-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mvf1u+Ho7tkjqwXFmmDLB9x1fa61IBiZLBOP6v+odmbRA+Kxsnod68FjWXeLTnEA nZhqsZBckV1qfhZrVnCCMw== 0001017062-98-001724.txt : 19980812 0001017062-98-001724.hdr.sgml : 19980812 ACCESSION NUMBER: 0001017062-98-001724 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980811 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: SEC FILE NUMBER: 001-08158 FILM NUMBER: 98682242 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 PERIOD ENDING JUNE 30, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from___________to________________ Commission File number 1-8158 VARCO INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) California 95-0472620 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 743 North Eckhoff Street, Orange, Ca 92868 (Address of principal executive offices) (Zip code) (714) 978-1900 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__X__ No____ 64,472,792 (Number of shares of Common Stock outstanding at June 30, 1998) PART I-FINANCIAL INFORMATION Item 1. Financial Statements. Pursuant to General Instruction D to Form 10-Q, the Condensed Consolidated Statements of Cash Flows, Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Income of Varco International, Inc., (the "Company") and its subsidiaries included in the registrant's Second Quarter Report to Shareholders for the three months ended June 30, 1998, filed as Exhibit 19 hereto are incorporated herein by reference. Such financial statements should be read in light of the following: Adjustments. The financial statements contained in Exhibit 19 hereto include all adjustments which in the opinion of management are of a normal recurring nature, considered necessary to present fairly the results of operations for the interim periods presented. Basic net income per share is based upon an average of 64,443,960 and 63,447,773 shares outstanding for the three months ended June 30, 1998, and 1997, respectively. Diluted net income per share is based upon an average of 65,884,697 and 65,155,951 shares outstanding for the three months ended June 30, 1998, and 1997, respectively. Basic net income per share is based upon an average of 64,342,409 and 63,366,010 shares outstanding for the six months ended June 30, 1998, and 1997, respectively. Diluted net income per share is based upon an average of 65,783,146 and 65,044,188 shares outstanding for the six months ended June 30, 1998, and 1997, respectively. Inventories. The Company estimates the components of inventory at June 30, 1998, and December 31, 1997, to be as follows: June 30, 1998 December 31, 1997 Raw Materials $ 6,934,000 $ 6,118,000 Work in Process 54,049,000 43,495,000 Finished Goods 120,967,000 95,063,000 LIFO Reserves (12,536,000) (12,705,000) ------------ ------------ $169,414,000 $131,971,000 ============ ============ Fixed Assets. Fixed assets are stated net of accumulated depreciation of $68,766,000 at June 30, 1998, and $62,469,000 at December 31, 1997. Common Stock and Additional Paid-In-Capital. On June 30, 1998, the Company Common Stock account was $54,841,000 and Additional Paid-In-Capital accounts were $100,606,000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Pursuant to General Instruction D to Form 10-Q, Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the registrant's Second Quarter Report to Shareholders for the three months ended June 30, 1998, filed as Exhibit 19 hereto, is incorporated herein by reference. PART II-OTHER INFORMATION Item 2. Changes in Securities In July 1992 the Company sold $50.0 million aggregate principal amount of its 8.95% Senior Notes Due June 30, 1999 (the "Senior Notes") to a group of ten institutional investors pursuant to a Note Agreement dated as of July 1, 1992 (as amended, the "Note Agreement"). The remaining $10.0 million principal balance of the Senior Notes is payable on June 30, 1999. The Note Agreement prohibits any "Restricted Payment" subsequent to July 17, 1992 unless after giving effect thereto, (i) the aggregate amount of all Restricted Payments subsequent to such date would not exceed $5,000,000 plus the cumulative sum of 50% of the Company's consolidated net income (or minus 100% in the case of a deficit) subsequent to March 31, 1992 and (ii) the Company could incur at least $1.00 of additional indebtedness under the Note Agreement covenant limiting indebtedness. The term "Restricted Payment" includes (a) any dividend (other than dividends payable in shares of capital stock) or other distributions on any shares of capital stock of the Company; (b) any purchase, redemption or other acquisition of any shares of the capital stock of the Company or any rights or options to purchase or acquire such shares; and (c) any "Restricted Investment", which is generally defined as any investment other than an investment in a subsidiary of the Company or an investment in certain designated government or rated securities. In addition, the Company may purchase, redeem or otherwise acquire shares of its capital stock or make Restricted Investments from the net cash proceeds of the substantially concurrent sales of shares of capital stock or from the sale of securities convertible into such shares upon conversion. On June 27, 1997 the