##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from  to
 Commission file number 1-8514
 Smith International, Inc.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    95-3822631
(I.R.S. Employer Identification No.)411 North Sam Houston Parkway, Suite 600
Houston, Texas
(Address of principal executive offices)
    
    77060
(Zip Code)
 (281) 443-3370
 
 þ o
  þ o o
 o þ




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##### 



INDEX
 PageNo.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months and Six Months ended June 30, 2007 and 2006
    
    
    2CONSOLIDATED CONDENSED BALANCE SHEETS
As of June 30, 2007 and December 31, 2006
    
    
    3CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months and Six Months ended June 30, 2007 and 2006
    
    
    4NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II  OTHER INFORMATIONItems 1-4
    
    
    21Items 5-6
    
    
    22SIGNATURES
    
    
    23EXHIBIT INDEX
    
    
    24Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 1350




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##### Table of Contents



PART
I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    2,114,373
    
    
    $
    1,738,263
    
    
    $
    4,222,097
    
    
    $
    3,420,384Costs and expenses:Costs of revenues
    
    
    1,417,827
    
    
    
    1,193,250
    
    
    
    2,849,586
    
    
    
    2,348,768Selling expenses
    
    
    287,162
    
    
    
    228,255
    
    
    
    559,495
    
    
    
    449,449General and administrative expenses
    
    
    76,935
    
    
    
    71,298
    
    
    
    149,439
    
    
    
    139,589Total costs and expenses
    
    
    1,781,924
    
    
    
    1,492,803
    
    
    
    3,558,520
    
    
    
    2,937,806Operating income
    
    
    332,449
    
    
    
    245,460
    
    
    
    663,577
    
    
    
    482,578Interest expense
    
    
    17,605
    
    
    
    14,685
    
    
    
    36,139
    
    
    
    27,521Interest income
    
    
    (895
    )
    
    
    (696
    )
    
    
    (1,659
    )
    
    
    (1,293
    )Income before income taxes and
minority interests
    
    
    315,739
    
    
    
    231,471
    
    
    
    629,097
    
    
    
    456,350Income tax provision
    
    
    100,891
    
    
    
    70,910
    
    
    
    193,990
    
    
    
    143,572Minority interests
    
    
    61,795
    
    
    
    41,728
    
    
    
    121,896
    
    
    
    86,729Net income
    
    $
    153,053
    
    
    $
    118,833
    
    
    $
    313,211
    
    
    $
    226,049Earnings per share:Basic
    
    $
    0.76
    
    
    $
    0.59
    
    
    $
    1.56
    
    
    $
    1.13Diluted
    
    $
    0.76
    
    
    $
    0.59
    
    
    $
    1.55
    
    
    $
    1.12Weighted average shares outstanding:Basic
    
    
    200,499
    
    
    
    200,457
    
    
    
    200,241
    
    
    
    200,725Diluted
    
    
    202,097
    
    
    
    202,162
    
    
    
    201,815
    
    
    
    202,371
  2




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SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 June 30,
    
    
    December 31,2007
    
    
    2006AssetsCurrent Assets:Cash and cash equivalents
    
    $
    94,903
    
    
    $
    80,379Receivables, net
    
    
    1,597,371
    
    
    
    1,592,230Inventories, net
    
    
    1,564,345
    
    
    
    1,457,371Deferred tax assets, net
    
    
    39,467
    
    
    
    51,070Prepaid expenses and other
    
    
    116,257
    
    
    
    89,977Total current assets
    
    
    3,412,343
    
    
    
    3,271,027Property, Plant and Equipment, net
    
    
    986,422
    
    
    
    887,044Goodwill, net
    
    
    870,004
    
    
    
    867,647Other Intangible Assets, net
    
    
    142,582
    
    
    
    141,140Other Assets
    
    
    185,871
    
    
    
    168,617Total Assets
    
    $
    5,597,222
    
    
    $
    5,335,475Liabilities and Stockholders EquityCurrent Liabilities:Short-term borrowings and current portion of long-term debt
    
    $
    298,399
    
    
    $
    287,704Accounts payable
    
    
    610,968
    
    
    
    654,215Accrued payroll costs
    
    
    107,686
    
    
    
    154,756Income taxes payable
    
    
    97,002
    
    
    
    130,339Other
    
    
    145,084
    
    
    
