<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 March 31, 2000
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 [_]
(Number of shares of Common Stock outstanding at April 30, 2000)
65,562,363
<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 First Quarter
Report to Shareholders for the three months ended March 31, 2000, 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. Basic net income per share is based upon an
average of 65,385,131 and 64,735,804 shares outstanding for the three months
ended March 31, 2000, and 1999, respectively. Diluted net income per share is
based upon an average of 66,206,502 and 65,480,304 shares outstanding for the
three months ended March 31, 2000, and 1999, respectively.
Inventories. The Company estimates the components of inventory at
March 31, 2000, and December 31, 1999, to be as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------- ------------------
<S> <C> <C>
Raw Materials $ 4,085,000 $ 4,118,000
Work in Process 16,000,000 14,625,000
Finished Goods 56,838,000 61,030,000
LIFO Reserves (12,643,000) (11,962,000)
------------ ------------
$ 64,280,000 $ 67,811,000
============ ============
</TABLE>
Fixed Assets. Fixed assets are stated net of accumulated depreciation
of $85,038,000 at March 31, 2000, and $81,685,000 at December 31, 1999.
<PAGE>
Common Stock and Additional Paid-In-Capital. On March 31, 2000, the
Company Common Stock account was $55,928,000 and Additional Paid-In-Capital
accounts were $108,126,000.
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 First Quarter Report to Shareholders for the three months ended
March 31, 2000, 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 consider 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 had no fixed interest rate debt at March 31, 2000.
Foreign currency exposures, due to rate fluctuations, are minimized by the
Company's using natural hedges.
PART II-OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company and Harris Trust Company of California (the "Rights Agent")
entered into an Amendment No. 1 to Rights Agreement, dated as of March 22, 2000
(the "Amendment"), amending the Rights Agreement, dated as of November 6, 1997,
between the Company and the Rights Agent (the "Rights Agreement") in order to,
among other things, amend the Rights Agreement to (1) provide that neither
Tuboscope Inc. ("Tuboscope") nor any of its Affiliates or Associates (as defined
in the Rights Agreement), will be deemed to be an Acquiring Person (as defined
in the Rights Agreement) and no Distribution Date (as defined in the Amendment)
will be deemed to have occurred, in each case solely by reason of the execution,
delivery or performance of the Merger Agreement (as defined in the Amendment) or
the Varco Stock Option Agreement (as defined in the Amendment), and (2) to
provide that the Rights (as defined in the Rights Agreement) will expire
immediately prior to the merger of the Company with and into Tuboscope pursuant
to the Merger Agreement.
<PAGE>
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; and (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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2 Agreement and Plan of Merger dated as of March 22, 2000, by and
between Varco International, Inc. and Tuboscope Inc., incorporated by
reference to Exhibit 2.1 to Varco's Current Report on Form 8-K dated
March 22, 2000.
*4 Amendment No. 1 to Rights Agreement dated as of March 22, 2000, by
and between Varco International, Inc. and Harris Trust Company of
California.
10.1 Varco Stock Option Agreement dated as of March 22, 2000, by and
between Tuboscope Inc. and Varco International, Inc., incorporated by
reference to Exhibit 10.1 to Varco's Current Report on Form 8-K dated
March 22, 2000.
10.2 Tuboscope Stock Option Agreement dated as of March 22, 2000, by and
between Varco International, Inc. and Tuboscope Inc., incorporated by
<PAGE>
reference to Exhibit 10.2 to Varco's Current Report on Form 8-K dated
March 22, 2000.
*11 Statement re computation of per share earnings for the three months
ended March 31, 2000 and 1999.
*19 Varco International, Inc. First Quarter Report to Shareholders, Three
Months Ended March 31, 2000.
*27 Financial Data Schedule March 31, 2000.
___________________
* Filed herewith
(b) Reports on Form 8-K.
On March 24, 2000, the Company filed a Form 8-K reporting that on March 22,
2000, the Company and Tuboscope Inc., a Delaware corporation ("Tuboscope"),
entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant
to the Merger Agreement, and subject to the conditions set forth therein
(including approval of the transaction by the shareholders of the Company and
Tuboscope), the Company will be merged with and into Tuboscope. The name of the
combined company will be Varco International, Inc., and the shares of the
combined company will be listed for trading on the New York Stock Exchange under
the symbol "VRC".
