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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 (I.R.S. Employer Identification Number)
of incorporation or organization)
743 North Eckhoff Street, 92868
Orange, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 978-1900
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ((S)229.405 of
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this chapter) is not contained herein, and will not be contained to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of February 28, 1997, 31,614,016 shares of common stock were outstanding.
The aggregate market value of the common stock on such date (based upon the
closing price of such shares on the New York Stock Exchange) held by persons
other than affiliates of registrant was approximately $679.8 million; the basis
of this calculation does not constitute a determination by the registrant that
such persons are affiliates, as defined in Rule 405.
Documents Incorporated by Reference
Part II, Items 5,6,7 and 8 The Company's Annual Report to Shareholders
for the year ended December 31, 1996.
Part III, Items 10,11,12 and 13 The Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to
be held on May 20, 1997 to be filed with
the Commission not later than April 30,
1997.
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ITEM 1. Business
Introduction
Varco was founded in 1908 and incorporated under the laws of the State of
California in 1911. Varco and its subsidiaries are engaged in the design,
manufacture, sale and rental of drilling tools, equipment and integrated systems
and rig instrumentation used for oil and gas drilling worldwide.
The Company's principal products are drilling equipment, drilling rig
instrumentation, pressure control and motion compensation equipment and solids
control equipment. Drilling equipment includes integrated systems for rotating
and handling the various sizes and types of pipe utilized on a drilling rig
("drilling systems") and specific purpose pipe handling tools, hoisting
equipment and rotary equipment ("oil tools"). Drilling systems are
manufactured and sold by the Varco Drilling Systems Division while oil tools are
manufactured and sold by the Varco BJ Oil Tools Division. Drilling rig
instrumentation products are manufactured, sold and rented by the Martin-
Decker/TOTCO Instrumentation Division. Pressure control and motion compensation
equipment are manufactured and sold by the Shaffer Division. Solids control
equipment and systems are sold by the Thule Rigtech Division.
The following table sets forth the contribution to the Company's total
revenues of its five Divisions:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995 1994
-----------------------------
(in thousands)
<S> <C> <C> <C>
Varco Drilling Systems $117,658 $101,440 $74,405
Varco BJ Oil Tools 53,830 41,663 41,309
Martin-Decker/TOTCO Instrumentation 62,227 58,013 54,176
Shaffer 123,846 60,925 50,900
Thule Rigtech 9,419 10,310 653
</TABLE>
Sales of the Company's products depend on the level of construction of new
drilling rigs and the replacement and upgrading of equipment for existing rigs,
particularly for offshore rigs and intermediate to deep land rigs (rigs designed
for drilling in excess of 8,000 feet). The level of construction of drilling
rigs and the rate at which equipment on existing rigs is replaced or upgraded
depends, in substantial part, on the level of worldwide exploration and
development drilling activity. Rental revenue, which is generated predominately
by the Martin-Decker/TOTCO Instrumentation Division, is directly related to the
level of drilling activity, particularly in the U.S. and Canada. Sales of
equipment and sales and rentals of instrumentation products have also depended
on the design, development and successful introduction of new products for the
drilling industry. Equipment and instrumentation are also sold to existing rigs
for use as spare or replacement parts.
The level of worldwide 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Drilling Process
An oil or gas well is drilled by a bit attached to the end of the drill stem
which is made up of 30-foot lengths of drill pipe joined by threaded connections
known as "tool joints." Heavy drill collars at the bottom of the drill stem
put weight on the bit. Using the conventional rotary drilling method, the drill
stem is turned from the rotary table in the floor of the drilling rig by torque
applied to the "kelly" (a square or hexagonal section of pipe located at the
top
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of the drill stem) by means of the master bushing and kelly bushing. During
the drilling process heavy fluids ("drilling mud") are pumped down through the
drill stem and forced out through the bit. The drilling mud returns to the
surface through the hole area surrounding the drill stem, carrying with it the
cuttings drilled out by the bit. The cuttings are removed from the mud by a
filtering system and the mud is continuously recirculated back into the hole.
The drilling mud also serves to contain pressure surges ("kicks") that may
intrude into the formation.
As the hole depth increases, the kelly must be removed frequently so that
additional 30-foot sections of pipe can be added to the drill stem, which may
reach lengths in excess of five miles. When the bit becomes dull, the entire
drill stem is pulled out of the hole and disassembled, the disconnected sections
of pipe are set aside or "racked," the old bit is replaced and the drill stem
reassembled and lowered back into the hole (a process called "tripping").
During drilling and tripping operations, tool joints must be screwed together
and tightened ("spun in" and "made up"), and loosened and unscrewed
("broken out" and "spun out"). When the hole has reached certain depths, all
of the drill pipe is pulled out of the hole and larger diameter pipe known as
casing is lowered into the hole and cemented in place in order to protect
against collapse and contamination of the hole.
The raising and lowering of the drill stem while drilling or tripping, and
the lowering of casing into the well bore, are accomplished with the rig's
hoisting system. A conventional hoisting system is a block and tackle mechanism
and the derrick must have sufficient structural integrity to support the entire
weight of the drill stem or casing string.
During the drilling process it is possible for formation fluids, such as
natural gas, water or oil, to get into the wellbore creating additional pressure
which, if not controlled, could lead to a "blowout" of the well. To prevent
blowouts a series of high-pressure valves known as blowout preventers ("BOPs")
are positioned at the top of the well and, when activated, form pressure tight
seals which prevent the escape of fluids. When closed, conventional BOPs prevent
normal rig operations and are activated only if drilling mud and normal well
control procedures cannot safely contain the pressure. BOPs must be designed to
contain pressure of up to 15,000 psi.
After the well has reached its total depth and the final section of casing
has been set, the drilling rig is moved off of the well and the well is prepared
to begin producing oil or gas in a process known as "well completion." A
producing well may undergo workover procedures to extend its life and increase
its production rate.
The Top Drive Drilling System, originally introduced by Varco in 1982,
significantly alters the traditional drilling process. Using the Top Drive
Drilling System, the drill stem is rotated from its top by means of a large
electric motor. This motor is affixed to rails installed in the derrick and
traverses from near the top of the derrick to the rig floor as the drill stem
penetrates the earth. Therefore, the Top Drive eliminates the use of the rotary
table for drilling. Components of the Top Drive also are used to connect
additional lengths of pipe to the drill stem during drilling operations.
Varco Drilling Systems
The Varco Drilling Systems Division designs and manufactures integrated systems
for rotating and handling the various sizes and types of pipe used on a drilling
rig. They are designed to enhance the safety and productivity of the drilling
rig through mechanization and automation.
The Varco Top Drive Drilling System ("TDS") combines elements of pipe
handling tools, as well as hoisting and rotary equipment, in a single system.
Torque to turn the drill stem is imparted directly by means of a large electric
motor which moves up and down along rails installed in the derrick and into
which the drill stem is connected. During drilling operations, elements of the
TDS perform functions such as spinning-in and making-up tool joints. It also
incorporates a drill pipe elevator, providing the capability to maneuver a stand
of pipe into position to be added to the drill string when drilling, or to hold
and hoist the entire drill stem. Drilling with a Top Drive Drilling System
provides several advantages over conventional drilling. It enables drilling
with three lengths of drill pipe, reducing by two-thirds the time spent in
making connections of drill pipe. In addition it facilitates "horizontal" and
"extended reach" drilling (the practice of drilling wells which deviate
substantially from the vertical) by providing the ability to rotate the pipe as
it is removed from, or replaced into, the hole, thus reducing friction and
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the incidence of pipe sticking. The Top Drive Drilling System also increases the
safety of drilling operations.
The Top Drive Drilling System has demonstrated substantial economic
advantages. Users of the system generally report reductions in drilling time
ranging from 20% to 40%. By facilitating extended reach drilling, the TDS
increases the area which can be drilled from a given location, such as a fixed
platform or man-made island. Thus, the production from a given reservoir of oil
can be increased and the number of costly fixed platforms required to develop
the field can be minimized.
The Top Drive Drilling System has evolved continuously since its initial
introduction. Today, the Top Drive product line includes several models, each
designed to satisfy specific customer requirements. The version initially
introduced to the market in 1982, the TDS-3, remains a part of the product line.
The TDS-4, introduced in 1990, is a two-speed model which permits a variation in
speed and torque that is desirable for differing drilling conditions. The TDS-
6S, first delivered in 1991, is a dual motor version which provides double the
power and torque of a single motor unit. The TDS-7S, initially introduced in
1993, is powered by an alternating current ("AC") motor instead of the direct
current ("DC") motor used on previous models. The AC system offers lower
maintenance cost, as well as providing higher torque for longer periods and a
running speed more than twice that of conventional DC motor powered systems.
The Integrated Drilling System ("IDS") is an adaptation of the Top Drive
concept which is more compact than its Top Drive counterparts, and which is
affixed to a separately installed torque tube rather than rails permanently
installed in the derrick. It can be used on rigs which are smaller and which do
not have the structural integrity necessary to support a traditional Top Drive.
In 1995 the TDS-9S was introduced. It is powered by dual AC motors, is
reduced in length and rides on a separately installed torque tube. For these
reasons it is especially well suited to the conventional land rig market, where
portability is critical. It is designed for ease of installation in existing
derricks, can be rigged up and rigged down in a matter of hours, and is easily
transported from one location to another. Twelve TDS-9S units were shipped in
1996.
Pipe racking systems are used to handle drill pipe, casing and other types
of pipe (collectively "tubulars") on a drilling rig. Vertical pipe racking
systems move drill pipe and casing between the well and a storage ("racking")
area on the rig floor. Horizontal racking systems are used to handle tubulars
while stored horizontally (for example, on the pipe deck of an offshore rig) and
transport it up to the rig floor and raise it to a vertical position from which
it may be passed to a vertical racking system.
