UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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.)
1310 Rankin Road		77073
Houston, Texas		(Zip Code)
(Address of principal executive offices)

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 248,507,612 shares of common stock outstanding, net of treasury shares held, on April 26, 2010.

 

 

INDEX

		Page
		No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS For the Three Months ended March 31, 2010 and 2009			3
CONSOLIDATED CONDENSED BALANCE SHEETS As of March 31, 2010 and December 31, 2009			4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS For the Three Months ended March 31, 2010 and 2009			5
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME For the Three Months ended March 31, 2010 and 2009			6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			18
Item 3. Quantitative and Qualitative Disclosures about Market Risk			28
Item 4. Controls and Procedures			28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 6. Exhibits			35
SIGNATURES			36
EXHIBIT INDEX			37
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SMITH INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
Revenues:
Oilfield operations		$	1,686,021			$	1,841,737
Distribution operations			451,790				569,742
Total revenues			2,137,811				2,411,479
Costs and expenses:
Cost of oilfield revenues			1,161,161				1,229,191
Cost of distribution revenues			385,470				489,986
Selling, general and administrative expenses			466,301				450,624
Total costs and expenses			2,012,932				2,169,801
Operating income			124,879				241,678
Interest expense			37,722				27,524
Interest income			(678	)			(358	)
Income before income taxes			87,835				214,512
Income tax provision			41,239				70,318
Net income			46,596				144,194
Noncontrolling interests in net income of subsidiaries			35,055				47,259
Net income attributable to Smith		$	11,541			$	96,935
Earnings per share:
Basic		$	0.05			$	0.44
Diluted			0.05				0.44
Weighted average shares outstanding:
Basic			248,360				219,201
Diluted			249,761				219,603

The accompanying notes are an integral part of these consolidated condensed financial statements.

SMITH INTERNATIONAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except par value data)
(Unaudited)

		March 31,				December 31,
		2010				2009
Assets
Current Assets:
Cash and cash equivalents		$	547,775			$	988,346
Receivables, net			1,917,994				1,791,498
Inventories, net			1,823,950				1,820,355
Deferred tax assets, net			71,832				65,667
Prepaid expenses and other			144,608				149,370
Total current assets			4,506,159				4,815,236
Property, plant and equipment, net			1,921,950				1,923,465
Goodwill, net			3,074,555				3,068,828
Other intangible assets, net			592,998				614,086
Other assets			307,050				317,800
Total assets		$	10,402,712			$	10,739,415
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term borrowings and current portion of long-term debt		$	486,360			$	358,768
Accounts payable			666,422				589,748
Accrued payroll costs			147,741				146,364
Income taxes payable			89,878				82,260
Other			204,521				233,649
Total current liabilities			1,594,922				1,410,789
Long-term debt			1,316,589				1,814,254
Deferred tax liabilities			506,493				533,537
Other long-term liabilities			151,979				150,905
Commitments and contingencies (Note 15)
Stockholders’ Equity:
Preferred stock, $1 par value; 5,000 shares authorized; no shares issued or outstanding in 2010 or 2009			—				—
Common stock, $1 par value; 500,000 shares authorized; 266,430 shares issued in 2010 (266,125 shares issued in 2009)			266,430				266,125
Additional paid-in capital			2,720,006				2,706,564
Retained earnings			2,907,198				2,925,467
Accumulated other comprehensive income			6,456				24,115
Less — Treasury securities, at cost; 17,954 common shares in 2010 (17,891 common shares in 2009)			(483,709	)			(481,704	)
Smith stockholders’ equity			5,416,381				5,440,567
Noncontrolling interests in subsidiaries			1,416,348				1,389,363
Total stockholders’ equity			6,832,729				6,829,930
Total liabilities and stockholders’ equity		$	10,402,712			$	10,739,415

The accompanying notes are an integral part of these consolidated condensed financial statements.

SMITH INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
Cash flows from operating activities:
Net income		$	46,596			$	144,194
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			94,084				91,095
LIFO inventory reserves			(4,669	)			(7,622	)
Share-based compensation expense			12,147				12,354
Deferred income tax provision			(16,808	)			13,779
Provision for losses on receivables			2,008				5,020
Foreign currency transaction (gain) loss			24,289				(9,514	)
Gain on disposal of property, plant and equipment			(7,651	)			(11,653	)
Equity earnings, net of dividends received			(5,355	)			(2,976	)
Changes in operating assets and liabilities:
Receivables			(142,019	)			155,004
Inventories			(3,815	)			78,109
Accounts payable			78,460				(206,066	)
Other current assets and liabilities			(28,853	)			(53,614	)
Other non-current assets and liabilities			4,575				(10,353	)
Net cash provided by operating activities			52,989				197,757
Cash flows from investing activities:
Acquisition-related payments, net of cash acquired			(8,798	)			(7,236	)
Purchases of property, plant and equipment			(96,180	)			(97,101	)
Proceeds from disposal of property, plant and equipment			13,338				22,397
Proceeds from sale of operations			8,400				65,019
Net cash used in investing activities			(83,240	)			(16,921	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt			—				1,000,000
Principal payments of long-term debt			(354,270	)			(63,981	)
Principal payment of short-term bridge loan			—				(1,000,000	)
Net change in short-term borrowings			(15,803	)			(423	)
Debt issuance costs			—				(8,099	)
Settlement of interest rate derivative contract			—				(33,383	)
Payment of common stock dividends			(29,786	)			(26,290	)
Distributions to noncontrolling joint venture partner			—				(4,000	)
Other financing activities			(578	)			(3,345	)
Net cash used in financing activities			(400,437	)			(139,521	)
Effect of exchange rate changes on cash			(9,883	)			(2,314	)
Increase (decrease) in cash and cash equivalents			(440,571	)			39,001
Cash and cash equivalents at beginning of period			988,346				162,508
Cash and cash equivalents at end of period		$	547,775			$	201,509
Supplemental disclosures of cash flow information:
Cash paid for interest		$	59,873			$	27,554
Cash paid for income taxes			30,082				57,138

The accompanying notes are an integral part of these consolidated condensed financial statements.

