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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, 2001
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 N. SAM HOUSTON PARKWAY, SUITE 600
HOUSTON, TEXAS 77060
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The following financial statements and exhibits are filed as a part of this
annual report:
Sequentially
Numbered
Page
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Index to Financial Statements and Supplementary Information:
Independent Auditors' Report 3
Copy of Prior Year's Report of Independent Public Accountants* 4
Financial Statements:
Statements of Net Assets Available for Plan Benefits
as of December 31, 2001 and 2000 5
Statement of Changes in Net Assets Available for
Plan Benefits for the Year Ended December 31, 2001 6
Notes to Financial Statements 7
Supplemental Schedule:
Schedule H, line 4i-Schedule of Assets (Held at End of Year) as of December 31, 2001 12
Schedule G, part 3-Schedule of Nonexempt Transactions 13
Schedules other than those listed above are omitted because of the absence of
the conditions under which they are required.
Exhibits:
23.1 - Independent Auditors' Consent 16
23.2 - Independent Auditors' Consent 17
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* - As allowed under the provisions of Rule 2-02(e) of Regulation S-X, the
Company has included a copy of Arthur Andersen's most recent signed and
dated report to satisfy the filing requirements.
2
INDEPENDENT AUDITORS' REPORT
To the Administrative Committee of
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, 2001, and
the related statement of changes in net assets available for plan benefits for
the year then ended. These financial statements are the responsibility of the
Administrative Committee. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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
audit provides 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, 2001, and the changes in net assets available for plan benefits for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of assets (held
at end of year) as of December 31, 2001, 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 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 28, 2002
3
Smith International Inc. ("Smith") dismissed Arthur Andersen LLP on April 15,
2002 and subsequently engaged Deloitte & Touche LLP as its independent auditors.
The predecessor auditor's report appearing below is a copy of Arthur Andersen's
previously issued opinion dated June 20, 2001. Arthur Andersen has advised
Smith in writing that key engagement members have resigned from the firm prior
to the date of this filing and, based upon specific advice from the Securities
and Exchange Commission, their firm is therefore precluded from manually signing
previously issued audit opinions relating to Smith. Since Smith is unable to
obtain a manually signed audit report, a copy of Arthur Andersen's most recent
signed and dated report has been included to satisfy filing requirements, as
permitted under Rule 2-02(e) of Regulation S-X.
COPY OF PRIOR YEAR'S REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Administrative Committee of
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, 2000 and
1999, and the related statement of changes in net assets available for plan
benefits for the year ended December 31, 2000. These financial statements and
the supplemental schedules referred to below are the responsibility of the
Administrative Committee. Our responsibility is to express an opinion on these
financial statements and supplemental schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. 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, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of the Plan as
of December 31, 2000 and 1999, and the changes in net assets available for plan
benefits for the year ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of assets (held
at end of year) as of December 31, 2000, and schedule of nonexempt transactions
for the year ended December 31, 2000, 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 supplemental schedules have been subjected to the
auditing procedures applied in the audits 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.
ARTHUR ANDERSEN LLP
Houston, Texas
June 20, 2001
4
M-I RETIREMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AS OF DECEMBER 31, 2001 AND 2000
2001 2000
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ASSETS:
Investments, at fair value $150,652,728 $131,562,614
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Receivables-
Company contributions 5,745,466 2,485,417
Participant contributions 606,895 833,132
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Total receivables 6,352,361 3,318,549
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NET ASSETS AVAILABLE FOR PLAN BENEFITS $157,005,089 $134,881,163
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The accompanying notes are an integral part of these financial statements.
5
M-I RETIREMENT PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 2001
NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2000 $ 134,881,163
ADDITIONS:
Income (loss)-
Interest income 1,400,447
Dividend income 5,278,657
Net depreciation in fair value of common stock (2,275,944)
Net depreciation in fair value of registered investment companies (7,518,801)
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Total loss (3,115,641)
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Contributions-
Company, net of forfeitures 10,428,992
Participant 9,535,003
Rollover 11,647,383
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Total contributions 31,611,378
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Total additions 28,495,737
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DEDUCTIONS:
Benefits paid to participants 6,286,478
Administrative expenses 85,333
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Total deductions 6,371,811
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NET ADDITIONS TO NET ASSETS AVAILABLE FOR PLAN BENEFITS 22,123,926
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NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2001 $ 157,005,089
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The accompanying notes are an integral part of this financial statement.
