<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 June 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
----- -----
30,355,880
(Number of shares of Common Stock outstanding at August 1, 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 Second Quarter Report to
Shareholders for the three months ended June 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
32,534,974 and 33,618,400 shares outstanding for the six months ended June 30,
1995, and 1994 respectively, and upon an average of 31,482,199 and 33,647,266
shares outstanding for the three months ended June 30, 1995 and 1994
respectively.
Inventories. The Company estimates the components of inventory at June 30,
1995, and December 31, 1994, to be as follows:
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Raw Materials $ 6,255,000 $ 6,164,000
Work in Process 19,737,000 13,677,000
Finished Goods 43,018,000 40,458,000
----------- -----------
$69,010,000 $60,299,000
=========== ===========
</TABLE>
Fixed Assets. Fixed assets are stated net of accumulated depreciation
of $56,674,000 at June 30, 1995, and $52,333,000 at December 31, 1994.
2
<PAGE>
Common Stock and Additional Paid-In-Capital. On June 30, 1995, the
Company Common Stock account was $20,722,000, and Additional Paid-In-Capital
accounts were $102,952,000.
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 Second Quarter Report to Shareholders for the three months ended
June 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 commencing 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 wavier 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 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of Shareholders of the Company was held on
May 18, 1995.
(c) Matters voted upon at the 1995 Annual Meeting of Shareholders of
the Company.
<TABLE>
<CAPTION>
1. Election of Directors
Name Votes For Votes Withheld
<S> <C> <C>
G. Boyadjieff 23,796,169 582,074
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
T. Embry 23,790,897 587,346
A. Horn 23,794,709 583,534
M. Jacques 23,597,299 780,944
J. Knowlton 23,793,819 584,424
L. Pircher 23,795,209 583,034
W. Reinhold 23,659,609 718,634
C. Suggs 23,794,619 583,624
R. Teitsworth 23,796,019 582,224
E. White 23,794,509 583,734
J. Woods 23,660,557 717,686
</TABLE>
2. Proposal to approve certain amendments to the Company's 1980 Employee
Stock Purchase Plan
Votes For Votes Against Abstentions
16,754,937 2,239,944 132,517
3. Proposal to approve certain amendments to the Company's Stock Bonus Plan
Votes For Votes Against Abstentions
14,254,323 4,563,588 309,487
4. Proposal to approve the adoption of the Company's 1994 Directors' Stock
Option Plan:
Votes For Votes Against Abstentions
15,668,570 3,245,153 213,675
5. Proposal to ratify Ernst & Young LLP as the independent auditors of the
Company.
Votes For Votes Against Abstentions
24,234,849 80,085 63,309
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4
<PAGE>
3 Amended and Restated Articles of Incorporation of Varco International,
Inc.
10.1 Amendment to the Varco 1980 Employee Stock Purchase Plan.
10.2 Amendment to the Varco International, Inc. Stock Bonus Plan.
11 Statement re computation of per share earnings for the three months
and six months ended June 30, 1995 and 1994.
19 Varco International, Inc. Second Quarter Report to Shareholders, Three
Months Ended June 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.
5
<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: August 11, 1995 By:/s/Richard A. Kertson
---------------------
Vice President-Finance
and Chief Financial Officer
Date: August 11, 1995 By:/s/Donald L. Stichler
---------------------
Controller-Treasurer
6
<PAGE>
EXHIBIT INDEX
3 Amended and Restated Articles of Incorporation of Varco International,
Inc.
10.1 Amendment to the Varco 1980 Employee Stock Purchase Plan.
10.2 Amendment to the Varco International, Inc. Stock Bonus Plan.
11 Statement re computation of per share earnings for the three months
and six months ended June 30, 1995 and 1994.
19 Varco International, Inc. Second Quarter Report to Shareholders, Three
Months Ended June 30, 1995.
27 Financial Data Schedule
<PAGE>
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
VARCO INTERNATIONAL, INC.
Richard A. Kertson and Donald L. Stichler certify that:
1. They are the duly elected and acting Vice President-Finance and
Secretary, respectively, of Varco International, Inc., a California corporation
(the "Company").
2. The Articles of Incorporation of the Company are amended and restated
to read in full as follows:
Name
One: The name of the corporation is:
Varco International, Inc.
