##### 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, 2007
 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 RoadHouston, Texas
    
    77032(Address of principal executive offices)
    
    (Zip Code)
 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.
 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
    
    
    10Item 1B.
    
    Unresolved Staff Comments
    
    
    11Item 2.
    
    Properties
    
    
    12Item 3.
    
    Legal Proceedings
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    13Item 6.
    
    Selected Financial Data
    
    
    14Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 8.
    
    Financial Statements and Supplementary Data
    
    
    26Item 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
    
    
    56First Amendment to Second Amended and Restated 1989 Long-Term Incentive Compensation PlanForm of Restricted Stock Unit AgreementForm of Performance-Based Restricted Stock Unit AgreementDirector Compensation SummaryAmended and Restated Executive Officer Annual Incentive PlanConsent of Independent Registered Public Accounting FirmCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906




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PART I
 
 Item 1. Business
 General
  www.smith.com
   Business Operations
 Oilfield Segment
 M-I SWACO
 Fluid Products and Services.
  2




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Fluid Competition.
  M-I SWACO Environmental Solutions Products and Services.
  Mud D-Gasser® Super Choke Super Mud Gas Separator Ô Super
Autochoke Ô
 CleanCut ® Thermal Phase Separation EnviroCenters®
 M-I SWACO Environmental Solutions Competition
 M-I SWACO Wellbore Assurance Products and Services
 3




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Wellbore Assurance Competition.
 Oilfield Production Chemicals
 Production Chemical Competition.
 Smith Technologies
 Products and Services.
 1 2
 3 4
 4




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® ®
   Competition
 Smith Services
 Products and Services.
 ® ® ® ®
  5




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®
  Competition.
 Distribution Segment
 Wilson
 Products and Services.
  Competition.
 6




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Non-U.S. Operations
   Sales and Distribution
   Manufacturing
   Raw Materials
   7




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Product Development, Engineering and Patents
     Employees
  8




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Officers of the Registrant
  Name, Age and Positions
    
    Principal Current Occupation and Other Significant Positions HeldDoug Rock (61)
Chairman of the Board, Chief
Executive Officer, President
and Chief Operating Officer
    
    Chairman of the Board since
February 1991, elected Chief
Executive Officer in March
1989 and served as President
and Chief Operating Officer
since December 1987. Held
various positions since
joining the Company in June
1974.Malcolm W. Anderson (60)
Senior Vice President,
Human Resources
    
    Senior Vice President, Human
Resources since December
2006. Joined Company as Vice
President, Human Resources in
May 2004. Vice President
Human Resources at Hewlett
Packard from January 2001 to
April 2004. Vice President
Human Resources at
Weatherford International
Ltd. from April 1996 to
December 2000.Richard E. Chandler, Jr. (51)
Senior Vice President, General
Counsel and Secretary
    
    Senior Vice President and
Secretary since January 2006
and General Counsel since
August 2005. Joined
predecessor to M-I SWACO in
December 1986 as Vice
President, General Counsel
and Secretary. Named Senior
Vice President 
Administration, General
Counsel and Secretary of M-I
SWACO in January 2004.Margaret K. Dorman (44)
Senior Vice President, Chief
Financial Officer and Treasurer
    
    Senior Vice President, Chief
Financial Officer and
Treasurer since June 1999.
Joined Company as Director of
Financial Reporting in
December 1995 and named Vice
President, Controller and
Assistant Treasurer in
February 1998.Bryan L. Dudman (51)
President, Smith Services
    
    President, Smith Services
since January 2006. Held
various positions since
joining the Company in
January 1979. Prior to being
named to current position,
served as Senior Vice
President of M-I SWACOs
Western Hemisphere Operations
since May 1994.John J. Kennedy (55)
President and Chief Executive
Officer, Wilson
    
    President and Chief Executive
Officer, Wilson since June
1999. Held various positions
since joining the Company in
November 1986. Elected Vice
President, Chief Accounting
Officer and Treasurer in
March 1994 and named Senior
Vice President, Chief
Financial Officer and
Treasurer in April 1997.Donald McKenzie (58)
President and Chief Executive Officer,
M-I SWACO
    
    President and Chief Executive
Officer, M-I SWACO since May
2006. Held various positions
since joining the Company in
1989. Named Senior Vice
President of M-I SWACOs
Eastern Hemisphere Operations
of M-I SWACO in April 1994.
Appointed Chief Operating
Officer of M-I SWACO in
January 2006.Michael D. Pearce (60)
President, Smith Technologies
    
    President, Smith Technologies
since May 2005. Joined
Company as Vice President
Sales of the Companys
GeoDiamond Division in April
1995 and named Vice President
Sales of Smith Technologies
in August 1998.Peter J. Pintar (49)
Vice President, Corporate
Strategy and Development
    
    Vice President Corporate
Strategy and Development
since September 2005. Held
various positions at DTE
Energy Company between
October 1997 and August 2005,
including Director 
Corporate Development,
Managing Director  Venture
Capital Investments, and
Director  Investor
Relations.Joseph S. Rinando, III (36)
Vice President and Controller
    
    Vice President and Controller
since April 2006. Joined
Company as Director of
Financial Reporting in May
2003. Served as Audit Manager
for PricewaterhouseCoopers
LLP from July 2000 to June
2002 and Senior Manager from
July 2002 to May 2003.Geraldine D. Wilde (57)
Vice President, Taxes and
Assistant Treasurer
    
    Vice President, Taxes since
February 1998. Joined
Company as Manager of Taxes
and Payroll of predecessor to
M-I SWACO in December 1986
and named Director of Taxes
and Assistant Treasurer in
April 1997.
  9




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Item 1A. Risk Factors
   We are 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 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.
  There are certain risks associated with conducting business in markets outside of North America.
  
    
    Changes in political and economic conditions in the countries in which we operate,
including civil uprisings, riots and terrorist acts;
    
    Unexpected changes in regulatory requirements;
    
    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; and
    
    Governmental sanctions.
 10




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We operate in a highly technical and competitive environment.
  Our businesses are subject to a variety of governmental regulations.
  Our industry is experiencing more litigation involving claims of infringement of intellectual property rights.
  
 Item 1B. Unresolved Staff Comments
  11




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Item 2. Properties
  Principal Products Processed,
    
    Land
    
    
    Approx. Bldg.Location
    

Manufactured
or Distributed
    
    (Acres)
    
    
    Space (sq.ft.)Oilfield Segment:Houston, Texas
    
    Smith corporate headquarters, tubulars, surface anddownhole tools, remedial products, liner hangers,diamond drill bits, turbodrills, drilling and fishingjars and fishing tool equipment
    
    
    96
    
    
    
    1,075,800Volgograd, Russia
    
    Drilling fluid and waste management products
    
    
    17
    
    
    
    719,350Houston, Texas
    
    M-I SWACO corporate headquarters and research center
    
    
    22
    
    
    
    268,400Macae, Brazil
    
    Drilling fluid chemical products
    
    
    5
    
    
    
    234,870Florence, Kentucky
    
    Separator units, mill units, parts, screens and motors
    
    
    6
    
    
    
    214,000Ponca City, Oklahoma
    
    Three-cone drill bits
    
    
    15
    
    
    
    207,000Oruro, Bolivia
    
    Drilling fluids
    
    
    5
    
    
    
    202,740Aberdeen, Scotland
    
    Downhole tools and remedial products
    
    
    10
    
    
    
    155,000Changzhou, China
    
    Drilling and downhole tools
    
    
    3
    
    
    
    146,360Greybull, Wyoming
    
    Bentonite mine and processing
    
    
    8,394
    
    
    
    110,000Saline di Volterra, Italy
    
    Three-cone drill bits
    
    
    11
    
    
    
    99,900Tulsa, Oklahoma
    
    Oilfield and industrial screening products
    
    
    7
    
    
    
    95,000Edinburgh, Scotland
    
    Wire cloth and oilfield screening products
    
    
    3
    
    
    
    92,450Salzweld, Germany
    
    Drilling fluid processing
    
    
    2
    
    
    
    86,000Nisku, Alberta, Canada
    
    Fishing and remedial services
    
    
    10
    
    
    
    83,000Provo, Utah
    
    Synthetic diamond materials
    
    
    5
    
    
    
    68,300Aberdeen, Scotland
    
    Production chemical processing
    
    
    2
    
    
    
    66,000Karmoy, Norway
    
    Barite and bentonite processing
    
    
    5
    
    
    
