<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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to________________
Commission File number 1-8158
VARCO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
California 95-0472620
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
743 North Eckhoff Street, Orange, Ca 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____
64,472,792
(Number of shares of Common Stock outstanding at June 30, 1998)
<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, 1998, 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.
Basic net income per share is based upon an average of 64,443,960 and
63,447,773 shares outstanding for the three months ended June 30, 1998, and
1997, respectively. Diluted net income per share is based upon an average of
65,884,697 and 65,155,951 shares outstanding for the three months ended June 30,
1998, and 1997, respectively.
Basic net income per share is based upon an average of 64,342,409 and
63,366,010 shares outstanding for the six months ended June 30, 1998, and 1997,
respectively. Diluted net income per share is based upon an average of
65,783,146 and 65,044,188 shares outstanding for the six months ended June 30,
1998, and 1997, respectively.
Inventories. The Company estimates the components of inventory at June
30, 1998, and December 31, 1997, to be as follows:
June 30, 1998 December 31, 1997
Raw Materials $ 6,934,000 $ 6,118,000
Work in Process 54,049,000 43,495,000
Finished Goods 120,967,000 95,063,000
LIFO Reserves (12,536,000) (12,705,000)
------------ ------------
$169,414,000 $131,971,000
============ ============
Fixed Assets. Fixed assets are stated net of accumulated depreciation
of $68,766,000 at June 30, 1998, and $62,469,000 at December 31, 1997.
Common Stock and Additional Paid-In-Capital. On June 30, 1998, the
Company Common Stock account was $54,841,000 and Additional Paid-In-Capital
accounts were $100,606,000.
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, 1998, filed as Exhibit 19 hereto, is incorporated
herein by reference.
<PAGE>
PART II-OTHER INFORMATION
Item 2. Changes in Securities
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 remaining $10.0 million principal
balance of the Senior Notes is payable on June 30, 1999.
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.
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 for a credit facility of $65.0 million, inclusive of a $20.0 million
letter of credit sub-facility. The maximum available under the Credit Agreement
is reduced in equal quarterly amounts over the last four years of the Credit
Agreement.
The Credit Agreement prohibits any "Restricted Junior Payment" unless (1) at
the time thereof no default exists under the Credit Agreement or will be caused
thereby and (2) the cumulative amount of all Restricted Junior Payments
subsequent to June 27, 1997, would not exceed the sum of $5,000,000 plus 25% of
the Company's consolidated net income arising after June 30, 1997. "Restricted
Junior Payment" is generally defined as (1) any dividend or other distribution
on any class of the Company's capital stock, except a dividend payable solely in
shares of that class; (2) any redemption, purchase or other acquisition for
value of any shares of any class of the capital stock of the Company; (3) any
payment made to retire or obtain the surrender of any outstanding warrants,
options or similar rights to acquire any shares of any class of the capital
stock of the Company; and (4) any payment on the Senior Notes other than
regularly scheduled payments of principal and interest thereon.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of Shareholders of the Company was held on May
19, 1998.
(c) Matters voted upon at the 1998 Annual Meeting of Shareholders of
the Company.
1. Election of Directors
Name Votes For Votes Withheld
<PAGE>
G. Boyadjieff 53,013,177 5,136,678
G. Dotson 53,013,613 5,136,242
A. Horn 43,336,955 14,812,900
J. Knowlton 53,009,935 5,139,920
L. Pircher 43,320,281 14,829,574
W. Reinhold 53,003,954 5,145,901
C. Suggs 53,013,588 5,136,267
R. Teitsworth 52,993,420 5,156,435
E. White 53,013,490 5,136,365
J. Woods 53,011,366 5,138,489
2. Proposal to amend the Company's Amended and Restated Articles of
Incorporation to increase the number of authorized shares of Common Stock from
80,000,000 to 120,000,000.
Votes For Votes Against Abstentions
57,396,622 615,435 137,798
3. Proposal to approve certain amendments to the Company's 1994
Directors' Stock Option Plan and certain options outstanding thereunder.
Votes For Votes Against Abstentions
56,088,403 1,882,612 178,840
4. Proposal to ratify Ernst & Young LLP as the independent auditors
of the Company.
