<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, 1996
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
incorporation or organization) Identification No.)
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____
31,401,951
(Number of shares of Common Stock outstanding at August 1, 1996)
<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, 1996, 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
31,184,899 and 32,534,974 shares outstanding for the six months ended June 30,
1996, and 1995 respectively, and upon an average of 31,447,509 and 31,482,199
shares outstanding for the three months ended June 30, 1996 and 1995
respectively.
INVENTORIES. The Company estimates the components of inventory at June 30,
1996, and December 31, 1995, to be as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
-------------- ------------------
<S> <C> <C>
Raw Materials $ 5,857,000 $ 5,480,000
Work in Process 19,778,000 18,061,000
Finished Goods 70,878,000 59,426,000
LIFO Reserves (13,952,000) (13,761,000)
------------ ------------
$ 82,561,000 $ 69,206,000
============ ============
</TABLE>
FIXED ASSETS. Fixed assets are stated net of accumulated depreciation of
$51,048,000 at June 30, 1996, and $48,376,000 at December 31, 1995.
<PAGE>
COMMON STOCK AND ADDITIONAL PAID-IN-CAPITAL. On June 30, 1996, the Company
Common Stock account was $21,766,000 and Additional Paid-In-Capital accounts
were $119,417,000.
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, 1996, filed as Exhibit 19 hereto, is incorporated herein by reference.
PART II-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On May 29, 1996 the Company completed the sale of 989,406 shares of its Common
Stock at a price to the public of $15.875 per share.
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 and a letter of credit facility of $10.0 million;
and (3) to amend certain convenants to permit the Tender Offer and to take into
account the effect of the consummation of the Tender Offer on certain financial
ratios.
<PAGE>
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 December 31, 1995 amendment to
the Credit Agreement discussed above, the Company may repurchase at any time
prior to December 31, 1996 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 16,
1996.
(c) Matters voted upon at the 1996 Annual Meeting of Shareholders of the
Company.
1. Election of Directors
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
- ------------- ----------- --------------
<S> <C> <C>
G. Boyadjieff 27,169,002 59,704
T. Embry 27,160,649 68,057
A. Horn 27,167,192 61,514
M. Jacques 27,144,465 84,241
J. Knowlton 27,168,792 59,914
L. Pircher 27,167,992 60,714
W. Reinhold 27,167,992 60,714
C. Suggs 27,167,202 61,504
R. Teitsworth 27,168,792 59,914
E. White 27,168,992 59,714
J. Woods 27,168,319 60,387
</TABLE>
2. Proposal to approve certain amendments to the Company's 1990 Stock
Option Plan.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS NON-VOTES
---------- ------------- ----------- ---------
<S> <C> <C> <C>
21,228,131 1,260,119 90,463 4,649,993
</TABLE>
3. Proposal to ratify Ernst & Young LLP as the independent auditors of
the Company.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
---------- ------------- -----------
<S> <C> <C>
27,176,009 28,249 24,448
</TABLE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Varco 1990 Stock Option Plan Amendments.
11 Statement re computation of per share earnings for the three
months ended June 30, 1996 and 1995.
19 Varco International, Inc. Second Quarter Report to Shareholders,
Three Months Ended June 30, 1996.
27.1 Financial Data Schedule, June 30, 1996
27.2 Restated Financial Data Schedule, March 31, 1996
27.3 Restated Financial Data Schedule, December 31, 1995
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this report
is filed.
<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 12, 1996 By:/s/Richard A. Kertson
--------------------------------------
Vice President-Finance
and Chief Financial Officer
Date: August 12, 1996 By:/s/Donald L. Stichler
--------------------------------------
Controller-Treasurer
and Secretary
<PAGE>
EXHIBIT INDEX
10 Varco 1990 Stock Option Plan Amendments.
11 Statement re computation of per share earnings for the three
months ended June 30, 1996 and 1995.
19 Varco International, Inc. Second Quarter Report to Shareholders,
Three Months Ended June 30, 1996.
