-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, MK4A6aXOSMrvu7D9VpOTcGegQJuPh29gj+QU4nnfo8jydOOSIWbdYyJN0PF5lU7t AYLVxqDzG3Trv7zPY+0zJQ== 0000898430-95-001512.txt : 19950814 0000898430-95-001512.hdr.sgml : 19950814 ACCESSION NUMBER: 0000898430-95-001512 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARCO INTERNATIONAL INC CENTRAL INDEX KEY: 0000102993 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 950472620 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08158 FILM NUMBER: 95561431 BUSINESS ADDRESS: STREET 1: 743 N ECKHOFF ST CITY: ORANGE STATE: CA ZIP: 92668 BUSINESS PHONE: 7149781900 MAIL ADDRESS: STREET 1: 743 NO ECKHOFF STREET CITY: ORANGE STATE: CA ZIP: 92668 10-Q 1 FORM 10-Q FOR 6/30/95 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, 1995 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 92668 (Address of principal executive offices) (Zip code) (714) 978-1900 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 30,355,880 (Number of shares of Common Stock outstanding at August 1, 1995) 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, 1995, filed as Exhibit 19 hereto are incorporated herein by reference. Such financial statements should be read in light of the following: Adjustments. The financial statements contained in Exhibit 19 hereto include all adjustments which in the opinion of management are of a normal recurring nature, considered necessary to present fairly the results of operations for the interim periods presented. Net Income Per Share. Net income per share is based upon an average of 32,534,974 and 33,618,400 shares outstanding for the six months ended June 30, 1995, and 1994 respectively, and upon an average of 31,482,199 and 33,647,266 shares outstanding for the three months ended June 30, 1995 and 1994 respectively. Inventories. The Company estimates the components of inventory at June 30, 1995, and December 31, 1994, to be as follows:
June 30, 1995 December 31, 1994 ------------- ----------------- Raw Materials $ 6,255,000 $ 6,164,000 Work in Process 19,737,000 13,677,000 Finished Goods 43,018,000 40,458,000 ----------- ----------- $69,010,000 $60,299,000 =========== ===========
Fixed Assets. Fixed assets are stated net of accumulated depreciation of $56,674,000 at June 30, 1995, and $52,333,000 at December 31, 1994. 2 Common Stock and Additional Paid-In-Capital. On June 30, 1995, the Company Common Stock account was $20,722,000, and Additional Paid-In-Capital accounts were $102,952,000. 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, 1995, filed as Exhibit 19 hereto, is incorporated herein by reference. PART II-OTHER INFORMATION Item 2. Changes in Securities On March 24, 1995, the Company commenced a "Dutch Auction" type tender offer (the "Tender Offer") to purchase up to 5,300,000 shares of its Common Stock at a purchase price not greater than $8.00 per share nor less than $6.75 per share. Pursuant to the Tender Offer, which terminated on April 21, 1995, the Company purchased 3,150,560 shares of its Common Stock at a purchase price of $8.00 per share. In July 1992 the Company sold $50.0 million aggregate principal amount of its 8.95% Senior Notes Due June 30, 1999 (the "Senior Notes") to a group of ten institutional investors pursuant to a Note Agreement dated as of July 1, 1992 (as amended, the "Note Agreement"). The principal of the Senior Notes is payable in five equal annual installments commencing on June 30, 1995. The Note Agreement prohibits any "Restricted Payment" subsequent to July 17, 1992 unless after giving effect thereto, (i) the aggregate amount of all Restricted Payments subsequent to such date would not exceed $5,000,000 plus the cumulative sum of 50% of the Company's consolidated net income (or minus 100% in the case of a deficit) subsequent to March 31, 1992 and (ii) the Company could incur at least $1.00 of additional indebtedness under the Note Agreement covenant limiting indebtedness. The term "Restricted Payment" includes (a) any dividend (other than dividends payable in shares of capital stock) or other distributions on any shares of capital stock of the Company; (b) any purchase, redemption or other acquisition of any shares of the capital stock of the Company or any rights or options to purchase or acquire such shares; and (c) any "Restricted Investment", which is generally defined as any investment other than an investment in a subsidiary of the Company or an investment in certain designated government or rated securities. In addition, the Company may purchase, redeem or otherwise acquire shares of its capital stock or make Restricted Investments from the net cash proceeds of the substantially concurrent sales of shares of capital stock or from the sale of securities convertible into such shares upon conversion. Pursuant to a wavier and amendment dated as of March 8, 1995, the holders of the Senior Notes (1) waived compliance with the limitations on Restricted Payments discussed above, (2) agreed that the amount expended in the Tender Offer would not constitute