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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:
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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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 Schedule:
Schedule H, line 4i-Schedule of Assets (Held at End of Year) as of December 31, 2002 11
Exhibits:
23.1 - Independent Auditors' Consent 14
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 15
-2-
INDEPENDENT AUDITORS' REPORT
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, 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 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. The supplemental schedule has been subjected to the auditing
procedures applied in the audit of the basic 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 25, 2003
3
SMITH INTERNATIONAL, INC. 401(k) 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 $ 199,357,919 $ 200,442,428
Receivables-
Company contributions 1,444,943 6,107,943
Participant contributions 401,217 413,650
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NET ASSETS AVAILABLE FOR PLAN BENEFITS $ 201,204,079 $ 206,964,021
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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, 2002
NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2001 $206,964,021
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ADDITIONS:
Income (loss)-
Interest and dividend income 3,875,454
Net appreciation in fair value of Company common stock investment 6,596,467
Net depreciation in fair value of registered investment company funds (25,387,923)
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Net investment loss (14,916,002)
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Contributions-
Company, net of forfeitures 10,073,342
Participant 12,960,136
Rollover and other 706,867
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Total contributions 23,740,345
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Total additions 8,824,343
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DEDUCTIONS:
Benefits paid to participants 14,410,803
Administrative expenses 173,482
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Total deductions 14,584,285
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NET DECREASE IN NET ASSETS AVAILABLE FOR PLAN BENEFITS (5,759,942)
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NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2002 $201,204,079
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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, 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 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 such eligible employees' hire date or the date on which such employees
attain 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 up to 12 percent of their
compensation to the Plan on a pretax basis, 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"). 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 mandatory 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 to participants who are employed by the Company on
December 31.
In the event the Company Discretionary Contribution causes the total
contribution to the individual's account to exceed amounts allowable under the
Code, the Plan provisions allow for the excess to be contributed to the
individual's account in the following Plan year.
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, judicial declaration of incompetence, or
normal or disability retirement, 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 L.L.C., 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.
Compensation
Compensation, as defined in the Plan, includes cash compensation paid by the
Company to participants excluding payments made in connection with termination
of employment, any compensation deferred under the Company's management
incentive plan, and cost-of-living and any other extraordinary payments made to
expatriates.
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. During 2002,
administrative expenses were paid from forfeitures of the Plan.
Plan Termination
The Company intends for the Plan to be permanent; however, in the event of
permanent discontinuance of contributions or termination of the Plan, the total
balances of all participants shall become fully vested.
Loans
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.
7
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.
Upon termination of employment with the Company, 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 2002,
forfeitures of $672,580 and $171,532 were used to reduce the Company's
contributions and pay Plan expenses, respectively. Forfeitures available at
December 31, 2002 and 2001, totaled $24,712 and $11,854, 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.
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.
8
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 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 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:
2002 2001
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Domestic Stock Funds 32.9% 40.1%
Short-Term Investments 24.6 19.1
Balanced Funds (Stocks and Bonds) 16.7 16.0
Smith International, Inc. common stock 13.5 14.9
Participant loans and other 5.4 5.1
Bond Funds 4.7 2.4
International Stock Funds 2.2 2.4
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100.0% 100.0%
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5. 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.
9
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 Prime Money Market Fund $ 49,136,496 $ 38,337,892
Vanguard Wellington Fund 33,206,581 32,095,206
Vanguard PRIMECAP Fund 30,218,984 40,373,354
Smith International, Inc. common stock 26,941,097 29,909,362
Vanguard 500 Index Portfolio Fund 20,665,874 23,887,446
Vanguard Windsor Fund 14,516,571 15,907,408
Participant Loans 10,588,185 9,765,471(*)
(*) Less than five percent, but presented for comparative purposes as the 2002
balance exceeds the five percent threshold.
10
SMITH INTERNATIONAL, INC. 401(k) RETIREMENT PLAN
EIN: 95-3822631
SCHEDULE H, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR)
AS OF DECEMBER 31, 2002
Identity of Issue Description of Investment Cost Current Value
------------------------------- --------------------------------------------- ---- -------------
Smith International, Inc. (a) Smith International, Inc. common stock (b) $ 26,941,097
Vanguard Group of Vanguard Brokerage Option Fund (includes
Investment companies (a) investments in various common stocks and
mutual funds) (b) 269,982
Vanguard Group of
Investment Companies (a) Vanguard 500 Index Portfolio Fund (b) 20,665,874
Vanguard Group of
Investment Companies (a) Vanguard International Growth Fund (b) 4,468,866
Vanguard Group of
Investment Companies (a) Vanguard Long-Term Corporate Fund (b) 9,345,283
Vanguard Group of
Investment Companies (a) Vanguard Prime Money Market Fund (b) 49,136,496
Vanguard Group of
Investment Companies (a) Vanguard PRIMECAP Fund (b) 30,218,984
Vanguard Group of
Investment Companies (a) Vanguard Wellington Fund (b) 33,206,581
Vanguard Group of
Investment Companies (a) Vanguard Windsor Fund (b) 14,516,571
The Plan (a) Participant loans (highest and lowest interest
rates are 10.50% and 5.75%, respectively) (b) 10,588,185
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Total investments $199,357,919
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(a) Indicates a party in interest to the Plan.
(b) Cost omitted for participant-directed investments.
11
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 26, 2003
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
12
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
13