    152,454Total current liabilities
    
    
    1,259,139
    
    
    
    1,379,468Long-Term Debt
    
    
    741,979
    
    
    
    800,928Deferred Tax Liabilities
    
    
    152,994
    
    
    
    143,124Other Long-Term Liabilities
    
    
    144,730
    
    
    
    102,904Minority Interests
    
    
    1,015,287
    
    
    
    922,114Commitments and Contingencies (Note 13)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;
216,270 shares issued in 2007(214,947 shares issued in 2006)
    
    
    216,270
    
    
    
    214,947Additional paid-in capital
    
    
    485,846
    
    
    
    442,155Retained earnings
    
    
    1,925,446
    
    
    
    1,653,480Accumulated other comprehensive income
    
    
    40,994
    
    
    
    23,227Less  Treasury securities, at cost; 15,863 common shares
in 2007 (15,031 common shares in 2006)
    
    
    (385,463
    )
    
    
    (346,872
    )Total stockholders equity
    
    
    2,283,093
    
    
    
    1,986,937Total Liabilities and Stockholders Equity
    
    $
    5,597,222
    
    
    $
    5,335,475
  3




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##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    313,211
    
    
    $
    226,049Adjustments to reconcile net income to net cash provided
by operating activities, excluding the net effects of
acquisitions:Minority interests
    
    
    121,896
    
    
    
    86,729Depreciation and amortization
    
    
    91,947
    
    
    
    68,625Deferred income tax provision
    
    
    18,932
    
    
    
    12,055Increase in LIFO inventory reserves
    
    
    21,777
    
    
    
    14,948Share-based compensation expense
    
    
    16,721
    
    
    
    13,385Provision for losses on receivables
    
    
    1,584
    
    
    
    4,215Foreign currency translation losses
    
    
    2,330
    
    
    
    1,075Gain on disposal of property, plant and equipment
    
    
    (11,210
    )
    
    
    (9,717
    )Equity earnings, net of dividends received
    
    
    (5,594
    )
    
    
    (6,399
    )Gain on sale of operations
    
    
    (1,534
    )
    
    
    (5,930
    )Changes in operating assets and liabilities:Receivables
    
    
    (20,371
    )
    
    
    (161,082
    )Inventories
    
    
    (121,812
    )
    
    
    (247,057
    )Accounts payable
    
    
    (44,371
    )
    
    
    71,390Other current assets and liabilities
    
    
    (76,138
    )
    
    
    (12,089
    )Other non-current assets and liabilities
    
    
    (13,163
    )
    
    
    (16,262
    )Net cash provided by operating activities
    
    
    294,205
    
    
    
    39,935Cash flows from investing activities:Acquisitions, net of cash acquired
    
    
    (18,604
    )
    
    
    (58,019
    )Purchases of property, plant and equipment
    
    
    (168,088
    )
    
    
    (113,965
    )Proceeds from disposal of property, plant and equipment
    
    
    23,712
    
    
    
    15,807Proceeds from sale of operations
    
    
    16,655
    
    
    
    9,296Net cash used in investing activities
    
    
    (146,325
    )
    
    
    (146,881
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    43,251
    
    
    
    393,031Principal payments of long-term debt
    
    
    (115,514
    )
    
    
    (215,290
    )Net change in short-term borrowings
    
    
    24,009
    
    
    
    36,782Purchases of common stock under Repurchase Program
    
    
    (35,195
    )
    
    
    (58,001
    )Net proceeds related to long-term incentive awards
    
    
    13,083
    
    
    
    8,598Payment of common stock dividends
    
    
    (35,984
    )
    
    
    (28,105
    )Debt issuance costs
    
    
    
    
    
    
    (4,744
    )Distributions to minority partner
    
    
    (28,000
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (134,350
    )
    
    
    132,271Effect of exchange rate changes on cash
    
    
    994
    
    
    
    634Increase in cash and cash equivalents
    
    
    14,524
    
    
    
    25,959Cash and cash equivalents at beginning of period
    
    
    80,379
    
    
    
    62,543Cash and cash equivalents at end of period
    
    $
    94,903
    
    
    $
    88,502Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    37,568
    
    
    $
    27,448Cash paid for income taxes
    
    
    163,967
    
    
    