a Restricted Payment, and (3) amended certain covenants to take into account the effect of the consummation of the Tender Offer on certain financial ratios. On February 25, 1993 the Company entered into an unsecured revolving credit agreement with Citicorp USA, Inc. and Citibank, N.A. (as amended, the "Credit Agreement"). Effective as of March 17, 1995 the Credit Agreement was amended to (1) extend the maturity date from March 31, 1996 to October 31, 1998; (2) increase the total maximum facility from $20.0 to $35.0 million, consisting of a loan facility of $25.0 million in and a letter of credit facility of $10.0 million; and (3) to amend certain covenants to permit the Tender Offer and to take into account the effect of the consummation of the Tender Offer on certain financial ratios. Under the terms of the Credit Agreement, the amount available for the payment of dividends on, and repurchases of, Common Stock is limited to 25% of the Company's consolidated net income arising after January 1, 1992, computed on a cumulative basis. In addition, pursuant to the March 17, 1995 amendment to the Credit Agreement discussed above, the Company may repurchase at any time prior to December 31, 1995 shares of its Common Stock for an aggregate cost not exceeding $50.0 million, including shares purchased pursuant to the Tender Offer. The Company may also purchase or otherwise acquire shares of Common Stock from the proceeds of the substantially concurrent sale of shares of Common Stock. Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of Shareholders of the Company was held on May 18, 1995. (c) Matters voted upon at the 1995 Annual Meeting of Shareholders of the Company.
1. Election of Directors Name Votes For Votes Withheld G. Boyadjieff 23,796,169 582,074
3
T. Embry 23,790,897 587,346 A. Horn 23,794,709 583,534 M. Jacques 23,597,299 780,944 J. Knowlton 23,793,819 584,424 L. Pircher 23,795,209 583,034 W. Reinhold 23,659,609 718,634 C. Suggs 23,794,619 583,624 R. Teitsworth 23,796,019 582,224 E. White 23,794,509 583,734 J. Woods 23,660,557 717,686
2. Proposal to approve certain amendments to the Company's 1980 Employee Stock Purchase Plan Votes For Votes Against Abstentions 16,754,937 2,239,944 132,517 3. Proposal to approve certain amendments to the Company's Stock Bonus Plan Votes For Votes Against Abstentions 14,254,323 4,563,588 309,487 4. Proposal to approve the adoption of the Company's 1994 Directors' Stock Option Plan: Votes For Votes Against Abstentions 15,668,570 3,245,153 213,675 5. Proposal to ratify Ernst & Young LLP as the independent auditors of the Company. Votes For Votes Against Abstentions 24,234,849 80,085 63,309 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4 3 Amended and Restated Articles of Incorporation of Varco International, Inc. 10.1 Amendment to the Varco 1980 Employee Stock Purchase Plan. 10.2 Amendment to the Varco International, Inc. Stock Bonus Plan. 11 Statement re computation of per share earnings for the three months and six months ended June 30, 1995 and 1994. 19 Varco International, Inc. Second Quarter Report to Shareholders, Three Months Ended June 30, 1995. 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. 5 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 11, 1995 By:/s/Richard A. Kertson --------------------- Vice President-Finance and Chief Financial Officer Date: August 11, 1995 By:/s/Donald L. Stichler --------------------- Controller-Treasurer 6 EXHIBIT INDEX 3 Amended and Restated Articles of Incorporation of Varco International, Inc. 10.1 Amendment to the Varco 1980 Employee Stock Purchase Plan. 10.2 Amendment to the Varco International, Inc. Stock Bonus Plan. 11 Statement re computation of per share earnings for the three months and six months ended June 30, 1995 and 1994. 19 Varco International, Inc. Second Quarter Report to Shareholders, Three Months Ended June 30, 1995. 27 Financial Data Schedule EX-3 2 AMENDED & RESTATED ARTICLE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF VARCO INTERNATIONAL, INC. Richard A. Kertson and Donald L. Stichler certify that: 1. They are the duly elected and acting Vice President-Finance and Secretary, respectively, of Varco International, Inc., a California corporation (the "Company"). 2. The Articles of Incorporation of the Company are amended and restated to read in full as follows: Name One: The name of the corporation is: Varco International, Inc. Purpose Two: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated under the California Corporations Code. Authorized Shares Three: This corporation is authorized to issue two classes of shares designated respectively "Common Stock" and "Preferred Stock," referred to herein as Common Stock or Common Shares and Preferred Stock or Preferred Shares, respectively. The number of shares of Common Stock is eighty million (80,000,000) and the number of shares of Preferred Stock is ten million (10,000,000). The Preferred Shares may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Shares and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Shares