<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, 1999
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 ___
---
65,058,673
(Number of shares of Common Stock outstanding at June 30, 1999)
<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, 1999, 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 65,044,761 and
64,443,960 shares outstanding for the three months ended June 30, 1999, and
1998, respectively. Diluted net income per share is based upon an average of
65,897,179 and 65,884,697 shares outstanding for the three months ended June 30,
1999, and 1998, respectively.
Basic net income per share is based upon an average of 64,891,136 and
64,342,409 shares outstanding for the six months ended June 30, 1999, and 1998,
respectively. Diluted net income per share is based upon an average of
65,743,554 and 65,783,146 shares outstanding for the six months ended June 30,
1999, and 1998, respectively.
Inventories. The Company estimates the components of inventory at
June 30, 1999, and December 31, 1998, to be as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Raw Materials $ 5,059,000 $ 5,806,000
Work in Process 36,932,000 50,684,000
Finished Goods 90,869,000 109,581,000
LIFO Reserves (12,677,000) (13,659,000)
------------ ------------
$120,183,000 $152,412,000
============ ============
</TABLE>
Fixed Assets. Fixed assets are stated net of accumulated depreciation
of $74,706,000 at June 30, 1999, and $71,263,000 at December 31, 1998.
Common Stock and Additional Paid-In-Capital. On June 30, 1999, the
Company Common Stock account was $55,427,000 and Additional Paid-In-Capital
accounts were $104,361,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
<PAGE>
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, 1999, filed as Exhibit 19 hereto, is incorporated
herein by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to certain market risks which are inherent in
the Company's financial instruments and which arise from transactions entered
into in the normal course of business. The Company does not considered these
risks significant, and the Company does not enter into derivative financial
instrument transactions to offset these risks.
Borrowings under the Company's revolving credit facility do not give rise to
significant interest rate risks because these borrowings have a variable
interest rate. The Company has no fixed interest rate debt at June 30, 1999.
Generally, the fair market value of debt with a fixed interest rate will
increase as interest rates fall, and the fair market value will decrease as
interest rates rise. Fixed interest rate borrowings have not been significant
during the three Months ended June 30, 1999.
PART II-OTHER INFORMATION
Item 2. Changes in Securities
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 13, 1999.
(c) Matters voted upon at the 1999 Annual Meeting of
Shareholders of the Company.
1. Election of Directors
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
<S> <C> <C>
G. Boyadjieff 57,405,787 111,469
G. Dotson 57,409,574 107,682
A. Horn 47,906,607 9,610,649
J. Knowlton 57,393,260 123,996
L. Pircher 56,560,434 956,822
W. Reinhold 57,396,677 120,579
C. Suggs 57,405,822 111,434
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
R. Teitsworth 57,406,098 111,158
E. White 57,401,637 115,619
J. Woods 57,402,207 115,049
</TABLE>
2. Proposal to ratify Ernst & Young LLP as the independent
auditors of the Company.
Votes For Votes Against Abstentions
57,465,475 24,525 27,256
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendments to the Varco International, Inc. 1990 Stock Option Plan.
10.2 Form of amendment to stock option agreements.
11 Statement re computation of per share earnings for the three months
and six months ended June 30, 1999 and 1998.
19 Varco International, Inc. Second Quarter Report to Shareholders,
Three Months Ended June 30, 1999.
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, 1999 By:/s/Richard A. Kertson
Vice President-Finance
and Chief Financial Officer
Date: August 10, 1999 By:/s/Donald L. Stichler
Vice President,
Controller-Treasurer
and Secretary
<PAGE>
EXHIBIT INDEX
10.1 Amendments to the Varco International, Inc. 1990 Stock Option Plan.
10.2 Form of amendment to stock option agreements.
11 Statement re computation of per share earnings for the three months and
six months ended June 30, 1999 and 1998.
19 Varco International, Inc. Second Quarter Report to Shareholders, Three
Months Ended June 30, 1999.
