Smith International, Inc. Business Information, Profile, and History

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Our people and technology make us a world leader in drilling tools and services. We work together to constantly improve customer satisfaction, employee opportunity and shareholder value.

History of Smith International, Inc.

Smith International, Inc. is a leading global supplier of products and services for the oil and gas and petrochemical industries. Smith International operates through four business units: M-I (49 percent of 2002 revenues), Wilson (28 percent), Smith Services (13 percent), and Smith Bits (10 percent). M-I specializes in drilling fluids and systems as well as equipment used in drilling to control solids, manage pressure, and handle waste; this joint venture is 60 percent owned by Smith International and 40 percent by Schlumberger Limited. Wilson is a distributor of a variety of products mainly used in the petroleum and mining industries and also provides supply-chain management services within these and other fields. Smith Services provides drilling, fishing, and completion products and services to the oil and gas drilling industry. Smith Bits designs, manufactures, and markets highly engineered drill bits mainly used to drill oil and natural gas wells. These units operate from more than 400 locations worldwide, and more than half of the company's revenues originate outside the United States. After filing for protection under Chapter 11 of the U.S. Bankruptcy Code in early 1986, and then emerging out of bankruptcy reorganized and restructured in late 1987, Smith spent several years consolidating its businesses before embarking on a ten-year spree of acquisitions in late 1993 that resulted in a remarkable increase in revenues from $220.7 million to $3.17 billion.

Early History

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 of 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 welcome 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 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 when he purchased Allen Brothers Oil Tools in 1936 and then the following year renamed the company H.C. Smith Oil Tool Company, the earliest predecessor to Smith International.

Emergence of Smith International, 1960s

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 Company. 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.

Near-Fatal Developments in the 1980s

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 effects 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 effects of widespread depressed oil activity were exacerbated by other negative developments peculiar to Smith International, which would leave 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, because 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 to 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 well over $150 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 effects 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. Annual 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 worst 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 noncore 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 noncore businesses. The company also reached a settlement with Hughes Tool over the patent dispute, paying that firm $95 million. Smith International's headquarters were 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 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. In March 1989 Doug Rock was named president and CEO. Rock, a chemist by training, had joined Smith in 1974 as a computer systems expert, working his way up through the ranks over the next 15 years.

Fueling Growth Through Acquisitions, 1990s and Early 2000s

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.

The corporation faced more litigation when a federal lawsuit was filed accusing Smith International, Baker Hughes Incorporated (the product of the 1987 merger of Hughes Tool and Baker International Corporation), Camco International, and Dresser Industries of fixing prices of drill bits from 1986 through 1992. Although Smith vehemently denied any wrongdoing, it agreed to settle the suit in 1993 because the other three defendant companies had done so. Smith agreed to pay a $200,000 fine to settle the criminal suit and $19 million to settle a civil suit brought by customers.

By 1993 directional drilling technology was emerging as a key drilling innovation. Smith International's operations in this sector accounted for more than 40 percent of the company's revenues, but Smith was at a competitive disadvantage because two much larger firms, Halliburton Company and Baker Hughes, were furiously pumping money into their directional drilling units. Rock decided the time was right to exit the business, and in March 1993 he sold it to Halliburton for $270 million in Halliburton stock.

The proceeds from this divestment were earmarked to develop a new niche for Smith International--drilling fluids and other well completion services--and to restore 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 Dresser's 64 percent interest in M-I Drilling Fluids Co., a $160 million acquisition that ranked as the largest in company history. It also provided a tremendous boost to Smith International's stature as a competitor in the oil and gas equipment and services industry. Houston-based M-Drilling was a joint venture with Halliburton, which owned 36 percent of the venture. It specialized in drilling and completion fluids and systems, solids-control equipment, and waste management services for the oil and gas drilling industry. In drilling, fluids and muds were used for such procedures as cooling drill bits, lubricating drill pipes, flushing out rock cuttings, and balancing pressure in wells. 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, Smith International's revenues leaped to $653.9 million from the $220 million generated in 1993, while gross earnings doubled.

