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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, 2003
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:
SMITH INTERNATIONAL, INC.
401(k) RETIREMENT PLAN
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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INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION Page
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Report of Independent Registered Public Accounting Firm 3
Financial Statements:
Statements of Net Assets Available for Plan Benefits
as of December 31, 2003 and 2002 4
Statement of Changes in Net Assets Available for
Plan Benefits for the Year Ended December 31, 2003 5
Notes to Financial Statements 6
Supplemental Schedule:
Form 5500, Schedule H, Part IV, Line 4i - Schedule of Assets (Held at End of Year)
December 31, 2003 10
Exhibit:
23.1 - Consent of Independent Registered Public Accounting Firm 13
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Administrative Committee of
the Smith International, Inc. 401(k) Retirement Plan:
We have audited the accompanying statements of net assets available for plan
benefits of the Smith International, Inc. 401(k) Retirement Plan (the "Plan") as
of December 31, 2003 and 2002, and the related statement of changes in net
assets available for plan benefits for the year ended December 31, 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States) and in accordance with generally
accepted auditing standards as established by the Auditing Standards Board
(United States). 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, 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, 2003 and 2002, and the changes in net assets available for plan benefits for
the year ended December 31, 2003, 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 schedule of
assets (held at end of year) is presented for purposes of additional analysis
and is not a required part of the basic financial statements, but is
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 schedule is the responsibility of the Administrative
Committee. Such supplemental schedule has been subjected to the auditing
procedures applied in our audit of the basic 2003 financial statements and, in
our opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Houston, Texas
June 21, 2004
3
SMITH INTERNATIONAL, INC. 401(k) RETIREMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AS OF DECEMBER 31, 2003 AND 2002
2003 2002
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ASSETS:
Investments, at fair value $252,215,205 $199,357,919
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Receivables-
Company contributions 3,891,654 1,444,943
Participant contributions 447,948 401,217
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Total receivables 4,339,602 1,846,160
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Total assets 256,554,807 201,204,079
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LIABILITIES:
Fees payable 11,990 --
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NET ASSETS AVAILABLE FOR PLAN BENEFITS $256,542,817 $201,204,079
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The accompanying notes are an integral part of these financial statements.
4
SMITH INTERNATIONAL, INC. 401(k) RETIREMENT PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 2003
NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2002 $ 201,204,079
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ADDITIONS:
Income -
Interest and dividend income 3,754,781
Net appreciation in fair value of investments (Note 7) 38,593,024
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Net investment gain 42,347,805
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Contributions-
Company, net of forfeitures 12,156,589
Participant 13,532,656
Rollover 1,947,234
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Total contributions 27,636,479
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Transfers from other plans, net (Note 4) 1,017,779
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Total additions 71,002,063
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DEDUCTIONS:
Benefits paid to participants 15,442,191
Administrative expenses 221,134
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Total deductions 15,663,325
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NET INCREASE IN NET ASSETS AVAILABLE FOR PLAN BENEFITS 55,338,738
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NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2003 $ 256,542,817
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The accompanying notes are an integral part of this financial statement.
5
SMITH INTERNATIONAL, INC. 401(k) RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT PLAN PROVISIONS
The following description of the Smith International, Inc. 401(k) Retirement
Plan (the "Plan") provides only general information about the Plan's provisions
in effect for the plan year ended December 31, 2003. 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 Smith International, Inc. ("Smith" or
the "Company"). 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 upon the
later of the employee's hire date or the date on which the employee attains the
age of 18.
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
The Plan allows participants to contribute a percentage of their compensation,
as defined by the Plan, subject to certain limitations of the Internal Revenue
Code of 1986, as amended (the "Code"). The Company contributes to the account of
each participant in the Plan between two percent and six percent of each
participant's compensation based upon the age of the participant (the "Company
Retirement Contributions"). The Company also makes matching contributions (the
"Company Matching Contribution") of up to 1.5 percent of each participant's
compensation. In addition, the Board of Directors may provide discretionary
contributions (the "Company Discretionary Contribution") based upon financial
performance of the Company to eligible participants who are employed by the
Company on December 31.
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
M-I SWACO ("M-I"), a majority-owned subsidiary of the Company, and Smith.
In connection with the purchase of business operations, the Company may elect to
amend the Plan to give past service credit to former employees of the acquired
operations who become employees of the Company.
6
Investment Options
Participants have the option of investing their contributions and the Company's
Retirement, Matching and Discretionary Contributions among one or all of the
seven registered investment company funds offered by the Vanguard Group of
Investment Companies (the "Vanguard Group") and the Company's common stock.
Participants may transfer some or all of the balances out of any fund into one
or any combination of the other funds, including the Company's 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 Plan document. 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 interest at prime plus one percent and are repaid through
payroll withholdings over a period not to exceed five years, except for
qualifying loans to purchase a primary residence which may be repaid over an
extended period.