    51,000Greystone, Nevada
    
    Barite mine and processing
    
    
    268
    
    
    
    50,000Macon, Georgia
    
    Separator units and screens
    
    
    1
    
    
    
    49,000Battle Mountain, Nevada
    
    Barite processing
    
    
    23
    
    
    
    43,000Zelmou, Morocco
    
    Barite mine
    
    
    3,954
    
    
    
    41,000Nisku, Alberta, Canada
    
    Drilling fluid chemical products
    
    
    4
    
    
    
    37,280Zavalla, Texas
    
    Drilling fluid chemical products
    
    
    33
    
    
    
    36,000Nivellas, Belgium
    
    Separator units, mill units, parts, screens and motors
    
    
    5
    
    
    
    31,780Scurelle, Italy
    
    Diamond drill bits and synthetic diamond materials
    
    
    4
    
    
    
    31,000Spruce Grove, Canada
    
    Drilling fluid processing
    
    
    7
    
    
    
    30,450Amelia, Louisiana
    
    Barite processing
    
    
    26
    
    
    
    25,000Berra, Italy
    
    Solids control equipment
    
    
    4
    
    
    
    24,930Port Fouchon, Louisiana
    
    Drilling fluid storage, processing and distribution
    
    
    11
    
    
    
    24,600Galveston, Texas
    
    Barite processing
    
    
    6
    
    
    
    21,000Grand Prairie, Canada
    
    Fishing and remedial services
    
    
    4
    
    
    
    13,960Foss/Aberfeldy, Scotland
    
    Barite mine and processing
    
    
    102
    
    
    
    10,000Mountain Springs, Nevada
    
    Barite mine
    
    
    900
    
    
    
    Distribution Segment:La Porte, Texas
    
    Pipe, valves and fittings
    
    
    15
    
    
    
    440,000Tampa, Florida
    
    Pipe, valves and fittings
    
    
    4
    
    
    
    86,200Trainer, Pennsylvania
    
    Pipe, valves and fittings
    
    
    3
    
    
    
    23,000
   12




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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
  2006 Common Stock
    
    2007 Common StockQ1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4High
    
    $
    44.63
    
    
    $
    44.35
    
    
    $
    45.79
    
    
    $
    44.11
    
    
    $
    48.41
    
    
    $
    60.34
    
    
    $
    74.00
    
    
    $
    75.34Low
    
    $
    35.66
    
    
    $
    36.17
    
    
    $
    36.05
    
    
    $
    35.89
    
    
    $
    36.01
    
    
    $
    48.84
    
    
    $
    56.78
    
    
    $
    59.16
  Stock Repurchases
   Total Number of
    
    
    Number of SharesShares Purchased as
    
    
    that May Yet BeTotal Number of
    
    
    Average Price Paid
    
    
    Part of Publicly
    
    
    Purchased Under thePeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Announced Program
    
    
    ProgramOctober 1  31
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    15,772,413November 1  30
    
    
    78,500
    
    
    
    59.64
    
    
    
    78,500
    
    
    
    15,693,913December 1  31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,693,9134th Quarter 2007
    
    
    78,500
    
    
    $
    59.64
    
    
    
    78,500
    
    
    
    15,693,913
 Dividend Program
   13




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Item 6. Selected Financial Data
 For the Years Ended December 31,2007
    
    2006
    
    2005
    
    2004(a)
    
    2003(In thousands, except per share data)Statements of Operations Data:Revenues
    
    $
    8,764,330
    
    
    $
    7,333,559
    
    
    $
    5,579,003
    
    
    $
    4,419,015
    
    
    $
    3,594,828Gross profit
    
    
    2,855,657
    
    
    
    2,344,271
    
    
    
    1,685,138
    
    
    
    1,351,939
    
    
    
    1,075,931Operating income
    
    
    1,369,797
    
    
    
    1,080,081
    
    
    
    670,561
    
    
    
    438,764
    
    
    
    328,747Income
before cumulative effect of change in accounting principle
    
    
    647,051
    
    
    
    502,006
    
    
    
    302,305
    
    
    
    182,451
    
    
    
    124,634Diluted
earnings per share before cumulative effect of change in accounting
principle(b)
    
    
    3.20
    
    
    
    2.49
    
    
    
    1.48
    
    
    
    0.89
    
    
    
    0.62Balance Sheet Data:Total assets
    
    $
    6,061,880
    
    
    $
    5,335,475
    
    
    $
    4,059,914
    
    
    $
    3,506,778
    
    
    $
    3,097,047Long-term debt
    
    
    845,624
    
    
    
    800,928
    
    
    
    610,857
    
    
    
    387,798
    
    
    
    488,548Total stockholders equity
    
    
    2,594,897
    
    
    
    1,986,937
    
    
    
    1,578,505
    
    
    
    1,400,811
    
    
    
    1,235,776Cash dividends declared per common
share(c)
    
    
    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)
    
    All fiscal years prior to 2005 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.
 14




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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
   15




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Results of Operations
 Segment Discussion
  For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Financial Data:(dollars in thousands)Revenues:M-I SWACO
    
    $
    4,422,408
    
    
    
    50
    
    
    $
    3,573,395
    
    
    
    49
    
    
    $
    2,682,511
    
    
    
    48Smith Technologies(1)
    
    
    1,018,578
    
    
    
    12
    
    
    
    884,616
    
    
    
    12
    
    
    
    654,611
    
    
    
    12Smith Services(1)
    
    
    1,191,583
    
    
    
    14
    
    
    
    929,727
    
    
    
    12
    
    
    
    641,877
    
    
    
    12Oilfield
    
    
    6,632,569
    
    
    
    76
    
    
    
    5,387,738
    
    
    
    73
    
    
    
    3,978,999
    
    
    
    72Wilson
    
    
    2,131,761
    
    
    
    24
    
    
    
    1,945,821
    
    
    
    27
    
    
    
    1,600,004
    
    
    
    28Total
    
    $
    8,764,330
    
    
    
    100
    
    
    $
    7,333,559
    
    
    
    100
    
    
    $
    5,579,003
    
    
    
    100Geographic Revenues:United States:Oilfield
    
    $
    2,396,281
    
    
    
    27
    
    
    $
    2,009,997
    
    
    
    27
    
    
    $
    1,393,564
    
    
    
    25Distribution
    
    
    1,571,525
    
    
    
    18
    
    
    
    1,374,732
    
    
    
    19
    
    
    
    1,127,142
    
    
    
    20Total United States
    
    
    3,967,806
    
    
    
    45
    
    
    
    3,384,729
    
    
    
    46
    
    
    
    2,520,706
    
    
    
    45Canada:Oilfield
    
    
    338,692
    
    
    
    4
    
    
    
    404,121
    
    
    
    5
    
    
    
    313,912
    
    
    
    6Distribution
    
    
    432,738
    
    
    
    5
    
    
    
    487,167
    
    
    
    7
    
    
    
    399,653
    
    
    
    7Total Canada
    
    
    771,430
    
    
    
    9
    
    
    
    891,288
    
    
    
    12
    
    
    
    713,565
    
    
    
    13Non-North America:Oilfield
    
    
    3,897,596
    
    
    
    45
    
    
    
    2,973,620
    
    
    
    41
    
    
    
    2,271,523
    
    
    
    41Distribution
    
    
    127,498
    
    
    
    1
    
    
    
    83,922
    
    
    
    1
    
    
    
    73,209
    
    
    
    1Total Non-North America
    
    
    4,025,094
    
    
    
    46
    
    
    
    3,057,542
    
    
    
    42
    
    
    
    2,344,732
    
    
    
    42Total Revenue
    
    $
    8,764,330
    
    
    
    100
    
    
    $
    7,333,559
    
    
    
    100
    
    
    $
    5,579,003
    
    
    
    100Operating Income:Oilfield
    
    $
    1,315,644
    
    
    
    20
    
    
    $
    1,012,295
    
    
    
    19
    
    
    $
    625,384
    
    
    
    16Distribution
    
    
    94,629
    
    
    
    4
    
    
    
    101,830
    
    
    
    5
    
    
    
    64,714
    
    
    
    4General Corporate
    
    
    (40,476
    )
    
    
    *
    
    
    
    (34,044
    )
    
    
    *
    
    
    
    (19,537
    )
    
    
    *Total
    
    $
    1,369,797
    
    
    
    16
    
    
    $
    1,080,081
    
    
    
    15
    
    
    $
    670,561
    
    
    