In connection with the Merger Agreement, the Company and Tuboscope entered
into (i) a Stock Option Agreement dated as of March 22, 2000, pursuant to which
Tuboscope has the right, under certain circumstances, to purchase up to
13,023,985 shares of Varco common stock (representing approximately 19.9% of the
issued and outstanding shares of Varco common stock) at a price of $14.56 per
share and (ii) a Stock Option Agreement, dated as of March 22, 2000, pursuant to
which the Company has the right, under certain circumstances, to purchase up to
8,908,653 shares of Tuboscope common stock (representing approximately 19.9% of
the issued and outstanding shares of Tuboscope common stock) at a price of
$17.00 per share.
<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: May 10, 2000 By: /s/ Wallace K. Chan
----------------------------------
Vice President-Finance
and Chief Financial Officer
Date: May 10, 2000 By: /s/ Donald L. Stichler
---------------------------------
Vice President
Controller-Treasurer
and Secretary
<PAGE>
EXHIBIT INDEX
(a) Exhibits
2 Agreement and Plan of Merger dated as of March 22, 2000, by and
between Varco International, Inc. and Tuboscope Inc., incorporated
by reference to Exhibit 2.1 to Varco's Current report on Form 8-K
dated March 22, 2000.
*4 Amendment no. 1 to Rights Agreement dated as of March 22, 2000, by
and between Varco International, Inc. and Harris Trust Company of
California.
10.1 Varco Stock Option Agreement dated as of March 22, 2000, by and
between Tuboscope Inc. and Varco International, Inc., incorporated
by reference to Exhibit 10.1 to Varco's Current Report on Form 8-K
dated March 22, 2000.
10.2 Tuboscope Stock Option Agreement dated as of March 22, 2000, by and
between Varco International, and Inc. Tuboscope Inc., incorporated
by reference to Exhibit 10.2 to Varco's Current Report on Form 8-K
dated March 22, 2000.
*11 Statement re computation of per share earnings for the three months
ended March 31, 2000 and 1999.
*19 Varco International, Inc. First Quarter Report to Shareholders,
Three Months Ended March 31, 2000.
*27 Financial Data Schedule March 31, 2000.
___________________
* Filed herewith
<PAGE>
Exhibit 4
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
-----------------------------------
THIS AMENDMENT NO. 1 TO RIGHTS AGREEMENT (this "Agreement") is entered into
as of March 22, 2000 by and between VARCO INTERNATIONAL, INC., a California
corporation (the "Company"), and HARRIS TRUST COMPANY OF CALIFORNIA, as Rights
Agent (the "Rights Agent"), amending the Rights Agreement, dated as of November
6, 1997, between the Company and the Rights Agent (the "Rights Agreement").
Recitals of the Company:
-----------------------
The Company has duly authorized the execution and delivery of this
Amendment, and all things necessary to make this Amendment a valid agreement of
the Company have been done. This Amendment is entered into pursuant to Section
27 of the Rights Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
1. Defined Terms. Terms defined in the Rights Agreement and used herein
-------------
shall have the meanings given to them in the Rights Agreement.
2. Amendments to Section 1.
-----------------------
(a) Section 1(a) of the Rights Agreement is amended to add the
following sentence at the end thereof:
"Notwithstanding anything in this Agreement to the contrary,
neither Tuboscope nor any of its Affiliates or Associates shall
be deemed to be an Acquiring Person solely by reason of the
approval, execution, delivery or performance of the Merger
Agreement, the consummation of the Merger or the approval,
execution, delivery or performance of the Vulcan Stock Option
Agreement or any combination of the foregoing."
(b) Section 1 of the Rights Agreement is amended as follows:
(i) clause (r) of Section 1 is amended by deleting the words
"or (iv)" of such clause and substituting in their place "(iv)"
and inserting immediately after the word "hereof" in the last
line thereof the following clause: "or (v) immediately prior to
the Effective Time."
(ii) to add the following clauses at the end of Section 1:
"(ss) "Effective Time" shall have the meaning
assigned to such term in the Merger Agreement.
