
    55.36
    
    
    $
    19.67
  Stock Repurchases
   Total Number ofTotal Number
    
    
    Average
    
    
    Shares Purchased as
    
    
    Number of Shares thatof Shares
    
    
    Price Paid
    
    
    Part of Publicly
    
    
    May Yet Be PurchasedPeriod
    
    Purchased
    
    
    per Share
    
    
    Announced Program
    
    
    Under the ProgramOctober 1  31
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    15,458,913November 1  30
    
    
    300,000
    
    
    
    28.05
    
    
    
    300,000
    
    
    
    15,158,913December 1  31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,158,9134th Quarter 2008
    
    
    300,000
    
    
    $
    28.05
    
    
    
    300,000
    
    
    
    15,158,913
  11




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Dividend Program
   
 Item 6. Selected Financial Data
 For the Years Ended December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004(a)(In thousands, except per share data)Statements of Operations Data:Revenues
    
    $
    10,770,838
    
    
    $
    8,764,330
    
    
    $
    7,333,559
    
    
    $
    5,579,003
    
    
    $
    4,419,015Gross profit
    
    
    3,428,916
    
    
    
    2,855,657
    
    
    
    2,344,271
    
    
    
    1,685,138
    
    
    
    1,351,939Operating income
    
    
    1,642,412
    
    
    
    1,369,797
    
    
    
    1,080,081
    
    
    
    670,561
    
    
    
    438,764Net income
    
    
    767,284
    
    
    
    647,051
    
    
    
    502,006
    
    
    
    302,305
    
    
    
    182,451Diluted earnings per share(b)
    
    
    3.68
    
    
    
    3.20
    
    
    
    2.49
    
    
    
    1.48
    
    
    
    0.89Balance Sheet Data:Total assets
    
    $
    10,816,224
    
    
    $
    6,061,880
    
    
    $
    5,335,475
    
    
    $
    4,059,914
    
    
    $
    3,506,778Long-term debt
    
    
    1,440,525
    
    
    
    845,624
    
    
    
    800,928
    
    
    
    610,857
    
    
    
    387,798Total stockholders equity
    
    
    4,549,339
    
    
    
    2,594,897
    
    
    
    1,986,937
    
    
    
    1,578,505
    
    
    
    1,400,811Cash dividends declared per common
share(c)
    
    
    0.48
    
    
    
    0.40
    
    
    
    0.32
    
    
    
    0.24
    
    
    
    
 
 (a)
    
    The 2004 results include a $31.4 million, or $0.10 per share, litigation-related
charge associated with a patent infringement suit.(b)
    
    The 2004 results have been restated for the impact of a two-for-one stock dividend
distributed on August 24, 2005.(c)
    
    In February 2005, the Companys Board of Directors approved a regular quarterly cash
dividend program. For additional information regarding the Companys dividend program, see
Part II, Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities to this Form 10-K.  12




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
  Company Products and Operations
     Business Outlook
  13




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Results of Operations
 Segment Discussion
  For the Years Ended December 31,2008
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Financial Data:(dollars in thousands)Revenues:M-I SWACO
    
    $
    5,183,335
    
    
    
    48
    
    
    $
    4,422,408
    
    
    
    50
    
    
    $
    3,573,395
    
    
    
    49Smith Oilfield
    
    
    2,848,804
    
    
    
    26
    
    
    
    2,210,161
    
    
    
    26
    
    
    
    1,814,343
    
    
    
    24Distribution
    
    
    2,738,699
    
    
    
    26
    
    
    
    2,131,761
    
    
    
    24
    
    
    
    1,945,821
    
    
    
    27Total
    
    $
    10,770,838
    
    
    
    100
    
    
    $
    8,764,330
    
    
    
    100
    
    
    $
    7,333,559
    
    
    
    100Geographic Revenues:United States:M-I SWACO
    
    $
    1,295,477
    
    
    
    12
    
    
    $
    1,172,448
    
    
    
    13
    
    
    $
    1,079,441
    
    
    
    15Smith Oilfield
    
    
    1,685,624
    
    
    
    16
    
    
    
    1,223,833
    
    
    
    14
    
    
    
    930,556
    
    
    
    12Distribution
    
    
    2,099,609
    
    
    
    19
    
    
    
    1,571,525
    
    
    
    18
    
    
    
    1,374,732
    
    
    
    19Total United States
    
    
    5,080,710
    
    
    
    47
    
    
    
    3,967,806
    
    
    
    45
    
    
    
    3,384,729
    
    
    
    46Canada:M-I SWACO
    
    
    178,814
    
    
    
    2
    
    
    
    181,249
    
    
    
    2
    
    
    
    225,084
    
    
    
    3Smith Oilfield
    
    
    159,215
    
    
    
    1
    
    
    
    157,443
    
    
    
    2
    
    
    
    179,037
    
    
    
    2Distribution
    
    
    513,069
    
    
    
    5
    
    
    
    432,738
    
    
    
    5
    
    
    
    487,167
    
    
    
    7Total Canada
    
    
    851,098
    
    
    
    8
    
    
    
    771,430
    
    
    
    9
    
    
    
    891,288
    
    
    
    12Non-North America:M-I SWACO
    
    
    3,709,044
    
    
    
    35
    
    
    
    3,068,711
    
    
    
    35
    
    
    
    2,268,870
    
    
    
    31Smith Oilfield
    
    
    1,003,965
    
    
    
    9
    
    
    
    828,885
    
    
    
    10
    
    
    
    704,750
    
    
    
    10Distribution
    
    
    126,021
    
    
    
    1
    
    
    
    127,498
    
    
    
    1
    
    
    
    83,922
    
    
    
    1Total Non-North America
    
    
    4,839,030
    
    
    
    45
    
    
    
    4,025,094
    
    
    
    46
    
    
    
    3,057,542
    
    
    
    42Total Revenue
    
    $
    10,770,838
    
    
    
    100
    
    
    $
    8,764,330
    
    
    
    100
    
    
    $
    7,333,559
    
    
    
    100Operating Income:M-I SWACO
    
    $
    839,647
    
    
    
    16
    
    
    $
    729,412
    
    
    
    17
    
    
    $
    553,304
    
    
    
    16Smith Oilfield
    
    
    746,826
    
    
    
    26
    
    
    
    619,038
    
    
    
    28
    
    
    
    495,301
    
    
    
    27Distribution
    
    
    180,178
    
    
    
    7
    
    
    
    97,154
    
    
    
    5
    
    
    
    104,730
    
    
    
    5General corporate
    
    
    (124,239
    )
    
    
    *
    
    
    
    (75,807
    )
    
    
    *
    
    
    
    (73,254
    )
    
    
    *Total
    
    $
    1,642,412
    
    
    
    15
    
    
    $
    1,369,797
    
    
    
    16
    
    
    $
    1,080,081
    
    
    
    15
 
 *
    
    not meaningful 14




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For the Years Ended December 31,2008
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Market Data:Average Worldwide Rig Count:(1)United States
    
    
    2,101
    
    
    
    45
    
    
    
    1,961
    
    
    
    46
    
    
    
    1,901
    
    
    
    47Canada
    
    
    328
    
    
    
    7
    
    
    
    311
    
    
    
    7
    
    
    
    413
    
    
    
    10Non-North America
    
    
    2,258
    
    
    
    48
    
    
    
    2,009
    
    
    
    47
    
    
    
    1,747
    
    
    
    43Total
    
    
    4,687
    
    
    
    100
    
    
    
    4,281
    
    
    
    100
    
    
    
    4,061
    
    
    
    100Onshore
    
    
    4,096
    
    
    
    87
    
    
    
    3,719
    
    
    
    87
    
    
    
    3,523
    
    
    
    87Offshore
    
    
    591
    
    
    
    13
    
    
    
    562
    
    
    
    13
    
    
    
    538
    
    
    
    13Total
    
    
    4,687
    
    
    
    100
    
    
    
    4,281
    
    
    
    100
    
    
    
    4,061
    
    
    
    100Average Commodity Prices:Crude Oil ($/Bbl)(2)
    
    $
    99.75
    
    
    
    
    
    
    $
    72.36
    
    
    
    
    
    
    $
    66.25Natural Gas ($/mcf)(3)
    
    
    8.89
    
    
    
    
    
    
    
    7.12
    
    
    
    
    
    
    
    6.98
 
 (1)
    
    Source: M-I SWACO.(2)
    
    Average daily West Texas Intermediate (WTI) spot closing prices, as quoted by
NYMEX.(3)
    
    Average daily Henry Hub, Louisiana spot closing prices, as quoted by NYMEX. M-I SWACO Segment
 Revenues
  Operating Income
  15




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Smith Oilfield Segment
 Revenues
  Operating Income
  Distribution Segment
 Revenues
  16




