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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 11-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM_________ TO _____________
COMMISSION FILE NUMBER 1-8514
A. FULL TITLE OF THE PLAN AND THE ADDRESS OF THE PLAN, IF DIFFERENT FROM
THAT OF THE ISSUER NAMED BELOW:
M-I RETIREMENT PLAN
P.O. BOX 42842
HOUSTON, TX 77242-2842
B. NAME OF ISSUER OF THE SECURITIES HELD PURSUANT TO THE PLAN AND THE
ADDRESS OF ITS PRINCIPAL EXECUTIVE OFFICE:
SMITH INTERNATIONAL, INC.
411 NORTH SAM HOUSTON PARKWAY, SUITE 600
HOUSTON, TEXAS 77060
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Sequentially
Numbered
Page
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Index to Financial Statements and Supplementary Information:
Independent Auditors' Report 3
Financial Statements:
Statements of Net Assets Available for Plan Benefits
as of December 31, 2002 and 2001 4
Statement of Changes in Net Assets Available for
Plan Benefits for the Year Ended December 31, 2002 5
Notes to Financial Statements 6
Supplemental Schedules:
Schedule H, line 4i-Schedule of Assets (Held at End of Year) as of December 31, 2002 11
Schedule G, part 3-Schedule of Nonexempt Transactions 12
Exhibits:
23.1 - Independent Auditors' Consent 15
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 16
2
INDEPENDENT AUDITORS' REPORT
To the Administrative Committee of the
M-I Retirement Plan:
We have audited the accompanying statements of net assets available for plan
benefits of the M-I Retirement Plan (the "Plan") as of December 31, 2002 and
2001, and the related statement of changes in net assets available for plan
benefits for the year ended December 31, 2002. These financial statements are
the responsibility of the Administrative Committee. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Administrative Committee, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the net assets available for plan benefits of the Plan as of December
31, 2002 and 2001, and the changes in net assets available for plan benefits for
the year ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplemental schedules
of assets (held at end of year) and nonexempt transactions are presented for
purposes of additional analysis and are not a required part of the basic
financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. The schedules are the
responsibility of the Administrative Committee. Such schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, are fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Houston, Texas
June 25, 2003
3
M-I RETIREMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AS OF DECEMBER 31, 2002 AND 2001
2002 2001
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ASSETS:
Investments, at fair value $154,142,919 $150,652,728
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Receivables-
Company contributions 1,979,270 5,745,466
Participant contributions -- 606,895
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Total receivables 1,979,270 6,352,361
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NET ASSETS AVAILABLE FOR PLAN BENEFITS $156,122,189 $157,005,089
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The accompanying notes are an integral part of these financial statements.
4
M-I RETIREMENT PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 2002
NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2001 $ 157,005,089
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ADDITIONS:
Income (loss)-
Interest and dividend income 4,230,442
Net appreciation in fair value of Smith common stock investment 2,729,820
Net depreciation in fair value of registered investment company funds (18,007,530)
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Net investment loss (11,047,268)
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Contributions-
Company, net of forfeitures 7,189,975
Participant 10,259,105
Rollover and other 784,976
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Total contributions 18,234,056
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Total additions 7,186,788
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DEDUCTIONS:
Benefits paid to participants 7,995,579
Administrative expenses 74,109
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Total deductions 8,069,688
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NET DECREASE IN NET ASSETS AVAILABLE FOR PLAN BENEFITS (882,900)
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NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2002 $ 156,122,189
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The accompanying notes are an integral part of this financial statement.
5
M-I RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT PLAN PROVISIONS
The following description of the M-I Retirement Plan (the "Plan"), formerly
known as the M-I L.L.C. Profit Sharing and Savings Plan, provides only general
information about the Plan's provisions in effect for the plan year ended
December 31, 2002. Participants should refer to the Plan document for a more
complete explanation of the Plan's provisions.
General and Eligibility
The Plan is a defined contribution plan of M-I L.L.C. (the "Company"). The
Company is a majority-owned subsidiary of Smith International, Inc. ("Smith").