27.1 Financial Data Schedule, June 30, 1996
27.2 Restated Financial Data Schedule, March 31, 1996
27.3 Restated Financial Data Schedule, December 31, 1995
<PAGE>
EXHIBIT 10
Amendments to Varco International Inc.'s
1990 Stock Option Plan
1. Section 4 of the Company's 1990 Stock Option Plan (the "1990 Plan") was
amended to read in its entirety as follows:
"Subject to adjustment as provided in Section 8 hereof, the
aggregate number of shares of Common Stock which may be issued upon
the exercise of options or SAR's under the Plan shall not exceed three
million (3,000,000). Such shares shall be authorized but unissued
shares. If any option granted under the Plan shall expire or terminate
for any reason without having been exercised in full, the unpurchased
shares subject thereto shall again become available for the purposes
of the Plan except that the shares subject to any option (or portion
thereof) surrendered upon the exercise of an SAR shall not again
become available for the purposes of the Plan."
2. The caption and text of Section 5 of the 1990 Plan was deleted from the 1990
Plan.
3. Section 6(c)J of the 1990 Plan was amended to read in its entirety as
follows:
"J.Limitation on Amount. Subject to the further limitations set
forth in Section 4 hereof, the aggregate Fair Market Value (determined
as of the time the option is granted) of the Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by
an employee
<PAGE>
in any calendar year (under the Plan and all other incentive stock
option plans of the Company and any parent or subsidiary of the
Company) shall not exceed $100,000."
<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
<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 1996 June 30 1996
---------------------------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $5,679,000 $8,707,000
<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, 1996 91 2,795,307,505 30,717,665 729,844 31,447,509
Six Months Ended June 30, 1996 182 5,542,820,025 30,455,055 729,844 31,184,899
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
------------------------
Total Shares Outstanding
Income Per Share =
Three Months Ended June 30, 1996 5,679,000 = $0.18
---------------
31,447,509
Six Months Ended June 30, 1996 8,707,000 = $0.28
---------------
31,184,899
</TABLE>
<PAGE>
Varco International, Inc.
1996
Second Quarter Report
<PAGE>
TO OUR SHAREHOLDERS
In our recent quarterly reports we have indicated that a strengthening offshore
drilling market is providing positive momentum for Varco. That trend is
continuing. Utilization of the worldwide offshore rig fleet averaged 89.8 per
cent for the second quarter and reached 90.3 per cent for the month of June, the
highest level since August of 1982. In response to the increased demand for
offshore rigs, particularly those capable of drilling in deep water and harsh
environments, stacked rigs are being activated and others are being upgraded.
These activities result in significant revenue potential for Varco.
The strength of the offshore market is reflected in our order bookings and
Revenue. Incoming orders for the three months ended June 30 totaled $85.2
million, following a record $102.2 million in the previous quarter, and $85.6
million in the fourth quarter of last year. These three quarterly totals are the
highest in the Company's history.
Revenue for the second quarter was $90.4 million, a record for Varco
International. For the comparable period of 1995, Revenue was $76.8 million. Net
Income for the three months ended June 30 was $5.7 million, $.18 per share,
versus $5.4 million, $.17 per share, for the same period last year. The Revenue
increase is primarily attributable to the Shaffer Division, which recorded
Revenues of $29.4 million in the most recent quarter as compared to $18.1
million a year ago. The sharp upturn in Shaffer's business is the direct result
of upgrading the water depth capacity of several floating offshore rigs. These
upgrades require equipment that represents a substantial portion of the Shaffer
product line, and each such upgrade can potentially result in revenue of $5-$20
million for Shaffer.
The modest increase in Net Income as compared to the second quarter of last
year primarily reflects lower gross margins. Gross margins were 33.4 per cent in
the most recent quarter, as compared to 36.7 per cent a year ago. This decline
is a result of two factors. First, the market for Shaffer products is the most
competitive in which Varco participates. Shaffer's gross margins are lower than
the average of the other Divisions, and the sharp increase in Shaffer's Revenue
had the effect of reducing the Company's overall gross margin. However, the
Revenue growth at Shaffer is generating a positive profit contribution which is
in line with our expectations. Although we are striving to improve margins on
this business, until there is an opportunity for improved pricing they will
remain below
<PAGE>
the average for the Company. Second, as we have previously indicated, beginning
with the fourth quarter of last year margins at the Drilling Systems Division
have fallen below our target levels. However, the two most recent quarters have
each demonstrated recovery, and plans are in place to generate additional
improvement.
In May we completed an underwritten secondary offering of 6,346,041 shares
of Varco International, Inc. Common Stock held by Baker Hughes Incorporated and
250,000 shares held by Walter B. Reinhold, Chairman of the Board. Baker Hughes'
shares were issued as partial consideration in two separate acquisitions in 1988
and 1990. Additionally, Varco International, Inc. sold 989,406 new shares upon
exercise of the underwriters' over-allotment option, with net proceeds to the
Company of approximately $14.6 million.
