<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, 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
----- -----
31,575,713
(Number of shares of Common Stock outstanding at October 31, 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 Third Quarter
Report to Shareholders for the three months ended September 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
of 31,488,163 and 33,910,939 shares outstanding for the nine months ended
September 30, 1996, and 1995 respectively, and upon an average of 32,118,119 and
30,640,435 shares outstanding for the three months ended September 30, 1996 and
1995 respectively.
INVENTORIES. The Company estimates the components of inventory at
September 30, 1996, and December 31, 1995, to be as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------- ------------------
<S> <C> <C>
Raw Materials $ 5,666,000 $ 5,480,000
Work in Process 20,663,000 18,061,000
Finished Goods 72,185,000 59,426,000
LIFO Reserves (14,005,000) (13,761,000)
------------ ------------
$ 84,509,000 $ 69,206,000
============ ============
</TABLE>
FIXED ASSETS. Fixed assets are stated net of accumulated depreciation
of $52,802,000 at September 30, 1996, and $48,376,000 at December 31, 1995.
<PAGE>
COMMON STOCK AND ADDITIONAL PAID-IN-CAPITAL. On September 30, 1996,
the Company Common Stock account was $21,775,000 and Additional Paid-In-Capital
accounts were $119,467,000.
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, 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.
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 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, 1996 and 1995.
19 Varco International, Inc. Third Quarter Report to
Shareholders, Three Months Ended September 30, 1996.
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.
<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 12, 1996 BY: /s/ RICHARD A. KERTSON
---------------------------
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
DATE: NOVEMBER 12, 1996 BY: /s/ DONALD L. STICHLER
---------------------------
CONTROLLER-TREASURER
AND SECRETARY
<PAGE>
EXHIBIT INDEX
11 Statement re computation of per share earnings for the three months
and nine months ended September 30, 1996 and 1995.
19 Varco International, Inc. Third Quarter Report to Shareholders, Three
Months Ended September 30, 1996.
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 1996 September 30 1996
------------------ ------------------
<S> <C> <C>
A.CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $7,167,000 $15,874,000
</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, 1996 92 2,889,117,512 31,403,451 714,668 32,118,119
Nine Months Ended September 30, 1996 274 8,431,937,537 30,773,495 714,668 31,488,163
</TABLE>
C.CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
------------------------
Total Shares Outstanding
Income Per Share =
<TABLE>
<S> <C> <C>
Three Months Ended September 30, 1996 7,167,000 = $0.22
--------------
32,118,119
Nine Months Ended September 30, 1996 15,874,000 = $0.50
--------------
31,488,163
</TABLE>
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
</TABLE>
C.CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
------------------------
Total Shares Outstanding
Income Per Share =
<TABLE>
<S> <C> <C>
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
Varco International, Inc.
1996
Third Quarter Report
<PAGE>
TO OUR SHAREHOLDERS
The worldwide offshore drilling industry is continuing to strengthen, resulting
in record Revenues, Net Income and order bookings for Varco. Oil companies are
finding the economics of drilling offshore increasingly attractive, generating
higher demand for offshore rigs, particularly "premium" rigs capable of drilling
in deep water and hostile environments. Reflecting this demand, the worldwide
utilization of offshore rigs averaged 91 percent during the third quarter, as
compared to 86 percent for the same period of last year; and the effective
utilization for some categories of rigs is approaching 100 per cent. As a
result, day rates are increasing and contract terms are lengthening, with many
deep water drilling rigs contracted into 1999 and beyond.
These conditions are directly benefiting Varco as stacked rigs are being
reactivated, existing rigs are being upgraded, and more funds are available for
refurbishing and replacing equipment. In particular, we are benefiting from the
upgrading of floating offshore rigs (semisubmersibles and drillships) to
increase their water depth capacity.
Third quarter Revenues of $98.1 million and Net Income of $7.2 million
represented the highest quarterly totals in the Company's history; per share
earnings were $.22. During the comparable period of last year, Net Income was
$3.7 million, $.12 per share, on Revenues of $68.1 million. Incoming orders
totaled $128.0 million for the most recent three months, also an all-time high,
surpassing the $102.2 million recorded in the first quarter of this year. Order
bookings were $67.8 million for the third quarter of 1995.