The Plan is operated for the sole benefit of the employees of the Company and
their beneficiaries and is subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The Plan is available to all
employees of the Company who meet certain eligibility requirements under the
Plan. Participation in the Plan may commence on the first day of the first month
following the date of hire. There is no minimum age requirement under the Plan.
Administration and Trustee
The Company is the plan administrator and sponsor of the Plan as defined under
ERISA. The Plan's operations are monitored by an administrative committee (the
"Administrative Committee") which is comprised of officers and employees of the
Company. Vanguard Fiduciary Trust Company ("Vanguard Trust" or the "Trustee") is
the trustee of all investments held by the Plan.
Contributions
Participants may elect to contribute voluntarily, in 0.5 percent increments,
from 0.5 percent to 15 percent of their compensation, subject to a maximum
amount of $11,000 during 2002 under Section 402(g) of the Internal Revenue Code
of 1986, as amended (the "Code").
At its discretion, the Company may provide contributions to the Plan for each
participant equal to three percent of the participant's compensation during the
Plan year (the "Basic Contribution"). The Company may also provide a 100 percent
matching contribution of the first 1.5 percent of a participant's contribution
(the "Matching Contribution"). For 2002, the Company made a Basic Contribution
equal to three percent of the participant's compensation during the Plan year
and a Matching Contribution equal to 100 percent of the first 1.5 percent of a
participant's contribution.
In addition, with respect to each Plan year, the Company may contribute to the
Plan profit-sharing contributions (the "Profit-Sharing Contribution") in such
amounts, if any, as determined by the Company and approved and ratified by the
Company's board of directors. For 2002, the Company made a Profit-Sharing
Contribution equal to 25 percent of a participant's contributions less the
Matching Contribution, subject to certain limitations.
6
Vesting
Participants are fully vested in their contributions and related earnings and
vest in Company contributions and related earnings at the rate of 20 percent for
each year of service. Upon death, termination of employment by reason of total
or permanent disability or retirement from the Company upon reaching the normal
retirement age of 65, participants become fully vested in Company contributions
and related earnings.
The Plan has certain provisions that provide for service credit for vesting and
eligibility purposes for all employees who directly transfer employment between
Smith and the Company.
Compensation
Compensation, as defined in the Plan, includes cash compensation paid by the
Company to participants during the Plan year and is included in the employee's
gross income under the Code, including regular or base salary, wages,
commissions, overtime, bonuses, non-deferred incentive awards and foreign
service allowance, as such compensation items are reported on the employee's
Form W-2 for the calendar year. Compensation shall exclude payments made in
connection with termination of employment, benefits paid or credited under the
Plan and compensation deferred under various plans maintained by the Company.
Investment Options
Participants have the option of investing their contributions and the Company's
Basic, Matching and Profit-Sharing Contributions among one or all of the seven
registered investment company funds, a common/collective trust offered by the
Vanguard Group of Investment Companies (the "Vanguard Funds") and the common
stock of Smith. Participants may transfer some or all of the balances out of any
fund into one or any combination of the other funds, including Smith common
stock, at any time.
Administrative Expenses
The Plan is responsible for its administrative expenses. The Company may elect
to pay administrative expenses from the forfeitures of the Plan or pay expenses
on behalf of the Plan.
Plan Termination
The Company intends for the Plan to be permanent; however, in the event of
termination, partial termination or discontinuance of contributions under the
Plan, the total balances of all participants shall become fully vested.
Loans
Participants may borrow from their accounts no more than once annually, subject
to terms specified by the Company. The Plan permits participants to borrow the
lesser of $50,000 or 50 percent of their vested account balances in the Plan.
These loans bear annual rates of interest commensurate with the prevailing
interest rate charged on similar commercial loans had the loan been made under
similar circumstances by a lending institution.
7
Withdrawals and Forfeitures
A participant may elect to receive benefit payments by any one of the several
methods provided by the Plan upon termination or retirement. The Plan also
provides for hardship distributions to participants with immediate and
significant financial needs, subject to authorization by the Company and
limited to the participant's vested account balance.