and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. Election Four: The corporation elects to be governed by all of the provisions of Division 1 of Title 1 of the California Corporations Code (as amended by act of the California Legislature, 1975-1976 regular session, effective January 1, 1977, as defined in Section 2300 of the California General Corporation Law) and not otherwise applicable to the corporation under Chapter 23 of said Division 1. Five: (a) Limitation of Directors' Liability. The liability of the ---------------------------------- directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) Indemnification of Corporate Agents. This corporation is ----------------------------------- authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) by bylaw provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to this corporation and its stockholders. (c) Repeal or Modification. Any repeal or modification of the ---------------------- foregoing provisions of this Article Five by the shareholders of this corporation shall not adversely affect any right or protection of an agent of this corporation existing at the time of such repeal or modification. 3. The amendment and restatement set forth herein have been duly approved by the Board of Directors of the Company. 4. The Certificate of Determination for the series of Preferred Stock designated as "$2.00 Cumulative Convertible Preferred Stock, Series A" (the "Series A Preferred Stock") provides that upon the acquisition thereof by the Company, shares of Series A Preferred Stock shall be returned to the status of authorized but unissued shares of Preferred Stock and, accordingly, shares so acquired may not be reissued as shares of Series A Preferred Stock. All of the authorized shares of the Series A Preferred Stock have been acquired by the Company. Accordingly, all statements of the rights, preferences, privileges, and restrictions relating solely to the Series A Preferred Stock have been eliminated from the Articles of Incorporation in the foregoing amendment and restatement. The foregoing is the only amendment to the Articles of Incorporation effected by the amendment and restatement set forth herein. The foregoing amendment is one which may be adopted with approval of the Board of Directors alone pursuant to the provisions of Section 510(b) of the California Corporations Code. IN WITNESS WHEREOF, the undersigned have executed this Certificate on May 18, 1995. /s/ RICHARD A. KERTSON ---------------------------- Richard A. Kertson Vice President-Finance /s/ DONALD L. STICHLER ---------------------------- Donald L. Stichler Secretary The undersigned, Richard A. Kertson and Donald L. Stichler, the Vice President-Finance and Secretary, respectively, of Varco International, Inc., each declares under penalty of perjury that the matters set forth in the foregoing Certificate are true of his own knowledge. Executed at Orange, California on May 18, 1995. /s/ RICHARD A. KERTSON ---------------------------- Richard A. Kertson Vice President-Finance /s/ DONALD L. STICHLER ---------------------------- Donald L. Stichler Secretary EX-10.1 3 AMENDED 1980 EMPLOYEE STOCK PLAN Exhibit 10.1 Varco International Inc. Amendment to Varco 1980 Employee Stock Purchase Plan RESOLVED, that Sections 3.2 and 6.1 of the Varco 1980 Employee Stock Purchase Plan be, and the same hereby are, amended to read in their entirety as follows: "3.2 Term of the Plan. The Plan shall remain in force for a period of ----------------- twenty-five years following its effective date unless it is sooner terminated by a resolution adopted by the Company's Board of Directors. Termination of the Plan by action of the Board of Directors shall not diminish the Rights of any existing Participant, nor shall it impair the Company's obligations under any outstanding Rights". "6.1 Shares Subject to the Plan. Subject to the provisions in Section --------------------------- 9 (relating to adjustment upon changes in the Company's capitalization), shares of stock sold pursuant to Rights existing under the Plan shall not exceed, in the aggregate, 2,000,000 shares of the Company's authorized Stock. These shares may be unissued or reacquired shares, or shares purchased on the market for purposes of the Plan". EX-10.2 4 AMENDED STOCK BONUS PLAN Exhibit 10.2 Varco International Inc. Amendment to Stock Bonus Plan RESOLVED, that Sections 4.02 and 6.02 of the Varco International Inc. Stock Bonus Plan be, and the same hereby are, amended to read in their entirety as follows: "4.02 The total number of shares of Common Stock which may be subject to Bonus Awards granted under the Plan shall not exceed 1,000,000 shares, subject, however, to adjustment pursuant to the provisions of Section 4.03. Any shares of Common Stock subject to Bonus Awards granted under the Plan but not issued because of the termination of an Employee's employment with the Company or otherwise shall not be available for the grant of future Bonus Awards under the Plan". "6.02 