6
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. Participants should refer to the Plan document for a more complete
explanation of the Plan's provisions as the Plan document is controlling at all
times.
General
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 who meet certain eligibility requirements.
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" or the "Trustee") is the
trustee of all investments held by the Plan.
Eligibility
An eligible employee of the Company, as defined under the Plan, may participate
in the Plan on the first day of the first month following the date of hire.
There is no minimum age requirement under the Plan.
Compensation
Compensation, as defined in the Plan, includes the cash compensation that is
paid by the Company to a participant during the Plan year for services performed
and is included in the employee's gross income under the Internal Revenue Code
of 1986, as amended (the "Code"), including regular or base salary, wages,
commissions, overtime, bonuses, nondeferred 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 benefits paid or credited
under the Plan or any other deferred compensation plan maintained by the
Company.
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 $10,500 during 2001 under Section 402(g) of the Code.
7
At its discretion, the Company may provide contributions to the Plan for each
participant equal to 3 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 2001, the Company made a Basic Contribution
equal to 3 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 (from the Company's net income or any accumulated earnings and profits)
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 2001, the Company made a Profit-Sharing
Contribution equal to 75 percent of a participant's contributions less matching
contribution, subject to certain limitations.
Vesting
Participants are immediately vested in their contributions and the net earnings
thereon. Participants will vest annually in the Company's contributions in 20
percent increments commencing with their first year of service. Participants, or
their beneficiaries, as appropriate, may also become fully vested in the
Company's contributions in the event of a participant's death, termination of
employment by reason of total or permanent disability or retirement from the
Company upon reaching the normal retirement age of 65.
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.
Investment Options
At December 31, 2001 and 2000, the Plan's investments are held in a trust fund
administered by Vanguard.
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 companies, a common/collective trust offered by the
Vanguard Group of Investment Companies (the "Vanguard Funds") and the common
stock of Smith International, Inc.
Payment of Benefits
A participant may elect to receive benefit payments by any one of the several
methods provided by the Plan upon termination of service or retirement.
The Plan also provides for hardship distributions to participants with immediate
and significant financial needs, subject to authorization by the Company. Such
distributions are limited to the vested amount then credited to such
participant's account.
Loans
Participants may borrow from their accounts no more than once annually, subject
to terms specified by the Company. Participants may not take out a loan that, in
the aggregate, exceeds $50,000 or 50 percent of the member's vested interest in
his or her account. These loans bear annual rates of interest
8
commensurate with the prevailing interest rate charged on similar commercial
loans had the loan been made under similar circumstances by a lending
institution.
Forfeitures
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. Any remaining
forfeitures may be used to reduce subsequent Company contributions or offset
Plan expenses. At December 31, 2001 forfeited nonvested accounts totaled
$219,591. During 2001, employer contributions were reduced by $387,425 on
forfeited nonvested accounts.
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.
Termination of the Plan
The Company presently intends to continue the Plan indefinitely. However, the
Company reserves the right to discontinue the Plan at any time and for any
reason. In the event of termination, partial termination or discontinuance of
contributions under the Plan, participants will be credited with a fully vested
interest in their respective Company contributions.
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
Plan investments are stated at fair value, as determined by the Trustee
primarily by reference to published market data, except for the Vanguard
Retirement Savings Trust which is stated at contract 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 5.9
percent for the year ended December 31, 2001. The average crediting interest
rate at December 31, 2001 was 5.8 percent.
9
Investment Income
Net depreciation in fair value of registered investment companies and net
depreciation in fair value of common stock in the statement of changes in net
assets available for plan benefits includes the realized gains or losses on the
sale of investments and unrealized appreciation or depreciation in the fair
value of investments.
Participant Account Valuation
The Plan provides that each fund's income shall be allocated daily to the
individual participant in the proportion that the individual participant's
account balance in such fund bears to the total balance of that fund, after
reducing the participant's account by any distributions from the account on a
daily basis.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Administrative Committee to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
changes in net assets during the reporting period. Actual results could differ
from those estimates.
3. TRANSFER FROM OTHER PLAN:
The Company acquired substantially all of the assets of the Sweco Division of
Emerson ("Sweco") on December 15, 2000. Certain former employees of Sweco were
given prior service credit for employment under Sweco and became eligible to
participate in the Plan effective January 1, 2001. In addition, certain assets
of Emerson-sponsored defined contribution plans were merged into the Plan
effective February 28, 2001.