Purpose
Two: The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the
trust company business or the practice of a profession permitted to
be incorporated under the California Corporations Code.
Authorized Shares
Three: This corporation is authorized to issue two classes of shares
designated respectively "Common Stock" and "Preferred Stock,"
referred to herein as Common Stock or Common Shares and Preferred
Stock or Preferred Shares, respectively. The number of shares of
Common Stock is eighty million (80,000,000) and the number of shares
of Preferred Stock is ten million (10,000,000). The Preferred Shares
may be issued from time to time in one or more series. The Board of
Directors is authorized to fix the number of shares of any series of
Preferred Shares and to determine the designation of any such
series. The Board of Directors is also authorized to determine or
alter the rights, preferences, privileges, and restrictions granted
to or imposed upon any wholly unissued series of Preferred Shares
and, within the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number
of shares constituting any series, to increase or decrease (but not
below the number of shares of such
<PAGE>
series then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series.
Election
Four: The corporation elects to be governed by all of the provisions of
Division 1 of Title 1 of the California Corporations Code (as
amended by act of the California Legislature, 1975-1976 regular
session, effective January 1, 1977, as defined in Section 2300 of
the California General Corporation Law) and not otherwise applicable
to the corporation under Chapter 23 of said Division 1.
Five: (a) Limitation of Directors' Liability. The liability of the
----------------------------------
directors of this corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law.
(b) Indemnification of Corporate Agents. This corporation is
-----------------------------------
authorized to provide indemnification of agents (as defined in
Section 317 of the California Corporations Code) by bylaw
provisions, agreements with agents, vote of shareholders or
disinterested directors, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the limits set forth in Section
204 of the California Corporations Code with respect to actions for
breach of duty to this corporation and its stockholders.
(c) Repeal or Modification. Any repeal or modification of the
----------------------
foregoing provisions of this Article Five by the shareholders of
this corporation shall not adversely affect any right or protection
of an agent of this corporation existing at the time of such repeal
or modification.
3. The amendment and restatement set forth herein have been duly
approved by the Board of Directors of the Company.
4. The Certificate of Determination for the series of Preferred Stock
designated as "$2.00 Cumulative Convertible Preferred Stock, Series A" (the
"Series A Preferred Stock") provides that upon the acquisition thereof by the
Company, shares of Series A Preferred Stock shall be returned to the status of
authorized but unissued shares of Preferred Stock and, accordingly, shares so
acquired may not be reissued as shares of Series A Preferred Stock. All of the
authorized shares of the Series A Preferred Stock have been acquired by the
Company. Accordingly, all statements of the rights, preferences, privileges, and
restrictions relating solely to the Series A Preferred Stock have been
eliminated from the Articles of Incorporation in the foregoing amendment and
restatement. The foregoing is the only amendment to the Articles of
Incorporation effected by
<PAGE>
the amendment and restatement set forth herein. The foregoing amendment is one
which may be adopted with approval of the Board of Directors alone pursuant to
the provisions of Section 510(b) of the California Corporations Code.
IN WITNESS WHEREOF, the undersigned have executed this Certificate on May
18, 1995.
/s/ RICHARD A. KERTSON
----------------------------
Richard A. Kertson
Vice President-Finance
/s/ DONALD L. STICHLER
----------------------------
Donald L. Stichler
Secretary
The undersigned, Richard A. Kertson and Donald L. Stichler, the Vice
President-Finance and Secretary, respectively, of Varco International, Inc.,
each declares under penalty of perjury that the matters set forth in the
foregoing Certificate are true of his own knowledge.
Executed at Orange, California on May 18, 1995.
/s/ RICHARD A. KERTSON
----------------------------
Richard A. Kertson
Vice President-Finance
/s/ DONALD L. STICHLER
----------------------------
Donald L. Stichler
Secretary
<PAGE>
Exhibit 10.1
Varco International Inc.
Amendment to
Varco 1980 Employee Stock Purchase Plan
RESOLVED, that Sections 3.2 and 6.1 of the Varco 1980 Employee Stock
Purchase Plan be, and the same hereby are, amended to read in their
entirety as follows:
"3.2 Term of the Plan. The Plan shall remain in force for a period of
-----------------
twenty-five years following its effective date unless it is sooner
terminated by a resolution adopted by the Company's Board of
Directors. Termination of the Plan by action of the Board of
Directors shall not diminish the Rights of any existing Participant,
nor shall it impair the Company's obligations under any outstanding
Rights".