Company entered into a seven-year unsecured revolving credit agreement with three banks (the "Credit Agreement"). The Credit Agreement provides for a credit facility of $65.0 million, inclusive of a $20.0 million letter of credit sub-facility. The maximum available under the Credit Agreement is reduced in equal quarterly amounts over the last four years of the Credit Agreement. The Credit Agreement prohibits any "Restricted Junior Payment" unless (1) at the time thereof no default exists under the Credit Agreement or will be caused thereby and (2) the cumulative amount of all Restricted Junior Payments subsequent to June 27, 1997, would not exceed the sum of $5,000,000 plus 25% of the Company's consolidated net income arising after June 30, 1997. "Restricted Junior Payment" is generally defined as (1) any dividend or other distribution on any class of the Company's capital stock, except a dividend payable solely in shares of that class; (2) any redemption, purchase or other acquisition for value of any shares of any class of the capital stock of the Company; (3) any payment made to retire or obtain the surrender of any outstanding warrants, options or similar rights to acquire any shares of any class of the capital stock of the Company; and (4) any payment on the Senior Notes other than regularly scheduled payments of principal and interest thereon. Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of Shareholders of the Company was held on May 19, 1998. (c) Matters voted upon at the 1998 Annual Meeting of Shareholders of the Company. 1. Election of Directors Name Votes For Votes Withheld G. Boyadjieff 53,013,177 5,136,678 G. Dotson 53,013,613 5,136,242 A. Horn 43,336,955 14,812,900 J. Knowlton 53,009,935 5,139,920 L. Pircher 43,320,281 14,829,574 W. Reinhold 53,003,954 5,145,901 C. Suggs 53,013,588 5,136,267 R. Teitsworth 52,993,420 5,156,435 E. White 53,013,490 5,136,365 J. Woods 53,011,366 5,138,489 2. Proposal to amend the Company's Amended and Restated Articles of Incorporation to increase the number of authorized shares of Common Stock from 80,000,000 to 120,000,000. Votes For Votes Against Abstentions 57,396,622 615,435 137,798 3. Proposal to approve certain amendments to the Company's 1994 Directors' Stock Option Plan and certain options outstanding thereunder. Votes For Votes Against Abstentions 56,088,403 1,882,612 178,840 4. Proposal to ratify Ernst & Young LLP as the independent auditors of the Company. Votes For Votes Against Abstentions 58,092,311 16,159 41,385 Item 5. Shareholder Proposal For purposes of Security and Exchange Commission (SEC) Rule 14 a-4(c), a notice to the Company of a shareholder proposal for the Company's 1999 Annual Meeting of Shareholders submitted outside the processes of SEC Rule 14 a-8, which is received by the Company after March 6, 1999 will be considered untimely. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Statement re computation of per share earnings for the three months and six months ended June 30, 1998 and 1997. 19 Varco International, Inc. Second Quarter Report to Shareholders, Three Months Ended June 30, 1998. 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARCO INTERNATIONAL, INC. Date: August 10, 1998 By:/s/Richard A. Kertson Vice President-Finance and Chief Financial Officer Date: August 10, 1998 By:/s/Donald L. Stichler Vice President, Controller-Treasurer and Secretary EXHIBIT INDEX 11 Statement re computation of per share earnings for the three months and six months ended June 30, 1998 and 1997. 19 Varco International, Inc. Second Quarter Report to Shareholders, Three Months Ended June 30, 1998. 27 Financial Data Schedule EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 VARCO INTERNATIONAL, INC. Statement Re Computation of Per Share Earnings
Three Months Six Months Ended Ended June 30 1998 June 30 1998 -------------------------------- A. CALCULATION OF ADJUSTED EARNINGS Net Income After Tax $19,729,000 $34,714,000 Total Number Average Stock Option Shares Used Number Number of of Shares after of Shares Equivalent To Calculate Days Weighing Outstanding Shares Diluted EPS ---------------------------------------------------------------------------- B. CALCULATION OF AVERAGE SHARES OUTSTANDING Common Stock Outstanding from time-to-time during: Three Months Ended June 30, 1998 91 5,864,400,395 64,443,960 1,440,737 65,884,697 Six Months Ended June 30, 1998 181 11,645,976,093 64,342,409 1,440,737 65,783,146 C. CALCULATION OF EARNINGS PER SHARE Income Per Share = Net Income After Tax ---------------------------------- Total Shares Outstanding Diluted Income Per Share = Three Months Ended June 30,1998 19,729,000 = $ 0.30 ------------ 65,884,697 Six Months Months Ended June 30,1998 34,714,000 = $ 0.53 ------------ 65,783,146 Basic Income Per Share Three Months Ended June 30,1998 19,729,000 = $ 0.31 ------------ 64,443,960 Six Months Months Ended June 30,1998 34,714,000 = $ 0.54 ------------ 64,342,409
