Business

We are engaged in providing pressure pumping services and other oilfield services to the oil and natural gas industry worldwide. Services are provided through four business segments: U.S./Mexico Pressure Pumping, Canada Pressure Pumping, International Pressure Pumping and the Oilfield Services Group.

The U.S./Mexico, Canada and International Pressure Pumping segments provide stimulation and cementing services to the petroleum industry throughout the world. Stimulation services are designed to improve the flow of oil and natural gas from producing formations. Cementing services consists of pumping a cement slurry into a well between the casing and the wellbore to isolate fluids that might otherwise damage the casing and/or affect productivity, or that could migrate to different zones, primarily during the drilling and completion phase of a well. See "Business" included elsewhere in this Annual Report on Form 10-K for more information on these operations.

The Oilfield Services Group consists of casing and tubular services, process and pipeline services, chemical services, completion tools and completion fluids services in the United States and select markets internationally.

Market Conditions

Our worldwide operations are primarily driven by the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity. Drilling activity, in turn, is largely dependent on the price of crude oil and natural gas and the volatility and expectations of future oil and natural gas prices. Our results of operations also depend heavily on the pricing we receive from our customers, which depends on activity levels, availability of equipment and other resources, and competitive pressures. These market factors often lead to volatility in our revenue and profitability, especially in the United States and Canada, where we have historically generated in excess of 50% of our revenue. Historical market conditions are reflected in the table below for our fiscal years ended September 30:

                                         2008     % Change      2007     % Change      2006
 Worldwide Rig Count(1):
 U.S.                                     1,851          6 %     1,749         10 %     1,587
 Canada                                     366          0 %       365        -27 %       502
 International(2)                         1,061          7 %       989          9 %       905
 Commodity Prices (average):
 Crude Oil (West Texas Intermediate)   $ 107.64         67 %   $ 64.62         -2 %   $ 66.06
 Natural Gas (Henry Hub)               $   9.00         30 %   $  6.90        -15 %   $  8.16

(1) Estimate of drilling activity as measured by average active drilling rigs based on Baker Hughes Inc. rig count information.

(2) Includes Mexico rig count of 100, 90 and 85 for the fiscal years ended September 30, 2008, 2007 and 2006 respectively.

Oil and natural gas prices have been extremely volatile in recent months, and have declined significantly from their historic highs in July 2008. Crude oil (West Texas Intermediate) and Natural Gas (Henry Hub) prices at November 17, 2008, were $54.95 and $6.55, respectively.

U.S. Rig Count

Demand for our pressure pumping services in the United States is primarily driven by oil and natural gas drilling activity, which tends to be extremely volatile, depending on the current and anticipated prices of crude oil and natural gas. During the last 10 years, the lowest annual U.S. rig count averaged 601 in fiscal 1999 and the highest annual U.S. rig count averaged 1,851 in fiscal 2008.

With the retraction of oil and natural gas prices over the last few months along with uncertainty in the credit markets, we expect to see some reduction in North America drilling activity in 2009. The magnitude of reduction is uncertain, and will ultimately be influenced by a number of factors, including commodity prices, winter demand for oil and natural gas and government policy with respect to the financial credit crisis.

Canadian Rig Count

The demand for our pressure pumping services in Canada is primarily driven by oil and natural gas drilling activity, and similar to the United States, tends to be extremely volatile. During the last 10 years, the lowest annual rig count averaged 212 in fiscal 1999 and the highest annual rig count averaged 502 in fiscal 2006.

International Rig Count

Many countries in which we operate are subject to political, social and economic risks which may cause volatility within any given country. However, our international revenue in total is less volatile because we operate in approximately 50 countries, which provides a reduction of exposure to any one country. Due to the significant investment and complexity of international projects, we believe drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent producer in North America. During the last 10 years, the lowest annual international rig count, excluding Canada and including Mexico, averaged 616 in fiscal 1999 and the highest annual international rig count averaged 1,061 in fiscal 2008.

