<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 92868
(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____
31,775,922
(Number of shares of Common Stock outstanding at June 30, 1997)
<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, 1997, 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
32,522,094 and 31,184,899 shares outstanding for the six months ended June 30,
1997, and 1996 respectively, and upon an average of 32,577,976 and 31,447,509
shares outstanding for the three months ended June 30, 1997, and 1996
respectively.
Inventories. The Company estimates the components of inventory at June 30,
1997, and December 31, 1996, to be as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
<S> <C> <C>
Raw Materials $ 5,849,000 $ 6,545,000
Work in Process 37,310,000 22,646,000
Finished Goods 81,732,000 77,150,000
LIFO Reserves (12,479,000) (14,468,000)
$112,412,000 $ 91,873,000
============ ============
</TABLE>
Fixed Assets. Fixed assets are stated net of accumulated depreciation of
$58,010,000 at June 30, 1997, and $54,534,000 at December 31, 1996.
Common Stock and Additional Paid-In-Capital. On June 30, 1997, the Company
Common Stock account was $22,145,000 and Additional Paid-In-Capital accounts
were $123,270,000.
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, 1997, filed as Exhibit 19 hereto, is incorporated herein by reference.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Credit Agreement, dated as of June 27, 1997, among Varco
International, Inc., the financial institutions listed therein as Lenders, and
Union Bank of California, N.A., as Agent, incorporated by reference to Exhibit
4.1 to Varco's quarterly report on Form 10-Q for the quarter ended June 30,
1997.
4.2 First Amendment to Credit Agreement, dated as of July 15, 1997, to
Credit Agreement included as Exhibit 4.1 hereto, incorporated by reference to
Exhibit 4.2 to Varco's quarterly report on Form 10-Q for the quarter ended
June 30, 1997.
*4.3 Eighth Amendment dated as of June 9, 1997 to Credit Agreement
included as Exhibit 4.6 to Varco's Annual Report on Form 10-K for the year ended
December 31, 1996.
*4.4 Ninth Amendment dated as of June 27, 1997 to Credit Agreement
included as Exhibit 4.6 to Varco's Annual Report on Form 10-K for the year ended
December 31, 1996.
10 Second Amendment to the Varco International, Inc. Supplemental
Executive Retirement Plan, incorporated by reference to Exhibit 10 to Varco's
quarterly report on Form 10-Q for the quarter ended June 30, 1997.
11 Statement re computation of per share earnings for the three months and
six months ended June 30, 1997 and 1996, incorporated by reference to Exhibit
11 to Varco's quarterly report on Form 10-Q for the quarter ended June 30,
1997.
*19 Varco International, Inc. Second Quarter Report to Shareholders, Three
Months Ended June 30, 1997. (corrected)
27 Financial Data Schedule, incorporated by reference to Exhibit 27 to
Varco's quarterly report on Form 10-Q for the quarter ended June 30, 1997.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report is filed.
* Filed herewith
<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 19, 1997 By: /s/ NANCY DACK
Assistant Treasurer
Date: August 19, 1997 By: /s/ DONALD L. STICHLER
Controller-Treasurer
and Secretary
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<C> <S>
4.1 Credit Agreement, dated as of June 27, 1997, among Varco International,
Inc., the financial institutions listed therein as Lenders, and Union Bank
of California, N.A., as Agent, incorporated by reference to Exhibit 4.1 to
Varco's quarterly report on Form 10-Q for the quarter ended June 30, 1997.
4.2 First Amendment to Credit Agreement, dated as of July 15, 1997, to Credit
Agreement included as Exhibit 4.1 hereto, incorporated by reference to
Exhibit 4.2 to Varco's quarterly report on Form 10-Q for the quarter ended
June 30, 1997.
*4.3 Eighth Amendment dated as of June 9, 1997 to Credit Agreement included as
Exhibit 4.6 to Varco's Annual Report on Form 10-K for the year ended
December 31, 1996.
*4.4 Ninth Amendment dated as of June 27, 1997 to Credit Agreement included as
Exhibit 4.6 to Varco's Annual Report on Form 10-K for the year ended
December 31, 1996.
10 Second Amendment to the Varco International, Inc. Supplemental Executive
Retirement Plan, incorporated by reference to Exhibit 10 to Varco's
quarterly report on Form 10-Q for the quarter ended June 30, 1997.
