##### 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 September 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
    
    95-3822631(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)16740 Hardy Street
    
    77032Houston, Texas
    
    (Zip Code)(Address of principal executive offices)
 (281) 443-3370
 
 þ o
  þ o o
 o þ




---



##### 



INDEX
 PageNo.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

For the Three Months and Nine Months ended September 30, 2007 and 2006
    
    
    2CONSOLIDATED CONDENSED BALANCE SHEETS

As of September 30, 2007 and December 31, 2006
    
    
    3CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months and Nine Months ended September 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 1-5
    
    
    21Item 6
    
    
    22SIGNATURES
    
    
    23EXHIBIT INDEX
    
    
    24Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 1350




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    2,245,059
    
    
    $
    1,914,184
    
    
    $
    6,467,156
    
    
    $
    5,334,568Costs and expenses:Costs of revenues
    
    
    1,516,153
    
    
    
    1,295,971
    
    
    
    4,365,739
    
    
    
    3,644,739Selling expenses
    
    
    300,084
    
    
    
    253,569
    
    
    
    859,579
    
    
    
    703,018General and administrative expenses
    
    
    78,485
    
    
    
    76,919
    
    
    
    227,924
    
    
    
    216,508Total costs and expenses
    
    
    1,894,722
    
    
    
    1,626,459
    
    
    
    5,453,242
    
    
    
    4,564,265Operating income
    
    
    350,337
    
    
    
    287,725
    
    
    
    1,013,914
    
    
    
    770,303Interest expense
    
    
    17,103
    
    
    
    17,287
    
    
    
    53,242
    
    
    
    44,808Interest income
    
    
    (1,152
    )
    
    
    (830
    )
    
    
    (2,811
    )
    
    
    (2,123
    )Income before income taxes and
minority interests
    
    
    334,386
    
    
    
    271,268
    
    
    
    963,483
    
    
    
    727,618Income tax provision
    
    
    106,579
    
    
    
    88,600
    
    
    
    300,569
    
    
    
    232,172Minority interests
    
    
    60,974
    
    
    
    49,743
    
    
    
    182,870
    
    
    
    136,472Net income
    
    $
    166,833
    
    
    $
    132,925
    
    
    $
    480,044
    
    
    $
    358,974Earnings per share:Basic
    
    $
    0.83
    
    
    $
    0.66
    
    
    $
    2.40
    
    
    $
    1.79Diluted
    
    $
    0.83
    
    
    $
    0.66
    
    
    $
    2.38
    
    
    $
    1.78Weighted average shares outstanding:Basic
    
    
    200,070
    
    
    
    200,009
    
    
    
    200,184
    
    
    
    200,484Diluted
    
    
    202,078
    
    
    
    201,811
    
    
    
    201,891
    
    
    
    202,158
  2




---



##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
   September 30,
    
    
    December 31,2007
    
    
    2006AssetsCurrent Assets:Cash and cash equivalents
    
    $
    98,716
    
    
    $
    80,379Receivables, net
    
    
    1,770,691
    
    
    
    1,592,230Inventories, net
    
    
    1,621,179
    
    
    
    1,457,371Deferred tax assets, net
    
    
    53,139
    
    
    
    51,070Prepaid expenses and other
    
    
    120,323
    
    
    
    89,977Total current assets
    
    
    3,664,048
    
    
    
    3,271,027Property, Plant and Equipment, net
    
    
    1,037,896
    
    
    
    887,044Goodwill, net
    
    
    888,754
    
    
    
    867,647Other Intangible Assets, net
    
    
    137,144
    
    
    
    141,140Other Assets
    
    
    194,506
    
    
    
    168,617Total Assets
    
    $
    5,922,348
    
    
    $
    5,335,475Liabilities and Stockholders EquityCurrent Liabilities:Short-term borrowings and current portion of long-term debt
    
    $
    153,701
    
    
    $
    287,704Accounts payable
    
    
    645,142
    
    
    
    654,215Accrued payroll costs
    
    
    131,783
    
    
    
    154,756Income taxes payable
    
    
    102,693
    
    
    