In the event that a participant terminates employment with the Company, the
participant's vested balances will be distributed at the participant's election
or distributed if the account balance is less than $5,000. Forfeitures are
applied first to reinstate the participant's previously forfeited amounts if the
participant is reemployed by the Company within five years. During 2002,
forfeitures of $571,733 and $74,109 were used to reduce the Company's
contributions and pay Plan expenses, respectively. Forfeitures available at
December 31, 2002 and 2001, totaled $20,607 and $3,126, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accounts of the Plan are maintained on the cash basis of accounting. For
financial reporting purposes, however, the financial statements have been
prepared on the accrual basis of accounting.
Investment Valuation and Income Recognition
The Plan's investments are stated at fair value. Registered investment company
funds are valued at quoted market prices which represent the net asset value of
shares held by the Plan at year-end. The Smith stock fund is valued at its
year-end unit closing price (computed by dividing the sum of (i) the year-end
market price plus (ii) the uninvested cash position, by the total number of
member units). Participant loans are valued at cost which approximates fair
value.
The Vanguard Retirement Savings Trust is a common/collective trust investing
primarily in guaranteed investment contracts ("GICS"). The GICS are fully
benefit responsive and are recorded at contract value. Contract value is
determined based on contributions made under the contract plus interest earned
at the contract's rate less funds used to pay investment fees and withdrawals.
There are no reserves against contract value for credit risk of the contract
issuer or otherwise. The effective yield of the collective trust fund was 4.72
percent for the year ended December 31, 2002. The average crediting interest
rate at December 31, 2002 was 4.95 percent.
Purchases and sales of Plan investments are recorded as of the trade date. The
net appreciation or depreciation in the fair value of investments reflected in
the accompanying statement of changes in net assets available for plan benefits
includes realized, as well as unrealized, gains or losses on the sale of
investments. The net change in realized gains and losses on sale are determined
using the actual purchase and sale price of the related investments. The net
changes in unrealized gains and losses are determined using the fair values as
of the beginning of the year or the purchase price if acquired since that date.
8
Participant Account Valuation
The Plan provides that net changes in unrealized appreciation and depreciation
and gains and losses upon sale are allocated daily to the individual
participant's account. The net changes, unrealized and realized, in a particular
investment fund are allocated in proportion to the respective participant's
account balance in each fund, after reducing the participant's account for
distributions, if any.
Dividend and interest income from investments is reported as earned on an
accrual basis in the statement of changes in net assets available for plan
benefits and is allocated to participants' accounts based upon each
participant's proportionate share of assets in each investment fund.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Administrative
Committee to make estimates and assumptions that affect the reported amounts of
assets and liabilities and changes therein, and disclosure of contingent assets
and liabilities.
3. FEDERAL INCOME TAX STATUS
The Plan obtained its latest determination letter on January 21, 2003, in which
the Internal Revenue Service stated that the Plan, as then designed, was in
compliance with the applicable requirements of the Code. The Administrative
Committee believes that the Plan is qualified and the related trust was
tax-exempt as of the financial statement date.
4. RISKS AND UNCERTAINTIES
The Plan provides for various investments in Smith common stock, registered
investment company funds and a common/collective trust. Investment securities,
in general, are exposed to various risks, such as interest rate, credit and
overall market volatility risk. Due to the level of risk associated with certain
investment securities, it is reasonably possible that changes in the values and
concentrations of investment securities will occur in the near term and those
changes could materially affect the amounts reported in the statement of net
assets available for Plan benefits. Historically, the investment mix has
remained relatively consistent. The allocation of total Plan assets by
investment type at December 31, is as follows:
2002 2001
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Balanced Funds (Stocks and Bonds) 35.7% 35.4%
Domestic Stock Funds 24.2 29.1
Guaranteed investment contracts 15.2 10.8
Short-Term Investments 9.9 9.7
Smith International, Inc. common stock 6.3 8.2
Participant loans 4.3 4.0
Bond Funds 3.2 1.5
International Stock Funds 1.2 1.3
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100.0% 100.0%
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9
5. RELATED-PARTY TRANSACTIONS
The Plan invests in shares of common stock of Smith. As Smith is the majority
owner of the sponsor, these transactions qualify as party-in-interest
transactions. In addition, the Plan invests in shares of registered investment
company funds and a common/collective trust fund managed by the Vanguard Group,
an affiliate of Vanguard Trust. As Vanguard Trust is the Trustee of the Plan,
these transactions qualify as party-in-interest transactions.