11 Statement re computation of per share earnings for the three months and six
months ended June 30, 1997 and 1996, incorporated by reference to Exhibit
11 to Varco's quarterly report on Form 10-Q for the quarter ended June 30,
1997.
*19 Varco International, Inc. Second Quarter Report to Shareholders, Three
Months Ended June 30, 1997. (corrected)
27 Financial Data Schedule, incorporated by reference to Exhibit 27 to Varco's
quarterly report on Form 10-Q for the quarter ended June 30, 1997.
</TABLE>
* Filed herewith
<PAGE>
EXHIBIT 4.3
EIGHTH AMENDMENT
Dated as of June 9, 1997
EIGHTH AMENDMENT dated as of June 9, 1997 (this "Amendment") to CREDIT
AGREEMENT dated as of February 25, 1993 (as amended by First Amendment dated as
of August 3, 1993, Second Amendment dated as of September 23, 1993, Third
Amendment dated as of December 1, 1993, Fourth Amendment dated as of May 12,
1994, Fifth Amendment and Waiver dated as of October 31, 1994, Sixth Amendment
dated as of March 17, 1995 and Seventh Amendment dated as of December 31, 1995,
the "Credit Agreement") among VARCO INTERNATIONAL, INC., a California
corporation, CITICORP USA, INC. and CITIBANK, N.A.
PRELIMINARY STATEMENTS. The parties to the Credit Agreement wish to amend
the Credit Agreement in certain respects as hereinafter set forth. Terms defined
in the Credit Agreement are used in this Amendment as defined in the Credit
Agreement and, except as otherwise indicated, all references to Sections and
Articles refer to the corresponding Sections and Articles of the Credit
Agreement.
The parties hereto therefore agree as follows:
SECTION 1. Amendments. Effective as of the Amendment Effective Date (as
----------
defined in Section 2 hereof), and subject to the satisfaction of the conditions
precedent set forth in Section 2 hereof, the Credit Agreement is hereby amended
as follows:
a. Section 1.01 is amended by inserting the following defined terms in the
appropriate alphabetical order:
"Available Commitment" means, at any time, (a) the lesser of the
--------------------
Availability and the Commitment minus (b) the sum of (i) the aggregate
-----
principal amount of all Advances then outstanding plus (ii) the Letter of
----
Credit Usage.
"Unused Commitment" means, at any time, the Commitment minus the sum of
----------------- -----
(i) the aggregate principal amount of all Advances then outstanding plus (ii)
----
the Letter of Credit Usage.
b. Section 1.01 is amended by deleting the defined term "Commitment" and
restating it as follows:
"Commitment" means $35,000,000, or such lesser amount to which the
----------
Commitment may be reduced from time to time in accordance with Section
2.07.
c. Section 2.01 is deleted and restated as follows:
SECTION 2.01. The Advances. The Lender agrees, on the terms and
------------
conditions hereinafter set forth, to make advances (the "Advances") to the
Borrower from time to time on any Business Day during the period from the
date hereof to but excluding the Loan Maturity Date in an amount not to
exceed the Available Commitment on such Business Day. Each Advance shall be
in an amount not less than $1,000,000 or an integral multiple of $500,000
in excess thereof, except that a Base Rate Advance may be in an amount
------
equal to the maximum Advance available hereunder. Within the limits set
forth in this Section 2.01, the Borrower may borrow, repay pursuant to
Section 2.01 and reborrow under this Section 2.01.
d. Subsection (a) of Section 2.04 is deleted and restated as follows:
(a) Letters of Credit. Subject to the terms and conditions of this
-----------------
Agreement and in reliance upon the representations and warranties of the
Borrower herein set forth, at any time on and after the Closing Date and
from time to time through the Business Day thirty days prior to the
Termination Date,
<PAGE>
the Issuing Bank shall issue Letters of Credit on any Business Day in an
aggregate face amount not to exceed the Available Commitment on such
Business Day. In no event shall the Issuing Bank issue (i) any Documentary
Letter of Credit having an expiration date more than 365 days after its
date of issuance or (y) any Standby Letter of Credit having an expiration
date more than thirty months after its date of issuance. The Issuing Bank
shall have no obligation to issue any Letter of Credit if the Lender shall
have notified the Issuing Bank and the Borrower that no further Letters of
Credit are to be issued by the Issuing Bank due to a failure by the
Borrower to satisfy the conditions precedent set forth in Section 3.03,
and such notice shall not have expired or been withdrawn by the Lender. The
issuance of any Letter of Credit shall require the satisfaction of each
condition set forth in Section 3.03.