The Board may at any time terminate the Plan by appropriate corporate resolution. Unless sooner terminated by the Board, the Plan shall automatically terminate upon the earlier of (i) the 15th anniversary of the date the Plan was adopted by the Board or (ii) the first date when all the shares available for the grant of Bonus Awards under the Plan shall have been granted. Under no circumstances shall the termination of the Plan affect the rights of any Employee with respect to any Bonus Award granted to him prior to such termination, and any such Bonus Award shall continue to be paid in accordance with its designated payment schedule. EX-11 5 STATEMENT RE COMPUTATION EXHIBIT 11 VARCO INTERNATIONAL, INC. Statement Re Computation of Per Share Earnings
Three Months Ended Six Months Ended June 30 1995 June 30 1995 ---------------------------------- A. CALCULATION OF ADJUSTED EARNINGS Net Income After Tax $5,403,000 $8,316,000
Total Number Average Number Stock Option Shares Used Number of of Shares after of Shares Equivalent To Calculate Days Weighing Outstanding Shares EPS ------------------------------------------------------------------------------ B. CALCULATION OF AVERAGE SHARES OUTSTANDING Common Stock Outstanding from time-to-time during: Three Months Ended June 30, 1995 91 2,842,995,435 31,241,708 240,491 31,482,199 Six Months Ended June 30, 1995 181 5,845,301,353 32,294,483 240,491 32,534,974 C. CALCULATION OF EARNINGS PER SHARE Income Per Share = Net Income After Tax -------------------------- Total Shares Outstanding Income Per Share = Three Months Ended June 30, 1995 5,403,000 = $0.17 -------------- 31,482,199 Six Months Ended June 30, 1995 8,316,000 = $0.26 -------------- 32,534,974
EXHIBIT 11 VARCO INTERNATIONAL, INC. Statement Re Computation of Per Share Earnings
Three Months Ended Six Months Ended June 30 1994 June 30 1994 ------------------------------------ A. CALCULATION OF ADJUSTED EARNINGS Net Income After Tax $2,904,000 $5,262,000
Total Number Average Number Stock Option Shares Used Number of of Shares after of Shares Equivalent To Calculate Days Weighing Outstanding Shares EPS --------------------------------------------------------------------------------- B. CALCULATION OF AVERAGE SHARES OUTSTANDING Common Stock Outstanding from time-to-time during: Three Months Ended June 30, 1994 91 3,038,166,587 33,386,446 260,820 33,647,266 Six Months Ended June 30, 1994 181 6,037,722,062 33,357,580 260,820 33,618,400 C. CALCULATION OF EARNINGS PER SHARE Income Per Share = Net Income After Tax ------------------------ Total Shares Outstanding Income Per Share = Three Months Ended June 30, 1994 2,904,000 = $0.09 -------------- 33,647,266 Six Months Ended June 30, 1994 5,262,000 = $0.16 -------------- 33,618,400
EX-19 6 SECOND QUARTER REPORT T O O U R S H A R E H O L D E R S Revenues and income for the three months ended June 30 were up sharply over prior periods. Quarterly Revenues of $76.8 million were 34 per cent above the second quarter of last year. This total is also the highest in the Company's history, 27 per cent above the previous high, established in the fourth quarter of last year. The record Revenues resulted from very strong order bookings in each of the two preceding quarters. Net Income for the second quarter was $5.4 million, $.17 per share, or 86 per cent above $2.9 million, $.09 per share, in the comparable quarter one year ago. For the first six months of the year, Net Income was $8.3 million, $.26 per share, 58 per cent above the same period of 1994; and Revenues totaled $134.4 million, 24 per cent above the comparable year-earlier figure. Incoming orders for the most recent quarter declined to $64.6 million, from $73.1 million in the fourth quarter of 1994 and $76.9 million in the first quarter of this year. However, the second quarter figure still represents the third highest quarterly total in the Company's history. The increased level of business does not result from higher overall drilling activity. The average worldwide rig count for the three months ended June 30 was below both the second quarter of 1994 and the first quarter of this year. Instead, we believe that the improvement relates to a continuing emphasis on the development of offshore oil and gas reserves, particularly in deeper waters and more difficult drilling environments. These factors generate a need for more reliable and higher capacity equipment, as well as a greater interest in the use of newer technologies. Both of these trends play to the strengths of Varco. Despite the lackluster overall drilling activity, two developing trends are very positive for Varco. First, international drilling has been increasing. In each of the last five months the international rig count has been above the comparable month of last year. Although the upturn has been modest (the second quarter international rig count was about three percent above that of the second quarter a year ago), it is the first sustained year-over-year increase in more than three years. Second, the offshore