<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 September 30, 1997
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
incorporation or organization) Identification No.)
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
----- -----
32,026,464
(Number of shares of Common Stock outstanding at November 3, 1997)
<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 Third Quarter
Report to Shareholders for the three months ended September 30, 1997, 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 32,576,462 and 31,488,163 shares outstanding for the nine months
ended September 30, 1997, and 1996 respectively and upon an average of
32,711,123 and 32,118,119 shares outstanding for the three months ended
September 30, 1997 and 1996 respectively.
Inventories. The Company estimates the components of inventory at
September 30, 1997, and December 31, 1996, to be as follows:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
<S> <C> <C>
Raw Materials $ 5,314,000 $ 6,545,000
Work in Process 40,406,000 22,646,000
Finished Goods 90,079,000 77,150,000
LIFO Reserves (12,690,000) (14,468,000)
------------ ------------
$123,109,000 $ 91,873,000
============ ============
</TABLE>
Fixed Assets. Fixed assets are stated net of accumulated
depreciation of $59,738,000 at September 30, 1997, and $54,534,000 at December
31, 1996.
Common Stock and Additional Paid-In-Capital. On September 30,
1997, the Company Common Stock account was $22,344,000 and Additional Paid-In-
Capital accounts were $124,483,000.
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 Third Quarter Report to Shareholders for the three months ended
September 30, 1997, filed as Exhibit 19 hereto, is incorporated herein by
reference.
PART II-OTHER INFORMATION
Item 2. Changes in Securities
<PAGE>
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 of $10.0 million, the first of which was made
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.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Waiver and Consent to Note Agreement, dated as of June 23, 1997,
to Note Agreement included as Exhibit 4.1 to Varco's annual report on Form 10-K
for the year ended December 31, 1996.
4.2 Waiver and Fourth Amendment to Note Agreement, dated as of
September 30, 1997, to Note Agreement included as Exhibit 4.1 to Varco's annual
report on Form 10-K for the year ended December 31, 1996.
<PAGE>
4.3 Second Amendment to Credit Agreement dated as of August 13, 1997,
to Credit Agreement included as Exhibit Exhibit 4.1 to Varco's quarterly report
on Form 10-Q for the quarter ended June 30, 1997.
4.4 Third Amendment to Credit Agreement dated as of November 7, 1997
to Credit Agreement included as Exhibit Exhibit 4.1 to Varco's quarterly report
on Form 10-Q for the quarter ended June 30, 1997.
11 Statement re computation of per share earnings for the three
months ended September 30, 1997 and 1996.
19 Varco International, Inc. Third Quarter Report to Shareholders,
Three Months Ended September 30, 1997.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VARCO INTERNATIONAL, INC.
Date: November 12, 1997 By: /s/Richard A. Kertson
------------------------------
Vice President-Finance
and Chief Financial Officer
Date: November 12, 1997 By: /s/Donald L. Stichler
------------------------------
Controller-Treasurer
and Secretary
<PAGE>
EXHIBIT INDEX
4.1 Waiver and Consent to Note Agreement, dated as of June 23, 1997, to
Note Agreement included as Exhibit 4.1 to Varco's annual report on Form 10-K for
the year ended December 31, 1996.
4.2 Waiver and Fourth Amendment to Note Agreement, dated as of September
30, 1997, to Note Agreement included as Exhibit 4.1 to Varco's annual report on
Form 10-K for the year ended December 31, 1996.
4.3 Second Amendment to Credit Agreement dated as of August 13, 1997, to
Credit Agreement included as Exhibit Exhibit 4.1 to Varco's quarterly report on
Form 10-Q for the quarter ended June 30, 1997.
4.4 Third Amendment to Credit Agreement dated as of November 7, 1997 to
Credit Agreement included as Exhibit Exhibit 4.1 to Varco's quarterly report on
Form 10-Q for the quarter ended June 30, 1997.
11 Statement re computation of per share earnings for the three months
ended September 30, 1997 and 1996.
19 Varco International, Inc. Third Quarter Report to Shareholders,
Three Months Ended September 30, 1997.
27 Financial Data Schedule
<PAGE>
EXHIBIT 4.1
VARCO INTERNATIONAL, INC.
WAIVER AND CONSENT TO NOTE AGREEMENT
DATED AS OF JUNE 23, 1997
To Each of the Holders Named
in the attached Schedule 1
Ladies and Gentlemen:
Reference is made to the Note Agreement dated as of July 1, 1992 (as
heretofore amended, modified or supplemented by amendment or waiver, the "Note
Agreement") between Varco International, Inc., a California corporation (the
"Company") and each of the Purchasers named in Schedule 1 attached thereto
pursuant to which the Company issued $50,000,000 aggregate original principal
amount of its 8.95% Senior Notes due June 30, 1999 (the "Senior Notes"). The
current holders of the Notes (the "Holders"), the respective original principal
amounts of the Notes held by each such Holder and the current outstanding
principal amount of the Notes held by each such Holder are set forth in Schedule
1 hereto. This Waiver and Consent to Note Agreement is hereinafter referred to
as the "Waiver." Capitalized terms used and not otherwise defined herein shall
have the meanings ascribed to such terms in the Note Agreement. This Waiver is
being executed and delivered in light of the following facts:
A. The Company is a party to a Credit Agreement, dated as of February 25,
1993 (as amended, the "Citicorp Credit Agreement"), among the Company, Citicorp
USA, Inc. and Citibank, N.A. (together, the "Existing Lenders").
B. In connection with the execution and delivery of the Citicorp Credit
Agreement and pursuant to the Waiver and Second Amendment to Note Agreement,
dated as of February 25, 1993 the holders of more than 66_% in aggregate
principal amount of the outstanding Senior Notes consented to the execution and
delivery of Guaranties and Subordination Agreements by the following
subsidiaries of the Company, dated as of the dates indicated:
GROUP 1
Best Industries, Inc. - February 25, 1993
Martin-Decker TOTCO, Inc. - February 25, 1993
Varco Shaffer, Inc. - February 25, 1993
GROUP 2
Varco International Inc Pte Ltd - February 25, 1993
Varco (U.K.) Limited - February 25, 1993
Varco International Canada Ltd.