e. Subsection (b) of Section 2.04 is amended by deleting clause (i)
thereof and restating it as follows:
(i) the face amount of such Letter of Credit does not exceed the Available
Commitment on and as of the date of such notice
f. Section 2.06 is deleted and restated as follows:
SECTION 2.06. Commitment Fees. The Borrower agrees to pay to the
---------------
Lender (for its benefit and the benefit of the Issuing Bank) a commitment
fee on the average daily Unused Commitment at the rate of 3/8 of 1% per
annum, payable in arrears on the first Business Day of each January,
April, July and October during the term of the Commitment, commencing
April 1, 1993 and on the Termination Date.
g. Subsections (a) and (b) of Section 2.07 are amended by deleting all
references to "the unused portion of the commitment of the Lender to make
Advances pursuant to Section 2.01 and/or the commitment of the Issuing Bank to
issue Letters of Credit pursuant to Section 2.04" and substituting "the Unused
Commitment".
SECTION 2. Conditions to Effectiveness. This Amendment shall be
---------------------------
effective as of June 9, 1997 (the "Amendment Effective Date"), subject to the
Lender's receipt of: (i) a counterpart of this Amendment executed by the
Borrower, (ii) a promissory note substantially in the form of Exhibit A hereto
made by the Borrower in favor of the Lender (the "Replacement Note"), (iii) a
certificate of the Secretary or an Assistant Secretary of the Borrower attaching
a copy of the resolutions of the Board of Directors of the Borrower authorizing
the execution and delivery of this Amendment and the Replacement Note and
certifying the name and true signature of each officer of the Borrower
executing this Amendment and the Replacement Note on its behalf, and (iv)
counterparts of a Consent and Acknowledgement in the form attached as Exhibit B
hereto executed by each Guarantor.
SECTION 3. Representations and Warranties. The Borrower represents and
------------------------------
warrants as follows as of the date hereof and the Amendment Effective Date: (a)
the Borrower is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction indicated at the beginning of this
Amendment; (b) the execution, delivery and performance by the Borrower of this
Amendment and the Replacement Note are within the Borrower's corporate powers,
have been duly authorized by all necessary corporate action and do not
contravene the Borrower's charter or by-laws, or any law or any contractual
restriction binding on or affecting the Borrower; (c) no authorization, approval
or other action by, and no notice to or filing with, any governmental authority
or regulatory body is required for the due execution and delivery by the
Borrower of this Amendment and the Replacement Note or for the performance by
the Borrower of the Credit Agreement as hereby amended; (d) this Amendment, the
Replacement Note and the Credit Agreement as hereby amended constitute the
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms; (e) all representations and
warranties of the Borrower set forth in Article IV are true and correct, as if
repeated and restated in full herein (except to the extent that such
representations and warranties expressly relate solely to an earlier date and
then are correct as of such date); and (f) no Default or Event of Default has
occurred and is continuing.
<PAGE>
SECTION 4. Reference to and Effect on the Credit Agreement. Upon the
-----------------------------------------------
effectiveness of Section 1 hereof, on and after the Amendment Effective Date,
(a) each reference in the Credit Agreement to "this Agreement," "hereunder,"
"hereof," "herein" or words of like import, and each reference in the Note or
the other Loan Documents to "the Credit Agreement," shall mean and be a
reference to the Credit Agreement as amended by this Amendment and (b) each
reference in the Credit Agreement and the other Loan Documents to the Note shall
mean and be a reference to the Replacement Note. Except as specifically amended
above, the Credit Agreement shall continue to be in full force and effect and is
hereby in all respects ratified and confirmed.
SECTION 5. Execution in Counterparts. This Amendment may be executed in any
-------------------------
number of counterparts and by any combination of the parties hereto in separate
counterparts, each of which counterparts shall be an original and all of which
taken together shall constitute one and the same Amendment.
SECTION 6. Governing Law. This Amendment shall be governed by, and
-------------
construed in accordance with, the laws of the State of New York.