"6.1 Shares Subject to the Plan. Subject to the provisions in Section
---------------------------
9 (relating to adjustment upon changes in the Company's
capitalization), shares of stock sold pursuant to Rights existing
under the Plan shall not exceed, in the aggregate, 2,000,000 shares of
the Company's authorized Stock. These shares may be unissued or
reacquired shares, or shares purchased on the market for purposes of
the Plan".
<PAGE>
Exhibit 10.2
Varco International Inc.
Amendment to
Stock Bonus Plan
RESOLVED, that Sections 4.02 and 6.02 of the Varco International Inc.
Stock Bonus Plan be, and the same hereby are, amended to read in their
entirety as follows:
"4.02 The total number of shares of Common Stock which may be subject
to Bonus Awards granted under the Plan shall not exceed 1,000,000
shares, subject, however, to adjustment pursuant to the provisions of
Section 4.03. Any shares of Common Stock subject to Bonus Awards
granted under the Plan but not issued because of the termination of an
Employee's employment with the Company or otherwise shall not be
available for the grant of future Bonus Awards under the Plan".
"6.02 The Board may at any time terminate the Plan by appropriate
corporate resolution. Unless sooner terminated by the Board, the Plan
shall automatically terminate upon the earlier of (i) the 15th
anniversary of the date the Plan was adopted by the Board or (ii) the
first date when all the shares available for the grant of Bonus Awards
under the Plan shall have been granted. Under no circumstances shall
the termination of the Plan affect the rights of any Employee with
respect to any Bonus Award granted to him prior to such termination,
and any such Bonus Award shall continue to be paid in accordance with
its designated payment schedule.
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 1995 June 30 1995
----------------------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $5,403,000 $8,316,000
</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 June 30, 1995 91 2,842,995,435 31,241,708 240,491 31,482,199
Six Months Ended June 30, 1995 181 5,845,301,353 32,294,483 240,491 32,534,974
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
--------------------------
Total Shares Outstanding
Income Per Share =
Three Months Ended June 30, 1995 5,403,000 = $0.17
--------------
31,482,199
Six Months Ended June 30, 1995 8,316,000 = $0.26
--------------
32,534,974
</TABLE>
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 1994 June 30 1994
------------------------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $2,904,000 $5,262,000
</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 June 30, 1994 91 3,038,166,587 33,386,446 260,820 33,647,266
Six Months Ended June 30, 1994 181 6,037,722,062 33,357,580 260,820 33,618,400
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
------------------------
Total Shares Outstanding
Income Per Share =
Three Months Ended June 30, 1994 2,904,000 = $0.09
--------------
33,647,266
Six Months Ended June 30, 1994 5,262,000 = $0.16
--------------
33,618,400
</TABLE>
<PAGE>
T O O U R S H A R E H O L D E R S
Revenues and income for the three months ended June 30 were up sharply over
prior periods. Quarterly Revenues of $76.8 million were 34 per cent above the
second quarter of last year. This total is also the highest in the Company's
history, 27 per cent above the previous high, established in the fourth quarter
of last year. The record Revenues resulted from very strong order bookings in
each of the two preceding quarters.
Net Income for the second quarter was $5.4 million, $.17 per share, or 86 per
cent above $2.9 million, $.09 per share, in the comparable quarter one year ago.
For the first six months of the year, Net Income was $8.3 million, $.26 per
share, 58 per cent above the same period of 1994; and Revenues totaled $134.4
million, 24 per cent above the comparable year-earlier figure.
Incoming orders for the most recent quarter declined to $64.6 million, from
$73.1 million in the fourth quarter of 1994 and $76.9 million in the first
quarter of this year. However, the second quarter figure still represents the
third highest quarterly total in the Company's history.
The increased level of business does not result from higher overall drilling
activity. The average worldwide rig count for the three months ended June 30
was below both the second quarter of 1994 and the first quarter of this year.