    130,339Other
    
    
    145,886
    
    
    
    152,454Total current liabilities
    
    
    1,179,205
    
    
    
    1,379,468Long-Term Debt
    
    
    931,559
    
    
    
    800,928Deferred Tax Liabilities
    
    
    157,348
    
    
    
    143,124Other Long-Term Liabilities
    
    
    145,083
    
    
    
    102,904Minority Interests
    
    
    1,073,116
    
    
    
    922,114Commitments and Contingencies (Note 14)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;
216,906 shares issued in 2007 (214,947 shares issued in 2006)
    
    
    216,906
    
    
    
    214,947Additional paid-in capital
    
    
    515,256
    
    
    
    442,155Retained earnings
    
    
    2,072,285
    
    
    
    1,653,480Accumulated other comprehensive income
    
    
    60,733
    
    
    
    23,227Less  Treasury securities, at cost; 16,606 common shares
in 2007 (15,031 common shares in 2006)
    
    
    (429,143
    )
    
    
    (346,872
    )Total stockholders equity
    
    
    2,436,037
    
    
    
    1,986,937Total Liabilities and Stockholders Equity
    
    $
    5,922,348
    
    
    $
    5,335,475
  3




---



##### Table of Contents



SMITH INTERNATIONAL, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
   Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    480,044
    
    
    $
    358,974Adjustments to reconcile net income to net cash provided
by operating activities, excluding the net effects of
acquisitions:Minority interests
    
    
    182,870
    
    
    
    136,472Depreciation and amortization
    
    
    141,461
    
    
    
    106,937Share-based compensation expense
    
    
    25,352
    
    
    
    20,173Increase in LIFO inventory reserves
    
    
    22,131
    
    
    
    16,864Deferred income tax provision (benefit)
    
    
    7,536
    
    
    
    (4,380
    )Provision for losses on receivables
    
    
    2,740
    
    
    
    5,443Foreign currency translation losses
    
    
    3,579
    
    
    
    2,992Gain on disposal of property, plant and equipment
    
    
    (17,250
    )
    
    
    (16,060
    )Equity earnings, net of dividends received
    
    
    (10,485
    )
    
    
    (7,310
    )Gain on sale of operations
    
    
    (1,534
    )
    
    
    (5,930
    )Changes in operating assets and liabilities:Receivables
    
    
    (179,390
    )
    
    
    (284,765
    )Inventories
    
    
    (169,290
    )
    
    
    (285,098
    )Accounts payable
    
    
    (17,211
    )
    
    
    101,046Other current assets and liabilities
    
    
    (61,674
    )
    
    
    21,443Other non-current assets and liabilities
    
    
    (20,261
    )
    
    
    (22,318
    )Net cash provided by operating activities
    
    
    388,618
    
    
    
    144,483Cash flows from investing activities:Acquisition-related payments, net of cash acquired
    
    
    (41,073
    )
    
    
    (224,305
    )Purchases of property, plant and equipment
    
    
    (248,530
    )
    
    
    (198,824
    )Proceeds from disposal of property, plant and equipment
    
    
    33,888
    
    
    
    25,649Proceeds from sale of operations
    
    
    16,655
    
    
    
    9,296Net cash used in investing activities
    
    
    (239,060
    )
    
    
    (388,184
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    233,175
    
    
    
    646,471Principal payments of long-term debt
    
    
    (272,676
    )
    
    
    (250,443
    )Net change in short-term borrowings
    
    
    36,129
    
    
    
    (8,243
    )Purchases of common stock under Repurchase Program
    
    
    (78,847
    )
    
    
    (91,119
    )Net proceeds related to long-term incentive awards
    
    
    24,627
    
    
    
    9,984Excess tax benefit from share-based compensation
    
    
    20,317
    
    
    
    4,545Payment of common stock dividends
    
    
    (56,031
    )
    
    
    (44,114
    )Debt issuance costs
    
    
    
    
    
    
    (4,744
    )Distributions to minority partner
    
    
    (40,097
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (133,403
    )
    
    
    262,337Effect of exchange rate changes on cash
    
    
    2,182
    
    
    