(formerly named 304774 Alberta Ltd.) - February 25, 1993
Varco BJ Oil Tools, B.V. - February 25, 1993
<PAGE>
Rig Technology Limited - November 30, 1994
Metrox, Inc. - August 17, 1993
The Guaranties and Subordination Agreements executed and delivered by the
companies listed above under the caption "Group 1" (the "Group 1 Guarantors")
are hereinafter collectively referred to as the "Continuing Guaranties" and the
"Continuing Subordination Agreements", respectively, and the Guaranties and
Subordination Agreements executed and delivered by the companies listed above
under the caption "Group 2" (the "Group 2 Guarantors") above are hereinafter
collectively referred to as the "Terminating Guaranties" and the "Terminating
Subordination Agreements", respectively. The Continuing Guaranties and the
Terminating Guaranties are hereinafter collectively referred to as the
"Guaranties", and the Continuing Subordination Agreements and the Terminating
Subordination Agreements are hereinafter collectively referred to as the
"Subordination Agreements".
C. The Company intends to enter into a Credit Agreement (the "Union Bank
Credit Agreement") with Union Bank of California, N.A. and the other financial
institutions listed on the signature pages thereof (collectively, the "New
Lenders"), which will make available to the Company a revolving credit facility
not exceeding $65,000,000 inclusive of a $20,000,000 letter of credit
subfacility.
D. The Union Bank Credit Agreement will provide as conditions precedent to
the availability of the credit facilities thereunder (1) that the commitments
under the Citicorp Credit Agreement be terminated, (2) that the Continuing
Guaranties and the Continuing Subordination Agreements be amended and restated
to read in full in substantially the forms of the attached Exhibits A and B,
respectively, and (3) that either (a) the termination of the Terminating
Guaranties be consented to by the holders of 100% of the outstanding principal
amount of the Senior Notes and the Existing Lenders or (b) that the each of the
Terminating Guaranties and the Terminating Subordination Agreements be amended
and restated to read in full in substantially the forms of the attached Exhibits
A and B, respectively.
E. The Union Bank Credit Agreement will also provide for the termination
of the Terminating Guaranties subsequent to their amendment and restatement as
contemplated by clause (2)(b) of paragraph D above in the event that the consent
of holders of 100% of the outstanding principal amount of the Senior Notes is
received subsequent to such amendment and restatement.
F. The Company has requested that the Holders consent to the amendment and
restatement of the Guaranties and the Subordination Agreements and the
termination of the Terminating Guaranties and the Terminating Subordination
Agreements, either as presently in effect or as amended and restated.
(S)1 CONSENT AND WAIVER
(S)1.1 Amendment and Restatement of Guaranties and Subordination
2.
<PAGE>
Agreements. The Holders hereby consent to the execution and delivery by each of
the Group 1 Guarantors and each of the Group 2 Guarantors of an Amended and
Restated Guaranty in substantially the form of the attached Exhibit A and an
Amended and Restated Subordination Agreement in substantially the form of the
attached Exhibit B and waive any violation of Section 7.9 of the Note Agreement
resulting therefrom. The consent and waiver provided for in this (S)1.1 shall
become effective as of the date set forth above upon the execution and delivery
of this Waiver by the Holders of not less than 66_% of the outstanding principal
amount of the Senior Notes and the satisfaction of the additional conditions
set forth in (S)4 of this Waiver.
(S)1.2 Termination of Terminating Guaranties and Terminating Subordination
Agreements. The Holders hereby consent to the termination of the Terminating
Guaranties and the Terminating Subordination Agreements either as presently in
effect or as amended and restated as contemplated by (S)1.1 of this Waiver. The
consent provided for in this (S)1.2 shall become effective upon the execution
and delivery of this Waiver by the Holders of all of the outstanding principal
amount of the Senior Notes and the satisfaction of the additional conditions set
forth in (S)4 of this Waiver. Upon such effectiveness, the Terminating
Guaranties and the Terminating Subordination Agreements shall terminate, and the
Holders shall have no further rights under the Terminating Guaranties or the
Terminating Subordination Agreements, either as presently in effect or as
amended and restated as contemplated by (S)1.1 of this Waiver.
(S)1.3 Additional Guaranties and Subordination Agreements. Each Holder
hereby consents to the execution and delivery by any other Subsidiary of a
Guaranty substantially in the form of the attached Exhibit A and a Subordination
Agreement substantially in the form of the attached Exhibit B and waive any
violation of Section 7.9 of the Note Agreement resulting therefrom. The consent
and waiver provided for in this Section 1.3 shall become effective upon the
execution and delivery of this Waiver by the Holders of not less than 66_% of
the outstanding principal amount of the Senior Notes and the satisfaction of the
additional conditions set forth in (S)4 of this Waiver.
(S)2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
As an inducement to the Purchasers to enter into this Waiver, the Company
represents and warrants that:
(S)2.1 Event of Default. Upon the effectiveness of this Waiver, there
will exist no Default or Event of Default under the Note Agreement.
(S)2.2 Authorization. The execution and delivery by the Company of this
Waiver and the amendment and restatement of the Subordination Agreements as
contemplated by (S)1.1 hereof, have been duly authorized by proper corporate
proceedings and this Waiver, the Note Agreement and the Subordination Agreements
constitute, and when (and in the case of the Terminating Subordination
Agreements if) executed and delivered by the Company will constitute, legal,
valid
3.
<PAGE>
and binding obligations of the Company enforceable by the other parties thereto
against the Company in accordance with their respective terms. The Guaranties
and Subordination Agreements constitute, and when (and in the case of the
Terminating Guaranties and the Terminating Subordination Agreements if) amended
and restated as contemplated by (S)1.1 hereof, will constitute, legal, valid and
binding obligations of the respective Subsidiaries party thereto, enforceable
against such Subsidiaries in accordance with their respective terms, subject to
the provisions hereof regarding the termination of the Terminating Guaranties
and the Terminating Subordination Agreements.
