Tungsten Carbide Unit to Be Sold by Smith International
Assets of Smith International Inc.’s Tustin-based Tungsten Carbide Manufacturing Division will be sold to a group of St. Louis investors in a deal designed to gain the ailing Newport Beach oil services company $11.6 million in cash.
Terms of sale also call for the investors to pay Smith an additional $11.7 million through various marketing agreements that were not disclosed.
U.S. Bankruptcy Judge James R. Dooley at a hearing in Los Angeles on Monday approved the terms of the sale to TCM Holding Group Inc., an affiliate of the privately owned Harbour Group Inc.
Smith currently buys some of its tungsten carbide products from another Harbour Group company, Rogers Tool Works, according to court documents.
Tungsten carbide is a key component of Smith’s drilling bits.
“It is obvious the company (Smith) has shrunk quite a bit,” Klemens Afting, Smith’s assistant treasurer, said after the hearing. “There are now ample supplies (of tungsten carbide products) and it makes no sense to run our own company.”
Afting said the division employs about 145 people, who will remain in Tustin “for the time being.”
An unidentified representative of the Harbour Group attending Monday’s hearing declined to comment on future plans for the division.
Creditors Not Objecting
However, Smith agreed to lease the land and buildings to TCM Holding rent-free for up to a year and to provide certain accounting and front office support until TCM “moves the assets which are being sold to a permanent location,” according to court documents.
Attorneys representing Smith’s creditors said there were no objections to the sale. The agreement calls for Smith to purchase 80% of its tungsten carbide products from TCM Holding for 7 1/2 years. Smith also agreed to sign a marketing agreement with a TCM subsidiary, according to Perry Landsberg, one of Smith’s bankruptcy attorneys.
Smith, which filed for bankruptcy protection 13 months ago, has been vigorously shedding assets and reducing its payroll.
The international oil field services company, once one of Orange County’s largest companies, sought Chapter 11 protection from its creditors shortly after losing a 14-year-old patent infringement lawsuit to Hughes Tool Co.
After a lengthy trial, a Los Angeles federal judge awarded Hughes $205 million in damages. Smith has appealed the verdict and is awaiting a decision.
Smith established the tungsten carbide division in 1971 to supply products to its tool division. At the time, Smith believed that outside suppliers were not spending enough time or money developing top-quality tungsten carbide products, according to a declaration filed by Dan Steigerwald, director of operational planning.
Operating Loss Reported
For the year ended Dec. 31, 1986, the tungsten carbide division reported a net operating loss of $900,000 on sales of $22.7 million.
In December, the division had a book value of $20.6 million, consisting of a $10-million inventory, personal property and equipment worth $8.5 million and $2.1 million in accounts receivable, according to Steigerwald.
The division’s sales peaked at $48 million in 1981, with about 90% of its products sold to other Smith divisions. By 1986, sales had fallen to $22 million, including $12 million in purchases by other Smith divisions.
Last year, the tungsten carbide division closed its Henderson, Nev., facility, which was valued at $1.7 million. That facility and the Tustin plant, worth $2.8 million, will not be sold to TCM Holdings. Instead, Smith hopes to sell the Tustin facility on the open market for $6 million and the Henderson plant for $2 million. Smith is also keeping $300,000 worth of laboratory equipment.
In other matters in the Chapter 11 proceeding, Judge Dooley approved a request by the equity creditors’ committee to retain Dean Witter as its investment banker at a cost of $50,000 per month.
Tax Returns Being Audited
Smith also received court approval to keep its self-insurance coverage for workers.
Documents filed in bankruptcy court revealed that Smith’s 1983 and 1984 federal income tax returns are being audited, but company officials said they do not expect any major problems. Meanwhile, Smith is struggling to recoup business during a worldwide oil drilling slump.
“The adverse market conditions currently prevailing in the foreign and domestic petroleum industry are unprecedented,” wrote Loren Carroll, Smith’s chief financial officer, in a declaration filed recently in court.
The domestic rig count, a key indicator of the oil services industry’s health, plummeted to 802 in February, down from 2,000 in January, 1986. In the same period, the worldwide rig count dropped to 1,800 from 3,600.
Carroll said Smith’s employment has decreased from 5,500 in January, 1986, to a current total of about 1,800. He said the company has reduced its general and administrative costs by $6 million a month but did not provide specific figures.
As of March 6, 1987, Smith had $100 million in cash, according to court records.