Mechanical vertical pipe racking systems include those developed and sold
by BJ Machinery prior to its acquisition by Varco in 1988. Such systems reduce,
but do not eliminate, the manual effort involved in pipe handling. The Pipe
Handling Machine ("PHM"), introduced by Varco in 1985, provides a fully
automated mechanism for handling and racking of drill pipe and drill collars
during drilling and tripping operations. It incorporates the spinning and
torquing functions of the Automated Roughneck with the automatic hoisting and
racking of disconnected sections of pipe. These functions are integrated via
computer controlled sequencing, and the Pipe Handling Machine is operated by a
person in an environmentally secure cabin.
The Automated Roughneck is an automated version of the Iron Roughneck(R),
which was originally introduced by Varco in 1976. It is a microprocessor
controlled device which automatically performs the torquing and spinning
functions required to connect and disconnect sections of drill pipe during
drilling and tripping operations, as well as during the setting of casing.
The Pipe Racking System ("PRS") is a semi-automated vertical pipe racking
system which has evolved from the "Star" system to which the Company acquired
the rights in 1990. When used in conjunction with an Automated Roughneck, it
provides an alternative to the more fully automated PHM. Like the PHM, it is
operated remotely from the driller's cabin by a single operator, but it requires
more operator intervention. Its design makes it more easily adapted to a land
rig or for retrofitting to an existing offshore rig.
Vertical pipe racking systems are used predominantly on offshore rigs and
are virtually mandatory on floating rigs such as semisubmersibles.
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Horizontal pipe racking systems were introduced by Varco in 1993. They
include the Pipe Deck Machine ("Pipe Mite") which is used to manipulate and move
tubulars while stored in a horizontal position; the Pipe Conveyor which
transports sections of pipe to the rig floor; and a Pickup Laydown System
("PLS") which raises the pipe to a vertical position for transfer to a vertical
racking system. These components may be employed separately, or incorporated
together to form a complete horizontal racking system, known as the Pipe
Transfer System ("PTS").
Varco BJ Oil Tools
The Varco BJ Oil Tools product line consists of a full complement of
conventional rig tools and equipment. It was formed by the combination of the
original Varco oil tool products and the related products acquired in the BJ
Machinery Division and the Martin-Decker Division acquisitions. These products
include pipe handling tools, hoisting equipment and rotary equipment.
Varco's pipe handling tools are designed to enhance the safety, efficiency
and reliability of pipe handling operations. Many of these tools have provided
innovative methods of performing the designated task through mechanization of
functions previously performed manually.
Varco BJ Oil Tools manufactures various tools used in the making up and
breaking out of drill pipe, including spinning wrenches, manual tongs, torque
wrenches and kelly spinners. The spinning wrench is a tool used to screw
together and unscrew sections of drill pipe. Powered pneumatically or
hydraulically, it replaces a hazardous device known as a spinning chain. Manual
tongs are used to make up or break out tool joints, while the torque wrench is a
hydraulically powered device which performs this function with enhanced safety
and precision. The kelly spinner is a pneumatically or hydraulically powered
tool used to connect and disconnect the kelly to and from the drill stem as
additional lengths of pipe are added while drilling.
The Company also manufactures other tools used in various pipe handling
functions. Slips are gripping devices which hold pipe or casing in suspension
while in the hole, and they may be either manual or spring operated. Other
products, which include safety clamps, casing bushings and casing bowls, are
used to hold and guide drill pipe or casing while in the hole.
When drilling, tripping or setting casing, lengths of pipe must be hoisted
into position above the hole, lowered into or lifted from the hole and held in
suspension while in the hole. Hoisting equipment includes devices used to grip
and hold various types of pipe ("tubulars") while being raised or lowered.
Drill pipe elevators are used to hold lengths of drill pipe as they are hoisted
into position to be attached to the drill stem, and to hold the entire drill
stem as it is lowered into or lifted from the hole. Similarly, casing elevators
and spiders are gripping devices used to hold the casing as additional lengths
are added and lowered into the hole. Links are elongated steel forgings from
which the elevator is suspended and which, in turn, hangs from beneath the hook
which is connected to the hoisting mechanism of the drilling rig. The Company
manufactures elevators to accommodate a variety of tubulars, as well as a
complete line of links and hooks, together with casing elevators and spiders, to
handle a variety of casing sizes and accommodate casing weighing up to 1,000
tons.
Varco BJ Oil Tools expanded its casing spider line in 1994 with the
introduction of the Flush Mounted Spider ("FMS 375") It is designed to improve
safety and efficiency during casing operations, by eliminating scaffolding which
otherwise must be used as a raised work platform for the rig crew.
During 1996 the Varco BJ Oil Tools product line was further expanded with
the introduction of the BX Hydraulic Elevator and the PS 21 Hydraulic Power
Slip. The BX Hydraulic Elevator increases safety and eliminates the normal rig
complement of several different types and sizes of elevators through the use of
removable bushings. The PS 21 Power Slip improves both safety and rig efficiency
by permitting the handling of all sizes and types of tubulars with a single tool
and by incorporating the FMS concept. During 1996 13 BX elevators and 13 PS 21s
were delivered to customers.
Rotary equipment products consist of kelly bushings and master bushings. The
kelly bushing applies torque to
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the kelly to rotate the drill stem and fits in the master bushing which is
turned by the rotary table on the floor of the rig. Varco produces kelly
bushings and master bushings for most sizes of kellys and makes of rotary
tables.
A substantial portion of the Company's sales in some of the Oil Tools
products is attributable to sales of replacement parts which are subject to
normal wear and to sales of spare parts. Replacement parts for kelly bushings,
rotary slips, casing tools and spinning wrenches are a material part of the
sales of those product lines.
Martin-Decker/TOTCO Instrumentation
The Martin-Decker/TOTCO Instrumentation Division designs, manufactures and sells
or rents hydraulic and electronic instrumentation and control systems,
primarily for use in oil and gas well drilling operations; and, to a lesser
extent, provides instrumentation to certain general industrial markets and for
use in non-drilling related oilfield applications.
A drilling rig instrumentation package is generally comprised of four
elements: (1) sensors, which measure selected variables at the point of origin;
(2) a mechanical or electronic means of transmitting that data to the display
device; (3) a display, which may range in sophistication from a simple gauge to
a computer terminal or workstation; and (4) a method for permanently recording
and/or electronically transmitting the data for subsequent review and analysis.
This equipment must be sufficiently rugged to withstand the hostile
environmental conditions of a drilling rig.
The driller relies on certain instruments to provide information critical to
the operation of the drilling rig. At a minimum, this information includes the
status of such basic data as weight-on-bit, rotary RPM, rotary torque, hook
load, rate of penetration, mud pit volume, and mud flow. The indicators which
display this data are generally contained in a common housing called a drilling
console. A drilling console may range in sophistication from a collection of
analog gauges to a microprocessor based system such as the Martin-Decker/TOTCO
"Spectrum 1000".
Computer based electronic data acquisition systems provide real-time
analysis and display of the various drilling data at the driller's station, as
well as other locations around the rig. In 1991 Martin-Decker/TOTCO introduced
the TOTAL system, a computer-based data acquisition system incorporating up to
date electronic technology with comprehensive analytical capabilities. The
emphasis in TOTAL is on the analysis and interpretation of data via computer
software, so that the information displayed to the driller enables him to
operate the rig more safely and efficiently.
In 1992, the Company licensed from the Sedco Forex Division of Schlumberger
Limited the rights to develop, manufacture and market the MDS/TM/ System, an
advanced computer-based drilling information and alarm system which is
integrated with TOTAL. Its software programs incorporate the knowledge and
experience of drilling personnel and engineers to provide critical information
in a user-friendly format.
In addition to MDS/TM/, a number of additional analytical capabilities have
been developed for the TOTAL System. Drill-Off, a computerized drilling
optimization program was jointly developed by Martin-Decker/TOTCO and Exxon. An
agreement
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with Schlumberger's Anadril Division, authorizing MD/TOTCO to manufacture and
market a sophisticated kick detection system known as Kick-Alert SM was
finalized in 1993. A joint effort by Martin-Decker/TOTCO and British Petroleum
to incorporate a software program known as Early Kick Detection (EKD) on the
TOTAL system was completed in 1995. An exclusive Worldwide Marketing agreement
with Logware, Inc. to market a Windows/TM/ based drilling information system was
completed in 1993.
The TOTAL system is designed so that it may be scaled to the requirements
of a particular drilling operation. For relatively routine drilling requirements
it can represent a cost-effective means of providing basic information; however,
it can be expanded to encompass the full range of analytical capability for
complex and costly offshore drilling.
Other drilling related products of Martin-Decker/TOTCO Instrumentation
include drift indicators, which are used to measure and record the degree of
drift of the well from vertical; mechanical recorders, which produce a permanent
record in chart form when an electronic system is not being used; drilling
control systems (auto-drillers) which automatically maintain a constant pressure
on the drill bit, and drilling chokes which provide a remotely actuated method
of controlling "kicks."
Products of the Martin-Decker/TOTCO Instrumentation Division used outside
the drilling process include load and radius indicating systems for pedestal
type cranes, anchor tension monitoring systems for use in mooring and
positioning applications, and specialty scales for industrial use.
In August 1993, the Company acquired all the outstanding shares of Metrox,
Inc., a manufacturer of strain gauge systems. The acquisition of strain gauge
technology provides further penetration into the industrial crane and weight
monitoring markets as well as enhancing the overall Martin-Decker/TOTCO sensor
technology. Strain gauge sensors provide an extremely precise measurement of
many parameters critical to the drilling operations.
Drilling consoles are typically sold as original equipment to the rig
manufacturer. However, electronic drilling consoles may be sold as upgrades to
existing rigs. In the United States and Canada, most other instrumentation
products are rented to the drilling contractor or oil company when necessary,
and are therefore not permanently installed on the rig. Internationally, nearly
all instrumentation equipment is sold to the rig owner and becomes a permanent
part of the drilling rig. A significant portion of the sales of some
instrumentation product lines is in spare and replacement parts.
Shaffer
The Shaffer Division designs, manufactures, sells and distributes
pressure control equipment, (including ram blowout preventers, annular or
spherical blowout preventers and rotating blowout preventers); blowout preventer
control systems; and motion compensation systems (including riser tensioners,
drillstring compensators and crown mounted compensators).
