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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, 2004
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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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, 2004 and 2003 4
Statement of Changes in Net Assets Available for
Plan Benefits for the Year Ended December 31, 2004 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, 2004 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
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, 2004 and
2003, and the related statement of changes in net assets available for plan
benefits for the year ended December 31, 2004. 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). These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Plan is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Plan's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also 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 management, 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, 2004 and 2003, and the changes in net assets available for plan benefits for
the year ended December 31, 2004, 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 2004 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, 2005
3
M-I RETIREMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AS OF DECEMBER 31, 2004 AND 2003
2004 2003
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ASSETS:
Investments, at fair value $ 240,791,865 $ 198,297,643
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Receivables-
Company contributions 7,655,608 4,215,107
Participant contributions 363,012 -
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Total receivables 8,018,620 4,215,107
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NET ASSETS AVAILABLE FOR PLAN BENEFITS $ 248,810,485 $ 202,512,750
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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, 2004
NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2003 $ 202,512,750
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ADDITIONS:
Income -
Interest and dividend income 7,851,624
Net appreciation in fair value of investments (Note 7) 16,608,898
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Net investment gain 24,460,522
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Contributions-
Company, net of forfeitures 13,871,958
Participant 12,791,030
Rollover 1,196,429
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Total contributions 27,859,417
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Transfers from other plan, net (Note 4) 280,455
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Total additions 52,600,394
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DEDUCTIONS:
Benefits paid to participants 6,212,099
Administrative expenses 90,560
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Total deductions 6,302,659
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NET INCREASE IN NET ASSETS AVAILABLE FOR PLAN BENEFITS 46,297,735
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NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2004 $ 248,810,485
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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") provides only
general information about the Plan's provisions in effect for the plan year
ended December 31, 2004. 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 SWACO (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 month
following a 30 day waiting period from 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
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"). At its discretion, the Company may make
basic, matching and in certain cases, discretionary matching contributions to
each participant's account under the Plan. Participants are eligible to receive
a basic contribution equal to three percent of qualified compensation, and a
full match on employee contributions of up to 1.5 percent of qualified
compensation. In addition, the Executive Committee of M-I LLC may provide
discretionary profit-sharing contributions based upon financial performance to
participants who are employed by M-I SWACO 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
Smith, Wilson International, Inc. ("Wilson"), a wholly-owned subsidiary of
Smith, and the Company.
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
basic, matching and discretionary contributions among one or all of the
available investments, including Smith common stock, 19 registered investment
company funds and a common/collective trust offered by the Vanguard Group of
Investment Companies. 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, subject to certain limitations.
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 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 2004,
forfeitures of $257,911 and $90,560 were used to reduce the Company's
contributions and pay Plan expenses, respectively. Forfeitures available at
December 31, 2004 and 2003, totaled $31,935 and $30,330, 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
converted to an accrual basis in accordance with accounting principles generally
accepted in the United States of America.
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. Units of the common/collective trust are
stated at their net asset value 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.
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 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 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 PLAN
In conjunction with the direct transfer of certain employees between the Company
and Smith during 2004, net assets of $280,455 were transferred into the Plan.
8
5. RISKS AND UNCERTAINTIES
The Plan provides for various investments in registered investment company
funds, a common/collective trust and Smith 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:
2004 2003
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Balanced Funds (Stocks and Bonds) 38.7% 35.9%
Domestic Stock Funds 30.4 29.7
Stable Value Fund 12.4 14.6
Smith International, Inc. common stock 6.7 5.3
Money Market Fund 3.6 6.5
Participant loans 3.5 3.7
Bond Funds 2.4 2.6
International Stock Funds 2.3 1.7
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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 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.
7. INVESTMENTS
Individual investments, which exceed five percent of net assets available for
Plan benefits as of December 31, are as follows:
2004 2003
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Vanguard Wellington Fund $ 82,691,060 $ 71,310,917
Vanguard PRIMECAP Fund 35,055,865 28,231,946
Vanguard Retirement Savings Trust 29,854,517 29,018,978
Vanguard Windsor Fund 20,484,754 16,570,111
Vanguard 500 Index Portfolio Fund 16,404,719 14,015,338
Smith International, Inc. common stock 16,140,022 10,567,322
Vanguard Prime Money Market Fund 8,711,951(*) 12,813,188
(*) Less than five percent, but presented for comparative purposes as the 2003
balance exceeds the five percent threshold.
During 2004, 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:
2004
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Equity funds $ 8,882,007
Smith International, Inc. common stock 3,562,558
Balanced funds 4,164,333
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$ 16,608,898
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9
M-I RETIREMENT PLAN
EIN: 76-0596553
FORM 5500, SCHEDULE H, PART IV, LINE 4i -
SCHEDULE OF ASSETS (HELD AT END OF YEAR)
DECEMBER 31, 2004
(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 Vanguard Wellington Fund ** $ 82,691,060
* Vanguard Group Vanguard PRIMECAP Fund ** 35,055,865
* Vanguard Group Vanguard Retirement Savings Trust ** 29,854,517
* Vanguard Group Vanguard Windsor Fund ** 20,484,754
* Vanguard Group Vanguard 500 Index Portfolio Fund ** 16,404,719
* Smith International, Inc. Smith International, Inc. common stock ** 16,140,022
* Vanguard Group Vanguard Prime Money Market Fund ** 8,711,951
* The Plan Participant loans (highest and lowest interest
rates are 10.50% and 4.00%, respectively) ** 8,328,525
* Vanguard Group Vanguard International Growth Fund ** 5,431,044
* Vanguard Group Vanguard Target Retirement 2015 Fund ** 5,021,187
* Vanguard Group Vanguard Long-Term Investment Grade Fund ** 4,763,847
* Vanguard Group Vanguard Target Retirement 2025 Fund ** 2,236,551
* Vanguard Group Vanguard Target Retirement 2035 Fund ** 1,711,474
* Vanguard Group Vanguard Target Retirement 2005 Fund ** 1,067,515
* Vanguard Group Vanguard Explorer Fund ** 804,718
* Vanguard Group Vanguard Total Bond Market Index Fund ** 621,048
* Vanguard Group Vanguard Extended Market Index Fund ** 575,787
* Vanguard Group Vanguard Long-Term Treasury Fund ** 228,582
* Vanguard Group Vanguard Target Retirement 2045 Fund ** 227,460
* Vanguard Group Vanguard Short-Term Treasury Fund ** 206,926
* Vanguard Group Vanguard Target Retirement Income Fund ** 187,297
* Vanguard Group Vanguard Intermediate-Term Treasury Fund ** 37,016
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Total investments $ 240,791,865
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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.
Dated: June 21, 2005 M-I RETIREMENT PLAN
By: Administrative Committee for
the M-I Retirement Plan
By: /s/ W. FRANK RICHTER
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W. Frank Richter, Member
By: /s/ MALCOLM W. ANDERSON
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Malcolm W. Anderson, Member
11
EXHIBIT INDEX
Exhibit
Number Description
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23.1 Consent of Independent Registered Public Accounting Firm
12