The decrease in U.S. drilling activity is attributable to the lower number of land-based programs, which are generally more sensitive to commodity prices. Customer spending in most international markets, which is primarily driven by oil-directed activities, has not been significantly impacted to date. Although the long-term outlook for the energy sector is favorable due to supply and demand fundamentals, the current state of the world economies could lead to further weakness in exploration and production spending levels - further reducing demand for the Company's products and services and adversely impacting future results.
Results of Operations
Segment Discussion
Our business is segregated into three operating divisions, 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.

                                                         For the Years Ended December 31,
                                      2008                             2007                             2006
                              Amount             %             Amount             %             Amount             %
Financial Data:
(dollars in
thousands)
Revenues:
M-I SWACO                  $  5,183,335            48        $ 4,422,408            50        $ 3,573,395            49
Smith Oilfield                2,848,804            26          2,210,161            26          1,814,343            24
Distribution                  2,738,699            26          2,131,761            24          1,945,821            27

Total                      $ 10,770,838           100        $ 8,764,330           100        $ 7,333,559           100


Geographic Revenues:
United States:
M-I SWACO                  $  1,295,477            12        $ 1,172,448            13        $ 1,079,441            15
Smith Oilfield                1,685,624            16          1,223,833            14            930,556            12
Distribution                  2,099,609            19          1,571,525            18          1,374,732            19

Total United States           5,080,710            47          3,967,806            45          3,384,729            46

Canada:
M-I SWACO                       178,814             2            181,249             2            225,084             3
Smith Oilfield                  159,215             1            157,443             2            179,037             2
Distribution                    513,069             5            432,738             5            487,167             7

Total Canada                    851,098             8            771,430             9            891,288            12

Non-North America:
M-I SWACO                     3,709,044            35          3,068,711            35          2,268,870            31
Smith Oilfield                1,003,965             9            828,885            10            704,750            10
Distribution                    126,021             1            127,498             1             83,922             1

Total Non-North
America                       4,839,030            45          4,025,094            46          3,057,542            42

Total Revenue              $ 10,770,838           100        $ 8,764,330           100        $ 7,333,559           100


Operating Income:
M-I SWACO                  $    839,647            16        $   729,412            17        $   553,304            16
Smith Oilfield                  746,826            26            619,038            28            495,301            27
Distribution                    180,178             7             97,154             5            104,730             5
General corporate              (124,239 )           *            (75,807 )           *            (73,254 )           *

Total                      $  1,642,412            15        $ 1,369,797            16        $ 1,080,081            15

* not meaningful

                                                   For the Years Ended December 31,
                                           2008                  2007                  2006
                                     Amount        %       Amount        %       Amount        %
   Market Data:
   Average Worldwide Rig Count:(1)
   United States                       2,101        45       1,961        46       1,901        47
   Canada                                328         7         311         7         413        10
   Non-North America                   2,258        48       2,009        47       1,747        43

   Total                               4,687       100       4,281       100       4,061       100

   Onshore                             4,096        87       3,719        87       3,523        87
   Offshore                              591        13         562        13         538        13

   Total                               4,687       100       4,281       100       4,061       100


   Average Commodity Prices:
   Crude Oil ($/Bbl)(2)              $ 99.75               $ 72.36               $ 66.25
   Natural Gas ($/mcf)(3)               8.89                  7.12                  6.98

(1) Source: M-I
SWACO.

(2) Average daily West Texas Intermediate ("WTI") spot closing prices, as quoted by NYMEX.

(3) Average daily Henry Hub, Louisiana spot closing prices, as quoted by NYMEX.