Blowout preventers ("BOPs") are devices used to seal the space between
the drill string and the borehole to prevent an uncontrolled flow of formation
fluids and gases. Shaffer manufactures three types of BOPs. Ram and annular BOPs
are back-up devices and are activated only if other techniques for controlling
pressure in the well bore are inadequate. When closed, these devices prevent
normal rig operations. Ram BOPs seal the wellbore by hydraulically closing
rams against each other across the wellbore. Specially designed packers
seal around specific sizes of pipe in the wellbore, shear pipe in the wellbore
or close off an open hole. Annular BOPs seal the wellbore by hydraulically
closing a rubber packing unit around the drill pipe or kelly or by sealing
against itself if nothing is in the hole. The rotating BOP allows operators to
drill or strip into or out of the well at low pressures without interrupting
normal operations.
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Shaffer expanded its BOP line in 1995 with the introduction of a system for
achieving Pressure Control While Drilling (PCWD(R)). This new BOP allows normal
drilling operations to proceed while controlling pressures up to 2,000 psi, and
will operate as a normal Spherical BOP at pressures up to 5,000 psi. During 1996
Shaffer sold two PCWD units and rented two additional units.
Shaffer sells BOP control systems under the registered trademark
Koomey(R). The Koomey control system is hydraulically actuated and is used to
remotely operate BOPs and associated valves for both land systems and offshore
systems.
Shaffer sells motion compensation equipment under the registered
trademark Rucker(R). Motion compensation equipment stabilizes the bit on the
bottom of the hole, increasing drilling effectiveness of floating offshore rigs
by compensating for wave and wind action. Shaffer also manufactures tensioners
which provide continuous reliable axial tension to the marine riser pipe and
guide lines on floating drilling rigs, tension leg platforms and jack-up rigs.
An important product extension in 1996 was the Riser Recoil System, which
provides a safe disconnect when the floating rig encounters an unanticipated
need to leave location.
Shaffer also manufactures and sells flowline devices, primarily Best(TM)
chokes, used in the production phase of the oil and gas industry. These chokes
are designed for both topside-platform and subsea production, for both standard
service and sulfur (H2S) service. Prior to 1993, these chokes were manufactured
and sold by Varco BJ Oil Tools.
Sales of spare and replacement parts, and the repair and reconditioning of
used equipment constitute a significant part of Shaffer's revenue.
Thule Rigtech
The Thule Rigtech Division designs, sells and rents equipment for use in
the mixing, handling, transport and cleaning of drilling fluid ("mud") used in
the drilling process. This equipment includes shale shakers, mud cleaners,
hydrocyclones, fume extraction hoods, mud chemical handling systems and
automated mud system controls. Thule Rigtech products are generally
subcontracted to third parties for manufacturing.
In the drilling operation, mud is pumped down the drill pipe and through
the holes in the drill bit. The mud acts as a lubricant to the drill bit, as a
pressure equalizer and as a vehicle which carries the drilled cuttings back to
the surface. Shale shakers are the principal machines used to clean the cuttings
from the mud, enabling it to be reused. The VSM 100 is designed to pass large
volumes of mud over fine mesh screens to extract as many of the cuttings as
possible from the mud, thus avoiding the use of the other filtering processes
before the mud is recirculated. Other equipment that may be employed to remove
cuttings are the VSM 200 mud cleaner and de-sander and de-silter hydrocyclones.
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The AMS 2000 mud chemical handling system is designed to handle, store and
mix mud chemicals. The mud chemicals are provided to the rig in 1-ton bags which
are placed in a hopper fitted with a vibrating mechanism. A computer controlled
valve in the base of the bag is used to discharge the chemical powder to the mud
mixer at the desired rate. The AMS 2000 eliminates the manual handling of large
sacks of powdered chemicals, improving efficiency and reducing exposure to a
potentially hazardous work environment.
The AMS 1000 automated mud system is a computer controlled system which
oversees and controls the entire mud function. The aim of the system is to
release manpower from manual operations while continuously monitoring the
process to ensure that it is performing properly.
Thule Rigtech equipment and systems are designed to minimize the cost of
drilling through lowering mud costs and improving operational efficiency, while
at the same time reducing the labor requirement and improving the safety of the
drilling operation.
Research and New Product Development
Varco believes that it is a leader in the development of new technology and
equipment to enhance the safety and productivity of the drilling process, and
that its sales and earnings have been dependent, in part, upon the successful
introduction of new or improved products. Varco's significant product
developments have included the safety spinning wrench, the torque wrench, the
spring slip, pneumatically operated casing elevators and spiders, the Automated
Roughneck, the Top Drive Drilling System, the Pipe Handling Machine and the
TOTAL system. At December 31, 1996 the Company employed 236 persons on its
engineering and design staffs who were principally engaged in research and
development. Total expenditures for research and development were $14.3 million
in 1996, $13.2 million in 1995 and $11.4 million in 1994.
As of December 31, 1996 the Company held 198 United States patents and had 9
patent applications pending. Expiration dates of such patents range from 1997 to
2013. As of such date the Company also had 144 foreign patents and 48 patent
applications pending relating to inventions covered by the United States
patents. The preceding include patent rights received in connection with the BJ
Machinery, Martin-Decker, TOTCO and Shaffer acquisitions. There are no
assurances that patents will be granted in response to pending applications.
Although the Company believes that its patents and applications have value,
competitive products with different designs have been successfully developed and
marketed by others. The Company considers the quality and timely delivery of its
products, the service it provides to its customers and the technical knowledge
and skills of its personnel to be more important than its patents in its ability
to compete. While the Company stresses the importance of its research and
development programs, the expense and market uncertainties associated with the
development and successful introduction of new products are such that there can
be no assurance that the Company will realize future revenues from new products.
Acquisitions
On July 17, 1992 Varco acquired substantially all of the assets and assumed
certain of the liabilities of the Shaffer Product Line ("Shaffer") of Baroid
Corporation for a cash consideration of approximately $36,000,000. Shaffer
designed, manufactured, and sold blowout prevention equipment and related
control systems and motion compensation systems used on drilling rigs in the oil
and gas industry. The Shaffer operations now comprise the Company's Shaffer
Division.
On August 17, 1993 the Company acquired all of the outstanding common stock
of Metrox, Inc. for a cash consideration of approximately $4,000,000. Metrox
designed and manufactured instrumentation used in the oil and gas industry, as
well as in general commercial and industrial applications. Metrox has been
combined with, and is reported within, the Company's Martin-Decker/TOTCO
Instrumentation Division.
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On November 30, 1994 the Company acquired all of the outstanding shares of
Rig Technology Limited ("Thule Rigtech"), a company incorporated in Scotland,
for a cost of approximately $8,954,000. Thule Rigtech provides equipment and
systems used in the handling, mixing, transport and conditioning of drilling
fluids and operates as the Company's Thule Rigtech Division.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
International Operations
The Company's products are sold for use in approximately 93 countries by
United States customers operating in the United States and abroad, as well as by
foreign customers such as privately-owned corporations and national oil
companies. The Company includes as an international sale any sale where the
product is designated for use other than in the United States. Revenues from
products sold for use outside the United States accounted for approximately 67%,
69% and 68% of the Company's total revenues for the years ended December 31,
1996, 1995, and 1994, respectively. For further information regarding the
Company's worldwide operations and international sales and rentals, see Note J
of Notes to Consolidated Financial Statements.
The Company's international operations are subject to the usual risks of
changes in international conditions such as changes in governmental policies
affecting the oil industry ( e.g., environmental regulations or the
nationalization of the operations of the Company's customers). Most
international sales are payable in United States dollars.
The Company has a policy prohibiting the payment of any bribe, kickback or
similar gratuity to any person in order to facilitate the sale of the Company's
products or to secure favorable action by a government official. The Company
believes that this policy does not impede its competitive position in the sale
of its products abroad.
Sales and Distribution
To facilitate the distribution of its drilling equipment and pressure
control products, the Company maintains domestic sales and service facilities in
California, Louisiana, Oklahoma, Texas and Wyoming. The rental of drilling rig
instrumentation requires local availability of equipment, transportation of the
equipment to the rig site and installation by qualified personnel. To service
this market, the Company maintains Martin-Decker/TOTCO Instrumentation sales and
service facilities in 14 states, including those mentioned above, as well as 3
locations in Canada. Internationally, the Company maintains offices in Abu
Dhabi, Brazil, China, Holland, Moscow, Norway, Scotland, Singapore and
Venezuela. The Company employs independent agents in Mexico, South America,
Europe, the Middle East, the Far East and Asia, the South Pacific and in parts
of the United States.
The Company's customers include private and government-owned oil companies,
drilling contractors, drilling rig manufacturers, rental tool companies, and
supply companies which supply oilfield products to the end users of the
Company's products.
Drilling systems, such as the Automated Roughneck, Top Drive Drilling System
and pipe racking systems and pressure control and motion compensation equipment,
represent significant capital expenditures and are usually sold directly to an
oil company, drilling contractor or rig builder. Other drilling equipment
products may be sold through supply stores or directly to government-owned oil
companies or drilling contractors.
During 1996 sales to a single customer, Diamond Offshore Drilling Inc.,
amounted to $45,228,000, 12.3% of total revenues. There were no sales to a
single customer in 1995 and 1994 in excess of 10% of total sales.
Backlog
11
<PAGE>
Sales of the Company's products are made on the basis of written purchase
orders or contracts and, consistent with industry practice, by telex, letter or
oral commitment later confirmed by a written order. In accordance with industry
practice, orders and commitments generally can be canceled by customers at any
time. In addition, orders and commitments are sometimes modified before or
during manufacture of the products.
