e11vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO
FEE REQUIRED) |
For the fiscal year ended December 31, 2005
OR
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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
Index to Financial Statements and Supplementary Information
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, 2005 and 2004, and the
related statement of changes in net assets available for plan benefits for the year ended December
31, 2005. 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, 2005 and 2004, and the changes in net
assets available for plan benefits for the year ended December 31, 2005, 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) as of
December 31, 2005 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 2005 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 26, 2006
3
SMITH INTERNATIONAL, INC. 401(k) RETIREMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AS OF DECEMBER 31, 2005 AND 2004
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2005 |
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2004 |
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ASSETS: |
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Investments, at fair value |
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$ |
286,180,815 |
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$ |
243,986,532 |
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Receivables- |
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Company contributions |
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8,348,775 |
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6,440,013 |
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Participant contributions |
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4,236 |
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924 |
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Total receivables |
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8,353,011 |
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6,440,937 |
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NET ASSETS AVAILABLE FOR PLAN BENEFITS |
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$ |
294,533,826 |
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$ |
250,427,469 |
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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, 2005
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NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2004 |
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$ |
250,427,469 |
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ADDITIONS: |
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Income - |
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Interest and dividend income |
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10,711,351 |
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Net appreciation in fair value of investments (Note 6) |
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15,657,194 |
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Net investment gain |
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26,368,545 |
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Contributions- |
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Company, net of forfeitures |
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16,203,403 |
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Participant |
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13,727,028 |
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Rollover |
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1,527,872 |
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Total contributions |
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31,458,303 |
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Total additions |
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57,826,848 |
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DEDUCTIONS: |
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Benefits paid to participants |
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13,258,650 |
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Transfers to other plans, net |
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300,242 |
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Administrative expenses |
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161,599 |
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Total deductions |
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13,720,491 |
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NET INCREASE IN NET ASSETS AVAILABLE FOR PLAN BENEFITS |
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44,106,357 |
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NET ASSETS AVAILABLE FOR PLAN BENEFITS AT DECEMBER 31, 2005 |
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$ |
294,533,826 |
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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, 2005. 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 makes basic, retirement and, in certain cases, discretionary matching contributions to
each participant’s account under the Plan. Participants receive a basic match on contributions to
the Plan of up to 1.5 percent of qualified compensation and a retirement contribution ranging from
two percent to six percent of qualified compensation. In addition, the Board of Directors may
provide discretionary profit-sharing contributions based upon financial performance to 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 Smith and M-I SWACO (“M-I”), a
majority-owned subsidiary of the Company, or Wilson International, Inc. (“Wilson”), a wholly-owned
subsidiary of 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 retirement,
matching and discretionary contributions among one or all of the available investments, including
the Company’s 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 the
Company’s 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 provided that they have no more than two loans
outstanding at anytime, 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 2005,
forfeitures of $501,842 and $161,599 were used to reduce the Company’s contributions and pay Plan
expenses, respectively. Forfeitures available at December 31, 2005 and 2004, totaled $38,394 and
$120,011, respectively.
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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
common/collective trust contains benefit-responsive investment contracts that are valued at
contract value which approximates fair value. Contract value represents contributions made under
the contract, plus earnings, less participant withdrawals and administrative expenses. There are
no reserves against contract value for credit risk of the contract issue or otherwise. The
crediting interest rates were 4.0 percent at December 31, 2005 and 2004, respectively. The average yield for the year ended December 31, 2005 was 4.1 percent. 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. |
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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.
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RISKS AND UNCERTAINTIES |
The Plan provides for various investments in registered investment company funds, a
common/collective trust 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:
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2005 |
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2004 |
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Domestic Stock Funds |
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35.2 |
% |
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38.7 |
% |
Balanced Funds (Stocks and Bonds) |
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22.5 |
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21.5 |
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Smith International, Inc. common stock |
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16.6 |
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12.3 |
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Money Market Fund |
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13.5 |
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15.5 |
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Participant loans and other |
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4.2 |
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4.6 |
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International Stock Funds |
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3.7 |
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3.3 |
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Bond Funds |
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3.6 |
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3.6 |
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Stable Value Fund |
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0.7 |
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0.5 |
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100.0 |
% |
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100.0 |
% |
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8
| 5. |
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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 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.