27 Financial Data Schedule
<PAGE>
Exhibit 10.1
Amendments to the Varco International, Inc. 1990 Stock Option Plan
WHEREAS, the Board of Directors of the Corporation deem it desirable
and in the best interests of the Corporation and its shareholders that
the Corporation's 1990 Stock Option Plan (the "Plan") be amended in
certain respects;
NOW, THEREFORE, BE IT RESOLVED, that paragraph F of Section 6(b) of
the Plan be, and the same hereby is, amended to read in its entirety
as follows:
F. Other Severance. In the event an employee's employment with
Varco and its subsidiaries is terminated for any reason other than as
set forth in paragraphs D and E above, any Nonstatutory Option which
he holds may be exercised, to the extent it was exercisable on the
date of termination of his employment, within such period after the
date of termination of his employment (not to exceed ninety (90) days)
as the Committee shall prescribe in his option agreement. For purposes
of this Paragraph F, an employee's employment shall be deemed to have
terminated on the earlier of the date his employment terminates or the
date he receives written notice that his employment is or will be
terminated. Such Option shall expire upon the expiration of such
period unless the employee dies prior thereto, in which event he shall
be deemed to have died on the date his employment terminated;
provided, however, in no event shall such Option be exercised more
than ten years from the date such Option was granted.
and further
RESOLVED, that paragraph F of Section 6(c) of the Plan be, and the
same hereby is, amended to read in its entirety as follows:
F. Other Severance. In the event an employee's employment with
Varco and its subsidiaries is terminated for any reason other than as
set forth in paragraphs D and E above, any Incentive Stock Option
which he holds may be exercised, to the extent it was exercisable on
the date of termination of his employment, within such period after
the date of termination of his employment (not to exceed ninety (90)
days) as the Committee shall prescribe in his option agreement. For
purposes of this Paragraph F, an employee's employment shall be deemed
to have terminated on the earlier of the date his employment
terminates or the date he receives written notice that his employment
is or will be terminated. Such Option shall expire upon the expiration
of such period unless the employee dies prior thereto, in which event
he shall be deemed to have died on the date his employment terminated;
provided, however, in no event shall such Option be exercised more
than ten years from the date such Option was granted.
and further
RESOLVED, that the Compensation Committee of the Board of Directors,
as the Committee under the Plan, is authorized, in its sole discretion
and from time to time, to amend any option outstanding under the Plan
in a manner consistent with the foregoing amendments to the Plan; and
RESOLVED, that each of the officers of the Corporation be, and he
hereby is, authorized and directed to perform all acts and to execute
and deliver all
<PAGE>
certificates and documents and to take or cause to be taken all other
action as any such officer may deem necessary or appropriate to carry
out the foregoing resolutions and to comply with the terms and
provisions of the Plan.
<PAGE>
Exhibit 10.2
Form of Amendment to Stock Option Agreements
VARCO INTERNATIONAL, INC.
AMENDMENT TO STOCK OPTION AGREEMENT
This AMENDMENT TO STOCK OPTION AGREEMENT, dated ___________, is made by and
between VARCO INTERNATIONAL, INC., a California corporation ("Varco") and the
employee executing this Amendment below as Employee (the "Employee").
W I T N E S S E T H:
WHEREAS, the Employee was granted one or more options on or prior to May
13, 1999 (the "Outstanding Options") to purchase shares of Varco's Common Stock
pursuant to Varco's 1990 Stock Option Plan; and
WHEREAS, the Outstanding Options are evidenced by one or more Stock Option
Agreements (the "Option Agreements") made by Varco for the benefit of the
Employee; and
WHEREAS, on May 13, 1999, the Board of Directors of Varco approved certain
amendments to the Plan and authorized the Compensation Committee (the
"Committee") of the Board of Directors of Varco, in its sole discretion, to
amend outstanding options consistent with the amendments to the Plan; and
WHEREAS, the Compensation Committee of the Board of Directors of Varco has
approved an amendment to the Outstanding Options and authorized the execution
and delivery of amendments to the Outstanding Options incorporating such
amendment; and
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Each of the Outstanding Option Agreements is hereby amended as
follows:
The provisions of each Outstanding Option Agreement providing for the
termination of the option upon the termination of the Employee's employment
with Varco and its subsidiaries in cases other than the Employee's death or
retirement under certain circumstances, wherever located and however
designated or numbered, are hereby amended to read in their entirety as
follows:
<PAGE>
"Subject to the provisions hereof relating to the termination of the
Option upon the death of the Employee or the retirement of the Employee in
specified circumstances, on the 90th day following the termination of the
employment of Employee with Varco and its subsidiaries for any reason
whatsoever, including, without limitation, any termination caused by
Employee's quitting, resigning or having been discharged. For the purposes
of this paragraph an Employee's employment shall be deemed to have
terminated at the earlier of the date his/her employment actually
terminates or the date he/she receives written notice that his/her
employment is or will be terminated. If the Employee dies after his
employment has terminated but before the expiration of such 90-day period,
he/she shall be deemed to have died on the date his/her employment
terminated. As used in this paragraph, the term "Employee", if not
otherwise defined herein as the holder of the Option, shall mean the
employee holding the Option.