EXHIBIT 11 RESTATED FOR STOCK SPLIT VARCO INTERNATIONAL, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Six Months Ended June 30 1997 June 30 1997 ------------------------------- A. CALCULATION OF ADJUSTED EARNINGS Net Income After Tax $10,770,000 $18,154,000 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, 1997 91 5,776,477,384 63,477,773 1,678,178 65,155,951 Six Months Ended June 30, 1997 181 11,469,247,876 63,366,010 1,678,178 65,044,188 C. CALCULATION OF EARNINGS PER SHARE Income Per Share = Net Income After Tax ------------------------ Total Shares Outstanding Basic Income Per Share = Three Months Ended June 30, 1997 10,770,000 = $0.17 ------------- 63,477,773 Six Months Ended June 30, 1997 18,154,000 = $0.29 ------------- 63,366,010 Diluted Income Per Share = Three Months Ended June 30, 1997 10,770,000 = $0.17 ------------- 65,155,951 Six Months Ended June 30, 1997 18,154,000 = $0.28 ------------- 65,044,188
EX-19 3 SECOND QUARTER REPORT - PERIOD ENDED 6/30/98 EXHIBIT 19 Varco International, Inc. 1998 Second Quarter Report Varco To Our Shareholders Financial results for the three months ended June 30 continued to reflect significant growth in Revenues and Net Income as compared to the same period a year ago. Net Income reached $19.7 million, $.30 per share, on Revenues of $197.2 million; the comparable figures for the second quarter of last year were $10.8 million, $.17 per share, and $129.6 million. For the first six months of 1998, Net Income totaled $34.7 million, $.53 per share, versus $18.2 million, $.28 per share, for the same period of 1997, as Revenues increased to $347.4 million from $230.7 million. Despite our strong financial results, we are beginning to feel the effect of the lower oil prices which have prevailed since late last year. Oil prices averaged approximately $15.25 per barrel during the second quarter, and approximately $14.50 for the month of June. That represents the lowest quarterly average since the initial three months of 1994, and compares to an average of approximately $20.50 for all of last year. With the lower oil prices negatively impacting cash flow, oil companies are curtailing their exploration and production spending plans. In the midyear update to their Survey and Analysis of Worldwide Oil and Gas Exploration and Production Expenditures, Salomon Smith Barney projects that 1998 spending will increase six percent over last year's rate, versus a planned increase of eleven percent in the initial survey published in January. As a result, the average rig count for the United States and Canada during the second quarter was 13 percent below that of the same period a year ago. As is traditionally the case, drilling activity outside North America demonstrated greater stability, declining by just two percent over the same period. Offshore drilling, Varco's most important market, has demonstrated greater resilience to reduced oil prices than has land drilling. During the second quarter, utilization of the worldwide offshore rig fleet averaged approximately 95 per cent, essentially unchanged from one year ago. However, utilization fell to 92 percent in late July, as some rigs have been unable to find work as contracts are completed. Additionally, as new contracts are signed, day rates have evidenced a decline from the peak reached last fall. While both offshore rig utilization and day rates remain at levels which would have been considered very positive just two years ago, the direction of the trend is a cause for some concern when viewed in the context of weak oil prices. Finally, the pace at which oil companies are contracting new deep water rigs has slowed noticeably from that which prevailed over the second half of last year and continued into early 1998. These industry conditions are most clearly reflected in Varco's order bookings. The second quarter total of $193.6 million, while in line with our current manufacturing capacity and above the $172.7 million recorded in the second quarter of last year, is well below that of the most recent three quarters. During that period of time, oil companies' primary concern was rig availability, particularly those capable of drilling in deep water. As contracts for new rigs were being entered into, equipment availability and lead times were seen as potential constraints, and Varco's orders reached levels well above its current and projected manufacturing capacity. With lower oil prices, the urgency relating to rig availability has subsided and orders for equipping new rigs have declined. On August 6 a customer announced that it was terminating the construction of a deep water drillship and had reached agreement with the oil company for cancellation of its five-year drilling contract. As a result, the customer cancelled orders totaling approximately $38.3 million, which were included in Varco's June 30 backlog. A significant portion of the equipment was due to be shipped in the third and fourth quarters of this year. Although the costs to Varco of this cancellation have not yet been ascertained, we believe that deposits received from the customer will be sufficient to cover, or substantially mitigate, those costs. This customer has indicated that the termination was the result of risks associated with meeting the required delivery date and cost estimate, and we believe it relates more to circumstances unique to this customer than to general industry conditions. Meanwhile, our backlog is strong and our biggest challenge over the next twelve to eighteen months remains