Varco May Pay Dividends in Common Stock : Firm Owes Preferred Shareholders $1.5 Million

In a move that will free up cash and help the company weather the impact of the international oil glut, Varco International shareholders agreed to accept up to 10 quarterly dividend payments on the company’s preferred stock in shares of common stock rather than cash.

Varco, an Orange-based manufacturer specializing in a unique top-drive oil rig drill motor, suffered a $1.7-million loss in 1985 and a $17.8-million loss in 1984. Because of an arrangement with three insurance company lenders, Varco has not been allowed to pay a cash dividend on its preferred stock since July, 1984. As a result, Varco now owes $3 in back dividends on each share of its 500,000 shares of preferred stock, a total of $1.5 million.

The 10 quarters of stock payments need not be consecutive and, according to Dick Kertson, vice president of finance for Varco, issuance of common stock in lieu of cash is entirely at the discretion of Varco’s board and could be applied retroactively to the money already owed stockholders. For purposes of the dividend, the common stock will be valued at 90% of its average trading price during the 20 days prior to the close of each quarter.

By the end of fiscal year 1985, Varco was $10 million below the minimum level set by its lenders to allow the issuance of cash dividends. The level is based on a complicated formula that takes into account net income, net losses and proceeds from the sale of capital stock.

Kertson said he does not believe that issuing common stock to preferred stockholders will affect ownership of the company because of the small number of preferred stockshares compared to the 11.2 million shares of outstanding common stock.

“I don’t think this action fundamentally alters the business outlook for the company. It is intended more as a way to meet our obligations to our preferred shareholders,” Kertson said.

Varco preferred stock closed on the New York Stock Exchange on Wednesday at $12.375, unchanged for the day. The company’s common stock closed at $2.75 a share, down 12.5 cents.

While Varco did post modest profits in its third and fourth quarters last year, those earnings came on the heels of 14 straight quarterly losses. Since mid-1984, Kertson said, the company has drastically cut costs. It has sold its Orange headquarters to raise $7.4 million and, since 1981, has cut back its work force from 1,640 employees to slightly under 400, Kertson estimates.

“Obviously, this is a difficult period for our industry, and we’re gearing up to deal with that,” Kertson said.

Kertson said he anticipates that earnings for the first quarter of fiscal 1986 will be comparable to those of 1985’s third and fourth quarters. He said the second quarter of 1986 might be more difficult, with revenues declining.

“Given the decline in oil prices and cutbacks in exploration budgets, there is no way we cannot reasonably expect a falloff in business,” Kertson said. “Should that decline in revenues materialize, suffice it to say I think there isn’t any kind of cost-reduction opportunity we wouldn’t examine.”