<PAGE>
(tt) "Merger" shall have the meaning assigned to such
term in the Merger Agreement.
(uu) "Merger Agreement" shall mean the Agreement and
Plan of Merger dated as of March 22, 2000, by and between
the Company and Tuboscope.
(vv) "Tuboscope" shall mean Tuboscope Inc., a
Delaware corporation.
(ww) "Vulcan Stock Option Agreement" shall mean the
Stock Option Agreement dated as of March 22, 2000,
between the Company and Tuboscope, providing for the
grant by the Company to Tuboscope of an option to
purchase shares of the Common Stock of the Company under
certain circumstances."
3. Amendment of Section 3(a). Section 3(a) of the Rights Agreement is
-------------------------
amended to add the following sentence at the end thereof:
"Notwithstanding anything in this Agreement to the contrary, a
Distribution Date shall not be deemed to have occurred solely as the
result of the approval, execution, delivery or performance of the
Merger Agreement, the consummation of the Merger or the approval,
execution, delivery or performance of the Vulcan Stock Option or any
combination of the foregoing."
4. Amendment of Section 7(a). Section 7(a) of the Rights Agreement is
-------------------------
amended to add the following sentence at the end thereof:
"Notwithstanding any provision of this Agreement to the contrary, upon
the Expiration Date, the Rights shall expire."
5. Amendment of Section 25. Section 25 of the Rights Agreement is amended
-----------------------
by adding the following paragraph (c) thereto:
"(c) The Company shall use its reasonable efforts to provide notice
to the Rights Agent of the consummation of the Merger as soon as
practicable prior to the Effective Time."
6. Effectiveness. This Amendment shall be deemed effective as of March
-------------
22, 2000. Except as amended hereby, the Rights Agreement shall remain in full
force and effect and shall be otherwise unaffected hereby.
2
<PAGE>
7. Miscellaneous. This Amendment shall be deemed to be a contract made
-------------
under the laws of the State of California and for all purposes shall be governed
by and construed in accordance with the laws of such state. This Amendment may
be executed in any number of counterparts, each of such counterparts shall for
all purposes be deemed an original and all such counterparts shall together
constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and attested, all as of the day and year first above written.
Attest: VARCO INTERNATIONAL, INC.
/s/ Donald L. Stichler By: /s/ George Boyadjieff
Secretary President
HARRIS TRUST COMPANY OF
CALIFORNIA, as Rights Agent
By: /s/ Michael O. Goedecke
Authorized Signature
3
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
March 31 2000
-----------------------------
<S> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $ 6,003,000
<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 March 31, 2000 91 5,950,046,965 65,385,131 821,371 66,206,502
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
-----------------------------
Total Shares Outstanding
Basic Income Per Share
Three Months Ended March 31,2000 6,003,000 = $0.09
-------------
65,385,131
Diluted Income Per Share =
Three Months Ended March 31, 2000 6,003,000 = $0.09
-------------
66,206,502
</TABLE>
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
March 31 1999
-----------------------------
<S> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $11,734,000
<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 March 31, 1999 90 5,826,222,344 64,735,804 744,500 65,480,304
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
--------------------------
Total Shares Outstanding
Basic Income Per Share
Three Months Ended March 31,1999 11,734,000 = $0.18
-------------
64,735,804
Diluted Income Per Share =
Three Months Ended March 31, 1999 11,734,000 = $0.18
-------------
65,480,304
</TABLE>
<PAGE>
EXHIBIT 19
V a r c o
varco international, inc. 2000 first quarter report
<PAGE>
to our shareholders,
customers and employees:
Oil and gas prices continued to strengthen during the first quarter of 2000.
Oil averaged $28.82 per barrel as compared to $13.14 per barrel a year ago and
$24.56 for the fourth quarter of 1999. Although the price of oil was above $34
per barrel during the early part of March, prices recently settled in the $26
per barrel range after OPEC agreed to increase production 1.45 million barrels
per day during its March 28 meeting. Natural gas prices averaged $2.66 per
thousand cubic feet in the first quarter, approximately 49 percent higher than a
year ago, with recent prices reaching above $3.00 per thousand cubic feet.