Withdrawals and Forfeitures
A participant may elect to receive benefit payments through 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 Plan management 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. Any unvested Company
contributions and related earnings/losses are forfeited if participants do not
return to the Company within 60 months of their termination. During 2003,
forfeitures of $500,419 and $219,334 were used to reduce the Company's
contributions and pay Plan expenses, respectively. Forfeitures available at
December 31, 2003 and 2002, totaled $24,904 and $24,712, 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 Company 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.
7
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.
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 16, 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 Plan has been
amended for minor items since receiving the determination letter which, in the
opinion of the Administrative Committee, would not impact the status of the
Plan. Therefore, the Administrative Committee believes that the Plan is
qualified and the related trust was tax-exempt as of the financial statement
date.
4. TRANSFERS FROM OTHER PLANS
During 2002, the Company completed two acquisitions of businesses which
sponsored their own qualified retirement plans. During 2003, certain qualified
assets of those plans totaling $723,524 were merged into the Plan.
In conjunction with the direct transfer of certain employees between the Company
and M-I during 2003, net assets of $294,255 were transferred into the Plan.
8
5. RISKS AND UNCERTAINTIES
The Plan provides for various investments in registered investment company funds
and the Company's common stock. 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:
2003 2002
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Domestic Stock Funds 39.5% 32.9%
Short-Term Investments 21.1 24.6
Balanced Funds (Stocks and Bonds) 17.0 16.7
Smith International, Inc. common stock 10.5 13.5
Participant loans and other 4.8 5.4
Bond Funds 4.3 4.7
International Stock Funds 2.8 2.2
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100.0% 100.0%
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6. RELATED-PARTY TRANSACTIONS
The Plan invests in shares of common stock of the Company. As the Company is the
Plan's administrator and sponsor, these transactions qualify as
party-in-interest transactions. In addition, the Plan invests in shares of
registered investment company funds 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.
7. INVESTMENTS
Individual investments which exceed five percent of net assets available for
Plan benefits as of December 31, are as follows:
2003 2002
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Vanguard Prime Money Market Fund $53,302,529 $49,136,496
Vanguard PRIMECAP Fund 46,972,150 30,218,984
Vanguard Wellington Fund 42,819,723 33,206,581
Vanguard 500 Index Portfolio Fund 30,098,362 20,665,874
Smith International, Inc. common stock 26,421,713 26,941,097
Vanguard Windsor Fund 22,489,554 14,516,571
Participant Loans 11,907,404(*) 10,588,185
(*) Less than five percent, but presented for comparative purposes as the
2002 balance exceeds the five percent threshold.
During 2003, the Plan's investments (including gains and losses on investments
bought and sold, as well as held during the year) appreciated in value as
follows:
2003
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Equity funds $24,971,440
Smith International, Inc. common stock 7,564,754
Balanced funds 6,056,830
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$38,593,024
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9
SMITH INTERNATIONAL, INC. 401(k) RETIREMENT PLAN
EIN: 95-3822631
FORM 5500, SCHEDULE H, PART IV, LINE 4i -
SCHEDULE OF ASSETS (HELD AT END OF YEAR)
DECEMBER 31, 2003
(a) (b) (c) (d) (e)
Description of Investment, Including
Identity of Issue, Borrower, Maturity Date, Rate of Interest,
Lessor or Similar Party Collateral, Par or Maturity Value Cost Current Value
----------------------- --------------------------------- ---- -------------
* Vanguard Group of
Investment Companies Vanguard Prime Money Market Fund ** $ 53,302,529
* Vanguard Group of
Investment Companies Vanguard PRIMECAP Fund ** 46,972,150
* Vanguard Group of
Investment Companies Vanguard Wellington Fund ** 42,819,723
* Vanguard Group of
Investment Companies Vanguard 500 Index Portfolio Fund ** 30,098,362
* Smith International, Inc. Smith International, Inc. common stock ** 26,421,713
* Vanguard Group of
Investment Companies Vanguard Windsor Fund ** 22,489,554
* Vanguard Group of
Investment Companies Vanguard Long-Term Corporate Fund ** 10,733,938
* Vanguard Group of
Investment Companies Vanguard International Growth Fund ** 7,129,123
* Vanguard Group of
Investment companies Vanguard Brokerage Option Fund (includes **
investments in various common stocks and
mutual funds) 340,709
* The Plan Participant loans (highest and lowest interest
rates are 10.50% and 5.00%, respectively) ** 11,907,404
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Total investments $ 252,215,205
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* Party-in-interest.
** Cost information is not required for participant-directed investments and,
therefore, is not included.
10
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.
Date: June 22, 2004 SMITH INTERNATIONAL, INC.
401(k) RETIREMENT PLAN
By: Administrative Committee for
the Smith International, Inc.
401(k) Retirement Plan
By: /s/ NEAL S. SUTTON
---------------------------------
Neal S. Sutton, Member
By: /s/ GERI D. WILDE
---------------------------------
Geri D. Wilde, Member
11
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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23.1 Consent of Independent Registered Public Accounting Firm
12