The backlog of unshipped orders was approximately as follows on the dates
indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995 1994
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Varco Drilling Systems $ 50,913 $30,849 $36,770
Varco BJ Oil Tools 9,625 7,147 6,558
Martin-Decker/TOTCO Instrumentation 6,258 4,535 4,581
Shaffer 119,611 31,918 3,882
Thule Rigtech 465 915 984
-------- ------- -------
Total $186,872 $75,364 $52,775
======== ======= =======
</TABLE>
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 December 31, 1996 backlog is longer than in prior years. The
Company expects that substantially all of the backlog will be shipped by
December 31, 1997, with approximately 40% to 45% being shipped subsequent to
June 30, 1997.
Competition
The products of the Company are sold in highly-competitive markets and its
sales and earnings can be affected by competitive actions such as price changes,
new product development or improved availability and delivery. The Company
competes with a large number of companies, some of which are larger than the
Company and have greater resources and more extensive and diversified
operations.
Varco's principal competitor with respect to most Drilling Systems products
is Maritime Hydraulics A/S, a Norwegian company. Other competitors with respect
to the Top Drive Drilling System include National-Oilwell, A/S Hydralift,
another Norwegian company which acquired the rights to the product previously
marketed by ACB offshore, a French company and Tesco Corporation, a Canadian
company that competes principally in the land Top Drive market against Drilling
Systems new TDS-9S. Since its introduction in 1982 and as of December 31, 1996,
Varco had sold and delivered 495 Top Drive Drilling Systems, and the Company
believes that its competitors had sold and delivered less than 200 systems
during the same time period.
Varco's most significant domestic competitors with respect to oil tools
include Phoenix Energy Services, DenCon Oil Tools and Weatherford International,
Inc. In foreign markets Varco experiences competition from most of its domestic
competitors and from foreign companies as well.
Martin-Decker/TOTCO Instrumentation competes, in the domestic rental market,
with the Swaco Geolograph Division of Smith International, Inc., Petron
Industries Inc. and Adair Supply Inc. In domestic product sales, the competition
consists of Wagner International Inc., Atlas Company and a number of smaller
regional companies. In the international market it competes with these same
companies along with such foreign competitors as Rigserv, a United Kingdom
company, and Hitec A/S, a Norwegian company.
Shaffer competes, in the BOP and related controls market, with Cooper
Cameron Corporation and Hydril
12
<PAGE>
Company, a privately held company. Shaffer's principal competitor with respect
to motion compensation equipment is Maritime Hydraulics A/S.
Thule Rigtech competes in the solids control equipment market principally
with Derrick Manufacturing Inc. and Brandt/EPI, a division of Tuboscope Vetco
International Corporation.
Although accurate industry figures are not available, the Company believes
that it has a substantial share of the market for most of its equipment and
instrumentation products.
Manufacturing and Raw Materials
The manufacturing processes for the Company's drilling and pressure control
equipment products generally consist of machining, welding and fabrication, heat
treating, assembly of manufactured and purchased components, and testing. The
Company's drilling and pressure control equipment products are manufactured
primarily from alloy steel, and the availability of alloy steel castings,
forgings, purchased components and bar stock is critical to the production and
timing of shipments. The Company believes that there are currently adequate
sources of supply for alloy steel castings, forgings, purchased components and
bar stock. The primary manufacturing processes associated with instrumentation
and solids control products are fabrication, machining, assembly of manufactured
and purchased components, and testing. The Company believes that adequate
sources of supply exist for all such purchased components.
Thule Rigtech products are generally subcontracted to third parties for
manufacturing. The Company believes that an adequate number of subcontractors
exist for the manufacture of Thule Rigtech products.
Employees
At December 31, 1996 the Company had a total of 1,936 employees (of which
220 were temporary employees). Of such employees, 458 employees were engaged in
sales and marketing, 236 employees were engaged in engineering and design, 132
employees were engaged in administrative or clerical capacities, and 1,110 were
engaged in manufacturing. The Company considers its relations with its employees
to be excellent and has never suffered a work stoppage or interruption due to a
labor dispute.
13
<PAGE>
MANAGEMENT
Executive Officers of the Registrant
The executive officers of Varco are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------------------------------------
<S> <C> <C>
Walter B. Reinhold 72 Chairman of the Board and Director
George Boyadjieff 58 President, Chief Executive Officer and Director
Richard A. Kertson 57 Vice President-Finance and Chief Financial Officer
Donald L. Stichler 53 Controller-Treasurer and Chief Accounting Officer and
Secretary
Marshall Bailey 49 Vice President and Managing Director-Rig Technology
Robert J. Gondek 53 Vice President and President - Martin-Decker/TOTCO
Instrumentation
Mark A. Merit 39 Vice President and President - Shaffer
Roger D. Morgan 53 Vice President and President - Varco Drilling Systems
Michael W. Sutherlin 50 Vice President and President - Varco BJ Oil Tools
</TABLE>
Officers are elected by, and serve at the pleasure of, the Board of Directors.
Mr. Reinhold has been a director of the Company since 1970. He served as
Chief Executive Officer of the Company from 1970 until April 1991, and prior
thereto he served as Executive Vice President. He has been employed by the
Company since 1949. Mr. Reinhold is a director of Amdahl Corporation and Revco
Drug Stores, Inc.
Mr. Boyadjieff was elected President of the Company in May 1981 and Chief
Executive Officer in April 1991. Mr. Boyadjieff served as Chief Operating
Officer from June 1979 until April 1991. Prior to his election as President, he
was the Senior Vice President - Operations. He has been a director of the
Company since 1976 and joined the Company in 1969. Mr. Boyadjieff is a director
of Unit Instruments, Inc.
Mr. Kertson was elected Vice President - Finance and Chief Financial Officer
in May 1984. He had been Controller of Varco Oil Tools since January 1982. He
joined the Company in October 1975, as Director of Management Information
Services.
Mr. Stichler was elected Controller-Treasurer in May 1984, Secretary in May
1994 and Chief Accounting Officer in May 1995. He served as Corporate
Controller from December 1982 to May 1984. He served as Manager of Accounting
and Taxation from 1981, when he joined the Company.
Mr. Bailey was elected Vice President of the Company and Managing Director
of Rig Technology in May 1995. Mr. Bailey was the Managing Director and
principal Shareholder of Rig Technology Limited from 1988 until 1994 when it was
acquired by the Company.
Mr. Gondek has served as President of Martin-Decker/TOTCO Instrumentation
Division since November 1990 and was elected Vice President of the Company in
April 1991. From September 1986 until November 1990 Mr. Gondek was the Vice
President and General Manager of the TOTCO operations of Baker Hughes
Incorporated. Prior to 1986 he held various positions with TOTCO International
Corporation including Vice President of Engineering, Vice President of
Manufacturing and Senior Vice President.
Mr. Merit was elected Vice President of the Company and President of Shaffer
in October 1992. He had been Vice President-Manufacturing of Varco Drilling
Systems since August 1991. Previously he was Operations Manager of Varco U.K.
Limited from March 1990, and prior to that he was Manager of Engineering
Software
14
<PAGE>
Development for Varco Drilling Systems since 1985. He has been employed by
the Company in various capacities since 1980.
Mr. Morgan was elected Vice President of the Company in May 1984 and
President of Varco Drilling Systems in May 1990. He had been Vice President-
Materials and Manufacturing of Varco Oil Tools since May 1981. Previously, he
was Vice President-Materials and Production of Varco Oil Tools. He has been
employed by the Company in various capacities since 1974.
Mr. Sutherlin was elected Vice President of the Company in May 1984 and
President-Varco BJ Oil Tools in July 1988. Previously he served as Vice
President-Best Operations. He has been employed by the Company in various
capacities since 1975.
ITEM 2. PROPERTIES
The Company's principal manufacturing facilities are located in Orange,
California (the "Orange Facility"), Etten-Leur, The Netherlands (the "Etten-
Leur Facility"), Cedar Park, Texas (the "Cedar Park Facility") and Houston,
Texas (the "Shaffer Facility"). The Orange Facility and the Etten-Leur
Facility are used primarily for manufacturing the Company's drilling equipment;
the Cedar Park Facility manufactures primarily instrumentation products; and the
Shaffer Facility is used for manufacturing pressure control, motion compensation
and drilling equipment and flow line devices. Thule Rigtech products are
generally subcontracted to third parties for manufacturing.
The Orange Facility occupies approximately nine acres in Orange County,
California which are leased under a long-term lease. The Orange Facility
includes three manufacturing/warehouse buildings comprising a total of
approximately 135,000 square feet and a four-story high-rise facility with
automatic storage and retrieval capabilities. The Orange Facility is currently
leased from certain officers, shareholders, and directors of the Company and
affiliated trusts. This facility is the primary manufacturing location for the
Varco Drilling Systems Division, and the Company estimates that based upon
direct labor hours and a two shift operation, utilization of this facility was
approximately 95% of capacity in 1996 as compared to 95% and 70% of capacity in
1995 and 1994 respectively.
The Etten-Leur Facility consists of approximately 73,000 square feet of
manufacturing and warehousing space and approximately 12,900 square feet of
office space on approximately six acres of land. This facility is the primary
manufacturing location for the Varco BJ Oil Tools Division, and the Company
estimates that based upon direct labor hours and a two shift operation,
utilization of this facility was near capacity in 1996 as compared to 80% of
capacity in 1995 and 75% of capacity in 1994.
The Martin-Decker/TOTCO Instrumentation products are manufactured at the
Cedar Park Facility. The Company leased this facility from Cooper Industries,
Inc. until 1995 when the Company purchased this facility for approximately $3.6
million. The Cedar Park Facility consists of approximately 200,000 square feet
of manufacturing and warehousing space and approximately 33,000 square feet of
office space located on approximately 40 acres. The Company estimates that based
upon direct labor hours and a two shift operation, utilization of this facility
was approximately 95% of capacity during each of the three years ended December
31, 1996.