(S)2.3 No Conflict. Neither the execution and delivery by the Company of
this Waiver or the amendment and restatement of the Guaranties or the
Subordination Agreements nor compliance with the provisions hereof or thereof,
or with the Note Agreement, will (in the case of the amended and restated
Guaranties and Subordination Agreements subject to the fulfillment of the
conditions precedent to effectiveness contained in this Waiver) violate any law,
rule, regulation, order, writ, judgment, injunction, decree or award binding on
the Company or any Subsidiary or the certificate or articles of incorporation or
by-laws of the Company or any Subsidiary or the provisions of any indenture,
instrument or agreement to which the Company or any Subsidiary is a party or is
subject, or by which its property is bound, or conflict with or constitute a
default thereunder.
(S)2.4 Representations and Warranties. The representations and warranties
set forth in Section 3.1 of the Note Agreement are true and correct, in all
material respects, as of the date of this Waiver.
(S)3. REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE HOLDERS.
(S)3.1 Authorization. Each Holder executing and delivering this Waiver,
severally and not jointly, represents and warrants to the Company (1) that such
execution and delivery has been duly authorized by proper corporate proceedings,
and that this Waiver has been duly executed and delivered by such Holder and
constitutes the legal, valid and binding obligation of such Holder enforceable
against it in accordance with its terms and (2) in the case of each such Holder
which holds one or more Senior Notes registered in the name of a nominee that
such Holder is the beneficial owner of the Senior Note(s) so held and is
authorized to execute and deliver this Waiver as the "holder" of such Senior
Note(s) within the meaning of (S)9.1 of the Note Agreement.
(S)4. ADDITIONAL CONDITIONS TO EFFECTIVENESS.
The effectiveness of the consent and waiver provided for in (S)1.1 hereof,
the consent provided for in (S)1.2 hereof, and the consent and waiver provided
for in (S)1.3 hereof are each subject to the following additional conditions:
(S)4.1 Union Bank Credit Agreement. The Company and the New Lenders shall
have entered into the Union Bank Credit Agreement.
4.
<PAGE>
(S)4.2 Continuing Guaranties and Continuing Subordination Agreements.
The Continuing Guaranty of each Group A Subsidiary shall have been amended and
restated substantially in the form of Exhibit A attached hereto, and the
Continuing Subordination Agreement of each Group A Subsidiary shall have been
amended and restated substantially in the form of Exhibit B attached hereto.
(S)4.3 Terminating Guaranties and Terminating Subordination Agreements.
Either (1) this Waiver shall have been executed and delivered by the Holders of
all of the outstanding Senior Notes or (2) the Terminating Guaranty of each
Group B Subsidiary shall have been amended and restated substantially in the
form of Exhibit A attached hereto, and the Terminating Subordination Agreement
of each Group B Subsidiary shall have been amended and restated substantially in
the form of Exhibit B attached hereto.
(S)4.4 Existing Lenders. The Existing Lenders shall have waived all of
their rights under the Guaranties and the Subordination Agreements.
(S)5. MISCELLANEOUS.
(S)5.1 Ratification. The terms and provisions of the Note Agreement,
except to the extent waived by this Waiver, shall remain in full force and
effect and is ratified, approved and confirmed in all respects.
(S)5.2 Choice of Law. This Waiver shall be governed by and construed in
accordance with the laws of the State of Illinois.
(S)5.3 Execution in Counterparts. This Waiver may be executed in one or
more counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the Company and the Holders have caused this Waiver
to be executed and delivered by their respective officer or officers thereunto
duly authorized as of the day and year first above written.
VARCO INTERNATIONAL, INC.
By:
-----------------------------------
Title:
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY
By:
-----------------------------------
Title:
5.
<PAGE>
JOHN HANCOCK VARIABLE LIFE INSURANCE
COMPANY
By:
---------------------------------
Title:
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By:
--------------------------------
Title:
JOHN HANCOCK LIFE INSURANCE COMPANY
By:
--------------------------------
Title:
CENTRAL LIFE ASSURANCE COMPANY
By:
--------------------------------
Title:
NORTH ATLANTIC LIFE INSURANCE COMPANY
By:
--------------------------------
Title:
CANADA LIFE INSURANCE COMPANY OF
AMERICA
By:
--------------------------------
Title:
NORTHWEST NATIONAL INSURANCE COMPANY
By:
--------------------------------
Title:
6.
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
===============================================================================
ORIGINAL OUTSTANDING
HOLDER PRINCIPAL PRINCIPAL
(REGISTERED NOTE NO(S)) AMOUNT AMOUNT
- -------------------------------------------------------------------------------
<S> <C> <C>
John Hancock Mutual Life Insurance $ 8,000,000 $ 4,800,000
Company
(R-7)
- -------------------------------------------------------------------------------
John Hancock Variable Life Insurance $ 4,000,000 $ 2,400,000
Company
(R-8 & R-13)
- -------------------------------------------------------------------------------
Massachusetts Mutual Life Insurance $10,000,000 $ 6,000,000
Company
(R-9 & R-11)
- -------------------------------------------------------------------------------
John Hancock Life Insurance Company $ 4,500,000 $ 2,700,000
of America
(R-12)
- -------------------------------------------------------------------------------
Central Life Assurance Company $ 5,000,000 $ 3,000,000
(Registered in name of Salkeld & Co.
as nominee for Bankers Trust Co. as
custodian)
(R-14)
- -------------------------------------------------------------------------------
North Atlantic Life Insurance Company $ 3,000,000 $ 1,800,000
of America
(R-18, R-19 & R-20)
- -------------------------------------------------------------------------------
Canada Life Insurance Company of $ 5,000,000 $ 3,000,000
America
(Registered in the name of Cummings
& Co. as nominee)
(R-21)
- -------------------------------------------------------------------------------
Northwestern National Life Insurance $ 2,500,000 $ 1,500,000
Company
(Registered in the name of Salkeld &
Co. as nominee)
(R-22, R-23 & R-24)
- -------------------------------------------------------------------------------
United Services Life Insurance $ 4,800,000 $ 4,800,000
Company
(Registered in the name of Salkeld &
Co. as nominee)
(Principal amount reduced from
$8,000,000 to $4,800,000 upon
transfer to reflect principal
prepayments of $1,600,000 on each
of June 30, 1995 and 1996)
(R-25)
- -------------------------------------------------------------------------------
Total: $46,800,000* $30,000,000
===============================================================================
</TABLE>
* Total does not add to $50,000,000 due to issuance of Senior Note to United
Services Life Insurance Company in reduced principal amount to reflect
prepayments of principal aggregating $3,200,000 made prior to transfer.