SECTION 7. Expenses. Each party hereto shall bear its own costs and
--------
expenses (including counsel fees and expenses) in connection with the
preparation, execution and delivery of this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
VARCO INTERNATIONAL, INC.
By: /s/ R.A. KERTSON
----------------------------
Title: Vice President -- Finance
CITICORP USA, INC.
By: /s/ [ILLEGIBLE SIGNATURE]
----------------------------
Vice President
CITIBANK, N.A.
By: /s/ [ILLEGIBLE SIGNATURE]
----------------------------
Vice President
<PAGE>
EXHIBIT 4.4
NINTH AMENDMENT, WAIVER AND CONSENT
DATED AS OF JUNE 27, 1997
NINTH AMENDMENT, WAIVER AND CONSENT dated as of June 27, 1997 (this
"Amendment and Consent") to CREDIT AGREEMENT dated as of February 25, 1993 (as
amended by First Amendment dated as of August 3, 1993, Second Amendment dated as
of September 23, 1993, Third Amendment dated as of December 1, 1993, Fourth
Amendment dated as of May 12, 1994, Fifth Amendment and Waiver dated as of
October 31, 1994, Sixth Amendment dated as of March 17, 1995, Seventh Amendment
dated as of December 31, 1995, and Eighth Amendment dated as of June 9, 1997,
the "Credit Agreement") among VARCO INTERNATIONAL, INC., a California
corporation, CITICORP USA, INC. and CITIBANK, N.A.
PRELIMINARY STATEMENTS. The parties to the Credit Agreement wish to amend
the Credit Agreement in certain respects as hereinafter set forth. Terms defined
in the Credit Agreement are used in this Amendment and Consent as defined in the
Credit Agreement and, except as otherwise indicated, all references to Sections
and Articles refer to the corresponding Sections and Articles of the Credit
Agreement.
The parties hereto therefore agree as follows:
SECTION 1. Amendment. Effective as of the Amendment Effective Date (as
---------
defined in Section 3 hereof), and subject to the satisfaction of the conditions
precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended
as follows:
a. Section 1.01 is amended by deleting all defined terms which are not
used in the Credit Agreement as amended by this Amendment and Consent.
b. The following Sections of Article II are deleted: 2.01, 2.02, 2.03,
2.04(a), 2.04(b) except the paragraph commencing with the caption "Payment of
----------
Amounts Drawn Under Letters of Credit", which shall be lettered "(c)", 2.04(g),
- -------------------------------------
2.06, 2.07, 2.08, 2.09, 2.11, 2.13(d), and 2.15.
c. The penultimate sentence of the paragraph of Section 2.04(b) which is
lettered as Section 2.04(c) above) of Article II is deleted and restated as
follows:
Any such amount which is not reimbursed to the Issuing Bank within one
Business Day after notice thereof by the Issuing Bank shall thereafter
bear interest, until the amount is reimbursed in full to such Issuing
Bank at 2.5% above the Base Rate in effect from time to time.
<PAGE>
d. Article III is deleted.
e. Article IV is deleted.
f. Article V is deleted.
g. Article VI is deleted.
h. The following Sections of this Article VII are deleted: 7.04, 7.09,
and 7.12
i. All Exhibits to the Credit Agreement which are not referred to in the
Credit Agreement as amended by this Amendment and Consent are deleted.
SECTION 2. Release of Guaranties and Subordination Agreements; Termination
---------------------------------------------------------------
of Commitment. (a) Effective as of the Amendment Effective Date (as defined in
- -------------
Section 3 hereof), and subject to the satisfaction of the conditions precedent
set forth in Section 3 hereof, the Lender and the Issuing Bank terminate their
respective rights under, and release all outstanding Guaranties and
Subordination Agreements. Each of the Lender and the Issuing Bank represents and
warrants to the Borrower that neither the Lender nor the Issuing Bank has
assigned to any other Person any of its rights under the Loan Agreement, any
Guaranty, any Subordination Agreement or any other Loan Document.
(b) The Borrower hereby gives notice pursuant to Section 2.07(d) of the
termination in whole of the Commitment, effective as of the Amendment Effective
Date, and agrees that the Commitment, once terminated, shall not be reinstated.
The Lender hereby waives any notice of such termination otherwise required under
Section 2.07(d).