    1,161Increase in cash and cash equivalents
    
    
    18,337
    
    
    
    19,797Cash and cash equivalents at beginning of period
    
    
    80,379
    
    
    
    62,543Cash and cash equivalents at end of period
    
    $
    98,716
    
    
    $
    82,340Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    54,482
    
    
    $
    45,888Cash paid for income taxes
    
    
    271,883
    
    
    
    206,199
  4




---



##### 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




---



##### Table of Contents



4. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic EPS:Net income
    
    $
    166,833
    
    
    $
    132,925
    
    
    $
    480,044
    
    
    $
    358,974Weighted average number of common shares outstanding
    
    
    200,070
    
    
    
    200,009
    
    
    
    200,184
    
    
    
    200,484Basic EPS
    
    $
    0.83
    
    
    $
    0.66
    
    
    $
    2.40
    
    
    $
    1.79Diluted EPS:Net income
    
    $
    166,833
    
    
    $
    132,925
    
    
    $
    480,044
    
    
    $
    358,974Weighted average number of common shares outstanding
    
    
    200,070
    
    
    
    200,009
    
    
    
    200,184
    
    
    
    200,484Dilutive effect of stock options and restricted stock units
    
    
    2,008
    
    
    
    1,802
    
    
    
    1,707
    
    
    
    1,674202,078
    
    
    
    201,811
    
    
    
    201,891
    
    
    
    202,158Diluted EPS
    
    $
    0.83
    
    
    $
    0.66
    
    
    $
    2.38
    
    
    $
    1.78
 5. Inventories
  September 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    136,049
    
    
    $
    117,812Work-in-process
    
    
    171,627
    
    
    
    147,543Finished goods
    
    
    1,429,177
    
    
    
    1,285,5581,736,853
    
    
    
    1,550,913Reserves to state certain U.S.
inventories (FIFO cost of $601,819
and $559,943 in 2007 and 2006,
respectively) on a LIFO basis
    
    
    (115,674
    )
    
    
    (93,542
    )$
    1,621,179
    
    
    $
    1,457,371
  6




---



##### Table of Contents



6. Property, Plant and Equipment
  September 30,
    
    
    December 31,2007
    
    
    2006Land and improvements
    
    $
    60,314
    
    
    $
    55,138Buildings
    
    
    220,751
    
    
    
    181,419Machinery and equipment
    
    
    832,067
    
    
    
    717,761Rental tools
    
    
    688,927
    
    
    
    597,4681,802,059
    
    
    
    1,551,786Less  Accumulated depreciation
    
    
    (764,163
    )
    
    
    (664,742
    )$
    1,037,896
    
    
    $
    887,044
 7. Goodwill and Other Intangible Assets
 Goodwill
  Oilfield
    
    
    Distribution
    
    
    ConsolidatedBalance as of December 31, 2006
    
    $
    826,996
    
    
    $
    40,651
    
    
    $
    867,647Goodwill acquired
    
    
    8,459
    
    
    
    3,820
    
    
    
    12,279Goodwill related to disposed operations
    
    
    (10,197
    )
    
    
    
    
    
    
    (10,197
    )Purchase price and other adjustments
    
    
    18,298
    
    
    
    727
    
    
    
    19,025Balance as of September 30, 2007
    
    $
    843,556
    
    
    $
    45,198
    
    
    $
    888,754
 Other Intangible Assets
  September 30, 2007
    
    
    December 31, 2006
    
    
    WeightedGross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    AverageCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    AmortizationAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    Period (years)Patents
    
    $
    112,096
    
    
    $
    31,667
    
    
    $
    80,429
    
    
    $
    101,269
    
    
    $
    19,547
    
    
    $
    81,722
    
    
    
    13.3License
agreements
    
    
    32,550
    
    
    
    13,351
    
    
    
    19,199
    
    
    
    31,231
    
    
    
    10,661
    
    
    
    20,570
    
    
    
    10.2Non-compete
agreements and
trademarks
    
    
    37,012
    
    
    
    19,668
    
    
    
    17,344
    
    
    
