At the recent Offshore Technology Conference in Houston, where the world's oil service companies show off their latest wares, Smith International Inc. hosted one of the biggest and brightest exhibits.
"I was shocked," said Jeffrey Freedman, a longtime Smith watcher who follows the industry for the investment firm of Smith Barney, Harris Upham & Co. "I expected to see a tiny thing from Smith, and there they were, front and center, with the biggest display."
Just fourteen months after filing for bankruptcy to protect itself from a $205-million judgment won by its archrival, Hughes Tool Co., Newport Beach-based Smith has emerged from the shadows.
The new, lean Smith has shrunk from 10 divisions to three and has a corporate staff of 42, down from 117 a year ago.
Despite a $149-million loss in fiscal 1986, Smith executives predict a profitable first quarter for 1987. The company has $150 million cash on hand, and Smith's stock price has climbed from $1.50 a share in the second quarter of 1986 to $5.25 in trading on the New York Stock Exchange on Friday.
The burden of seven separate appeals filed by Hughes was lifted Thursday when a bankruptcy judge dismissed them all. And Smith continues to negotiate a reduced settlement of the $205-million patent infringement award with the newly merged Baker-Hughes.
Although conscious of disastrous market conditions and burdened by the weight of its legal problems, Smith is aggressively marketing a line of new oil patch products and planning for its future.
"Most analysts see us as a survivor," said Chief Financial Officer Loren K. Carroll.
Indeed, industry analysts say Smith's bold approach at the trade show and its new line of drilling equipment reflect the confidence gained from surviving the worst year in its history.
Still, some analysts now question whether Smith can remain independent in a shrinking universe of oil services companies. But that question won't have to be answered until Smith emerges from its Chapter 11 reorganization.
Smith's horrendous year began in February, 1986, when the Newport Beach-based firm lost an acrimonious 14-year-old patent infringement battle to Houston-based Hughes Tool Co. A Los Angeles federal judge ruled that Smith's use of Hughes' patented drill bit technology was worth $205 million, making it one of the largest damage awards in U.S. history. A few days later, seeking to protect its assets, Smith filed for protection under Chapter 11 of the federal bankruptcy code.
Outside the Los Angeles federal courthouse, 1986 was not much better for Smith.
For the year ended Dec. 31, Smith suffered a $149-million net loss on revenues of $415.2 million. At its peak in 1981, Smith reported $1.2 billion in revenues and net income of $133.1 million.
Sales to Smith's primary customers--oil companies--plunged because a worldwide oil glut forced oil prices to a low of about $10 a barrel. At those depressed prices, oil companies stopped drilling, and the number of drilling rigs active in the United States plummeted 59% to 896 rigs.
In response to all these factors, Smith slashed its worldwide work force from 7,400 to 3,100 and sold 87% of its U.S. manufacturing capacity.
Today, Smith Chairman Jerry W. Neely cheerfully says that the staff is so lean that there are only three people between him and the customer.
"You can't say poor us when everybody else is in the same boat," Neely said in his first interview in more than a year.
Neely says he spends his time supervising day-to-day business operations, while Carroll deals primarily with the bankruptcy proceedings.
"I try to make everybody feel they have a stake in this," said Neely, who meets frequently with his division managers and employees in an effort to boost morale.
"Our customers have been very supportive," Neely said. "And our suppliers are standing by us."
He says the remaining Smith employees are a loyal, close-knit group who believe in the company's future. When asked how he has hung on through adversity, he thought for a moment, and then said: "You either quit and leave or deal with the realities of life."
Neely, who will earn $300,000 this year, admits that it is sometimes difficult to concentrate on the business at hand while worrying about the $205-million Hughes judgment. A federal appellate court in Washington is expected to make a decision within the month on whether or not to uphold the judgment.
Even if it is upheld, Neely says, Smith has "26 or 29 plans, and none suggest you just give them the keys (to Smith)."
He says any reorganization must be fair to all the creditors, not just Hughes.