Results of Operations

Consolidated (dollars in millions)



                                2008      % Change       2007      % Change       2006
     Revenue                  $ 5,426.3         13 %   $ 4,802.4         10 %   $ 4,367.9
     Operating income             907.1        -21 %     1,150.5         -2 %     1,171.7

     Worldwide rig count(1)       3,278          6 %       3,103          4 %       2,995

(1) Estimate of drilling activity as measured by average active drilling rigs based on Baker Hughes Inc. rig count information.

Results for fiscal 2008 compared to fiscal 2007

Consolidated revenue for fiscal 2008 increased 13% compared to fiscal 2007, with all of our reportable segments showing revenue growth. Revenue from U.S./Mexico Pressure Pumping Services increased 8% from last year as a result of higher activity levels largely offset by lower pricing for our products and services. Revenue from our Canada and International Pressure Pumping Services increased 14% and 17%, respectively. The Canadian increase was primarily attributable to favorable exchange rates and the International increase was the result of increased activity in the Middle East, Asia Pacific and Latin America. During 2008, our Oilfield Services Group's revenue increased 23%, largely as a result of increased international activity and, to a lesser extent, the acquisition of Innicor Subsurface Technologies Inc. in May 2008.

Despite improved revenue from all of our reportable segments, consolidated operating income margin declined from 24% in fiscal 2007 to 17% in fiscal 2008. Declining prices for our products and services in the North American market as well increased material and fuel costs led to the overall decline in operating income margin.

Results for fiscal 2007 compared to fiscal 2006

All of our reportable segments, except Canada, contributed to the increase in revenue for fiscal 2007 when compared to fiscal 2006. The increase primarily relates to higher activity in all major markets except Canada, where depressed market conditions were present throughout fiscal 2007. Worldwide average active drilling rigs for fiscal 2007 increased 4% compared to the prior year.

Fiscal 2007 consolidated operating income margin was 24%, down from 27% in fiscal 2006. Operating income margin was negatively impacted by a 68% decline in operating income from Canada as well as price reductions in the U.S. market.

See discussion below on individual segments for further revenue and operating income variance details.

U.S./Mexico Pressure Pumping Segment (dollars in millions)



                               2008      % Change       2007      % Change       2006
       Revenue               $ 2,777.6          8 %   $ 2,562.7          9 %   $ 2,353.8
       Operating income          605.6        -31 %       881.6         -2 %       899.2

       U.S. rig count(1)         1,851          6 %       1,749         10 %       1,587
       Mexico rig count(1)         100         11 %          90          6 %          85

(1) Estimate of drilling activity as measured by average active drilling rigs based on Baker Hughes Inc. rig count information.

Results for fiscal 2008 compared to fiscal 2007

Fiscal 2008 revenue for our U.S./Mexico Pressure Pumping segment increased 8% compared the prior fiscal year, with average active drilling rigs increasing 6%. All of the operating regions within U.S./Mexico Pressure Pumping, except the Gulf Coast, showed improved revenue from fiscal 2007. While U.S. activity increased for fiscal 2008 compared to fiscal 2007, the prices we received for our products and services declined.

U.S./Mexico Pressure Pumping operating income margin decreased from 34% in fiscal 2007 to 22% for fiscal 2008. A decline in prices coupled with increased material, maintenance and fuel costs caused the fiscal 2008 decline.

Results for fiscal 2007 compared to fiscal 2006

Fiscal 2007 U.S./Mexico revenue increased compared to the prior year as the result of activity increases most notably in East Texas, Permian Basin and Northeast regions of the United States. The Mexico region also benefited from improved revenues attributable to the expansion of our business in southern Mexico. These increases were slightly offset by a decline in activity in the Pacific region. While the U.S./Mexico average active drilling rigs increased 10% for fiscal 2007, revenue was negatively impacted by lower prices received for our products and services stemming from competitive pressures in the market.

Operating income margin declined to 34% compared to 38% in the prior fiscal year, primarily due to lower pricing, increased material and labor costs and increased depreciation expense.

Canada Pressure Pumping (dollars in millions)



                                 2008     % Change      2007     % Change      2006
          Revenue               $ 442.5         14 %   $ 386.5        -20 %   $ 481.4
          Operating income         34.3          6 %      32.5        -68 %     102.1

          Canada rig count(1)       366          0 %       365        -27 %       502

(1) Estimate of drilling activity as measured by average active drilling rigs based on Baker Hughes Inc. rig count information.