    33,421
    
    
    
    15,662
    
    
    
    17,759
    
    
    
    9.3Customer lists
and contracts
    
    
    34,603
    
    
    
    14,431
    
    
    
    20,172
    
    
    
    29,403
    
    
    
    8,314
    
    
    
    21,089
    
    
    
    8.5$
    216,261
    
    
    $
    79,117
    
    
    $
    137,144
    
    
    $
    195,324
    
    
    $
    54,184
    
    
    $
    141,140
    
    
    
    11.7
  7




---



##### Table of Contents



8. Debt
  September 30, 2007
    
    
    December 31, 2006Current:Short-term borrowings
    
    $
    125,436
    
    
    $
    89,307Current portion of long-term debt
    
    
    28,265
    
    
    
    198,397Short-term borrowings and current portion of long-term debt
    
    $
    153,701
    
    
    $
    287,704Long-Term:Senior Notes, net of unamortized discounts
    
    $
    494,451
    
    
    $
    651,413Bank revolvers payable
    
    
    316,000
    
    
    
    160,500Term loans and other
    
    
    149,373
    
    
    
    187,412959,824
    
    
    
    999,325Less  current portion of long-term debt
    
    
    (28,265
    )
    
    
    (198,397
    )Long-term debt
    
    $
    931,559
    
    
    $
    800,928
   2009
    
    $
    26,9382010
    
    
    342,9092011
    
    
    246,5942012
    
    
    26,892Thereafter
    
    
    288,226$
    931,559
 9. Income Taxes
     Jurisdiction
    
    Earliest Open Tax PeriodCanada
    
    
    2000Italy
    
    
    2001Norway
    
    
    1997Russia
    
    
    2004United Kingdom
    
    
    2001United States
    
    
    1999
 8




---



##### Table of Contents



10. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    166,833
    
    
    $
    132,925
    
    
    $
    480,044
    
    
    $
    358,974Currency translation adjustments
    
    
    19,427
    
    
    
    1,522
    
    
    
    37,045
    
    
    
    13,132Changes in unrealized fair value of
derivatives, net
    
    
    312
    
    
    
    354
    
    
    
    461
    
    
    
    1,995Comprehensive income
    
    $
    186,572
    
    
    $
    134,801
    
    
    $
    517,550
    
    
    $
    374,101
  September 30,
    
    
    December 31,2007
    
    
    2006Currency translation adjustments
    
    $
    62,600
    
    
    $
    25,555Unrealized fair value of derivatives
    
    
    710
    
    
    
    249Pension liability adjustments
    
    
    (2,577
    )
    
    
    (2,577
    )Accumulated other comprehensive income
    
    $
    60,733
    
    
    $
    23,227
 11. Employee Benefit Plans
  12. 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
    
    
    29,200
    
    
    
    45.47
    
    
    
    
    
    
    
    
    
    
    
    29,200Forfeited
    
    
    (14,609
    )
    
    
    40.11
    
    
    
    (23,669
    )
    
    
    36.61
    
    
    
    (38,278
    )Vested
    
    
    (3,412
    )
    
    
    33.68
    
    
    
    (301,948
    )
    
    
    38.74
    
    
    
    (305,360
    )Outstanding at September 30, 2007
    
    
    535,731
    
    
    $
    41.16
    
    
    
    1,240,032
    
    
    $
    39.91
    
    
    
    1,775,763
 
 (a)
    
    Reflects the weighted average grant-date fair value.  9




---



##### Table of Contents



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
    
    
    (54,254
    )
    
    
    21.32Exercised
    
    
    (1,612,044
    )
    
    
    17.39Outstanding at September 30, 2007
    
    
    1,685,083
    
    
    
    20.03
    
    
    
    5.8
    
    
    $
    86,570Exercisable at September 30, 2007
    
    
    973,467
    
    
    $
    18.02
    
    
    
    5.2
    
    
    $
    51,963
 Share-based Compensation Expense
   13. Industry Segments
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Oilfield
    
