<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to________________
Commission File number 1-8158
VARCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
California 95-0472620
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
743 North Eckhoff Street, Orange, Ca 92668
(Address of principal executive offices)
(Zip code)
(714) 978-1900
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
30,364,355
(Number of shares of Common Stock outstanding at October 31, 1995)
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Pursuant to General Instruction D to Form 10-Q, the Condensed Consolidated
Statements of Cash Flows, Condensed Consolidated Balance Sheets and Condensed
Consolidated Statements of Income of Varco International, Inc., (the "Company")
and its subsidiaries included in the registrant's Third Quarter Report to
Shareholders for the three months ended September 30, 1995, filed as Exhibit 19
hereto are incorporated herein by reference. Such financial statements should
be read in light of the following:
ADJUSTMENTS. The financial statements contained in Exhibit 19 hereto
include all adjustments which in the opinion of management are of a normal
recurring nature, considered necessary to present fairly the results of
operations for the interim periods presented.
NET INCOME PER SHARE. Net income per share is based upon an average of
31,910,939 and 33,527,248 shares outstanding for the nine months ended September
30, 1995, and 1994 respectively, and upon an average of 30,640,435 and
33,545,611 shares outstanding for the three months ended September 30, 1995 and
1994 respectively.
INVENTORIES. The Company estimates the components of inventory at
September 30, 1995, and December 31, 1994, to be as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
<S> <C> <C>
Raw Materials $ 6,064,000 $ 6,164,000
Work in Process 19,408,000 13,677,000
Finished Goods 47,807,000 40,458,000
----------- -----------
$73,279,000 $60,299,000
=========== ===========
</TABLE>
FIXED ASSETS. Fixed assets are stated net of accumulated depreciation of
$58,551,000 at September 30, 1995, and $52,333,000 at December 31, 1994.
2
<PAGE>
COMMON STOCK AND ADDITIONAL PAID-IN-CAPITAL. On September 30, 1995, the
Company Common Stock account was $20,800,000 and Additional Paid-In-Capital
accounts were $103,178,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Pursuant to General Instruction D to Form 10-Q, Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
registrant's Third Quarter Report to Shareholders for the three months ended
September 30, 1995, filed as Exhibit 19 hereto, is incorporated herein by
reference.
PART II-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 24, 1995, the Company commenced a "Dutch Auction" type tender offer
(the "Tender Offer") to purchase up to 5,300,000 shares of its Common Stock at a
purchase price not greater than $8.00 per share nor less than $6.75 per share.
Pursuant to the Tender Offer, which terminated on April 21, 1995, the Company
purchased 3,150,560 shares of its Common Stock at a purchase price of $8.00 per
share.
In July 1992 the Company sold $50.0 million aggregate principal amount of
its 8.95% Senior Notes Due June 30, 1999 (the "Senior Notes") to a group of ten
institutional investors pursuant to a Note Agreement dated as of July 1, 1992
(as amended, the "Note Agreement"). The principal of the Senior Notes is payable
in five equal annual installments of $10.0 million, the first of which was made
on June 30, 1995.
The Note Agreement prohibits any "Restricted Payment" subsequent to July
17, 1992 unless after giving effect thereto, (i) the aggregate amount of all
Restricted Payments subsequent to such date would not exceed $5,000,000 plus the
cumulative sum of 50% of the Company's consolidated net income (or minus 100%
in the case of a deficit) subsequent to March 31, 1992 and (ii) the Company
could incur at least $1.00 of additional indebtedness under the Note Agreement
covenant limiting indebtedness. The term "Restricted Payment" includes (a) any
dividend (other than dividends payable in shares of capital stock) or other
distributions on any shares of capital stock of the Company; (b) any purchase,
redemption or other acquisition of any shares of the capital stock of the
Company or any rights or options to purchase or acquire such shares; and (c) any
"Restricted Investment", which is generally defined as any investment other than
an investment in a subsidiary of the Company or an investment in certain
designated government or rated securities. In addition, the Company may
purchase, redeem or otherwise acquire shares of its capital stock or make
Restricted Investments from the net cash proceeds of the substantially
concurrent sales of shares of capital stock or from the sale of securities
convertible into such shares upon conversion.
Pursuant to a waiver and amendment dated as of March 8, 1995, the holders
of the Senior Notes (1) waived compliance with the limitations on Restricted
Payments discussed above, (2) agreed that the amount expended in the Tender
Offer would not constitute a Restricted Payment, and (3) amended certain
covenants to take into account the effect of the consummation of the Tender
Offer on certain financial ratios.