SMITH INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2010 and 2009
(In thousands)

														Accumulated
						Additional								Other								Smith				Noncontrolling				Total
		Common				Paid-in				Retained				Comprehensive				Treasury				Stockholders’				Interests in				Stockholders’
		Stock				Capital				Earnings				Income				Securities				Equity				Subsidiaries				Equity
Balance, December 31, 2008		$	236,726			$	1,975,102			$	2,885,792			$	(73,833	)		$	(474,448	)		$	4,549,339			$	1,310,970			$	5,860,309
Net income			—				—				96,935				—				—				96,935				47,259				144,194
Changes in fair value of derivatives, net of tax			—				—				—				38,966				—				38,966				—				38,966
Currency translation adjustments and other			—				—				—				(9,542	)			—				(9,542	)			(4,186	)			(13,728	)
Comprehensive income			—				—				96,935				29,424				—				126,359				43,073				169,432
Common stock dividends declared			—				—				(26,372	)			—				—				(26,372	)			—				(26,372	)
Distribution to noncontrolling joint venture partner			—				—				—				—				—				—				(4,000	)			(4,000	)
Long-term incentive compensation activity			193				9,799				—				—				(983	)			9,009				—				9,009
Balance, March 31, 2009		$	236,919			$	1,984,901			$	2,956,355			$	(44,409	)		$	(475,431	)		$	4,658,335			$	1,350,043			$	6,008,378

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2010 and 2009
(In thousands)

														Accumulated
						Additional								Other								Smith				Noncontrolling				Total
		Common				Paid-in				Retained				Comprehensive				Treasury				Stockholders'				Interests in				Stockholders'
		Stock				Capital				Earnings				Income				Securities				Equity				Subsidiaries				Equity
Balance, December 31, 2009		$	266,125			$	2,706,564			$	2,925,467			$	24,115			$	(481,704	)		$	5,440,567			$	1,389,363			$	6,829,930
Net income			—				—				11,541				—				—				11,541				35,055				46,596
Changes in fair value of derivatives, net of tax			—				—				—				(473	)			—				(473	)			—				(473	)
Currency translation adjustments and other			—				—				—				(17,186	)			—				(17,186	)			(8,070	)			(25,256	)
Comprehensive income			—				—				11,541				(17,659	)			—				(6,118	)			26,985				20,867
Common stock dividends declared			—				—				(29,810	)			—				—				(29,810	)			—				(29,810	)
Long-term incentive compensation activity			305				13,442				—				—				(2,005	)			11,742				—				11,742
Balance, March 31, 2010		$	266,430			$	2,720,006			$	2,907,198			$	6,456			$	(483,709	)		$	5,416,381			$	1,416,348			$	6,832,729

The accompanying notes are an integral part of these consolidated condensed financial statements.

SMITH INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(All dollar amounts are expressed in thousands, unless otherwise noted)
(Unaudited)

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of Smith International, Inc. and subsidiaries (“Smith” or the “Company”) were prepared in accordance with U.S. generally accepted accounting principles and applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information. These interim financial statements do not include all information or footnote disclosures required by generally accepted accounting principles for complete financial statements and, therefore, should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s 2009 Annual Report on Form 10-K and other current filings with the Commission. All adjustments that are, in the opinion of management, of a normal and recurring nature and are necessary for a fair presentation of the interim financial statements have been included.

Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities and the reported amounts of revenues and expenses. Management believes the most significant estimates and assumptions are associated with the valuation of accounts receivables, inventories, goodwill, indefinite-lived intangibles and deferred taxes as well as the determination of liabilities related to self-insurance programs. If the underlying estimates and assumptions, upon which the financial statements are based, change in future periods, actual amounts may differ from those included in the accompanying consolidated condensed financial statements.

Management believes the consolidated condensed financial statements present fairly the financial position, results of operations and cash flows of the Company as of the dates indicated. The results of operations for the interim period presented may not be indicative of results which may be reported on a fiscal year basis.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”). On January 1, 2010, the Company adopted a new accounting standard, which amends previous guidance on the consolidation of variable interest entities (“VIE”). The standard modifies how an enterprise determines the primary beneficiary that would consolidate the VIE from a quantitative risks and rewards calculation to a qualitative approach. Such assessment is required to be performed on a continuous basis and is influenced by, among other things, an enterprise’s ability to direct the most significant activities that influence the VIE’s operating performance. The adoption of this accounting standard did not have a material impact on the Company’s consolidated condensed financial statements.

In October 2009, the FASB issued an update to existing guidance with respect to revenue recognition for arrangements with multiple deliverables. This update will allow allocation of consideration received for qualified separate deliverables based on estimated selling prices for both delivered and undelivered items when vendor-specific or third-party evidence is not available. Additionally, disclosure of the nature of multiple element arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required. The Company is currently evaluating this update, which will be adopted for new revenue arrangements entered into or materially modified beginning January 1, 2011.

Management believes the impact of other recently issued standards and updates, which are not yet effective, will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows upon adoption.

2. Schlumberger Limited Merger Agreement

On February 21, 2010, the Company, Schlumberger Limited (“Schlumberger”) and Turnberry Merger Sub, Inc., a wholly-owned subsidiary of Schlumberger, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Turnberry Merger Sub, Inc. will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Schlumberger, and each share of Company common stock will be converted into the right to receive 0.6966 shares of Schlumberger common stock (the “Merger”). Completion of the Merger is subject to (i) approval of the Merger by the stockholders of the Company, (ii) applicable regulatory approvals, including the termination or expiration of the applicable waiting period (and any extensions thereof) under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and European Community merger regulations, and (iii) other customary closing conditions. In early April 2010, the parties received a request for additional information and documentary material, often referred to as a “second request”, from the Antitrust Division of the United States Department of Justice, which extends the waiting period under the Hart-Scott-Rodino Act.

Under the Merger Agreement, the Company agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally refrain from, among other things, acquiring new or selling existing businesses, incurring new indebtedness, repurchasing Company shares, issuing new common stock or equity awards, or entering into new material contracts or commitments outside the normal course of business, without the consent of Schlumberger. During the first quarter of 2010, the Company incurred $15.4 million in expenses associated with the proposed Merger, which expenses are included within selling, general and administrative expenses in the consolidated condensed statements of operations.