SECTION 3. Conditions to Effectiveness. This Amendment and Consent shall
---------------------------
be effective as of June 27, 1997 (the "Amendment Effective Date"), subject to
the Lender's receipt of: (i) a counterpart of this Amendment and Consent
executed by the Borrower, (ii) a certificate of the Secretary or an Assistant
Secretary of the Borrower attaching a copy of the resolutions of the Board of
Directors of the Borrower authorizing the execution and delivery of this
Amendment and Consent and certifying the name and true signature of each officer
of the Borrower executing this Amendment and Consent on its behalf, (iv)
repayment in full of all outstanding Advances, together with interest thereon to
the Amendment Effective Date and any amounts payable under Section 7.05(b) in
connection with the repayment of such advances, (v) payment of all commitment
fees under Section 2.06 accrued through the Amendment Effective Date and any
unpaid reimbursement obligations in respect of Letters of Credit which are
outstanding and unpaid on the Amendment Effective Date, and (vi) a Letter of
2.
<PAGE>
Credit issued by Union Bank of California, N.A., naming the Issuing Bank as
beneficiary, in a face amount equal to the aggregate face amounts of all Letters
of Credit outstanding on the Amendment Effective Date, and otherwise
substantially in the form of Exhibit A hereto.
SECTION 4. Representations and Warranties. The Borrower represents and
------------------------------
warrants as follows as of the date hereof and the Effective Date: (a) the
Borrower is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction indicated at the beginning of this Amendment
and Consent; (b) the execution, delivery and performance by the Borrower of this
Amendment and Consent are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action and do not contravene the
Borrower's charter or by-laws, or any law or any contractual restriction binding
on or affecting the Borrower; and (c) no authorization, approval or other action
by, and no notice to or filing with, any governmental authority or regulatory
body is required for the due execution and delivery by the Borrower of this
Amendment and Consent or for the performance by the Borrower of the Credit
Agreement as hereby amended; (d) this Amendment and Consent and the Credit
Agreement as hereby amended constitute the legal, valid and binding obligations
of the Borrower enforceable against the Borrower in accordance with their
respective terms.
SECTION 5. Reference to and Effect on the Credit Agreement. Upon the
-----------------------------------------------
effectiveness of Section 1 hereof, on and after the Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the Note or the other
Loan Documents to "the Credit Agreement", shall mean and be a reference to the
Credit Agreement as amended by this Amendment and Consent. Except as
specifically amended above, the Credit Agreement shall continue to be in full
force and effect and is hereby in all respects ratified and confirmed.
SECTION 6. Execution in Counterparts. This Amendment and Consent may be
-------------------------
executed in any number of counterparts and by any combination of the parties
hereto in separate counterparts, each of which counterparts shall be an original
and all of which taken together shall constitute one and the same Agreement.
SECTION 7. Governing Law. This Amendment and Consent shall be governed
-------------
by, and construed in accordance with, the laws of the State of New York.
3.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
VARCO INTERNATIONAL, INC.
By:_______________________________
Title:____________________________
CITICORP USA, INC.
By:_______________________________
Vice President
CITIBANK, N.A.
By:_______________________________
Vice President
4.
<PAGE>
EXHIBIT 19
Varco International, Inc.
1997 Second Quarter Report
<PAGE>
To Our Shareholders
As market conditions continued to improve, second quarter Revenues, Net Income
and order bookings each were the highest in the Company's history. This market
improvement reflects an extension and acceleration of several trends.
The key driving force is increasing exploration and production spending by
oil and gas companies. Salomon Brothers' mid-year update of their Survey and
Analysis of 1997 Worldwide Oil and Gas Exploration and Production Expenditures
indicates that these companies are now planning to increase spending 17.9
per cent this year, above both the 15.2 per cent growth rate for 1996 and the
initial projection of 14.7 per cent for 1997. This spending translates into
increased demand for drilling rigs; which, in turn, yields higher day rates and
rig utilization, resulting in improved cash flow for our key customers--the
drilling contractors.
Of particular significance to Varco is the growth in the offshore drilling
market, since the dollar value of the drilling equipment typical of an offshore
rig is significantly greater than that of a land rig. Utilization of the
offshore rig fleet is currently reported to be approximately 95 per cent.