Industry analysts expect oil prices to remain in the $25-$26 per barrel range
for the remainder of 2000 and gas prices to increase to $3.50 per thousand cubic
feet by this summer. Even though oil and gas prices have rebounded from near
ten-year lows in early 1999, offshore and international drilling activity, where
Varco traditionally generates its highest revenue per rig, remains depressed.
The worldwide active rig count increased in the first quarter of 2000 from
an average of 1,461 rigs last year to 1,826 rigs. However, this was driven
primarily by higher natural gas drilling in the United States and Canada. The
international rig count on the other hand decreased nearly eight percent from
the same period a year ago. The offshore drilling segment activity, as measured
by rig utilization, averaged 74 percent during the first quarter as compared to
78 percent a year ago. In addition, new rig construction has ceased in the
current market environment.
Reflecting the impact of the decline in international and offshore drilling
activity, coupled with the absence of new rig construction, Revenues for the
first quarter were $96.3 million. This compares to $152.2 million in Revenues
for the same period a year ago, and $144.3 million for the fourth quarter of
1999. Net Income for the most recent quarter was $6.0 million, $.09 per share
(diluted) versus $11.7 million, $.18 per share (diluted) for the first quarter
of last year and $6.7 million, $.10 per share (diluted), excluding restructuring
charges, for the fourth quarter of 1999. The modest decrease in Net Income from
the previous quarter on a 33 percent decline in Revenues is primarily
attributable to cost reduction programs implemented during 1999 and in the first
quarter of 2000.
<PAGE>
Incoming orders for the most recent quarter were $97.7 million,
representing the third consecutive quarter of increasing order rates. This
total is well above the similar quarter of last year when incoming orders were
$72.3 million (before cancellations of $15.8 million). Backlog at March 31
increased to $66.5 million from $63.8 million at the end of December, the first
increase in backlog since the first quarter of 1998.
As indicated by the year-over-year increase in order rate, the market
appears to be stabilizing, and an industry recovery may be on the horizon. The
Salomon Smith Barney First Quarter Update to its Annual Survey of worldwide
exploration and production expenditures for 2000 projects a 15.2 percent
increase over 1999 spending levels, predominantly in the second half of the
year. It is worth noting that these forecasted expenditures are based on an
average oil price of $21.29 per barrel, suggesting that further increases may be
possible if prices remain in the $26 per barrel range. Having said this, there
continues to be a high degree of uncertainty and contradiction in our industry.
Commodity prices are higher, but industry activity remains weak. Although we
are convinced that the prospects for an industry recovery are strong, the
magnitude and timing of any increase in drilling activity are more difficult to
predict.
We will continue aligning our cost structure to a level consistent with
current market conditions while aggressively pursuing our successful long-term
strategy of developing new products that reduce the cost of drilling.
With regard to the proposed merger with Tuboscope Inc., we expect to close
during the second quarter, subject to shareholder approval.
As always, we appreciate your continued support.
/s/ GEORGE I. BOYADJIEFF
- ------------------------
George I. Boyadjieff
Chairman and
Chief Executive Officer
May 4, 2000
<PAGE>
condensed consolidated balance sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 2000 1999
<S> <C> <C>
Current Assets
Cash and cash equivalents and
short-term investments $107,704 $ 77,859
Receivables (net) 114,470 140,399
Inventories 64,280 67,811
Other 14,486 13,960
- ---------------------------------------------------------------------
Total Current Assets 300,940 300,029
Property, plant and equipment (net) 82,296 84,332
Rental equipment (net) 12,945 12,107
Cost in excess of net assets acquired 31,856 32,229
Other assets 29,328 30,988
- ---------------------------------------------------------------------
Total Assets $457,365 $459,685
=====================================================================
Current Liabilities
Accounts payable $ 25,926 $ 29,643
Customer deposits 5,397 7,836
Other liabilities 41,591 45,697
- ---------------------------------------------------------------------
Total Current Liabilities 72,914 83,176
Non-current liabilities 15,886 15,761
- ---------------------------------------------------------------------
Total Liabilities 88,800 98,937
Shareholders' Equity
Common Stock and additional
paid-in capital 164,054 161,886
Retained earnings 204,511 198,862
- ---------------------------------------------------------------------
Total Shareholders' Equity 368,565 360,748
- ---------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $457,365 $459,685
=====================================================================
</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, 1999.