    12Market Data:Average Worldwide Rig Count:(2)United States
    
    
    1,961
    
    
    
    46
    
    
    
    1,901
    
    
    
    47
    
    
    
    1,666
    
    
    
    47Canada
    
    
    311
    
    
    
    7
    
    
    
    413
    
    
    
    10
    
    
    
    408
    
    
    
    11Non-North America
    
    
    2,009
    
    
    
    47
    
    
    
    1,747
    
    
    
    43
    
    
    
    1,517
    
    
    
    42Total
    
    
    4,281
    
    
    
    100
    
    
    
    4,061
    
    
    
    100
    
    
    
    3,591
    
    
    
    100Onshore
    
    
    3,719
    
    
    
    87
    
    
    
    3,523
    
    
    
    87
    
    
    
    3,069
    
    
    
    85Offshore
    
    
    562
    
    
    
    13
    
    
    
    538
    
    
    
    13
    
    
    
    522
    
    
    
    15Total
    
    
    4,281
    
    
    
    100
    
    
    
    4,061
    
    
    
    100
    
    
    
    3,591
    
    
    
    100Average Commodity Prices:Crude Oil ($/Bbl)(3)
    
    $
    72.36
    
    
    
    
    
    
    $
    66.25
    
    
    
    
    
    
    $
    56.71Natural Gas ($/mcf)(4)
    
    
    7.12
    
    
    
    
    
    
    
    6.98
    
    
    
    
    
    
    
    9.01
 
 (1)
    
    In 2007, the Company formed the Smith Borehole Enlargement (SBE) group, combining
various product and service offerings from Smith Technologies and Smith Services. Due to the
formation of SBE, prior period revenues were reclassified to conform to the current presentation.(2)
    
    Source: M-I SWACO.(3)
    
    Average daily West Texas Intermediate (WTI) spot closing prices, as quoted by
NYMEX.(4)
    
    Average daily Henry Hub, Louisiana spot closing prices, as quoted by NYMEX.*
    
    not meaningful 16




---



##### Table of Contents



Oilfield Segment
 Revenues
   hydra-jar®
 17




---



##### Table of Contents



Operating Income
  Distribution Segment
 Revenues
  Operating Income
  18




---



##### Table of Contents



Consolidated Discussion
  For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Revenues
    
    $
    8,764,330
    
    
    
    100
    
    
    $
    7,333,559
    
    
    
    100
    
    
    $
    5,579,003
    
    
    
    100Gross profit
    
    
    2,855,657
    
    
    
    33
    
    
    
    2,344,271
    
    
    
    32
    
    
    
    1,685,138
    
    
    
    30Operating expenses
    
    
    1,485,860
    
    
    
    17
    
    
    
    1,264,190
    
    
    
    17
    
    
    
    1,014,577
    
    
    
    18Operating income
    
    
    1,369,797
    
    
    
    16
    
    
    
    1,080,081
    
    
    
    15
    
    
    
    670,561
    
    
    
    12Interest expense
    
    
    69,990
    
    
    
    1
    
    
    
    62,967
    
    
    
    1
    
    
    
    44,446
    
    
    
    1Interest income
    
    
    (4,068
    )
    
    
    
    
    
    
    (2,982
    )
    
    
    
    
    
    
    (1,692
    )
    
    
    Income before income taxes and
minority interests
    
    
    1,303,875
    
    
    
    15
    
    
    
    1,020,096
    
    
    
    14
    
    
    
    627,807
    
    
    
    11Income tax provision
    
    
    408,471
    
    
    
    5
    
    
    
    326,674
    
    
    
    4
    
    
    
    202,743
    
    
    
    4Minority interests
    
    
    248,353
    
    
    
    3
    
    
    
    191,416
    
    
    
    3
    
    
    
    122,759
    
    
    
    2Net income
    
    $
    647,051
    
    
    
    7
    
    
    $
    502,006
    
    
    
    7
    
    
    $
    302,305
    
    
    
    5
 2007 versus 2006
     19




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##### Table of Contents



2006 versus 2005
       20




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##### Table of Contents



Liquidity and Capital Resources
 General
         21




---



##### Table of Contents



Contractual Obligations, Commitments and Contingencies
 Contractual Obligations
  Amount of Commitment Expiration per PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsDebt maturities
    
    $
    985,105
    
    
    $
    139,481
    
    
    $
    298,060
    
    
    $
    272,797
    
    
    $
    274,767Interest on fixed rate
long-term debt
    
    
    186,657
    
    
    
    31,350
    
    
    
    62,700
    
    
    
    34,857
    
    
    
    57,750Operating lease commitments
    
    
    317,053
    
    
    
    72,775
    
    
    
    91,449
    
    
    
    45,523
    
    
    
    107,306Total
    
    $
    1,488,815
    
    
    $
    243,606
    
    
    $
    452,209
    
    
    $
    353,177
    
    
    $
    439,823
   Standby Letters of Credit
  22




---



##### Table of Contents



Insurance
  Litigation
  Environmental
   Critical Accounting Policies and Estimates
   Allowance for doubtful accounts.
 Inventory reserves.
 23




---



##### Table of Contents



Goodwill
 Self-Insurance
 Income taxes
 Environmental Obligations
 Recent Accounting Pronouncements
     24




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
     25




---



##### 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/ Margaret K. Dorman

Margaret K. DormanChairman of the Board and
    
    Senior Vice President,Chief Executive Officer
    
    Chief Financial Officer and Treasurer
 26




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
        
 27




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
 28




---



##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2007
    
    
    2006AssetsCurrent Assets:Cash and cash equivalents
    
    $
    158,267
    
    
    $
    80,379Receivables, net (Note 1)
    
    
    1,750,561
    
    
    
    1,592,230Inventories, net
    
    
    1,658,172
    
    
    
    1,457,371Deferred tax assets, net
    
    
    46,220
    
    
    
    51,070Prepaid expenses and other
    
    
    114,515
    
    
    
    89,977Total current assets
    
    
    3,727,735
    
    
    
    3,271,027Property, Plant and Equipment, net
    
    
    1,105,880
    
    
    
    887,044Goodwill, net
    
    
    896,442
    
    
    
    867,647Other Intangible Assets, net
    
    
    128,359
    
    
    
    141,140Other Assets
    
    
    203,464
    
    
    
    168,617Total Assets
    
    $
    6,061,880
    
    
    $
    5,335,475Liabilities and Stockholders EquityCurrent Liabilities:Short-term borrowings and current portion of long-term debt
    
    $
    139,481
    
    
    $
    287,704Accounts payable
    
    
    655,413
    
    
    
    654,215Accrued payroll costs
    
    
    153,453
    
    
    
    154,756Income taxes payable
    
    
    80,181
    
    
    
    130,339Other
    
    
    144,772
    
    
    
    152,454Total current liabilities
    
    
    1,173,300
    
    
    
    1,379,468Long-Term Debt
    
    
    845,624
    
    
    
    800,928Deferred Tax Liabilities
    
    
    160,244
    
    
    
    143,124Other Long-Term Liabilities
    
    
    157,042
    
    
    
    102,904Minority Interests
    
    
    1,130,773
    
    
    
    922,114Commitments and Contingencies(Note 16)Stockholders Equity:Preferred stock, $1 par value; 5,000 shares authorized; no
shares issued or outstanding in 2007 or 2006
    
    
    
    
    
    
    Common stock, $1 par value; 250,000 shares authorized; 217,586
shares issued in 2007(214,947 shares issued in 2006)
    
    
    217,586
    
    
    
    214,947Additional paid-in capital
    
    
    533,429
    
    
    
    442,155Retained earnings
    
    
    2,219,224
    
    
    
    1,653,480Accumulated other comprehensive income
    
    
    67,840
    
    
    
    23,227Less  Treasury securities, at cost; 16,825 common shares in 2007
(15,031 common shares in 2006)
    
    
    (443,182
    )
    
    
    (346,872
    )Total stockholders equity
    
    
    2,594,897
    
    
    
    1,986,937Total Liabilities and Stockholders Equity
    
    $
    6,061,880
    
    
    $
    5,335,475
  29




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##### Table of Contents



SMITH
INTERNATIONAL, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Revenues
    
    $
    8,764,330
    
    
    $
    7,333,559
    
    
    $
    5,579,003Costs and expenses:Costs of revenues
    
    
    5,908,673
    
    
    
    4,989,288
    
    
    
    3,893,865Selling expenses
    
    
    1,177,359
    
    
    