drilling market is also gaining momentum, with June rig utilization at its highest level since December of 1993. International rigs offer a higher revenue potential to Varco than those operating in North America. An improved market for offshore rigs, which are relatively more costly to operate, is more likely to spur investment in our newer technology products. The pickup in the international and offshore markets has occurred in spite of a continuing softness in oil and gas prices. While oil crept above $20 per barrel briefly in April, it fell back to the $17-$18 range toward the end of the quarter, and natural gas prices generally ranged between $1.45-$1.60 per million BTU during the April-June period. We find the improvement in the international and offshore markets to be very encouraging in light of relatively flat commodity prices. We are pleased with our recent accomplishments and encouraged by our prospects. Successful execution of our key strategies continues to yield improving results. With oil and gas prices at historically low levels in real terms, oil companies are aggressively pursuing cost reduction. Products, technologies and services which contribute to that effort have become increasingly significant. As a result, our newer products are achieving greater market acceptance and are providing increased opportunities for Varco. We continue to focus on converting these opportunities into improved performance. We appreciate the support of our shareholders, customers, employees and friends. Walter B. Reinhold George I. Boyadjieff Chairman President and Chief Executive Officer August 10, 1995 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands) June 30, December 31, 1995 1994 CURRENT ASSETS Cash and cash equivalents $ 5,607 $ 8,793 Short term investments 29,832 Receivables (net) 65,177 52,250 Inventories 69,010 60,299 Other 6,792 7,603 - ---------------------------------------------------------------------------------------- Total Current Assets 146,586 158,777 Property, plant and equipment at cost, less accumulated depreciation 48,450 49,807 Cost in excess of net assets acquired 37,044 37,529 Other assets 10,600 11,528 - ---------------------------------------------------------------------------------------- Total Assets $242,680 $257,641 ======================================================================================== CURRENT LIABILITIES Accounts payable $ 21,751 $ 15,345 Other liabilities 25,869 21,090 Current portion of long-term debt 10,000 10,000 - ---------------------------------------------------------------------------------------- Total Current Liabilities 57,620 46,435 Long-term debt 29,466 39,349 Other non-current liabilities 7,737 8,129 - ---------------------------------------------------------------------------------------- Total Liabilities 94,823 93,913 SHAREHOLDERS' EQUITY Common Stock and additional paid-in capital $123,674 $125,897 Retained earnings 24,183 37,831 - ---------------------------------------------------------------------------------------- Total Shareholders' Equity 147,857 163,728 - ---------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $242,680 $257,641 =========================================================================================
V A R C O I N T E R N A T I O N A L , I N C. A N D S U B S I D I A R I E S CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) Six Months Ended June 30, 1995 1994 OPERATING ACTIVITIES Net income $ 8,316 $ 5,262 Depreciation and amortization 6,050 5,323 Increase (decrease) in operating cash flows: Receivables (12,927) (4,074) Inventories (8,711) (4,530) Accounts payable 6,406 991 Interest payable 13 3 Other 5,204 (1,889) - ------------------------------------------------------------------------ Net cash from operating activities 4,351 1,086 - ------------------------------------------------------------------------ INVESTING ACTIVITIES Short-term investments 29,832 (2,547) Equipment purchases (3,400) (5,472) Proceeds from equipment sales 295 31 Other 463 (399) - ------------------------------------------------------------------------ Net cash from (used in) investing activities 27,190 (8,387) - ------------------------------------------------------------------------ FINANCING ACTIVITIES Repurchase of Common Stock (25,672) (614) Payment on long-term debt (10,000) Other 945 566 - ------------------------------------------------------------------------ Net cash (used in) financing activities (34,727) (48) - ------------------------------------------------------------------------ Net change in cash and cash equivalents (3,186) (7,349) - ------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 8,793 22,560 - ------------------------------------------------------------------------ Cash and cash equivalents at end of quarter $ 5,607 $15,211 ========================================================================
V A R C O I N T E R N A T I O N A L , I N C. A N D S U B S I D I A R I E S CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands,except per share data)