    123,830
  4




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##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 1. Basis of Presentation of Interim Financial Statements
    2. Recent Accounting Pronouncements
    3. Acquisitions and Dispositions
     5




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4. Earnings Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic EPS:Net income
    
    $
    153,053
    
    
    $
    118,833
    
    
    $
    313,211
    
    
    $
    226,049Weighted average number of common shares outstanding
    
    
    200,499
    
    
    
    200,457
    
    
    
    200,241
    
    
    
    200,725Basic EPS
    
    $
    0.76
    
    
    $
    0.59
    
    
    $
    1.56
    
    
    $
    1.13Diluted EPS:Net income
    
    $
    153,053
    
    
    $
    118,833
    
    
    $
    313,211
    
    
    $
    226,049Weighted average number of common shares outstanding
    
    
    200,499
    
    
    
    200,457
    
    
    
    200,241
    
    
    
    200,725Dilutive effect of stock options and restricted stock units
    
    
    1,598
    
    
    
    1,705
    
    
    
    1,574
    
    
    
    1,646202,097
    
    
    
    202,162
    
    
    
    201,815
    
    
    
    202,371Diluted EPS
    
    $
    0.76
    
    
    $
    0.59
    
    
    $
    1.55
    
    
    $
    1.12
 5. Inventories
  June 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    143,834
    
    
    $
    117,812Work-in-process
    
    
    154,918
    
    
    
    147,543Finished goods
    
    
    1,380,912
    
    
    
    1,285,5581,679,664
    
    
    
    1,550,913Reserves to state certain U.S.
inventories (FIFO cost of $616,883
and $559,943 in 2007 and 2006,
respectively) on a LIFO basis
    
    
    (115,319
    )
    
    
    (93,542
    )$
    1,564,345
    
    
    $
    1,457,371
  6




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##### Table of Contents



6. Property, Plant and Equipment
  June 30,
    
    
    December 31,2007
    
    
    2006Land and improvements
    
    $
    57,705
    
    
    $
    55,138Buildings
    
    
    207,069
    
    
    
    181,419Machinery and equipment
    
    
    783,909
    
    
    
    717,761Rental tools
    
    
    657,903
    
    
    
    597,4681,706,586
    
    
    
    1,551,786Less  Accumulated depreciation
    
    
    (720,164
    )
    
    
    (664,742
    )$
    986,422
    
    
    $
    887,044
 7. Goodwill and Other Intangible Assets
 Goodwill
  Oilfield
    
    
    Distribution
    
    
    ConsolidatedBalance as of December 31, 2006
    
    $
    826,996
    
    
    $
    40,651
    
    
    $
    867,647Goodwill acquired
    
    
    4,833
    
    
    
    1,721
    
    
    
    6,554Goodwill related to disposed operations
    
    
    (10,197
    )
    
    
    
    
    
    
    (10,197
    )Purchase price and other adjustments
    
    
    5,273
    
    
    
    727
    
    
    
    6,000Balance as of June 30, 2007
    
    $
    826,905
    
    
    $
    43,099
    
    
    $
    870,004
 Other Intangible Assets
  June 30, 2007
    
    
    December 31, 2006
    
    
    WeightedGross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    AverageCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    AmortizationAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    Period (years)Patents
    
    $
    111,414
    
    
    $
    28,167
    
    
    $
    83,247
    
    
    $
    101,269
    
    
    $
    19,547
    
    
    $
    81,722
    
    
    
    13.1License
agreements
    
    
    31,688
    
    
    
    12,436
    
    
    
    19,252
    
    
    
    31,231
    
    
    
    10,661
    
    
    
    20,570
    
    
    
    10.4Non-compete
agreements and
trademarks
    
    
    35,921
    
    
    
    18,262
    
    
    
    17,659
    
    
    
    33,421
    
    
    
    15,662
    
    
    
    17,759
    
    
    
    9.2Customer lists
and contracts
    
    
    34,603
    
    
    
    12,179
    
    
    
    22,424
    
    
    
    29,403
    
    
    
    8,314
    
    
    
    21,089
    
    
    
    8.2$
    213,626
    
    
    $
    71,044
    
    
    $
    142,582
    
    
    $
    195,324
    
    
    $
    54,184
    
    
    $
    141,140
    
    
    