<PAGE>
EXHIBIT 4.2
VARCO INTERNATIONAL, INC.
WAIVER AND FOURTH AMENDMENT
TO
NOTE AGREEMENT
Dated as of September 30, 1997
To Each of the institutions Named
in the attached Schedule 1 (the "Holders")
Ladies and Gentlemen:
Reference is made to the Note Agreement dated as of July 1, 1992 (as
heretofore amended, modified or supplemented by amendment or waiver, the "Note
Agreement") between Varco International, Inc., a California corporation (the
"Company"), and each of the Purchasers named in schedule 1 thereto pursuant to
which the Company issued $50,000,000 aggregate principal amount of its 8.95%
Senior Notes due June 30, 1999 (the "Notes"). This Waiver and Fourth Amendment
to Note Agreement is hereinafter referred to as the "Waiver". Capitalized terms
used and not otherwise defined herein shall have the meanings subscribed to such
terms in the Note Agreement.
The Company has provided to the Holders a Notice of Default dated October
28, 1997 (the "Notice of Default") and requested a Waiver and an amendment of
section 7.3 of the Note Agreement, and the Holders are willing to agree to such
amendment and grant such waiver on the terms and conditions hereinafter set
forth.
In consideration of the premises and for the good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
company and the Holders agree as follows:
1. AMENDMENT OF THE NOTE AGREEMENT.
Amendment of Section 7.3. Section 7.3 of the Note Agreement is amended
to read in its entirety as follows:
"7.3 Current Ratio. The Company will not permit, at any time, the
--------------
ratio of Consolidated Current Assets to consolidated Current Liabilities to
be less than 1.5 to 1.0."
2. CONSENT, WAIVER AND AGREEMENT. The Holders hereby (1) acknowledge receipt
of the Notice of Default and (ii) Any Event of Default arising under Section 7.3
of the Note Agreement at any time on or before September 30, 1997 and any right
to accelerate or other rights of the Holders attendant thereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
As an inducement to the Holders to enter into this Waiver, the Company
represents and warrants that:
3.1 Event of Default. Upon the effectiveness of this Waiver, there will
exist no Default or Event of Default under the Note Agreement, as amended
hereby.
3.2 Authorization. The execution and delivery by the Company of this Waiver
have been duly authorized by proper corporate proceedings, and this Waiver and
the Note agreement, as amended hereby, constitute legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms.
<PAGE>
3.3 No Conflict. Neither the execution and delivery by the Company of this
Waiver, nor compliance with the provisions hereof or with the Note Agreement as
amended hereby, will violate any law, rule, regulation, order, writ, judgment,
injunction, decree or award binding on the Company or the articles of
incorporation or by-laws of the Company or the provisions of any indenture,
instrument or agreement to which the Company is a party or is subject, or by
which it or its property is bound, or conflict with or constitute a default
thereunder.
3.4 Representations and Warranties. The representations and warranties set
forth in Section 3.1 of the Note Agreement are true and correct, in all material
respects, as of the date of this Waiver.
4. EFFECTIVE DATE OF WAIVER. This Waiver shall be effective as of the date set
forth above upon the execution and delivery of this Waiver by the Holders of at
least 66-2/3% in aggregate principal amount of the Notes outstanding.
5. MISCELLANEOUS.
5.1 Ratification. The Note Agreement, as amended hereby, shall remain in
full force and effect and is ratified, approved and confirmed in all respects.
5.2 Reference to Note Agreement. From and after the effective date of this
Waiver, each reference in the Note Agreement to "this Agreement," "hereof," or
"hereunder" or words like import, and all references to the Note Agreement in
any and all agreements, instrument, documents, notes, certificates and other
writings of every kind and nature shall be deemed to mean the Note Agreement, as
modified and amended by this Waiver.
5.3 Choice of Law. This Waiver shall be governed by and construed in
accordance with the laws of the State of Illinois.
5.4 Execution in Counterparts. This Waiver may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the Company and the Holders have caused this Waiver to
be executed and delivered by their respective officer or officers thereunto duly
authorized.
VARCO INTERNATIONAL, INC.
By: ____________________
Title:
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: ____________________
Title:
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By: ____________________
Title:
<PAGE>
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
By: ____________________
Title:
JOHN HANCOCK LIFE
INSURANCE COMPANY
By: ____________________
Title:
AMERUS LIFE INSURANCE COMPANY
(formerly Central Life Assurance Company)
By: ____________________
Title:
RELIASTAR BANKERS SECURITY
LIFE INSURANCE COMPANY as
successor by merger to NORTH ATLANTIC
LIFE INSURANCE COMPANY
By: ____________________
Title:
CANADA LIFE INSURANCE COMPANY
OF AMERICA
By: ____________________
Title:
RELIASTAR LIFE INSURANCE COMPANY
F/K/A/ Northwestern National Life Insurance
Company
By: ____________________
Title:
RELIASTAR LIFE INSURANCE COMPANY
F/K/A/ United Services Life Insurance
Company
By: ____________________
Title:
<PAGE>
SCHEDULE 1
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ORIGINAL OUTSTANDING
HOLDER PRINCIPAL PRINCIPAL
(REGISTERED NOTE NO(S)) AMOUNT AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
John Hancock Mutual Life Insurance Company $ 8,000,000 $ 3,200,000
(R-7)
- --------------------------------------------------------------------------------
John Hancock Variable Life Insurance Company $ 4,000,000 $ 1,600,000
(R-8 & R-13)
- --------------------------------------------------------------------------------
Massachusetts Mutual Life Insurance of America $10,000,000 $ 4,000,000
(R-9 & R-11)
- --------------------------------------------------------------------------------
John Hancock Life Insurance Company of America $ 4,500,000 $ 1,800,000
(R-12)
- --------------------------------------------------------------------------------
Central Life Assurance Company $ 5,000,000 $ 2,000,000
(Registered in name of Salkeld & Co. as
nominee for Bankers Trust Co. as custodian)
(R-14)
- --------------------------------------------------------------------------------
North Atlantic Life Insurance Company $ 3,000,000 $ 1,200,000
of America
(R-18, R-19 & R-20)
- --------------------------------------------------------------------------------
Canada Life Insurance Company of America $ 5,000,000 $ 2,000,000
(Registered in the name of Cummings & Co. as
nominee)
(R-21)
- --------------------------------------------------------------------------------
Northwestern National Life Insurance Company $ 2,500,000 $ 1,000,000
(Registered in the name of Salkeld & Co. as
nominee)
(R-22, R-23 & R-24)
- --------------------------------------------------------------------------------
United Services Life Insurance Company $ 4,800,000 $ 3,200,000
(Registered in the name of Salkeld & Co. as
nominee)
(Principal amount reduced from $8,000,000 to
$4,800,000 upon transfer to reflect principal
prepayments of $1,600,000 on each of June 30,
1995 and 1996)
(R-25)
- --------------------------------------------------------------------------------
TOTAL $46,800,000* $20,000,000
- --------------------------------------------------------------------------------
</TABLE>
* Total does not add to $50,000,000 due to issuance of Senior Note to United
Services Life Insurance Company in reduced principal amount to reflect
prepayments of principal aggregating $3,200,000 made prior to transfer.