Votes For Votes Against Abstentions
58,092,311 16,159 41,385
Item 5. Shareholder Proposal
For purposes of Security and Exchange Commission (SEC) Rule 14 a-4(c),
a notice to the Company of a shareholder proposal for the Company's 1999 Annual
Meeting of Shareholders submitted outside the processes of SEC Rule 14 a-8,
which is received by the Company after March 6, 1999 will be considered
untimely.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re computation of per share earnings for the three months
and six months ended June 30, 1998 and 1997.
<PAGE>
19 Varco International, Inc. Second Quarter Report to Shareholders, Three
Months Ended June 30, 1998.
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: August 10, 1998 By:/s/Richard A. Kertson
Vice President-Finance
and Chief Financial Officer
Date: August 10, 1998 By:/s/Donald L. Stichler
Vice President,
Controller-Treasurer
and Secretary
<PAGE>
EXHIBIT INDEX
11 Statement re computation of per share earnings for the three months and six
months ended June 30, 1998 and 1997.
19 Varco International, Inc. Second Quarter Report to Shareholders, Three
Months Ended June 30, 1998.
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30 1998 June 30 1998
--------------------------------
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $19,729,000 $34,714,000
Total Number Average Stock Option Shares Used
Number
Number of of Shares after of Shares Equivalent To Calculate
Days Weighing Outstanding Shares Diluted 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, 1998 91 5,864,400,395 64,443,960 1,440,737 65,884,697
Six Months Ended June 30, 1998 181 11,645,976,093 64,342,409 1,440,737 65,783,146
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
----------------------------------
Total Shares Outstanding
Diluted Income Per Share =
Three Months Ended June 30,1998 19,729,000 = $ 0.30
------------
65,884,697
Six Months Months Ended June 30,1998 34,714,000 = $ 0.53
------------
65,783,146
Basic Income Per Share
Three Months Ended June 30,1998 19,729,000 = $ 0.31
------------
64,443,960
Six Months Months Ended June 30,1998 34,714,000 = $ 0.54
------------
64,342,409
</TABLE>
<PAGE>
EXHIBIT 11
RESTATED FOR STOCK SPLIT
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 1997 June 30 1997
-------------------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $10,770,000 $18,154,000
<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, 1997 91 5,776,477,384 63,477,773 1,678,178 65,155,951
Six Months Ended June 30, 1997 181 11,469,247,876 63,366,010 1,678,178 65,044,188
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
------------------------
Total Shares Outstanding
Basic Income Per Share =
Three Months Ended June 30, 1997 10,770,000 = $0.17
-------------
63,477,773
Six Months Ended June 30, 1997 18,154,000 = $0.29
-------------
63,366,010
Diluted Income Per Share =
Three Months Ended June 30, 1997 10,770,000 = $0.17
-------------
65,155,951
Six Months Ended June 30, 1997 18,154,000 = $0.28
-------------
65,044,188
</TABLE>
<PAGE>
EXHIBIT 19
Varco International, Inc.
1998 Second Quarter Report
Varco
<PAGE>
To Our Shareholders
Financial results for the three months ended June 30 continued to reflect
significant growth in Revenues and Net Income as compared to the same period a
year ago. Net Income reached $19.7 million, $.30 per share, on Revenues of
$197.2 million; the comparable figures for the second quarter of last year were
$10.8 million, $.17 per share, and $129.6 million.
For the first six months of 1998, Net Income totaled $34.7 million, $.53 per
share, versus $18.2 million, $.28 per share, for the same period of 1997, as
Revenues increased to $347.4 million from $230.7 million.
Despite our strong financial results, we are beginning to feel the effect of the
lower oil prices which have prevailed since late last year. Oil prices averaged
approximately $15.25 per barrel during the second quarter, and approximately
$14.50 for the month of June. That represents the lowest quarterly average since
the initial three months of 1994, and compares to an average of approximately
$20.50 for all of last year.
With the lower oil prices negatively impacting cash flow, oil companies are
curtailing their exploration and production spending plans. In the midyear
update to their Survey and Analysis of Worldwide Oil and Gas Exploration and
Production Expenditures, Salomon Smith Barney projects that 1998 spending will
increase six percent over last year's rate, versus a planned increase of eleven
percent in the initial survey published in January. As a result, the average rig
count for the United States and Canada during the second quarter was 13 percent
below that of the same period a year ago. As is traditionally the case, drilling
activity outside North America demonstrated greater stability, declining by just
two percent over the same period.