Varco International, Inc. and Subsidiaries
<PAGE>
Note 2. Special Charge
During the fourth quarter of 1999 the Company recognized a $5.6 million special
charge consisting primarily of cash severance cost for 528 employees. During
the first quarter of 2000 the Company spent $1.5 million of this cash charge. As
of March 31, 2000, the Company has spent, in total, $3.4 million of the cash
charge and expects to spend all of the remaining cash charge during the balance
of 2000.
Note 3. Business Segments
Selected financial information for the Company's reportable segments for the
three months ended March 31, 2000 and 1999 follows:
<TABLE>
<CAPTION>
2000
Revenues Intercompany Operating
(in thousands) Revenues Profit (Loss)
- ---------------------------------------------------------------
<S> <C> <C> <C>
Varco Systems $ 34,004 $ 479 $ 4,189
Varco BJ 10,326 67 1,382
M/D Totco 18,673 428 2,685
Shaffer 27,831 3,054
Rigtech 4,191 19
- ---------------------------------------------------------------
$ 95,025 $ 974 $11,329
===============================================================
1999
Varco Systems $ 60,141 $ 320 $13,082
Varco BJ 20,985 43 5,336
M/D Totco 13,647 888 (1,415)
Shaffer 53,735 4,905
Rigtech 3,233 (544)
- ---------------------------------------------------------------
$151,741 $1,251 $21,364
===============================================================
</TABLE>
The following reconciles segment operating income to consolidated income before
income taxes.
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands) 2000 1999
- ----------------------------------------------------------------------
<S> <C> <C>
Reconciliation of profit (loss)
Segment income $11,329 $21,364
Elimination of intercompany profit (234) (265)
Unallocated amounts:
Interest expense (90) (297)
Corporate and other expenses (1,681) (2,657)
- ----------------------------------------------------------------------
Earnings before income taxes $ 9,324 $18,145
======================================================================
</TABLE>
Varco International, Inc. and Subsidiaries
<PAGE>
condensed consolidated
statements of cash flows
<TABLE>
<CAPTION>
(unaudited)
Three Months Ended March 31,
(in thousands) 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 6,003 $ 11,734
Depreciation and amortization 5,845 6,009
Increase (decrease) in operating cash flows:
Receivables 25,929 10,914
Inventories 3,531 8,083
Additions to rental equipment (2,163) (1,633)
Accounts payable (3,717) (11,946)
Customer deposits (2,439) (26,557)
Taxes payable 2,990 1,987
Other (5,475) (5,319)
- -------------------------------------------------------------------------------
Net cash from (used in) operating activities 30,504 (6,728)
- -------------------------------------------------------------------------------
Investing Activities
Equipment purchases (1,989) (4,571)
Proceeds from equipment sales 70 39
- -------------------------------------------------------------------------------
Net cash (used in) investing activitites (1,919) (4,532)
- -------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of Common Stock 1,260 243
- -------------------------------------------------------------------------------
Net cash from financing activities 1,260 243
- -------------------------------------------------------------------------------
Net change in cash, cash equivalents and short-term
investments 29,845 (11,017)
- -------------------------------------------------------------------------------
Cash, cash equivalents, and short-term
investments at beginning of quarter 77,859 29,138
- -------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments
at end of quarter $107,704 $ 18,121
===============================================================================
</TABLE>
Varco International, Inc. and Subsidiaries
<PAGE>
condensed consolidated
statements of income
<TABLE>
<CAPTION>
(unaudited)
(in thousands, Three Months Ended March 31,
except per share data) 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Equipment $ 73,395 $133,106
Rental and service 21,630 18,635
Other income 1,238 427
- -------------------------------------------------------------------------------
96,263 152,168
- -------------------------------------------------------------------------------
Costs and Expenses
Cost of equipment 50,060 91,691
Cost of rental and service 13,177 12,729
Selling, general and administrative expense 18,810 21,847
Research and development costs 4,797 7,459
Interest expense 95 297
- -------------------------------------------------------------------------------
86,939 134,023
- -------------------------------------------------------------------------------
Income before income taxes 9,324 18,145
Provision for income taxes 3,321 6,411
- -------------------------------------------------------------------------------
Net income $ 6,003 $ 11,734
===============================================================================
Basic income per share $ .09 $ .18
===============================================================================
Shares used in computing basic income per share 65,385 64,736
===============================================================================
Diluted income per share $ .09 $ .18
===============================================================================
Shares used in computing diluted income per share 66,207 65,480
===============================================================================
</TABLE>
Varco International, Inc. and Subsidiaries
<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 the prices of
oil and gas, economic and political conditions, discovery and development costs
of oil companies, oil companies' exploration and production spending,
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.