    969,825
    
    
    
    786,668General and administrative expenses
    
    
    308,501
    
    
    
    294,365
    
    
    
    227,909Total costs and expenses
    
    
    7,394,533
    
    
    
    6,253,478
    
    
    
    4,908,442Operating income
    
    
    1,369,797
    
    
    
    1,080,081
    
    
    
    670,561Interest expense
    
    
    69,990
    
    
    
    62,967
    
    
    
    44,446Interest income
    
    
    (4,068
    )
    
    
    (2,982
    )
    
    
    (1,692
    )Income before income taxes and minority interests
    
    
    1,303,875
    
    
    
    1,020,096
    
    
    
    627,807Income tax provision
    
    
    408,471
    
    
    
    326,674
    
    
    
    202,743Minority interests
    
    
    248,353
    
    
    
    191,416
    
    
    
    122,759Net income
    
    $
    647,051
    
    
    $
    502,006
    
    
    $
    302,305Earnings per share:Basic
    
    $
    3.23
    
    
    $
    2.51
    
    
    $
    1.50Diluted
    
    
    3.20
    
    
    
    2.49
    
    
    
    1.48Weighted average shares outstanding:Basic
    
    
    200,244
    
    
    
    200,252
    
    
    
    201,651Diluted
    
    
    201,947
    
    
    
    202,008
    
    
    
    204,522
  30




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##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    647,051
    
    
    $
    502,006
    
    
    $
    302,305Adjustments to reconcile net income to net cash provided
by operating activities, excluding the net effects of
acquisitions:Minority interests
    
    
    248,353
    
    
    
    191,416
    
    
    
    122,759Depreciation and amortization
    
    
    193,296
    
    
    
    150,384
    
    
    
    117,722Share-based compensation expense
    
    
    34,239
    
    
    
    27,280
    
    
    
    5,947Increase in LIFO inventory reserves
    
    
    22,712
    
    
    
    18,942
    
    
    
    22,144Deferred income tax provision
    
    
    22,265
    
    
    
    3,737
    
    
    
    10,636Provision for losses on receivables
    
    
    5,082
    
    
    
    7,578
    
    
    
    4,216Foreign currency translation losses
    
    
    4,059
    
    
    
    3,376
    
    
    
    1,213Gain on disposal of property, plant and equipment
    
    
    (21,133
    )
    
    
    (18,893
    )
    
    
    (14,812
    )Equity earnings, net of dividends received
    
    
    (17,170
    )
    
    
    (9,247
    )
    
    
    (10,420
    )Gain on sale of operations
    
    
    (1,534
    )
    
    
    (6,473
    )
    
    
    (5,898
    )Changes in operating assets and liabilities:Receivables
    
    
    (154,355
    )
    
    
    (364,834
    )
    
    
    (243,882
    )Inventories
    
    
    (202,436
    )
    
    
    (412,748
    )
    
    
    (197,204
    )Accounts payable
    
    
    (9,760
    )
    
    
    161,111
    
    
    
    105,832Other current assets and liabilities
    
    
    (58,262
    )
    
    
    48,975
    
    
    
    3,487Other non-current assets and liabilities
    
    
    (23,920
    )
    
    
    (24,126
    )
    
    
    (15,996
    )Net cash provided by operating activities
    
    
    688,487
    
    
    
    278,484
    
    
    
    208,049Cash flows from investing activities:Acquisition-related payments, net of cash acquired
    
    
    (53,452
    )
    
    
    (226,727
    )
    
    
    (81,328
    )Purchases of property, plant and equipment
    
    
    (355,821
    )
    
    
    (308,470
    )
    
    
    (177,845
    )Proceeds from disposal of property, plant and equipment
    
    
    45,045
    
    
    
    35,743
    
    
    
    26,426Proceeds from settlement of property insurance claims
    
    
    
    
    
    
    15,026
    
    
    
    Proceeds from sale of operations
    
    
    16,655
    
    
    
    13,504
    
    
    
    20,496Net cash used in investing activities
    
    
    (347,573
    )
    
    
    (470,924
    )
    
    
    (212,251
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    146,847
    
    
    
    803,635
    
    
    
    187,804Principal payments of long-term debt
    
    
    (272,676
    )
    
    
    (426,557
    )
    
    
    (57,592
    )Net change in short-term borrowings
    
    
    22,302
    
    
    
    (30,299
    )
    
    
    14,478Debt issuance costs
    
    
    
    
    
    
    (4,744
    )
    
    
    Purchases of common stock under Repurchase Program
    
    
    (83,529
    )
    
    
    (102,894
    )
    
    
    (117,820
    )Payment of common stock dividends
    
    
    (76,026
    )
    
    
    (60,074
    )
    
    
    (36,353
    )Excess tax benefit from share-based compensation
    
    
    27,271
    
    
    
    8,724
    
    
    
    11,405Net proceeds related to long-term incentive awards
    
    
    18,101
    
    
    
    20,393
    
    
    
    39,847Distributions to minority interest partner
    
    
    (48,097
    )
    
    
    
    
    
    
    (28,000
    )Net cash provided by (used in) financing activities
    
    
    (265,807
    )
    
    
    208,184
    
    
    
    13,769Effect of exchange rate changes on cash
    
    
    2,781
    
    
    
    2,092
    
    
    
    (620
    )Increase in cash and cash equivalents
    
    
    77,888
    
    
    
    17,836
    
    
    
    8,947Cash and cash equivalents at beginning of year
    
    
    80,379
    
    
    
    62,543
    
    
    
    53,596Cash and cash equivalents at end of year
    
    $
    158,267
    
    
    $
    80,379
    
    
    $
    62,543Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    74,536
    
    
    $
    62,161
    
    
    $
    44,217Cash paid for income taxes
    
    
    384,145
    
    
    
    291,981
    
    
    
    177,697
  31




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##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2007, 2006 and 2005  (In thousands, except share data)
 Accumulated
    
    
    Treasury SecuritiesCommon Stock
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    Common Stock
    
    
    TotalNumber of
    
    
    
    
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Number of
    
    
    
    
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    EquityBalance, January 1, 2005
    
    
    105,296,653
    
    
    $
    105,297
    
    
    $
    432,395
    
    
    $
    961,574
    
    
    $
    24,404
    
    
    
    (4,222,466
    )
    
    $
    (122,859
    )
    
    $
    1,400,811Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302,305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302,305Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,635
    )
    
    
    
    
    
    
    
    
    
    
    (14,635
    )Changes in unrealized fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,044
    )
    
    
    
    
    
    
    
    
    
    
    (2,044
    )Minimum pension liability adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (824
    )
    
    
    
    
    
    
    
    
    
    
    (824
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302,305
    
    
    
    (17,503
    )
    
    
    
    
    
    
    
    
    
    
    284,802Purchases of common stock under Repurchase Program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,198,800
    )
    
    
    (117,820
    )
    
    
    (117,820
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,396
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,396
    )Exercise of stock options and non-employee equity awards
    
    
    1,749,605
    
    
    
    1,749
    
    
    
    51,542
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,291Vesting of restricted stock
    
    
    34,632
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,276
    )
    
    
    (165
    )
    
    
    (130
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    5,947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,947Two-for-one common stock split (Note 1 and 11)
    
    
    106,188,814
    
    
    
    106,189
    
    
    
    (106,189
    )
    
    
    
    
    
    
    
    
    
    
    (5,875,386
    )
    
    
    
    
    
    
    Balance, December 31, 2005
    
    
    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 unrealized fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,425
    
    
    
    
    
    
    
    
    
    
    
    2,425Minimum pension liability adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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 unrealized 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
    )
    
    $
    2,594,897
  32




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##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Basis of Presentation
   Stock Split
  Use of Estimates
  Cash and Cash Equivalents
  Allowance for Doubtful Accounts
  Inventories
  33




---



##### Table of Contents



Fixed Assets
   Goodwill and Other Intangible Assets
   Impairment of Long-Lived Assets
  Environmental Obligations
  Liabilities Related to Self-Insurance Programs
  Foreign Currency Translation and Transactions
   34




---



##### Table of Contents



Financial Instruments
   Income Taxes
    Revenue Recognition
  Minority Interests
  Long-term Incentive Compensation
    35




---



##### Table of Contents



2005Net income, as reported
    
    $
    302,305Add: Stock-based compensation expense included in reported income, net of related tax effect
    
    
    3,952Less: Total stock-based compensation expense determined under fair value methods, net of
related tax effect
    