The Shaffer Division's products are manufactured at the Shaffer Facility,
which consists of approximately 270,000 square feet of manufacturing and
warehousing space and approximately 73,000 square feet of office space located
on approximately 34 acres. In addition, certain products of the Varco BJ Oil
Tools Division are manufactured at this facility. The Shaffer facility has been
operated by the Company since the acquisition of Shaffer on July 17, 1992. The
Company estimates that based upon direct labor hours and a two shift operation,
utilization of this facility for 1996 was in excess of a two shift operation as
compared to 80% in 1995 and 70% in 1994. In February 1997, Shaffer purchased
all the assets of a Houston machine shop operation and simultaneously entered
into a five-year lease for the related 80,000 square foot manufacturing
facility. Shaffer began operation of the facility in March 1997.
An additional manufacturing facility located in Houston (the "Houston BJ
Facility") was closed during the fourth quarter of 1992 and activities
previously performed at that plant have been moved to other Company
15
<PAGE>
locations, principally the Shaffer Facility. The Houston BJ Facility, which
consists of approximately 135,000 square feet of manufacturing and office space,
and the 32.2 acres of land on which it is located are owned by the Company. This
facility has been listed for sale.
The Drilling Systems Division's administration and Company's executive
offices are located in Orange, California adjacent to the Orange Facility. They
comprise approximately 36,000 square feet of office space and are leased from
certain officers, shareholders and directors of the Company and affiliated
trusts.
The Company owns sales and service facilities in Oklahoma, Wyoming, Scotland
and Singapore and leases approximately 29 such facilities throughout the United
States in addition to facilities in Canada, Mexico and Venezuela.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which Varco or any of its subsidiaries
is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information concerning the market for the Registrant's Common Stock and
related stockholder matters contained under the captions "Price Range of Varco
Common Stock," "Dividend Policy" and "Common Stock" on page 40 of the
Registrant's Annual Report to Shareholders for the year ended December 31, 1996,
is hereby incorporated by reference.
During the fiscal year ended December 31, 1996 there were no sales of equity
securities of the Registrant by the Registrant which were not registered under
the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth under the caption "Five Year
Financial and Operating Highlights" on page 18 of the Registrant's Annual
Report to Shareholders for the year ended December 31, 1996, is hereby
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 20 through 24 of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1996, is hereby incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is hereby incorporated by reference to
pages 25 through 38 of the
16
<PAGE>
Registrant's Annual Report to Shareholders for the year ended December 31, 1996.
The Report of Independent Auditors is included in Item 14(d).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference to
the information set forth under the sub captions "Nominees" and "Section 16(a)
Beneficial Ownership Reporting Compliance" under the caption "ELECTION OF
DIRECTORS" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 20, 1997, except that information concerning the
Executive Officers of the Registrant is contained in Item 1 under the caption
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to
the information set forth under the sub captions "Compensation and Stock Option
Information" and "Compensation Committee Interlocks and Insider
Participation" under the caption "EXECUTIVE COMPENSATION" and under the
subcaption "Director Compensation" under the caption "ELECTION OF DIRECTORS"
in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be
held on May 20, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to
the information set forth under the caption "BENEFICIAL OWNERSHIP OF VARCO
SECURITIES" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 20, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference to
the information set forth under the caption "CERTAIN TRANSACTIONS AND
RELATIONSHIPS" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 20, 1997.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules
The following consolidated financial statements of Varco International, Inc.
and subsidiaries, included in the Registrant's Annual Report to Shareholders for
the year ended December 31, 1996, are incorporated by reference in Item 8:
<TABLE>
<CAPTION>
Page in
Annual
Report
------
<S> <C>
Consolidated Balance Sheets-as of December 31, 1996 and 1995............................ 25
Consolidated Statements of Income-Years ended December 31, 1996, 1995 and 1994.......... 26
Consolidated Statements of Shareholders' Equity-Years ended December 31, 1996,
1995 and 1994........................................................................ 27
Consolidated Statements of Cash Flows-Years ended December 31, 1996, 1995 and
1994................................................................................. 28
Notes to Consolidated Financial Statements.............................................. 29
</TABLE>
The Report of Independent Auditors and the following consolidated financial
statement schedule of Varco International, Inc., and subsidiaries are included
in Item 14(d):
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors......................................................... 23
Schedule II - Valuation and Qualifying Accounts....................................... 24
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Individual financial statements of the registrant have been omitted as the
registrant is primarily an operating company and all subsidiaries included in
the consolidated financial statements filed, in the aggregate, do not have
minority equity interest and/or indebtedness to any person other than the
registrant or its consolidated subsidiaries in amounts which together (excepting
indebtedness incurred in the ordinary course of business which is not overdue
and matures within one year from the date of its creation, whether or not
evidenced by securities, and indebtedness of subsidiaries which is
collateralized by the registrant by guarantee, pledge, assignment or otherwise)
exceed 5 percent of the total assets as shown by the most recent year-end
consolidated balance sheet.
(b) Reports on Form 8-K
Varco filed no reports on Form 8-K during the three months ended December
31, 1996.
18
<PAGE>
(c) Exhibits
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Each management contract or compensation plan or
arrangement filed as an exhibit hereto is identified by a dagger.
3.1 Amended and Restated Articles of Incorporation of Varco, incorporated
by reference to Exhibit 3.1 to Varco's annual report on Form 10-K for
the year ended December 31, 1995.
3.2 Bylaws of Varco, incorporated by reference to Exhibit 3.7 to Amendment
No. 1 to Varco's Registration Statement on Form S-1, Registration No.
33-40191.
4.1 Note Agreement, dated as of July 1, 1992 between Varco International,
Inc. and the Purchasers named in Schedule 1 thereto, incorporated by
reference to Exhibit 4.0 to Varco's Quarterly report on Form 10-Q for
the quarter ended September 30, 1992.
4.2 First Amendment to Note Agreement, dated as of November 12, 1992, to
Note Agreement included as Exhibit 4.1 hereto, incorporated by
reference to Exhibit 4.3 to Varco's annual report on Form 10-K for the
year ended December 31, 1992.
4.3 Waiver and Second Amendment to Note Agreement, dated as of February
25, 1994, to Note Agreement included as Exhibit 4.1 hereto,
incorporated by reference to Exhibit 4.4 to Varco's annual report on
Form 10-K for the year ended December 31, 1992.
4.4 Waiver, dated as of March 8, 1995, to Note Agreement included as
Exhibit 4.1 hereto incorporated by reference to Exhibit 4.4 to Varco's
annual report on Form 10-K for the year ended December 31, 1994.
4.5 Waiver and Third Amendment to Note Agreement, dated as of March 8,
1995, to Note Agreement included as Exhibit 4.1 hereto, incorporated
by reference to Exhibit 4.5 to Varco's annual report on Form 10-K for
the year ended December 31, 1995.
4.6 Credit Agreement, dated as of February 25, 1993 among Varco
International, Inc., Citicorp USA, Inc. and Citibank, N.A.,
incorporated by reference to Exhibit 4.5 to Varco's annual report on
Form 10-K for the year ended December 31, 1992.
4.7 First Amendment dated as of August 3, 1993 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4
to Varco's quarterly report on Form 10-Q for the quarter ended
September 30, 1993.
4.8 Second Amendment dated as of September 23, 1993 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to
Exhibit 4.6 to Varco's annual report on Form 10-K for the year ended
December 31, 1993.
4.9 Third Amendment dated as of December 1, 1993 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to Exhibit
4.7 to Varco's annual report on Form 10-K for the year ended December
31, 1993.
4.10 Fourth Amendment dated as of May 12, 1994 to Credit Agreement included
as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4 to
Varco's quarterly report on Form 10-Q for the quarter ended June 30,
1994.
4.11 Fifth Amendment dated as of October 31, 1994 to Credit Agreement
included as Exhibit 4.6 hereto incorporated by reference to Exhibit
4.10 to Varco's annual report on Form 10-K for the year ended December
31, 1994.
19
<PAGE>
December 31, 1994
4.12 Sixth Amendment dated as of March 17, 1995 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to
Exhibit 4.12 to Varco's annual report on Form 10-K for the
year ended December 31, 1995.
4.13 Seventh Amendment dated as of December 31, 1995 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to Exhibit
4.13 to Varco's annual report on Form 10-K for the year ended December
31, 1995.
10.1+ The Varco 1980 Stock Option Plan, as amended, incorporated by
reference to Exhibit 4.5 to Post-Effective Amendment No. 4 to Varco's
Registration Statement on Form S-8, Registration No. 2-66830.
10.2+ Amendment to Varco 1980 Stock Option Plan included as Exhibit 10.1
hereto, incorporated by reference to Exhibit 10.2 to Varco's quarterly
report on Form 10-Q for the quarter ended September 30, 1984.
*10.3+ Amendment to Varco 1980 Stock Option Plan included as Exhibit
10.1 hereto.
10.4+ The Varco 1982 Non-Employee Director Stock Option Plan,
incorporated by reference to Exhibit 19.3 to Varco's quarterly report
on Form 10-Q for the quarter ended June 30, 1982.
10.5+ Varco International, Inc. Supplemental Executive Retirement
Plan, incorporated by reference to Exhibit 10.6 to Varco's annual
report on Form 10-K for the year ended December 31, 1992.
*10.6+ Amendment to Varco International, Inc. Supplemental Executive
Retirement Plan included as Exhibit 10.5 hereto.
10.7+ Varco International, Inc. Stock Bonus Plan, incorporated by reference
to Exhibit 10.8 to Varco's annual report on Form 10-K for the year
ended December 31, 1985.
10.8+ Amendment to Varco International, Inc. Stock Bonus Plan included as
Exhibit 10.7 hereto, incorporated by reference to Exhibit 10.7 to
Varco's annual report on Form 10-K for the year ended December 31,
1995.
*10.9+ Amendment to Varco International, Inc. Stock Bonus Plan included as
Exhibit 10.7 hereto.
10.10 Lease dated March 7, 1975, as amended, incorporated by reference to
Exhibit 10.7 to Varco's annual report on Form 10-K for the year ended
December 31, 1981, and agreement with respect thereto dated as of
January 1, 1982, incorporated by reference to Exhibit 10.8 to Varco's
annual report on Form 10-K for the year ended December 31, 1982.