<PAGE>
EXHIBIT 4.3
VARCO INTERNATIONAL, INC.
SECOND AMENDMENT
TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is dated as of
August 13, 1997 and entered into by and among VARCO INTERNATIONAL, INC., a
California corporation ("COMPANY"), THE FINANCIAL INSTITUTIONS LISTED ON THE
SIGNATURE PAGES HEREOF (each individually referred to herein as a "LENDER" and
collectively as "LENDERS"), and UNION BANK OF CALIFORNIA, N.A. ("UBOC"), as
agent for Lenders (in such capacity, "AGENT"), and is made with reference to
that certain Credit Agreement dated as of June 27, 1997, as amended by a First
Amendment to Credit Agreement dated as of July 15, 1997 (as so amended the
"CREDIT AGREEMENT"), by and among Company, Lenders and Agent. Capitalized terms
used herein without definition shall have the same meanings herein as set forth
in the Credit Agreement.
RECITALS
WHEREAS, the parties hereto wish to amend the Credit Agreement in certain
respects;
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
AMENDMENT TO SUBSECTION 7.9. RESTRICTION ON LEASES
---------------------------------------------------
Subsection 7.9 of the Credit Agreement is hereby amended by deleting
"$5,000,000" set forth therein and substituting therefor "$10,000,000".
SECTION 2. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
(i) Each reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import referring to the
Credit Agreement, and each reference in the other Loan Documents to the
"Credit
1
<PAGE>
Agreement", "thereunder", "thereof" or words of like import referring to
the Credit Agreement shall mean and be a reference to this Amended
Agreement.
(ii) Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of Agent
or any Lender under, the Credit Agreement or any of the other Loan
Documents.
B. FEES AND EXPENSES. Company acknowledges that all reasonable
costs, fees and expenses as described in subsection 10.2 of the Credit Agreement
incurred by Agent and its counsel with respect to this Amendment and the
documents and transactions contemplated hereby shall be for the account of
Company.
C. HEADINGS. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING
WITHOUT LIMITATION SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA),
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment shall become
effective and shall be retroactive to June 27, 1997 upon the execution of a
counterpart hereof by Requisite Lenders and each of the other parties hereto and
receipt by Company and Agent of written or telephonic notification of such
execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
COMPANY:
VARCO INTERNATIONAL, INC.
By: /s/ R.A. KERTSON
---------------------------------------
Title: Vice President
Notice Address:
743 North Eckhoff Street
Orange, CA 92868
Attention: Chief Financial Officer
LENDERS:
UNION BANK OF CALIFORNIA, N.A.
as a Lender, as Issuing Lender and as Agent
By: /s/
----------------------------------------
Title:
Notice Address:
445 South Figueroa Street
16th Floor
Los Angeles, CA 90071
Attention: Andrew G. Ewing, Jr.
S-1
<PAGE>
THE CHASE MANHATTAN BANK, as a Lender
By: /s/
---------------------------------------
Title: Vice President
Notice Address:
707 Travis Street, 5th Floor
Houston, TX 77002
Attention: Darl Petty
S-2
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as a Lender
By: /s/ ROBERT L. BARRETT
---------------------------------------
Title: Vice President
Notice Address:
60 Wall Street
New York, NY 10260
Attention: Robert Barrett
S-3
<PAGE>
EXHIBIT 4.4
VARCO INTERNATIONAL, INC.
THIRD AMENDMENT
TO CREDIT AGREEMENT
This THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as
of November 7, 1997 and entered into by and among VARCO INTERNATIONAL, INC., a
California corporation ("Company"), THE FINANCIAL INSTITUTIONS LISTED ON THE
SIGNATURE PAGES HEREOF (each individually referred to herein as a "Lender" and
collectively as "Lenders"), and UNION BANK OF CALIFORNIA, N.A. ("UBOC"), as
agent for Lenders (in such capacity, "Agent"), and is made with reference to
that certain Credit Agreement dated as of June 27, 1997, as amended by a First
Amendment to Credit Agreement dated as of July 15, 1997 and by a Second
Amendment to Credit Agreement dated as of August 13, 1997 (as so amended the
"Credit Agreement"), by and among Company, Lenders and Agent. Capitalized terms
used herein without definition shall have the same meanings herein as set forth
in the Credit Agreement.
RECITALS
WHEREAS, the parties hereto wish to amend the Credit Agreement in
certain respects;
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
Section 1. AMENDMENTS TO THE CREDIT AGREEMENT
A. Amendment to Subsection 7.6D. MINIMUM CONSOLIDATED CURRENT RATIO
----------------------------------------------------------------
Subsection 7.6D of the Credit Agreement is hereby amended by deleting
"2.00 to 1.00" set forth therein and substituting therefor "1.50 to 1.00".
B. Amendment to Compliance Certificate
-----------------------------------
Exhibit V to the Credit Agreement (Form of Compliance Certificate) is
hereby amended by deleting "2.00:1.00" in item I.4. of Attachment 1, and
substituting therefor "1.50:1.00".
1
<PAGE>
Section 2. MISCELLANEOUS
A. Reference to and Effect on the Credit Agreement and the Other
Loan Documents.