On February 25, 1993 the Company entered into an unsecured revolving
credit agreement with Citicorp USA, Inc. and Citibank, N.A. (as amended, the
"Credit Agreement"). Effective as of March 17, 1995 the Credit Agreement was
amended to (1) extend the maturity date from March 31, 1996 to October 31, 1998;
(2) increase the total maximum facility from $20.0 to $35.0 million, consisting
of a loan facility of $25.0 million in and a letter of credit facility of $10.0
million; and (3) to amend certain covenants to permit the Tender Offer and to
take into account the effect of the consummation of the Tender Offer on certain
financial ratios.
Under the terms of the Credit Agreement, the amount available for the
payment of dividends on, and repurchases of, Common Stock is limited to 25% of
the Company's consolidated net income arising after January 1, 1992, computed on
a cumulative basis. In addition, pursuant to the March 17, 1995 amendment to the
Credit Agreement discussed above, the Company may repurchase at any time prior
to December 31, 1995 shares of its Common Stock for an aggregate cost not
exceeding $50.0 million, including shares purchased pursuant to the Tender
Offer. The Company may also purchase or otherwise acquire shares of Common Stock
from the proceeds of the substantially concurrent sale of shares of Common
Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re computation of per share earnings for the three
months and nine months ended September 30, 1995 and 1994.
19 Varco International, Inc. Third Quarter Report to Shareholders,
Three Months Ended September 30, 1995.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report is filed.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VARCO INTERNATIONAL, INC.
DATE: NOVEMBER 10, 1995 BY: /S/ RICHARD A. KERTSON
----------------------
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
DATE: NOVEMBER 10, 1995 BY: /S/ DONALD L. STICHLER
----------------------
CONTROLLER-TREASURER
AND SECRETARY
4
<PAGE>
EXHIBIT INDEX
11 Statement re computation of per share earnings for the three months and
nine months ended September 30, 1995 and 1994.
19 Varco International, Inc. Third Quarter Report to Shareholders, Three
Months Ended September 30, 1995.
27 Financial Data Schedule
5
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $3,681,000 $11,997,000
</TABLE>
<TABLE>
<CAPTION>
Total Number Average Number Stock Option Shares Used
Number of of Shares after of Shares Equivalent To Calculate
Days Weighing Outstanding Shares EPS
--------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
B. CALCULATION OF AVERAGE SHARES OUTSTANDING
Common Stock Outstanding from time-to-time during:
Three Months Ended September 30, 1995 92 2,794,794,140 30,378,197 262,238 30,640,435
Nine Months Ended September 30, 1995 273 8,640,095,493 31,648,701 262,238 31,910,939
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
-------------------------
Total Shares Outstanding
Income Per Share =
Three Months Ended September 30, 1995 3,681,000 = $0.12
---------------
30,640,435
Nine Months Ended September 30, 1995 11,997,000 = $0.38
---------------
31,910,939
</TABLE>
<PAGE>
EXHIBIT 19
T O O U R S H A R E H O L D E R S
Third quarter financial results continued to reflect improvement over the
comparable period of last year as Net Income was $3.7 million, $.12 per share,
versus $3.0 million, $.09 per share, for the same quarter of 1994. Revenues
increased to $68.1 million, from $54.2 million in the third quarter a year ago.
For the first nine months of this year, Revenues reached $202.5 million, 24
per cent above the $163.1 million total for the similar period of 1994.
Correspondingly, Net Income has increased by 45 per cent, to $12.0 million, $.38
per share, as compared to $8.3 million, $.25 per share, for the first three
quarters of 1994.
The year-over-year Revenue growth for the nine-month period is primarily the
result of increases at the Drilling Systems and Shaffer Divisions, together with
the impact of the Thule Rigtech operation, which was acquired in November of
last year. Drilling Systems' Revenues were $74.1 million for the first nine
months of this year, as compared to $54.5 million a year ago; and Shaffer's
increased to $45.1 million, from $36.8 million last year. Thule Rigtech has
contributed Revenues of $8.3 million during the first three quarters of this
year.
The two principal factors which have influenced Revenue growth are an
increased market acceptance of mechanized and automated pipe racking systems,
and the upgrading of many semi-submersible rigs, particularly to accommodate
drilling in greater water depths. Sales of pipe racking systems accounted for
roughly half of the Drilling Systems' Revenue growth; and the increase at
Shaffer is tied primarily to the upgrading and refurbishment of pressure control
equipment, motion compensation devices and related equipment for
semi-submersibles.