the delivery, installation and ongoing support of the drilling equipment that is the lifeblood of the rigs that will be placed in service over the next two years. Toward that end, we have significantly expanded our capability and capacity over the past eighteen months, as has been reflected in our revenue growth. As the rate of growth moderates, the opportunity exists to focus on the efficient execution of those tasks critical to meeting our customers' expectations. The events of recent weeks serve as a reminder that we operate in an industry where change is the norm and predictability is elusive. Our operational priorities are clear, and we will be prepared to react to market factors as they unfold. /s/ George I. Boyadjieff George I. Boyadjieff Chairman and Chief Executive Officer August 10, 1998 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, (in thousands) 1998 1997 - -------------------------------------------------------------------------------- Current Assets - -------------- Cash and cash equivalents $ 8,629 $ 39,827 Receivables (net) 177,542 142,324 Inventories 169,414 131,971 Other 19,184 17,396 - -------------------------------------------------------------------------------- Total Current Assets 374,769 331,518 Property, plant and equipment at cost less accumulated depreciation 84,575 73,862 Rental equipment less accumulated depreciation 15,452 18,213 Cost in excess of net assets acquired 34,102 34,609 Other assets 13,332 12,927 - -------------------------------------------------------------------------------- Total Assets $522,230 $471,129 ================================================================================ Current Liabilities - ------------------- Accounts payable $ 57,386 $ 53,394 Customer deposits 93,898 79,068 Other liabilities 56,077 52,905 Current portion of long-term debt 9,897 10,000 - -------------------------------------------------------------------------------- Total Current Liabilities 217,258 195,367 Long-term debt 9,520 Other non-current liabilities 13,534 13,043 - -------------------------------------------------------------------------------- Total Liabilities 230,792 217,930 Shareholders' Equity - -------------------- Common Stock and additional paid-in capital 155,447 151,222 Retained earnings 135,991 101,977 - -------------------------------------------------------------------------------- Total Shareholders' Equity 291,438 253,199 - -------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $522,230 $471,129 ================================================================================
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, (in thousands) 1998 1997 - -------------------------------------------------------------------------------- Operating Activities - -------------------- Net income $ 34,714 $ 18,154 Depreciation and amortization 10,060 7,893 Increase (decrease) in operating cash flows: Receivables (35,218) (27,796) Inventories (37,443) (17,039) Additions to rental equipment (2,112) (4,741) Transfers from rental equipment 2,134 Accounts payable 3,992 10,126 Customer deposits 14,830 17,632 Taxes payable 3,772 (763) Other (604) 426 - -------------------------------------------------------------------------------- Net cash from (used in) operating activities (5,875) 3,892 - -------------------------------------------------------------------------------- Investing Activities - -------------------- Equipment purchases (17,387) (11,536) Proceeds from equipment sales 214 1,130 - -------------------------------------------------------------------------------- Net cash (used in) investing activities (17,173) (10,406) - -------------------------------------------------------------------------------- Financing Activities - -------------------- Decrease in long-term debt (10,000) (10,000) Increase in long-term debt 16,000 Proceeds from issuance of Common Stock 1,850 1,313 Deferred issue costs 243 - -------------------------------------------------------------------------------- Net cash from (used in) financing activities (8,150) 7,556 - -------------------------------------------------------------------------------- Net change in cash and cash equivalents (31,198) 1,042 - -------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 39,827 5,794 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of quarter $ 8,629 $ 6,836 ================================================================================
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------- Revenues - -------- Net sales $187,854 $118,543 $326,795 $209,775 Rental income 9,120 11,009 19,922 20,761 Other income 237 82 685 169 - ---------------------------------------------------------------------------------------------------------- 197,211 129,634 347,402 230,705 - ---------------------------------------------------------------------------------------------------------- Costs and Expenses - ------------------ Cost of sales 126,574 81,605 218,404 145,104 Cost of rental income 3,087 3,302 6,305 6,175 Selling, general and administrative expenses 28,594 22,048 52,942 40,182 Research and development costs 8,378 5,012 15,908 9,036 Interest expense 581 1,074 1,086 2,109 - ---------------------------------------------------------------------------------------------------------- 