10.11 Agreement dated as of January 1, 1984, with respect to Lease included
as Exhibit 10.10 hereto, incorporated by reference to Exhibit 10.13 to
Varco's annual report on Form 10-K for the year ended December 31,
1984.
10.12 Agreement dated as of February 8, 1985, with respect to Lease included
as Exhibit 10.10 hereto, incorporated by reference to Exhibit 10.14 to
Varco's annual report on Form 10-K for the year ended December 31,
1984.
10.13 Agreement dated as of April 12, 1985 to Lease included as Exhibit
10.10 hereto, incorporated by reference to Exhibit 10.2 to Varco's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1985.
20
<PAGE>
10.14 Amendment dated as of January 11, 1995 to Lease included as Exhibit
10.10 hereto, incorporated by reference to Exhibit 10.12 to Varco's
annual report on Form 10-K for the year ended December 31, 1995.
10.15 Standard Industrial Lease-Net dated September 29, 1988 for the
premises at 743 N. Eckhoff, Orange, California, incorporated by
reference to Exhibit 10.14 to Varco's annual report on Form 10-K for
the year ended December 31, 1988.
10.16 First amendment dated as of January 11, 1995 to Lease included as
Exhibit 10.15 hereto, incorporated by reference to Exhibit 10.15 to
Varco's annual report on Form 10-K for the year ended December 31,
1995.
10.17 Asset Purchase Agreement between Varco International, Inc. and Baker
Hughes Incorporated dated as of August 10, 1988, incorporated by
reference to Exhibit 2.0 to Varco's Form 8-K dated September 29, 1988.
10.18+ The Varco International Inc. 1990 Stock Option Plan, as amended,
incorporated by reference to Exhibit 4.2 to Varco's Registration
Statement on Form S-8, Registration No. 333-21681.
10.19+ Varco 1980 Employee Stock Purchase Plan, as amended, incorporated by
reference to Exhibit 28 to Varco's Registration Statement on Form S-8,
Registration No. 33-36841.
10.20+ Amendment to the Varco 1980 Employee Stock Purchase Plan included as
Exhibit 10.19 hereto, incorporated by reference to Exhibit 10.19 to
Varco's annual report on Form 10-K for the year ended December 31,
1995.
*10.21+ Amendment to the Varco 1980 Employee Stock Purchase Plan included
as Exhibit 10.19 hereto.
*10.22+ Varco International Inc. Management Incentive Bonus Plan.
10.23 Asset Purchase Agreement, dated as of April 10, 1992, by and between
Varco International, Inc. and Baroid Corporation, incorporated by
reference to Exhibit 2 to Varco's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1992.
10.24 Amendments dated May 28, 1992, June 30, 1992, July 15, 1992 and two
amendments dated July 16, 1992 to Asset Purchase Agreement included as
Exhibit 10.23 hereto, incorporated by reference to Exhibit 2.1 to
Varco's Current Report on Form 8-K dated July 17, 1992.
10.25+ The Varco International Inc. 1994 Directors' Stock Option Plan,
incorporated by reference to Exhibit 10.24 to Varco's annual report on
Form 10-K for the year ended December 31, 1995.
10.26+ The Varco International, Inc. Director Savings Plan incorporated by
reference to Exhibit 10.23 to Varco's annual report on Form 10-K the
year ended December 31, 1994.
10.27+ The Varco International, Inc. Executive Management Savings Plan
incorporated by reference to Exhibit 10.24 to Varco's annual report in
Form 10-K for the year ended December 31, 1994.
*11 Statement re computation of per share earnings.
21
<PAGE>
*12 Statement re computation of ratios.
*13 1996 Annual Report to Shareholders, to the extent expressly
incorporated by reference in this Report on Form 10-K. Such Annual
Report, except for those portions so incorporated by reference, is
furnished only for information and is not to be deemed filed herewith.
*21 Subsidiaries of Varco.
*23 Consent of Independent Auditors.
*27 Financial Data Schedule
- --------------
* Filed herewith
+ Management contract, compensation plan or arrangement.
As to any security holder of the Registrant requesting a copy of this Form
10-K, the Registrant will furnish copies of any exhibits listed above as filed
with this Form 10-K upon payment to it of its reasonable expenses in furnishing
such exhibits.
(d) Schedules
The Report of Independent Auditors and the schedules listed in the Index to
Financial Statements and Schedules (Item 14(a)) are filed as part of this Annual
Report on Form 10-K.
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Varco International, Inc.
We have audited the consolidated balance sheets of Varco International, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Varco International, Inc. and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Orange County, California
February 12, 1997
23
<PAGE>
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------------------------------------- --------------- ------------
Additions
--------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end of
Description of period expenses accounts Deductions period
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts................. $ 1,585 $ 497 $(22) $ 304(1) $ 1,756
Allowance for excess and obsolete inventory..... 39,069 (21) 2,169(2) 36,879
Reserve for assets held for sale................ 4,750 240 (6) 4,996
-------------------------------------------------------------------------
TOTALS $45,404 $ 716 ($22) $2,467 $43,631
=========================================================================
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts................. $ 1,580 $ 223 $ 14 $ 232(1) $ 1,585
Allowance for excess and obsolete inventory..... 41,912 789 440(3) 4,072(2) 39,069
Reserve for assets held for sale................ 4,553 239 (42) 4,750
-------------------------------------------------------------------------
TOTALS $48,045 $1,251 $ 412 $4,304 $45,404
=========================================================================
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts................. $ 1,743 $ 34 $ 105 $ 302(1) $ 1,580
Allowance for excess and obsolete inventory..... 45,133 253 133 3,607(2) 41,912
Reserve for assets held for sale................ 4,207 341 5 4,553
-------------------------------------------------------------------------
TOTALS $51,083 $ 628 $ 243 $3,909 $48,045
=========================================================================
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventories written off.
(3) Slow moving inventories sold.
</TABLE>
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By GEORGE I. BOYADJIEFF
-----------------------
George I. Boyadjieff
President and Chief
Executive Officer
and Director
Dated March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Principal Executive Officer and Director:
<TABLE>
<S> <C> <C>
GEORGE I. BOYADJIEFF President and Chief March 27, 1997
- -------------------- Executive Officer
George I. Boyadjieff
Principal Financial Officer:
RICHARD A. KERTSON Vice President- March 27, 199
- ------------------ Finance
Richard A. Kertson
Principal Accounting Officer:
DONALD L. STICHLER Controller-Treasurer March 27, 1997
- ------------------ and Secretary
Donald L. Stichler
Other Directors:
WALTER B. REINHOLD Director-Chairman March 27, 1997
- ------------------
Walter B. Reinhold
Director March 27, 1997
- ---------------
Talton R. Embry
GEORGE S. DOTSON Director March 27, 1997
- ----------------
George S. Dotson
ANDRE R. HORN Director March 27, 1997
- -------------
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
Andre R. Horn
MAURICE E. JACQUES Director March 27, 1997
- ------------------
Maurice E. Jacques
JACK W. KNOWLTON Director March 27, 1997
- ----------------
Jack W. Knowlton
LEO J. PIRCHER Director March 27, 1997
- --------------
Leo J. Pircher
CARROLL W. SUGGS Director March 27, 1997
- ----------------
Carroll W. Suggs
ROBERT A. TEITSWORTH Director March 27, 1997
- --------------------
Robert A. Teitsworth
EUGENE R. WHITE Director March 27, 1997
- ---------------
Eugene R. White
JAMES D. WOODS Director March 27, 1997
- --------------
James D. Woods
</TABLE>
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
- -------- ----
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Varco, incorporated
by reference to Exhibit 3.1 to Varco's annual report on Form 10-K for
the year ended December 31, 1995.
3.2 Bylaws of Varco, incorporated by reference to Exhibit 3.7 to Amendment
No. 1 to Varco's Registration Statement on Form S-1, Registration No.
33-40191.
4.1 Note Agreement, dated as of July 1, 1992 between Varco International,
Inc. and the Purchasers named in Schedule 1 thereto, incorporated by
reference to Exhibit 4.0 to Varco's Quarterly report on Form 10-Q for
the quarter ended September 30, 1992.
4.2 First Amendment to Note Agreement, dated as of November 12, 1992, to
Note Agreement included as Exhibit 4.1 hereto, incorporated by
reference to Exhibit 4.3 to Varco's annual report on Form 10-K for the
year ended December 31, 1992.
4.3 Waiver and Second Amendment to Note Agreement, dated as of February
25, 1994, to Note Agreement included as Exhibit 4.1 hereto,
incorporated by reference to Exhibit 4.4 to Varco's annual report on
Form 10-K for the year ended December 31, 1992.
4.4 Waiver, dated as of March 8, 1995, to Note Agreement included as
Exhibit 4.1 hereto incorporated by reference to Exhibit 4.4 to Varco's
annual report on Form 10-K for the year ended December 31, 1994.
4.5 Waiver and Third Amendment to Note Agreement, dated as of March 8,
1995, to Note Agreement included as Exhibit 4.1 hereto, incorporated
by reference to Exhibit 4.5 to Varco's annual report on Form 10-K for
the year ended December 31, 1995.
4.6 Credit Agreement, dated as of February 25, 1993 among Varco
International, Inc., Citicorp USA, Inc. and Citibank, N.A.,
incorporated by reference to Exhibit 4.5 to Varco's annual report on
Form 10-K for the year ended December 31, 1992.
4.7 First Amendment dated as of August 3, 1993 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4
to Varco's quarterly report on Form 10-Q for the quarter ended
September 30, 1993.
4.8 Second Amendment dated as of September 23, 1993 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to
Exhibit 4.6 to Varco's annual report on Form 10-K for the year ended
December 31, 1993.
4.9 Third Amendment dated as of December 1, 1993 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to Exhibit
4.7 to Varco's annual report on Form 10-K for the year ended December
31, 1993.
4.10 Fourth Amendment dated as of May 12, 1994 to Credit Agreement included
as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4 to
Varco's quarterly report on Form 10-Q for the quarter ended June 30,
1994.