2. This Amendment shall not be effective with respect to an Outstanding
Option unless executed by both Varco and the Employee prior to the termination
of such Outstanding Option in accordance with its terms, without giving effect
to the foregoing amendment.
3. The Company and the Employee confirm that, as amended by this
Amendment, each Outstanding Options shall terminate on the 90th day following
the date hereof, or such earlier date as such Outstanding Option shall terminate
in accordance with its terms.
3. This Amendment shall be governed by and interpreted in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Amendment on the day and
year first above written.
"Varco"
VARCO INTERNATIONAL, INC.
By_______________________________
Richard A. Kertson
Vice President-Finance
"Employee"
__________________________________
Signature
__________________________________
Printed Name
2
<PAGE>
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
EXHIBIT 11
1 OF 2
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
---------------------------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $11,164,000 $22,898,000
</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 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, 1999 91 5,919,073,221 65,044,761 852,418 65,897,179
Six Months Ended June 30, 1999 181 11,745,295,565 64,891,136 852,418 65,743,554
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
-----------------------------
Total Shares Outstanding
Diluted Income Per Share =
Three Months Ended June 30,1999 11,164,000 = $0.17
-----------------
65,897,179
Six Months Ended June 30, 1999 22,898,000 = $0.35
-----------------
65,743,554
Basic Income Per Share
Three Months Ended June 30, 1999 11,164,000 = $0.17
-----------------
65,044,761
Six Months Ended June 30, 1999 22,898,000 = $0.35
-----------------
64,891,136
</TABLE>
<PAGE>
EXHIBIT 11
2 of 2
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
-----------------------------------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $ 19,729,000 $ 34,714,000
<CAPTION>
Total Number Average Number Stock Option Shares Used
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
</TABLE>
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 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 Ended June 30, 1998 34,714,000 = $ 0.54
-------------
64,342,409
<PAGE>
EXHIBIT 19
Varco
International,Inc.
1999 SECOND QUARTERLY REPORT
Varco is the leading
supplier of drilling
equipment in the world
with key products that
enhance the safety and
productivity of the
drilling process.
<PAGE>
[LOGO] TO OUR SHAREHOLDERS,
CUSTOMERS AND EMPLOYEES
Although the price of oil has recovered sharply and natural gas prices have
strengthened, overall conditions in the oil service industry remain depressed.
Oil prices averaged slightly more than $17.60 per barrel for the second quarter
and have risen above $20 more recently, as compared to an average of
approximately $13.00 in the previous quarter and $14.70 in the second quarter of
last year. Natural gas prices, which did not suffer as severe a decline,
averaged approximately $2.10 per thousand cubic feet during the most recent
quarter versus an average of approximately $1.75 for the first quarter of this
year and $2.20 for the second quarter a year ago.
However, these more favorable commodity prices have not yet resulted in any
improvement in our business, as oil companies have not responded with increased
exploration and production spending. Worldwide drilling activity has remained at
historic lows, with the rig count averaging 1,225 for the second quarter, down
16 per cent from the previous quarter and 33 per cent from a year ago.
The effect of these market conditions on Varco is most clearly reflected in
an incoming order rate of $63.2 million (excluding cancellations of $1.1
million) for the most recent quarter, as compared to $193.6 million in the same
quarter a year ago. For the first six months of 1999 orders totaled $135.5
million (excluding cancellations of $17.0 million) versus $493.2 million
(excluding cancellations of $13.0 million) for the first half of last year.
Because we entered the year with a substantial order backlog, Revenues for the
first two quarters have remained above the incoming order rate. We expect that
condition to continue over the rest of the year.
Revenues for the second quarter were $155.9 million and Net Income was
$11.2 million, $.17 per (diluted) share. For the second quarter of last year,
Revenues totaled $197.2 million and Net Income was $19.7 million, $.30 per
(diluted) share.
