Smith International, Inc. - Company Profile, Information, Business Description, History, Background Information on Smith International, Inc.



16740 Hardy Street
Houston, Texas 77032
U.S.A.

History of Smith International, Inc.

A leading supplier of equipment and services used in the drilling of oil and gas wells, Smith International, Inc. manufactures and markets drilling fluids and systems, highly-engineered drill bits, and drilling and completion products and services. During the mid-1990s, Smith International derived 97 percent of its revenues from sales to the oil and gas industry, with international sales accounting for more than half of the company's total sales. The company filed for protection under Chapter 11 of the U.S. Bankruptcy Code in early 1986, then emerged out of bankruptcy reorganized and restructured in late 1987. By the mid-1990s, after several years of consolidating its businesses, Smith International had begun to restore much of its lost luster and stood positioned as the second-largest drill bit manufacturer in the world, poised to take advantage of gains recorded by the market for high-technology drill bits.

The historical roots of Houston, Texas-based Smith International originate in southern California, where the founder of the company, Herman C. Smith, resided and where the company maintained its corporate offices for most the 20th century. The chain of events that led up to the creation of Smith International began in 1902, when Herman Smith opened a blacksmith shop in Whittier, California. Later that same year, oil was discovered in the area, a defining and auspicious discovery for Smith International and an event to be heralded by the 20-year-old Smith and his infant blacksmith shop. The arrival of oil rigs and attendant oil workers provided a welcomed infusion of business for Smith's shop, keeping the young blacksmith busy sharpening the oilmen's drill bits and providing a steady source of cash for the newly opened shop. For years, Smith kept the area's drill bits sharp and repaired other tools used in drilling for oil, developing a relationship with the oil drillers who frequented his shop that gradually led Smith in a new business direction and formed the foundation for Smith International.

By listening to oil drillers discuss the shortcomings of the tools of their trade and by eliciting their suggestions for improvements, Smith developed an expertise that set him apart from the typical blacksmith and, over time, distinguished his shop as a haven for oil drillers and their equipment. Using the information he had gleaned from oil drillers, Smith began making unique adjustments to the tools brought into his shop and he began developing new tools. By the 1920s, Smith's business, which had been named H.C. Smith Manufacturing Company, subsisted on re-working fishtail bits and modifying oil tools as its mainstay business, having secured a place for itself in the California oil and gas industry by staying attuned to the peculiar needs of its customers. The business of H.C. Smith Manufacturing Company, however, would not be inherited by Smith International, despite logical inferences to the contrary. In the history of Smith International, the three decades Smith spent in building H.C. Smith Manufacturing Company represented a proving ground for the establishment of the company that would eventually become one of the world's largest suppliers of drill bits and other oilfield products to the global oil and gas industry. For Smith International, the history of H.C. Smith Manufacturing Company was merely the prelude to its distinct genesis and the decades of development to follow.

The cause for the interruption was attributable solely to Herman Smith, who, by the late 1920s, had decided it was time to retire. In 1929, at age 47, Smith sold the business he had created over the previous 27 years to Globe Oil Tools, then settled into retirement and ended his working days in the oil and gas industry. As it turned out, however, Smith's departure from the oil and gas industry did not mark the beginning of his retirement, but rather the start of a seven-year hiatus. Unable to enjoy the vicissitudes of retirement, Smith returned to action in the business world in 1936 when he purchased Allen Brothers Oil Tools and renamed the company H.C. Smith Oil Tool Company, the earliest predecessor to Smith International.

Once back in business, Smith set to work building an enterprise that would make his name internationally recognized decades after his death, leaving a lasting vestige to his efforts in creating H.C. Smith Manufacturing Company and H.C. Smith Oil Tool Company. The H.C. Smith Oil Tool Company corporate title was retained until 1959, when the company went public and changed its name to Smith Tool Co. The following year a parent organization, Smith Industries International, Inc. was formed to facilitate expansion both domestically and abroad in the coming decade, which the company accomplished at a 15 percent rate during the 1960s. By the end of the 1960s, yet another name change was in the offing, occurring in 1969 when "Industries" was dropped from the corporate title and Smith International, Inc. was adopted as the company's official name. As Smith International, Inc., the company would record its most prolific growth, rising to become an international giant in the oil and gas equipment industry, and, under the same corporate banner, the company also would struggle through its most tortuous years, teetering on the brink of failure.