However, excluding rigs undergoing upgrade or otherwise not available, the
mobile offshore rig fleet is essentially fully utilized.
Our customers' response to these conditions is impacting Varco's business
in three important Ways:
. first, the increased drilling activity is resulting in greater demand for
spare and replacement parts and equipment;
. second, existing rigs are being upgraded to meet today's drilling
requirements;
. third, rigs which had previously been removed from the fleet are being
reconverted to drilling use, and new rigs are being constructed.
As a result, we are experiencing improving financial results.
Second quarter Revenues of $129.6 million were up 43 per cent from $90.4
million in the comparable quarter of 1996; and Net Income of $10.8 million, $.33
per share, was 90 per cent above the $5.7 million, $.18 per share, earned in the
year-ago period. Order bookings for the most recent three months totaled $172.7
million, more than double the $85.2 million recorded in the comparable period of
last year.
The second quarter Revenue level was 28 per cent above that of the
preceding quarter as we began to ramp up our manufacturing capacity and output.
During the first half of the year we invested approximately $8 million in
increasing manufacturing capacity and expect to continue building capacity
over the next few quarters. The strength of our recent order rate dictates that
we make these investments to satisfy the requirements of our customers.
We believe that our industry is moving from a recovery phase to a state of
healthy growth and expansion. If so, the size and capability of the offshore rig
fleet is not sufficient to meet the current and future needs of the world's oil
and gas companies. As that fleet is expanded, upgraded and replaced, the kinds
of equipment designed and supplied by Varco are a critical component. We have
made a substantial investment of time, energy, and human and financial resources
in positioning ourselves to flourish in such an environment. We are committed to
doing so, and to providing commensurate rewards for our shareholders.
We appreciate your continued support.
/s/ Walter B. Reinhold /s/ George I. Boyadjieff
Walter B. Reinhold George I. Boyadjieff
Chairman President and
Chief Executive Officer
August 12, 1997
<PAGE>
CONDENSED CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
- --------------
Cash and cash equivalents $ 6,836 $ 5,794
Receivables (net) 122,956 95,160
Inventories 108,912 91,873
Other 14,411 13,835
- -------------------------------------------------------------------------------
Total Current Assets 253,115 206,662
Property, plant and equipment at cost
less accumulated depreciation 55,545 48,711
Rental inventory less accumulated
depreciation 15,238 13,601
Cost in excess of net assets acquired 35,198 35,879
Other assets 11,977 11,168
- --------------------------------------------------------------------------------
Total Assets $ 371,073 $ 316,021
================================================================================
Current Liabilities
- -------------------
Accounts payable $ 47,941 $ 37,815
Other liabilities 57,064 38,601
Current portion of long-term debt 10,000 10,000
- --------------------------------------------------------------------------------
Total Current Liabilities 115,005 86,416
Long-term debt 28,550 22,715
Other non-current liabilities 12,149 11,382
- --------------------------------------------------------------------------------
Total Liabilities 155,704 120,513
Shareholders' Equity
- --------------------
Common Stock and additional
paid-in capital 145,415 143,533
Retained earnings 69,954 51,975
- --------------------------------------------------------------------------------
Total Shareholders' Equity 215,369 195,508
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 371,073 $ 316,021
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) Six Months Ended June 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 18,154 $ 8,707
Depreciation and amoritization 7,893 6,274
Increase (decrease)in operating
cash flows:
Receivables (27,796) (18,088)
Inventories (17,039) (13,355)
Additions to rental equipment (4,741) (5,957)
Accounts payable 10,126 8,807
Customer deposits 17,632 5,501
Taxes payable (763) 2,052
Other 426 3,186
- -------------------------------------------------------------------------------
Net cash from (used in)
operating activities 3,892 (2,873)
- -------------------------------------------------------------------------------
Investing Activities
- --------------------
Equipment purchases (11,536) (4,883)
Proceeds from equipment sales 1,130 215
- --------------------------------------------------------------------------------
Net cash (used in) investing activities (10,406) (4,668)
- --------------------------------------------------------------------------------
Financing Activities
- --------------------
Decrease in long-term debt (10,000)
Increase in long-term debt 16,000
Proceeds from issuance of Common Stock 1,313 15,838
Deferred issue costs 243
- -------------------------------------------------------------------------------
Net cash from financing activities 7,556 15,838
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents 1,042 8,297
- -------------------------------------------------------------------------------