Most of our order backlog consists of equipment to be installed
on offshore rigs still under construction, the majority of which was ordered in
1997 and 1998. In response
<PAGE>
to declining Revenues, we have reduced our cost structure as aggressively as our
commitments to deliver and install this equipment permit. Meanwhile, many of the
newly constructed deep-water rigs are beginning to drill, and most have an
extensive complement of Varco's newer technology equipment. These rigs are
performing well and beginning to demonstrate the benefits of this advanced
equipment. Notably, one Varco equipped rig recently set a world record, drilling
in water depths exceeding 8,000 feet offshore Brazil.
Although higher commodity prices provide a reason to be optimistic that
market conditions will improve, and many analysts are forecasting a recovery in
the second half of this year, we face a period of extraordinary market
uncertainty. However, we believe there are several reasons why we are well
positioned to respond to this uncertainty. We have an extremely strong balance
sheet, with no debt as of June 30. We have in place plans to continue reducing
costs as appropriate to the Revenue level. We believe that our newer products
provide opportunity, even in a difficult market. By demonstrating their
potential to significantly reduce drilling costs, we believe that many of these
products can be sold as retrofits to existing rigs and generate additional
Revenue.
Experience has taught us that any attempt to predict the future direction
of our industry is likely to prove wrong. We believe that adherence to a
consistent strategy of developing and introducing products that reduce drilling
costs, while managing our cost structure to current business levels and
maintaining a strong balance sheet, is the best path to long-term success.
We appreciate your continued support.
/s/ GEORGE I. BOYADJIEFF
George I. Boyadjieff
Chairman and
Chief Executive Officer
August 10, 1999
<PAGE>
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 25,590 $ 29,138
Receivables (net) 150,261 179,241
Inventories 120,183 152,412
Other 24,563 29,600
- --------------------------------------------------------------------------------
Total Current Assets 320,597 390,391
Property, plant and equipment (net) 88,801 89,997
Rental equipment (net) 11,326 11,440
Cost in excess of net assets acquired 32,637 33,511
Other assets 33,179 21,581
- --------------------------------------------------------------------------------
Total Assets $486,540 $546,920
================================================================================
Current Liabilities
Accounts payable $ 27,033 $ 45,969
Customer deposits 45,026 95,766
Other liabilities 56,473 62,409
Current portion of long-term debt 0 9,948
- --------------------------------------------------------------------------------
Total Current Liabilities 128,532 214,092
Non-current liabilities 13,933 13,461
- --------------------------------------------------------------------------------
Total Liabilities 142,465 227,553
Shareholders' Equity
Common Stock and additional paid-in capital 159,788 157,073
Retained earnings 184,287 162,294
- --------------------------------------------------------------------------------
Total Shareholders' Equity 344,075 319,367
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $486,540 $546,920
================================================================================
</TABLE>
Notes to Condensed Consolidated
Financial Statements
Note 1. Basis of Presentation
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, 1998.
Varco International, Inc. and Subsidiaries
<PAGE>
Note 2. Special Charge
During the fourth quarter of 1998 the Company recognized a $8.5 million special
charge consisting of severance for 1,100 employees of $6.1 million; a non-cash
write-off of rental equipment of $1.5 million; and an allowance for abandoned
leases and other obligations of $900 thousand. During the second quarter of 1999
the Company spent $2.7 million of the cash charge. As of June 30, 1999 the
Company has spent, in total, $4.0 million of the cash charge and expects to
spend all of the remaining cash charge during the balance of 1999.