Three Months Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 REVENUES Net sales $70,466 $51,530 $121,269 $ 96,688 Rental income 5,925 5,494 12,294 11,160 Other income 396 495 869 985 - ---------------------------------------------------------------------------------------- 76,787 57,519 134,432 108,833 - ---------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of sales 46,587 33,846 78,141 62,714 Cost of rental income 1,787 1,738 3,618 3,428 Selling, general and administrative expenses 15,490 13,176 30,635 26,007 Research and development costs 3,345 2,947 6,535 6,079 Interest expense 1,289 1,196 2,493 2,339 - ---------------------------------------------------------------------------------------- 68,498 52,903 121,422 100,567 - ---------------------------------------------------------------------------------------- Income before income taxes 8,289 4,616 13,010 8,266 Provision for income taxes 2,886 1,712 4,694 3,004 - ---------------------------------------------------------------------------------------- Net income $ 5,403 $ 2,904 $ 8,316 $ 5,262 ======================================================================================== Net income per share of Common Stock $ .17 $ .09 $ .26 $ .16 ======================================================================================== Shares used to calculate earnings per share 31,482 33,647 32,535 33,618 ========================================================================================
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, 1994. V A R C O I N T E R N A T I O N A L , I N C. A N D S U B S I D I A R I E S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL INDUSTRY CONDITIONS Worldwide drilling activity, as measured by the average number of active drilling rigs, decreased in the first six months of 1995 to an average of approximately 1,683 from an average of approximately 1,724 during the same period in 1994. North American drilling activity declined approximately 5% to an average of approximately 930 rigs. International drilling activity increased to an average of approximately 753 rigs as compared to 744 in the first half of 1994. The average number of offshore rigs under contract decreased slightly year-over-year; however, offshore rigs under contract during the month of June increased to 543, its highest level since the end of 1993. Both increased international drilling and the recent increase in offshore drilling activity is positive for the Company. Generally, international rigs offer a higher revenue potential to the Company than those operating in North America and offshore rigs, which are generally more costly to operate, are more likely to spur investment in the Company's newer technology products. ACQUISITION On November 30, 1994 the Company acquired all of the outstanding shares of Rig Technology Limited ("Thule Rigtech"), a company incorporated in Scotland, for a cost of approximately $9.0 million. Thule Rigtech provides equipment and systems used in the handling, mixing, transport and conditioning of drilling fluids and operates as the Company's Thule Rigtech Division. RESULTS OF OPERATIONS Set forth below are the net orders and revenues for the Company's five operating divisions:
Three months ended June 30, Six months ended June 30, 1995 1994 1995 1994 NET ORDERS Varco Drilling Systems $24,126 $18,628 $ 47,406 $ 36,018 Varco BJ Oil Tools 9,074 11,867 21,104 22,752 Martin-Decker/TOTCO Instrumentation 13,526 12,395 29,179 25,667 Shaffer 15,549 14,474 38,059 25,336 Thule Rigtech 2,349 5,796 - ----------------------------------------------------------------------------------- Total $64,624 $57,364 $141,544 $109,773 =================================================================================== REVENUES Varco Drilling Systems $30,180 $21,118 $ 50,028 $ 37,444 Varco BJ Oil Tools 9,907 10,794 20,230 20,785 Martin-Decker/TOTCO Instrumentation 15,109 13,239 28,827 25,683 Shaffer 18,135 11,873 28,505 23,936 Thule Rigtech 3,060 5,973 - ----------------------------------------------------------------------------------- Total $76,391 $57,024 $133,563 $107,848 ===================================================================================
Incoming orders and revenues for the first six months of 1995 increased by 28.9% and 23.8%, respectively, as compared to the same period of 1994. These increases are primarily due to increases in Varco products used on offshore drilling rigs, particularly those of the Drilling Systems and Shaffer Divisions, and to the inclusion of Thule Rigtech which was acquired in November of 1994. In addition, during the second quarter the Drilling Systems Division delivered the first two units of its new Top Drive Drilling System designed specifically for use on land rigs, the TDS-9S. Included in the Drilling Systems order total were orders to equip three new offshore platform rigs with our newer technology pipe handling equipment. These orders, all scheduled for delivery in the fourth quarter of 1995, total approximately $9.5 million, and each