Results for fiscal 2008 compared to fiscal 2007

The 14% increase in revenue for Canada Pressure Pumping for fiscal 2008 is almost entirely due to the strengthening of the Canadian dollar. Relative to the U.S. dollar, the average Canadian dollar exchange rate increased 9% in fiscal 2008 compared to fiscal 2007, thereby increasing the U.S. dollar equivalent of revenues earned in Canada. Activity levels had little impact on the revenue increase, as the Canadian average active drilling rigs for fiscal 2008 remained unchanged from the prior year.

Operating income margin for fiscal 2008 was 8%, consistent with fiscal 2007. Despite improved revenues, the region operating income margin was negatively impacted by increased pricing pressures and cost increases in fiscal 2008.

Results for fiscal 2007 compared to fiscal 2006

Lower activity levels influenced by lower natural gas prices caused revenue to decline compared to the prior year. Average active drilling rigs decreased 27% in fiscal 2007, with revenue exhibiting a corresponding decrease of 20%. The region has also experienced lower pricing for our products and services.

Operating income margin decreased to 8% from 21% in the prior year. Along with declining prices for our products and services, the region also had higher depreciation expense, material costs and labor costs during fiscal 2007.

International Pressure Pumping Segment (dollars in millions)



                                         2008        % Change         2007        % Change        2006
Revenue                                $ 1,252.6           17 %     $ 1,074.7           21 %     $ 884.7
Operating income                           172.5           13 %         152.7           11 %       138.1

International rig count, excluding
Mexico(1)                                    961            7 %           899           10 %         820

(1) Estimate of drilling activity as measured by average active drilling rigs based on Baker Hughes Inc. rig count information.

Results for fiscal 2008 compared to fiscal 2007

                                         % change in Revenue
                     Europe (1)                          -11 %
                     Middle East (1)                      27 %
                     Asia Pacific                         15 %
                     Latin America (1)                    28 %
                     Russia                               -7 %

(1) In fiscal 2008, we revised the internal management reporting structure of our pressure pumping operations in Africa, whose results of operations were previously reported in our Europe/Africa operating segment. Our North Africa results, including Algeria and Libya, are now included in our Middle East operating segment, while our West Africa results south of Nigeria, including Angola and Gabon, are now included in our Latin America operating segment. Nigeria and coastal areas north of there remain as part of our Europe operating segment. Prior period results have been revised to conform with the current presentation.

International Pressure Pumping revenue increased 17% for fiscal 2008 compared fiscal 2007. Increased revenue from our Middle East and Latin American operations were significant contributors to the overall revenue increase. Our Middle East operations benefited from the introduction of two stimulation vessels into the India market as well as improved revenues from Algeria and activity increases in Saudi Arabia, Kazakhstan and Azerbaijan.

Our Latin American operations experienced significant growth in Brazil, Argentina, Gabon and Venezuela when comparing fiscal 2008 revenue to fiscal 2007, primarily as a result of increased drilling and completion activity in those countries. Average active drilling rigs in the region increased 6% when compared to the prior year.

In Asia Pacific, revenue increased 15% with average active drilling rigs in the region increasing 11%. Most major markets within the region experienced revenue growth.

Declines in revenue from our offshore stimulation vessel in the North Sea due to its relocation to India, as well as a revenue decline from our Northern West Africa operations caused the 11% decrease in revenue for Europe for fiscal 2008.

The decline in revenue in Russia was almost entirely due to the sale of the work-over rig business during fiscal 2007.

Operating income margin remained consistent with fiscal 2007 at 14%, with declines in revenue from our Russia and Asia Pacific operations offsetting positive contribution to operating income from our other operating regions.

During fiscal 2008 we recognized a non-cash goodwill impairment charge of $6.1 million related to our Russia operations. With the competitive pressure in the areas in which we operate in Russia, cost inflation, currency risks and concerns over future activity reductions, our analysis indicates that our goodwill associated with Russia might not be recoverable.