3. Devaluation of Venezuelan Bolivar Fuertes

In January 2010, the Venezuelan government announced a devaluation of the Venezuelan Bolivar Fuertes which modified the official fixed rate from 2.15 Venezuelan Bolivar Fuertes per U.S. dollar to a multi-rate system. The Company accounts for its operations in Venezuela using the U.S. dollar as its functional currency. Exchange rates used in translating Venezuelan Bolivar Fuertes denominated transactions, assets and liabilities subsequent to the devaluation date are dependent upon a number of factors, including the nature of contracts and the types of goods and services provided, which range between 2.6 and 4.3 Venezuelan Bolivar Fuertes per U.S. dollar. In connection with the revaluation of its Venezuelan Bolivar Fuertes denominated net asset position, the Company recorded a pre-tax loss of $23.0 million in the first quarter of 2010, which is included within selling, general and administrative expenses.

4. Acquisitions and Dispositions

Acquisitions

From time to time, the Company enters into transactions involving the purchase of a full or partial ownership interest in complementary business operations. No material acquisitions were finalized during the first quarter of 2010 or 2009.

On April 16, 2010, the Company acquired the remaining 65 percent ownership interest in @Balance, B.V. (“@ Balance”) in exchange for cash consideration of $74.0 million. @Balance is a supplier of managed pressure drilling services. Generally accepted accounting principles require that an acquirer remeasure its previously held equity interest in an acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings. The Company expects to recognize a pre-tax gain ranging between $15 million and $25 million in the second quarter of 2010 as a result of remeasuring its previously held equity interest in @Balance.

Dispositions

During the first quarter of 2009, the Company disposed of certain non-core operations acquired in connection with the W-H transaction. The Company received cash proceeds of $65.0 million and is entitled to future consideration in the event financial metrics established under earn-out arrangements are met. The accompanying consolidated condensed financial statements reflect no gain or loss associated with the sale of these operations.

5. Earnings Per Share

Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to the potential dilution of earnings that could have occurred if additional shares were issued for stock option and restricted stock awards under the treasury stock method. For each of the periods presented, an immaterial number of outstanding stock-based awards were excluded from the computation of diluted EPS because they were anti-dilutive. The following schedule reconciles the income and shares used in the basic and diluted EPS computations (in thousands, except per share data):

		Three Months Ended
		March 31,
		2010				2009
Net income attributable to Smith		$	11,541			$	96,935
Weighted average number of common shares outstanding			248,360				219,201
Basic EPS		$	0.05			$	0.44
Net income attributable to Smith		$	11,541			$	96,935
Weighted average number of common shares outstanding			248,360				219,201
Dilutive effect of stock options and restricted stock units			1,401				402
			249,761				219,603
Diluted EPS		$	0.05			$	0.44

6. Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the average cost method for the majority of the Company’s inventories; however, certain of the Company’s U.S.-based inventories are valued utilizing the last-in, first-out (“LIFO”) method. Inventory costs, consisting of materials, labor and factory overhead, are as follows:

		March 31,				December 31,
		2010				2009
Raw materials		$	170,757			$	173,953
Work-in-process			166,701				163,489
Finished goods			1,655,558				1,656,648
			1,993,016				1,994,090
Reserves to state certain U.S. inventories (FIFO cost of $807,473 and $840,326 in 2010 and 2009, respectively) on a LIFO basis			(169,066	)			(173,735	)
		$	1,823,950			$	1,820,355

7. Property, Plant and Equipment

Property, plant and equipment consist of the following:

		March 31,				December 31,
		2010				2009
Land and improvements		$	87,847			$	88,154
Buildings			363,163				357,521
Machinery and equipment			1,186,222				1,181,269
Rental tools			1,469,043				1,435,870
			3,106,275				3,062,814
Less — Accumulated depreciation			(1,184,325	)			(1,139,349	)
		$	1,921,950			$	1,923,465

8. Goodwill and Other Intangible Assets

Goodwill

The following table presents goodwill on a segment basis as of the dates indicated as well as changes in the account during the period shown.

						Smith
		M-I SWACO				Oilfield				Distribution				Consolidated
Balance as of December 31, 2009		$	752,821			$	2,264,920			$	51,087			$	3,068,828
Purchase price revisions			6,015				(288	)			—				5,727
Balance as of March 31, 2010		$	758,836			$	2,264,632			$	51,087			$	3,074,555

Other Intangible Assets

The components of other intangible assets are as follows:

		March 31, 2010												December 31, 2009
		Gross												Gross
		Carrying				Accumulated								Carrying				Accumulated
		Amount				Amortization				Net				Amount				Amortization				Net
Patents		$	430,935			$	91,125			$	339,810			$	445,973			$	83,387			$	362,586
Trademarks(a)			207,807				4,744				203,063				205,031				4,390				200,641
License agreements			42,710				22,268				20,442				41,677				20,517				21,160
Non-compete agreements			38,445				29,531				8,914				37,928				28,410				9,518
Customer relationships and contracts			61,913				41,144				20,769				58,438				38,257				20,181
		$	781,810			$	188,812			$	592,998			$	789,047			$	174,961			$	614,086

Intangible amortization expense totaled $13.9 million and $12.9 million for the three months ended March 31, 2010 and 2009, respectively. The weighted average life for other intangible assets subject to amortization, which excludes certain indefinite-lived trademarks, approximates 13 years. Amortization expense on existing intangible assets is expected to approximate $53 million for fiscal year 2010 and is anticipated to range between $32 million and $47 million per year for the 2011 — 2014 fiscal years.

Changes during the first quarter of 2010 to the gross carrying amounts of goodwill and other components of intangible assets primarily relate to revisions of preliminary purchase price allocations for 2009 acquisitions.