Instead, we believe that the improvement relates to a continuing emphasis on the
development of offshore oil and gas reserves, particularly in deeper waters and
more difficult drilling environments. These factors generate a need for more
reliable and higher capacity equipment, as well as a greater interest in the use
of newer technologies. Both of these trends play to the strengths of Varco.
Despite the lackluster overall drilling activity, two developing trends are
very positive for Varco. First, international drilling has been increasing. In
each of the last five months the international rig count has been above the
comparable month of last year. Although the upturn has been modest (the second
quarter international rig count was about three percent above that of the second
quarter a year ago), it is the first sustained year-over-year increase in more
than three years. Second, the offshore drilling market is also gaining
<PAGE>
momentum, with June rig utilization at its highest level since December of 1993.
International rigs offer a higher revenue potential to Varco than those
operating in North America. An improved market for offshore rigs, which are
relatively more costly to operate, is more likely to spur investment in our
newer technology products.
The pickup in the international and offshore markets has occurred in spite of
a continuing softness in oil and gas prices. While oil crept above $20 per
barrel briefly in April, it fell back to the $17-$18 range toward the end of the
quarter, and natural gas prices generally ranged between $1.45-$1.60 per million
BTU during the April-June period. We find the improvement in the international
and offshore markets to be very encouraging in light of relatively flat
commodity prices.
We are pleased with our recent accomplishments and encouraged by our
prospects. Successful execution of our key strategies continues to yield
improving results. With oil and gas prices at historically low levels in real
terms, oil companies are aggressively pursuing cost reduction. Products,
technologies and services which contribute to that effort have become
increasingly significant. As a result, our newer products are achieving greater
market acceptance and are providing increased opportunities for Varco. We
continue to focus on converting these opportunities into improved performance.
We appreciate the support of our shareholders, customers, employees and
friends.
Walter B. Reinhold George I. Boyadjieff
Chairman President and Chief Executive Officer
August 10, 1995
<PAGE>
CONDENSED CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) June 30, December 31,
1995 1994
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,607 $ 8,793
Short term investments 29,832
Receivables (net) 65,177 52,250
Inventories 69,010 60,299
Other 6,792 7,603
- ----------------------------------------------------------------------------------------
Total Current Assets 146,586 158,777
Property, plant and equipment at cost,
less accumulated depreciation 48,450 49,807
Cost in excess of net assets acquired 37,044 37,529
Other assets 10,600 11,528
- ----------------------------------------------------------------------------------------
Total Assets $242,680 $257,641
========================================================================================
CURRENT LIABILITIES
Accounts payable $ 21,751 $ 15,345
Other liabilities 25,869 21,090
Current portion of long-term debt 10,000 10,000
- ----------------------------------------------------------------------------------------
Total Current Liabilities 57,620 46,435
Long-term debt 29,466 39,349
Other non-current liabilities 7,737 8,129
- ----------------------------------------------------------------------------------------
Total Liabilities 94,823 93,913
SHAREHOLDERS' EQUITY
Common Stock
and additional paid-in capital $123,674 $125,897
Retained earnings 24,183 37,831
- ----------------------------------------------------------------------------------------
Total Shareholders' Equity 147,857 163,728
- ----------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $242,680 $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) Six Months Ended June 30,
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,316 $ 5,262
Depreciation and amortization 6,050 5,323
Increase (decrease) in operating
cash flows:
Receivables (12,927) (4,074)
Inventories (8,711) (4,530)
Accounts payable 6,406 991
Interest payable 13 3
Other 5,204 (1,889)
- ------------------------------------------------------------------------
Net cash from
operating activities 4,351 1,086
- ------------------------------------------------------------------------
INVESTING ACTIVITIES
Short-term investments 29,832 (2,547)
Equipment purchases (3,400) (5,472)
Proceeds from equipment sales 295 31
Other 463 (399)
- ------------------------------------------------------------------------
Net cash from (used in)
investing activities 27,190 (8,387)
- ------------------------------------------------------------------------
FINANCING ACTIVITIES
Repurchase of Common Stock (25,672) (614)
Payment on long-term debt (10,000)
Other 945 566
- ------------------------------------------------------------------------
Net cash (used in) financing activities (34,727) (48)
- ------------------------------------------------------------------------
Net change in cash and cash equivalents (3,186) (7,349)