Our outlook remains positive, as reflected in the continued strength of
incoming orders. For the third quarter, orders totaled $67.8 million, as
compared to $58.6 million in the third quarter of 1994 and $64.6 million in the
second quarter of this year. Backlog increased to $60.8 million at September 30,
1995, from $39.2 million as of the same date one year ago.
Industry conditions are little changed since our report to you at the end of
the second quarter. Oil prices were generally in the $17-$18 per barrel range
during the past three months; and natural gas prices continued to hover around
$1.50 per million BTU, before temporarily spiking up during late September in
response to concerns about weather-related supply disruptions in the Gulf of
Mexico.
Likewise, recent trends in drilling activity are largely unchanged. The
U.S. rig count increased seasonally during the third quarter but remains below
the comparable period of last year. Conversely, the international rig count
continues to be somewhat above the year-ago level. A particular bright spot for
Varco is the offshore drilling market, as the utilization of mobile offshore
rigs reached its highest level in more than ten years during the third quarter.
The result is improved cash flow for our most important customers, the offshore
drilling contractors, and a greater incentive and ability on their part to
upgrade their rigs with the kinds of equipment Varco supplies.
With the final months of 1995 upon us, we are pleased with the continued
growth in revenue and profits that we have achieved. As we begin to look ahead
to 1996 it appears that the potential exists to demonstrate further improvement.
To capitalize on that opportunity we must continue to effectively execute those
strategies that have served us well in recent years.
We appreciate your continued support.
Walter B. Reinhold George I. Boyadjieff
Chairman President and Chief Executive Officer
November 3, 1995
<PAGE>
CONDENSED CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) September 30, December 31,
1995 1994
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,652 $ 8,793
Short term investments 29,832
Receivables (net) 56,472 52,250
Inventories 73,279 60,299
Other 8,727 7,603
- ------------------------------------------------------------------------------
Total Current Assets 146,130 158,777
Property, plant and equipment at cost,
less accumulated depreciation 50,965 49,807
Cost in excess of net assets acquired 36,768 37,529
Other assets 12,122 11,528
- ------------------------------------------------------------------------------
Total Assets $245,985 $257,641
==============================================================================
CURRENT LIABILITIES
Accounts payable $ 21,481 $ 15,345
Other liabilities 25,718 21,090
Current portion of long-term debt 10,000 10,000
- ------------------------------------------------------------------------------
Total Current Liabilities 57,199 46,435
Long-term debt 29,524 39,349
Other non-current liabilities 7,914 8,129
- ------------------------------------------------------------------------------
Total Liabilities 94,637 93,913
SHAREHOLDERS' EQUITY
Common Stock
and additional paid-in capital $123,978 $125,897
Retained earnings 27,370 37,831
- ------------------------------------------------------------------------------
Total Shareholders' Equity 151,348 163,728
- ------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $245,985 $257,641
==============================================================================
</TABLE>
V A R C O I N T E R N A T I O N A L , I N C. A N D S U B S I D I A R I E S
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended September 30,
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,997 $ 8,270
Depreciation and amortization 9,239 8,126
Increase (decrease) in operating
cash flows:
Receivables (4,222) (4,419)
Inventories (12,980) (6,500)
Accounts payable 6,136 (230)
Interest payable 917 1,123
Other 2,678 (3,037)
- ------------------------------------------------------------------------------
Net cash from
operating activities 13,765 3,333
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Short-term investments 29,832 (2,906)
Equipment purchases (10,657) (8,457)
Proceeds from equipment sales 402 112
Other 463 (554)
- ------------------------------------------------------------------------------
Net cash from (used in)
investing activities 20,040 (11,805)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repurchase of Common Stock (26,343) (1,067)
Payment on long-term debt (10,000)
Other 1,397 673
- ------------------------------------------------------------------------------
Net cash (used in) financing activities (34,946) (394)
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,141) (8,866)
- ------------------------------------------------------------------------------
Cash and cash equivalents at
beginning of year 8,793 22,560
- ------------------------------------------------------------------------------
Cash and cash equivalents at
end of quarter $ 7,652 $ 13,694
==============================================================================
</TABLE>
V A R C O I N T E R N A T I O N A L , I N C. A N D S U B S I D I A R I E S
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 61,507 $ 47,666 $182,776 $144,354
Rental income 6,313 5,998 18,607 17,158
Other income 233 584 1,102 1,569
- --------------------------------------------------------------------------------
68,053 54,248 202,485 163,081
- --------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 41,115 30,004 119,256 92,718
Cost of rental income 1,925 1,858 5,543 5,286
Selling, general and
administrative
expenses 15,235 13,583 45,870 39,590
Research and
development costs 3,302 2,720 9,837 8,799
Interest expense 1,019 1,219 3,512 3,558
- --------------------------------------------------------------------------------
62,596 49,384 184,018 149,951
- --------------------------------------------------------------------------------
Income before
income taxes 5,457 4,864 18,467 13,130
Provision for
income taxes 1,776 1,856 6,470 4,860
Net income $ 3,681 $ 3,008 $ 11,997 $ 8,270
================================================================================
Net income per
share of
Common Stock $ .12 $ .09 $ .38 $ .25
================================================================================
Shares used to
calculate earnings
per share 30,640 33,546 31,911 33,527
================================================================================
</TABLE>
NOTE:
These statements are condensed and do not contain disclosures required by
generally accepted accounting principles. Reference should be made to the
financial statements contained in the Annual Report to Shareholders for the year
ended December 31, 1994.