Commodity prices for oil and gas were strong during the first quarter of
2000, continuing a recovery, which began in the second quarter of 1999. The
price of oil averaged approximately $28.82 per barrel during the first quarter
versus approximately $24.56, $21.62 and $17.64 for the last three quarters of
1999, respectively. The price of natural gas was approximately $2.66 per
thousand cubic feet during the first quarter of 2000 as compared to $1.78 for
the same period last year. These higher prices have led to higher United States
and Canadian land drilling activity but are yet to have a significant impact on
international or offshore drilling.
Worldwide drilling activity, as measured by the average number of active
drilling rigs, increased 25% in the first three months of 2000 to an average of
approximately 1,826 from an average of approximately 1,461 during the same
period in 1999. The U.S. and Canadian component of the rig count averaged 1,250,
a 49% increase over the prior year's rig count. The international component of
active drilling rigs averaged approximately 576 in the first quarter of 2000, a
decrease of 44 rigs over the prior year.
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 2000, mobile offshore rig utilization
averaged 74% as compared to 78% in the first quarter of 1999. 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.
<PAGE>
Results of Operations
Set forth below are the orders and revenues for the Company's five operating
divisions:
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands) 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Orders
Varco Systems $26,086 $ 20,972
Varco BJ 13,456 13,935
M/D Totco 17,569 12,836
Shaffer 36,688 20,344
Rigtech 4,193 4,176
Cancellations (262) (15,831)
- -------------------------------------------------------------------------------
Total $97,730 $ 56,432
===============================================================================
<CAPTION>
Three Months Ended March 31,
(in thousands) 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Varco Systems $34,004 $ 60,141
Varco BJ 10,326 20,985
M/D Totco 18,673 13,647
Shaffer 27,831 53,735
Rigtech 4,191 3,233
- -------------------------------------------------------------------------------
Total $95,025 $151,741
===============================================================================
</TABLE>
First quarter 2000 new order bookings, before cancellations, of $98.0 million
increased from $72.3 million, before cancellations, in the first quarter of 1999
and from $88.1 million, before cancellations, in the fourth quarter of 1999. The
first quarter of 2000 represents the third consecutive quarter of new order
increases. This improvement is primarily due to increased drilling activity.
The revenue declines at Varco Systems, Varco BJ and Shaffer as compared to
the first quarter of 1999, primarily were due to lower shipments of equipment
for upgrading, conversion and new construction of offshore drilling rigs. The
revenue increase at M/D Totco was due to the increase in overall drilling
activity, particularly in the U.S. and Canada, where M/D Totco generates a
greater portion of its revenue as compared to other Divisions and to shipments
of its new drilling rig control system, "V-ICIS".
At March 31, 2000, the Company's backlog of unshipped orders was
approximately $66.5 million as compared to $63.8 million at December 31, 1999,
and $272.1 million at March 31, 1999. At March 31, 2000, the Company had
received $5.4 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 (equipment and rental and service revenues less costs of
equipment, rental and service revenues) as a percentage of equipment and rental
and service revenues for the first quarter of 2000 was 33.5%. This compares to a
gross
<PAGE>
margin of 31.2% for the same period in 1999. This increase was primarily caused
by the higher percentage of M/D Totco revenue as compared to other revenues in
the first quarter of 2000. M/D Totco revenues carry a higher gross margin than
revenues of other Divisions.
The Company believes that new product development is a significant factor
for the future of the Company. Research and development costs were 5% of
revenue, for each of the first quarters of 2000 and 1999. Research and
developments costs were $4.8 million in the first quarter of 2000 and $7.5
million for the same period of 1999.