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Operating Income
  Consolidated Discussion
  For the Years Ended December 31,2008
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Revenues
    
    $
    10,770,838
    
    
    
    100
    
    
    $
    8,764,330
    
    
    
    100
    
    
    $
    7,333,559
    
    
    
    100Gross profit
    
    
    3,428,916
    
    
    
    32
    
    
    
    2,855,657
    
    
    
    33
    
    
    
    2,344,271
    
    
    
    32Selling, general and
administrative expenses
    
    
    1,786,504
    
    
    
    17
    
    
    
    1,485,860
    
    
    
    17
    
    
    
    1,264,190
    
    
    
    17Operating income
    
    
    1,642,412
    
    
    
    15
    
    
    
    1,369,797
    
    
    
    16
    
    
    
    1,080,081
    
    
    
    15Interest expense
    
    
    89,765
    
    
    
    1
    
    
    
    69,990
    
    
    
    1
    
    
    
    62,967
    
    
    
    1Interest income
    
    
    (3,374
    )
    
    
    
    
    
    
    (4,068
    )
    
    
    
    
    
    
    (2,982
    )
    
    
    Income before income taxes and
minority interests
    
    
    1,556,021
    
    
    
    14
    
    
    
    1,303,875
    
    
    
    15
    
    
    
    1,020,096
    
    
    
    14Income tax provision
    
    
    505,892
    
    
    
    4
    
    
    
    408,471
    
    
    
    5
    
    
    
    326,674
    
    
    
    4Minority interests
    
    
    282,845
    
    
    
    3
    
    
    
    248,353
    
    
    
    3
    
    
    
    191,416
    
    
    
    3Net income
    
    $
    767,284
    
    
    
    7
    
    
    $
    647,051
    
    
    
    7
    
    
    $
    502,006
    
    
    
    7
 2008 versus 2007
   17




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2007 versus 2006
      18




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##### Table of Contents



Liquidity and Capital Resources
 General
         19




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##### Table of Contents



Contractual Obligations, Commitments and Contingencies
 Contractual Obligations
  Amount of Commitment Expiration per PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsDebt maturities
    
    $
    2,806,821
    
    
    $
    1,366,296
    
    
    $
    1,165,721
    
    
    $
    
    
    
    $
    274,804Interest on fixed rate long-term debt
    
    
    160,875
    
    
    
    31,350
    
    
    
    71,775
    
    
    
    33,000
    
    
    
    24,750Operating lease commitments
    
    
    374,275
    
    
    
    85,472
    
    
    
    110,006
    
    
    
    61,359
    
    
    
    117,438Total
    
    $
    3,341,971
    
    
    $
    1,483,118
    
    
    $
    1,347,502
    
    
    $
    94,359
    
    
    $
    416,992
   20




---



##### Table of Contents



Standby Letters of Credit
  Insurance
  Litigation
  Environmental
  Critical Accounting Policies and Estimates
   Allowance for doubtful accounts.
 Inventory reserves.
 21




---



##### Table of Contents



Goodwill
 Self-Insurance
 Income taxes
 Recent Accounting Pronouncements
      22




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
     23




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 
 Managements Report on Internal Control Over Financial Reporting
      /s/ Doug Rock

Doug Rock
    
    
    
    /s/ John Yearwood

John Yearwood
    
    
    
    /s/ Margaret K. Dorman

Margaret K. DormanChairman of the Board
    
    
    
    Chief Executive Officer, President
and Chief Operating Officer
    
    
    
    Executive Vice President, Chief
Financial Officer and Treasurer
 24




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       Deloitte & Touche LLP
 
 25




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      Deloitte & Touche LLP
 
 26




---



##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED BALANCE SHEETS
  December 31,2008
    
    
    2007AssetsCurrent Assets:Cash and cash equivalents
    
    $
    162,508
    
    
    $
    158,267Receivables, net (Note 1)
    
    
    2,253,477
    
    
    
    1,750,561Inventories, net
    
    
    2,367,166
    
    
    
    1,658,172Deferred tax assets, net
    
    
    81,834
    
    
    
    46,220Prepaid expenses and other
    
    
    221,399
    
    
    
    114,515Total current assets
    
    
    5,086,384
    
    
    
    3,727,735Property, Plant and Equipment, net
    
    
    1,844,036
    
    
    
    1,105,880Goodwill, net
    
    
    3,016,425
    
    
    
    896,442Other Intangible Assets, net
    
    
    637,450
    
    
    
    128,359Other Assets
    
    
    231,929
    
    
    
    203,464Total Assets
    
    $
    10,816,224
    
    
    $
    6,061,880Liabilities and Stockholders EquityCurrent Liabilities:Short-term borrowings and current portion of long-term debt
    
    $
    1,366,296
    
    
    $
    139,481Accounts payable
    
    
    979,000
    
    
    
    655,413Accrued payroll costs
    
    
    178,040
    
    
    
    153,453Income taxes payable
    
    
    92,922
    
    
    
    80,181Other
    
    
    317,174
    
    
    
    144,772Total current liabilities
    
    
    2,933,432
    
    
    
    1,173,300Long-Term Debt
    
    
    1,440,525
    
    
    
    845,624Deferred Tax Liabilities
    
    
    428,986
    
    
    
    160,244Other Long-Term Liabilities
    
    
    152,972
    
    
    
    157,042Minority Interests
    
    
    1,310,970
    
    
    
    1,130,773Commitments and Contingencies(Note 16)Stockholders Equity:Preferred stock, $1 par value; 5,000 shares authorized;
no shares issued or outstanding in 2008 or 2007
    
    
    
    
    
    
    Common stock, $1 par value; 250,000 shares authorized;
236,726 shares issued in 2008 (217,586 shares issued in 2007)
    
    
    236,726
    
    
    
    217,586Additional paid-in capital
    
    
    1,975,102
    
    
    
    533,429Retained earnings
    
    
    2,885,792
    
    
    
    2,219,224Accumulated other comprehensive income (loss)
    
    
    (73,833
    )
    
    
    67,840Less  Treasury securities, at cost; 17,616 common shares in 2008
(16,825 common shares in 2007)
    
    
    (474,448
    )
    
    
    (443,182
    )Total stockholders equity
    
    
    4,549,339
    
    
    
    2,594,897Total Liabilities and Stockholders Equity
    
    $
    10,816,224
    
    
    $
    6,061,880
  27




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##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  For the Years Ended December 31,2008
    
    
    2007
    
    
    2006Revenues:Oilfield operations
    
    $
    8,032,139
    
    
    $
    6,632,569
    
    
    $
    5,387,738Distribution operations
    
    
    2,738,699
    
    
    
    2,131,761
    
    
    
    1,945,821Total revenues
    
    
    10,770,838
    
    
    
    8,764,330
    
    
    
    7,333,559Costs and expenses:Cost of oilfield revenues
    
    
    5,069,274
    
    
    
    4,119,137
    
    
    
    3,378,281Cost of distribution revenues
    
    
    2,272,648
    
    
    
    1,789,536
    
    
    
    1,611,007Selling, general and administrative expenses
    
    
    1,786,504
    
    
    
    1,485,860
    
    
    
    1,264,190Total costs and expenses
    
    
    9,128,426
    
    
    
    7,394,533
    
    
    
    6,253,478Operating income
    
    
    1,642,412
    
    
    
    1,369,797
    
    
    
    1,080,081Interest expense
    
    
    89,765
    
    
    
    69,990
    
    
    
    62,967Interest income
    
    
    (3,374
    )
    
    
    (4,068
    )
    
    
    (2,982
    )Income before income taxes and
minority interests
    
    
    1,556,021
    
    
    
    1,303,875
    
    
    
    1,020,096Income tax provision
    
    
    505,892
    
    
    
    408,471
    
    
    
    326,674Minority interests
    
    
    282,845
    
    
    
    248,353
    
    
    
    191,416Net income
    
    $
    767,284
    
    
    $
    647,051
    
    
    $
    502,006Earnings per share:Basic
    
    $
    3.70
    
    
    $
    3.23
    
    
    $
    2.51Diluted
    
    $
    3.68
    
    
    $
    3.20
    
    
    $
    2.49Weighted average shares outstanding:Basic
    
    
    207,400
    
    
    
    200,244
    
    
    
    200,252Diluted
    
    
    208,727
    
    
    
    201,947
    
    
    
    202,008
  28




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##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Years Ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    767,284
    
    
    $
    647,051
    
    
    $
    502,006Adjustments to reconcile net income to net cash provided by
operating activities, excluding the net effects of
acquisitions:Minority interests
    
    
    282,845
    
    
    
    248,353
    
    
    
    191,416Depreciation and amortization
    
    
    263,443
    
    
    
    193,296
    
    
    