4. FEDERAL INCOME TAX STATUS:
The Plan obtained its latest determination letter on March 4, 1998, 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 and restated since receiving the determination letter. A request for a
new determination letter was submitted on February 14, 2002. However, the
Administrative Committee believes that the Plan is currently designed and being
operated in compliance with the applicable requirements of the Code. Therefore,
the Administrative Committee believes that the Plan was qualified and the
related trust was tax-exempt as of the financial statement date.
5. RISKS AND UNCERTAINTIES:
The Plan provides for various investments in common stock, registered investment
companies 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 of investment
securities will occur in the near term.
10
6. PARTY-IN-INTEREST TRANSACTIONS:
The Plan invests in shares of common stock of Smith. As Smith is the parent
company of the sponsor, these transactions qualify as party-in-interest
transactions. In addition, the Plan invests in shares of registered investment
companies and a common/collective trust fund managed by Vanguard. As Vanguard is
the Trustee of the Plan, these transactions qualify as party-in-interest
transactions.
7. INVESTMENTS:
Individual investments, which exceed 5 percent of net assets available for Plan
benefits as of December 31, 2001, are as follows:
Smith International, Inc., common stock $ 12,535,505
Vanguard 500 Index Portfolio Fund 10,339,251
Vanguard Prime Money Market Fund 14,962,618
Vanguard PRIMECAP Fund 20,263,786
Vanguard Retirement Savings Trust 16,552,333
Vanguard Wellington Fund 52,324,632
Vanguard Windsor Fund 13,136,016
Individual investments, which exceed 5 percent of net assets available for Plan
benefits as of December 31, 2000, are as follows:
Smith International, Inc., common stock $ 10,076,120
Vanguard 500 Index Portfolio Fund 11,000,544
Vanguard PRIMECAP Fund 25,155,689
Vanguard Retirement Savings Trust 15,627,887
Vanguard Wellington Fund 43,441,170
Vanguard Windsor Fund 11,175,992
8. 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.
11
M-I RETIREMENT PLAN
SCHEDULE H, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR)
AS OF DECEMBER 31, 2001
Current
Identity of Issue Description of Investment Cost Value
--------------------------------------- --------------------------------------- ---- ------------
Smith International, Inc.* Smith International, Inc., common stock (a) $ 12,535,505
Vanguard Group of Investment Companies* Vanguard 500 Index Portfolio Fund (a) 10,339,251
Vanguard Group of Investment Companies* Vanguard International Growth Fund (a) 1,974,619
Vanguard Group of Investment Companies* Vanguard Long-Term Corporate Fund (a) 2,241,457
Vanguard Group of Investment Companies* Vanguard Prime Money Market Fund (a) 14,962,618
Vanguard Group of Investment Companies* Vanguard PRIMECAP Fund (a) 20,263,786
Vanguard Group of Investment Companies* Vanguard Retirement Savings Trust (a) 16,552,333
Vanguard Group of Investment Companies* Vanguard Wellington Fund (a) 52,324,632
Vanguard Group of Investment Companies* Vanguard Windsor Fund (a) 13,136,016
The Plan* Participant loans (highest and lowest
interest rates are 10.5% and 4.75%,
respectively) (a) 6,322,511
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$150,652,728
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* Identified as a party in interest.
(a) Cost omitted for participant-directed investments.
12
M-I RETIREMENT PLAN
SCHEDULE G, PART 3 - SCHEDULE OF NONEXEMPT TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
Relationship to
Plan, Employer Interest
Identity of or Other Incurred
Party Involved Party in Interest Description of Transactions Amount Loaned on Loan
----------------------- -------------------- -------------------------------------------------- ------------- --------------
Due to procedural deficiencies, there were
two untimely remittances 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 20, 2001, maturity of
April 23, 2001, with interest of 7.58
percent in the quarter outstanding $520,867 $2,548
Deemed loan dated September 21, 2001, maturity
of September 25, 2001, with interest of 6.78
percent in the quarter outstanding 522,485 2,386
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$ 4,934(a)
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(a) The employer remitted interest to the Plan subsequent to Plan year-end.
13
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: July 1, 2002
M-I RETIREMENT PLAN
By: Administrative Committee for the
M-I Retirement Plan
By: /s/ Geri D. Wilde
Geri D. Wilde
Assistant Treasurer
14
INDEX TO EXHIBITS
Exhibit
Number Description
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23.1 Independent Auditors' Consent
23.2 Independent Auditors' Consent
15