4.11 Fifth Amendment dated as of October 31, 1994 to Credit Agreement
included as Exhibit 4.6 hereto incorporated by reference to Exhibit
4.10 to Varco's annual report on Form 10-K for the year ended December
31, 1994.
</TABLE>
27
<PAGE>
December 31, 1994
4.12 Sixth Amendment dated as of March 17, 1995 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to
Exhibit 4.12 to Varco's annual report on Form 10-K for the
year ended December 31, 1995.
4.13 Seventh Amendment dated as of December 31, 1995 to Credit Agreement
included as Exhibit 4.6 hereto, incorporated by reference to Exhibit
4.13 to Varco's annual report on Form 10-K for the year ended December
31, 1995.
10.1+ The Varco 1980 Stock Option Plan, as amended, incorporated by
reference to Exhibit 4.5 to Post-Effective Amendment No. 4 to Varco's
Registration Statement on Form S-8, Registration No. 2-66830.
10.2+ Amendment to Varco 1980 Stock Option Plan included as Exhibit 10.1
hereto, incorporated by reference to Exhibit 10.2 to Varco's quarterly
report on Form 10-Q for the quarter ended September 30, 1984.
*10.3+ Amendment to Varco 1980 Stock Option Plan included as Exhibit
10.1 hereto.
10.4+ The Varco 1982 Non-Employee Director Stock Option Plan,
incorporated by reference to Exhibit 19.3 to Varco's quarterly report
on Form 10-Q for the quarter ended June 30, 1982.
10.5+ Varco International, Inc. Supplemental Executive Retirement
Plan, incorporated by reference to Exhibit 10.6 to Varco's annual
report on Form 10-K for the year ended December 31, 1992.
*10.6+ Amendment to Varco International, Inc. Supplemental Executive
Retirement Plan included as Exhibit 10.5 hereto.
10.7+ Varco International, Inc. Stock Bonus Plan, incorporated by reference
to Exhibit 10.8 to Varco's annual report on Form 10-K for the year
ended December 31, 1985.
10.8+ Amendment to Varco International, Inc. Stock Bonus Plan included as
Exhibit 10.7 hereto, incorporated by reference to Exhibit 10.7 to
Varco's annual report on Form 10-K for the year ended December 31,
1995.
*10.9+ Amendment to Varco International, Inc. Stock Bonus Plan included as
Exhibit 10.7 hereto.
10.10 Lease dated March 7, 1975, as amended, incorporated by reference to
Exhibit 10.7 to Varco's annual report on Form 10-K for the year ended
December 31, 1981, and agreement with respect thereto dated as of
January 1, 1982, incorporated by reference to Exhibit 10.8 to Varco's
annual report on Form 10-K for the year ended December 31, 1982.
10.11 Agreement dated as of January 1, 1984, with respect to Lease included
as Exhibit 10.10 hereto, incorporated by reference to Exhibit 10.13 to
Varco's annual report on Form 10-K for the year ended December 31,
1984.
10.12 Agreement dated as of February 8, 1985, with respect to Lease included
as Exhibit 10.10 hereto, incorporated by reference to Exhibit 10.14 to
Varco's annual report on Form 10-K for the year ended December 31,
1984.
10.13 Agreement dated as of April 12, 1985 to Lease included as Exhibit
10.10 hereto, incorporated by reference to Exhibit 10.2 to Varco's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1985.
28
<PAGE>
10.14 Amendment dated as of January 11, 1995 to Lease included as Exhibit
10.10 hereto, incorporated by reference to Exhibit 10.12 to Varco's
annual report on Form 10-K for the year ended December 31, 1995.
10.15 Standard Industrial Lease-Net dated September 29, 1988 for the
premises at 743 N. Eckhoff, Orange, California, incorporated by
reference to Exhibit 10.14 to Varco's annual report on Form 10-K for
the year ended December 31, 1988.
10.16 First amendment dated as of January 11, 1995 to Lease included as
Exhibit 10.15 hereto, incorporated by reference to Exhibit 10.15 to
Varco's annual report on Form 10-K for the year ended December 31,
1995.
10.17 Asset Purchase Agreement between Varco International, Inc. and Baker
Hughes Incorporated dated as of August 10, 1988, incorporated by
reference to Exhibit 2.0 to Varco's Form 8-K dated September 29, 1988.
10.18+ The Varco International Inc. 1990 Stock Option Plan, as amended,
incorporated by reference to Exhibit 4.2 to Varco's Registration
Statement on Form S-8, Registration No. 333-21681.
10.19+ Varco 1980 Employee Stock Purchase Plan, as amended, incorporated by
reference to Exhibit 28 to Varco's Registration Statement on Form S-8,
Registration No. 33-36841.
10.20+ Amendment to the Varco 1980 Employee Stock Purchase Plan included as
Exhibit 10.19 hereto, incorporated by reference to Exhibit 10.19 to
Varco's annual report on Form 10-K for the year ended December 31,
1995.
*10.21+ Amendment to the Varco 1980 Employee Stock Purchase Plan included
as Exhibit 10.19 hereto.
*10.22+ Varco International Inc. Management Incentive Bonus Plan.
10.23 Asset Purchase Agreement, dated as of April 10, 1992, by and between
Varco International, Inc. and Baroid Corporation, incorporated by
reference to Exhibit 2 to Varco's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1992.
10.24 Amendments dated May 28, 1992, June 30, 1992, July 15, 1992 and two
amendments dated July 16, 1992 to Asset Purchase Agreement included as
Exhibit 10.23 hereto, incorporated by reference to Exhibit 2.1 to
Varco's Current Report on Form 8-K dated July 17, 1992.
10.25+ The Varco International Inc. 1994 Directors' Stock Option Plan,
incorporated by reference to Exhibit 10.24 to Varco's annual report on
Form 10-K for the year ended December 31, 1995.
10.26+ The Varco International, Inc. Director Savings Plan incorporated by
reference to Exhibit 10.23 to Varco's annual report on Form 10-K the
year ended December 31, 1994.
10.27+ The Varco International, Inc. Executive Management Savings Plan
incorporated by reference to Exhibit 10.24 to Varco's annual report in
Form 10-K for the year ended December 31, 1994.
*11 Statement re computation of per share earnings.
29
<PAGE>
*12 Statement re computation of ratios.
*13 1996 Annual Report to Shareholders, to the extent expressly
incorporated by reference in this Report on Form 10-K. Such Annual
Report, except for those portions so incorporated by reference, is
furnished only for information and is not to be deemed filed herewith.
*21 Subsidiaries of Varco.
*23 Consent of Independent Auditors.
*27 Financial Data Schedule
- --------------
* Filed herewith
+ Management contract, compensation plan or arrangement.
30
<PAGE>
EXHIBIT 10.3
AMENDMENT TO 1980 STOCK OPTION PLAN
RESOLVED, that the first sentence of Subsection A of Section 2 of the Varco 1980
Stock Option Plan be, and the same hereby is, amended to read in its entirety as
follows:
A. The Plan shall be administered by a committee (the "Committee")
appointed by the Board of Directors of Varco (the "Board"), which shall consist
of not less than three directors of the Company, each of whom shall be a
"Non-Employee Director", as such term is defined in Rule 16b-3 adopted by the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as such Rule may be amended from time to time.
<PAGE>
EXHIBIT 10.6
FIRST AMENDMENT TO THE
VARCO INTERNATIONAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
This Amendment by Varco International, Inc. (hereinafter referred as the
"Company") is made with the reference to the following facts:
Effective January 1, 1991, the Company adopted the Varco International,
Inc. Supplemental Executive Retirement Plan (hereinafter the "Plan") which
reserves to the Board of Directors (hereinafter the "Board") the right to amend
the Plan (Section 7.03 thereof). The Board has adopted a Resolution approving
this First Amendment and an authorized officer of the Company has executed the
same amending the Plan in the manner hereinafter provided.
NOW, THEREFORE, the Plan is hereby amended as follows:
I.
Effective January 1, 1996, Section 3.01 of the Plan is amended by replacing
the first sentence in this section with the following.
"Each Participant shall have a nonforfeitable right to receive a fixed
dollar amount equal to 40% of the average of a Participant's highest five
calendar years of base salary."
II.
Effective January 1, 1996, the first paragraph of Section 3.02 is amended
to clarify the meaning of this section as follows:
"Upon Early Retirement or termination of employment prior to reaching
Normal Retirement, each Participant shall have a non-forfeitable right to
receive the vested portion of the Benefit for Normal Retirement set forth in
Section 3.01, except that such benefit shall be multiplied by a fraction. The
numerator of this fraction is Years of Service at the earlier of Early
Retirement or termination of employment and the denominator is Years of Service
at age 65. This benefit shall be payable at age 65, unless the Participant
reaches Early Retirement and elects to begin receiving his benefit at that time.
If a Participant elects to begin receiving his benefit at or after Early
Retirement, such benefit shall be further reduced by 8% per year compounded for
each year benefits commence prior to age 65."
<PAGE>
EXHIBIT 10.9
AMENDMENT TO STOCK BONUS PLAN
RESOLVED, that Section 2.01 of the Varco International, Inc. Stock Bonus Plan
be, and the same hereby is, amended to read in its entirety as follows:
2.01 The Plan shall be administered by a committee (the "Committee")
appointed by the Board of Directors of Varco (the "Board"), which shall consist
of not less than three directors of Varco, each of whom shall be a "Non-Employee
Director", as such term is defined in Rule 16b-3 adopted by the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as such
Rule may be amended from time to time. The members of the Committee shall serve
at the pleasure of the Board. The Board may designate its Compensation
Committee, if any, as the Committee provided that the members of the
Compensation Committee meet the foregoing criteria.
<PAGE>
EXHIBIT 10.21
AMENDMENT TO 1980 EMPLOYEE STOCK PURCHASE PLAN
RESOLVED, that the first sentence of the first paragraph of Section 10 of the
Varco 1980 Employee Stock Purchase Plan be, and the same hereby is, amended to
read in its entirety as follows:
The Plan is being administered by the Committee, which shall be composed of
not less than three directors of the Company, each of whom shall be a "Non-
Employee Director", as such term is defined in Rule 16b-3 adopted by the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as such Rule may be amended from time to time.