    11.5
  7




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8. Income Taxes
     Earliest OpenJurisdiction
    
    Tax PeriodCanada
    
    
    2000Italy
    
    
    2000Norway
    
    
    1997Russia
    
    
    2004United Kingdom
    
    
    1999United States
    
    
    1999
 9. Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    153,053
    
    
    $
    118,833
    
    
    $
    313,211
    
    
    $
    226,049Currency translation adjustments
    
    
    13,045
    
    
    
    11,067
    
    
    
    17,618
    
    
    
    11,610Changes in unrealized fair value of
derivatives, net
    
    
    (114
    )
    
    
    1,052
    
    
    
    149
    
    
    
    1,641Comprehensive income
    
    $
    165,984
    
    
    $
    130,952
    
    
    $
    330,978
    
    
    $
    239,300
  June 30,
    
    
    December 31,2007
    
    
    2006Currency translation adjustments
    
    $
    43,173
    
    
    $
    25,555Unrealized fair value of derivatives
    
    
    398
    
    
    
    249Pension liability adjustments
    
    
    (2,577
    )
    
    
    (2,577
    )Accumulated other comprehensive income
    
    $
    40,994
    
    
    $
    23,227
 8




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##### Table of Contents



10. Employee Benefit Plans
  11. Long-Term Incentive Compensation
  Restricted Stock
  Time-based Awards
    
    
    Performance-based Awards
    
    
    TotalNo. of
    
    
    Fair
    
    
    No. of
    
    
    Fair
    
    
    RestrictedUnits
    
    
    Value(a)
    
    
    Units
    
    
    Value(a)
    
    
    Stock UnitsOutstanding at December 31, 2006
    
    
    524,552
    
    
    $
    40.84
    
    
    
    1,565,649
    
    
    $
    39.64
    
    
    
    2,090,201Granted
    
    
    21,700
    
    
    
    42.78
    
    
    
    
    
    
    
    
    
    
    
    21,700Forfeited
    
    
    (4,477
    )
    
    
    39.11
    
    
    
    (14,904
    )
    
    
    35.50
    
    
    
    (19,381
    )Vested
    
    
    (500
    )
    
    
    27.73
    
    
    
    (301,724
    )
    
    
    38.74
    
    
    
    (302,224
    )Outstanding at June 30, 2007
    
    
    541,275
    
    
    $
    40.94
    
    
    
    1,249,021
    
    
    $
    39.90
    
    
    
    1,790,296
 
 (a)
    
    Reflects the weighted average grant-date fair value.  tock Options
  Weighted
    
    Weighted Average
    
    AggregateShares
    
    Average
    
    Remaining
    
    Intrinsic ValueUnder Option
    
    Exercise Price
    
    Contractual Life
    
    (in thousands)Outstanding at December 31, 2006
    
    
    3,351,381
    
    
    $
    18.78Granted
    
    
    
    
    
    
    Forfeited
    
    
    (43,344
    )
    
    
    21.39Exercised
    
    
    (978,894
    )
    
    
    16.82Outstanding at June 30, 2007
    
    
    2,329,143
    
    
    
    19.55
    
    
    
    6.0
    
    
    $
    91,037Exercisable at June 30, 2007
    
    
    1,610,543
    
    
    $
    18.12
    
    
    
    5.6
    
    
    $
    65,265
 Share-based Compensation Expense
  9




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12. Industry Segments
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Oilfield
    
    $
    1,614,915
    
    
    $
    1,277,104
    
    
    $
    3,176,599
    
    
    $
    2,488,712Distribution
    
    
    499,458
    
    
    
    461,159
    
    
    
    1,045,498
    
    
    
    931,672$
    2,114,373
    
    
    $
    1,738,263
    
    
    $
    4,222,097
    
    
    $
    3,420,384Revenues by Area:United States
    
    $
    987,046
    
    
    $
    815,090
    
    
    $
    1,948,550
    
    
    $
    1,558,401Canada
    
    
    138,703
    
    
    
    178,164
    
    
    
    375,842
    
    
    
    447,051North America
    
    
    1,125,749
    
    
    
    993,254
    
    
    
    2,324,392
    
    
    
    2,005,452Latin America
    
    
    173,213
    
    
    
    134,671
    
    
    
    321,551
    
    
    
    259,168Europe/Africa
    
    
    512,335
    
    
    