Note 3. Business Segments
Selected financial information for the Company's reportable segments for the
three months and six months ended June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Three Months Ended June 30, 1998
--------------------------------------- ---------------------------------------
Revenues Intercompany Operating Revenues Intercompany Operating
Revenues Profit (Loss) Revenues Profit (Loss)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Varco Systems $ 49,929 $ 309 $11,030 $ 70,310 $ 853 $18,585
Varco BJ 21,750 56 7,138 23,906 84 6,390
M/D Totco 14,991 444 (497) 23,237 1,573 2,105
Shaffer 66,068 3,761 71,750 7,315
Rigtech 2,709 (1,833) 7,771 947
- -----------------------------------------------------------------------------------------------------------------
$155,447 $ 809 $19,599 $196,974 $2,510 $35,342
=================================================================================================================
<CAPTION>
Six Months Ended June 30, 1999 Six Months Ended June 30, 1998
--------------------------------------- ---------------------------------------
Revenues Intercompany Operating Revenues Intercompany Operating
Revenues Profit (Loss) Revenues Profit (Loss)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Varco Systems $110,070 $ 629 $24,112 $123,806 $1,583 $30,108
Varco BJ 42,735 99 12,474 43,924 172 11,700
M/D Totco 28,638 1,332 (1,912) 46,846 2,605 6,125
Shaffer 119,803 8,666 118,962 11,321
Rigtech 5,942 (2,377) 13,179 1,544
- -----------------------------------------------------------------------------------------------------------------
$307,188 $2,060 $40,963 $346,717 $4,360 $60,798
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
ended ended ended ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reconciliation of profit (loss)
Segment income $19,599 $35,342 $40,963 $60,798
Elimination of intercompany profit (212) (562) (477) (392)
Unallocated amounts:
Interest expense (312) (581) (609) (1,086)
Corporate and other expenses (2,509) (4,202) (5,166) (6,563)
- ---------------------------------------------------------------------------------------------------
Earnings before income taxes $16,566 $29,997 $34,711 $52,757
===================================================================================================
</TABLE>
Varco International, Inc. and Subsidiaries
<PAGE>
Condensed Consolidated
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
(in thousands) 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 22,898 $ 34,714
Depreciation and amortization 11,625 10,060
Increase (decrease) in operating cash flows:
Receivables 28,980 (35,218)
Inventories 32,229 (37,443)
Additions to rental equipment (2,354) (2,112)
Transfer from rental equipment 2,134
Accounts payable (18,936) 3,992
Customer deposits (50,740) 14,830
Taxes payable 1,719 3,772
Other (12,685) (604)
- ------------------------------------------------------------------------------
Net cash from (used in) operating activities 12,736 (5,875)
- ------------------------------------------------------------------------------
Investing Activities
Equipment purchases (9,268) (17,387)
Proceeds from equipment sales 1,276 214
- ------------------------------------------------------------------------------
Net cash (used in) investing activities (7,992) (17,173)
- ------------------------------------------------------------------------------
Financing Activities
Decrease in long-term debt (10,000) (10,000)
Proceeds from issuance of Common Stock 1,708 1,850
- ------------------------------------------------------------------------------
Net cash (used in) financing activities (8,292) (8,150)
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents (3,548) (31,198)
- ------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 29,138 39,827
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of quarter $ 25,590 $ 8,629
==============================================================================
</TABLE>
Varco International, Inc. and Subsidiaries
<PAGE>
Condensed Consolidated
Statements of Income
(unaudited)
<TABLE>
<CAPTION>
(in thousands, Three Months Ended June 30, Six Months Ended June 30,
except per share data) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Net sales $150,816 $187,854 $297,145 $326,795
Rental income 4,631 9,120 10,043 19,922
Other income 430 237 857 685
- ------------------------------------------------------------------------------------
155,877 197,211 308,045 347,402
- ------------------------------------------------------------------------------------
Costs and Expenses
Cost of sales 107,830 126,574 210,222 218,404
Cost of rental income 2,012 3,087 4,040 6,305
Selling, general and
administrative expenses 21,650 28,594 43,497 52,942
Research and development
costs 7,507 8,378 14,966 15,908
Interest expense 312 581 609 1,086
- ------------------------------------------------------------------------------------
139,311 167,214 273,334 294,645
- ------------------------------------------------------------------------------------
Income before income taxes 16,566 29,997 34,711 52,757
Provision for income taxes 5,402 10,268 11,813 18,043
- ------------------------------------------------------------------------------------
Net income $ 11,164 $ 19,729 $ 22,898 $ 34,714
====================================================================================
Basic income per share $ .17 $ .31 $ .35 $ .54
====================================================================================
Shares used in basic income
per share calculation 65,045 64,444 64,891 64,342
====================================================================================
Diluted income per share $ .17 $ .30 $ .35 $ .53
====================================================================================
Shares used in diluted
income per share
calculation 65,897 65,885 65,744 65,783
====================================================================================
</TABLE>
Varco International, Inc. and Subsidiaries
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General Industry Conditions
During the second quarter of 1999, commodity prices for oil and gas recovered
from their recent lows. The price of oil averaged approximately $17.64 per
barrel for the second quarter, as compared to an average of $13.20 per barrel
for the first quarter of 1999 and $14.40 per barrel for the year 1998. The price
of natural gas for the second quarter of 1999 averaged approximately $2.10 per
thousand cubic feet as compared to $1.78 for the first quarter of 1999 and was
$2.04 per thousand cubic feet for all of 1998. The low commodity prices in 1998
and early 1999 have led to lower cash flows for the oil companies and a
reduction in exploration and production expenditures, resulting in declining
drilling activity. The second quarter prices are continuing with the price of
oil climbing above $20.00 per barrel and recent gas prices above $2.60 per
thousand cubic feet. These higher prices are yet to have any significant impact
on exploration and production expenditures.