Cash and cash equivalents at
beginning of year 5,794 6,762
- -------------------------------------------------------------------------------
Cash and cash equivalent at
end of quarter $ 6,836 $ 15,059
===============================================================================
</TABLE>
<PAGE>
Condensed Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except per share data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
- --------
Net sales $ 118,543 $ 83,005 $ 209,775 $ 146,837
Rental income 11,009 6,869 20,761 13,293
Other income 82 476 169 1,189
- ---------------------------------------------------------------------------------------------------------------
129,634 90,350 230,705 161,319
- ---------------------------------------------------------------------------------------------------------------
Costs and Expenses
- ------------------
Cost of sales 81,605 57,904 145,104 101,507
Cost of rental income 3,302 1,994 6,175 3,901
Selling, general and administrative expenses 22,048 17,135 40,182 33,252
Research and development costs 5,012 3,790 9,036 7,362
Interest expense 1,074 1,036 2,109 2,041
- ---------------------------------------------------------------------------------------------------------------
113,041 81,859 202,606 148,063
- ---------------------------------------------------------------------------------------------------------------
Income Before income taxes 16,593 8,491 28,099 13,256
Provision for income taxes 5,823 2,812 9,945 4,549
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 10,770 $ 5,679 $ 18,154 $ 8,707
===============================================================================================================
Net income per share of Common Stock $ .33 $ .18 $ .56 $ .28
===============================================================================================================
Shares used to calculate earnings per share 32,578 31,448 32,522 31,185
===============================================================================================================
</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, 1996.
<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 18% in the second quarter of 1997 to an
average of approximately 2,004 from an average of approximately 1,704 during the
same period in 1996. North American drilling activity increased approximately
31% to an average of approximately 1,192 rigs and international drilling
activity increased to an average of approximately 812 rigs as compared to 794 in
the second quarter 1996.
Offshore drilling activity continued its year-over-year strength, as
reflected by an increase in rig utilization (mobile offshore rigs under contract
as a percent of available rigs). For the second quarter of 1997, mobile offshore
rig utilization averaged 95% as compared to 89% in the second quarter of 1996.
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 June 10, Six Months Ended June 30,
1997 1996 1997 1996
--------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net Orders
- ----------
Varco Drilling Systems $ 52,533 $ 28,813 $ 92,284 $ 53,156
Varco BJ Oil Tools 23,472 13,521 46,975 27,589
Martin-Decker/TOTCO
Instrumentation 25,431 15,112 46,209 28,739
Shaffer 65,515 25,656 119,693 73,607
Thule Rigtech 5,723 2,082 7,860 4,313
- ------------------------------------------------------------------------------------------
Total $172,674 $ 85,184 $313,021 $187,404
==========================================================================================
Revenues
- --------
Varco Drilling Systems $ 38,569 $ 31,536 $ 65,097 $ 57,231
Varco BJ Oil Tools 15,584 12,234 27,931 24,012
Martin-Decker/TOTCO
Instrumentation 22,434 14,430 38,999 29,069
Shaffer 51,268 29,396 94,385 44,767
Thule Rigtech 1,697 2,278 4,124 5,051
- ------------------------------------------------------------------------------------------
Total $129,552 $ 89,874 $230,536 $160,130
==========================================================================================
</TABLE>
<PAGE>
Order bookings increased $87.5 million, or 103%, in the second quarter of
1997 and $125.6 million, or 67%, in the first six months of 1997 as compared to
the same periods of 1996. These increases are primarily due to orders
associated with the upgrading and construction of offshore drilling rigs,
particularly floating rigs that are capable of drilling in water depths
exceeding 3,000 feet. Each such rig creates significant potential for the high
dollar value products provided by the Shaffer and Drilling Systems Divisions as
well as the products of the Company's other Divisions. In addition, the
incoming order rate was favorably impacted by the overall 18% increase in
worldwide drilling activity discussed above.
The Company's increased revenue levels in the 1997 periods as compared to
1996 are generally due to improved industry conditions as discussed above.
Particularly significant has been the impact on Shaffer of the upgrading,
conversion and new construction of floating offshore rigs. Shaffer's product
line includes a significant amount of equipment of the types essential to these
activities. Shaffer Division revenues accounted for 55% of second quarter
increase from the comparable year-ago period, and 70% of the increase for the
six-month period.