By the beginning of the 1970s, Smith International had established itself as a leading manufacturer of drilling equipment for natural resource development, its broad line of drilling equipment used by companies involved in developing oil, gas, minerals, and water. Supported by a well-established overseas business, which generated nearly 40 percent of the company's total annual sales, Smith International had grown to become a roughly $100-million-a-year concern by the early 1970s, deriving three-quarters of its sales from its involvement in oil and gas markets. In the decade ahead, Smith International would register its most prodigious success, outdistancing its competitors to leap to the top tier of its industry, ranking, by the beginning of the 1980s, as the second-largest drill-bit manufacturer in the world, trailing only Hughes Tool Co. Through internal growth, astute acquisitions, and international and domestic expansion, annual sales for the company soared exponentially, swelling to $1.2 billion by the beginning of the 1980s, while earnings followed suit, jumping to $133 million, more than the company had collected in sales a decade earlier.

Despite the impressive financial figures posted by the company, the early 1980s marked the beginning of what could have been the end for Smith International, as the demand for oil rigs shuddered to a halt in the face of declining oil prices. Heavily dependent on the fortunes of the oil and gas industry, Smith International began to suffer from the repercussive affects of anemic drilling activity, not the first time the company's business had faltered in its nearly 50 years of existence in the frequently capricious oil market. Periods of market stagnation had pocked Smith International's financial performance throughout its history, but the affects of widespread depressed oil activity were exacerbated by other negative developments peculiar to Smith International, which, once their deleterious power reached full force, left the company perilously close to complete collapse.



The first of the negative developments to compound the severity of pervasive depressed oil drilling activities was Smith International's ill-conceived, ill-timed attempt to take control of Gearhart Industries Inc., an oilfield services company that specialized in sophisticated wireline, measurement-while-drilling services. In November 1983, as the oil industry continued its retrogressive slide, Smith International paid more than $100 million for General Electric company's 23 percent stake in Gearhart, a move welcomed by Gearhart's founder, Marvin Gearhart, since it staved off General Electric's attempt to purchase his company. Marvin Gearhart's ire was raised, however, when Smith International increased its holding in Gearhart Industries to 33 percent, then announced it intended to acquire 56 percent of the wireline services firm. Marvin Gearhart vehemently opposed Smith International's tender offer and did everything in his power to thwart such a transaction from being completed, touching off a squabble between the two companies that, in the end, left Marvin Gearhart victorious in his attempt keep his unwanted suitor at arm's length and saddled Smith International with enormous debt.

When the dust had settled from Smith International's failed attempt to acquire control of Gearhart Industries' sophisticated "downhole" measuring technology, the losses amounted to nearly $200 million. Smith International withdrew its bid in March 1985, by which time the company had spent $165 million in trying to buy Gearhart Industries. The stock Smith International had acquired was sold for $80 million, but the company took an $85 million charge against working capital after selling its Gearhart Industries holdings, giving it a cumbersome burden to carry in the depressed economic times within the oil industry. By mid-1985, the combined affects of a laggard economic climate and the losses incurred from the failed Gearhart Industries acquisition had thrust Smith International into a precarious position, forcing it to close plants, lay off more than half of its 14,000 employees, and cease production of certain products. Annuals sales, which had stood at $1.2 billion in 1981, plummeted to $747 million in 1984. Earnings took a more precipitous plunge, dropping from $133 million in 1981 to a loss of $65 million in 1984. By all accounts, the early 1980s had been disastrous years for the company, but the worse was yet to come. The "St. Valentine's Day Massacre," as a Smith International chief financial officer dubbed it, was looming ahead, and its arrival would deliver a near fatal blow to Smith International.

The company was still contending with the difficulties caused by its declining business and the Gearhart Industries imbroglio when, on February 14, 1986, the Federal District Court for the Central District of California issued a ruling that rocked all those at Smith International. The judgment by the court marked the culmination of a lawsuit originally filed by Smith International against Hughes Tool in 1974, a lawsuit Smith International would later regret having filed. By the end of the protracted legal dispute over patents, Smith International was found to be the culprit and was ordered to pay what ended up being $205.4 million for its infringement upon Hughes Tool's patent for an "O-ring seal" rock bit. Combined with Smith International's other losses, the ruling handed down by the court represented the third devastating strike incurred by the company, the meting of a "triple whammy" as one industry observer phrased it, and Smith International reeled from the successive blows, leading a host of bankers and analysts to predict that Smith International would either be sold or forced into Chapter 11 bankruptcy.

On the heels of the judgment against Smith International, immediate steps were taken to salvage the company, leading to what one analyst referred to as the company's "weekend bloodbath." Smith International laid off 32 vice-presidents, consolidated several divisions, and announced it would lay off as many as 2,000 employees, but by the first week of March 1986 there was nothing left to do but seek protection under Chapter 11 of the U.S. Bankruptcy Code.