Offshore drilling, Varco's most important market, has demonstrated greater
resilience to reduced oil prices than has land drilling. During the second
quarter, utilization of the worldwide offshore rig fleet averaged approximately
95 per cent, essentially unchanged from one year ago. However, utilization fell
to 92 percent in late July, as some rigs have been unable to find work as
contracts are completed. Additionally, as new contracts are signed, day rates
have evidenced a decline from the peak reached last fall. While both offshore
rig utilization and day rates remain at levels which would have been considered
very positive just two years ago, the direction of the trend is a cause for some
concern when viewed in the context of weak oil prices. Finally, the pace at
which oil companies are contracting new deep water rigs has slowed noticeably
from that which prevailed over the second half of last year and continued into
early 1998.
These industry conditions are most clearly reflected in Varco's order bookings.
The second quarter total of $193.6 million, while in line with our current
manufacturing capacity and above the $172.7 million recorded in the second
quarter of last year, is well below that of the most recent three quarters.
During that period of time, oil companies' primary concern was rig availability,
particularly those capable of drilling in deep water. As contracts for new rigs
were being entered into, equipment availability and lead times were seen as
potential constraints, and Varco's orders reached levels well above its current
and projected manufacturing capacity. With lower oil prices, the urgency
relating to rig availability has subsided and orders for equipping new rigs have
declined.
On August 6 a customer announced that it was terminating the construction of a
deep water drillship and had reached agreement with the oil company for
cancellation of its five-year drilling contract. As a result, the customer
cancelled orders totaling approximately $38.3 million, which were included in
Varco's June 30 backlog. A significant portion of the equipment was due to be
shipped in the third and fourth quarters of this year. Although the costs to
Varco of this cancellation have not yet been ascertained, we believe that
deposits received from the customer will be sufficient to cover, or
substantially mitigate, those costs. This customer has indicated that the
termination was the result of risks associated with meeting the required
delivery date and cost estimate, and we believe it relates more to circumstances
unique to this customer than to general industry conditions.
Meanwhile, our backlog is strong and our biggest challenge over the next twelve
to eighteen months remains the delivery, installation and ongoing support of the
drilling equipment that is the lifeblood of the rigs that will be placed in
service over the next two years. Toward that end, we have significantly expanded
our capability and capacity over the past eighteen months, as has been reflected
in our revenue growth. As the rate of growth moderates, the opportunity exists
to focus on the efficient execution of those tasks critical to meeting our
customers' expectations.
The events of recent weeks serve as a reminder that we operate in an industry
where change is the norm and predictability is elusive. Our operational
priorities are clear, and we will be prepared to react to market factors as they
unfold.
/s/ George I. Boyadjieff
George I. Boyadjieff
Chairman and
Chief Executive Officer
August 10, 1998
<PAGE>
CONDENSED CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
- --------------
Cash and cash equivalents $ 8,629 $ 39,827
Receivables (net) 177,542 142,324
Inventories 169,414 131,971
Other 19,184 17,396
- --------------------------------------------------------------------------------
Total Current Assets 374,769 331,518
Property, plant and equipment at cost less
accumulated depreciation 84,575 73,862
Rental equipment less accumulated depreciation 15,452 18,213
Cost in excess of net assets acquired 34,102 34,609
Other assets 13,332 12,927
- --------------------------------------------------------------------------------
Total Assets $522,230 $471,129
================================================================================
Current Liabilities
- -------------------
Accounts payable $ 57,386 $ 53,394
Customer deposits 93,898 79,068
Other liabilities 56,077 52,905
Current portion of long-term debt 9,897 10,000
- --------------------------------------------------------------------------------
Total Current Liabilities 217,258 195,367
Long-term debt 9,520
Other non-current liabilities 13,534 13,043
- --------------------------------------------------------------------------------
Total Liabilities 230,792 217,930
Shareholders' Equity
- --------------------
Common Stock and additional paid-in capital 155,447 151,222
Retained earnings 135,991 101,977
- --------------------------------------------------------------------------------
Total Shareholders' Equity 291,438 253,199
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $522,230 $471,129
================================================================================
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 34,714 $ 18,154
Depreciation and amortization 10,060 7,893
Increase (decrease) in operating cash flows:
Receivables (35,218) (27,796)
Inventories (37,443) (17,039)
Additions to rental equipment (2,112) (4,741)
Transfers from rental equipment 2,134
Accounts payable 3,992 10,126
Customer deposits 14,830 17,632
Taxes payable 3,772 (763)
Other (604) 426
- --------------------------------------------------------------------------------
Net cash from (used in) operating activities (5,875) 3,892