V A R C O I N T E R N A T I O N A L, I N C. A N D S U B S I D I A R I E S
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL INDUSTRY CONDITIONS
Worldwide drilling activity, as measured by the average number of active
drilling rigs, decreased in the first nine months of 1995 to an average of
approximately 1,697 from an average of approximately 1,740 during the same
period in 1994. North American drilling activity declined approximately 7% to an
average of approximately 941 rigs. International drilling activity increased by
3% to an average of approximately 756 as compared to 733 in the first nine
months of 1994. The average number of offshore rigs under contract increased
slightly year-over-year and offshore rigs under contract during the month of
September was at its highest level since December 1993.
Both increased international drilling and the recent increase in offshore
drilling activity are positive to the Company. Generally, international rigs
offer a higher revenue potential to the Company than those operating in North
America and offshore rigs, which are generally more costly to operate, are more
likely to spur investment in the Company's newer technology products.
ACQUISITION
On November 30, 1994 the Company acquired all of the outstanding shares of Rig
Technology Limited ("Thule Rigtech"), a company incorporated in Scotland, for a
cost of approximately $9.0 million. Thule Rigtech provides equipment and systems
used in the handling, mixing, transport and conditioning of drilling fluids and
operates as the Company's Thule Rigtech Division.
RESULTS OF OPERATIONS
Set forth below are the net orders and revenues for the Company's five operating
divisions:
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
NET ORDERS
Varco Drilling Systems $23,693 $26,631 $ 71,099 $ 62,649
Varco BJ Oil Tools 10,348 9,116 31,452 31,868
Martin-Decker/TOTCO
Instrumentation 14,406 13,032 43,585 38,699
Shaffer 17,180 9,838 55,239 35,174
Thule Rigtech 2,176 7,972
- --------------------------------------------------------------------------------
Total $67,803 $58,617 $209,347 $168,390
================================================================================
REVENUES
Varco Drilling Systems $24,023 $17,037 $ 74,051 $ 54,481
Varco BJ Oil Tools 11,062 10,095 31,292 30,880
Martin-Decker/TOTCO
Instrumentation 13,860 13,681 42,687 39,364
Shaffer 16,593 12,851 45,098 36,787
Thule Rigtech 2,282 8,255
- --------------------------------------------------------------------------------
Total $67,820 $53,664 $201,383 $161,512
================================================================================
</TABLE>
Incoming orders and revenues for the first nine months of 1995 increased by
24.3% and 24.7%, respectively, as compared to the same period of 1994. These
increases are primarily due to increases in products used on offshore drilling
rigs, particularly those of the Shaffer
<PAGE>
and Drilling Systems Divisions, and to the inclusion of Thule Rigtech, which was
acquired in November of 1994.
The Shaffer Division totals include increases in orders to upgrade several
offshore rigs with pressure control and motion compensation equipment. The
Drilling Systems totals include orders to equip five new offshore platform rigs
with our newer technology pipe handling equipment. These orders totaled
approximately $14.6 million and include both horizontal and vertical racking
systems. Similar orders for the first nine months of 1994 totaled approximately
$5.4 million.