Results for fiscal 2007 compared to fiscal 2006

                                        % change in Revenue
                     Europe(1)                            2 %
                     Middle East(1)                      41 %
                     Asia Pacific                        28 %
                     Latin America(1)                    23 %
                     Russia                              -5 %

(1) In fiscal 2008, we revised the internal management reporting structure of our pressure pumping operations in Africa, whose results of operations were previously reported in our Europe/Africa operating segment. Our North Africa results, including Algeria and Libya, are now included in our Middle East operating segment, while our West Africa results south of Nigeria, including Angola and Gabon, are now included in our Latin America operating segment. Nigeria and coastal areas north of there remain as part of our Europe operating segment. Prior period results have been revised to conform with the current presentation.

All of our operating regions within International Pressure Pumping, except Russia, showed increases in revenue in fiscal 2007 compared to fiscal 2006.

Europe showed improvement due to increased activity in the Netherlands. This increase was slightly offset by lower coiled tubing revenue in Norway. The average active drilling rig count in Europe increased 8% compared to fiscal 2006.

Despite a significant decline in revenue from the prior year's non-repeat blowout work in Bangladesh, the Middle East showed improved revenues due to increased activity and the introduction of vessel operations in India, increased coiled tubing work in Saudi Arabia, the expansion of operations into Libya, and the acquisition of a controlling interest in our Algerian joint venture in July 2006. The average active drilling rig count for fiscal 2007 in the region increased 13% compared to fiscal year 2006.

The award of contracts in Malaysia and activity increases in Australia accounted for most of Asia Pacific's revenue increase. This increase was offset by a decline in revenue from New Zealand due to non-repeat work in the prior fiscal year. The average active drilling rig count for fiscal 2007 increased 4% in Asia Pacific compared to fiscal year 2006.

Our Latin American region improvement was due primarily to increased activity in Argentina, Colombia and Brazil. The average active drilling rig count increased 10% in Latin America compared to the prior year.

Our Russian revenue declined as the result of the divesture of our workover rig business in the region during the year as well as lower margin performance activity. Excluding revenue from our workover rig business, revenue from the region increased 10% compared to fiscal 2006.

Operating income margin for International Pressure Pumping was 14% for fiscal 2007 compared to 16% in fiscal 2006. Margin contributions from the Asia Pacific and Latin America were offset by margin declines from the high margin non-repeat blowout work in Bangladesh in the prior fiscal year and activity declines in Norway.

Oilfield Services Group (in millions)



                               2008     % Change      2007     % Change      2006
           Revenue            $ 953.6         23 %   $ 778.4         20 %   $ 648.0
           Operating income     183.9         12 %     163.5         23 %     132.4

Results for fiscal 2008 compared to fiscal 2007

                                               % Change in Revenue
               Tubular Services                                 11 %
               Process and Pipeline Services                    37 %
               Chemical Services                                31 %
               Completion Tools                                 42 %
               Completion Fluids                               -18 %

All of the operating segments within our Oilfield Services Group, except Completion Fluids which was negatively impacted by a decline in offshore deepwater activity in the Gulf of Mexico, showed improved revenues for fiscal 2008 compared to the prior year. Process and Pipeline Services benefited from increased international and domestic activity, while Chemical Services benefited primarily from increased revenue from capillary services and increased U.S. activity levels.

In May 2008 we acquired Innicor Subsurface Technologies Inc. This acquisition along with increased activity levels in international markets accounted for our Completion Tools revenue improvement. Excluding the effect of the Innicor acquisition, Completion Tools revenue improved 29%. Tubular Services also showed improved revenue as a result of increased activity in international markets.

Operating income margin for fiscal 2008 declined to 19% from 21% in the prior year. Positive contributions from our Process and Pipeline Services, Chemical Services and Tubular Services groups were offset by declining operating income margins from our other operating segments within the Oilfield Services Group.