- --------------------------------------------------------------------------------
Investing Activities
- --------------------
Equipment purchases (17,387) (11,536)
Proceeds from equipment sales 214 1,130
- --------------------------------------------------------------------------------
Net cash (used in) investing activities (17,173) (10,406)
- --------------------------------------------------------------------------------
Financing Activities
- --------------------
Decrease in long-term debt (10,000) (10,000)
Increase in long-term debt 16,000
Proceeds from issuance of Common Stock 1,850 1,313
Deferred issue costs 243
- --------------------------------------------------------------------------------
Net cash from (used in) financing activities (8,150) 7,556
- --------------------------------------------------------------------------------
Net change in cash and cash equivalents (31,198) 1,042
- --------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 39,827 5,794
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of quarter $ 8,629 $ 6,836
================================================================================
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except per share data) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
- --------
Net sales $187,854 $118,543 $326,795 $209,775
Rental income 9,120 11,009 19,922 20,761
Other income 237 82 685 169
- ----------------------------------------------------------------------------------------------------------
197,211 129,634 347,402 230,705
- ----------------------------------------------------------------------------------------------------------
Costs and Expenses
- ------------------
Cost of sales 126,574 81,605 218,404 145,104
Cost of rental income 3,087 3,302 6,305 6,175
Selling, general and administrative expenses 28,594 22,048 52,942 40,182
Research and development costs 8,378 5,012 15,908 9,036
Interest expense 581 1,074 1,086 2,109
- ----------------------------------------------------------------------------------------------------------
167,214 113,041 294,645 202,606
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 29,997 16,593 52,757 28,099
Provision for income taxes 10,268 5,823 18,043 9,945
- ----------------------------------------------------------------------------------------------------------
Net income $ 19,729 $ 10,770 $ 34,714 $ 18,154
==========================================================================================================
Basic income per share $ .31 $ .17 $ .54 $ .29
==========================================================================================================
Shares used in basic income per share calculation 64,444 63,478 64,342 63,366
==========================================================================================================
Diluted income per Share $ .30 $ .17 $ .53 $ .28
==========================================================================================================
Shares used in diluted income per share calculation 65,885 65,156 65,783 65,044
==========================================================================================================
</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, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL INDUSTRY CONDITIONS
- ---------------------------
The business of the Company depends primarily upon the level of worldwide
drilling activity, particularly offshore drilling activity. The level of
drilling activity can be influenced by numerous factors, including economic and
political conditions, the prices of oil and gas, finding and development costs
of oil companies, development of alternative energy sources, availability of
equipment and materials, availability of new onshore and offshore acreage or
concessions, and new and continued governmental regulations regarding
environmental protection, taxation, price controls and product allocations.
Since November of 1997 the price of oil has declined significantly. For the
first and second quarters of 1998, the price of oil has averaged approximately
$15.75 and $15.25 per barrel, respectively, as compared to an average of $20.50
per barrel for the full year 1997. At the end of July 1998, the price of oil
was approximately $14.25 per barrel. These lower prices have resulted in lower
cash flows and curtailed exploration and production spending plans for the oil
companies and lower rig day rates and cash flows for drilling contractors, the
Company's customers.
Worldwide drilling activity, as measured by the average number of active
drilling rigs, decreased approximately 8% in the second quarter of 1998 to an
average of approximately 1,837 from an average of approximately 2,004 during the
same period in 1997. As compared to the first quarter of 1998, the second
quarter average declined approximately 18%. North American drilling activity
decreased approximately 13% as compared to last year and 27% as compared to the
first quarter of 1998. International drilling activity was not impacted as much
as North American drilling activity. International activity decreased to an
average of approximately 797 rigs as compared to 812 in the second quarter of
1997 and as compared to 810 in the first quarter of 1998.
Despite low oil prices, offshore drilling activity has continued to be
relatively strong, as reflected by rig utilization (mobile offshore rigs under
contract as a percent of available rigs). For the second quarter of 1998,
utilization averaged 95%, unchanged from the second quarter of 1997. More
recently, offshore drilling activity has shown some signs of weakening. In June
of 1998 offshore rig utilization was at 93.6%, its lowest level since January
1997 and rig day rates were at levels below their year-end 1997 rates.