9. Debt

The following summarizes the Company’s outstanding debt:

		March 31,				December 31,
		2010				2009
Current:
Short-term borrowings		$	71,464			$	87,267
Current portion of long-term debt			414,896				271,501
Short-term borrowings and current portion of long-term debt		$	486,360			$	358,768
Long-Term:
Notes, net of unamortized discounts		$	1,493,718			$	1,493,634
Revolving credit facilities			—				—
Term loans			237,767				592,121
			1,731,485				2,085,755
Less — Current portion of long-term debt			(414,896	)			(271,501	)
Long-term debt		$	1,316,589			$	1,814,254

During the first quarter of 2010, the Company used a portion of the cash received in the November 2009 equity offering to repay $370.1 million of outstanding borrowings under various loan agreements. Additionally, $220.0 million of senior notes maturing in February 2011 and classified as long-term debt as of December 31, 2009 are classified within the current portion of long-term debt as of March 31, 2010.

In December 2009, the Company entered into a $1.0 billion unsecured revolving credit facility provided by a syndicate of financial institutions, under which M-I SWACO can utilize up to $125 million. The revolving credit agreement allows for the election of interest at a base rate or a Eurodollar rate of LIBOR plus 250 basis points, and requires the payment of a quarterly commitment fee of 37.5 basis points on the unutilized portion of the facility. The credit facility, which expires in March 2013, contains customary covenants, a debt-to-total capitalization limitation and remained undrawn at March 31, 2010. Additionally, the Company has a $375.0 million unsecured revolving credit facility, which expires in July 2010 and was undrawn at March 31, 2010.

Principal payments of long-term debt for the twelve-month periods ending subsequent to March 31, 2011 are as follows:

2011		$	22,652
2012			19,957
2013			—
2014			299,410
Thereafter			974,570
		$	1,316,589

The Company was in compliance with its loan covenants under the various loan indentures, as amended, at March 31, 2010.

10. Derivative Financial Instruments

The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in currency exchange rates and interest rates. In an effort to mitigate these risks, the Company enters into derivative financial instruments, which are accounted for as cash flow or fair value hedges in accordance with the authoritative accounting standard. The Company does not enter into derivative instruments for speculative purposes.

For foreign exchange and interest rate derivative instruments that do not qualify as cash flow hedges, realized and unrealized gains and losses are recognized currently through earnings. Foreign exchange hedge contracts not designated as cash flow hedges with a notional amount of $134.5 million and $114.5 million were outstanding at March 31, 2010 and December 31, 2009, respectively.

For foreign exchange and interest rate derivative instruments that qualify as cash flow hedges, realized and unrealized gains and losses are deferred to accumulated other comprehensive income (“AOCI”) and recognized in the consolidated statements of operations when the hedged item affects earnings. At March 31, 2010, the Company had one outstanding interest rate cash flow hedge contract with a notional amount of $59.9 million and various outstanding foreign exchange cash flow hedge contracts with notional amounts totaling $26.6 million. At December 31, 2009, the Company had one outstanding interest rate cash flow hedge contract with a notional amount of $63.9 million and no outstanding foreign exchange cash flow hedge contracts. Approximately $3.2 million of losses deferred in AOCI related to cash flow foreign exchange and interest rate derivative contracts, or $1.5 million net of taxes and noncontrolling interests, will be reclassified into earnings during the remainder of fiscal 2010.

The Company has recognized $7.0 million of derivative contract losses in the consolidated condensed statements of operations for the three-month period ended March 31, 2010. During the first quarter of 2009, the Company recognized $7.1 million of derivative contract losses and a $2.4 million mark-to-market interest rate derivative loss on a non-qualifying cash flow hedge contract.

The following table provides required information with respect to the classification and loss amounts recognized in income as well as the derivative-related contract losses deferred in AOCI for the three months ended March 31, 2010 and 2009:

Derivatives Designated		Gain (Loss)								Location of		Gain (Loss)								Location of Gain (Loss)		Gain (Loss)
as Cash Flow Hedging		Recognized								Gain (Loss) Reclassified		Reclassified from								Recognized in Income		Recognized in Income
Instruments —		in AOCI								from AOCI to Income		AOCI to Income								(Ineffective)		(Ineffective)
		March 31,										March 31,										March 31,
		2010				2009						2010				2009						2010				2009
Interest rate contracts		$	(357	)		$	(490	)		Interest expense		$	(869	)		$	(642	)		Selling, general and administrative expenses		$	—			$	(76	)
Foreign exchange contracts			(1,131	)			(1,061	)		Cost of oilfield revenues			(51	)			(1,408	)					—				—
Total		$	(1,488	)		$	(1,551	)				$	(920	)		$	(2,050	)				$	—			$	(76	)

				Gain (Loss)
		Location of Gain (Loss)		Recognized in Income
Derivatives Not Designated —		Recognized in Income		March 31,
				2010				2009
Foreign exchange contracts		Selling, general and administrative expenses		$	(6,043	)		$	(4,945	)

The fair value of outstanding foreign exchange derivative instruments is determined using composite pricing from published financial market sources whereas the fair value of the outstanding interest rate derivative instruments is determined by obtaining quoted prices in active markets for similar contracts. Both measurement methodologies are classified as Level Two tier under the applicable accounting standard. The recorded fair value of derivative instruments is as follows:

		Fair Value of Derivatives
		March 31,				December 31,
		2010				2009				Classification
Asset Derivatives
Derivatives Not Designated —
Foreign exchange contracts		$	3,427			$	2,648			Prepaid expenses and other
Liability Derivatives
Derivatives Designated as Hedging Instruments —
Interest rate contracts		$	(4,146	)		$	(4,623	)		Other current liabilities
Foreign exchange contracts			(931	)			—			Other current liabilities
Derivatives Not Designated —
Foreign exchange contracts			(7,074	)			(4,138	)		Other current liabilities
Total		$	(12,151	)		$	(8,761	)

Other Financial Instruments

The fair value of outstanding long-term debt instruments is determined using quoted prices for similar debt instruments, which is classified as a Level Two tier measurement methodology under the applicable accounting standard. At March 31, 2010, the fair value of long-term debt instruments approximated $2.05 billion and the recorded value totaled $1.73 billion. The fair and recorded values of long-term debt instruments totaled $2.33 billion and $2.09 billion, respectively, at December 31, 2009.