    150,384Increase in LIFO inventory reserves
    
    
    95,591
    
    
    
    22,712
    
    
    
    18,942Share-based compensation expense
    
    
    43,443
    
    
    
    34,239
    
    
    
    27,280Loss on interest rate derivative contract
    
    
    29,881
    
    
    
    
    
    
    
    Deferred income tax provision
    
    
    3,734
    
    
    
    22,265
    
    
    
    3,737Provision for losses on receivables
    
    
    9,795
    
    
    
    5,082
    
    
    
    7,578Foreign currency translation losses
    
    
    7,509
    
    
    
    4,059
    
    
    
    3,376Gain on disposal of property, plant and equipment
    
    
    (36,792
    )
    
    
    (21,133
    )
    
    
    (18,893
    )Equity earnings, net of dividends received
    
    
    (10,352
    )
    
    
    (17,170
    )
    
    
    (9,247
    )Gain on sale of operations
    
    
    
    
    
    
    (1,534
    )
    
    
    (6,473
    )Changes in operating assets and liabilities:Receivables
    
    
    (307,002
    )
    
    
    (154,355
    )
    
    
    (364,834
    )Inventories
    
    
    (792,224
    )
    
    
    (202,436
    )
    
    
    (412,748
    )Accounts payable
    
    
    294,218
    
    
    
    (9,760
    )
    
    
    161,111Other current assets and liabilities
    
    
    62,893
    
    
    
    (58,262
    )
    
    
    48,975Other non-current assets and liabilities
    
    
    (49,123
    )
    
    
    (23,920
    )
    
    
    (24,126
    )Net cash provided by operating activities
    
    
    665,143
    
    
    
    688,487
    
    
    
    278,484Cash flows from investing activities:Acquisition-related payments, net of cash acquired
    
    
    (1,670,987
    )
    
    
    (53,452
    )
    
    
    (226,727
    )Purchases of property, plant and equipment
    
    
    (442,885
    )
    
    
    (355,821
    )
    
    
    (308,470
    )Proceeds from disposal of property, plant and equipment
    
    
    73,111
    
    
    
    45,045
    
    
    
    35,743Other
    
    
    
    
    
    
    16,655
    
    
    
    28,530Net cash used in investing activities
    
    
    (2,040,761
    )
    
    
    (347,573
    )
    
    
    (470,924
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    1,178,418
    
    
    
    146,847
    
    
    
    803,635Principal payments of long-term debt
    
    
    (606,712
    )
    
    
    (272,676
    )
    
    
    (426,557
    )Proceeds
from short-term bridge loan
    
    
    1,000,000
    
    
    
    
    
    
    
    Net change in short-term borrowings
    
    
    (16,151
    )
    
    
    22,302
    
    
    
    (30,299
    )Debt issuance costs
    
    
    
    
    
    
    
    
    
    
    (4,744
    )Purchases of common stock under Repurchase Program
    
    
    (21,499
    )
    
    
    (83,529
    )
    
    
    (102,894
    )Payment of common stock dividends
    
    
    (94,557
    )
    
    
    (76,026
    )
    
    
    (60,074
    )Excess tax benefit from share-based compensation
    
    
    3,376
    
    
    
    27,271
    
    
    
    8,724Net proceeds related to long-term incentive awards
    
    
    (856
    )
    
    
    18,101
    
    
    
    20,393Distributions to minority interest partner
    
    
    (55,187
    )
    
    
    (48,097
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    1,386,832
    
    
    
    (265,807
    )
    
    
    208,184Effect of exchange rate changes on cash
    
    
    (6,973
    )
    
    
    2,781
    
    
    
    2,092Increase in cash and cash equivalents
    
    
    4,241
    
    
    
    77,888
    
    
    
    17,836Cash and cash equivalents at beginning of year
    
    
    158,267
    
    
    
    80,379
    
    
    
    62,543Cash and cash equivalents at end of year
    
    $
    162,508
    
    
    $
    158,267
    
    
    $
    80,379Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    86,310
    
    
    $
    74,536
    
    
    $
    62,161Cash paid for income taxes
    
    
    419,994
    
    
    
    384,145
    
    
    
    291,981Supplemental disclosures of non-cash transactions:Shares
issued in W-H transaction
    
    $
    1,403,617
    
    
    $
    
    
    
    $
    
  29




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##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 For the Years Ended
December 31, 2008, 2007 and 2006
 Accumulated
    
    
    Treasury SecuritiesCommon Stock
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    Common Stock
    
    
    TotalNumber of
    
    
    
    
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Number of
    
    
    
    
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Shares
    
    
    Amount
    
    
    EquityBalance, January 1, 2006
    
    
    213,269,704
    
    
    $
    213,270
    
    
    $
    383,695
    
    
    $
    1,215,483
    
    
    $
    6,901
    
    
    
    (12,300,928
    )
    
    $
    (240,844
    )
    
    $
    1,578,505Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    502,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    502,006Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,407
    
    
    
    
    
    
    
    
    
    
    
    12,407Changes in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,425
    
    
    
    
    
    
    
    
    
    
    
    2,425Changes in pension and other postretirement benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    857
    
    
    
    
    
    
    
    
    
    
    
    857Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    502,006
    
    
    
    15,689
    
    
    
    
    
    
    
    
    
    
    
    517,695Impact of SFAS 158 adoption (Note 13)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    637
    
    
    
    
    
    
    
    
    
    
    
    637Purchases of common stock under Repurchase Program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,656,987
    )
    
    
    (102,894
    )
    
    
    (102,894
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,009
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,009
    )Exercise of stock options and non-employee equity awards
    
    
    1,376,213
    
    
    
    1,376
    
    
    
    31,180
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,556Vesting of restricted stock
    
    
    300,834
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73,163
    )
    
    
    (3,134
    )
    
    
    (2,833
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    27,280
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,280Balance, December 31, 2006
    
    
    214,946,751
    
    
    
    214,947
    
    
    
    442,155
    
    
    
    1,653,480
    
    
    
    23,227
    
    
    
    (15,031,078
    )
    
    
    (346,872
    )
    
    
    1,986,937Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    647,051
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    647,051Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,743
    
    
    
    
    
    
    
    
    
    
    
    46,743Changes in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506
    
    
    
    
    
    
    
    
    
    
    
    506Changes in pension and other postretirement benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,636
    )
    
    
    
    
    
    
    
    
    
    
    (2,636
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    647,051
    
    
    
    44,613
    
    
    
    
    
    
    
    
    
    
    
    691,664Impact of FIN 48 adoption (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,191
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,191
    )Purchases of common stock under Repurchase Program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,570,300
    )
    
    
    (83,529
    )
    
    
    (83,529
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80,116
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80,116
    )Exercise of stock options and non-employee equity awards
    
    
    1,790,706
    
    
    
    1,790
    
    
    
    57,035
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,825Vesting of restricted stock
    
    
    848,760
    
    
    
    849
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (223,892
    )
    
    
    (12,781
    )
    
    
    (11,932
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    34,239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,239Balance, December 31, 2007
    
    
    217,586,217
    
    
    
    217,586
    
    
    
    533,429
    
    
    
    2,219,224
    
    
    
    67,840
    
    
    
    (16,825,270
    )
    
    
    (443,182
    )
    
    
    2,594,897Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    767,284
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    767,284Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96,533
    )
    
    
    
    
    
    
    
    
    
    
    (96,533
    )Changes in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,244
    )
    
    
    
    
    
    
    
    
    
    
    (43,244
    )Changes in pension and other postretirement benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,896
    )
    
    
    
    
    
    
    
    
    
    
    (1,896
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    767,284
    
    
    
    (141,673
    )
    
    
    
    
    
    
    
    
    
    
    625,611Shares issued in W-H acquisition
    
    
    17,780,802
    
    
    
    17,781
    
    
    
    1,385,836
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,403,617Purchases of common stock under Repurchase Program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (535,000
    )
    
    
    (21,499
    )
    
    
    (21,499
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,716
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,716
    )Exercise of stock options and non-employee equity awards
    
    
    466,956
    
    
    
    467
    
    
    
    12,394
    
    
    
    
    
    
    
    
    
    
    
    (44,495
    )
    
    
    (3,614
    )
    
    
    9,247Vesting of restricted stock
    
    
    891,816
    
    
    
    892
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (210,747
    )
    
    
    (6,153
    )
    
    
    (5,261
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    43,443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,443Balance, December 31, 2008
    
    
    236,725,791
    
    
    $
    236,726
    
    
    $
    1,975,102
    
    
    $
    2,885,792
    
    
    $
    (73,833
    )
    
    
    (17,615,512
    )
    
    $
    (474,448
    )
    
    $
    4,549,339
  30




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##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  1. Summary of Significant Accounting Policies
 Basis of Presentation
   Use of Estimates
  Cash and Cash Equivalents
  Allowance for Doubtful Accounts
  Inventories
  Property, Plant and Equipment
  31