167,214 113,041 294,645 202,606 - ---------------------------------------------------------------------------------------------------------- Income before income taxes 29,997 16,593 52,757 28,099 Provision for income taxes 10,268 5,823 18,043 9,945 - ---------------------------------------------------------------------------------------------------------- Net income $ 19,729 $ 10,770 $ 34,714 $ 18,154 ========================================================================================================== Basic income per share $ .31 $ .17 $ .54 $ .29 ========================================================================================================== Shares used in basic income per share calculation 64,444 63,478 64,342 63,366 ========================================================================================================== Diluted income per Share $ .30 $ .17 $ .53 $ .28 ========================================================================================================== Shares used in diluted income per share calculation 65,885 65,156 65,783 65,044 ==========================================================================================================
Note: These statements are condensed and do not contain disclosures required by generally accepted accounting principles. Reference should be made to the financial statements contained in the Annual Report to Shareholders for the year ended December 31, 1997. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL INDUSTRY CONDITIONS - --------------------------- The business of the Company depends primarily upon the level of worldwide drilling activity, particularly offshore drilling activity. The level of drilling activity can be influenced by numerous factors, including economic and political conditions, the prices of oil and gas, finding and development costs of oil companies, development of alternative energy sources, availability of equipment and materials, availability of new onshore and offshore acreage or concessions, and new and continued governmental regulations regarding environmental protection, taxation, price controls and product allocations. Since November of 1997 the price of oil has declined significantly. For the first and second quarters of 1998, the price of oil has averaged approximately $15.75 and $15.25 per barrel, respectively, as compared to an average of $20.50 per barrel for the full year 1997. At the end of July 1998, the price of oil was approximately $14.25 per barrel. These lower prices have resulted in lower cash flows and curtailed exploration and production spending plans for the oil companies and lower rig day rates and cash flows for drilling contractors, the Company's customers. Worldwide drilling activity, as measured by the average number of active drilling rigs, decreased approximately 8% in the second quarter of 1998 to an average of approximately 1,837 from an average of approximately 2,004 during the same period in 1997. As compared to the first quarter of 1998, the second quarter average declined approximately 18%. North American drilling activity decreased approximately 13% as compared to last year and 27% as compared to the first quarter of 1998. International drilling activity was not impacted as much as North American drilling activity. International activity decreased to an average of approximately 797 rigs as compared to 812 in the second quarter of 1997 and as compared to 810 in the first quarter of 1998. Despite low oil prices, offshore drilling activity has continued to be relatively strong, as reflected by rig utilization (mobile offshore rigs under contract as a percent of available rigs). For the second quarter of 1998, utilization averaged 95%, unchanged from the second quarter of 1997. More recently, offshore drilling activity has shown some signs of weakening. In June of 1998 offshore rig utilization was at 93.6%, its lowest level since January 1997 and rig day rates were at levels below their year-end 1997 rates. RESULTS OF OPERATIONS - --------------------- Set forth below are the net orders and revenues for the Company's five operating divisions:
Three Months Ended June 30, Six Months Ended June 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Net Orders - ---------- Varco Systems $ 43,672 $ 52,533 $178,402 $ 92,284 VarcoBJ 26,432 23,472 57,708 46,975 MD/Totco 37,271 25,431 69,222 46,209 Shaffer 83,467 65,515 163,998 119,693 Rigtech 2,773 5,723 10,811 7,860 - -------------------------------------------------------------------------------- Total $193,615 $172,674 $480,141 $313,021 ================================================================================ Revenues - -------- Varco Systems $ 70,310 $ 38,569 $123,806 $ 65,097 VarcoBJ 23,906 15,584 43,924 27,931 MD/Totco 23,237 22,434 46,846 38,999 Shaffer 71,750 51,268 118,962 94,385 Rigtech 7,771 1,697 13,179 4,124 - -------------------------------------------------------------------------------- Total $196,974 $129,552 $346,717 $230,536 ================================================================================