    384,467
    
    
    
    991,013
    
    
    
    728,838Middle East/Asia
    
    
    303,076
    
    
    
    225,871
    
    
    
    585,141
    
    
    
    426,926Non-North America
    
    
    988,624
    
    
    
    745,009
    
    
    
    1,897,705
    
    
    
    1,414,932$
    2,114,373
    
    
    $
    1,738,263
    
    
    $
    4,222,097
    
    
    $
    3,420,384Operating Income:Oilfield
    
    $
    322,940
    
    
    $
    231,948
    
    
    $
    633,953
    
    
    $
    451,743Distribution
    
    
    20,031
    
    
    
    22,206
    
    
    
    49,266
    
    
    
    48,232General corporate
    
    
    (10,522
    )
    
    
    (8,694
    )
    
    
    (19,642
    )
    
    
    (17,397
    )$
    332,449
    
    
    $
    245,460
    
    
    $
    663,577
    
    
    $
    482,578
 13. Commitments and Contingencies
 Standby Letters of Credit
  Litigation
 Rose Dove Egle v. John M. Egle, et al.
  Rose Dove Egle v. John M. Egle, et
al.
 10




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##### Table of Contents



Other
  Environmental
   11




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
  Company Products and Operations
    Business Outlook
   12




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##### Table of Contents



Forward-Looking Statements
  13




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##### Table of Contents



Results of Operations
 Segment Discussion
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Financial Data:(dollars in thousands)Revenues:M-I SWACO
    
    $
    1,086,524
    
    
    
    51
    
    
    $
    849,134
    
    
    
    49
    
    
    $
    2,121,608
    
    
    
    50
    
    
    $
    1,651,684
    
    
    
    48Smith Technologies(1)
    
    
    248,294
    
    
    
    12
    
    
    
    214,317
    
    
    
    12
    
    
    
    492,385
    
    
    
    12
    
    
    
    414,729
    
    
    
    12Smith Services(1)
    
    
    280,097
    
    
    
    13
    
    
    
    213,653
    
    
    
    12
    
    
    
    562,606
    
    
    
    13
    
    
    
    422,299
    
    
    
    13Oilfield
    
    
    1,614,915
    
    
    
    76
    
    
    
    1,277,104
    
    
    
    73
    
    
    
    3,176,599
    
    
    
    75
    
    
    
    2,488,712
    
    
    
    73Distribution
    
    
    499,458
    
    
    
    24
    
    
    
    461,159
    
    
    
    27
    
    
    
    1,045,498
    
    
    
    25
    
    
    
    931,672
    
    
    
    27Total
    
    $
    2,114,373
    
    
    
    100
    
    
    $
    1,738,263
    
    
    
    100
    
    
    $
    4,222,097
    
    
    
    100
    
    
    $
    3,420,384
    
    
    
    100Geographic Revenues:United States:Oilfield
    
    $
    599,901
    
    
    
    29
    
    
    $
    481,287
    
    
    
    28
    
    
    $
    1,174,826
    
    
    
    28
    
    
    $
    925,509
    
    
    
    27Distribution
    
    
    387,145
    
    
    
    18
    
    
    
    333,803
    
    
    
    19
    
    
    
    773,724
    
    
    
    18
    
    
    
    632,892
    
    
    
    19Total United States
    
    
    987,046
    
    
    
    47
    
    
    
    815,090
    
    
    
    47
    
    
    
    1,948,550
    
    
    
    46
    
    
    
    1,558,401
    
    
    
    46Canada:Oilfield
    
    
    62,032
    
    
    
    3
    
    
    
    75,336
    
    
    
    4
    
    
    
    168,687
    
    
    
    4
    
    
    
    191,669
    
    
    
    6Distribution
    
    
    76,671
    
    
    
    3
    
    
    
    102,828
    
    
    
    6
    
    
    
    207,155
    
    
    
    5
    
    
    
    255,382
    
    
    
    7Total Canada
    
    
    138,703
    
    
    
    6
    
    
    
    178,164
    
    
    
    10
    
    
    
    375,842
    
    
    
    9
    
    
    
    447,051
    
    
    
    13Non-North America:Oilfield
    
    
    952,982
    
    
    
    45
    
    
    
    720,481
    
    
    
    41
    
    
    
