Smith Surprises Analysts by Posting Its First Operating Profit Since 1985

Smith International, the Newport Beach drill-bit manufacturer that emerged from bankruptcy in January, reported Thursday its first quarterly operating profit since 1985. The stronger than expected performance surprised and pleased analysts who had recently been told that the company was likely to remain in the red for most of the year.

The company posted net earnings of $481,000, or a penny a share, on revenues of $77.6 million for the quarter ended March 31.

The wide discrepancy between the first quarter profit and the earlier projected loss is explained by higher than expected drill bit prices and an increase in drilling activity, particularly in the North Sea, Canada and Mexico, according to the company.

“Our first quarter results substantially exceeded those originally anticipated in the plan of reorganization,” chief financial officer Loren Carroll said in a prepared statement.

Under the company’s reorganization plan, Smith had projected in October, 1987, that the company would post a loss of $9.9 million for 1988 and a profit of $500,000 for 1989. On Monday, however, when the company announced the appointment of Robert Sutherland as Smith’s new chairman, Carroll noted that the first quarter earnings would come in “better than expected.”

“We were told at an analysts’ meeting a month ago that as the year progressed, Smith might move into the black. It’s nice to see that happen in the first quarter,” said Mary Anne Sudol, a securities analyst with Fitch Investors Service, the New York rating agency.

One factor helping Smith has been the relative stability of oil prices, which have been fluctuating in the $15 to $18 a barrel range this year and which have enabled such large oil companies as Exxon, Amoco and Occidental to maintain and expand their exploration and drilling budgets, according to Sudol. Other analysts noted that Smith’s new-found profitability stems from significantly scaling back its Irvine drill-bit manufacturing plant under the reorganization plan.

“They’re operating at 70% of capacity this year compared to 20% of capacity a year ago,” said Vishnu Sawrup, an analyst with Prudential-Bache Securities, the New York brokerage.

Sutherland, a vice president of the New Zealand investment company Industrial Equity Pacific, replaces H. Moak Rollins as chairman of Smith. Industrial Equity has been building its position in Smith and owns 30% of its stock.

Rollins took over as chairman in January, three weeks after the company emerged from bankruptcy, and was credited with helping to get the company back on a profitable track after a wrenching bankruptcy. Rollins stepped down for health reasons.

At its peak, Smith had earnings of $200 million on sales of $2.1 billion in 1982. But the company suffered heavy losses from a failed and costly attempt to take over Gearhardt Industries in June of 1985 and from the virtual depression in the oil industry, beginning in January, 1986.

The company filed for bankruptcy in March, 1986, after a court slapped a $205-million judgment against Smith in a 14-year patent infringement suit filed by competitor Hughes Tool Co., which has since merged with a Texas company to form Baker-Hughes.

That judgment was eventually reduced to $90 million under the reorganization plan which saw Smith shed all but its core businesses and slash its work force from a high of 14,400 to its current level of 2,700 workers.