Order bookings increased $20.9 million, 12%, in the second quarter of 1998 and $167.1 million, 53%, in the first six months of 1998 as compared to the same periods of 1997. However, the second quarter order rate of $193.6 million is below that of the prior three quarters. Incoming orders were $266.5 million and $241.4 million for the third and fourth quarters of 1997, respectively, and $286.5 million in the first quarter of 1998. The year-over-year increases are primarily due to orders associated with the upgrading and construction of offshore drilling rigs, particularly floating rigs that are capable of drilling in water depths exceeding 3,000 feet. Each such rig creates significant potential for the high dollar value products provided by the Shaffer and Varco Systems Divisions as well as the products of the other Divisions. The decline in order rates as compared to the prior three quarters is due to a decline in orders associated with new rig construction and upgrades particularly at the Varco Systems Division. On August 6 a customer announced that it was terminating the construction of a deep water drillship and had reached agreement with the oil company for cancellation of its five-year drilling contract. As a result, the customer cancelled orders totaling approximately $38.3 million, which were included in Varco's June 30 backlog. A significant portion of the equipment was due to be shipped in the third and fourth quarters of this year. Although the costs to Varco of this cancellation have not yet been ascertained, we believe that deposits received from the customer will be sufficient to cover, or substantially mitigate, those costs. The Company's operating revenues increased by 52% in the second quarter of 1998 to $197.0 million, from same period 1997 and increased 50% in the first half of 1998 as compared to the first half of 1997. These increases primarily resulted from the delivery of equipment for upgrading, conversion and new construction of offshore drilling rigs. At June 30, 1998 the Company's backlog of unshipped orders was approximately $596.3 million as compared to $462.9 million at December 31, 1997 and $269.4 million at June 30, 1997. Orders for new rigs and major upgrades generally include the Company's longer lead-time products. Therefore, the average lead-time of the products included in the June 30, 1998 backlog is longer as compared to prior periods. The Company expects that approximately $250.0 million of the June 30, 1998 backlog will not be shipped until 1999. At June 30, 1998 the Company had received $93.9 million in customer cash deposits related to orders included in backlog. In accordance with industry practice, orders and commitments generally are cancelable by customers at any time. Gross margin (net sales and rental income less costs of sales and rental income) as a percentage of net sales and rental income for the first half of 1998 was 35.2%. This compares to a gross margin of 34.4% for the same period in 1997. The higher 1998 margins were a result of improved margins at VarcoBJ and Varco Systems. These improvements favorably impacted consolidated margins by approximately 2.2%. Price increases accounted for approximately 85% of the improvement, and the remainder was attributable to the favorable Dutch Guilder exchange rate which had the effect of lowering dollar cost at VarcoBJ's Netherlands manufacturing facility. This improvement was partially offset by lower margins at the Shaffer Division which were negatively impacted by high initial costs on some of its newer products. Second quarter 1998 gross margin was 34.2% as compared to 34.5% in the second quarter of 1997. This decline was due to the decline in rental income offsetting the benefit of the improvements at VarcoBJ and Varco Systems. Rental Income carries a higher gross margin than other revenues. The Company believes that new product development is a significant factor for the future of the Company. During the first six months of 1998 the Company spent $15.9 million or 4.6% of revenues on new product development. This compares to $9.0 million or 3.9% of revenues during the same period in 1997. The increase in selling, general and administrative expenses in 1998 as compared to 1997 is primarily a result of activity related to the increased revenues. As a percent of revenues, selling, general and administrative expenses are down year-to-year. For the first half of 1998 this percent was 15.2% and it was 14.5% for the second quarter of 1998. As a percent of revenues, selling, general and administrative expenses were 17.4% and 17.0% for the first half and second quarter of 1997, respectively. Overall Company employment at June 30, 1998 was 3,340 (including 472 temporary employees) which compares to 2,373 (including 309 temporary employees) a year ago. The effective tax rate for the first half of 1998 was 34.2% as compared to 35.4% for the first half of 1997. The lower effective tax rate in 1998 is due to the elimination in 1998 of the Company's valuation allowance on deferred tax assets. The Company now believes that it is more likely than not that all of its deferred tax assets will be realized. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At June 30, 1998 the Company had cash and cash equivalents of $8.6 million as compared to $39.8 million at December 31, 1997. This decline was due to increased working capital requirements during the first half of 1998 and to the June 30, 1998 Senior Note payment. In July 1992 the Company sold $50.0 million aggregate principal amount of its 8.95% Senior Notes Due June 30, 1999 (the "Senior Notes") to a group of ten institutional investors pursuant to a Note Agreement dated as of July 1, 1992 (the "Note Agreement"). The remaining $10.0 million principal balance of the Senior Notes is payable June 30, 1999. On June 27, 1997 the Company entered into a seven-year unsecured revolving credit agreement with three banks (the "Credit Agreement"). The Credit Agreement provides for a credit facility of $65.0 million, inclusive of a $20.0 million letter of credit sub-facility. The maximum available under the Credit Agreement is reduced in equal quarterly amounts over the last four years of the Credit Agreement. At June 30, 1998 there were no advances and $5.9 million in letters of credit outstanding under this facility. Both the Note Agreement and the Credit Agreement restrict the payment of dividends (other than dividends payable solely in shares of Common Stock) on, and repurchases of, Common Stock. Under the terms of the Credit Agreement, which is generally the more restrictive of these, the amount available for the payment of dividends on, and repurchases of, Common Stock is limited to $5.0 million plus 25% of the Company's consolidated net income arising after June 30, 1997, computed on a cumulative basis. On November 6, 1997 the Board of Directors of the Company declared a two- for-one stock split of its Common Stock, payable in the form of a 100% stock dividend on December 4, 1997 to shareholders of record at the close of business on November 20, 1997. At June 30, 1998 the Company's working capital was $157.5 million as compared to $136.2 million at December 31, 1997 and its current ratio was 1.72 to 1.0 as compared to 1.70 to 1.0 at December 31, 1997. The preceding changes are primarily due to an increase in inventory and receivables during the first half of 1998. The Company's capital expenditures during the first half of 1998 were $17.4 million as compared to $11.5 million for the first half of 1997. The Company's current plans for capital expenditures in the next twelve months are approximately $35.0 to $40.0 million. The Company anticipates that its June 30, 1998 cash and cash equivalents and its existing credit facility will be sufficient to meet its capital expenditures and operating cash needs and the principal payment on the Senior Notes in 1999. CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - ------------------------------------------------ In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that the statements in this Quarterly Report, which are forward-looking and which provide other than historical information, involve risks and uncertainties that may impact the Company's results of operations. These forward-looking statements include, among others, statements concerning the Company's general business strategies, customer orders, backlog, operating trends, industry trends, manufacturing capacity, and expectations for funding capital expenditures and operations in future periods. The Company also continues to face many risks and uncertainties including: changes in the prices of oil and natural gas, changes in capital spending by companies in the oil and gas industry for exploration, development and equipment, management of accelerating growth, competitive pressures, technological and structural changes in the industry, litigation and environmental laws. The risks and uncertainties inherent in these forward- looking statements could cause actual results to differ materially from those expressed in or implied by these statements. PROFILE - ------- Varco International, Inc. is a leading manufacturer of products used in the oil and gas well drilling industry worldwide. The Company also leads in the development of new technology and equipment to enhance the safety and productivity of the drilling process. Operating through five divisions, the Company's products include: integrated systems for rotating and handling the various sizes and types of pipe used on a drilling rig; conventional pipe handling tools, hoisting equipment and rotary equipment; drilling rig instrumentation; pressure control and motion compensation equipment; and solids control equipment and systems. INVESTOR CONTACT - ---------------- Richard A. Kertson Vice President - Finance Varco International, Inc. 743 North Eckhoff Street Orange, California 92868 Tel (714) 978-1900 Fax (714) 937-5029 E-mail: investor-relations@ora.varco.com Web site: http://www.varco.com VARCO EX-27 4 FINANCIAL DATA SCHEDULE - ARTICLE 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE REGISTRANT INCLUDED IN ITS FIRST QUARTER REPORT TO SHAREHOLDERS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 8,629,000 0 179,910,000 (2,368,000) 169,414,000 374,769,000 153,341,000 (68,766,000) 522,230,000 217,258,000 0 0 0 155,447,000 135,991,000 522,230,000 196,974,000 197,211,000 129,661,000 158,255,000 8,378,000 0 581,000 29,997,000 10,268,000 19,729,000 0 0 0 19,729,000 $0.31 $0.30
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