    1,833,086
    
    
    
    43
    
    
    
    1,371,534
    
    
    
    40Distribution
    
    
    35,642
    
    
    
    2
    
    
    
    24,528
    
    
    
    2
    
    
    
    64,619
    
    
    
    2
    
    
    
    43,398
    
    
    
    1Total Non-North America
    
    
    988,624
    
    
    
    47
    
    
    
    745,009
    
    
    
    43
    
    
    
    1,897,705
    
    
    
    45
    
    
    
    1,414,932
    
    
    
    41Total Revenue
    
    $
    2,114,373
    
    
    
    100
    
    
    $
    1,738,263
    
    
    
    100
    
    
    $
    4,222,097
    
    
    
    100
    
    
    $
    3,420,384
    
    
    
    100Operating Income:Oilfield
    
    $
    322,940
    
    
    
    20
    
    
    $
    231,948
    
    
    
    18
    
    
    $
    633,953
    
    
    
    20
    
    
    $
    451,743
    
    
    
    18Distribution
    
    
    20,031
    
    
    
    4
    
    
    
    22,206
    
    
    
    5
    
    
    
    49,266
    
    
    
    5
    
    
    
    48,232
    
    
    
    5General Corporate
    
    
    (10,522
    )
    
    
    *
    
    
    
    (8,694
    )
    
    
    *
    
    
    
    (19,642
    )
    
    
    *
    
    
    
    (17,397
    )
    
    
    *Total
    
    $
    332,449
    
    
    
    16
    
    
    $
    245,460
    
    
    
    14
    
    
    $
    663,577
    
    
    
    16
    
    
    $
    482,578
    
    
    
    14Market Data:Average
Worldwide Rig Count: (2)United States
    
    
    1,934
    
    
    
    48
    
    
    
    1,867
    
    
    
    49
    
    
    
    1,917
    
    
    
    46
    
    
    
    1,837
    
    
    
    47Canada
    
    
    126
    
    
    
    3
    
    
    
    258
    
    
    
    7
    
    
    
    305
    
    
    
    7
    
    
    
    417
    
    
    
    11Non-North America
    
    
    1,960
    
    
    
    49
    
    
    
    1,700
    
    
    
    44
    
    
    
    1,924
    
    
    
    47
    
    
    
    1,672
    
    
    
    42Total
    
    
    4,020
    
    
    
    100
    
    
    
    3,825
    
    
    
    100
    
    
    
    4,146
    
    
    
    100
    
    
    
    3,926
    
    
    
    100Onshore
    
    
    3,456
    
    
    
    86
    
    
    
    3,283
    
    
    
    86
    
    
    
    3,595
    
    
    
    87
    
    
    
    3,388
    
    
    
    86Offshore
    
    
    564
    
    
    
    14
    
    
    
    542
    
    
    
    14
    
    
    
    551
    
    
    
    13
    
    
    
    538
    
    
    
    14Total
    
    
    4,020
    
    
    
    100
    
    
    
    3,825
    
    
    
    100
    
    
    
    4,146
    
    
    
    100
    
    
    
    3,926
    
    
    
    100Average Commodity Prices:Crude Oil ($/Bbl) (3)
    
    $
    65.02
    
    
    
    
    
    
    $
    70.72
    
    
    
    
    
    
    $
    61.68
    
    
    
    
    
    
    $
    67.13Natural Gas ($/mcf) (4)
    
    $
    7.65
    
    
    
    
    
    
    $
    6.65
    
    
    
    
    
    
    $
    7.42
    
    
    
    
    
    
    $
    7.24
 
 (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 14




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##### Table of Contents



Oilfield Segment
 Revenues
   hydra-jar â
 15




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##### Table of Contents



Operating Income
  Distribution Segment
 Revenues
  Operating Income
  16




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##### Table of Contents



Consolidated Results
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Revenues
    
    $
    2,114,373
    
    
    
    100
    
    
    $
    1,738,263
    
    
    
    100
    
    
    $
    4,222,097
    
    
    
    100
    
    
    $
    3,420,384
    
    
    
    100Gross profit
    
    
    696,546
    
    
    
    33
    
    
    
    545,013
    
    
    
    31
    
    
    
    1,372,511
    
    
    
    33
    
    
    
    1,071,616
    
    
    