Worldwide drilling activity, as measured by the average number of active
drilling rigs, decreased approximately 33% in the second quarter of 1999 to an
average of approximately 1,225 from an average of approximately 1,837 during the
same period in 1998. As compared to the first quarter of 1999, the second
quarter average declined approximately 16%. North American drilling activity
decreased approximately 40% as compared to last year and 25% as compared to
first quarter of 1999. International drilling activity was not impacted as much
as North America drilling activity. International activity decreased 25% to an
average of approximately 597 rigs as compared to 797 in the second quarter of
1998.
Offshore drilling activity decreased year-to-year, as reflected by a
decrease in rig utilization (mobile offshore rigs under contract as a percent of
available rigs). For the first quarter of 1999, mobile offshore rig utilization
averaged approximately 72% as compared to 95% in the second quarter of 1998. The
lower utilization was accompanied by decreasing day rates which have a negative
impact on the cash flows of the Company's primary customer, the drilling
contractor.
Results of Operations
Sets forth below are the net orders and revenues for the Company's five
operating divisions:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Orders
Varco Systems $ 15,796 $ 43,672 $ 36,768 $178,402
VarcoBJ 8,926 26,432 22,861 57,708
M/D Totco 13,672 37,271 26,508 69,222
Shaffer 23,318 83,467 43,662 177,022
Rigtech 1,526 2,773 5,702 10,811
Cancellations (1,123) (16,954) (13,024)
- ---------------------------------------------------------------------------------
Total $ 62,115 $193,615 $118,547 $480,141
=================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Varco Systems $ 49,929 $ 70,310 $110,070 $123,806
VarcoBJ 21,750 23,906 42,735 43,924
M/D Totco 14,991 23,237 28,638 46,846
Shaffer 66,068 71,750 119,803 118,962
Rigtech 2,709 7,771 5,942 13,179
- ---------------------------------------------------------------------------------
Total $155,447 $196,974 $307,188 $346,717
=================================================================================
</TABLE>
During the second quarter of 1999 new order bookings, before cancellations,
declined to $63.2 million from $193.6 million in the second quarter of 1998.
This decline is primarily the result of the absence of orders associated with
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
Systems and Shaffer Divisions. In addition, new orders were negatively impacted
in all Divisions by the decline in overall drilling activity.
The revenue decreases, from the second quarter of 1998 in all Divisions
except M/D Totco, primarily were due to lower shipments of equipment for
upgrading, conversion and new construction of offshore drilling rigs. The lower
revenues at M/D Totco were due to the decline in overall drilling activity,
particularly in the U.S. and Canada.
At June 30, 1999, the Company's backlog of unshipped orders was
approximately $178.8 million as compared to $272.1 at March 31, 1999, and $367.4
million at December 31, 1998. The Company expects that substantially all of its
existing June 30, 1999 backlog will be shipped by December 31, 1999. At June 30,
1999, the Company had received $45.0 million in customer cash deposits related
to orders included in backlog. In accordance with industry practice, orders and
commitments generally are cancellable 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 second quarter
of 1999 was 29.3%. This compares to a gross margin of 34.2% for the same period
in 1998. The decline was caused by high initial costs and retrofit costs on
newer products at Shaffer, M/D Totco and Rigtech; by the increase in the
proportion of Shaffer revenues to other Divisions' revenues (Shaffer products
carry lower gross margins than other Divisions' products), and by higher
manufacturing costs and increased manufacturing inefficiencies. Approximately
2.3% of the 4.7% decline was due to high initial costs and retrofit costs on
newer products; 1.3% was due to the higher proportion of Shaffer revenue, and
1.1% was due to manufacturing costs.
The Company believes that new product development is a significant factor
for the future of the Company. During the first six months of 1999 the Company
spent $15.0 million or 4.9% of revenues on new
<PAGE>
product development. This compares to $15.9 million or 4.6% of revenues during
the same period in 1998.