Results for fiscal 2007 compared to fiscal 2006

The following table summarizes the change in revenue for fiscal 2007 compared to fiscal 2006 for each of the operating segments of the Oilfield Services Group:

                                               % Change in Revenue
               Tubular Services                                 30 %
               Process and Pipeline Services                    21 %
               Chemical Services                                39 %
               Completion Tools                                 28 %
               Completion Fluids                                -5 %

All of our operating segments except Completion Fluids showed revenue improvement in fiscal 2007. Our Tubular Services' revenue for fiscal 2007 increased largely due to international market expansion, while our Process and Pipeline Services benefited from increased activity in our U.K. and U.S. operations as well as the acquisition of Norson in March 2007. Excluding the impact of the Norson acquisition, Process and Pipeline Services revenue increased 15%. Chemical Services revenue increased largely due to the acquisitions of Dyna-Coil's and Allis-Chalmers' capillary string businesses. Excluding these acquisitions, Chemical Services revenue increased 12%. Our Completion Tools revenue improvement was due to international growth as well as increased domestic deepwater activity, while revenue from our Completion Fluids operations declined due to the closing of low margin operations in the U.K. and Norway in the previous year.

Fiscal 2007 operating income margin for the Oilfield Services Group was 21%, an increase from 20% reported in fiscal year 2006, with Tubular Services being the largest contributor to the increase.

Outlook

As stated under "Market Conditions" above, our worldwide operations are primarily driven by the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity.

With the current commodity price and credit environment, we anticipate that North American drilling activity will be lower in 2009 compared to 2008 which would negatively impact demand for our products and services. The extent and duration of the projected decline is uncertain at this time, but we will continue to focus on labor cost efficiencies and monitor discretionary spending to respond to prevailing activity levels.

Historically, international drilling programs tend to be longer-term in nature, and therefore less affected by short term swings in oil prices. Consequently, we expect to see year over year revenue growth in our International Pressure Pumping operations, based on contracts in place and current prospects. However, in the event crude oil and natural gas prices were to decline significantly from current price levels, drilling activity and consequently our activity could experience significant reductions from our projections. Our Oilfield Services businesses reported solid growth in fiscal 2008 and is expected to continue this growth trend in fiscal 2009, particularly outside of North America as these product lines are further expanded into our established international operations.

Other Expenses

The following table sets forth our other operating expenses (dollars in
millions):



                                           % of                  % of                  % of
                                 2008     Revenue      2007     Revenue      2006     Revenue
   Research and engineering     $  72.0       1.3 %   $  67.5       1.4 %   $  63.9       1.5 %
   Marketing                      120.9       2.2 %     107.4       2.2 %     103.3       2.4 %
   General and administrative     161.0       3.0 %     144.0       3.0 %     132.0       3.0 %

Research and engineering expense: Research and engineering expense increased $4.5 million, or 7%, in fiscal 2008 compared to fiscal 2007, primarily due to increased personnel costs. As a percentage of revenue, research and engineering expense decreased to 1.3% in fiscal 2008 compared to 1.4% in the prior fiscal year.

In fiscal 2007, these expenses increased $3.6 million from fiscal 2006. The increase mostly relates to increased personnel at our primary research facility in Tomball, Texas and certain operating locations to support higher activity.

Marketing expense: An increase in personnel costs was the main contributor to the $13.5 million, or 13%, increase in marketing expense from fiscal 2007 to fiscal 2008. As a percentage of revenue, fiscal 2008 marketing expense remained consistent with the prior fiscal year.

For fiscal 2007, these expenses increased 4% when compared to fiscal 2006 as the result of higher commissions in certain markets internationally as well as increased headcount to support market growth.

General and administrative expense: In fiscal 2008 general and administrative expenses increased $17.0 million, or 12%, primarily as a result of increased personnel costs and depreciation expense. As a percentage of revenue, general and administrative expense was 3.0 % in fiscal 2008, consistent with fiscal 2007 and 2006.

For fiscal 2007, these expenses remained consistent as a percent of revenue and increased 9% compared to fiscal 2006. The increase primarily relates to increased personnel and a stock-based compensation expense increase of $7.6 million, offset by lower compensation expense related to annual performance incentive accruals. The decrease in annual performance incentive accruals is the primary reason for the decrease in Corporate expenses in fiscal 2007.

The following table shows a comparison of interest expense, interest income, and . . .