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##### Table of Contents



Goodwill and Other Intangible Assets
  Evaluating Impairment of Long-Lived Assets
   Environmental Obligations
  Liabilities Related to Self-Insurance Programs
  Foreign Currency Translation and Transactions
   Derivative Financial Instruments
  32




---



##### Table of Contents



Income Taxes
   Revenue Recognition
    Minority Interests
  33




---



##### Table of Contents



Long-term Incentive Compensation
    Recent Accounting Pronouncements
      34




---



##### Table of Contents



2. Acquisitions
   Purchase price consideration:Shares issued
    
    $
    1,403,617Cash paid, net
    
    
    1,615,133Consideration paid to former W-H equity holders
    
    
    3,018,750Acquired company transaction costs
    
    
    12,874$
    3,031,624
  Purchase Price
    
    $
    3,031,624Receivables
    
    
    276,978Inventories
    
    
    84,254Prepaid and other current assets
    
    
    148,546Property, plant and equipment
    
    
    597,526Identifiable intangible assets
    
    
    522,150Other assets
    
    
    2,749Accounts payable and accrued liabilities
    
    
    (73,735
    )Other current liabilities
    
    
    (105,659
    )Long-term debt
    
    
    (261,700
    )Deferred income taxes
    
    
    (259,741
    )Other liabilities
    
    
    (4,019
    )Goodwill recorded
    
    $
    2,104,275
   35




---



##### Table of Contents



2008
    
    
    2007
    
    
    2006Revenues
    
    $
    11,617,234
    
    
    $
    9,861,637
    
    
    $
    8,203,754Net income
    
    $
    828,162
    
    
    $
    694,530
    
    
    $
    519,659Earnings per share:Basic
    
    $
    3.78
    
    
    $
    3.19
    
    
    $
    2.38Diluted
    
    $
    3.76
    
    
    $
    3.16
    
    
    $
    2.36
 36




---



##### Table of Contents



2008
    
    
    2007
    
    
    2006Fair value of tangible and identifiable intangible assets, net of cash acquired
    
    $
    1,670,731
    
    
    $
    26,185
    
    
    $
    171,125Goodwill acquired
    
    
    2,116,943
    
    
    
    19,422
    
    
    
    129,278Payments to former shareholders of businesses acquired
    
    
    1,727
    
    
    
    13,522
    
    
    
    Total liabilities assumed
    
    
    (714,797
    )
    
    
    (5,677
    )
    
    
    (73,676
    )Fair value of shares issued
    
    
    (1,403,617
    )
    
    
    
    
    
    
    Cash paid for acquisitions, net of cash acquired
    
    $
    1,670,987
    
    
    $
    53,452
    
    
    $
    226,727
 3. Dispositions
   4. Earnings Per Share
  2008
    
    
    2007
    
    
    2006Net Income
    
    $
    767,284
    
    
    $
    647,051
    
    
    $
    502,006Weighted average number of common shares outstanding
    
    
    207,400
    
    
    
    200,244
    
    
    
    200,252Basic EPS
    
    $
    3.70
    
    
    $
    3.23
    
    
    $
    2.51Net Income
    
    $
    767,284
    
    
    $
    647,051
    
    
    $
    502,006Weighted average number of common shares outstanding
    
    
    207,400
    
    
    
    200,244
    
    
    
    200,252Dilutive effect of stock options and restricted stock units
    
    
    1,327
    
    
    
    1,703
    
    
    
    1,756208,727
    
    
    
    201,947
    
    
    
    202,008Diluted EPS
    
    $
    3.68
    
    
    $
    3.20
    
    
    $
    2.49
 5. Inventories
  2008
    
    
    2007Raw materials
    
    $
    190,790
    
    
    $
    139,218Work-in-process
    
    
    202,019
    
    
    
    173,836Finished goods
    
    
    2,186,203
    
    
    
    1,461,3732,579,012
    
    
    
    1,774,427Reserves to state certain U.S. inventories
(FIFO cost of $1,044,345 and $611,062 in 2008
and 2007, respectively) on a LIFO basis
    
    
    (211,846
    )
    
    
    (116,255
    )$
    2,367,166
    
    
    $
    1,658,172
 37




---



##### Table of Contents



6. Property, Plant and Equipment
  2008
    
    
    2007Land and improvements
    
    $
    77,463
    
    
    $
    62,546Buildings
    
    
    322,569
    
    
    
    235,545Machinery and equipment
    
    
    1,048,821
    
    
    
    880,562Rental tools
    
    
    1,292,796
    
    
    
    726,3332,741,649
    
    
    
    1,904,986Less  Accumulated depreciation
    
    
    (897,613
    )
    
    
    (799,106
    )$
    1,844,036
    
    
    $
    1,105,880
 7. Goodwill and Other Intangible Assets
 Goodwill
  SmithM-I SWACO
    
    
    Oilfield
    
    
    Distribution
    
    
    ConsolidatedBalance as of December 31, 2006
    
    $
    683,900
    
    
    $
    143,096
    
    
    $
    40,651
    
    
    $
    867,647Goodwill acquired
    
    
    4,422
    
    
    
    4,833
    
    
    
    10,167
    
    
    
    19,422Goodwill related to disposed operations
    
    
    
    
    
    
    (10,197
    )
    
    
    
    
    
    
    (10,197
    )Purchase price and other adjustments
    
    
    18,843
    
    
    
    
    
    
    
    727
    
    
    
    19,570Balance as of December 31, 2007
    
    
    707,165
    
    
    
    137,732
    
    
    
    51,545
    
    
    
    896,442Goodwill acquired
    
    
    5,771
    
    
    
    2,111,172
    
    
    
    
    
    
    
    2,116,943Purchase price and other adjustments
    
    
    1,727
    
    
    
    1,771
    
    
    
    (458
    )
    
    
    3,040Balance as of December 31, 2008
    
    $
    714,663
    
    
    $
    2,250,675
    
    
    $
    51,087
    
    
    $
    3,016,425
 Other Intangible Assets
  2008
    
    
    2007WeightedAverageGross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    AmortizationCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    PeriodAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    (years)Patents
    
    $
    426,772
    
    
    $
    52,175
    
    
    $
    374,597
    
    
    $
    112,485
    
    
    $
    35,190
    
    
    $
    77,295
    
    
    
    13.7Trademarks(a)
    
    
    205,031
    
    
    
    3,764
    
    
    
    201,267
    
    
    
    9,331
    
    
    
    3,135
    
    
    
    6,196
    
    
    
    17.4License agreements
    
    
    32,416
    
    
    
    17,311
    
    
    
    15,105
    
    
    
    31,688
    
    
    
    14,204
    
    
    
    17,484
    
    
    
    10.9Non-compete
agreements
    
    
    37,928
    
    
    
    23,122
    
    
    
    14,806
    
    
    
    27,373
    
    
    
    17,897
    
    
    
    9,476
    
    
    
    5.0Customer relationships
and contracts
    
    
    58,438
    
    
    
    26,763
    
    
    
    31,675
    
    
    
    34,603
    
    
    
    16,695
    
    
    
    17,908
    
    
    
    6.6$
    760,585
    
    
    $
    123,135
    
    
    $
    637,450
    
    
    $
    215,480
    
    
    $
    87,121
    
    
    $
    128,359
    
    
    
    12.8
 
 (a)
    
    Included within the gross carrying amount of trademarks is $195.7 million, of
indefinite-lived assets. The corresponding weighted average amortization period reflects the
weighting of finite-lived trademarks.  38




---



##### Table of Contents



8. Debt
  2008
    
    
    2007Current:Short-term borrowings
    
    $
    1,096,443
    
    
    $
    111,609Current portion of long-term debt
    
    
    269,853
    
    
    
    27,872Short-term borrowings and current portion of long-term debt
    
    $
    1,366,296
    
    
    $
    139,481Long-Term:Notes:6.0% Senior
Notes maturing June 2016 with an effective interest rate of
6.11%. Interest payablesemi-annually (presented net of unamortized discount of $231
and $262 in 2008 and 2007, respectively)
    
    $
    274,769
    
    
    $
    274,7386.75% Senior Notes maturing February 2011 with an effective interest rate of 6.83%.
Interest payable semi-annually (presented net of unamortized discount of $131
and $249 in 2008 and 2007, respectively)
    
    
    219,869
    
    
    
    219,751Bank revolvers payable:$275 million revolving note expiring May 2010. Interest payable quarterly at base
rate (3.25% at December 31, 2008) or Eurodollar rate, as defined
(1.58% at December 31, 2008) and described below
    
    
    260,000
    
    
    