- ------------------------------------------------------------------------
Cash and cash equivalents at
beginning of year 8,793 22,560
- ------------------------------------------------------------------------
Cash and cash equivalents at
end of quarter $ 5,607 $15,211
========================================================================
</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 Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Net sales $70,466 $51,530 $121,269 $ 96,688
Rental income 5,925 5,494 12,294 11,160
Other income 396 495 869 985
- ----------------------------------------------------------------------------------------
76,787 57,519 134,432 108,833
- ----------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 46,587 33,846 78,141 62,714
Cost of rental income 1,787 1,738 3,618 3,428
Selling, general and
administrative
expenses 15,490 13,176 30,635 26,007
Research and
development costs 3,345 2,947 6,535 6,079
Interest expense 1,289 1,196 2,493 2,339
- ----------------------------------------------------------------------------------------
68,498 52,903 121,422 100,567
- ----------------------------------------------------------------------------------------
Income before
income taxes 8,289 4,616 13,010 8,266
Provision for
income taxes 2,886 1,712 4,694 3,004
- ----------------------------------------------------------------------------------------
Net income $ 5,403 $ 2,904 $ 8,316 $ 5,262
========================================================================================
Net income per
share of
Common Stock $ .17 $ .09 $ .26 $ .16
========================================================================================
Shares used to
calculate earnings
per share 31,482 33,647 32,535 33,618
========================================================================================
</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 six months of 1995 to an average of
approximately 1,683 from an average of approximately 1,724 during the same
period in 1994. North American drilling activity declined approximately 5% to
an average of approximately 930 rigs. International drilling activity increased
to an average of approximately 753 rigs as compared to 744 in the first half of
1994. The average number of offshore rigs under contract decreased slightly
year-over-year; however, offshore rigs under contract during the month of June
increased to 543, its highest level since the end of 1993.
Both increased international drilling and the recent increase in offshore
drilling activity is positive for 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 June 30, Six months ended June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
NET ORDERS
Varco Drilling Systems $24,126 $18,628 $ 47,406 $ 36,018
Varco BJ Oil Tools 9,074 11,867 21,104 22,752
Martin-Decker/TOTCO
Instrumentation 13,526 12,395 29,179 25,667
Shaffer 15,549 14,474 38,059 25,336
Thule Rigtech 2,349 5,796
- -----------------------------------------------------------------------------------
Total $64,624 $57,364 $141,544 $109,773
===================================================================================
REVENUES
Varco Drilling Systems $30,180 $21,118 $ 50,028 $ 37,444
Varco BJ Oil Tools 9,907 10,794 20,230 20,785
Martin-Decker/TOTCO
Instrumentation 15,109 13,239 28,827 25,683
Shaffer 18,135 11,873 28,505 23,936
Thule Rigtech 3,060 5,973
- -----------------------------------------------------------------------------------
Total $76,391 $57,024 $133,563 $107,848
===================================================================================
</TABLE>
Incoming orders and revenues for the first six months of 1995 increased by 28.9%
and 23.8%, respectively, as compared to the same period of 1994. These
increases are primarily due to increases in Varco products used on offshore
drilling rigs, particularly those of the Drilling Systems and Shaffer Divisions,
and to the inclusion of Thule Rigtech
<PAGE>
which was acquired in November of 1994. In addition, during the second quarter
the Drilling Systems Division delivered the first two units of its new Top Drive
Drilling System designed specifically for use on land rigs, the TDS-9S.
Included in the Drilling Systems order total were orders to equip three new
offshore platform rigs with our newer technology pipe handling equipment. These
orders, all scheduled for delivery in the fourth quarter of 1995, total
approximately $9.5 million, and each includes both horizontal and vertical
racking systems. The Shaffer total includes orders to upgrade several offshore
rigs with motion compensation and pressure control equipment.
The Company has also experienced increases in orders and revenue from the
sales and rental of its TOTAL product line. All of the increases at Martin-
Decker/TOTCO are from TOTAL sales and rentals.
The Company's incoming orders have totaled $73.1 million for the fourth
quarter of 1994, and $76.9 million and $64.6 million for the first two quarters
of 1995, respectively. These rates compare to an average of $56.1 million for
the first three quarters of 1994. Since these recent quarterly totals represent
significant increases over previous periods during a time in which worldwide
drilling activity has declined somewhat, the Company does not believe that these
rates, particularly those of the fourth and first quarters, will be sustained in
the near term.