    
    (13,056
    )Net income, pro forma
    
    $
    293,201Earnings per share:As reported:Basic
    
    $
    1.50Diluted
    
    
    1.48Pro forma:Basic
    
    $
    1.45Diluted
    
    
    1.43
 Recent Accounting Pronouncements
     2. Acquisitions
    36




---



##### Table of Contents



2007
    
    
    2006
    
    
    2005Fair value of tangible and identifiable intangible assets, net of cash acquired
    
    $
    26,185
    
    
    $
    171,125
    
    
    $
    68,597Goodwill acquired
    
    
    19,422
    
    
    
    129,278
    
    
    
    23,444Payments to former shareholders of businesses acquired
    
    
    13,522
    
    
    
    
    
    
    
    Total liabilities assumed
    
    
    (5,677
    )
    
    
    (73,676
    )
    
    
    (10,713
    )Cash paid for acquisitions, net of cash acquired
    
    $
    53,452
    
    
    $
    226,727
    
    
    $
    81,328
 37




---



##### Table of Contents



3. Dispositions
   4. Earnings Per Share
  2007
    
    
    2006
    
    
    2005Net Income
    
    $
    647,051
    
    
    $
    502,006
    
    
    $
    302,305Weighted average number of common shares outstanding
    
    
    200,244
    
    
    
    200,252
    
    
    
    201,651Basic EPS
    
    $
    3.23
    
    
    $
    2.51
    
    
    $
    1.50Net Income
    
    $
    647,051
    
    
    $
    502,006
    
    
    $
    302,305Weighted average number of common shares outstanding
    
    
    200,244
    
    
    
    200,252
    
    
    
    201,651Dilutive effect of stock options and restricted stock units
    
    
    1,703
    
    
    
    1,756
    
    
    
    2,871201,947
    
    
    
    202,008
    
    
    
    204,522Diluted EPS
    
    $
    3.20
    
    
    $
    2.49
    
    
    $
    1.48
 5. Inventories
  2007
    
    
    2006Raw materials
    
    $
    139,218
    
    
    $
    117,812Work-in-process
    
    
    173,836
    
    
    
    147,543Finished goods
    
    
    1,461,373
    
    
    
    1,285,5581,774,427
    
    
    
    1,550,913Reserves to state certain U.S. inventories
(FIFO cost of $611,062 and $559,943 in
2007 and 2006, respectively) on a LIFO basis
    
    
    (116,255
    )
    
    
    (93,542
    )$
    1,658,172
    
    
    $
    1,457,371
  38




---



##### Table of Contents



6. Property, Plant and Equipment
  2007
    
    
    2006Land and improvements
    
    $
    62,546
    
    
    $
    55,138Buildings
    
    
    235,545
    
    
    
    181,419Machinery and equipment
    
    
    880,562
    
    
    
    717,761Rental tools
    
    
    726,333
    
    
    
    597,4681,904,986
    
    
    
    1,551,786Less  Accumulated depreciation
    
    
    (799,106
    )
    
    
    (664,742
    )$
    1,105,880
    
    
    $
    887,044
 7. Goodwill and Other Intangible Assets
 Goodwill
  Oilfield
    
    
    DistributionSegment
    
    
    Segment
    
    
    ConsolidatedBalance as of December 31, 2005
    
    $
    699,142
    
    
    $
    37,906
    
    
    $
    737,048Goodwill acquired
    
    
    126,964
    
    
    
    2,314
    
    
    
    129,278Purchase price and other adjustments
    
    
    890
    
    
    
    431
    
    
    
    1,321Balance as of December 31, 2006
    
    
    826,996
    
    
    
    40,651
    
    
    
    867,647Goodwill acquired
    
    
    9,255
    
    
    
    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
    
    $
    844,897
    
    
    $
    51,545
    
    
    $
    896,442
 Other Intangible Assets
  2007
    
    
 2006
    
    
    WeightedGross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    AverageCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    AmortizationAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    Period (years)Patents
    
    $
    112,485
    
    
    $
    35,190
    
    
    $
    77,295
    
    
    $
    101,269
    
    
    $
    19,547
    
    
    $
    81,722
    
    
    
    13.5License
agreements
    
    
    31,688
    
    
    
    14,204
    
    
    
    17,484
    
    
    
    31,231
    
    
    
    10,661
    
    
    
    20,570
    
    
    
    10.6Non-compete
agreements and
trademarks
    
    
    36,704
    
    
    
    21,032
    
    
    
    15,672
    
    
    
    33,421
    
    
    
    15,662
    
    
    
    17,759
    
    
    
    9.7Customer lists
and contracts
    
    
    34,603
    
    
    
    16,695
    
    
    
    17,908
    
    
    
    29,403
    
    
    
    8,314
    
    
    
    21,089
    
    
    
    8.9$
    215,480
    
    
    $
    87,121
    
    
    $
    128,359
    
    
    $
    195,324
    
    
    $
    54,184
    
    
    $
    141,140
    
    
    
    12.0
  39




---



##### Table of Contents



8. Debt
  2007
    
    
    2006Current:Short-term borrowings
    
    $
    111,609
    
    
    $
    89,307Current portion of long-term debt
    
    
    27,872
    
    
    
    198,397Short-term borrowings and current portion of long-term debt
    
    $
    139,481
    
    
    $
    287,704Long-Term:Notes:6.0% Senior Notes maturing June 2016 with an effective interest rate of 6.11%.
Interest payable semi-annually (presented net of unamortized discount of $262 and
$293 in 2007 and 2006, respectively)
    
    $
    274,738
    
    
    $
    274,7076.75% Senior Notes maturing February 2011 with an effective interest rate of 6.83%.
Interest payable semi-annually (presented net of unamortized discount of $249 and
$368 in 2007 and 2006, respectively)
    
    
    219,751
    
    
    
    219,6327.0% Senior Notes repaid in September 2007
    
    
    
    
    
    
    149,9317.7% Senior Notes repaid in July 2007
    
    
    
    
    
    
    7,143Bank revolvers payable:$275 million revolving note expiring May 2010. Interest payable quarterly at base
rate (7.25% at December 31, 2007) or Eurodollar rate, as defined
(5.57% at December 31, 2007) and described below
    
    
    245,000
    
    
    
    119,000M-I SWACO $125 million revolving note expiring May 2010. Interest payable
quarterly at base rate or Eurodollar rate, as defined and described below
    
    
    
    
    
    
    41,500Term Loans: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 (6.32% at December 31, 2007)
    
    
    133,235
    
    
    
    157,686M-I SWACO 27.5 million term loan repaid in June 2007
    
    
    
    
    
    
    28,868Other
    
    
    772
    
    
    
    858873,496
    
    
    
    999,325Less-Current portion of long-term debt
    
    
    (27,872
    )
    
    
    (198,397
    )Long-term debt
    
    $
    845,624
    
    
    $
    800,928Principal
payments of long-term debt for years subsequent to 2008 are as
follows:2009
    
    $
    26,5232010
    
    
    271,5362011
    
    
    246,2742012
    
    
    26,524Thereafter
    
    
    274,767$
    845,624
 40




---



##### Table of Contents



9. Financial Instruments
 Foreign Currency Contracts
  Fair Value of Other Financial Instruments
  2007
    
    
    2006Recorded
    
    
    Fair
    
    
    Recorded
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueLong-term Debt
    
    $
    873,496
    
    
    $
    889,104
    
    
    $
    999,325
    
    
    $
    1,015,062
  41




---



##### Table of Contents



10. Income Taxes
  2007
    
    
    2006
    
    
    2005Income before income taxes and minority interests:United States
    
    $
    644,283
    
    
    $
    443,453
    
    
    $
    225,207Non-United States
    
    
    659,592
    
    
    
    576,643
    
    
    
    402,600Total
    
    $
    1,303,875
    
    
    $
    1,020,096
    
    
    $
    627,807
  2007
    
    
    2006
    
    
    2005Current:United States
    
    $
    172,948
    
    
    $
    127,964
    
    
    $
    62,243Non-United States
    
    
    208,352
    
    
    
    183,695
    
    
    
    124,881State
    
    
    4,906
    
    
    
    11,278
    
    
    
    4,983386,206
    
    
    
    322,937
    
    
    
    192,107Deferred:United States
    
    
    21,849
    
    
    
    2,308
    
    
    
    8,073Non-United States
    
    
    381
    
    
    
    1,289
    
    
    
    2,349State
    
    
    35
    
    
    