The fair value of the remaining financial instruments, including cash and cash equivalents, receivables, payables and short-term borrowings, approximates the carrying value due to the nature of these instruments.

11. Accumulated Other Comprehensive Income

Accumulated other comprehensive income in the accompanying consolidated condensed balance sheets consist of the following:

		March 31,				December 31,
		2010				2009
Currency translation adjustments		$	14,042			$	31,290
Fair value of derivatives			(2,747	)			(2,274	)
Pension and other postretirement benefits			(4,839	)			(4,901	)
Accumulated other comprehensive income		$	6,456			$	24,115

12. Long-Term Incentive Compensation

As of March 31, 2010, the Company had outstanding restricted stock and stock option awards granted under the Third Amended and Restated 1989 Long-Term Incentive Compensation Plan (the “LTIC Plan”). As of March 31, 2010, approximately 775 thousand shares were authorized for future issuance pursuant to the LTIC Plan.

Restricted Stock

The restricted stock program consists of a combination of performance-based restricted stock units (“performance-based units”) and time-based restricted stock units (“time-based units”). The number of performance-based units issued under the program, which can range from zero to 150 percent of the target units granted, is solely dependent upon financial metrics achieved by the Company in the fiscal year subsequent to the award. Activity under the Company’s restricted stock program for the three-month period ended March 31, 2010 is presented below (in thousands, except per share data):

		Time-Based Awards								Performance-Based Awards								Total
		No. of				Fair				No. of				Fair				Restricted
		Units				Value(a)				Units(b)				Value(a)				Stock Units
Outstanding at December 31, 2009			2,366			$	29.33				1,795			$	27.52				4,161
Granted			24				30.75				—				—				24
Forfeited			(20	)			27.61				(3	)			43.18				(23	)
Vested			—				—				(226	)			22.82				(226	)
Outstanding at March 31, 2010			2,370				29.36				1,566				28.17				3,936

Restrictions on approximately 1.2 million restricted stock units outstanding at March 31, 2010 are expected to lapse and issue during the 2010 fiscal year.

Stock Options

Activity under the Company’s stock option program for the three-month period ended March 31, 2010 is presented below (in thousands, except per share data):

		Shares				Weighted				Weighted Average
		Under				Average				Remaining				Aggregate
		Option				Exercise Price				Contractual Life				Intrinsic Value
Outstanding at December 31, 2009			1,057			$	20.01
Exercised			(76	)			18.27
Outstanding and exercisable at March 31, 2010			981				20.19				3.3			$	22,205

Share-based Compensation Expense

Share-based compensation expense, consisting of restricted stock and stock option awards, was $12.1 million and $12.4 million for the three-month periods ended March 31, 2010 and 2009, respectively.

Assuming achievement of target-level financial metrics for performance-based awards granted in December 2009, unrecognized share-based compensation expense totaled $97.4 million for awards outstanding as of March 31, 2010. After adjusting for taxes and noncontrolling interests, approximately $62.3 million of additional share-based compensation is expected to be recognized over a weighted average period of 2.4 years.

13. Income Taxes

The effective tax rate for the March 2010 quarter was 47.0 percent as compared to 32.8 percent for the prior-year period. The Company’s current quarter results include $23.0 million of losses related to devaluation of the Venezuelan local currency denominated net asset position and certain business combination transaction-related expenses for which no tax benefit was recognized. On a combined basis, the effect of these items accounted for the year-over-year increase in the effective tax rate. The consolidated tax provision assumes completion of the proposed Merger as well as other business combination transactions. If these transactions do not close, an additional tax benefit would be recorded.

14. Industry Segments and International Operations

The Company is a global provider of products and services used during the drilling, completion and production phases of oil and natural gas development activities. Our business is segregated into three operating segments, M-I SWACO, Smith Oilfield and Distribution, which is the basis upon which we report our results.

The M-I SWACO segment consists of a majority-owned drilling fluid and environmental services joint venture operation. The Smith Oilfield segment is comprised of our wholly-owned drilling and completion services operations, which includes drill bits, directional drilling services and downhole tools. The Distribution segment consists of the Wilson distribution operations and a majority-owned interest in CE Franklin Ltd., a publicly-traded Canadian distribution company. Finally, general corporate primarily reflects expenses related to corporate personnel, administrative support functions and long-term incentive compensation programs.

The following table presents consolidated revenues by region:

		Three Months Ended March 31,
		2010				2009
United States		$	838,432			$	1,089,540
Canada			227,713				192,284
North America			1,066,145				1,281,824
Latin America			270,809				276,107
Europe/Africa			541,454				539,815
Middle East/Asia			259,403				313,733
Non-North America			1,071,666				1,129,655
		$	2,137,811			$	2,411,479

The following table presents financial information for each reportable segment:

		Three Months Ended March 31,
		2010				2009
Revenues:
M-I SWACO		$	1,111,190			$	1,159,337
Smith Oilfield			574,831				682,400
Distribution			451,790				569,742
		$	2,137,811			$	2,411,479
Operating Income:
M-I SWACO		$	120,404			$	147,508
Smith Oilfield			56,548				105,765
Distribution			4,702				15,521
General corporate			(56,775	)			(27,116	)
		$	124,879			$	241,678

The following tables summarize charges, included within selling, general and administrative expenses, on a reportable segment basis:

     For the three-months ended March 31, 2010:

						Tax (Provision)				Noncontrolling
		Pre-Tax Cost				Benefit				Interest				Net
Venezuelan currency devaluation:
M-I SWACO		$	11,646			$	(3,166	)		$	5,925			$	8,887
General corporate			11,330				508				—				10,822
			22,976				(2,658	)			5,925				19,709
Business combination transaction-related costs:
M-I SWACO			1,163				—				465				698
General corporate			15,392				792				—				14,600
			16,555				792				465				15,298
		$	39,531			$	(1,866	)		$	6,390			$	35,007

Charges incurred in the March 2010 quarter include a $23.0 million charge associated with the Venezuelan government’s devaluation of the Venezuelan Bolivar Fuertes, resulting in a revaluation of the Company’s Venezuelan Bolivar Fuertes denominated net asset position. The quarter also includes $16.6 million in transaction-related charges, primarily attributable to expenses associated with the proposed Merger.