M-I SWACO Segment
Revenues
M-I SWACO primarily provides drilling and completion fluid systems and engineering and technical services to the oil and gas industry. Additionally, these operations provide oilfield production chemicals and manufacture and market equipment and services used for solids control, particle separation, pressure control, rig instrumentation and waste management. M-I SWACO is significantly influenced by its exposure to the global offshore market, which constitutes approximately 50 percent of the revenue base, and to exploration and production spending for land-based projects outside of North America, which contributes approximately 30 percent of the division's revenues. Offshore drilling programs, which accounted for 13 percent of the worldwide rig count in 2008, are generally more revenue intensive than land-based projects due to the complex nature of the related drilling environment. For the year ended December 31, 2008, M-I SWACO reported revenues of $5.2 billion, an increase of 17 percent over the amounts reported in the 2007 fiscal year. Approximately two-thirds of the revenue improvement was attributable to growth in Eastern Hemisphere markets. The increase largely reflects a 27 percent increase in onshore business volumes, influenced by increased customer activity in the Former Soviet Union ("FSU"), and higher offshore spending in West Africa and the North Sea markets. Western Hemisphere revenues grew 15 percent above the prior year level due to the impact of new land-based contract awards in Mexico and higher customer spending associated with unconventional U.S. land-based drilling projects. For the year ended December 31, 2007, M-I SWACO reported revenues of $4.4 billion, an increase of 24 percent over the amounts reported in the 2006 fiscal year. Three-quarters of the revenue improvement was attributable to growth in Eastern Hemisphere markets, largely reflecting a 40 percent increase in offshore business volumes related to new contract awards and increased customer activity in the North Sea, Middle East/Asia and West Africa regions. Western Hemisphere revenues grew 13 percent above the prior year level due to the impact of new land-based contract awards in Mexico and higher customer spending in the deepwater markets of the United States and Brazil. Operating Income
Operating income for the M-I SWACO segment was $839.6 million, or 16.2 percent of revenues for the year ended December 31, 2008. Operating profit increased $110.2 million over the prior year; however, as a percentage of revenue margins were 30 basis points below the comparable prior year period. On an absolute dollar basis, the incremental gross profit associated with the growth in global business volumes was partially offset by higher variable-based operating expenses. Several factors contributed to the operating margin performance, including the impact of a shift in business mix towards lower-relative margin, land-based programs which resulted in a lower proportion of premium drilling fluid revenues. For the year ended December 31, 2007, M-I SWACO's operating income totaled $729.4 million, or 16.5 percent of revenues.