    $
    1,685,687
    
    
    $
    1,412,934
    
    
    $
    4,862,286
    
    
    $
    3,901,646Distribution
    
    
    559,372
    
    
    
    501,250
    
    
    
    1,604,870
    
    
    
    1,432,922$
    2,245,059
    
    
    $
    1,914,184
    
    
    $
    6,467,156
    
    
    $
    5,334,568Revenues by Area:United States
    
    $
    1,017,936
    
    
    $
    905,002
    
    
    $
    2,966,486
    
    
    $
    2,463,403Canada
    
    
    195,330
    
    
    
    221,953
    
    
    
    571,172
    
    
    
    669,004North America
    
    
    1,213,266
    
    
    
    1,126,955
    
    
    
    3,537,658
    
    
    
    3,132,407Latin America
    
    
    208,193
    
    
    
    139,872
    
    
    
    529,744
    
    
    
    399,040Europe/Africa
    
    
    534,012
    
    
    
    418,845
    
    
    
    1,525,025
    
    
    
    1,147,683Middle East/Asia
    
    
    289,588
    
    
    
    228,512
    
    
    
    874,729
    
    
    
    655,438Non-North America
    
    
    1,031,793
    
    
    
    787,229
    
    
    
    2,929,498
    
    
    
    2,202,161$
    2,245,059
    
    
    $
    1,914,184
    
    
    $
    6,467,156
    
    
    $
    5,334,568Operating Income:Oilfield
    
    $
    336,482
    
    
    $
    270,710
    
    
    $
    970,435
    
    
    $
    722,453Distribution
    
    
    24,533
    
    
    
    25,359
    
    
    
    73,799
    
    
    
    73,591General corporate
    
    
    (10,678
    )
    
    
    (8,344
    )
    
    
    (30,320
    )
    
    
    (25,741
    )$
    350,337
    
    
    $
    287,725
    
    
    $
    1,013,914
    
    
    $
    770,303
 10




---



##### Table of Contents



14. 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
   11




---



##### 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




---



##### Table of Contents



Forward-Looking Statements
  13




---



##### Table of Contents



Results of Operations
 Segment Discussion
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Financial Data:(dollars in thousands)Revenues:M-I SWACO
    
    $
    1,110,542
    
    
    
    49
    
    
    $
    942,191
    
    
    
    49
    
    
    $
    3,232,150
    
    
    
    50
    
    
    $
    2,593,875
    
    
    
    48Smith Technologies(1)
    
    
    259,104
    
    
    
    12
    
    
    
    228,765
    
    
    
    12
    
    
    
    751,489
    
    
    
    12
    
    
    
    643,494
    
    
    
    12Smith Services(1)
    
    
    316,041
    
    
    
    14
    
    
    
    241,978
    
    
    
    13
    
    
    
    878,647
    
    
    
    13
    
    
    
    664,277
    
    
    
    13Oilfield
    
    
    1,685,687
    
    
    
    75
    
    
    
    1,412,934
    
    
    
    74
    
    
    
    4,862,286
    
    
    
    75
    
    
    
    3,901,646
    
    
    
    73Distribution
    
    
    559,372
    
    
    
    25
    
    
    
    501,250
    
    
    
    26
    
    
    
    1,604,870
    
    
    
    25
    
    
    
    1,432,922
    
    
    
    27Total
    
    $
    2,245,059
    
    
    
    100
    
    
    $
    1,914,184
    
    
    
    100
    
    
    $
    6,467,156
    
    
    
    100
    
    
    $
    5,334,568
    
    
    
    100Geographic Revenues:United States:Oilfield
    
    $
    606,254
    
    
    
    27
    
    
    $
    539,995
    
    
    
    28
    
    
    $
    1,781,080
    
    
    
    28
    
    
    $
    1,465,504
    
    
    
    27Distribution
    
    
    411,682
    
    
    
    18
    
    
    
    365,007
    
    
    
    19
    
    
    
    1,185,406
    
    
    
    18
    
    
    
    997,899
    
    
    
    19Total United States
    
    
    1,017,936
    
    
    
    45
    
    
    
    905,002
    
    
    
    47
    
    
    