     For the three-months ended March 31, 2009:

						Tax (Provision)				Noncontrolling
		Pre-Tax Cost				Benefit				Interest				Net
Employee severance and other costs:
M-I SWACO		$	19,301			$	4,750			$	7,023			$	7,528
Smith Oilfield			12,359				4,325				—				8,034
Distribution			651				228				—				423
			32,311				9,303				7,023				15,985
Derivative contract-related loss:
General corporate			2,481				869				—				1,612
		$	34,792			$	10,172			$	7,023			$	17,597

Charges incurred during the first quarter of 2009 are attributable to severance-related expenses of $31.0 million associated with a reduction in North American personnel levels and $1.3 million in facility closure costs. During the quarter, the Company also recognized a $2.5 million loss on an interest rate derivative contract.

15. Commitments and Contingencies

Litigation

Subsequent to the announcement of the proposed Merger, five putative class action lawsuits were commenced on behalf of stockholders of the Company against the Company and its directors and in certain cases against Schlumberger and one of its affiliates, challenging the proposed transaction. Four of the lawsuits were filed in the District Court of Harris County, Texas, which have been consolidated into a single action in the 164^th District Court of Harris County, Texas (the “Texas Action”), and one lawsuit is pending in the Delaware Court of Chancery (the “Delaware Action,” and collectively with the Texas Action, the “Actions”). The plaintiff in the Texas Action has filed a First Amended Petition. The Actions variously allege that the Company’s directors breached their fiduciary duties by, among other things, causing Smith to enter into the Merger Agreement at an allegedly inadequate and unfair price and agreeing to transaction terms that improperly inhibit alternative transactions. The Texas Action separately alleges that the Company aided and abetted the directors’ breaches of fiduciary duties, and both Actions allege that Schlumberger aided and abetted the directors’ breaches of fiduciary duties. The complaints seek, among other things, an injunction barring defendants from consummating the proposed transaction, declaratory relief and attorneys’ fees. The parties in the Texas Action and Delaware Action have agreed to an expedited discovery schedule and to the coordination of pleadings and discovery in advance of any preliminary injunction hearing, which will be heard only in the Texas Action. On April 19, 2010, the court in the Delaware Action approved the parties’ agreement concerning the coordination of the Texas and Delaware actions and agreed to otherwise stay the Delaware proceedings through any preliminary injunction hearing in Texas. The Company believes that the lawsuits are without merit and intends to defend these lawsuits vigorously.

The Company is also a defendant in various other legal proceedings arising in the ordinary course of business. In the opinion of management, these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

M-I SWACO Noncontrolling Interest

If the proposed Merger is not consummated, either the Company or its M-I SWACO joint venture partner, Schlumberger, can offer to sell to the other party its entire ownership interest in the joint venture in exchange for a cash purchase price specified by the offering partner. If the initiating partner’s offer to sell is not accepted, such party is obligated to purchase the other party’s interest at the same valuation per interest. If the Company agrees to purchase Schlumberger’s joint venture interest, whether pursuant to these provisions or otherwise, Smith would need to fund the transaction. The Company’s funding could include issuing equity, resulting in dilution to existing stockholders, obtaining additional debt, which may require waivers of applicable debt covenants, or obtaining other financing, as well as using available cash to fund the purchase. Should the Company instead not purchase Schlumberger’s interest, the Company would no longer have an interest in the joint venture.

Standby Letters of Credit

In the normal course of business with customers, vendors and others, the Company is contingently liable for performance under standby letters of credit and bid, performance and surety bonds. Certain of these outstanding instruments guarantee payment to insurance companies with respect to certain liability coverages of the Company’s insurance captive. Excluding the impact of these instruments, for which $19.1 million of related liabilities are reflected in the accompanying consolidated condensed balance sheet, the Company was contingently liable for approximately $252 million of standby letters of credit and bid, performance and surety bonds at March 31, 2010. Management does not expect any material amounts to be drawn on these instruments.

Insurance

The Company maintains insurance coverage for various aspects of its business and operations. The Company has elected to retain a portion of losses that occur through the use of deductibles and retentions under its insurance programs. Amounts in excess of the self-insured retention levels are fully insured to limits believed appropriate for the Company’s operations. Self-insurance accruals are based on claims filed and an estimate for claims incurred but not reported. While management believes that amounts accrued in the accompanying consolidated condensed financial statements are adequate for expected liabilities arising from the Company’s portion of losses, estimates of these liabilities may change as circumstances develop.

Environmental

The Company routinely establishes and reviews the adequacy of reserves for estimated future environmental clean-up costs for properties currently or previously operated by the Company. In the opinion of management, these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is provided to assist readers in understanding the Company’s financial performance during the periods presented and significant trends which may impact the future performance of the Company. This discussion includes forward-looking statements that are subject to risks and uncertainties and should be read in conjunction with the Consolidated Condensed Financial Statements of the Company and the related notes thereto included elsewhere in this Form 10-Q, the Company’s 2009 Annual Report on Form 10-K and other current filings with the Commission.

Recent Developments

Schlumberger Limited Merger Agreement

On February 21, 2010, the Company, Schlumberger Limited (“Schlumberger”) and Turnberry Merger Sub, Inc., a wholly-owned subsidiary of Schlumberger, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Turnberry Merger Sub, Inc. will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Schlumberger, and each share of Company common stock will be converted into the right to receive 0.6966 shares of Schlumberger common stock (the “Merger”). Completion of the Merger is subject to (i) approval of the Merger by the stockholders of the Company, (ii) applicable regulatory approvals, including the termination or expiration of the applicable waiting period (and any extensions thereof) under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and European Community merger regulations, and (iii) other customary closing conditions. In early April 2010, the parties received a request for additional information and documentary material, often referred to as “second request”, from the Antitrust Division of the United States Department of Justice, which extends the waiting period under the Hart-Scott-Rodino Act.