Over the next ten years, Smith International completed more than 40 acquisitions to strengthen its existing operations and diversify into related areas. In June 1996 M-I became the largest firm in the worldwide drilling fluids industry by acquiring Anchor Drilling Fluids, A.S. from Norway's Transocean A.S. for $114.7 million in cash and assumed debt. Anchor was particularly attractive because of its strong presence in the North Sea and Malaysia, where M-I had less of a presence. To pass antitrust muster with the U.S. Justice Department, M-I had to sell Anchor's U.S. operations, which were subsequently sold to Jordan Drilling Fluids. Of the several other acquisitions completed by M-I from 1996 to 1998, two were especially noteworthy. In October 1997 M-I spent $17.3 million for Calgary-based Fleming Oilfield Services, Ltd., a provider of drilling fluid products and services to the Canadian oil and gas industry. Then in May 1998 Safeguard Disposal Systems, Inc., of Lafayette, Louisiana, was bought for $42.7 million in stock and cash. Safeguard specialized in the rental of waste management systems used in petroleum drilling. Meanwhile, Halliburton reached an agreement in early 1998 on a merger with Dresser Industries. To gain approval for this deal from the Justice Department, Halliburton had to divest its 36 percent stake in M-I. In August of that year, Halliburton sold the stake to Smith International for $265 million, giving Smith full control of M-I.

During this same period, Smith Drilling and Completions made its own string of acquisitions. Among these were the October 1996 purchase of The Red Baron (Oil Tools Rental) Ltd. for about $40.3 million and the April 1997 buyout of Tri-Tech Fishing Services, L.L.C. for approximately $20.4 million. Based in Aberdeen, Scotland, Red Baron supplied fishing and other downhole remedial products and services to oil and gas drillers in the North Sea, the Middle East, and Southeast Asia. Tri-Tech, operating out of Lafayette, Louisiana, had an operational profile similar to that of Red Baron, but it was active in the U.S. Gulf Coast region. The Smith Drilling and Completions unit was renamed simply Smith Services in August 1999.

Smith International ventured into a new field in April 1998 through a merger with Wilson Industries, Inc. in a stock swap valued at about $454 million. Wilson, a private company based in Houston, was a distributor of pipe, valves, and other miscellaneous supplies to the oil and gas industry. Wilson became one of Smith International's main operating units.

Smith saw its revenues surge past the $2 billion mark in 1998 thanks to its string of acquisitions. But the oil industry went into another cyclical downturn, leading to a net loss of $16.1 million in the final quarter of the year and full-year earnings of just $34.1 million, down from the 1997 total of $102.4 million. The company moved quickly to control costs, cutting its workforce from 9,100 in March 1998 to 6,300 in mid-1999. Revenues for 1999 fell about 15 percent, to $1.81 billion, but profits rebounded to $56.7 million.

In July 1999 Smith combined its M-I unit with the non-U.S. drilling fluid operations of Schlumberger's Dowell unit into a new M-I joint venture, 60 percent owned by Smith and 40 percent by its new partner. In addition to its contribution of assets, Schlumberger also paid Smith $280 million in cash. Just a couple of weeks after the deal's completion was announced, however, the U.S. Justice Department filed a petition in a U.S. district court accusing the two companies of a criminal violation of antitrust law. The government alleged that the new joint venture violated a 1994 consent decree that specifically barred Smith from combining M-I with the drilling fluid operations of Schlumberger and several other firms. In December 1999 a federal judge found Smith and Schlumberger guilty of criminal contempt, assessing each a fine of $750,000 and five years of probation. The firms also reached an agreement with the Justice Department whereby they would pay a $13.1 million civil penalty and would be able to continue operating the M-I joint venture.