    245,000M-I SWACO $125 million revolving note expiring May 2010. Interest payable
quarterly at base rate or Eurodollar rate, as defined and described below
    
    
    
    
    
    
    Term Loans:$1.0 billion term loan payable to a syndicate of financial institutions. Principal due
in semi-annual installments of $125.0 million through June 2012. Interest payable
at Eurodollar rate of LIBOR plus 70 basis points (3.52% at December 31, 2008)
    
    
    875,000
    
    
    
    M-I SWACO £80 million term loan payable to a financial institution. Principal due
in semi-annual installments of £6.7 million through December 2012. Interest payable
at Eurocurrency rate of LIBOR plus 35 basis points (6.51% at December 31, 2008)
    
    
    77,456
    
    
    
    133,235Other
    
    
    3,284
    
    
    
    7721,710,378
    
    
    
    873,496Less-Current portion of long-term debt
    
    
    (269,853
    )
    
    
    (27,872
    )Long-term debt
    
    $
    1,440,525
    
    
    $
    845,624
  2010
    
    $
    532,0812011
    
    
    489,2772012
    
    
    144,3632013
    
    
    Thereafter
    
    
    274,804$
    1,440,525
  39




---



##### Table of Contents



9. Financial Instruments
  Foreign Exchange Derivative Instruments
    40




---



##### Table of Contents



Interest Rate Derivative Instruments
   Other Financial Instruments
   2008
    
    2007Recorded
    
    Fair
    
    Recorded
    
    FairValue
    
    Value
    
    Value
    
    ValueLong-term Debt
    
    $
    1,710,378
    
    
    $
    1,634,890
    
    
    $
    873,496
    
    
    $
    889,104
  Concentration of Credit Risk
  41




---



##### Table of Contents



10. Income Taxes
  2008
    
    
    2007
    
    
    2006Income before income taxes and minority interests:United States
    
    $
    821,812
    
    
    $
    644,283
    
    
    $
    443,453Non-United States
    
    
    734,209
    
    
    
    659,592
    
    
    
    576,643Total
    
    $
    1,556,021
    
    
    $
    1,303,875
    
    
    $
    1,020,096
  2008
    
    
    2007
    
    
    2006Current:United States
    
    $
    237,022
    
    
    $
    172,948
    
    
    $
    127,964Non-United States
    
    
    250,168
    
    
    
    208,352
    
    
    
    183,695State
    
    
    14,968
    
    
    
    4,906
    
    
    
    11,278502,158
    
    
    
    386,206
    
    
    
    322,937Deferred:United States
    
    
    17,140
    
    
    
    21,849
    
    
    
    2,308Non-United States
    
    
    (13,758
    )
    
    
    381
    
    
    
    1,289State
    
    
    352
    
    
    
    35
    
    
    
    1403,734
    
    
    
    22,265
    
    
    
    3,737Income tax provision
    
    $
    505,892
    
    
    $
    408,471
    
    
    $
    326,674
   2008
    
    2007
    
    2006U.S. federal statutory tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Minority partners share of U.S. partnership earnings
    
    
    (2.9
    )
    
    
    (3.0
    )
    
    
    (2.6
    )Non-deductible expenses
    
    
    0.9
    
    
    
    1.1
    
    
    
    0.9Benefit of extraterritorial income exclusion, manufacturers
production exclusion and research credits
    
    
    (0.6
    )
    
    
    (0.9
    )
    
    
    (0.5
    )State taxes, net
    
    
    1.0
    
    
    
    0.3
    
    
    
    1.1Non-U.S. tax provisions which vary from the U.S.
rate/non-U.S. losses with no tax benefit realized
    
    
    (0.9
    )
    
    
    (1.2
    )
    
    
    (1.3
    )Change in valuation allowance
    
    
    
    
    
    
    (0.1
    )
    
    
    Other items, net
    
    
    
    
    
    
    0.1
    
    
    
    (0.6
    )Effective tax rate
    
    
    32.5
    %
    
    
    31.3
    %
    
    
    32.0
    %
 42




---



##### Table of Contents



2008
    
    
    2007Deferred tax liabilities attributed to the excess of net book basis
over remaining tax basis (principally depreciation and
amortization):United States
    
    $
    (380,850
    )
    
    $
    (116,886
    )Non-United States
    
    
    (79,418
    )
    
    
    (87,766
    )Total deferred tax liabilities
    
    
    (460,268
    )
    
    
    (204,652
    )Deferred tax assets attributed to net operating loss
and tax credit carryforwards:United States
    
    
    
    
    
    
    Non-United States
    
    
    16,034
    
    
    
    14,672Other deferred tax assets (principally accrued liabilities
not deductible until paid and inventory reserves):United States
    
    
    83,441
    
    
    
    71,453Non-United States
    
    
    33,077
    
    
    
    17,981Subtotal
    
    
    132,552
    
    
    
    104,106Valuation allowance
    
    
    (14,696
    )
    
    
    (14,662
    )Total deferred tax assets
    
    
    117,856
    
    
    
    89,444Net deferred tax liabilities
    
    $
    (342,412
    )
    
    $
    (115,208
    )Balance sheet presentation:Deferred tax assets, net
    
    $
    81,834
    
    
    $
    46,220Other assets
    
    
    12,691
    
    
    
    8,206Income taxes payable
    
    
    (7,951
    )
    
    
    (9,390
    )Deferred tax liabilities
    
    
    (428,986
    )
    
    
    (160,244
    )Net deferred tax liabilities
    
    $
    (342,412
    )
    
    $
    (115,208
    )
  Liability for Uncertain Tax Positions
   43




---



##### Table of Contents



2008
    
    
    2007Balance at beginning of year
    
    $
    34,538
    
    
    $
    22,629Additions for tax positions of prior years
    
    
    7,829
    
    
    
    7,271Reductions for tax positions of prior years
    
    
    (3,202
    )
    
    
    (2,758
    )Additions for tax positions in the current year
    
    
    2,146
    
    
    
    8,324Settlements with tax authorities
    
    
    (300
    )
    
    
    (200
    )Reductions due to the lapse of applicable statute of limitations
    
    
    
    
    
    
    (728
    )Balance at end of year
    
    $
    41,011
    
    
    $
    34,538
   Jurisdiction
    
    Earliest Open Tax PeriodCanada
    
    
    2001Italy
    
    
    2003Norway
    
    
    1998Russia
    
    
    2005United Kingdom
    
    
    2002United States
    
    
    2001
 11. Stockholders Equity
 Dividend Program
   Common Stock Repurchases
   44




---



##### Table of Contents



Stockholder Rights Plan
     Accumulated Other Comprehensive Income (Loss)
  2008
    
    
    2007Currency translation adjustments
    
    $
    (24,235
    )
    
    $
    72,298Fair value of derivatives
    
    
    (42,489
    )
    
    
    755Pension and other postretirement benefits
    
    
    (7,109
    )
    
    
    (5,213
    )Accumulated other comprehensive income (loss)
    
    $
    (73,833
    )
    
    $
    67,840
  12. Retirement Plans
 Defined Contribution Plans
 1 2
 45




---



##### Table of Contents



1 4
 1 2
    Deferred Compensation Plans
    13. Employee Benefit Plans
    46




---



##### Table of Contents



Pension Plans
    
    
    Postretirement Benefit Plans2008
    
    
    2007
    
    
    2008
    
    
    2007Changes in benefit obligations:Benefit obligations at beginning of year
    
    $
    66,926
    
    
    $
    49,988
    
    
    $
    9,386
    
    
    $
    10,059Service cost
    
    
    4,820
    
    
    
    4,461
    
    
    
    349
    
    
    
    381Interest cost
    
    
    3,094
    
    
    
    3,104
    
    
    
    572
    
    
    
    563Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    551
    
    
    
    587Actuarial loss (gain)
    
    
    (2,317
    )
    
    
    6,229
    
    
    
    (533
    )
    
    
    (1,466
    )Exchange rate changes and other
    
    
    (9,011
    )
    
    
    4,210
    
    
    
    
    
    
    
    Benefits paid
    
    
    (896
    )
    
    
    (1,066
    )
    
    
    (928
    )
    
    
    (738
    )Benefit obligations at end of year
    
    $
    62,616
    
    
    $
    66,926
    
    
    $
    9,397
    
    
    $
    9,386Changes in plan assets:Fair value of plan assets at beginning of year
    
    $
    49,572
    
    
    $
    44,616
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    (7,649
    )
    
    
    2,182
    
    
    
    
    
    
    
    Employer contributions
    
    
    5,114
    
    
    
    3,840
    
    
    
    377
    
    
    
    151Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    551
    
    
    
    587Exchange rate changes and other
    
    
    (2,782
    )
    
    
    
    
    
    
    
    
    
    
    Benefits paid
    
    
    (896
    )
    