(i) Each reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import referring to the
Credit Agreement, and each reference in the other Loan Documents to the
"Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to this
Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Documents shall remain in full force and effect
and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of Agent
or any Lender under, the Credit Agreement or any of the other Loan
Documents.
B. Fees and Expenses. Company acknowledges that all reasonable
costs, fees and expenses as described in subsection 10.2 of the Credit Agreement
incurred by Agent and its counsel with respect to this Amendment and the
documents and transactions contemplated hereby shall be for the account of
Company.
C. Headings. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
D. Applicable Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA
(INCLUDING WITHOUT LIMITATION SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF
CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. Counterparts; Effectiveness. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment shall become
effective and shall be retroactive to September 30, 1997 upon the execution of a
counterpart hereof by Requisite Lenders and each of the other
2
<PAGE>
parties hereto and receipt by Company and Agent of written or telephonic
notification of such execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
COMPANY:
VARCO INTERNATIONAL, INC.
By:
---------------------------------------
Name:
Title:
Notice Address:
743 North Eckhoff Street
Orange, CA 92868
Attention: Chief Financial Officer
LENDERS:
UNION BANK OF CALIFORNIA, N.A.
as a Lender, as Issuing Lender and as Agent
By:
----------------------------------------
Name:
Title:
Notice Address:
445 South Figueroa Street
16th Floor
Los Angeles, CA 90071
Attention: Andrew G. Ewing, Jr.
S-1
<PAGE>
THE CHASE MANHATTAN BANK, as a Lender
By:
---------------------------------------
Name:
Title:
Notice Address:
707 Travis Street, 5th Floor
Houston, TX 77002
Attention: Darl Petty
S-2
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as a Lender
By:
---------------------------------------
Name:
Title:
Notice Address:
60 Wall Street
New York, NY 10260
Attention: Robert Barrett
S-3
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
---------------------------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $7,167,000 $15,874,000
<CAPTION>
Total Number Average Number Stock Option Shares Used
Number of of Shares after of Shares Equivalent To Calculate
Days Weighing Outstanding Shares EPS
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
B. CALCULATION OF AVERAGE SHARES OUTSTANDING
Common Stock Outstanding from time-to-time during:
Three Months Ended September 30, 92 2,889,117,512 31,403,451 714,668 32,118,119
Nine Months Ended September 30, 274 8,431,937,537 30,773,495 714,668 31,488,163
C. CALCULATION OF EARNINGS PER SHARE
Net Income After Tax
Income Per Share = ------------------------
Total Shares Outstanding
Income Per Share =
Three Months Ended September 30, 7,167,000 = $0.22
------------
32,118,119
Nine Months Ended September 30, 15,874,000 = $0.50
------------
31,488,163
</TABLE>
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
---------------------------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $13,401,000 $31,555,000
<CAPTION>
Total Number Average Number Stock Option Shares Used
Number of of Shares after of Shares Equivalent To Calculate
Days Weighing Outstanding Shares EPS
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
B. CALCULATION OF AVERAGE SHARES OUTSTANDING
Common Stock Outstanding from time-to-time during:
Three Months Ended September 30, 92 2,933,522,382 31,886,113 825,010 32,711,123
Nine Months Ended September 30, 273 8,668,146,320 31,751,452 825,010 32,576,462
C. CALCULATION OF EARNINGS PER SHARE
Net Income After Tax
Income Per Share = ------------------------
Total Shares Outstanding
Income Per Share =
Three Months Ended September 30, 13,401,000 = $0.41
------------
32,711,123
Nine Months Ended September 30, 31,555,000 = $0.97
------------
32,576,462
</TABLE>
<PAGE>
EXHIBIT 19
Varco International, Inc.
1997 Third Quarter Report
Varco
<PAGE>
To Our Shareholders
Varco's third quarter results reflect record Revenues, Net Income and order
bookings, as the overall market for oilfield services and equipment continues to
strengthen, and those factors especially favorable to Varco remain positive.
As discussed in our recent reports to you, oil company exploration and
production spending has been accelerating, as has the portion of that spending
directed to the offshore areas of the world. The resulting demand for offshore
drilling rigs has led to an overall worldwide utilization rate in excess of 95
per cent, with the utilization of selected categories of rigs effectively 100
per cent. In response, new rigs are being constructed and rigs which had been
converted to alternate uses are being reconverted to drilling rigs.
Since a typical offshore rig, particularly one capable of drilling in deep water
and hostile environments, requires a significant amount of equipment of the
type supplied by Varco, these trends have created a sharp increase in demand for
our products. With rig owners generally seeking to build rigs which offer
greater capabilities and improved productivity over older designs, the newer
technology equipment which we have developed in recent years continues to gain
acceptance, thereby increasing the total dollar value of products which we
provide to such a rig.
Reflecting the stronger market, third quarter Revenues reached $140.4 million
and Net Income was $13.4 million, $.41 per share, each representing all-time
records for Varco. By comparison, Net Income was $7.2 million, $.22 per share,
on Revenues of $98.1 million for the third quarter of 1996. Incoming orders for
the most recent three months totaled $266.5 million, also the highest quarterly
total in the Company's history, lifting backlog at quarter-end to $395.6
million.
For the twelve months ended September 30, 1997 incoming orders totaled $743
million, exceeding revenues by approximately 51 per cent. At that level,
customer demand is outpacing our ability to deliver; consequently, we have begun
taking steps to increase manufacturing capacity. Our initial goal is to achieve
manufacturing and related capacity approximating $750 million in annualized
revenue by mid-1998.
It is our view that the market conditions which exist today are based upon
solid, sustainable economics throughout our industry. We also believe that the
strategic acquisitions we have made, coupled with our continued emphasis on
product development, have strongly positioned Varco to benefit from, and
contribute to, the current industry environment. We are committed to leveraging
that position to achieve a rate of growth which exceeds that of the overall
industry, and to generating superior rates of return for our shareholders.
At its November meeting, the Board of Directors declared a two-for-one split of
the Common Stock, payable on December 4 to shareholders of record on November
20. Additionally, the Board adopted a Shareholder Rights Plan. While this
action in not in response to any specific takeover threat, the Board feels it
prudent to take steps to protect Varco's shareholders from any unfair or
coercive takeover attempt.
We appreciate the continued support of our shareholders, customers, employees
and friends.