The decline in 1995 third quarter Drilling Systems orders as compared to the
third quarter of 1994 is due to a decline in Top Drive unit orders from 12 to
7. For the first nine months of 1995 Top Drive unit orders totaled 26 as
compared to 32 in the same period of 1994.
The Company has also experienced increases in orders and revenue from the
sales and rental of its TOTAL product line. All of the revenue increases at
Martin-Decker/TOTCO is from increased TOTAL sales and rentals.
At September 30, 1995 the Company's backlog of unshipped orders was
approximately $60.8 million as compared to $52.8 million at December 31, 1994.
In accordance with industry practice, orders and commitments generally are
cancelable by customers at any time. The Company believes that most of the
backlog will be shipped by December 31, 1995.
Gross margin (net sales and rental income less costs of sales and rental
income) as a percentage of net sales and rental income for the first nine months
of 1995 was 38.0%, compared to a gross margin of 39.3% for the same period in
1994. Gross margin for the third quarter 1995 decreased to 36.5% from 40.6% in
the third quarter 1994. The decline in margin in the third quarter of 1995 as
compared to third quarter 1994 is due to the increase in Shaffer's revenues,
which generate lower margins than the combined gross margin of the other
divisions and due to lower than average margins on new products of Drilling
Systems. These factors each accounted for approximately half of the decline in
gross margin for the third quarter 1995 as compared to the third quarter 1994.
The above factors also impacted the nine month gross margin but were partially
offset by a favorable impact of 1.5% resulting from the increased utilization of
the Company's manufacturing facilities. The Company estimates that based upon
direct labor hours (based upon a two shift operation) its manufacturing
facilities were approximately 90% utilized during the first nine months of 1995
as compared to only 75% utilization during the same period of 1994. The effect
of this higher utilization has been to increase the percentage of manufacturing
expenses allocated to inventory and decrease expenses charged directly to cost
of sales.
The Company believes that new product development is a significant factor
for the future of the Company. During the first nine months of 1995 the Company
spent $9.8 million or 4.9% of revenues on new product development. This compares
to $8.8 million or 5.4% of revenues during the same period in 1994.
Primarily as a result of activities related to the increased revenues
selling, general and administrative expenses have increased in 1995 when
compared to similar periods in 1994. However, as a percent of revenues, selling,
general and administrative expenses are down year-to-year. For the first nine
months of 1995 this percent was 22.7% and it compares to 24.3% for the same
period of 1994.
Overall Company employment at September 30, 1995 was 1,572
<PAGE>
(including 219 temporary employees) which compares to 1,390 (including 203
temporary employees) a year ago. This increase is primarily due to an increase
in manufacturing employees and the addition of 37 Thule Rigtech employees.
The effective tax rate for the first nine months of 1995 was 35% as compared
to 37% for 1994. The decreased tax rate is primarily due to recording a credit
for a foreign tax loss carryforward.
LIQUIDITY AND CAPITAL
RESOURCES
At September 30, 1995 the Company had cash and cash equivalents of $7.7 million
as compared to $38.6 million of cash and cash equivalents and short term
investments at December 31, 1994. This decline is due to the Tender Offer and
the Senior Note payment, discussed below.
On March 24, 1995, the Company commenced a "Dutch Auction" type tender offer
(the "Tender Offer") to purchase up to 5,300,000 shares of its Common Stock at a
purchase price not greater than $8.00 per share nor less than $6.75 per share.
Pursuant to the Tender Offer, which terminated on April 21, 1995, the Company
purchased 3,150,560 shares of its Common Stock at a purchase price of $8.00 per
share. The aggregate cost to the Company of the Tender Offer, including
expenses, was approximately $26.2 million, which was funded from cash and cash
equivalents and short term investments.
In July 1992 the Company sold $50.0 million aggregate principal amount of
its 8.95% Senior Notes Due June 30, 1999 (the "Senior Notes") to a group of ten
institutional investors pursuant to a Note Agreement dated as of July 1, 1992
(the "Note Agreement"). The principal of the Senior Notes is payable in five
equal annual installments of $10.0 million, the first of which was made on
June 30, 1995. Effective as of March 8, 1995, the holders of the Senior Notes
waived compliance with certain covenants contained in the Note Agreement in
order to permit the Tender Offer and amended certain financial covenants to take
into account the effect of the consummation of the Tender Offer. The Senior
Notes include a yield maintenance prepayment penalty if any principal is repaid
prior to the installment due date. Had the entire outstanding principal amount
been prepaid at September 30, 1995 the prepayment penalty would have been
approximately $2.3 million.