The outlook for our industry remains positive. Commodity prices have been
relatively strong, and oil companies have generally reported increased profits
and cash flows. As a result, oil company capital budgets are increasing. Salomon
Brothers mid-year update of their annual Survey of Worldwide Exploration and
Production Expenditures indicates that planned spending for 1996 is up 11.4%
from the reported 1995 level. This compares to an increase of 7.7% originally
forecast last December, and to an actual increase of 9.0% in 1995. Higher E & P
spending translates to increased demand for drilling rigs, higher day rates and
improved cash flow for our key customers, the offshore drilling contractors.
While market factors have created a more favorable industry environment
than we have experienced in recent years, we will continue to focus on the key
strategies that have proven successful for us. In an industry which has been
characterized by unpredictability we intend to remain vigilant.
We appreciate your continued support.
Walter B. Reinhold George I. Boyadjieff
Chairman President and Chief Executive Officer
August 8, 1996
<PAGE>
CONDENSED CONSOLIDATED
BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
(in thousands) June 30, December 31,
1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 15,059 $ 6,762
Receivables (net) 78,771 60,683
Inventories 82,561 69,206
Other 8,667 8,663
-------- --------
Total Current Assets 185,058 145,314
Property, plant and equipment at cost
less accumulated depreciation 46,402 45,260
Rental inventory less accumulated
depreciation 10,715 6,988
Cost in excess of net assets acquired 35,778 36,371
Other assets 11,396 12,638
-------- --------
Total Assets $289,349 $246,571
======== ========
Current Liabilities
Accounts payable $ 30,163 $ 21,356
Other liabilities 34,664 26,397
Current portion of long-term debt 10,000 10,000
-------- --------
Total Current Liabilities 74,827 57,753
Long-term debt 29,627 29,539
Other non-current liabilities 8,409 8,100
-------- --------
Total Liabilities 112,863 95,392
Shareholders' Equity
Common Stock
and additional paid-in capital 141,183 124,552
Retained earnings 35,303 26,627
-------- --------
Total Shareholders' Equity 176,486 151,179
-------- --------
Total Liabilities and
Shareholders' Equity $289,349 $246,571
======== ========
</TABLE>
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
(in thousands) Six Months Ended June 30,
1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 8,707 $ 8,316
Depreciation and amortization 6,274 6,050
Increase (decrease) in operating cash flows:
Receivables (18,088) (12,927)
Inventories (13,355) (8,937)
Accounts payable 8,807 6,406
Customer deposits 5,501 1,420
Interest payable (21) 13
Other 5,259 4,010
-------- --------
Net cash from operating activities 3,084 4,351
-------- --------
Investing Activities
Short-term investments 29,832
Equipment purchases (4,883) (2,430)
Additions to rental inventory (5,957) (970)
Proceeds from equipment sales 215 295
Other 463
-------- --------
Net cash from (used in) investing activities (10,625) 27,190
-------- --------
Financing Activities
Payment on long-term debt (10,000)
Proceeds from issuance of Common Stock 15,838
Repurchase of Common Stock (25,672)
Other 945
-------- --------
Net cash from (used in) financing activities 15,838 (34,727)
-------- --------
Net change in cash and cash equivalents 8,297 (3,186)
-------- --------
Cash and cash equivalents at beginning of year 6,762 8,793
-------- --------
Cash and cash equivalents at end of quarter $ 15,059 $ 5,607
======== ========
</TABLE>
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
(In thousands, Three Months Ended Six Months Ended
except per share data) June 30, June 30,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Net sales $83,005 $70,466 $146,837 $121,269
Rental income 6,869 5,925 13,293 12,294
Other income 476 396 1,189 869
------- ------- -------- --------
90,350 76,787 161,319 134,432
------- ------- -------- --------
Costs and Expenses
Cost of sales 57,904 46,587 101,507 78,141
Cost of rental income 1,994 1,787 3,901 3,618
Selling, general and administrative expenses 17,135 15,490 33,252 30,635
Research and development costs 3,790 3,345 7,362 6,535
Interest expense 1,036 1,289 2,041 2,493
------- ------- -------- --------
81,859 68,498 148,063 121,422
------- ------- -------- --------
Income before income taxes 8,491 8,289 13,256 13,010
Provision for income taxes 2,812 2,886 4,549 4,694
------- ------- -------- --------
Net income $ 5,679 $ 5,403 $ 8,707 $ 8,316
======= ======= ======== ========
Net income per share of Common Stock $ .18 $ .17 $ .28 $ .26
======= ======= ======== ========
Shares used to calculate earnings per share 31,448 31,482 31,185 32,535
======= ======= ======== ========
</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, 1995.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<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, increased approximately 8% in the second quarter of 1996 to an
average of approximately 1,704 from an average of approximately 1,579 during the
same period in 1995. North American drilling activity increased approximately
11% to an average of approximately 910 rigs, and international drilling
activity increased to an average of approximately 794 rigs as compared to 756 in
the second quarter 1995.