/s/ Walter B. Reinhold /s/ George I. Boyadjieff
Walter B. Reinhold George I. Boyadjieff
Chairman President and
Chief Executive Officer
November 12, 1997
<PAGE>
CONDENSED CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
- --------------
Cash and cash equivalents $ 52,632 $ 5,794
Receivables (net) 129,311 95,160
Inventories 123,109 91,873
Other 16,128 13,835
- -------------------------------------------------------------------------------
Total Current Assets 321,180 206,662
Property, plant and equipment at cost
less accumulated depreciation 61,582 48,711
Rental inventory less accumulated
depreciation 16,777 13,601
Cost in excess of net assets acquired 34,710 35,879
Other assets 11,348 11,168
- -------------------------------------------------------------------------------
Total Assets $445,597 $316,021
===============================================================================
Current Liabilities
- -------------------
Accounts payable $ 47,870 $ 37,815
Other liabilities 115,750 38,601
Current portion of long-term debt 10,000 10,000
- -------------------------------------------------------------------------------
Total Current Liabilities 173,620 86,416
Long-term debt 29,483 22,715
Other non-current liabilities 12,578 11,382
- -------------------------------------------------------------------------------
Total Liabilities 215,681 120,513
Shareholders' Equity
- --------------------
Common Stock and additional
paid-in capital 146,827 143,533
Retained earnings 83,089 51,975
- -------------------------------------------------------------------------------
Total Shareholders' Equity 229,916 195,508
- -------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $445,597 $316,021
===============================================================================
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 31,557 $ 15,874
Depreciation and amortization 12,187 9,667
Increase (decrease) in operating
cash flows:
Receivables (34,151) (28,465)
Inventories (31,236) (15,303)
Additions to rental equipment (7,631) (7,689)
Accounts payable 10,055 6,751
Customer deposits 67,222 3,385
Taxes payable 759 3,756
Other 7,568 2,655
- --------------------------------------------------------------------------------
Net cash from (used in)
operating activities 56,330 (9,369)
- --------------------------------------------------------------------------------
Investing Activities
- --------------------
Equipment purchases (20,097) (7,344)
Proceeds from equipment sales 1,227 587
- --------------------------------------------------------------------------------
Net cash (used in) investing activitites (18,870) (6,757)
- --------------------------------------------------------------------------------
Financing Activities
- --------------------
Decrease in long-term debt (10,000) (10,000)
Increase in long-term debt 17,000 8,000
Proceeds from issuance of Common Stock 2,725 15,897
Deferred issue costs (347)
- --------------------------------------------------------------------------------
Net cash from financing activities 9,378 13,897
- --------------------------------------------------------------------------------
Net change in cash and cash equivalents 46,838 (2,229)
- --------------------------------------------------------------------------------
Cash and cash equivalents at
beginning of year 5,794 6,762
- --------------------------------------------------------------------------------
Cash and cash equivalents at
end of quarter $ 52,632 $ 4,533
================================================================================
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
- --------
Net sales $128,607 $89,706 $338,382 $236,543
Rental income 11,644 8,198 32,405 21,491
Other income 157 208 326 1,397
- ---------------------------------------------------------------------------------------
140,408 98,112 371,113 259,431
- ---------------------------------------------------------------------------------------
Costs and Expenses
- ------------------
Cost of sales 84,815 62,244 229,919 163,751
Cost of rental income 3,369 2,691 9,544 6,592
Selling, general and administrative expenses 24,899 17,804 65,081 51,056
Research and development costs 5,524 3,223 14,560 10,585
Interest expense 990 918 3,099 2,959
- ---------------------------------------------------------------------------------------
119,597 86,880 322,203 234,943
- ---------------------------------------------------------------------------------------
Income before income taxes 20,811 11,232 48,910 24,488
Provision for income taxes 7,410 4,065 17,355 8,614
- ---------------------------------------------------------------------------------------
Net income $ 13,401 $ 7,167 $ 31,555 $ 15,874
=======================================================================================
Net income per share of Common Stock $ .41 $ .22 $ .97 $ .50
=======================================================================================
Shares used to calculate earnings per share 32,711 32,118 32,576 31,488
=======================================================================================
</TABLE>
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, 1996.
<PAGE>
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, increased approximately 17% in the third quarter of 1997 to an
average of approximately 2,197 from an average of approximately 1,878 during the
same period in 1996. North American drilling activity increased approximately
29% to an average of approximately 1,388 rigs and international drilling
activity increased to an average of approximately 809 rigs as compared to 801 in
the third quarter of 1996.
Offshore drilling activity continued its year-over-year strength, as
reflected by an increase in rig utilization (mobile offshore rigs under contract
as a percent of available rigs). For the third quarter of 1997, mobile offshore
rig utilization averaged 95% as compared to 91% in the third quarter of 1996.
The higher utilization was accompanied by increasing day rates and longer
contract periods, particularly among the "premium" offshore rigs.
The increase in drilling activity, particularly the increase in offshore
rig utilization, has led to higher day rates and improved profits and cash flow
for the Company's major customers, the offshore drilling contractors. This has
led to the construction of new offshore drilling rigs. In September of 1997
there were approximately 41 new offshore rigs under construction as compared to
11 in September of 1996.
RESULTS OF OPERATIONS
- ---------------------
Set forth below are the net orders and revenues for the Company's five
operating divisions:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Orders
- ----------
Varco Drilling Systems $ 81,976 $ 28,497 $174,260 $ 81,653
Varco BJ Oil Tools 24,024 14,110 70,999 41,699
Martin-Decker/TOTCO
Instrumentation 23,649 15,861 69,858 44,600
Shaffer 128,190 67,696 247,883 141,303
Thule Rigtech 8,613 1,810 16,475 6,123
- ----------------------------------------------------------------------------------------
Total $266,452 $127,974 $579,473 $315,378
========================================================================================
Revenues
- --------
Varco Drilling Systems $ 45,158 $ 30,142 $110,255 $ 87,373
Varco BJ Oil Tools 17,832 12,672 45,763 36,684
Martin-Decker/TOTCO
Instrumentation 23,061 14,658 62,060 43,727
Shaffer 52,119 38,904 146,504 83,671
Thule Rigtech 2,081 1,528 6,205 6,579
- ----------------------------------------------------------------------------------------
Total $140,251 $ 97,904 $370,787 $258,034
========================================================================================
</TABLE>
<PAGE>
Order bookings more than doubled in the third quarter of 1997 as compared
to the third quarter of 1996 and increased $264.1 million, 84%, in the first
nine months of 1997 as compared to the same period of 1996. These 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
Drilling Systems Divisions as well as the products of the other Divisions. In
addition, the incoming order rate was favorably impacted by the overall 17%
increase in worldwide drilling activity discussed above.