includes both horizontal and vertical racking systems. The Shaffer total includes orders to upgrade several offshore rigs with motion compensation and pressure control equipment. The Company has also experienced increases in orders and revenue from the sales and rental of its TOTAL product line. All of the increases at Martin- Decker/TOTCO are from TOTAL sales and rentals. The Company's incoming orders have totaled $73.1 million for the fourth quarter of 1994, and $76.9 million and $64.6 million for the first two quarters of 1995, respectively. These rates compare to an average of $56.1 million for the first three quarters of 1994. Since these recent quarterly totals represent significant increases over previous periods during a time in which worldwide drilling activity has declined somewhat, the Company does not believe that these rates, particularly those of the fourth and first quarters, will be sustained in the near term. At June 30, 1995 the Company's backlog of unshipped orders was approximately $60.7 million as compared to $52.8 million at December 31, 1994. In accordance with industry practice, orders and commitments generally are cancelable by customers at any time. The Company believes that most of the backlog will be shipped by December 31, 1995. Gross margins (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 1995 were 38.8%, compared to a gross margin of 38.7% for the same period in 1994. Gross margins for the second quarter 1995 decreased to 36.7% from 37.6% in the second quarter of 1994. The decline in margins in the second quarter of 1995 is primarily due to the increase in Shaffer's revenue, which produces lower margins than the combined gross margins of the other Divisions and due to lower than average margins on new products such as the TDS-9 and racking systems at Drilling Systems. These factors accounted for an approximate 2.5% decline in margin as compared to the second quarter 1994. This decline was partially offset by a 1.8% improvement to margins as a result of increased utilization of the Company's manufacturing facilities. The Company estimates that based upon direct labor hours (based upon a two shift operation) its manufacturing facilities were approximately 90% utilized during the second quarter of 1995 as compared to only 75% utilization during the second quarter of 1994. The effect of this higher utilization has been to increase the percentage of manufacturing expenses allocated to inventory and decrease expenses charged directly to cost of sales. The Company believes that new product development is a significant factor for the future of the Company. During the first six months of 1995 the Company spent $6.5 million or 4.9% of revenues on new product development. This compares to $6.1 million or 5.6% of revenues during the same period in 1994. The increase in selling, general and administrative expenses compared to 1994 is primarily a result of activity related to the increased revenues. As a percent of revenues, selling, general and administrative expenses were down year-to-year. For the first half of 1995 this percent was 22.8%, and it was 20.2% for the second quarter of 1995. As a percent of revenues, selling, general and administrative expenses were 23.9% and 22.9% for the first half and second quarter of 1994, respectively. Overall Company employment at June 30, 1995 was 1,514 (including 235 temporary employees) which compares to 1,364 (including 210 temporary employees) a year ago. This increase is primarily due to an increase in manufacturing employees and the addition of 39 Thule Rigtech employees. The effective tax rate for the second quarter of 1995 was 35% as compared to 37% for the second quarter of 1994. The decreased tax rate is primarily due to a lower percentage of non-deductible expenses incurred in 1995 than 1994. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1995 the Company had cash and cash equivalents of $5.6 million as compared to $38.6 million in cash and cash equivalents and short term investments at December 31, 1994. This decline is due to the Tender Offer and the Senior Note payment, both discussed below. On March 24, 1995, the Company commenced a "Dutch Auction" type tender offer (the "Tender Offer") to purchase up to 5,300,000 shares of its Common Stock at a purchase price not greater than $8.00 per share nor less than $6.75 per share. Pursuant to the Tender Offer, which terminated on April 21, 1995, the Company purchased 3,150,560 shares of its Common Stock at a purchase price of $8.00 per share. The aggregate cost to the Company of the Tender Offer, including expenses, was approximately $26.2 million, which was funded from cash and cash equivalents and short term investments. In July 1992 the Company sold $50.0 million aggregate principal amount of its 8.95% Senior Notes Due June 30, 1999 (the "Senior Notes") to a group of ten institutional investors pursuant to a Note Agreement dated as of July 1, 1992 (the "Note Agreement"). The principal of the Senior Notes is payable in five equal annual