    140
    
    
    
    21422,265
    
    
    
    3,737
    
    
    
    10,636Income tax provision
    
    $
    408,471
    
    
    $
    326,674
    
    
    $
    202,743
   2007
    
    
    2006
    
    
    2005U.S. federal statutory tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Minority partners share of U.S. partnership earnings
    
    
    (3.0
    )
    
    
    (2.6
    )
    
    
    (2.5
    )Non-deductible expenses
    
    
    1.1
    
    
    
    0.9
    
    
    
    1.1Benefit of extraterritorial income exclusion, manufacturers
production exclusion and research credits
    
    
    (0.9
    )
    
    
    (0.5
    )
    
    
    (0.8
    )State taxes, net
    
    
    0.3
    
    
    
    1.1
    
    
    
    0.8Non-U.S. tax provisions which vary from the U.S.
rate/non-U.S. losses with no tax benefit realized
    
    
    (1.2
    )
    
    
    (1.3
    )
    
    
    (0.9
    )Change in valuation allowance
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )Other items, net
    
    
    0.1
    
    
    
    (0.6
    )
    
    
    (0.3
    )Effective tax rate
    
    
    31.3
    %
    
    
    32.0
    %
    
    
    32.3
    %
 42




---



##### Table of Contents



2007
    
    
    2006Deferred tax liabilities attributed to the excess of net book basis
over remaining tax basis (principally depreciation and
amortization):United States
    
    $
    (116,886
    )
    
    $
    (99,443
    )Non-United States
    
    
    (87,766
    )
    
    
    (84,244
    )Total deferred tax liabilities
    
    
    (204,652
    )
    
    
    (183,687
    )Deferred tax assets attributed to net operating loss
and tax credit carryforwards:United States
    
    
    
    
    
    
    Non-United States
    
    
    14,672
    
    
    
    18,395Other deferred tax assets (principally accrued liabilities
not deductible until paid and inventory reserves):United States
    
    
    71,453
    
    
    
    76,298Non-United States
    
    
    17,981
    
    
    
    15,160Subtotal
    
    
    104,106
    
    
    
    109,853Valuation allowance
    
    
    (14,662
    )
    
    
    (16,232
    )Total deferred tax assets
    
    
    89,444
    
    
    
    93,621Net deferred tax liabilities
    
    $
    (115,208
    )
    
    $
    (90,066
    )Balance sheet presentation:Deferred tax assets, net
    
    $
    46,220
    
    
    $
    51,070Other assets
    
    
    8,206
    
    
    
    8,822Income taxes payable
    
    
    (9,390
    )
    
    
    (6,834
    )Deferred tax liabilities
    
    
    (160,244
    )
    
    
    (143,124
    )Net deferred tax liabilities
    
    $
    (115,208
    )
    
    $
    (90,066
    )
  Liability for Uncertain Tax Positions
   43




---



##### Table of Contents



Balance as of January 1, 2007
    
    $
    22,629Additions for tax positions of prior years
    
    
    7,271Reductions for tax positions of prior years
    
    
    (2,758
    )Additions for tax positions in the current year
    
    
    8,324Settlements with tax authorities
    
    
    (200
    )Reductions due to the lapse of applicable statute of limitations
    
    
    (728
    )Balance as of December 31, 2007
    
    $
    34,538
  Jurisdiction
    
    Earliest Open Tax PeriodCanada
    
    
    2000Italy
    
    
    2002Norway
    
    
    1997Russia
    
    
    2004United Kingdom
    
    
    2001United States
    
    
    2001
 11. Stockholders Equity
 Dividend Program
   Stock Split
  Common Stock Repurchases
  44




---



##### Table of Contents



Stockholder Rights Plan
     Accumulated Other Comprehensive Income
  2007
    
    
    2006Currency translation adjustments
    
    $
    72,298
    
    
    $
    25,555Unrealized fair value of derivatives
    
    
    755
    
    
    
    249Pension and other postretirement benefits
    
    
    (5,213
    )
    
    
    (2,577
    )Accumulated other comprehensive income
    
    $
    67,840
    
    
    $
    23,227
  45




---



##### Table of Contents



12. Retirement Plans
 Defined Contribution Plans
 1 2
 1 4
 1 2
   Deferred Compensation Plans
    46




---



##### Table of Contents



13. Employee Benefit Plans
     Pension Plans
    
    
    Postretirement Benefit Plans2007
    
    
    2006
    
    
    2007
    
    
    2006Changes in benefit obligations:Benefit obligations at beginning of year
    
    $
    49,988
    
    
    $
    46,631
    
    
    $
    10,059
    
    
    $
    10,070Service cost
    
    
    4,461
    
    
    
    3,111
    
    
    
    381
    
    
    
    267Interest cost
    
    
    3,104
    
    
    
    2,456
    
    
    
    563
    
    
    
    538Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    587
    
    
    
    624Actuarial loss (gain)
    
    
    6,229
    
    
    
    (1,349
    )
    
    
    (1,466
    )
    
    
    (565
    )Other
    
    
    4,210
    
    
    
    
    
    
    
    
    
    
    
    Benefits paid
    
    
    (1,066
    )
    
    
    (861
    )
    
    
    (738
    )
    
    
    (875
    )Benefit obligations at end of year
    
    $
    66,926
    
    
    $
    49,988
    
    
    $
    9,386
    
    
    $
    10,059Changes in plan assets:Fair value of plan assets at beginning of year
    
    $
    44,616
    
    
    $
    38,993
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    2,182
    
    
    
    3,797
    
    
    
    
    
    
    
    Employer contributions
    
    
    3,840
    
    
    
    4,464
    
    
    
    151
    
    
    
    251Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    587
    
    
    
    624Other
    
    
    
    
    
    
    (1,777
    )
    
    
    
    
    
    
    Benefits paid
    
    
    (1,066
    )
    
    
    (861
    )
    
    
    (738
    )
    
    
    (875
    )Fair value of plan assets at end of year
    
    $
    49,572
    
    
    $
    44,616
    
    
    $
    
    
    
    $
    Funded status
    
    $
    (17,354
    )
    
    $
    (5,372
    )
    
    $
    (9,386
    )
    
    $
    (10,059
    )Amounts recognized in the consolidated balance sheet:Non-current assets
    
    $
    584
    
    
    $
    34
    
    
    $
    
    
    
    $
    Other long-term liabilities
    
    
    (17,938
    )
    
    
    (5,406
    )
    
    
    (9,386
    )
    
    
    (10,059
    )Net amount recognized
    
    $
    (17,354
    )
    
    $
    (5,372
    )
    
    $
    (9,386
    )
    
    $
    (10,059
    )Amounts in accumulated other comprehensive income:Net actuarial loss(gain)
    
    $
    7,907
    
    
    $
    4,396
    
    
    $
    (2,738
    )
    
    $
    (1,906
    )Prior service costs
    
    
    44
    
    
    
    88
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    7,951
    
    
    $
    4,484
    
    
    $
    (2,738
    )
    
    $
    (1,906
    )
 47




---



##### Table of Contents



Net Periodic Benefit Expense
  Pension Plans
    
    
    Post-retirement Benefit Plans2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005Components of net periodic benefit expense:Service cost
    
    $
    4,461
    
    
    $
    3,111
    
    
    $
    2,787
    
    
    $
    381
    
    
    $
    267
    
    
    $
    242Interest cost
    
    
    3,104
    
    
    
    2,456
    
    
    
    2,142
    
    
    
    563
    
    
    
    538
    
    
    
    548Return on plan assets
    
    
    (3,478
    )
    
    
    (2,365
    )
    
    
    (2,292
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    8
    
    
    
    11
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    (91
    )Amortization of loss (gain)
    
    
    286
    
    
    
    818
    
    
    
    706
    
    
    
    (157
    )
    
    
    (87
    )
    
    
    (130
    )Plan termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,467
    )Net periodic benefit expense (income)
    
    $
    4,381
    
    
    $
    4,031
    
    
    $
    3,354
    
    
    $
    787
    
    
    $
    718
    
    
    $
    (3,898
    )Other changes in plan assets and benefit obligations recognized in other comprehensive income (OCI):Net (gain)/loss arising during the year
    $
    3,762
    
    
    
    *
    
    
    
    *
    
    
    $
    (989
    )
    
    
    *
    
    
    
    *Amortization of prior service (cost)/credit
    
    
    (8
    )
    
    
    *
    
    
    
    *
    
    
    
    
    
    
    