The Company's increased revenue levels in the 1997 periods as compared to
1996 are generally due to improved industry conditions as discussed above.
Particularly significant has been the impact on all Divisions of the upgrading,
conversion and new construction of floating offshore rigs. Most of the 1997
revenue increases are due to the increase in the offshore construction market.
At September 30, 1997 the Company's backlog of unshipped orders was
approximately $395.6 million as compared to $186.9 million at December 31, 1996.
Orders for new rigs and major upgrades generally include the Company's longer
lead-time products, nine to twelve months. As a result, the Company's backlog
has more than doubled during the last nine months to the highest level in the
Company's history. The Company expects that most of the backlog will ship by
December 31, 1998. In accordance with industry practice, orders and commitments
generally are cancelable by customers at any time.
Gross margins (net sales and rental income less costs of sales and rental
income) as a percentage of net sales and rental income improved year-over-year.
For the third quarter of 1997 gross margins were 37.1%, compared to 33.7% for
the same period in 1996 and they were 35.4% and 34.0% in the first nine months
of 1997 and 1996, respectively. Third quarter 1997 gross margins were favorably
impacted by improved selling prices, the impact of the strong United States
dollar on foreign manufacturing costs and on lower per unit manufacturing
costs. Improved selling prices accounted for approximately two-thirds of the
increase while the impact of the dollar and lower per unit manufacturing costs
accounted for the remaining improvement. The higher 1997 nine-month margins
reflect the impact of the third quarter improvements.
The Company believes that new product development is a significant factor
for the future of the Company. During the first nine months of 1997 the Company
spent $14.6 million or 3.9% of revenues on new product development. This
compares to $10.6 million or 4.1% of revenues during the same period in 1996.
<PAGE>
The increase in selling, general and administrative expenses compared to
1996 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 nine months of 1997 this percent was 17.5% and it was
17.7% for the third quarter of 1997. As a percent of revenues, selling, general
and administrative expenses were 19.7% and 18.1% for the first nine months and
third quarter of 1996, respectively.
Overall Company employment at September 30, 1997 was 2,594 (including 369
temporary employees) which compares to 1,843 (including 230 temporary
employees) a year ago. This increase is primarily due to an increase in
manufacturing employees.
The effective tax rate for the third quarter of 1997 was 35.6% as compared
to 36.2% for the third quarter of 1996. The lower tax rate is due to a lower
effective foreign tax rate in the third quarter of 1997 as compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
September 30, 1997 cash and cash equivalents were $52.6 million as compared
to the December 31, 1996 balance of $5.8 million. This increase is due to the
receipt of $67.2 million in customer deposits on equipment orders. These
deposits will be used to partially fund the working capital requirements of
these orders.
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 $20.0 million principal balance of the Senior Notes
is payable in two equal installments on June 30, 1998 and 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. Proceeds from the initial advances were used to payoff a previous
credit agreement with Citicorp USA, Inc. and Citibank, N.A and to make the June
30, 1997 principal and interest payment on the Senior Notes. At September 30,
1997 there were $20.0 million in advances outstanding and $11.2 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
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 on December 4, 1997 to
shareholders of record at the close of business on November 20, 1997.
At September 30, 1997 the Company's working capital was $147.6 million as
compared to $120.2 million at December 31, 1996 and its current ratio was 1.8 to
1.0 as compared to 2.4 to 1.0 at December 31, 1996. The increase in working
capital is primarily due to increases in inventory and receivables during the
first nine months of 1997. The decline in the current ratio results from the
increase in customer deposits. Long-term debt as a percent of total
capitalization was 11% at September 30, 1997 as compared to 10% at December 31,
1996.
The Company's capital expenditures during the first nine months of 1997
were $20.1 million as compared to $7.3 million for the first nine months of
1996. The Company currently plans to increase its rate of capital expenditures
and the Company estimates that capital expenditures will be in excess of $50.0
million over the next fifteen months. 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.
PROFILE
- --------------------------------------------------------------------------------
Varco International, Inc. is a leading manufacturer of products used in the oil
and gas well drilling industry worldwide. The Company also leads in the
development of new technology and equipment to enhance the safety and
productivity of the drilling process. Operating through five divisions, the
Company's products include: integrated systems for rotating and handling the
various sizes and types of pipe used on a drilling rig; conventional pipe
handling tools, hoisting equipment and rotary equipment; drilling rig
instrumentation; pressure control and motion compensation equipment; and solids
control equipment and systems.
INVESTOR CONTACT
- --------------------------------------------------------------------------------
Richard A. Kertson
Vice President - Finance
Varco International, Inc.
743 North Eckhoff Street
Orange, California 92868
Tel (714) 978-1900
Fax (714) 937-5029
E-mail: [email protected]
Web site: http://www.varco.com
VARCO
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<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 SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 52,632,000
<SECURITIES> 0
<RECEIVABLES> 131,195,000
<ALLOWANCES> (1,884,000)
<INVENTORY> 123,109,000
<CURRENT-ASSETS> 321,180,000
<PP&E> 121,320,000
<DEPRECIATION> (59,738,000)
<TOTAL-ASSETS> 445,597,000
<CURRENT-LIABILITIES> 173,620,000
<BONDS> 29,483,000
0
0
<COMMON> 146,827,000
<OTHER-SE> 83,089,000
<TOTAL-LIABILITY-AND-EQUITY> 445,597,000
<SALES> 140,251,000
<TOTAL-REVENUES> 140,408,000
<CGS> 88,184,000
<TOTAL-COSTS> 113,083,000
<OTHER-EXPENSES> 5,524,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 990,000
<INCOME-PRETAX> 20,811,000
<INCOME-TAX> 7,410,000
<INCOME-CONTINUING> 13,401,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,401,000
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
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