On February 25, 1993 the Company entered into an unsecured revolving credit
agreement with Citicorp USA, Inc. and Citibank, N.A. (the "Credit Agreement").
Effective as of March 17, 1995 the Credit Agreement was amended to (1) extend
the maturity date from March 31, 1996 to October 31, 1998; (2) increase the
total maximum facility from $20.0 to $35.0 million, consisting of a loan
facility of $25.0 million and a letter of credit facility of $10.0 million; and
(3) to amend certain covenants to permit the Tender Offer and to take into
account the effect of the consummation of the Tender Offer on certain financial
ratios. At September 30, 1995 there were no advances outstanding and $2.9
million in letters of credit outstanding under this facility.
Both the Note Agreement and the Credit Agreement restrict the payment of
dividends (other than dividends payable solely in shares of Common Stock) on,
and repurchases of, Common Stock. Under the terms of the Credit Agreement, which
is generally the more restrictive of these, the amount available for the payment
of dividends on, and
<PAGE>
repurchases of, Common Stock is limited to 25% of the Company's consolidated net
income arising after January 1, 1992, computed on a cumulative basis. In
addition, pursuant to the March 17, 1995 amendment to the Credit Agreement
discussed above, the Company may repurchase at any time prior to December 31,
1995 shares of its Common Stock for an aggregate cost not exceeding $50.0
million including shares purchased pursuant to the Tender Offer. The Company may
also purchase or otherwise acquire shares of Common Stock from the proceeds of
the substantially concurrent sale of shares of Common Stock.
On May 26, 1994 the Company announced that its Board of Directors authorized
the repurchase of up to one million shares of the Company's Common Stock for an
aggregate purchase price not exceeding $6 million (the "Repurchase Program"). On
May 26, 1995 the Company announced an increase and extension of the above
Repurchase Program. The total number of shares authorized for repurchase was
increased to 1,500,000; the maximum aggregate purchase price was increased to
$11.0 million and the purchase period was extended through December 31, 1996.
This additional authorization is subject to approval by the Company's lenders.
To date the Company has repurchased on the open market 436,500 shares of its
Common Stock at an average price of approximately $7.53 per share. The last such
purchase was on November 2, 1995.
At September 30, 1995 the Company's working capital was $88.9 million as
compared to $112.3 million at December 31, 1994 and its current ratio was 2.6 to
1.0 as compared to 3.4 to 1.0 at December 31, 1994. Long-term debt as a percent
of total capitalization was 16% at September 30, 1995 as compared to 19% at
December 31, 1994. The decrease in working capital and current ratio is due to
the completion of the Tender Offer. The decline in long-term debt as a percent
of total capitalization is due to the June 30 principal payment made on the
Senior Notes.
The Company's capital expenditures during the first nine months of 1995 were
$10.7 million. For all of 1995 the Company's expects capital expenditures to be
approximately $13.6 million. These expenditures compare to capital expenditures
of $8.6 million in 1994. The Company believes its revolving credit facility and
its cash and cash equivalents will be sufficient to purchase additional shares
pursuant to the Repurchase Program and to meet its capital expenditures and
operating cash needs in 1995 and 1996.
INVESTOR CONTACT
Richard A. Kertson
Vice President -- Finance
Varco International, Inc.
743 North Eckhoff Street
Orange, California 92668
Tel (714) 978-1900
Fax (714) 937-5029
[LOGO of VARCO]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT INCLUDED IN ITS THIRD QUARTER REPORT TO
SHAREHOLDERS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 7,652,000
<SECURITIES> 0
<RECEIVABLES> 58,086,000
<ALLOWANCES> (1,614,000)
<INVENTORY> 73,279,000
<CURRENT-ASSETS> 146,130,000
<PP&E> 109,516,000
<DEPRECIATION> (58,551,000)
<TOTAL-ASSETS> 245,985,000
<CURRENT-LIABILITIES> 57,199,000
<BONDS> 29,524,000
<COMMON> 123,978,000
0
0
<OTHER-SE> 27,370,000
<TOTAL-LIABILITY-AND-EQUITY> 245,985,000
<SALES> 67,820,000
<TOTAL-REVENUES> 68,053,000
<CGS> 43,040,000
<TOTAL-COSTS> 58,275,000
<OTHER-EXPENSES> 3,302,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,019,000
<INCOME-PRETAX> 5,457,000
<INCOME-TAX> 1,776,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,681,000
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0
</TABLE>