    *
    
    
    
    *Amortization of net gain/(loss)
    
    
    (286
    )
    
    
    *
    
    
    
    *
    
    
    
    157
    
    
    
    *
    
    
    
    *Other comprehensive income
    
    $
    3,468
    
    
    
    *
    
    
    
    *
    
    
    $
    (832
    )
    
    
    *
    
    
    
    *Total net periodic benefit expense and OCI:
    $
    7,849
    
    
    
    *
    
    
    
    *
    
    
    $
    (45
    )
    
    
    *
    
    
    
    *
 *   Due to
the adoption of SFAS 158, the pension and postretirement benefit plan
disclosures are not comparable on a year-to-year basis.
 Net periodic benefit expense:Discount rate
    
    
    5.75
    %
    
    
    5.50
    %
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    5.50
    %
    
    
    5.75
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AProjected benefit obligation:Discount rate
    
    
    6.30
    %
    
    
    5.75
    %
    
    
    5.50
    %
    
    
    6.30
    %
    
    
    5.75
    %
    
    
    5.50
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 Additional Pension Plan Information
  2007
    
    
    2006Common stock and related index funds
    
    
    44
    %
    
    
    47
    %Fixed income securities and related index funds
    
    
    44
    
    
    
    40Real estate
    
    
    7
    
    
    
    6Money market funds
    
    
    5
    
    
    
    7Total
    
    
    100
    %
    
    
    100
    %
  2007
    
    2006Projected benefit obligation
    
    $
    66,926
    
    
    $
    49,988Accumulated benefit obligation
    
    
    51,712
    
    
    
    49,988Plan assets at fair value
    
    
    49,572
    
    
    
    44,616
  48




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##### Table of Contents



Additional Postretirement Benefit Plan Information
  2007
    
    2006Health care cost trend rate for current year
    
    
    10.9
    %
    
    
    12.0
    %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
    
    $
    5
    
    
    $
    (80
    )Effect on accumulated postretirement benefit obligation
    
    
    118
    
    
    
    (867
    )
  14. Long-Term Incentive Compensation
  Restricted Stock Units
  TotalTime-based Awards
    
    
    Performance-based Awards
    
    
    RestrictedNo. of Units
    
    
    Fair Value(a)
    
    
    No. of Units
    
    
    Fair Value(a)
    
    
    Stock UnitsOutstanding at December 31, 2006
    
    
    524,552
    
    
    $
    40.84
    
    
    
    1,601,616
    (b)
    
    $
    39.71
    
    
    
    2,126,168Granted
    
    
    444,428
    
    
    
    62.53
    
    
    
    400,665
    
    
    
    63.76
    
    
    
    845,093Forfeited
    
    
    (19,913
    )
    
    
    40.51
    
    
    
    (25,050
    )
    
    
    37.05
    
    
    
    (44,963
    )Vested
    
    
    (152,380
    )
    
    
    40.26
    
    
    
    (696,380
    )
    
    
    37.39
    
    
    
    (848,760
    )Outstanding at December 31, 2007
    
    
    796,687
    
    
    $
    53.06
    
    
    
    1,280,851
    
    
    $
    48.55
    
    
    
    2,077,538
 
 (a)
    
    Reflects the weighted average grant-date fair value.(b)
    
    Reflects achievement of performance criteria for awards granted prior to December
2007. 
  49




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##### Table of Contents



Stock Options
  Weighted
    
    
    WeightedShare
    
    
    Average
    
    
    Average
    
    
    Aggregateunder
    
    
    Exercise
    
    
    Remaining
    
    
    Intrinsic ValueOption
    
    

    Price
    
    

    Contractual Life
    
    

(in thousands)Outstanding at December 31, 2006
    
    
    3,351,381
    
    
    $
    18.78Granted
    
    
    
    
    
    
    Forfeited
    
    
    (55,004
    )
    
    
    21.33Exercised
    
    
    (1,748,706
    )
    
    
    17.58Outstanding at December 31, 2007
    
    
    1,547,671
    
    
    $
    20.04
    
    
    
    5.5
    
    
    $
    83,277Exercisable at December 31, 2007
    
    
    1,411,143
    
    
    $
    19.19
    
    
    
    5.4
    
    
    $
    77,135
   2006
    
    2005Fair value of stock options granted
    
    $
    11.92
    
    
    $
    8.53Expected life of option (years)
    
    
    5.0
    
    
    
    5.0Expected stock volatility
    
    
    31.0
    %
    
    
    31.0
    %Expected dividend yield
    
    
    0.8
    %
    
    
    0.8
    %Risk-free interest rate
    
    
    4.3
    %
    
    
    3.9
    %
  Share-based Compensation Expense
    50




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##### Table of Contents



15.
    
    Industry Segments and International Operations
     2007
    
    
    2006
    
    
    2005Revenues:Oilfield
    
    $
    6,632,569
    
    
    $
    5,387,738
    
    
    $
    3,978,999Distribution
    
    
    2,131,761
    
    
    
    1,945,821
    
    
    
    1,600,004$
    8,764,330
    
    
    $
    7,333,559
    
    
    $
    5,579,003Operating Income (Loss):Oilfield
    
    $
    1,315,644
    
    
    $
    1,012,295
    
    
    $
    625,384Distribution
    
    
    94,629
    
    
    
    101,830
    
    
    
    64,714General corporate
    
    
    (40,476
    )
    
    
    (34,044
    )
    
    
    (19,537
    )$
    1,369,797
    
    
    $
    1,080,081
    
    
    $
    670,561Capital Expenditures:Oilfield
    
    $
    333,856
    
    
    $
    292,073
    
    
    $
    173,510Distribution
    
    
    6,929
    
    
    
    5,153
    
    
    
    2,354General corporate
    
    
    15,036
    
    
    
    11,244
    
    
    
    1,981$
    355,821
    
    
    $
    308,470
    
    
    $
    177,845Depreciation and Amortization:Oilfield
    
    $
    187,112
    
    
    $
    144,335
    
    
    $
    110,160Distribution
    
    
    4,763
    
    
    
    4,840
    
    
    
    6,435General corporate
    
    
    1,421
    
    
    
    1,209
    
    
    
    1,127$
    193,296
    
    
    $
    150,384
    
    
    $
    117,722Total Assets:Oilfield
    
    $
    5,169,331
    
    
    $
    4,474,401
    
    
    $
    3,356,112Distribution
    
    
    752,221
    
    
    
    737,445
    
    
    
    596,867General corporate
    
    
    140,328
    
    
    
    123,629
    
    
    
    106,935$
    6,061,880
    
    
    $
    5,335,475
    
    
    $
    4,059,914
 51




---



##### Table of Contents



2007
    
    
    2006
    
    
    2005United States
    
    $
    3,967,806
    
    
    $
    3,384,729
    
    
    $
    2,520,706Canada
    
    
    771,430
    
    
    
    891,288
    
    
    
    713,565North America
    
    
    4,739,236
    
    
    
    4,276,017
    
    
    
    3,234,271Latin America
    
    
    738,026
    
    
    
    543,844
    
    
    
    452,349Europe/Africa
    
    
    2,105,745
    
    
    
    1,605,559
    
    
    
    1,188,038Middle East/Asia
    
    
    1,181,323
    
    
    
    908,139
    
    
    
    704,345Non-North America
    
    
    4,025,094
    
    
    
    3,057,542
    
    
    
    2,344,732$
    8,764,330
    
    
    $
    7,333,559
    
    
    $
    5,579,003
  2007
    
    
    2006
    
    
    2005United States
    
    $
    588,345
    
    
    $
    458,273
    
    
    $
    353,370Canada
    
    
    52,596
    
    
    
    48,510
    
    
    
    43,908North America
    
    
    640,941
    
    
    
    506,783
    
    
    
    397,278Latin America
    
    
    95,834
    
    
    
    67,377
    
    
    
    53,911Europe/Africa
    
    
    266,437
    
    
    
    230,607
    
    
    
    156,632Middle East/Asia
    
    
    102,668
    
    
    
    82,277
    
    
    
    57,568Non-North America
    
    
    464,939
    
    
    
    380,261
    
    
    
    268,111$
    1,105,880
    
    
    $
    887,044
    
    
    $
    665,389
  16. Commitments and Contingencies
 Leases
   Amount2008
    
    $
    72,7752009
    
    
    54,5892010
    
    
    36,8602011
    
    
    25,8322012
    
    
    19,6912013-2017
    
    
    63,437Thereafter
    
    
    43,869$
    317,053
  52




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##### Table of Contents



Standby Letters of Credit
  Insurance
  Litigation
  Environmental
   17. Quarterly Information (Unaudited)
 First
    
