The painting of a stormy landscape hanging behind Smith International Inc. Chairman Jerry Neely's desk suits the dark mood around the company's Newport Beach headquarters.
So far this year, the provider of equipment and services for oil and gas drillers reported a 6-month loss of $50 million and laid off more than 800 workers, including 31 at the corporate headquarters.
Along with the falling financial fortunes, morale has sunk to a new low as rumors of additional layoffs continue to circulate among employees despite official denials that further cuts are planned.
The company is not only struggling to weather a prolonged industrywide slump, fierce price discounting and depressed oil prices, it also remains embroiled in a 13-year-old, $3-billion patent infringement lawsuit filed by Hughes Tool Co. The patent in question, for a drilling bit, quietly expired on Aug. 20, but a federal court had already ruled that Smith had infringed on Hughes' patent. But the court still must decide, what, if any, damages Smith must pay Hughes. A trial is scheduled to begin Jan. 2.
It is against this grim backdrop that Smith is attempting to map its future.
"I can't increase the oil price or stop Iraq and Iran from bombing each other, but we can be well prepared for the Hughes suit, improve our core business and get profitable," Neely said in a recent interview.
Rumors about Smith's search for a financially strong business partner are rampant, although company officials deny them and some industry analysts wonder why any company would want to buy Smith while it is haunted by the specter of the Hughes lawsuit.
Still, other analysts interviewed said even with the Hughes suit, Smith could still be a bargain. They consider Beverly Hills-based Litton Industries Inc. a likely candidate to rescue Smith.
Not only are Neely and Litton Chairman Fred O'Green friends, but Litton's Western Geophysical Group is one of the most successful companies in the oil-field services industry. Western Geophysical and Litton's other oil-related subsidiaries generated about $700 million in revenues in 1984.
Litton considers the oil-services business one of its three core businesses, according to company spokesman John Thom. In early 1984, Litton acquired Core Labs, the world's largest core-analysis company. (Cores are geological samples used to determine which rock types are present in an oil or gas reservoir.) Litton, which reported net income of $223 million on revenues of $3.5 billion for the nine months ended April 30, is not only financially strong but also located nearby, making any business combination easier.
"Litton is so logical, it's almost perfect," said one analyst who follows Smith.
However, Jim Carr, Litton's vice president of corporate communications, would not comment on any discussions or possible business combination with Smith: "We say nothing one way or another."
Other analysts said TRW Inc. is a potential suitor, and some believe industry giant Schlumberger Ltd. may offer to buy parts of Smith's operations.
Meanwhile, Neely and Smith President Fred Barnes are cutting expenses to the bone. "Fred Barnes is very conservative, and foremost in his mind is financial integrity," one analyst said. "If he has to slice into muscle to keep the company from drifting into serious financial shape, he will."
As part of a companywide austerity program, Smith recently consolidated and restructured several divisions and moved into smaller corporate quarters in Newport Beach.
"There is no more to cut on price, so we are trying to stabilize the production-to-sales ratio," Neely said.
Instead of focusing on manufacturing, Neely said, Smith is now focusing on its tool rental business and on providing services.
Neely said the company also has been improving its products to make them more efficient because "people are demanding more for their money."
Neely also said he has been talking to investment bankers about a possible long-term bond deal to replace the company's commercial paper.
"This is a logical time to look at a window of opportunity for long-term financing," he said. No offerings have been filed so far, however.
Smith's credit rating was downgraded in early June by Standard and Poor's Corp. S&P reduced Smith's bond rating from single A to triple B and reduced the rating on its commercial paper from A-1 to A-3, which is not considered investment grade by many investors. Smith's long-term debt stood at $173 million on June 30, 1985, down from $235 million on Dec. 31, 1984.
Stock Prices Fall
Smith's stock price also has suffered in recent months. It closed at $8.50, up 12.5 cents, Wednesday on the New York Stock Exchange, compared with a high of $20.50 during the second quarter of 1984. Some analysts believe that despite the Hughes suit, Smith is vulnerable to a takeover because its stock is selling for less than half its book value.
Oppenheimer Holdings Inc. of New York owns 8.32% of Smith's 22.7 million shares. Torray Clark & Co. of Bethesda, Md. holds 11.7%. Los Angeles-based Whittaker Corp. holds 7%. Company officers and directors hold 3.5% of the company's outstanding shares. Neely owns 1.7% of the stock, and Barnes owns less than 1%.
While Neely and Barnes are steering Smith through troubled waters, four law firms and more than 20 attorneys are devoted to defending Smith in the damages portion of the Hughes patent suit.