Offshore drilling activity increased significantly year-to-year, as
reflected by an increase in rig utilization (mobile offshore rigs under contract
as a percent of available rigs). For the second quarter of 1996, mobile offshore
rig utilization averaged approximately 89%, the highest level in more than ten
years, as compared to approximately 84% in the second quarter of 1995. The
higher utilization was accompanied by increasing day rates and longer contract
periods, particularly among the "premium" offshore rigs. This resulted in
increased cash flow for the Company's major customers, the drilling contractors.
RESULTS OF OPERATIONS
Set forth below are the net orders and revenues for the Company's five operating
divisions:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1996 1995 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Orders
Varco Drilling Systems $28,813 $24,126 $ 53,156 $ 47,406
Varco BJ Oil Tools 13,521 9,074 27,589 21,104
Martin-Decker/TOTCO
Instrumentation 15,112 13,526 28,739 29,179
Shaffer 25,656 15,549 73,607 38,059
Thule Rigtech 2,082 2,349 4,313 5,796
------- ------- -------- --------
Total $85,184 $64,624 $187,404 $141,544
======= ======= ======== ========
Revenues
Varco Drilling Systems $31,536 $30,180 $ 57,231 $ 50,028
Varco BJ Oil Tools 12,234 9,907 24,012 20,230
Martin-Decker/TOTCO
Instrumentation 14,430 15,109 29,069 28,827
Shaffer 29,396 18,135 44,767 28,505
Thule Rigtech 2,278 3,060 5,051 5,973
------- ------- -------- --------
Total $89,874 $76,391 $160,130 $133,563
======= ======= ======== ========
</TABLE>
Order bookings increased $45.9 million, 32%, in the first six months of 1996 and
$20.6 million, 32%, in the second quarter of 1996 as compared to the same
periods of 1995. These increases are mostly attributable to the Shaffer Division
and included orders to upgrade several offshore rigs (primarily floating
offshore rigs used in deepwater drilling) with higher capacity pressure
control, motion compensation and related equipment. The six-month bookings for
Drilling Systems in 1996 include the receipt of orders for 29 Top Drive Drilling
Systems including orders for 10 of the Company's new land top drives ("TDS-9").
Total Top Drive Drilling Systems orders were 19 in the comparable 1995 period.
The year-to-year increase
- -------------------------------------------------------------------------------
<PAGE>
in order rate at the Oil Tool Division generally reflect the overall increase in
drilling activity and the improved cash flow for the drilling contractors.
The Company's increased revenue levels in the 1996 periods as compared to
1995 are generally due to improved industry conditions as discussed above.
Particularly significant has been the impact on Shaffer of the upgrade of
floating offshore rigs. Shaffer Division revenues account for 84% of the second
quarter increase from the comparable year-ago period, and 61% of the increase
for the six-month period. The increased Drilling Systems revenues, as compared
to the first six months of 1995, are primarily attributable to the Racking
Systems product line.
Total Company new orders were $85.6 million for the fourth quarter of 1995,
$102.2 million for the first quarter of 1996 and $85.2 million for the second
quarter of 1996. These rates compare to an average of $69.8 million for the
first three quarters of 1995. The majority of these increases is attributable to
the Shaffer Division, resulting from the offshore rig upgrades discussed above.
At June 30, 1996 the Company's backlog of unshipped orders was
approximately $102.6 million as compared to $75.4 million at December 31, 1995.
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, 1996.
