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Despite Legal Problems, Firm Turns Aggressive in Marketing New Products : A Leaner Smith International Is Back in Fighting Trim

May 10, 1987|JANE APPLEGATE | Times Staff Writer

At the recent Offshore Technology Conference in Houston, where the world's oil service companies show off their latest wares, Smith International 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 14 months after filing for bankruptcy to protect itself from a $205-million judgment won by archrival Hughes Tool, 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 in cash on hand, and Smith's stock price has climbed from a low of $1.50 a share a year ago to $5.25 on Friday.

Court Eases Burden

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 Hughes Tool, which recently merged with Baker International and became 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 industry products and planning for its future.

"Most analysts see us as a survivor," Chief Financial Officer Loren K. Carroll said.

Indeed, industry analysts said Smith's bold approach at the trade show and its new line of drilling equipment reflects the confidence gained from surviving the worst year in its corporate 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 company lost its acrimonious 14-year patent infringement battle to Houston-based Hughes Tool.

A Los Angeles federal judge ruled that Smith's infringement of Hughes' patented drill bit technology was worth $205 million, among the largest damage awards in U.S. history.

A few days later, seeking to protect its assets from seizure during the appeals process, Smith filed for protection under Chapter 11 of the U.S. 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 revenue of $415.2 million. At its peak in 1981, Smith reported net income of $133.1 million on $1.2 billion in revenue.

Sales to Smith's primary customers--oil companies--plunged after a worldwide oil glut forced oil prices to a low of about $10 a barrel by early 1986.

At those depressed prices, oil companies stopped drilling, and the number of drilling rigs active in the United States plummeted 59% to 896. In response to all these factors, Smith slashed its worldwide work force to 3,100 from 7,400 and sold 87% of its U.S. manufacturing capacity.

Staff Cut Sharply

Today, Smith Chairman Jerry W. Neely cheerfully says 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 (market-wise)," Neely said last week in his first lengthy interview in more than a year.

Neely said 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 to boost morale. "Our customers have been very supportive, and our suppliers are standing by us."

He said 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 replied: "You either quit and leave, or deal with the realities of life."

Neely, who earns $300,000 a year, acknowledged that it is sometimes difficult to concentrate on the business at hand while worrying about the $205-million Hughes judgment.

A federal appeals court in Washington is expected to make a decision soon on whether to uphold the district court's judgment.

Has Some Alternatives

Even if a multimillion-dollar judgment is upheld, Neely said, Smith has alternatives "and none suggest you just give (Baker-Hughes) the keys (to Smith)."

He said any reorganization must be fair to all the creditors, not just Baker Hughes.

Smith executives said they welcomed the recent merger of Baker and Hughes because Smith and Baker have always had a cordial relationship. Baker had been based in nearby Orange until moving its headquarters to Houston last March.

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