Although each of the Company's four largest business units experienced
increased Revenues and orders as compared to the third quarter of last year,
most of the growth is attributable to the Shaffer Division. For the third
quarter, Shaffer had Revenues of $38.9 million and incoming orders of $67.7
million, versus $16.6 million and $17.2 million, respectively, in the comparable
quarter a year ago. As we have indicated in recent reports to you, the sharp
increase in Shaffer's business has resulted from upgrading the water depth
<PAGE>
capacity of several floating offshore rigs. Each such upgrade represents
significant revenue potential, as it requires equipment representing a
substantial portion of the type Shaffer provides.
With the industry recovery gaining momentum there is considerable evidence
that the upturn is sustainable. Salomon Brothers' survey of Exploration and
Production spending anticipates a 1996 increase in excess of eleven per cent
from 1995, with another year of double-digit growth being projected for next
year. It is significant that this survey also indicates that those spending
plans generally assume lower oil and gas prices than currently prevail. Thus, it
would appear that there is some "cushion" below the unexpectedly strong
commodity prices that exist today, as well as some upside potential if they
remain near current levels.
After years of downsizing and consolidation, the recovery is enabling the
oil service industry to begin generating much improved financial results and
returns. We believe that the acquisitions we have made, together with our
continuing investment in product development, have uniquely positioned Varco
take advantage of the improved industry conditions. Our challenge is to reap the
benefits of our past actions while continually planting the seeds of our future
success.
We appreciate the support and confidence of our shareholders, employees,
suppliers, and friends.
Walter B. Reinhold George I. Boyadjieff
Chairman President and Chief Executive Officer
November 12, 1996
<PAGE>
CONDENSED CONSOLIDATED
BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 4,533 $ 6,762
Receivables (net) 89,148 60,683
Inventories 84,509 69,206
Other 10,148 8,663
Total Current Assets 188,338 145,314
Property, plant and equipment at cost
less accumulated depreciation 46,974 45,260
Rental inventory less accumulated
depreciation 12,047 6,988
Cost in excess of net assets acquired 35,588 36,371
Other assets 11,161 12,638
Total Assets $294,108 $246,571
Accounts payable $ 28,107 $ 21,356
Other liabilities 35,698 26,397
Current portion of long-term debt 10,000 10,000
Total Current Liabilities 73,805 57,753
Long-term debt 27,671 29,539
Other non-current liabilities 8,806 8,100
Total Liabilities 110,282 95,392
Common Stock and additional paid-in capital 141,242 124,552
Retained earnings 42,584 26,627
Total Shareholders' Equity 183,826 151,179
Total Liabilities and Shareholders' Equity $294,108 $246,571
</TABLE>
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
<TABLE>
<CAPTION>
(unaudited)
(in thousands) Nine Months Ended September 30,
1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Net income $ 15,874 $ 11,997
Depreciation and amortization 9,667 9,239
Increase (decrease) in operating
cash flows:
Receivables (28,465) (4,222)
Inventories (15,303) (12,980)
Accounts payable 6,751 6,136
Customer deposits 3,385 304
Taxes payable 3,756 1,367
Interest payable (1,056) 917
Other 3,711 1,343
Net cash from operating activities (1,680) 14,101
Short-term investments 29,832
Equipment purchases (7,344) (8,397)
Additions to rental inventory (7,689) (2,260)
Proceeds from equipment sales 587 402
Other 463
Net cash from (used in)
investing activities (14,446) 20,040
Payment on long-term debt (10,000) (10,000)
Increase in line of credit 8,000
Proceeds from issuance of Common Stock 15,897 1,061
Repurchase of Common Stock (26,343)
Net cash from (used in)
financing activities 13,897 (35,282)
Net change in cash and cash equivalents (2,229) (1,141)
Cash and cash equivalents at
beginning of year 6,762 8,793
Cash and cash equivalents at
end of quarter $ 4,533 $ 7,652
</TABLE>
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
(unaudited)
<TABLE>
<CAPTION>
(in thousands, Three Months Ended Nine Months Ended
except per share amounts) September 30, September 30,
1994 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $89,706 $61,507 $236,543 $182,776
Rental income 8,198 6,313 21,491 18,607
Other income 208 233 1,397 1,102
98,112 68,053 259,431 202,485