    2,966,486
    
    
    
    46
    
    
    
    2,463,403
    
    
    
    46Canada:Oilfield
    
    
    83,861
    
    
    
    4
    
    
    
    104,902
    
    
    
    6
    
    
    
    252,548
    
    
    
    4
    
    
    
    296,571
    
    
    
    6Distribution
    
    
    111,469
    
    
    
    5
    
    
    
    117,051
    
    
    
    6
    
    
    
    318,624
    
    
    
    5
    
    
    
    372,433
    
    
    
    7Total Canada
    
    
    195,330
    
    
    
    9
    
    
    
    221,953
    
    
    
    12
    
    
    
    571,172
    
    
    
    9
    
    
    
    669,004
    
    
    
    13Non-North America:Oilfield
    
    
    995,572
    
    
    
    44
    
    
    
    768,037
    
    
    
    40
    
    
    
    2,828,658
    
    
    
    43
    
    
    
    2,139,571
    
    
    
    40Distribution
    
    
    36,221
    
    
    
    2
    
    
    
    19,192
    
    
    
    1
    
    
    
    100,840
    
    
    
    2
    
    
    
    62,590
    
    
    
    1Total Non-North America
    
    
    1,031,793
    
    
    
    46
    
    
    
    787,229
    
    
    
    41
    
    
    
    2,929,498
    
    
    
    45
    
    
    
    2,202,161
    
    
    
    41Total Revenue
    
    $
    2,245,059
    
    
    
    100
    
    
    $
    1,914,184
    
    
    
    100
    
    
    $
    6,467,156
    
    
    
    100
    
    
    $
    5,334,568
    
    
    
    100Operating Income:Oilfield
    
    $
    336,482
    
    
    
    20
    
    
    $
    270,710
    
    
    
    19
    
    
    $
    970,435
    
    
    
    20
    
    
    $
    722,453
    
    
    
    19Distribution
    
    
    24,533
    
    
    
    4
    
    
    
    25,359
    
    
    
    5
    
    
    
    73,799
    
    
    
    5
    
    
    
    73,591
    
    
    
    5General Corporate
    
    
    (10,678
    )
    
    
    *
    
    
    
    (8,344
    )
    
    
    *
    
    
    
    (30,320
    )
    
    
    *
    
    
    
    (25,741
    )
    
    
    *Total
    
    $
    350,337
    
    
    
    16
    
    
    $
    287,725
    
    
    
    15
    
    
    $
    1,013,914
    
    
    
    16
    
    
    $
    770,303
    
    
    
    14Market Data:Average Worldwide
Rig Count:(2)United States
    
    
    1,998
    
    
    
    45
    
    
    
    1,947
    
    
    
    47
    
    
    
    1,944
    
    
    
    46
    
    
    
    1,874
    
    
    
    47Canada
    
    
    313
    
    
    
    7
    
    
    
    437
    
    
    
    10
    
    
    
    307
    
    
    
    7
    
    
    
    424
    
    
    
    10Non-North America
    
    
    2,087
    
    
    
    48
    
    
    
    1,778
    
    
    
    43
    
    
    
    1,979
    
    
    
    47
    
    
    
    1,707
    
    
    
    43Total
    
    
    4,398
    
    
    
    100
    
    
    
    4,162
    
    
    
    100
    
    
    
    4,230
    
    
    
    100
    
    
    
    4,005
    
    
    
    100Onshore
    
    
    3,819
    
    
    
    87
    
    
    
    3,627
    
    
    
    87
    
    
    
    3,669
    
    
    
    87
    
    
    
    3,468
    
    
    
    87Offshore
    
    
    579
    
    
    
    13
    
    
    
    535
    
    
    
    13
    
    
    
    561
    
    
    
    13
    
    
    
    537
    
    
    
    13Total
    
    
    4,398
    
    
    
    100
    
    
    
    4,162
    
    
    
    100
    
    
    
    4,230
    
    
    
    100
    
    
    
    4,005
    
    
    
    100Average Commodity Prices:Crude Oil ($/Bbl) (3)
    
    $
    73.24
    
    
    