6. INVESTMENTS
Individual investments, which exceed five percent of net assets available for
Plan benefits as of December 31, are as follows:
2002 2001
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Vanguard Wellington Fund $55,087,156 $52,324,632
Vanguard Retirement Savings Trust 23,462,279 16,552,333
Vanguard PRIMECAP Fund 16,427,023 20,263,786
Vanguard Prime Money Market Fund 15,320,076 14,962,618
Vanguard Windsor Fund 11,012,154 13,136,016
Smith International, Inc. common stock 9,755,165 12,535,505
Vanguard 500 Index Portfolio Fund 9,570,164 10,339,251
7. NONEXEMPT TRANSACTIONS
As reported on Schedule G, part 3-Schedule of Nonexempt Transactions, certain
Plan contributions were not remitted to the trust within the time frame
specified by the Department of Labor's Regulation 29 CFR 2510.3-102, thus
constituting a nonexempt transaction between the Plan and the Company.
10
M-I RETIREMENT PLAN
EIN: 76-0434986
SCHEDULE H, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR)
AS OF DECEMBER 31, 2002
Current
Identity of Issue Description of Investment Cost Value
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Smith International, Inc. (a) Smith International, Inc. common stock (b) $9,755,165
Vanguard Group of
Investment Companies (a) Vanguard 500 Index Portfolio Fund (b) 9,570,164
Vanguard Group of
Investment Companies (a) Vanguard International Growth Fund (b) 1,848,820
Vanguard Group of
Investment Companies (a) Vanguard Long-Term Corporate Fund (b) 5,004,672
Vanguard Group of
Investment Companies (a) Vanguard Prime Money Market Fund (b) 15,320,076
Vanguard Group of
Investment Companies (a) Vanguard PRIMECAP Fund (b) 16,427,023
Vanguard Group of
Investment Companies (a) Vanguard Retirement Savings Trust (b) 23,462,279
Vanguard Group of
Investment Companies (a) Vanguard Wellington Fund (b) 55,087,156
Vanguard Group of
Investment Companies (a) Vanguard Windsor Fund (b) 11,012,154
The Plan (a) Participant loans (highest and lowest
interest rates are 10.50% and 4.75%,
respectively) (b) 6,655,410
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$154,142,919
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a) Identified as a party in interest.
b) Cost omitted for participant-directed investments.
11
M-I RETIREMENT PLAN
EIN: 76-0434986
SCHEDULE G, PART 3 - SCHEDULE OF NONEXEMPT TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
Relationship to
Plan, Employer Interest
Identity of or Other Amount Incurred
Party Involved Party in Interest Description of Transactions Loaned on Loan
-------------- ----------------- ------------------------------------------------- ---------- --------
Dueto procedural
deficiencies, there was
one untimely remittance of
contributions to the Plan.
M-I L.L.C. Employer Lending of monies from the Plan to the employer
(contributions not timely remitted to the Plan)
as follows-
Deemed loan dated April
26, 2002, maturity of
May 23, 2002, with
interest of 5.86
percent in the
quarter outstanding
$ 623,874 $2,666*
* The employer remitted interest to the Plan subsequent to Plan year-end.
12
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934,
the trustees (or other persons who administer the employee benefit plan) have
duly caused this annual report to be signed on its behalf by the undersigned
hereunto duly authorized.
Dated: June 26, 2003
M-I RETIREMENT PLAN
By: Administrative Committee for the
M-I Retirement Plan
By: /s/ GERI D. WILDE
Geri D. Wilde
Assistant Treasurer
13
EXHIBIT INDEX
Exhibit
Number Description
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23.1 Independent Auditors' Consent
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
14