Cost of sales 62,244 41,115 163,751 119,256
Cost of rental income 2,691 1,925 6,592 5,543
Selling, general and administrative 17,804 15,235 51,056 45,870
Research and development costs 3,223 3,302 10,585 9,837
Interest expense 918 1,019 2,959 3,512
86,880 62,596 234,943 184,018
Income before income taxes 11,232 5,457 24,488 18,467
Provision for income taxes 4,065 1,776 8,614 6,470
Net income $ 7,167 $ 3,681 $ 15,874 $ 11,997
Net income per share of Common
Stock $ .22 $ .12 $ .50 $ .38
Shares used to calculate earning
per share 32,118 30,640 31,488 31,911
</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 in the first nine months of 1996 to an average of
approximately 1,807 from an average of approximately 1,697 during the same
period in 1995. North American drilling activity increased approximately 6% to
an average of approximately 1,003 rigs. International drilling activity
increased by 5% to an average of approximately 792 as compared to 756 in the
first nine months of 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 third quarter of 1996, mobile offshore
rig utilization averaged 91%, the highest level since early 1982, as compared to
86% in the third quarter of 1995. The higher utilization was accompanied by
increasing day rates and longer contract periods, particularly among the
"premium" offshore rigs.
The increase in drilling activity, particularly the increase in offshore
rig utilization, has led to higher day rates and improved profits and cash flow
for the Company's major customers, the offshore 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 Nine Months Ended
September 30, 1996 1995 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Varco Drilling Systems $ 28,497 $ 23,693 $ 81,653 $ 71,099
Varco BJ Oil Tools 14,110 10,348 41,699 31,452
Martin-Decker/TOTCO
Instrumentation 15,861 14,406 44,600 43,585
Shaffer 67,696 17,180 141,303 55,239
Thule Rigtech 1,810 2,176 6,123 7,972
Total $127,974 $ 67,803 $315,378 $209,347
Varco Drilling Systems $ 30,142 $ 24,023 $ 87,373 $ 74,051
Varco BJ Oil Tools 12,672 11,062 36,684 31,292
Martin-Decker/TOTCO
Instrumentation 14,658 13,860 43,727 42,687
Shaffer 38,904 16,593 83,671 45,098
Thule Rigtech 1,528 2,282 6,579 8,255
Total $ 97,904 $ 67,820 $258,034 $201,383
</TABLE>
Order bookings increased $106.0 million, 51%, in the first nine months of 1996
and $60.2 million, 89%, in the third 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 nine-month bookings for Drilling
Systems in 1996 include orders for 36 Top Drive Drilling Systems, including
orders for 13 of the Company's new land top drives ("TDS-9S"). Total Top Drive
Drilling Systems orders were 26 in the comparable 1995 period. The year-to-year
increase in order rates at the Oil Tool Division generally reflects the overall
increase
- --------------------------------------------------------------------------------
<PAGE>
in drilling activity and the impact of 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. The increase in the Shaffer Division revenues accounted
for 74% of the third quarter increase from the comparable year-ago period, and
68% of the increase for the nine-month period. The increased Drilling Systems
revenue, as compared to the first nine months of 1995; are attributable to the
Racking Systems product line and to an increase in the parts and service
revenue.
At September 30, 1996 the Company's backlog of unshipped orders was
approximately $132.7 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 mid-1997.
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 1996 was 34.0%, compared to a gross margin of 38.0% for the same period in
1995. Approximately 2.0% of this decline is due to lower margins at the Drilling
Systems Division. These lower margins primarily reflect low margins on TDS-9S
units ($8.5 million in Revenue), which included high field support costs, and
generally higher manufacturing cost, particularly during the earlier part of the
year. Prior to the second quarter of 1996, the TDS-9S product line incurred
negative margins. These margins have improved to just over 20% in the third
quarter of 1996. 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. Gross margins for the third
quarter 1996 decreased to 33.7% from 36.5% in the third quarter 1995. This
decline in margins of 2.8% is primarily due to the increase in Shaffer's
revenue. The impact of Shaffer's lower margins represented 1.6% of the 2.8%
decline. The balance of the third-quarter decline was primarily due to lower-
than-average margins on newer products at Drilling Systems.