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
1996 were 34.2%, compared to 38.8% for the same period in 1995. Gross margins
for the second quarter 1996 decreased to 33.4% from 36.7% in the second quarter
of 1995. The six-month decline of 4.6% is primarily due to lower margins at the
Drilling Systems Division, which had the effect of reducing overall Company
margins by approximately 2.9%. These lower margins primarily reflect low margins
on TDS-9 units ($5.9 million in Revenue), which included high field support
costs, and generally higher manufacturing costs. The balance of the decline is
due to higher Shaffer revenues which carry lower gross margins (due principally
to price competition) than the combined gross margins of the other Divisions. In
the second quarter of 1996 the decline in margins of 3.3% from 1995 is primarily
due to the increase in Shaffer's revenue. The impact of Shaffer's lower margins
represented 2.0% of the 3.3% decline. The balance of the second quarter decline
was due to lower than average margins on new products and higher manufacturing
costs at Drilling Systems.
The Company believes that new product development is a significant factor
for the future of the Company. During the first six months of 1996 the Company
spent $7.4 million or 4.6% of revenues on new product development. This compares
to $6.5 million or 4.9% of revenues during the same period in 1995.
The increase in selling, general and administrative expenses compared to
1995 is primarily a result of activity related to the increased revenues. As a
percent of revenues, selling, general and administrative expenses are down year-
to-year. For the first half of 1996 this percent was 20.6% and it was 19.0% for
the second quarter of 1996. As a percent of revenues, selling, general and
administrative expenses were 22.8% and 20.2% for the first half and second
quarter of 1995, respectively.
<PAGE>
Overall Company employment at June 30, 1996 was 1,803 (including 235
temporary employees) which compares to 1,514 (including 235 temporary employees)
a year ago. This increase is primarily due to an increase in manufacturing
employees.
The effective tax rate for the first half of 1996 was 34.3% as compared to
36.1% for the first half of 1995. The lower tax rate is due to a higher
effective foreign tax rate in the first half of 1995 as compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
On May 29, 1996 the Company completed the sale of 989,406 shares of its Common
Stock at a price to the public of $15.875 per share. A portion of the net
proceeds from the sale of approximately $14.6 million was used to make the $10.0
million principal payment due June 30, 1996 on the Senior Notes. Such payment
was made on July 1, 1996 as June 30, 1996 was a non-business day. At June 30,
1996 the Company had cash and cash equivalents of $15.1 million as compared to
$6.8 million at December 31, 1995. This increase was due to the Common Stock
sale.
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 certain purchases of the Company's Common Stock and amended certain
financial covenants. 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, 1996 the prepayment
penalty would have been approximately $1.4 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 certain purchases of Company stock and
to amend certain financial ratios. At June 30, 1996 there were no advances
outstanding and $5.3 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 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 a December 31, 1995 amendment to the
Credit Agreement, the Company may repurchase at any time prior to December 31,
1996 shares of its Common Stock for an aggregate cost not exceeding $50.0
million, including the 3,150,560 shares purchased pursuant to the Company's 1995
tender offer. The Company may also purchase or otherwise acquire shares of
Common Stock from the
<PAGE>
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 $6.0 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. To date, the Company has repurchased on the open market
627,600 shares of its Common Stock at an average price of approximately $ 8.00
per share. The last such purchase was on December 6, 1995.
At June 30, 1996 the Company's working capital was $110.2 million as
compared to $87.6 million at December 31, 1995 and its current ratio was 2.5 to
1.0 the same as at December 31, 1995. Long-term debt as a percent of total
capitalization was 14% at June 30, 1996 as compared to 16% at December 31, 1995.
The increase in working capital and lower debt to total capitalization ratio is
primarily due to the increase in cash and cash equivalents as a result of the
sale of Common Stock to the public.
The increase to the Company's rental inventory of $6.0 million during the
first six months of 1996 is primarily due to the addition of Drilling Systems'
TDS-9 units to the rental fleet. The Company estimates that additions to its
rental fleet in the second half of 1996 will be approximately $4.0 million.
The Company's capital expenditures during the first half of 1996 were $4.9
million as compared to $2.4 million for the first half of 1995. The Company's
current plans for capital expenditures in 1996 are approximately $11.0 million.
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 for the next twelve months.
PROFILE
Varco International, Inc. is a leading manufacturer of products used in the oil
and gas well drilling industry worldwide. The Company also leads in the
development of new technology and equipment to enhance the safety and
productivity of the drilling process. Operating through five divisions, the
Company's products include: integrated systems for rotating and handling the
various sizes and types of pipe used on a drilling rig; conventional pipe
handling tools, hoisting equipment and rotary equipment; drilling rig
instrumentation; pressure control and motion compensation equipment; and solids
control equipment and systems.
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]
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THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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SHAREHOLDERS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AS RESTATED TO REFLECT
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THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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