    
    (1,066
    )
    
    
    (928
    )
    
    
    (738
    )Fair value of plan assets at end of year
    
    $
    43,359
    
    
    $
    49,572
    
    
    $
    
    
    
    $
    Funded status
    
    $
    (19,257
    )
    
    $
    (17,354
    )
    
    $
    (9,397
    )
    
    $
    (9,386
    )Amounts recognized in the consolidated balance
sheet:Non-current assets
    
    $
    
    
    
    $
    584
    
    
    $
    
    
    
    $
    Other long-term liabilities
    
    
    (19,257
    )
    
    
    (17,938
    )
    
    
    (9,397
    )
    
    
    (9,386
    )Net amount recognized
    
    $
    (19,257
    )
    
    $
    (17,354
    )
    
    $
    (9,397
    )
    
    $
    (9,386
    )Amounts in accumulated other comprehensive
income:Net actuarial loss (gain)
    
    $
    10,280
    
    
    $
    7,907
    
    
    $
    (3,198
    )
    
    $
    (2,738
    )Prior service costs
    
    
    27
    
    
    
    44
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    10,307
    
    
    $
    7,951
    
    
    $
    (3,198
    )
    
    $
    (2,738
    )
 47




---



##### Table of Contents



Net Periodic Benefit Expense
  Pension Plans
    
    
    Postretirement Benefit Plans2008
    
    
    2007
    
    
    2006
    
    
    2008
    
    
    2007
    
    
    2006Components of net periodic benefit
expense:Service cost
    
    $
    4,820
    
    
    $
    4,461
    
    
    $
    3,111
    
    
    $
    349
    
    
    $
    381
    
    
    $
    267Interest cost
    
    
    3,094
    
    
    
    3,104
    
    
    
    2,456
    
    
    
    572
    
    
    
    563
    
    
    
    538Return on plan assets
    
    
    (2,956
    )
    
    
    (3,478
    )
    
    
    (2,365
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    7
    
    
    
    8
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    Amortization of loss (gain)
    
    
    514
    
    
    
    286
    
    
    
    818
    
    
    
    (235
    )
    
    
    (157
    )
    
    
    (87
    )Plan termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit expense
    
    $
    5,479
    
    
    $
    4,381
    
    
    $
    4,031
    
    
    $
    686
    
    
    $
    787
    
    
    $
    718Other changes in plan assets and benefit
obligations recognized in other
comprehensive income (loss) (OCI),
net of tax and minority interest:Net (gain) loss arising during the year
    
    $
    2,877
    
    
    $
    3,762
    
    
    
    *
    
    
    $
    (695
    )
    
    $
    (989
    )
    
    
    *Amortization of prior service cost
    
    
    (7
    )
    
    
    (8
    )
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    *Amortization of net gain (loss)
    
    
    (514
    )
    
    
    (286
    )
    
    
    *
    
    
    
    235
    
    
    
    157
    
    
    
    *Other
comprehensive (income) loss
    
    $
    2,356
    
    
    $
    3,468
    
    
    
    *
    
    
    $
    (460
    )
    
    $
    (832
    )
    
    
    *Total net periodic benefit expense and OCI
    
    $
    7,835
    
    
    $
    7,849
    
    
    
    *
    
    
    $
    226
    
    
    $
    (45
    )
    
    
    *
 
 *
    
    Due to the adoption of SFAS 158, the pension and postretirement benefit plan disclosures for 2006 are not comparable.Net periodic benefit expense: Discount rate
    
    
    5.25
    %
    
    
    5.75
    %
    
    
    5.50
    %
    
    
    6.33
    %
    
    
    5.75
    %
    
    
    5.50
    %Expected return on plan assets
    
    
    6.67
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AProjected benefit obligation:Discount rate
    
    
    5.59
    %
    
    
    6.30
    %
    
    
    5.75
    %
    
    
    6.24
    %
    
    
    6.30
    %
    
    
    5.75
    %Expected return on plan assets
    
    
    6.67
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 Additional Pension Plan Information
  2008
    
    2007Common stock and related index funds
    
    
    22
    %
    
    
    44
    %Fixed income securities and related index funds
    
    
    77
    
    
    
    44Other
    
    
    1
    
    
    
    12Total
    
    
    100
    %
    
    
    100
    %
  2008
    
    2007Projected benefit obligation
    
    $
    24,896
    
    
    $
    17,975Accumulated benefit obligation
    
    
    24,153
    
    
    
    17,110Plan assets at fair value
    
    
    16,320
    
    
    
    14,463
 48




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##### Table of Contents



Additional Postretirement Benefit Plan Information
  2008
    
    2007Health care cost trend rate for current year
    
    
    10.1
    %
    
    
    10.9
    %Rate that the cost trend rate gradually declines (ultimate trend rate)
    
    
    5.0
    %
    
    
    5.0
    %Year that the rate reaches the ultimate trend rate
    
    
    2016
    
    
    
    2016
  One-Percentage-
    
    One-Percentage-Point Increase
    
    Point DecreaseEffect on total service and interest cost
    
    $
    
    
    
    $
    (79
    )Effect on accumulated postretirement benefit obligation
    
    
    112
    
    
    
    (751
    )
  14. Long-Term Incentive Compensation
  Restricted Stock Units
  Time-based Awards
    
    
    Performance-based Awards
    
    
    TotalNo. of
    
    
    Fair
    
    
    No. of
    
    
    Fair
    
    
    RestrictedUnits
    
    
    Value(a)
    
    
    Units
    
    
    Value(a)
    
    
    Stock UnitsOutstanding at December 31, 2007
    
    
    796,687
    
    
    $
    53.06
    
    
    
    1,250,066
    (b)
    
    $
    48.55
    
    
    
    2,046,753Granted
    
    
    2,098,106
    
    
    
    27.33
    
    
    
    1,206,834
    
    
    
    23.38
    
    
    
    3,304,940Forfeited
    
    
    (48,698
    )
    
    
    52.16
    
    
    
    (46,022
    )
    
    
    40.95
    
    
    
    (94,720
    )Vested
    
    
    (247,405
    )
    
    
    50.27
    
    
    
    (771,736
    )
    
    
    45.04
    
    
    
    (1,019,141
    )Outstanding at December 31, 2008
    
    
    2,598,690
    
    
    $
    32.57
    
    
    
    1,639,142
    
    
    $
    31.60
    
    
    
    4,237,832
 
 (a)
    
    Reflects the weighted average grant-date fair value.(b)
    
    Performance-based units outstanding at December 31, 2007 have been adjusted to reflect the
actual payout achieved related to the December 2007 grants.  49




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##### Table of Contents



tock Options
  Weighted
    
    
    WeightedShares
    
    
    Average
    
    
    Average
    
    
    AggregateUnder
    
    
    Exercise
    
    
    Remaining
    
    
    Intrinsic ValueOption
    
    
    Price
    
    
    Contractual Life
    
    
    (in thousands)Outstanding at December 31, 2007
    
    
    1,547,671
    
    
    $
    20.04Assumed(a)
    
    
    69,334
    
    
    
    12.51Forfeited
    
    
    (19,732
    )
    
    
    27.62Exercised
    
    
    (447,733
    )
    
    
    19.74Outstanding at December 31, 2008
    
    
    1,149,540
    
    
    $
    19.58
    
    
    
    4.41
    
    
    $
    5,378Exercisable at December 31, 2008
    
    
    1,142,341
    
    
    $
    19.48
    
    
    
    4.40
    
    
    $
    5,378
 
 (a)
    
    Stock options assumed under the W-H program have been adjusted using the conversion
factor determined as of the transaction announcement date.  Share-based Compensation Expense
    15. Industry Segments and International Operations
   50




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##### Table of Contents



2008
    
    
    2007
    
    
    2006Revenues:M-I SWACO
    
    $
    5,183,335
    
    
    $
    4,422,408
    
    
    $
    3,573,395Smith Oilfield
    
    
    2,848,804
    
    
    
    2,210,161
    
    
    
    1,814,343Distribution
    
    
    2,738,699
    
    
    
    2,131,761
    
    
    
    1,945,821$
    10,770,838
    
    
    $
    8,764,330
    
    
    $
    7,333,559Operating Income:M-I SWACO
    
    $
    839,647
    
    
    $
    729,412
    
    
    $
    553,304Smith Oilfield
    
    
    746,826
    
    
    
    619,038
    
    
    
    495,301Distribution
    
    
    180,178
    
    
    
    97,154
    
    
    
    104,730General corporate
    
    
    (124,239
    )
    
    
    (75,807
    )
    
    
    (73,254
    )$
    1,642,412
    
    
    $
    1,369,797
    
    
    $
    1,080,081Capital Expenditures:M-I SWACO
    
    $
    210,471
    
    
    $
    184,027
    
    
    $
    203,454Smith Oilfield
    
    
    221,269
    
    
    