RESULTS OF OPERATIONS
- ---------------------
Set forth below are the net orders and revenues for the Company's five
operating divisions:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Orders
- ----------
Varco Systems $ 43,672 $ 52,533 $178,402 $ 92,284
VarcoBJ 26,432 23,472 57,708 46,975
MD/Totco 37,271 25,431 69,222 46,209
Shaffer 83,467 65,515 163,998 119,693
Rigtech 2,773 5,723 10,811 7,860
- --------------------------------------------------------------------------------
Total $193,615 $172,674 $480,141 $313,021
================================================================================
Revenues
- --------
Varco Systems $ 70,310 $ 38,569 $123,806 $ 65,097
VarcoBJ 23,906 15,584 43,924 27,931
MD/Totco 23,237 22,434 46,846 38,999
Shaffer 71,750 51,268 118,962 94,385
Rigtech 7,771 1,697 13,179 4,124
- --------------------------------------------------------------------------------
Total $196,974 $129,552 $346,717 $230,536
================================================================================
</TABLE>
<PAGE>
Order bookings increased $20.9 million, 12%, in the second quarter of 1998
and $167.1 million, 53%, in the first six months of 1998 as compared to the same
periods of 1997. However, the second quarter order rate of $193.6 million is
below that of the prior three quarters. Incoming orders were $266.5 million and
$241.4 million for the third and fourth quarters of 1997, respectively, and
$286.5 million in the first quarter of 1998. The year-over-year 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 Varco
Systems Divisions as well as the products of the other Divisions. The decline in
order rates as compared to the prior three quarters is due to a decline in
orders associated with new rig construction and upgrades particularly at the
Varco Systems Division.
On August 6 a customer announced that it was terminating the construction
of a deep water drillship and had reached agreement with the oil company for
cancellation of its five-year drilling contract. As a result, the customer
cancelled orders totaling approximately $38.3 million, which were included in
Varco's June 30 backlog. A significant portion of the equipment was due to be
shipped in the third and fourth quarters of this year. Although the costs to
Varco of this cancellation have not yet been ascertained, we believe that
deposits received from the customer will be sufficient to cover, or
substantially mitigate, those costs.
The Company's operating revenues increased by 52% in the second quarter of
1998 to $197.0 million, from same period 1997 and increased 50% in the first
half of 1998 as compared to the first half of 1997. These increases primarily
resulted from the delivery of equipment for upgrading, conversion and new
construction of offshore drilling rigs.
At June 30, 1998 the Company's backlog of unshipped orders was
approximately $596.3 million as compared to $462.9 million at December 31, 1997
and $269.4 million at June 30, 1997. Orders for new rigs and major upgrades
generally include the Company's longer lead-time products. Therefore, the
average lead-time of the products included in the June 30, 1998 backlog is
longer as compared to prior periods. The Company expects that approximately
$250.0 million of the June 30, 1998 backlog will not be shipped until 1999. At
June 30, 1998 the Company had received $93.9 million in customer cash deposits
related to orders included in backlog. In accordance with industry practice,
orders and commitments generally are cancelable by customers at any time.
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 half of
1998 was 35.2%. This compares to a gross margin of 34.4% for the same period in
1997. The higher 1998 margins were a result of improved margins at VarcoBJ and
Varco Systems. These improvements favorably impacted
<PAGE>
consolidated margins by approximately 2.2%. Price increases accounted for
approximately 85% of the improvement, and the remainder was attributable to the
favorable Dutch Guilder exchange rate which had the effect of lowering dollar
cost at VarcoBJ's Netherlands manufacturing facility. This improvement was
partially offset by lower margins at the Shaffer Division which were negatively
impacted by high initial costs on some of its newer products. Second quarter
1998 gross margin was 34.2% as compared to 34.5% in the second quarter of 1997.
This decline was due to the decline in rental income offsetting the benefit of
the improvements at VarcoBJ and Varco Systems. Rental Income carries a higher
gross margin than other revenues.
The Company believes that new product development is a significant factor
for the future of the Company. During the first six months of 1998 the Company
spent $15.9 million or 4.6% of revenues on new product development. This
compares to $9.0 million or 3.9% of revenues during the same period in 1997.
The increase in selling, general and administrative expenses in 1998 as
compared to 1997 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 1998 this percent was 15.2% and it
was 14.5% for the second quarter of 1998. As a percent of revenues, selling,
general and administrative expenses were 17.4% and 17.0% for the first half and
second quarter of 1997, respectively.