The Company believes that new product development is a significant factor
for the future of the Company. During the first nine months of 1996 the Company
spent $10.6 million or 4.1% of revenues on new product development. This
compares to $9.8 million or 4.9% of revenues during the same period in 1995. The
Company expects both the dollar amount and percentage of research and
development expenditures in 1997 to increase.
Primarily as a result of activities related to the increased revenues,
selling, general and administrative expenses have increased in 1996 when
compared to similar periods in 1995. However, as a percent of revenues, selling,
general and administrative expenses are down year-to-year. For the first nine
months of 1996 this percent was 19.7%, and it compares to 22.7% for the same
period of 1995.
Overall Company employment at September 30, 1996 was 1,843 (including 230
temporary employees) which compares to 1,572 (including 219 temporary employees)
a year ago. This increase is primarily due to an increase in manufacturing
employees.
The effective tax rate for he third quarter of 1996 was 36%
<PAGE>
as compared to 33% for 1995. The lower third quarter 1995 tax rate is due to
recording a credit for a foreign tax loss carryforward.
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. At September
30, 1996 the Company had cash and cash equivalents of $4.5 million as compared
to $6.8 million at December 31, 1995. This decrease was due to increased working
capital, primarily receivables and inventory.
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 September 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) amend certain covenants to permit certain purchases of Company stock and to
amend certain financial ratios. At September 30, 1996 there were $8.0 million in
advances outstanding and $5.0 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 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
<PAGE>
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 September 30, 1996 the Company's working capital was $114.5 million as
compared to $87.6 million at December 31, 1995 and its current ratio was 2.6 to
1.0 as compared to 2.5 to 1.0 at December 31, 1995. Long-term debt as a percent
of total capitalization was 13% at September 30, 1996 as compared to 16% at
December 31, 1995. The increase in working capital is due to the higher level of
receivables and inventory needed to support the Company's higher revenue levels.
The lower debt to total capitalization ratio is primarily due to the sale of
Common Stock to the public.
The increase to the Company's rental inventory of $7.7 million during the
first nine months of 1996 is primarily due to the addition of Drilling Systems'
TDS-9S units to the rental fleet.
The Company's capital expenditures during the first nine months of 1996
were $7.3 million as compared to $8.4 million (including $3.6 million for the
purchase of Martin-Decker/TOTCO's manufacturing facility) for the 1995
nine-month period. The Company's current plans for capital expenditures in 1996
are approximately $11.0 million. During 1997 capital expenditures are expected
to increase to over $20.0 million, primarily consisting of equipment purchases.
The Company believes its revolving credit facility and its cash and cash
equivalents will be sufficient to meet operating its cash needs and to make the
June 30, 1997 principal payment on the Senior Notes. The Company intends to
finance a portion of its 1997 capital expenditures.
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]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIALS STATEMENTS OF THE REGISTRANT INCLUDED IN ITS THIRD QUARTER REPORT TO
SHAREHOLDERS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,533,000
<SECURITIES> 0
<RECEIVABLES> 90,935,000
<ALLOWANCES> (1,787,000)
<INVENTORY> 84,509,000
<CURRENT-ASSETS> 188,338,000
<PP&E> 99,776,000
<DEPRECIATION> (52,802,000)
<TOTAL-ASSETS> 294,108,000
<CURRENT-LIABILITIES> 73,805,000
<BONDS> 27,671,000
0
0
<COMMON> 141,242,000
<OTHER-SE> 42,584,000
<TOTAL-LIABILITY-AND-EQUITY> 294,108,000
<SALES> 97,904,000
<TOTAL-REVENUES> 98,112,000
<CGS> 64,935,000
<TOTAL-COSTS> 82,739,000
<OTHER-EXPENSES> 3,223,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 918,000
<INCOME-PRETAX> 11,232,000
<INCOME-TAX> 4,065,000
<INCOME-CONTINUING> 7,167,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,167,000
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
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