    149,829
    
    
    
    88,619Distribution
    
    
    7,238
    
    
    
    6,929
    
    
    
    5,153General corporate
    
    
    3,907
    
    
    
    15,036
    
    
    
    11,244$
    442,885
    
    
    $
    355,821
    
    
    $
    308,470Depreciation and Amortization:M-I SWACO
    
    $
    123,227
    
    
    $
    111,618
    
    
    $
    84,868Smith Oilfield
    
    
    133,459
    
    
    
    75,494
    
    
    
    59,467Distribution
    
    
    4,736
    
    
    
    4,763
    
    
    
    4,840General corporate
    
    
    2,021
    
    
    
    1,421
    
    
    
    1,209$
    263,443
    
    
    $
    193,296
    
    
    $
    150,384Total Assets:M-I SWACO
    
    $
    4,124,291
    
    
    $
    3,589,790
    
    
    $
    3,195,372Smith Oilfield
    
    
    5,473,372
    
    
    
    1,579,541
    
    
    
    1,279,029Distribution
    
    
    1,070,909
    
    
    
    752,221
    
    
    
    737,445General corporate
    
    
    147,652
    
    
    
    140,328
    
    
    
    123,629$
    10,816,224
    
    
    $
    6,061,880
    
    
    $
    5,335,475
  2008
    
    
    2007
    
    
    2006United States
    
    $
    5,080,710
    
    
    $
    3,967,806
    
    
    $
    3,384,729Canada
    
    
    851,098
    
    
    
    771,430
    
    
    
    891,288North America
    
    
    5,931,808
    
    
    
    4,739,236
    
    
    
    4,276,017Latin America
    
    
    987,104
    
    
    
    738,026
    
    
    
    543,844Europe/Africa
    
    
    2,569,803
    
    
    
    2,105,745
    
    
    
    1,605,559Middle East/Asia
    
    
    1,282,123
    
    
    
    1,181,323
    
    
    
    908,139Non-North America
    
    
    4,839,030
    
    
    
    4,025,094
    
    
    
    3,057,542$
    10,770,838
    
    
    $
    8,764,330
    
    
    $
    7,333,559
  2008
    
    
    2007
    
    
    2006United States
    
    $
    1,269,691
    
    
    $
    588,345
    
    
    $
    458,273Canada
    
    
    45,241
    
    
    
    52,596
    
    
    
    48,510North America
    
    
    1,314,932
    
    
    
    640,941
    
    
    
    506,783Latin America
    
    
    115,269
    
    
    
    95,834
    
    
    
    67,377Europe/Africa
    
    
    297,209
    
    
    
    266,437
    
    
    
    230,607Middle East/Asia
    
    
    116,626
    
    
    
    102,668
    
    
    
    82,277Non-North America
    
    
    529,104
    
    
    
    464,939
    
    
    
    380,261$
    1,844,036
    
    
    $
    1,105,880
    
    
    $
    887,044
 51




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##### Table of Contents



16. Commitments and Contingencies
 Leases
   Amount2009
    
    $
    85,4722010
    
    
    63,5782011
    
    
    46,4282012
    
    
    34,3812013
    
    
    26,9782014-2018
    
    
    75,495Thereafter
    
    
    41,943$
    374,275
  Standby Letters of Credit
  Insurance
  Litigation
  52




---



##### Table of Contents



Environmental
  17. Quarterly Information (Unaudited)
 First
    
    Second
    
    Third
    
    Fourth
    
    Year(In thousands, except per share data)2008Revenues
    
    $
    2,370,998
    
    
    $
    2,494,158
    
    
    $
    2,849,311
    
    
    $
    3,056,371
    
    
    $
    10,770,838Gross profit
    
    
    781,484
    
    
    
    807,452
    
    
    
    906,798
    
    
    
    933,182
    
    
    
    3,428,916Net income
    
    
    174,991
    
    
    
    183,273
    
    
    
    209,843
    
    
    
    199,177
    
    
    
    767,284EPS:Basic
    
    
    0.87
    
    
    
    0.91
    
    
    
    1.00
    
    
    
    0.91
    
    
    
    3.70Diluted
    
    
    0.87
    
    
    
    0.91
    
    
    
    1.00
    
    
    
    0.91
    
    
    
    3.682007Revenues
    
    $
    2,107,724
    
    
    $
    2,114,373
    
    
    $
    2,245,059
    
    
    $
    2,297,174
    
    
    $
    8,764,330Gross profit
    
    
    675,965
    
    
    
    696,546
    
    
    
    728,906
    
    
    
    754,240
    
    
    
    2,855,657Net income
    
    
    160,158
    
    
    
    153,053
    
    
    
    166,833
    
    
    
    167,007
    
    
    
    647,051EPS:Basic
    
    
    0.80
    
    
    
    0.76
    
    
    
    0.83
    
    
    
    0.83
    
    
    
    3.23Diluted
    
    
    0.80
    
    
    
    0.76
    
    
    
    0.83
    
    
    
    0.83
    
    
    
    3.20
 18. Subsequent Event (Unaudited)
 
  53




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of disclosure controls and procedures.
  Changes in internal control over financial reporting.
 Design and evaluation of internal control over financial reporting.
 
 Item 9B. Other Information
  54




---



##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  55




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 PageReference(a)(1) Financial statements included in this report:Managements Report on Internal Control over Financial Reporting
    
    
    24Reports of Independent Registered Public Accounting Firm
    
    
    25Consolidated Balance Sheets at December 31, 2008 and 2007
    
    
    27Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 and 2006
    
    
    28Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006
    
    
    29Consolidated Statements of Stockholders Equity and Comprehensive Income
for the years ended December 31, 2008, 2007 and 2006
    
    
    30Notes to Consolidated Financial Statements
    
    
    31(2) Financial Statement Schedule II-Valuation and Qualifying Accounts and Reserves
    
    
    60
  (3)
    
    ExhibitsExhibits designated with an * are filed, and with an ** are furnished, as an exhibit to
this Annual Report on Form 10-K. Exhibits designated with a + are identified as
management contracts or compensatory plans or arrangements. Exhibits previously filed as
indicated below are incorporated by reference.
 2.1
    -
    
    Agreement and Plan of Merger, dated as of June 3, 2008, among the Company, Whitehall
Acquisition Corp. and W-H Energy Services, Inc. (schedules and exhibits have been
omitted pursuant to Item 601(b)(2)of Regulation S-K). Filed as Exhibit 2.01 to the
Companys report on Form 8-K dated June 3, 2008 and incorporated herein by
reference.3.1
    -
    
    Restated Certificate of Incorporation of the Company dated July 26, 2005, as amended
on June 4, 2008. Filed as Exhibit 3.1 to the Companys report on Form 10-Q for the
quarter ended June 30, 2008 and incorporated herein by reference.3.2
    -
    
    Amended and Restated Bylaws of the Company dated October 22, 2008. Filed as Exhibit
3.1 to the Companys report on Form 8-K dated October 22, 2008 and incorporated
herein by reference.4.1
    -
    
    Rights Agreement, dated as of June 8, 2000, between the Company and First Chicago
Trust Company of New York, as Rights Agent. Filed as Exhibit 4.1 to the Companys
report on
Form 8-A, dated June 15, 2000, and incorporated herein by reference.4.2
    -
    
    Amendment to Rights Agreement dated June 8, 2000, by and among the Company and
First Chicago Trust Company of New York and effective as of October 1, 2001. Filed
as Exhibit 4.1 to the Companys report on Form 10-Q for the quarter ended September
30, 2001 and incorporated herein by reference.4.3
    -
    
    Amendment No. 2 to Rights Agreement by and among the Company and EquiServe Trust
Company, N.A. and effective as of December 31, 2002. Filed as Exhibit 4.3 to the
Companys report on Form 10-K for the year ended December 31, 2002 and incorporated
herein by reference.4.4
    -
    
    Form of Indenture between the Company and The Bank of New York, as Trustee. Filed as
Exhibit 4.1 to the Companys Registration Statement on Form S-3 dated August 22,
1997 and incorporated herein by reference.
 56




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##### Table of Contents



4.5
    -
    
    Form of Senior Note due 2011. Filed as Exhibit 4.1 to the Companys report on Form
8-K dated February 13, 2001 and incorporated herein by reference.4.6
    -
    
    Form of Senior Note due 2016. Filed as Exhibit 4.1 to the Companys report on Form
8-K dated June 12, 2006 and incorporated herein by reference.10.1+
    -
    
    Smith International, Inc. Third Amended and Restated 1989 Long-Term Incentive
Compensation Plan, effective January 1, 2008. Filed as Exhibit 10.1 to the
Companys report on Form 8-K dated May 13, 2008 and incorporated herein by
reference.10.2+
    -
    