Under the Merger Agreement, the Company agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally refrain from, among other things, acquiring new or selling existing businesses, incurring new indebtedness, repurchasing Company shares, issuing new capital stock or equity awards, or entering into new material contracts or commitments outside the ordinary course of business, without the consent of Schlumberger. During the first quarter of 2010, the Company incurred $15.4 million in expenses associated with the proposed Merger, which expenses are included within selling, general and administrative expenses in the consolidated condensed statements of operations.

Stockholder Litigation

Subsequent to the announcement of the proposed Merger, five putative class action lawsuits were commenced on behalf of stockholders of the Company against the Company and its directors, and in certain cases against Schlumberger and one of its affiliates, challenging the Merger. Four of the lawsuits were filed in the District Court of Harris County, Texas, which have been consolidated into a single action in the 164^th District Court of Harris County, Texas (the “Texas Action”), and one lawsuit is pending in the Delaware Court of Chancery (the “Delaware Action,” and collectively with the Texas Action, the “Actions”). The plaintiff in the Texas Action has filed a First Amended Petition. The Actions variously allege that the Company’s directors breached their fiduciary duties by, among other things, causing Smith to enter into the proposed transaction at an allegedly inadequate and unfair price and agreeing to transaction terms that improperly inhibit alternative transactions. The Texas Action separately alleges that the Company aided and abetted the directors’ breaches of fiduciary duties, and both Actions allege that Schlumberger aided and abetted the directors’ breaches of fiduciary duties. The complaints seek, among other things, an injunction barring defendants from consummating the proposed transaction, declaratory relief and attorneys’ fees. The parties in the Texas Action and Delaware Action have agreed to an expedited discovery schedule and to the coordination of pleadings and discovery in advance of any preliminary injunction hearing, which will be heard only in the Texas Action. On April 19, 2010, the court in the Delaware Action approved the parties’ agreement concerning the coordination of the Texas and Delaware actions and agreed to otherwise stay the Delaware proceedings through any preliminary injunction hearing in Texas. The Company believes that the lawsuits are without merit and intends to defend these lawsuits vigorously.

Where to Find Additional Information

Additional information about Schlumberger is included in documents that it has filed with the Securities and Exchange Commission (“SEC”). Additional information concerning the Merger is contained in Item 1A, Risk Factors, and in the proxy statement/prospectus and registration statement filed with the SEC on April 27, 2010. STOCKHOLDERS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT REGARDING THE PROPOSED TRANSACTION AS IT CONTAINS IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. These materials are available to the stockholders of Smith at no expense to them. Investors and security holders are able to obtain the documents free of charge at the SEC’s website, www.sec.gov. In addition, such materials (and all other documents filed with the SEC) are available free of charge at www.smith.com or www.slb.com. A stockholder may also read and copy any reports, statements and other information filed by Smith or Schlumberger with the SEC at the SEC public reference room at 100 F Street N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at (800) 732-0330 or visit the SEC’s website for further information on its public reference room.

Each company’s directors and executive officers and other persons may be deemed, under SEC rules, to be participants in the solicitation of proxies in connection with the proposed transaction. Information regarding Schlumberger’s directors can be found in its proxy statement filed with the SEC on March 4, 2010 and officers can be found in its 2009 Form 10-K filed with the SEC on February 5, 2010. Information regarding Smith’s directors can be found in the proxy statement/prospectus filed on April 27, 2010 and officers can be found in Smith’s 2009 Form 10-K filed with the SEC on March 1, 2010. Additional information regarding the participants in the proxy solicitation and a description of their direct and indirect interests in the transaction, by security holdings or otherwise, are contained in the proxy statement/prospectus filed on April 27, 2010 and other relevant materials to be filed with the SEC.

Devaluation of Venezuelan Bolivar Fuertes

In January 2010, the Venezuelan government announced a devaluation of the Venezuelan Bolivar Fuertes which modified the official fixed rate from 2.15 Venezuelan Bolivar Fuertes per U.S. dollar to a multi-rate system. The Company accounts for its operations in Venezuela using the U.S. dollar as its functional currency. Exchange rates used in translating Venezuelan Bolivar Fuertes denominated transactions, assets and liabilities subsequent to the devaluation date are dependent upon a number of factors, including the nature of contracts and the types of goods and services provided, which range between 2.6 and 4.3 Venezuelan Bolivar Fuertes per U.S. dollar. In connection with the revaluation of its Venezuelan Bolivar Fuertes denominated net asset position, the Company recorded a pre-tax loss of $23.0 million in the first quarter of 2010, which is included within selling, general and administrative expenses in the consolidated condensed statements of operations.

Company Products and Operations

The Company is a leading global provider of premium products and services used during the drilling, completion and production phases of oil and natural gas exploration and development activities. We provide a comprehensive line of technologically-advanced products and engineering services, including drilling and completion fluid systems, solids-control and separation equipment, waste-management services, three-cone and diamond drill bits, borehole enlargement services, tubulars, directional systems, measurement-while-drilling and logging-while-drilling services, coiled tubing, cased-hole wireline and other complementary downhole tools and services. The Company also offers supply-chain management solutions through an extensive North American branch network providing pipe, valves and fittings as well as mill, safety and other maintenance products.

The Company’s operations are driven principally by the level of exploration and production (“E&P”) spending in major energy-producing regions around the world and the depth and complexity of these projects. Although E&P spending is significantly influenced by the market price of oil and natural gas, it may also be affected by supply and demand fundamentals, finding and development costs, decline and depletion rates, environmental concerns, the financial condition of independent E&P companies, the overall level of global economic growth and activity, and political actions and uncertainties including, but not limited to, increased taxation and royalties. In addition, approximately five percent of the Company’s consolidated revenues relate to the downstream energy sector, including petrochemical plants and refineries, whose spending is largely impacted by the general condition of the U.S. economy.