Selling, general and administrative expenses decreased 13.9% in the first
quarter of 2000 as compared to the first quarter of 1999. As a percent of
revenue, selling, general and administrative expenses increased to 19.5% from
14.4% in the first quarter of 1999. The decrease in expenses is primarily
related to the reduction in employment related costs.
Overall Company employment at March 31, 2000, was 1,716 (including 37
temporary employees) which compares to 2,623 (including 70 temporary employees)
a year ago and to 1,906 (including 42 temporary employees) at December 31, 1999.
The Company's effective income tax rate was 35.6% in the first quarter of
2000 as compared to 35.3% in the same quarter of 1999.
Liquidity and Capital Resources
At March 31, 2000, the Company had cash, cash equivalents and short-term
investments of $107.7 million as compared to $77.9 million at December 31, 1999.
This increase was due to the decline in non-cash working capital and to cash
from earnings. At March 31, 2000 the Company's working capital was $228.0
million as compared to $216.9 million at December 31, 1999 and its current ratio
was 4.1 to 1.0 as compared to 3.6 to 1.0 at December 31, 1999. These increases
are due to the cash generated from the decline in receivables and the cash from
earnings.
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. Proceeds from the initial advances were used to repay borrowings
under a previous credit agreement and for the June 30, 1997 principal and
interest payment on the Company's Senior Notes. At March 31, 2000, there were no
advances outstanding and $4.0 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,
<PAGE>
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. At March 31, 2000, the amount available
for dividends and repurchases under the Credit Agreement was $38.8 million.
At March 31, 2000, the Company had no long-term debt. Capital expenditures
were $2.0 million in the first quarter of 2000. These capital expenditures were
primarily for the purchase of software and computer equipment. The Company
expects that its future 2000 capital expenditures will be at a rate similar to
the first quarter rate of expenditures. The Company believes that its March 31,
2000 cash and cash equivalents, short-term investments and its credit facility
will be sufficient to meet its capital expenditures, cash portion of the special
charge, and its operating cash needs prior to the closing of the proposed merger
with Tuboscope (see below). If the merger is consummated, the Company intends to
use its cash balances to pay down portions of Tuboscope's existing debt.
Quantitative and Qualitative
Market Risk Disclosure
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 consider 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 had no fixed
interest rate debt at March 31, 2000. Foreign currency exposures, due to rate
fluctuations, are minimized by the Company's using natural hedges.
Merger Agreement
On March 24, 2000 the Company filed a Form 8-K reporting that on March 22, 2000,
the Company and Tuboscope Inc., a Delaware corporation, entered into an
Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger
Agreement, and subject to the conditions set forth therein (including approval
of the transaction by the shareholders of the Company and Tuboscope), the
Company will be merged with and into Tuboscope. The name of the combined company
will be Varco International, Inc., and the shares of the combined company will
be listed for trading on the New York Stock Exchange under the symbol "VRC".
<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 and cancellations, backlog, operating trends, industry trends,
the prices of oil and gas, manufacturing capacity, expectations for funding
capital expenditures and operations in future periods and plans, and objectives.
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 capacities, 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
Wallace K. Chan, 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
V A R C O
<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 MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 92,824,000
<SECURITIES> 14,880,000
<RECEIVABLES> 117,484,000
<ALLOWANCES> (3,014,000)
<INVENTORY> 64,280,000
<CURRENT-ASSETS> 300,940,000
<PP&E> 167,334,000
<DEPRECIATION> (85,038,000)
<TOTAL-ASSETS> 457,365,000
<CURRENT-LIABILITIES> 72,914,000
<BONDS> 0
0
0
<COMMON> 164,054,000
<OTHER-SE> 204,511,000
<TOTAL-LIABILITY-AND-EQUITY> 457,365,000
<SALES> 95,025,000
<TOTAL-REVENUES> 96,263,000
<CGS> 63,237,000
<TOTAL-COSTS> 82,047,000
<OTHER-EXPENSES> 4,797,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,000
<INCOME-PRETAX> 9,324,000
<INCOME-TAX> 3,321,000
<INCOME-CONTINUING> 6,003,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,003,000
<EPS-BASIC> $0.09
<EPS-DILUTED> $0.09
</TABLE>