    31Operating expenses
    
    
    364,097
    
    
    
    17
    
    
    
    299,553
    
    
    
    17
    
    
    
    708,934
    
    
    
    17
    
    
    
    589,038
    
    
    
    17Operating income
    
    
    332,449
    
    
    
    16
    
    
    
    245,460
    
    
    
    14
    
    
    
    663,577
    
    
    
    16
    
    
    
    482,578
    
    
    
    14Interest expense
    
    
    17,605
    
    
    
    1
    
    
    
    14,685
    
    
    
    1
    
    
    
    36,139
    
    
    
    1
    
    
    
    27,521
    
    
    
    1Interest income
    
    
    (895
    )
    
    
    
    
    
    
    (696
    )
    
    
    
    
    
    
    (1,659
    )
    
    
    
    
    
    
    (1,293
    )
    
    
    Income before
income taxes and
minority interests
    
    
    315,739
    
    
    
    15
    
    
    
    231,471
    
    
    
    13
    
    
    
    629,097
    
    
    
    15
    
    
    
    456,350
    
    
    
    13Income tax provision
    
    
    100,891
    
    
    
    5
    
    
    
    70,910
    
    
    
    4
    
    
    
    193,990
    
    
    
    5
    
    
    
    143,572
    
    
    
    4Minority interests
    
    
    61,795
    
    
    
    3
    
    
    
    41,728
    
    
    
    2
    
    
    
    121,896
    
    
    
    3
    
    
    
    86,729
    
    
    
    2Net income
    
    $
    153,053
    
    
    
    7
    
    
    $
    118,833
    
    
    
    7
    
    
    $
    313,211
    
    
    
    7
    
    
    $
    226,049
    
    
    
    7
     17




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##### Table of Contents



Liquidity and Capital Resources
 General
       18




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##### Table of Contents



Commitments and Contingencies
 Standby Letters of Credit
  Litigation
 Rose Dove Egle v. John M. Egle, et al.
 Rose Dove Egle v. John M. Egle, et
al.
 Other
  Environmental
   19




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##### Table of Contents



Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 20




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total Number of
    
    Number of SharesTotal Number
    
    Average
    
    Shares Purchased as
    
    that May Yet Beof Shares
    
    Price Paid
    
    Part of Publicly
    
    Purchased UnderPeriod
    
    Purchased
    
    per Share
    
    Announced Program
    
    the ProgramApril 1  April 30
    
    
    206,900
    
    
    $
    49.82
    
    
    
    206,900
    
    
    
    16,707,313May 1  May 31
    
    
    16,900
    
    
    
    51.18
    
    
    
    16,900
    
    
    
    16,690,413June 1  June 30
    
    
    175,000
    
    
    
    57.72
    
    
    
    175,000
    
    
    
    16,515,4132nd Quarter 2007
    
    
    398,800
    
    
    $
    53.35
    
    
    
    398,800
    
    
    
    16,515,413
 Item 3. Defaults upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  For
    
    WithheldElection of Directors:James R. Gibbs
    
    
    179,578,579
    
    
    
    6,606,526John Yearwood
    
    
    183,391,870
    
    
    
    2,793,235
 BrokerFor
    
    Against
    
    Abstain
    
    Non-VotesApproval of the Smith International, Inc.
Second Amended and Restated 1989
Long-Term Incentive Compensation Plan
    
    
    156,476,161
    
    
    
    5,544,008
    
    
    
    1,340,941
    
    
    
    22,823,995Ratification of Deloitte & Touche LLP as
independent registered public accountants
for the Company for 2007
    
    
    184,872,188
    
    
    
    127,511
    
    
    
    1,185,406
    
    
    
    
 21




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##### Table of Contents



Item 5. Other Information
  Item 6. Exhibits
  ExhibitNumber
    
    Description3.1
    
    
    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.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.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.
 22




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##### Table of Contents



SIGNATURES
  SMITH INTERNATIONAL, INC.
RegistrantDate: August 9, 2007
    By:
    /s/ Doug RockDoug RockChairman of the Board, Chief Executive Officer,
President and Chief Operating Officer
(principal executive officer)Date: August 9, 2007
    By:
    /s/ Margaret K. DormanMargaret K. DormanSenior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer) 23




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber
    
    Description3.1
    
    
    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.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.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.
 24