    Second
    
    Third
    
    Fourth
    
    Year(In thousands, except per share data)2007Revenues
    
    $
    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
    
    
    
    3.202006Revenues
    
    $
    1,682,121
    
    
    $
    1,738,263
    
    
    $
    1,914,184
    
    
    $
    1,998,991
    
    
    $
    7,333,559Gross profit
    
    
    526,603
    
    
    
    545,013
    
    
    
    618,213
    
    
    
    654,442
    
    
    
    2,344,271Net income
    
    
    107,216
    
    
    
    118,833
    
    
    
    132,925
    
    
    
    143,032
    
    
    
    502,006EPS:Basic
    
    
    0.53
    
    
    
    0.59
    
    
    
    0.66
    
    
    
    0.72
    
    
    
    2.51Diluted
    
    
    0.53
    
    
    
    0.59
    
    
    
    0.66
    
    
    
    0.71
    
    
    
    2.49
 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




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##### 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
    
    
    26Reports of Independent Registered Public Accounting Firm
    
    
    27Consolidated Balance Sheets at December 31, 2007 and 2006
    
    
    29Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005
    
    
    30Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005
    
    
    31Consolidated Statements of Stockholders Equity and Comprehensive Income
for the years ended December 31, 2007, 2006 and 2005
    
    
    32Notes to Consolidated Financial Statements
    
    
    33(2)
    
    Financial Statement Schedule II-Valuation and Qualifying Accounts and Reserves
    
    
    59
    3.1
    
    -
    
    Restated Certificate of Incorporation of the Company dated July 26, 2005. Filed as Exhibit 3.4 to the Companys report on Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.3.2
    
    -
    
    Restated Bylaws of the Company. Filed as Exhibit 3.3 to the Companys report on Form 10-K for the year ended December 31, 2004 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.4.5
    
    -
    
    Form of Senior Note due 2007. Filed as Exhibit 4.2 to Amendment No. 1 to the Companys Registration Statement on Form S-3 dated September 9, 1997 and incorporated herein by reference.
 56




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##### Table of Contents



4.6
    
    -
    
    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.4.7
    
    -
    
    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. Second Amended and Restated 1989 Long-Term Incentive Compensation Plan, effective January 1, 2005. Filed as Exhibit 10.1 to the Companys report on Form 8-K dated April 24, 2007 and incorporated herein by reference.10.2+*
    
    -
    
    First Amendment to the Smith International, Inc. Second Amended and Restated 1989 Long-Term Incentive Compensation Plan, dated October 23, 2007.10.3+
    
    -
    
    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.10.4+
    
    -
    
    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.10.5+
    
    -
    
    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.10.6+
    
    -
    
    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.10.7+*
    
    -
    
    Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December 2007.10.8+
    
    -
    
    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 2007.10.11+*
    
    -
    
    Director Compensation Summary of Smith International, Inc. effective January 1, 2008.10.12+
    
    -
    
    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.10.13+
    
    -
    
    Smith International, Inc. Amended and Restated Post-2004 Supplemental Executive Retirement Plan effective as of January 1, 2006. Filed as Exhibit 10.13 to the Companys report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.10.14+*
    
    -
    
    Smith International, Inc. Amended and Restated Executive Officer Annual Incentive Plan effective as of January 1, 2008, dated October 17, 2007.10.15+
    
    -
    
    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.
 57




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##### Table of Contents



10.16+
    
    -
    
    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.10.17+
    
    -
    
    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.10.18+
    
    -
    
    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.10.19+
    
    -
    
    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.10.20+
    
    -
    
    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.10.21+
    
    -
    
    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.10.22+
    
    -
    
    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.10.23+
    
    -
    
    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.10.24
    
    -
    
    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.10.25+
    
    -
    
    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. Filed as Exhibit 21.1 to the Companys report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.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.
 58




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##### Table of Contents



SCHEDULE II
 SMITH INTERNATIONAL, INC.
 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
 Balance at
    
    Charged
    
    
    
    
    
    BalanceBeginning
    
    to
    
    
    
    
    
    at Endof Year
    
    Expense
    
    Write-offs
    
    of YearAllowance for doubtful accounts:Year ended December 31, 2007
    
    $
    16,709
    
    
    $
    5,082
    
    
    $
    (4,513
    )
    
    $
    17,278Year ended December 31, 2006
    
    
    13,884
    
    
    
    7,578
    
    
    
    (4,753
    )
    
    
    16,709Year ended December 31, 2005
    
    
    12,558
    
    
    
    4,216
    
    
    
    (2,890
    )
    
    
    13,884
 59




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##### Table of Contents



SIGNATURES
  SMITH INTERNATIONAL, INC.February 29, 2008
    By:
    /s/ Doug RockDoug RockChief Executive Officer,
President and Chief Operating Officer  /s/ Doug Rock

(Doug Rock)
    
    
    
    Chairman of the Board, Chief
Executive Officer, President and
Chief Operating Officer (principal
executive officer)
    
    
    
    February 29, 2008/s/ Margaret K. Dorman

(Margaret K. Dorman)
    
    
    
    Senior Vice President, Chief
Financial Officer
and Treasurer (principal financial
and accounting officer)
    
    
    
    February 29, 2008/s/ G. Clyde Buck

(G. Clyde Buck)
    
    
    
    Director
    
    
    
    February 29, 2008/s/ Loren K. Carroll

(Loren K. Carroll)
    
    
    
    Director
    
    
    
    February 29, 2008/s/ Dod A. Fraser

(Dod A. Fraser)
    
    
    
    Director
    
    
    
    February 29, 2008/s/ James R. Gibbs

(James R. Gibbs)
    
    
    
    Director
    
    
    
    February 29, 2008/s/ Robert Kelley

(Robert Kelley)
    
    
    
    Director
    
    
    
    February 29, 2008/s/ John Yearwood

(John Yearwood)
    
    
    
    Director
    
    
    
    February 29, 2008
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Exhibit Index
  3.1
    
    -
    
    Restated Certificate of Incorporation of the Company dated July 26, 2005. Filed as Exhibit 3.4 to the Companys report on Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.3.2
    
    -
    
    Restated Bylaws of the Company. Filed as Exhibit 3.3 to the Companys report on Form 10-K for the year ended December 31, 2004 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.4.5
    
    -
    
    Form of Senior Note due 2007. Filed as Exhibit 4.2 to Amendment No. 1 to the Companys Registration Statement on Form S-3 dated September 9, 1997 and incorporated herein by reference.4.6
    
    -
    
    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.4.7
    
    -
    
    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. Second Amended and Restated 1989 Long-Term Incentive Compensation Plan, effective January 1, 2005. Filed as Exhibit 10.1 to the Companys report on Form 8-K dated April 24, 2007 and incorporated herein by reference.10.2+*
    
    -
    
    First Amendment to the Smith International, Inc. Second Amended and Restated 1989 Long-Term Incentive Compensation Plan, dated October 23, 2007.10.3+
    
    -
    
    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.10.4+
    
    -
    
    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.10.5+
    
    -
    
    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.
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##### Table of Contents



10.6+
    
    -
    
    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.10.7+*
    
    -
    
    Smith International, Inc. Form of Restricted Stock Unit Agreement as amended December 2007.10.8+
    
    -
    
    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 2007.10.11+*
    
    -
    
    Director Compensation Summary of Smith International, Inc. effective January 1, 2008.10.12+
    
    -
    
    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.10.13+
    
    -
    
    Smith International, Inc. Amended and Restated Post-2004 Supplemental Executive Retirement Plan effective as of January 1, 2006. Filed as Exhibit 10.13 to the Companys report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.10.14+*
    
    -
    
    Smith International, Inc. Amended and Restated Executive Officer Annual Incentive Plan effective as of January 1, 2008, dated October 17, 2007.10.15+
    
    -
    
    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.10.16+
    
    -
    
    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.10.17+
    
    -
    
    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.10.18+
    
    -
    
    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.10.19+
    
    -
    
    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.10.20+
    
    -
    
    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.10.21+
    
    -
    
    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.
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10.22+
    
    -
    
    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.10.23+
    
    -
    
    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.10.24
    
    -
    
    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.10.25+
    
    -
    
    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. Filed as Exhibit 21.1 to the Companys report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.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.
 63