Operating margins were 1.0 percentage point above the 2006 fiscal year, reflecting incremental operating margins of 21 percent. The period-to-period improvement was primarily influenced by expansion in the segment's gross profit margins, attributable to increased business volumes and a favorable product shift associated with higher relative growth experienced in the offshore market. On an absolute dollar basis, fiscal 2007 operating income increased $176.1 million over the prior year, largely attributable to the impact of higher revenue volumes on reported gross profit, partially offset by growth in variable-based operating expenses associated with the expanding business base. Smith Oilfield Segment
Revenues
The Smith Oilfield segment provides three-cone and diamond drill bits, tubulars, borehole enlargement tools, drill motors, directional drilling, measurement-while-drilling, and logging-while-drilling services, as well as completions, coiled tubing, cased-hole wireline and drilling related services. Approximately two-thirds of the segment's business base is concentrated in North America, driven in part by the significance of increased unconventional drilling projects in the U.S. land-based market and the complexity of drilling projects - which drives demand for a wider range of product offerings. For the year ended December 31, 2008, Smith Oilfield's revenues totaled $2.8 billion, a 29 percent improvement over the comparable prior year period. The majority of the year-on-year revenue growth related to the addition of the W-H operations in August 2008. Excluding the impact of the acquired operations, Smith Oilfield revenues grew six percent above the prior year level influenced by strong demand for drill bit products in key geographic markets, including the United States, Brazil and the FSU region. For the year ended December 31, 2007, Smith Oilfield reported revenues of $2.2 billion, a 22 percent improvement over the comparable prior year period. Approximately three-quarters of the year-over-year revenue growth was concentrated in the U.S. market as strong demand for additional rigs and related drilling equipment contributed to 56 percent growth in premium tubular products and drill pipe business volumes. To a lesser extent, improved diamond bit rental volumes and increased market penetration for three-cone products in the United States also contributed to the year-over-year revenue variance.
Operating Income
Operating income for the Smith Oilfield segment was $746.8 million, or 26.2 percent of revenues, for the year ended December 31, 2008. The segment's operating margins were 1.8 percentage points below the prior year level, reflecting incremental operating margins of 20 percent. The addition of W-H's operations, which carry lower margins on a comparative basis accounted for the margin decline. For the year ended December 31, 2007, Smith Oilfield's operating income totaled $619.0 million, or 28.0 percent of revenues. The segment operating margins were 70 basis points above the prior year level, reflecting incremental operating margins of 31 percent. The period-to-period operating margin increase was influenced by improved business volumes and pricing initiatives, which contributed to growth in the underlying gross profit margins. Distribution Segment
Revenues
The Distribution segment markets pipe, valves, fittings and mill, safety and other maintenance products to energy and industrial markets, primarily through an extensive network of supply branches in the United States and Canada. The segment has the most significant North American revenue exposure of any of the Company's operations with 95 percent of fiscal 2008 revenues generated in those markets. Moreover, approximately one-fourth of the segment's revenues relate to sales to the downstream energy sector, including petrochemical plants and refineries, whose spending is largely influenced by the general state of the U.S. economic environment. Additionally, certain customers in this sector utilize petroleum products as a base material and, accordingly, are impacted by crude oil and natural gas prices. For the year ended December 31, 2008, the Distribution segment reported revenues of $2.7 billion, 29 percent above the 2007 fiscal year. The majority of the revenue growth was attributable to increased demand for line pipe and other operating supplies associated with unconventional onshore drilling projects and pipeline expansion projects in the United States. For the year ended December 31, 2007, the Distribution segment reported revenues of $2.1 billion, 10 percent above the 2006 fiscal year. The revenue growth was reported by the energy operations, influenced by higher U.S. drilling activity levels and increased line pipe project spending. The impact of lower Canadian business volumes during 2007, related to the corresponding decline in drilling activity levels, was substantially offset by project-related spending in Europe/Africa.

Operating Income
Operating income for the Distribution segment in fiscal 2008 was $180.2 million, or 6.6 percent of revenues. Distribution operating margins improved 2.0 percentage points, reflecting improved business volumes and product pricing related to line pipe expansion projects in the energy sector. On an absolute dollar basis, operating income was $83.0 million above the prior year period reflecting higher revenue volumes and improved gross profit levels, partially offset by growth in operating expenses to support the expanded business base. Operating income for the Distribution segment in fiscal 2007 was $97.2 million, or 4.6 percent of revenues. Segment operating margins deteriorated 80 basis points, reflecting the impact on gross profit of an increased proportion of line pipe and international project business volumes, which carry relatively lower margins, and the influence of the year-over-year decline in Canadian drilling activity levels. On an absolute dollar basis, operating income was $7.5 million below the amount reported in 2006, largely due to the impact of the unfavorable business mix on gross profit and higher variable-based operating expenses.
Consolidated Discussion
For the periods indicated, the following table summarizes the consolidated results of operations of the Company and presents these results as a percentage of total revenues (dollars in thousands):

                                                         For the Years Ended December 31,
                                      2008                             2007                             2006
                              Amount             %             Amount             %             Amount             %
Revenues                   $ 10,770,838           100        $ 8,764,330           100        $ 7,333,559           100


Gross profit                  3,428,916            32          2,855,657            33          2,344,271            32

Selling, general and
administrative
expenses                      1,786,504            17          1,485,860            17          1,264,190            17


Operating income              1,642,412            15          1,369,797            16          1,080,081            15

Interest expense                 89,765             1             69,990             1             62,967             1
Interest income                  (3,374 )           -             (4,068 )           -             (2,982 )           -


Income before income
taxes and minority
interests                     1,556,021            14          1,303,875            15          1,020,096            14

Income tax provision            505,892             4            408,471             5            326,674             4

Minority interests              282,845             3            248,353             3            191,416             3


Net income                 $    767,284             7        $   647,051             7        $   502,006             7