While under Chapter 11, Smith International divested its non-core businesses, retaining only its tool manufacturing and drilling divisions to carry the company forward. Its corporate office building in Newport Beach, California was sold as well as a plant in Irvine, California, giving the company $46 million to go along with the $200 million raised through its divestiture of non-core businesses. Smith International's headquarter offices were then relocated to a one-story industrial building next to its primary plant in Irvine, as consolidation and cost-cutting reigned during the company's nearly two-year-long battle to reorganize while in bankruptcy.

In December 1987, Smith International emerged from under the protective umbrella of bankruptcy, coming out of a year in which the company recorded $264.4 million in sales and registered a $26.1 million loss in earnings. Smith International was a shadow of its former self, but what remained was lean and, despite the profit loss recorded in 1987, capable of generating positive gains for the company. Over the course of the following year, a vibrant company began to emerge, buoyed by its continued investment in research that provided Smith International with a range of new, high-technology drilling products. Net productivity per employee during 1988 stood at $126,000, an all-time high, fueling hopes that the company had begun to wrest free from the debilitating first half of the decade.

In 1989, Smith International closed its sprawling 638,000-square-foot Irvine, California production facility, then consolidated all petroleum and mining-bit operations into its 169,000 square-foot manufacturing plant in Ponca City, Oklahoma. The company's headquarters moved as well, relocating from Irvine to Houston, Texas, where Smith International's management could superintend a company that had dramatically ameliorated its ability to compete as an oil and gas equipment and services firm.

Smith International entered the 1990s as a company well-positioned in the high-technology drilling market, where demand was high for its heavy investment in products such as "steerable systems," or devices patterned after aerospace guidance systems that allowed oil workers to drill in different directions from a single site. In 1990, a proposed merger between Dresser Industries Inc. and Smith International fell through when Dresser Industries backed out of the deal citing potential antitrust problems with the U.S. Justice Department, but in early 1994 the two would-be partners announced a transaction that ranked as Smith International's largest acquisition in its history, restoring some of the magnitude lost during the previous decade.

On February 28, 1994, eight years and two weeks after the bleakest day in Smith International's history, the company acquired a 64 percent interest in M-I Drilling Fluids Co. from Dresser Industries, an acquisition that provided a tremendous boost to Smith International's stature as a competitor in the oil and gas equipment and services industry. Concurrent with the acquisition, Smith International reorganized into three operating divisions: Smith Drill Bits, Smith Drilling and Completion Services, and M-I Drilling Fluids. In the wake of the purchase of M-I Drilling Fluids, Smith International's revenues leaped to $653.9 million from the $220 million generated in 1993, while gross earnings doubled, spawning hope that the company's future could eradicate the staggering developments of the 1980s.

Principal Subsidiaries: Smith International, S.A. de C.V. (Mexico); Omega II Insurance Ltd. (Bermuda); S.I. Nederland B.V. (Netherlands); Smith International Acquisition Corp.; Smith International Australia (Pty) Ltd.; Smith International Canada Ltd.; Smith International do Brasil Ltda. (Brazil); Smith International Deutschland GmbH (Germany); Smith International France, S.A.R. L.; Smith International Italia S.p.A. (Italy); Smith International (North Sea) Ltd. (Scotland); Smith International de Venezuela, C.A.

Principal Operating Units: Smith Drill Bits; Smith Drilling and Completion Services; M-I Drilling Fluids

Additional Details

Further Reference

"Another Setback for Smith," Business Week, March 3, 1986, p. 46.Carson, Teresa, "Smith International: When a Takeover Try Goes Bust," Business Week, April 1, 1985, p. 65.Francis, Robert, "Smith Int'l Lays Off 32 VPs, Consolidates Some Divisions," American Metal Market, March 3, 1986, p. 4.Jaffe, Thomas, "Someone's Knocking," Forbes, May 7, 1984, p. 213.Kindel, Stephen. "Mission Mistaken," Financial World, May 31, 1988, p. 16.Klinkerman, Steve, "Marvin Gearhart Has Won His Independence--But Not Much Else," Business Week, April 1, 1985, p. 64.Koprowski, Gene, "New Zealand Financier Wants Control of Smith," Metalworking News, June 5, 1989, p. 6.Pybus, Kenneth R., "Revenues Rise after Largest Buy in Smith International's History," Houston Business Journal, June 9, 1995, p. 22B.

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