    Smith International, Inc. Form of Nonstatutory Option Agreement as amended December
2005. Filed as Exhibit 10.3 to the Companys report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by reference.10.3+
    -
    
    Smith International, Inc. Form of Nonstatutory Option Agreement as amended December
2006. Filed as Exhibit 10.5 to the Companys report on Form 10-K for the year ended
December 31, 2006 and incorporated herein by reference.10.4+
    -
    
    Smith International, Inc. Form of Restricted Stock Unit Agreement as amended
December 2005. Filed as Exhibit 10.4 to the Companys report on Form 10-K for the
year ended December 31, 2005 and incorporated herein by reference.10.5+
    -
    
    Smith International, Inc. Form of Restricted Stock Unit Agreement as amended
December 2006. Filed as Exhibit 10.7 to the Companys report on Form 10-K for the
year ended December 31, 2006 and incorporated herein by reference.10.6+
    -
    
    Smith International, Inc. Form of Restricted Stock Unit Agreement as amended
December 2007. Filed as Exhibit 10.7 to the Companys report on Form 10-K for the
year ended December 31, 2007 and incorporated herein by reference.10.7+*
    -
    
    Smith International, Inc. Form of Restricted Stock Unit Agreement as amended
December 2008.10.8+
    -
    
    Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement
as amended December 2005. Filed as Exhibit 10.5 to the Companys report on Form
10-K for the year ended December 31, 2005 and incorporated herein by reference.10.9+
    -
    
    Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement
as amended December 2006. Filed as Exhibit 10.9 to the Companys report on Form
10-K for the year ended December 31, 2006 and incorporated herein by reference.10.10+
    -
    
    Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement
as amended December 2007. Filed as Exhibit 10.10 to the Companys report on Form
10-K for the year ended December 31, 2007 and incorporated herein by reference.10.11+*
    -
    
    Smith International, Inc. Form of Performance-Based Restricted Stock Unit Agreement
as amended December 2008.10.12+
    -
    
    Director Compensation Summary of Smith International, Inc. effective January 1,
2008. Filed as Exhibit 10.11 to the Companys report on Form 10-K for the year
ended December 31, 2007 and incorporated herein by reference.10.13+
    -
    
    Smith International, Inc. Supplemental Executive Retirement Plan, as amended to
date. Filed as Exhibit 10.1 to the Companys report on Form 10-Q for the quarter
ended September 30, 2001 and incorporated herein by reference.10.14+*
    -
    
    Smith International, Inc. Amended and Restated Post-2004 Supplemental Executive
Retirement Plan effective as of January 1, 2008.
 57




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##### Table of Contents



10.15+
    -
    
    Smith International, Inc. Amended and Restated Executive Officer Annual Incentive
Plan effective as of January 1, 2008, dated October 17, 2007. Filed as Exhibit
10.14 to the Companys report on Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference.10.16+
    -
    
    Employment Agreement dated December 10, 1987 between the Company and
Douglas L. Rock. Filed as Exhibit 10.11 to the Companys report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.10.17+
    -
    
    Employment Agreement effective January 1, 2009 between the Company and Doug Rock.
Filed as Exhibit 10.1 to the Companys report on Form 8-K dated December 19, 2008
(filed on
December 19, 2008) and incorporated herein by reference.10.18+
    -
    
    Employment Agreement dated December 10, 1987 between the Company and Bryan L.
Dudman. Filed as Exhibit 10.13 to the Companys report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.10.19+*
    -
    
    Amended and Restated Employment Agreement dated December 31, 2008 between the
Company and Bryan L. Dudman.10.20+
    -
    
    Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Douglas L. Rock. Filed as Exhibit 10.11 to the Companys report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by reference.10.21+
    -
    
    Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Loren K. Carroll. Filed as Exhibit 10.14 to the Companys report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by reference.10.22+
    -
    
    Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
Margaret K. Dorman. Filed as Exhibit 10.15 to the Companys report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by reference.10.23+
    -
    
    Change-of-Control Employment Agreement dated January 4, 2000 between the Company and
John J. Kennedy. Filed as Exhibit 10.16 to the Companys report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by reference.10.24+
    -
    
    Change-of-Control Employment Agreement dated May 15, 2005 between the Company and
Michael Pearce. Filed as Exhibit 10.1 to the Companys report on Form 8-K dated May
15, 2005 and incorporated herein by reference.10.25+
    -
    
    Form of Change-of-Control Employment Agreement as of April 2006. Filed as Exhibit
10.2 to the Companys report on Form 8-K dated April 25, 2006 and incorporated
herein by reference.10.26+
    -
    
    Form of Change-of-Control Employment Agreement as of December 2008. Filed as
Exhibit 10.1 to the Companys report on Form 8-K dated December 19, 2008 (filed on
December 23, 2008) and incorporated herein by reference.10.27+
    -
    
    Form of Employment Agreement for Advisors as of April 2006. Filed as Exhibit 10.3
to the Companys report on Form 8-K dated April 25, 2006 and incorporated herein by
reference.10.28+
    -
    
    Letter Agreement on Non-Competition between the Company and Loren K. Carroll dated
May 9, 2008. Filed as Exhibit 10.1 to the Companys report on Form 10-Q for the
quarter ended March 31, 2008 and incorporated herein by reference.10.29
    -
    
    Credit Agreement dated as of May 5, 2005 among the Company and M-I L.L.C., the
Lenders From Time to Time Party Thereto and Comerica Bank, as Administrative Agent,
ABN AMRO Bank N.V., as Syndication Agent, Den Norske Bank ASA, as Documentation
Agent, and Calyon New York Branch and RBS Securities Corporation, as Co-Lead
Arrangers and Joint Bookrunners. Filed as Exhibit 10.1 to the Companys report on
Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference.
 58




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##### Table of Contents



10.30
    -
    
    Credit Agreement dated as of August 20, 2008 among the Company, Fortis Bank SA/NV,
New York Branch, as administrative agent, the other agents named therein, and the
lenders parties thereto. Filed as Exhibit 10.1 to the Companys report on Form 8-K
dated August 19, 2008 and incorporated herein by reference.10.31+
    -
    
    Form of Director Indemnification Agreement as of February 28, 2007. Filed as
Exhibit 10.28 to the Companys report on Form 10-K for the year ended December 31,
2006 and incorporated herein by reference.21.1*
    -
    
    Subsidiaries of the Company.23.1*
    -
    
    Consent of Independent Registered Public Accounting Firm.31.1*
    -
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    -
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1**
    -
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 59




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##### Table of Contents



SCHEDULE II
 SMITH INTERNATIONAL, INC.
 
 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
 Additions
    
    
    DeductionsBalance at
    
    
    Charged
    
    
    
    
    
    
    
    
    
    Balance atBeginning of Year
    
    
    to Expense
    
    
    Other(a)
    
    
    Write-offs
    
    
    End of YearAllowance for doubtful accounts:Year ended December 31, 2008
    
    $
    17,278
    
    
    $
    9,795
    
    
    $
    9,022
    
    
    $
    (6,757
    )
    
    $
    29,338Year ended December 31, 2007
    
    
    16,709
    
    
    
    5,082
    
    
    
    
    
    
    
    (4,513
    )
    
    
    17,278Year ended December 31, 2006
    
    
    13,884
    
    
    
    7,578
    
    
    
    
    
    
    
    (4,753
    )
    
    
    16,709
 
 (a)
    
    Amount represents accounts receivable reserves related to acquisitions made by
the Company. 60




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##### Table of Contents



SIGNATURES
  SMITH INTERNATIONAL, INC.February 27, 2009
    By:
    /s/ John YearwoodJohn YearwoodChief Executive Officer, President

and Chief Operating Officer  /s/ Doug Rock

(Doug Rock)
    
    Chairman of the Board
    
    February 27, 2009/s/ John Yearwood

(John Yearwood)
    
    Chief Executive Officer, President and
Chief Operating Officer (principal
executive officer) and Director
    
    February 27, 2009/s/ Margaret K. Dorman

(Margaret K. Dorman)
    
    Executive Vice President, Chief
Financial
Officer and Treasurer (principal
financial
and accounting officer)
    
    February 27, 2009/s/ Loren K. Carroll

(Loren K. Carroll)
    
    Director
    
    February 27, 2009/s/ Dod A. Fraser

(Dod A. Fraser)
    
    Director
    
    February 27, 2009/s/ James R. Gibbs

(James R. Gibbs)
    
    Director
    
    February 27, 2009/s/ Robert Kelley

(Robert Kelley)
    
    Director
    
    February 27, 2009/s/Luiz Rodolfo Landim Machado

(Luiz Rodolfo Landim Machado)
    
    Director
    
    February 27, 2009
 61