At June 30, 1997 the Company's backlog of unshipped orders was
approximately $269.4 million as compared to $186.9 million at December 31, 1996.
Orders for new rigs and major upgrades generally include the Company's longer
lead-time products, nine to twelve months. This has contributed to the
Company's backlog increasing significantly during the last six months to its
highest level in the Company's history. The Company expects that a majority of
the backlog will ship by December 31, 1997 resulting in revenues for the
remaining quarters of 1997 being at a higher rate than the second quarter. In
accordance with industry practice, orders and commitments generally are
cancelable by customers at any time.
Gross margins (net sales and rental income less costs of sales and rental
income) as a percentage of net sales and rental income were slightly improved
year-over-year. For the first half of 1997 gross margins were 34.4%, compared
to 34.2% for the same period in 1996 and they were 34.5% and 33.4% in the second
quarters of 1997 and 1996, respectively. Gross margins were favorably impacted
by improved margins at the Drilling Systems and Oil Tools Divisions due to cost
improvements. During the first half of 1996 Drilling Systems experienced low
margins on TDS-9 units which were improved in 1997. Oil Tools improved margins
are mostly due to lower manufacturing cost. Taken alone, each of the foregoing
would have improved margins by approximately 1%. These improved margins were
offset by the impact of Shaffer's higher proportion of revenues. Shaffer's
products carry lower gross margins (due principally to price competition) than
the combined gross margins of the other Divisions.
The Company believes that new product development is a significant factor
for the future of the Company. During the first six months of 1997 the Company
spent $9.0 million or 3.9% of revenues on new product development. This
compares to $7.4 million or 4.6% of revenues during the same period in 1996.
<PAGE>
The increases in selling, general and administrative expenses in 1997 as
compared to 1996 are primarily a result of activity related to the increased
revenues. As a percent of revenues, selling, general and administrative expenses
were down year-to-year. For the first half of 1997 this percent was 17.4% and it
was 17.0% for the second quarter of 1997. As a percent of revenues, selling,
general and administrative expenses were 20.6% and 19.0% for the first half and
second quarter of 1996, respectively.
Overall Company employment at June 30, 1997 was 2,373 (including 309
temporary employees) which compares to 1,803 (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 1997 was 35.4% as compared to
34.3% for the first half of 1996. The higher tax rate is due to a higher
effective foreign tax rate in the first half of 1997 as compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The cash and cash equivalents of $6.8 million are not significantly changed
from the December 31, 1996 balance of $5.8 million.
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 $20.0 million principal balance of the Senior Notes
is payable in two equal installments on June 30, 1998 and June 30, 1999.
On June 27, 1997 the Company entered into a seven-year unsecured revolving
credit agreement with three banks (the "Credit Agreement"). The Credit Agreement
provides a credit facility of $65.0 million, inclusive of a $20.0 letter of
credit subfacility. The maximum available under the Credit Agreement is reduced
in equal quarterly amounts over the last four years of the Credit Agreement.
Proceeds from the initial advances were used to payoff a previous credit
agreement with Citicorp USA, Inc. and Citibank, N.A and to make the June 30,
1997 principal and interest payment on the Senior Notes. At June 30, 1997 there
were $19.0 million in advances outstanding and $9.7 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 $5 million plus
25% of the Company's consolidated net income arising after June 30, 1997,
computed on a cumulative basis.
At June 30, 1997 the Company's working capital was $138.1 million as
compared to $120.2 million at December 31, 1996 and its current ratio was 2.2 to
1.0 as compared to 2.4 to 1.0 at December 31, 1996. The preceding changes are
primarily due to increases in inventory and receivables during the first half of
1997. Long-term debt as a percent of total capitalization was 12% at June 30,
1997 as compared to 10% at December 31, 1996. The increase in this percentage is
primarily due to capital expenditures made in the first half of 1997.
The Company's capital expenditures during the first half of 1997 were $11.5
million as compared to $4.9 million for the first half of 1996. The Company's
current plans for capital expenditures in 1997 is an additional $15.0 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 92868
Tel (714) 978-1900
Fax (714) 937-5029
E-mail: [email protected]
Web site: http://www.varco.com
VARCO