2008 versus 2007
Consolidated revenues totaled $10.8 billion for the year ended December 31, 2008, representing a 23 percent increase over amounts reported in the prior year. Excluding the impact of incremental revenues associated with the W-H transaction, base-business levels increased 17 percent over the prior year period. The base-business improvement primarily reflects higher drilling and completion fluid volumes to support the eight percent growth in global land-based drilling activity and, to a lesser extent, increased demand for line pipe and other operating supplies associated with unconventional onshore drilling projects and pipeline expansion projects in the United States.
Gross profit increased to $3.4 billion in the 2008 fiscal year, reflecting a 20 percent improvement over the prior year's results. Gross profit margins declined approximately 80 basis points as compared to the 2007 fiscal year influenced, in part, by the lower proportion of offshore revenues which impacted sales volumes of premium drilling fluids. On an absolute dollar basis, gross profit increased $573.3 million over the prior year impacted by growth in overall business volumes and, to a lesser extent, incremental profitability associated with the acquired W-H business operations.

Selling, general and administrative expenses totaled $1.8 billion, a 20 percent increase over the amounts reported in the prior fiscal year. As a percentage of revenues, operating expenses declined approximately 40 basis points reflecting improved fixed cost coverage across sales and administrative functions. Higher variable-related costs associated with the expansion in base-business volumes and, to a lesser extent, operating expenses attributable to the acquired W-H business operations contributed to the reported expense growth.
Net interest expense, which represents interest expense less interest income, equaled $86.4 million for the 2008 fiscal year. The $20.5 million year-over-year reported increase in interest reflects borrowings required to fund the W-H acquisition and, to a lesser extent, increased working capital investment. The impact of the higher incremental borrowings on interest expense was partially offset by the substantial decline in short-term Eurodollar interest rates experienced during fiscal 2008.
Income tax expense totaled $505.9 million for the year ended December 31, 2008, reflecting an effective tax rate of 32.5 percent. Excluding the impact of non-recurring tax benefits recognized during the prior fiscal year, the Company's effective rate increased approximately 60 basis points. Net of non-recurring items, the increase was influenced by the W-H acquisition which resulted in a modest shift in the geographic mix of earnings towards a higher relative-rate tax jurisdiction. The effective tax rate was lower than the U.S. statutory rate due to the impact of M-I SWACO's U.S. partnership earnings for which the minority partner is directly responsible for its related income taxes. The Company properly consolidates the pretax income related to the minority partner's share of U.S. partnership earnings but excludes the related tax provision.
Minority interest expense reflects the portion of the results of majority-owned operations which are applicable to the minority interest partners. Minority interest expense totaled $282.8 million in 2008, a $34.5 million increase above the amount reported in the prior year period, primarily associated with improved profitability levels in the M-I SWACO joint venture.
2007 versus 2006
Consolidated revenues increased to $8.8 billion for the year ended December 31, 2007, 20 percent above the prior year. Oilfield business volumes contributed more than 85 percent of the revenue increase - influenced by significant growth in offshore business volumes outside North America and the impact of new land-based contracts in Latin America and the Former Soviet Union. To a lesser extent, the year-over-year revenue expansion reflects higher demand for tubular and drill bit products in the United States.
Gross profit totaled $2.9 billion, or 33 percent of revenues, 60 basis points above the gross profit margins generated in the 2006 fiscal year. The results reflect improved oilfield business margins and, to a lesser extent, an increased proportion of oilfield revenues, which generate higher comparable margins. On an absolute dollar basis, gross profit was $511.4 million, or 22 percent, above the prior year primarily reflecting the increased sales volumes in the oilfield operations.
Selling, general and administrative expenses increased $221.7 million from the amount reported in 2006; however, as a percentage of revenues decreased 30 basis points. Improved fixed cost coverage in the general and administrative functions accounted for the operating expense percentage decline. The majority of the absolute dollar increase was attributable to variable-related costs associated with the improved business volumes, including increased investment in personnel and infrastructure.
Net interest expense, which represents interest expense less interest income, . . .