Individual investments which exceed five percent of net assets available for Plan benefits as of
December 31, are as follows:
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2005 |
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2004 |
Vanguard PRIMECAP Fund |
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$ |
48,967,191 |
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$ |
47,356,229 |
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Smith International, Inc. common stock |
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47,436,254 |
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29,995,432 |
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Vanguard Wellington Fund |
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45,191,572 |
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39,609,084 |
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Vanguard Prime Money Market Fund |
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38,628,317 |
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37,895,105 |
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Vanguard 500 Index Portfolio Fund |
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24,698,557 |
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22,749,096 |
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Vanguard Windsor Fund |
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23,651,912 |
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22,958,986 |
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During 2005, 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:
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2005 |
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Smith International, Inc. common stock |
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$ |
12,279,261 |
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Equity funds |
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2,772,680 |
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Balanced funds |
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605,253 |
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$ |
15,657,194 |
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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, 2005
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(b) |
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(c) |
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(d) |
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(e) |
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Description of Investment, Including |
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Identity of Issue, Borrower, |
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Maturity Date, Rate of Interest, |
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Lessor or Similar Party |
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Collateral, Par or Maturity Value |
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Cost |
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Current Value |
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Vanguard Group |
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Vanguard PRIMECAP Fund |
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** |
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$ |
48,967,191 |
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| * |
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Smith International, Inc. |
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Smith International, Inc. common stock |
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** |
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47,436,254 |
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| * |
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Vanguard Group |
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Vanguard Wellington Fund |
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** |
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45,191,572 |
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| * |
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Vanguard Group |
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Vanguard Prime Money Market Fund |
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** |
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38,628,317 |
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| * |
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Vanguard Group |
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Vanguard 500 Index Portfolio Fund |
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** |
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24,698,557 |
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| * |
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Vanguard Group |
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Vanguard Windsor Fund |
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** |
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23,651,912 |
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| * |
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The Plan |
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Participant loans (highest and lowest
interest rates are 10.50% and 5.00%,
respectively) |
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** |
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11,838,112 |
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| * |
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Vanguard Group |
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Vanguard International Growth Fund |
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** |
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10,698,125 |
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| * |
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Vanguard Group |
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Vanguard Long-Term Investment Grade Fund |
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** |
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9,404,046 |
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| * |
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Vanguard Group |
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Vanguard Target Retirement 2015 Fund |
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** |
|
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6,604,447 |
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| * |
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Vanguard Group |
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Vanguard Target Retirement 2025 Fund |
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** |
|
|
5,351,787 |
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| * |
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Vanguard Group |
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Vanguard Target Retirement 2035 Fund |
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** |
|
|
3,380,260 |
|
| * |
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Vanguard Group |
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Vanguard Target Retirement 2005 Fund |
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** |
|
|
2,463,679 |
|
| * |
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Vanguard Group |
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Vanguard Retirement Savings Trust |
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** |
|
|
1,946,579 |
|
| * |
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Vanguard Group |
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Vanguard Extended Market Index Fund |
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** |
|
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1,846,745 |
|
| * |
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Vanguard Group |
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Vanguard Explorer Fund |
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** |
|
|
1,523,559 |
|
| * |
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Vanguard Group |
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Vanguard Target Retirement 2045 Fund |
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** |
|
|
1,143,239 |
|
| * |
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Vanguard Group |
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Vanguard Total Bond Market Index Fund |
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** |
|
|
405,305 |
|
| * |
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Vanguard Group |
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Vanguard Long-Term Treasury Fund |
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** |
|
|
300,398 |
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| * |
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Vanguard Group |
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Vanguard Target Retirement Income Fund |
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** |
|
|
281,238 |
|
| * |
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Vanguard Group |
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Vanguard Short-Term Treasury Fund |
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** |
|
|
221,766 |
|
| * |
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Vanguard Group |
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Vanguard Brokerage Option Fund |
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** |
|
|
101,638 |
|
| * |
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Vanguard Group |
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Vanguard Intermediate-Term Treasury Fund |
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** |
|
|
96,089 |
|
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Total investments |
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$ |
286,180,815 |
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| * |
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Party-in-interest. |
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| ** |
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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.
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| Date: June 28, 2006 |
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SMITH INTERNATIONAL, INC. |
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401(k) RETIREMENT PLAN |
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By:
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Administrative Committee for |
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the Smith International, Inc. |
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401(k) Retirement Plan |
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By:
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/s/ Richard E. Chandler, jr. |
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Richard E. Chandler, Member |
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By:
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/s/ Malcolm W. Anderson |
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Malcolm W. Anderson, Member |
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11
EXHIBIT INDEX
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| Exhibit |
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| Number |
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Description |
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23.1
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Consent of Independent Registered Public Accounting Firm |
12