installments of $10.0 million, the first of which was made on June 30, 1995. Effective as of March 8, 1995, the holders of the Senior Notes waived compliance with certain covenants contained in the Note Agreement in order to permit the Tender Offer and amended certain financial covenants to take into account the effect of the consummation of the Tender Offer. The Senior Notes include a yield maintenance prepayment penalty if any principal is repaid prior to the installment due date. Had the entire outstanding principal amount been prepaid at June 30, 1995 the prepayment penalty would have been approximately $2.4 million. On February 25, 1993 the Company entered into an unsecured revolving credit agreement with Citicorp USA, Inc. and Citibank, N.A. (the "Credit Agreement"). Effective as of March 17, 1995 the Credit Agreement was amended to (1) extend the maturity date from March 31, 1996 to October 31, 1998; (2) increase the total maximum facility from $20.0 to $35.0 million, consisting of a loan facility of $25.0 million and a letter of credit facility of $10.0 million; and (3) to amend certain covenants to permit the Tender Offer and to take into account the effect of the consummation of the Tender Offer on certain financial ratios. At June 30, 1995 there were no advances outstanding and $3.3 million in letters of credit outstanding under this facility. Both the Note Agreement and the Credit Agreement restrict the payment of dividends (other than dividends payable solely in shares of Common Stock) on, and repurchases of, Common Stock. Under the terms of the Credit Agreement, which is generally the more restrictive of these, the amount available for the payment of dividends on, and repurchases of, Common Stock is limited to 25% of the Company's consolidated net income arising after January 1, 1992, computed on a cumulative basis. In addition, pursuant to the March 17, 1995 amendment to the Credit Agreement discussed above, the Company may repurchase at any time prior to December 31, 1995 shares of its Common Stock for an aggregate cost not exceeding $50.0 million including shares purchased pursuant to the Tender Offer. The Company may also purchase or otherwise acquire shares of Common Stock from the proceeds of the substantially concurrent sale of shares of Common Stock. On May 26, 1994 the Company announced that its Board of Directors authorized the repurchase of up to one million shares of the Company's Common Stock for an aggregate purchase price not exceeding $6 million (the "Repurchase Program"). On May 26, 1995 the Company announced an increase and extension of the above Repurchase Program. The total number of shares authorized for repurchase was increased to 1,500,000; the maximum aggregate purchase price was increased to $11.0 million and the purchase period was extended through December 31, 1996. This additional authorization is subject to approval by the Company's lenders. To date the Company has repurchased on the open market 267,200 shares of its Common Stock at an average price of approximately $6.28 per share. The last such purchase was in January, 1995. At June 30, 1995 the Company's working capital was $89.0 million as compared to $112.3 million at December 31, 1994 and its current ratio was 2.5 to 1.0 as compared to 3.4 to 1.0 at December 31, 1994. Long-term debt as a percent of total capitalization was 17% at June 30, 1995 as compared to 19% at December 31, 1994. The decrease in working capital and current ratio is due to the completion of the Tender Offer. The decline in long-term debt as a percent of total capitalization is due to the June 30 principal payment made on the Senior Notes. The Company's capital expenditures during the first half of 1995 were $3.4 million as compared to $5.5 million for the first half 1994. For all of 1995 the Company expects capital expenditures for machinery and equipment to be approximately $10.0 million. Additionally, the Company intends to purchase its Cedar Park manufacturing facility (currently under lease) for approximately $3.6 million. These expenditures compare to capital expenditures of $8.6 million in 1994. The Company believes its revolving credit facility and its cash and cash equivalents will be sufficient to meet its capital expenditures and operating cash needs in 1995 and 1996. INVESTOR CONTACT Richard A. Kertson Vice President -- Finance Varco International, Inc. 743 North Eckhoff Street Orange, California 92668 Tel (714) 978-1900 Fax (714) 937-5029 V A R C O I N T E R N A T I O N A L , I N C. EX-27 7 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 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, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1995 JUN-30-1995 5,607,000 0 66,793,000 (1,616,000) 69,010,000 146,586,000 105,124,000 (56,674,000) 242,680,000 57,620,000 29,466,000 123,674,000 0 0 24,183,000 242,680,000 76,391,000 76,787,000 48,374,000 63,864,000 3,345,000 0 1,289,000 8,289,000 2,886,000 0 0 0 0 5,403,000 0.17 0
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