At June 30, 1995 the Company's backlog of unshipped orders was approximately
$60.7 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 margins (net sales and rental income less costs of sales and rental
income) as a percentage of net sales and rental income for the first half of
1995 were 38.8%, compared to a gross margin of 38.7% for the same period in
1994. Gross margins for the second quarter 1995 decreased to 36.7% from 37.6%
in the second quarter of 1994. The decline in margins in the second quarter of
1995 is primarily due to the increase in Shaffer's revenue, which produces lower
margins than the combined gross margins of the other Divisions and due to lower
than average margins on new products such as the TDS-9 and racking systems at
Drilling Systems. These factors accounted for an approximate 2.5% decline in
margin as compared to the second quarter 1994. This decline was partially
offset by a 1.8% improvement to margins as a result of 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 second quarter of 1995 as
compared to only 75% utilization during the second quarter 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 six months of 1995 the Company
spent $6.5 million or 4.9% of revenues on new product development. This
compares to $6.1 million or 5.6% of revenues during the same period in 1994.
The increase in selling, general and administrative expenses compared to 1994
is primarily a result of activity related to the increased revenues. As a
percent of revenues, selling, general and
<PAGE>
administrative expenses were down year-to-year. For the first half of 1995 this
percent was 22.8%, and it was 20.2% for the second quarter of 1995. As a percent
of revenues, selling, general and administrative expenses were 23.9% and 22.9%
for the first half and second quarter of 1994, respectively.
Overall Company employment at June 30, 1995 was 1,514 (including 235 temporary
employees) which compares to 1,364 (including 210 temporary employees) a year
ago. This increase is primarily due to an increase in manufacturing employees
and the addition of 39 Thule Rigtech employees.
The effective tax rate for the second quarter of 1995 was 35% as compared to
37% for the second quarter of 1994. The decreased tax rate is primarily due to
a lower percentage of non-deductible expenses incurred in 1995 than 1994.
LIQUIDITY AND CAPITAL
RESOURCES
At June 30, 1995 the Company had cash and cash equivalents of $5.6 million as
compared to $38.6 million in 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, both 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 June 30, 1995 the prepayment penalty would have been approximately
$2.4 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 June 30, 1995 there were no advances outstanding and $3.3 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
<PAGE>
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 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 267,200 shares of its
Common Stock at an average price of approximately $6.28 per share. The last
such purchase was in January, 1995.
At June 30, 1995 the Company's working capital was $89.0 million as compared
to $112.3 million at December 31, 1994 and its current ratio was 2.5 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 17% at June 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 half of 1995 were $3.4
million as compared to $5.5 million for the first half 1994. For all of 1995
the Company expects capital expenditures for machinery and equipment to be
approximately $10.0 million. Additionally, the Company intends to purchase its
Cedar Park manufacturing facility (currently under lease) for approximately $3.6
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 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
V A R C O I N T E R N A T I O N A L , I N C.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT INCLUDED IN ITS SECOND QUARTER REPORT TO
SHAREHOLDERS FOR THE THREE MONTHS ENDED JUNE 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> JUN-30-1995
<CASH> 5,607,000
<SECURITIES> 0
<RECEIVABLES> 66,793,000
<ALLOWANCES> (1,616,000)
<INVENTORY> 69,010,000
<CURRENT-ASSETS> 146,586,000
<PP&E> 105,124,000
<DEPRECIATION> (56,674,000)
<TOTAL-ASSETS> 242,680,000
<CURRENT-LIABILITIES> 57,620,000
<BONDS> 29,466,000
<COMMON> 123,674,000
0
0
<OTHER-SE> 24,183,000
<TOTAL-LIABILITY-AND-EQUITY> 242,680,000
<SALES> 76,391,000
<TOTAL-REVENUES> 76,787,000
<CGS> 48,374,000
<TOTAL-COSTS> 63,864,000
<OTHER-EXPENSES> 3,345,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,289,000
<INCOME-PRETAX> 8,289,000
<INCOME-TAX> 2,886,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,403,000
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0
</TABLE>