Primarily as a result of a reduction in employment related expenses,
selling, general and administrative expenses decreased 24.3% in the second
quarter of 1999 as compared to the second quarter of 1998. As a percent of
revenue, selling, general and administrative expenses decreased to 13.9% from
14.5% in the second quarter of 1998. Overall Company employment at June 30,
1999, was 2,211 (including 49 temporary employees) which compares to 3,340
(including 472 temporary employees) a year ago.
The effective tax rate for the first half of 1999 was 34.0% as compared to
34.2% for the first half of 1998.
As the June 30, 1999 backlog is delivered, the Company expects that its
revenue level will decline to a level more reflective of its incoming order
rate. As this decline occurs, the Company has in place plans to further reduce
its cost structure and capital expenditures as appropriate for the anticipated
level of future revenue.
Liquidity and Capital Resources
At June 30, 1999, the Company had cash and cash equivalents of $25.6
million as compared to $29.1 million at December 31, 1998. This reduction was
due in part to the final payment of the Company's 8.95% Senior Notes. At June
30, 1999, the Company's working capital was $192.1 million as compared to $176.3
million at December 31, 1998, and its current ratio was 2.5 to 1.0 as compared
to 1.8 to 1.0 at December 31, 1998. These changes are primarily due to the
reduction in current liabilities.
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, 1999, there were no advances and $4.5 million in letters
of credit outstanding under this facility.
The Credit Agreement restricts 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, 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.
The Company's capital expenditures during the first half of 1999 were $9.3
million as compared to $17.4 million for the first half of 1998. The Company's
current plans for capital expenditures in the next twelve months are
approximately $5.0 to $10.0 million. The Company anticipates that its June 30,
1999 cash and cash equivalents and its existing credit facility will be
sufficient to meet its capital expenditures and operating cash needs.
<PAGE>
Year 2000 Compliance
The following supplements the Year 2000 disclosure included in the Company's
Annual Report to Shareholders for the year ended December 31, 1998, and
reference should be made to such disclosure included therein.
Products. The Company has completed testing of its currently supported
products, as opposed to discontinued and obsolete products, and believes they
are Year 2000 compliant. The Company has mailed to its customers a list of
compliant products and has advised customers which products needed to be
upgraded or replaced for Year 2000 compliance.
Internal Business Systems. The Company has completed its assessment phase
and believes that it has identified substantially all of the major systems,
software applications and related equipment used in connection with its internal
operations that must be modified or upgraded in order to minimize the
possibility of a material disruption to its business. The Company estimates that
its business systems will be Year 2000 compliant by the end of the third quarter
of 1999.
Third-Party Suppliers and Customers. The Company has requested
confirmation from its suppliers and customers of their Year 2000 compliance.
Replies from most of the suppliers and customers have been received and the
replies received to date indicate that Year 2000 compliance will be achieved.
Facility Systems. The Company does not anticipate that facility systems
will have any material impact on the Company's operations.
The Company does not separately track internal cost incurred on the Year
2000 Issue. The Company has estimated that approximately 15% to 20% of its IT
personnel's time is spent on the Year 2000 Issue. The Company has estimated that
less than $1.5 million will be paid to third parties for software, hardware and
consultation. As of June 30, 1999 most of these costs have been incurred.
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 con-
<PAGE>
cerning 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, potential excess
capacity; 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 SECOND QUARTER REPORT TO
SHAREHOLDERS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 25,590,000
<SECURITIES> 0
<RECEIVABLES> 153,791,000
<ALLOWANCES> (3,530,000)
<INVENTORY> 120,183,000
<CURRENT-ASSETS> 320,597,000
<PP&E> 163,507,000
<DEPRECIATION> (74,706,000)
<TOTAL-ASSETS> 486,540,000
<CURRENT-LIABILITIES> 128,532,000
<BONDS> 0
0
0
<COMMON> 159,788,000
<OTHER-SE> 184,287,000
<TOTAL-LIABILITY-AND-EQUITY> 486,540,000
<SALES> 155,447,000
<TOTAL-REVENUES> 155,877,000
<CGS> 109,842,000
<TOTAL-COSTS> 131,492,000
<OTHER-EXPENSES> 7,507,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 312,000
<INCOME-PRETAX> 16,566,000
<INCOME-TAX> 5,402,000
<INCOME-CONTINUING> 11,164,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,164,000
<EPS-BASIC> $0.17
<EPS-DILUTED> $0.17
</TABLE>