With this legal distraction behind it, Smith International continued to seek growth via the acquisition route. Several deals involved M-I. In December 2000 M-I acquired Emerson's Sweco Division, a producer of specialty screen and separation equipment for oilfield applications, for $75 million. The oilfield and industrial screen operations of Madison Filter Belgium S.A. were acquired in October 2001 for $93.5 million. In January 2003 M-I paid about EUR 76 million for the oilfield chemical business of Finland-based Dynea International. Wilson, meantime, was bolstered through the January 2001, $41.1 million acquisition of Van Leeuwen Pipe and Tube Corporation, a Houston-based distributor of pipe, valves, and fittings to the refining, petrochemical, and power generation industries.

Smith International posted record revenues and net income in 2001 of $3.55 billion and $152.1 million, respectively. Yet another cyclical downturn in exploration and production hit the firm's results the following year, however, with revenues falling 11 percent and profits plunging 39 percent. Despite such inevitable setbacks, Smith seemed certain to remain one of the key players in the global oilfield products and services industry.

Principal Subsidiaries: S.I. Nederland B.V. (Netherlands); Smith (Bermuda) Ltd.; 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 Development Corporation (Panama); Smith International Inc., S.A. (Argentina); Smith International Italia, S.p.A. (Italy); Smith International (North Sea) Ltd. (Scotland); Smith Internacional de Venezuela, C.A.; Wilhold, Inc.

Principal Operating Units: M-I (60%); Smith Bits; Smith Services; Wilson.

Principal Competitors: Halliburton Company; Baker Hughes Incorporated; Schlumberger Limited; Weatherford International Ltd.; BJ Services Company; Varco International, Inc.; Tetra Technologies, Inc.; Ambar, Inc.; Grant Prideco, Inc.; Ondeo Nalco Energy Services L.P.; Champion Technologies, Inc.; TIW Corporation; National-Oilwell Inc.; Redman Pipe and Supply Company; Derrick Corporation; McJunkin Corporation; W.W. Grainger, Inc.; Hagemeyer N.V.

Chronology

• Key Dates:
• 1902: Herman C. Smith opens a blacksmith shop in Whittier, California; oil drillers soon develop into his main customers, with Smith sharpening their drill bits and repairing oil drilling tools.
• 1920s:Smith's company, now known as H.C. Smith Manufacturing Company, focuses on re-working fishtail bits and modifying oil tools.
• 1929: Herman Smith decides to retire and sells his business to Globe Oil Tools.
• 1936: Smith comes out of retirement to acquire Allen Brothers Oil Tools.
• 1937: Smith renames the company H.C. Smith Oil Tool Company.
• 1959: Company goes public as Smith Tool Co.
• 1960: To facilitate expansion, a parent company called Smith Industries International, Inc. is created.
• 1969: Company shortens its name to Smith International, Inc.
• 1983: Smith International acquires a minority stake in Gearhart Industries, Inc., a specialist in wireline, measurement-while-drilling services; Smith soon launches a takeover bid of Gearhart.
• 1985: Smith is forced to withdraw its bid for Gearhart, having spent $165 million trying to buy it.
• 1986: A federal court orders the company to pay Hughes Tool Company $205.4 million for infringement upon Hughes's patent for an "O-ring seal" rock bit; Smith International is forced to file for Chapter 11 bankruptcy protection.
• 1987: Having divested noncore businesses and reined in costs, Smith emerges from bankruptcy in December.
• 1989: Corporate headquarters are relocated from California to Houston, Texas.
• 1990: A proposed merger with Dresser Industries, Inc. falls through.
• 1993: Smith's directional drilling business is sold to Halliburton Company for $270 million.
• 1994: Smith acquires Dresser's 64 percent interest in M-I Drilling Fluids Co.; company reorganizes into three operating divisions: Smith Drill Bits, Smith Drilling and Completion Services, and M-I Drilling Fluids.
• 1996: M-I acquires Anchor Drilling Fluids.
• 1998: Company acquires Wilson Industries, Inc., distributor of oil and gas equipment, for $454 million in stock, and also buys Halliburton's 36 percent stake in M-I for $265 million.
• 1999: New M-I joint venture is formed that includes the non-U.S. operations of Schlumberger's Dowell unit; Schlumberger, which pays Smith $280 million as part of the deal, owns 40 percent of M-I, Smith owns 60 percent.