Capital investment by energy companies is largely divided into two markets, which vary greatly in terms of primary business drivers and associated volatility levels. North American drilling activity is primarily influenced by natural gas fundamentals, with approximately 60 percent of the first quarter 2010 rig count focused on natural gas finding and development activities. Conversely, drilling in areas outside of North America is more dependent on crude oil fundamentals, which influence three-quarters of international drilling activity. Historically, business in markets outside of North America has proved to be less volatile as the high cost E&P programs in these regions are generally undertaken by major oil companies, consortiums and national oil companies as part of a longer-term strategic development plan. Although approximately half of the Company’s consolidated revenues were generated in North America during the first quarter of 2010, Smith’s profitability was influenced by business levels in markets outside of North America. The Distribution segment, which accounts for 21 percent of consolidated revenues and primarily supports a North American customer base, masks the geographic revenue mix of the Company’s oilfield operations. Excluding the impact of the Distribution segment, approximately 62 percent of the Company’s revenues were generated in markets outside of North America during the first quarter of 2010.

Business Outlook

The Company’s current year results will be influenced by worldwide drilling activity and the general state of the global economic environment. On a worldwide basis, drilling activity is currently expected to increase moderately over 2009 levels. The majority of the anticipated increase is expected in the North American market, which is largely dependent on natural gas fundamentals. Markets outside of North America, which focus on oil-directed activities, will be influenced by global energy demand and oil-targeted drilling projects. Near-term activity levels will likely be influenced by the annual spring break-up in Canada, which limits land-based drilling activity in that market during a portion of the second quarter. Seasonal drilling restrictions have resulted in a significant decline in the Canadian rig count from the levels reported for the first quarter of 2010, which will likely contribute to a temporary decline in average worldwide drilling activity for the second quarter. Although additional deterioration in the global economic environment could lead to lower exploration and production spending, further reducing demand for the Company’s products and services and adversely impacting future results, the long-term outlook for the energy sector is favorable due to supply and demand fundamentals.

The Merger Agreement with Schlumberger contains a number of restrictions on the Company’s operations during the pendency of the Merger. Smith’s ability to implement its business plan and respond to market conditions will be subject to compliance with these restrictions. Further information on these restrictions can be found in the Merger Agreement and in the proxy statement/prospectus filed with the Securities and Exchange Commission on April 27, 2010.

Forward-Looking Statements

This document contains forward-looking statements within the meaning of the Section 21E of the Securities Exchange Act of 1934, as amended, concerning, among other things, our outlook, financial projections and business strategies, all of which are subject to risks, uncertainties and assumptions. These forward-looking statements are identified by their use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “project,” “should” and similar terms. These statements are based on certain assumptions and analyses that we believe are appropriate under the circumstances. Such statements are subject to, among other things, satisfaction of the closing conditions to the Merger, the risk that the contemplated Merger does not occur, negative effects from the pendency of the Merger, the ability to successfully integrate the merged businesses and to realize expected synergies, the risk that we will not be able to retain key employees, expenses of the Merger, overall demand for and pricing of the Company’s products and services, general economic and business conditions, the level of oil and natural gas exploration and development activities, global economic growth and activity, political stability of oil-producing countries, finding and development costs of operations, decline and depletion rates for oil and natural gas wells, seasonal weather conditions, industry conditions, and changes in laws or regulations and other risk factors that are discussed beginning on page 29 of this Form 10-Q, in the Company’s Form 10-K for the fiscal year ended December 31, 2009, and other documents filed with the Securities and Exchange Commission, many of which are beyond the control of the Company. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may differ materially from those expected, estimated or projected. Management believes these forward-looking statements are reasonable. However, a stockholder should not place undue reliance on these forward-looking statements, which are based only on our current expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any of them in light of new information, future events or otherwise.

Results of Operations

Segment Discussion

Our business is segregated into three operating segments, M-I SWACO, Smith Oilfield and Distribution, which is the basis upon which we report our results. The M-I SWACO segment consists of a majority-owned drilling fluid and environmental services joint venture operation. The Smith Oilfield segment is comprised of our wholly-owned drilling and completion services operations, which includes drill bits, directional drilling services and downhole tools. The Distribution segment consists of the Wilson distribution operations and a majority-owned interest in CE Franklin, Ltd., a publicly-traded Canadian distribution company. Finally, general corporate primarily reflects expenses related to corporate personnel, administrative support functions and long-term incentive compensation programs.

		Three Months Ended March 31,
		2010								2009
		Amount				%				Amount				%
Financial Data: (Dollars in thousands)
Revenues:
M-I SWACO		$	1,111,190				52			$	1,159,337				48
Smith Oilfield			574,831				27				682,400				28
Distribution			451,790				21				569,742				24
Total		$	2,137,811				100			$	2,411,479				100
Geographic Revenues:
United States:
M-I SWACO		$	239,959				11			$	259,889				11
Smith Oilfield			284,532				13				397,481				16
Distribution			313,941				15				432,170				18
Total United States			838,432				39				1,089,540				45
Canada:
M-I SWACO			61,470				3				40,926				2
Smith Oilfield			48,733				2				37,938				1
Distribution			117,510				6				113,420				5
Total Canada			227,713				11				192,284				8
Non-North America:
M-I SWACO			809,761				38				858,522				36
Smith Oilfield			241,566				11				246,981				10
Distribution			20,339				1				24,152				1
Total Non-North America			1,071,666				50				1,129,655				47
Total Revenues		$	2,137,811				100			$	2,411,479				100
Operating Income:
M-I SWACO		$	120,404				11			$	147,508				13
Smith Oilfield			56,548				10				105,765				16
Distribution			4,702				1				15,521				3
General corporate			(56,775	)			*				(27,116	)			*
Total		$	124,879				6			$	241,678				10

		Three Months Ended March 31,
		2010								2009
		Amount				%				Amount				%
Market Data:
Average Worldwide Rig Count: (1)
United States			1,489				32				1,347				30
Canada			403				9				293				7
Non-North America			2,750				59				2,809				63
Total			4,642				100				4,449				100
Onshore			4,049				87				3,852				87
Offshore			593				13				597				13
Total			4,642				100				4,449				100
Average Commodity Prices:
Crude Oil ($/Bbl) (2)		$	78.88							$	43.31
Natural Gas ($/mcf) (3)			4.99								4.47