Overall Company employment at June 30, 1998 was 3,340 (including 472
temporary employees) which compares to 2,373 (including 309 temporary employees)
a year ago.
The effective tax rate for the first half of 1998 was 34.2% as compared to
35.4% for the first half of 1997. The lower effective tax rate in 1998 is due to
the elimination in 1998 of the Company's valuation allowance on deferred tax
assets. The Company now believes that it is more likely than not that all of its
deferred tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1998 the Company had cash and cash equivalents of $8.6 million
as compared to $39.8 million at December 31, 1997. This decline was due to
increased working capital requirements during the first half of 1998 and to the
June 30, 1998 Senior Note payment.
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 remaining $10.0 million principal balance of the
Senior Notes is payable 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 for a credit facility of $65.0 million, inclusive of a $20.0 million
letter of credit sub-facility. The maximum available under the Credit Agreement
is reduced in equal quarterly amounts over the last four years of the Credit
Agreement. At June 30, 1998 there were no advances and $5.9 million in letters
of credit outstanding under this facility.
Both the Note Agreement and the Credit Agreement restrict the payment of
dividends (other than dividends payable solely in shares of Common Stock) on,
and repurchases of, Common Stock. Under the terms of the Credit Agreement, which
is generally the more restrictive of these, the amount available for the payment
of dividends on, and repurchases of, Common Stock is limited to $5.0 million
plus 25% of the Company's consolidated net income arising after June 30, 1997,
computed on a cumulative basis.
On November 6, 1997 the Board of Directors of the Company declared a two-
for-one stock split of its Common Stock, payable in the form of a 100% stock
dividend on December 4, 1997 to shareholders of record at the close of business
on November 20, 1997.
At June 30, 1998 the Company's working capital was $157.5 million as
compared to $136.2 million at December 31, 1997 and its current ratio was 1.72
to 1.0 as compared to 1.70 to 1.0 at December 31, 1997. The preceding changes
are primarily due to an increase in inventory and receivables during the first
half of 1998.
The Company's capital expenditures during the first half of 1998 were $17.4
million as compared to $11.5 million for the first half of 1997. The Company's
current plans for capital expenditures in the next twelve months are
approximately $35.0 to $40.0 million. The Company anticipates that its June 30,
1998 cash and cash equivalents and its existing credit facility will be
sufficient to meet its capital expenditures and operating cash needs and the
principal payment on the Senior Notes in 1999.
<PAGE>
CAUTIONARY STATEMENT PURSUANT TO THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- ------------------------------------------------
In accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that the statements in this
Quarterly Report, which are forward-looking and which provide other than
historical information, involve risks and uncertainties that may impact the
Company's results of operations. These forward-looking statements include, among
others, statements concerning the Company's general business strategies,
customer orders, backlog, operating trends, industry trends, manufacturing
capacity, and expectations for funding capital expenditures and operations in
future periods. The Company also continues to face many risks and uncertainties
including: changes in the prices of oil and natural gas, changes in capital
spending by companies in the oil and gas industry for exploration, development
and equipment, management of accelerating growth, competitive pressures,
technological and structural changes in the industry, litigation and
environmental laws. The risks and uncertainties inherent in these forward-
looking statements could cause actual results to differ materially from those
expressed in or implied by these statements.
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT INCLUDED IN ITS FIRST QUARTER REPORT TO
SHAREHOLDERS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,629,000
<SECURITIES> 0
<RECEIVABLES> 179,910,000
<ALLOWANCES> (2,368,000)
<INVENTORY> 169,414,000
<CURRENT-ASSETS> 374,769,000
<PP&E> 153,341,000
<DEPRECIATION> (68,766,000)
<TOTAL-ASSETS> 522,230,000
<CURRENT-LIABILITIES> 217,258,000
<BONDS> 0
0
0
<COMMON> 155,447,000
<OTHER-SE> 135,991,000
<TOTAL-LIABILITY-AND-EQUITY> 522,230,000
<SALES> 196,974,000
<TOTAL-REVENUES> 197,211,000
<CGS> 129,661,000
<TOTAL-COSTS> 158,255,000
<OTHER-EXPENSES> 8,378,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 581,000
<INCOME-PRETAX> 29,997,000
<INCOME-TAX> 10,268,000
<INCOME-CONTINUING> 19,729,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,729,000
<EPS-PRIMARY> $0.31
<EPS-DILUTED> $0.30
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