    
    
    
    $
    70.60
    
    
    
    
    
    
    $
    66.22
    
    
    
    
    
    
    $
    68.29Natural Gas ($/mcf) (4)
    
    $
    6.56
    
    
    
    
    
    
    $
    6.18
    
    
    
    
    
    
    $
    7.03
    
    
    
    
    
    
    $
    6.88
 
 (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




---



##### Table of Contents



Oilfield Segment
 Revenues
   hydra-jar ®
 Operating Income
  15




---



##### Table of Contents



Distribution Segment
 Revenues
  Operating Income
  16




---



##### Table of Contents



Consolidated Results
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Revenues
    
    $
    2,245,059
    
    
    
    100
    
    
    $
    1,914,184
    
    
    
    100
    
    
    $
    6,467,156
    
    
    
    100
    
    
    $
    5,334,568
    
    
    
    100Gross profit
    
    
    728,906
    
    
    
    33
    
    
    
    618,213
    
    
    
    32
    
    
    
    2,101,417
    
    
    
    33
    
    
    
    1,689,829
    
    
    
    31Operating expenses
    
    
    378,569
    
    
    
    17
    
    
    
    330,488
    
    
    
    17
    
    
    
    1,087,503
    
    
    
    17
    
    
    
    919,526
    
    
    
    17Operating income
    
    
    350,337
    
    
    
    16
    
    
    
    287,725
    
    
    
    15
    
    
    
    1,013,914
    
    
    
    16
    
    
    
    770,303
    
    
    
    14Interest expense
    
    
    17,103
    
    
    
    1
    
    
    
    17,287
    
    
    
    1
    
    
    
    53,242
    
    
    
    1
    
    
    
    44,808
    
    
    
    1Interest income
    
    
    (1,152
    )
    
    
    
    
    
    
    (830
    )
    
    
    
    
    
    
    (2,811
    )
    
    
    
    
    
    
    (2,123
    )
    
    
    Income before
income taxes and
minority interests
    
    
    334,386
    
    
    
    15
    
    
    
    271,268
    
    
    
    14
    
    
    
    963,483
    
    
    
    15
    
    
    
    727,618
    
    
    
    13Income tax provision
    
    
    106,579
    
    
    
    5
    
    
    
    88,600
    
    
    
    5
    
    
    
    300,569
    
    
    
    5
    
    
    
    232,172
    
    
    
    4Minority interests
    
    
    60,974
    
    
    
    3
    
    
    
    49,743
    
    
    
    2
    
    
    
    182,870
    
    
    
    3
    
    
    
    136,472
    
    
    
    2Net income
    
    $
    166,833
    
    
    
    7
    
    
    $
    132,925
    
    
    
    7
    
    
    $
    480,044
    
    
    
    7
    
    
    $
    358,974
    
    
    
    7
     17




---



##### Table of Contents



Liquidity and Capital Resources
 General
       18




---



##### 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




---



##### 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




---



##### 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 ProgramJuly 1  July 31
    
    
    225,000
    
    
    $
    61.34
    
    
    
    225,000
    
    
    
    16,290,413August 1  August 31
    
    
    493,000
    
    
    
    57.15
    
    
    
    493,000
    
    
    
    15,797,413September 1  September 30
    
    
    25,000
    
    
    
    67.02
    
    
    
    25,000
    
    
    
    15,772,4133rd Quarter 2007
    
    
    743,000
    
    
    $
    58.75
    
    
    
    743,000
    
    
    
    15,772,413
 Item 3. Defaults upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  21




---



##### Table of Contents



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.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




---



##### Table of Contents



SIGNATURES
  SMITH INTERNATIONAL, INC.
RegistrantDate: November 9, 2007
    By:
    /s/ Doug RockDoug RockChairman of the Board, Chief Executive Officer,

President and Chief Operating Officer

(principal executive officer)Date: November 9, 2007
    By:
    /s/ Margaret K. DormanMargaret K. DormanSenior Vice President,
Chief Financial Officer and Treasurer

(principal financial and accounting officer) 23




---



##### 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.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