<PAGE>
EXHIBIT 10.22
M A N A G E M E N T C O N F I D E N T I A L
VARCO INTERNATIONAL, INC.
MANAGEMENT INCENTIVE BONUS PLAN
Purpose
- -------
The primary intent of the Management Incentive Bonus Plan is to reward
those managers and other key employees who have a substantial direct impact on
the financial results of the Company, for the achievement of above average
financial performance. Secondarily, the plan is intended to be a critical
component of a total compensation program that will attract and retain a top
quality management group.
Eligibility
- -----------
Selected key employees in Grade Levels 12 and above as well as selected
Senior Managers in grade level 11 are eligible to participate in the Management
Incentive Bonus Plan. Additionally, other key persons in Grade Levels 10 and 11
who have a significant impact on overall financial results may be selected as
participants, based on the recommendation of the Division President with the
approval of the President and Chief Executive Officer and the Corporate Director
of Human Resources. The list of eligible participants will be determined at the
beginning of the fiscal year; persons hired or promoted during the year into
positions that otherwise meet the eligibility criteria will be included in the
bonus plan on a prorata basis for the fiscal year. A participant must be an
active employee on December 31 of the applicable performance year to receive any
bonus amount. No bonus is paid to employees not on active status on December 31
of the performance year.
Methodology
- -----------
At the beginning of each fiscal year, the Compensation Committee of the
Board of Directors establishes the total bonus dollars to be made available for
distribution under the plan at varying levels of financial performance, and the
specific formulae by which the total bonus dollars will be allocated to
individual participants.
An individual participant's cash bonus will be based upon: (1) the level of
financial performance achieved; (2) the participant's Salary Grade and actual
salary; (3) his/her overall individual contribution to the attainment of
Corporate or Division performance; and (4) the achievement of predetermined
individual goals. Corporate executives' and managers' bonuses will be based
upon the overall Company financial performance, and Division executives',
managers' and key employees' bonuses will be based upon a combination of Company
and Division financial performance.
The cash bonus amount for which Corporate Officers would otherwise be
eligible may be increased or decreased depending upon the performance of Varco's
stock price as compared to that of a select group of 10 other oil field service
and equipment companies. If the year-end percentage increase in Varco stock over
that of the prior year ranks among the highest 3 of the group, each Corporate
officer's potential bonus is increased by 50% if Varco's stock price change
ranks in the lowest 3, each officer's potential bonus amount is reduced by 33%.
The individual bonus amount for Corporate Officers will be established by
the Compensation Committee based upon the recommendation of the Chief Executive
Officer and the Corporate Director of Human Resources. The final individual
bonus
<PAGE>
2 of 2
amount for other participants will be established by the Chief Executive Officer
based upon the recommendation of the respective Division President and the
Corporate Director of Human Resources.
In addition to the cash bonus described above, each participant in the
Management Incentive Bonus Plan is eligible for a Stock Bonus (i.e. payable in
shares of Varco common stock) equal to 1/3 of the cash bonus amount for which
the participant would be eligible based upon his/her Salary Grade and actual
salary and the level of overall Company financial performance achieved. Final
Stock Bonus distributions are approved by the Compensation Committee, based upon
the recommendation of the Chief Executive Officer and the Corporate Director of
Human Resources.
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, 1996 December 31, 1996
---------------------------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $8,668,000 $24,542,000
</TABLE>
<TABLE>
<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 December 31, 1996 92 2,903,991,068 31,565,120 753,467 32,318,587
Twelve Months Ended December 31, 1996 366 11,335,928,605 30,972,483 753,467 31,725,950
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
------------------------
Total Shares Outstanding
Income Per Share =
Three Months Ended December 31, 1996 8,668,000 = $0.27
----------
32,318,587
Twelve Months Ended December 31, 1996 24,542,000 = $0.77
----------
31,725,950
</TABLE>
<PAGE>
EXHIBIT 12
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATIONS OF RATIOS
($000'S)
<TABLE>
<CAPTION>
Ratio of Earnings to Fixed Charges 1996 1995 1994
- ---------------------------------- ------- ------- -------
<S> <C> <C> <C>
Earnings:
Pretax Income $38,088 $21,908 $18,917
Plus:
Interest Expense 3,948 4,326 4,766
Amortization of Debt
Issuance Costs 177 190 185
-------------------------------
Total $42,213 $26,424 $23,868
===============================
Fixed Charges:
Interest Expense $ 4,326 $ 4,326 $ 4,766
Amortization of Debt
Issuance Costs 177 190 185
Preferred Stock Dividend 0 0 0
-------------------------------
Total $ 4,503 $ 4,516 $ 4,951
===============================
Ratio of Earnings to Fixed Charges 9.37 5.85 4.82
</TABLE>
<PAGE>
1996 ANNUAL REPORT
VARCO
<PAGE>
CONSOLIDATED FINANCIAL AND OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND EMPLOYEES)
YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Revenues $368,422 $273,731 $223,601 $193,480 $173,069
Net income 24,542 14,439 12,161 7,096 2,358
Net income per share .77 .46 .36 .21 .07
Net income as a percent of revenues 6.7% 5.3% 5.4% 3.7% 1.4%
Average shares outstanding 31,726 31,729 33,522 33,400 32,996
Shareholders' equity 195,508 151,179 163,728 152,608 144,366
Return on average shareholders' equity 14.2% 9.2% 7.7% 4.8% 1.6%
Capital expenditures 11,023 10,517 5,195 2,559 3,839
Number of employees 1,936 1,636 1,410 1,261 1,198
</TABLE>
FOR UNAUDITED SELECTED QUARTERLY FINANCIAL DATA SEE NOTE I OF NOTES TO
CONSOLIDATED FINANCIAL 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 pipe;
conventional pipe handling tools, hoisting equipment and rotary equipment;
drilling rig instrumentation; pressure control equipment; and solids control
equipment and systems.
<PAGE>
TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES
[PICTURE OF WALTER B. REINHOLD AND GEORGE BOYADJIEFF]
1996 may well be viewed in retrospect as the year in which the oil service
industry emerged from a 15-year depression. More than a decade of aggressive
downsizing and consolidation, coupled with a gradual increase in demand, have
largely eliminated the excesses created in the early 1980's and have brought all
segments of the industry much closer to a balance of supply and demand.
Reflecting this recovery, Varco's revenues, earnings and order bookings reached
all-time highs.
INDUSTRY CONDITIONS
-------------------
Worldwide drilling activity, as measured by the average number of active rigs,
grew by approximately seven per cent in 1996, reaching its highest level in five
years. Although that overall growth provides positive momentum, it understates
the actual strength of the market, particularly as it relates to Varco.
Very significant for Varco is the continued strengthening of the offshore
drilling segment. Utilization of the mobile offshore rig fleet established a
post-1982 high for the second consecutive year, averaging 90 per cent for 1996,
well above the 84 per cent average of a year ago. As a result, day rates
continued to climb and contract terms lengthened, particularly for "premium"
offshore rigs. Since the dollar value of equipment which Varco can potentially
2
<PAGE>
[MOBILE OFFSHORE RIG FLEET CHART]
supply to an offshore rig is considerably greater than that to a land rig, the
impact on our performance has been very significant.
FINANCIAL RESULTS AND CONDITION
-------------------------------
Total Revenues reached $368.4 million in 1996, an increase of 35 per cent from
$273.7 million in 1995. Net Income increased by 70 per cent, to $24.5 million,
$.77 per share, from $14.4 million, $.46 per share, a year ago. Both Revenues
and Net Income were the highest in the Company's 89-year history.
Order bookings reached an all-time high of $478.5 million in 1996, 62 per
cent above last year's total. As a result, the backlog of unfilled orders grew
to $186.9 million at December 31, from $75.4 million at the end of 1995.
The sharp increase in orders and Revenues during 1996 is attributable to
the strength of the offshore drilling market in general, and the emphasis on
deep water drilling, in particular. Increasingly, the search for oil and gas
has led oil companies to those areas which have been least explored, such as
water depths in excess of 3,000 feet or in very harsh climatic conditions. With
a shortage of "premium" rigs capable of such drilling, rig owners have been
upgrading the capability and productivity of existing rigs and, more recently,
have committed to the construction of several new rigs. These trends play
directly into Varco's strengths and
3
<PAGE>
[REVENUE GROWTH CHART]
are reflected in the record results.
In May, Baker Hughes Incorporated sold approximately 6.6 million shares of
Varco International, Inc. Common Stock in a registered public offering. These
shares represented approximately 20 per cent of the outstanding shares and were
originally issued to Baker Hughes as partial consideration for two acquisitions
which occurred in 1988 and 1990. We appreciate the loyalty and support of the
management group of Baker Hughes over the years. James D. Woods, recently
retired as Chairman and CEO of Baker Hughes, remains a director of Varco.
OUTLOOK
-------
The fundamentals that drive our business appear very positive. Salomon
Brothers' Annual Survey of Worldwide Exploration and Production Expenditures
indicates that major and independent oil and gas companies are planning to
increase spending 14.7 per cent in 1997, the highest planned growth in nine
years, following an estimated actual increase of 15.2 per cent last year.
Significantly, the 1997 plans are predicated on an assumed average oil price
slightly below $20.00 per barrel and an average natural gas price of
approximately $2.00 per thousand cubic feet--each below the average for
1996 and the first two months of 1997. It appears that projections for
continued strength across our industry are well founded.
4
<PAGE>
[OPERATING INCOME GROWTH CHART]
The Salomon Brothers' survey also reports that oil companies intend to
continue to allocate a higher percentage of their Exploration and Production
budgets to offshore projects. Coupled with a growing emphasis on newer
technologies, these factors point toward a continued favorable climate for
Varco.
We are pleased that George S. Dotson, President of Helmerich & Payne
International Drilling Co., has joined Varco's Board of Directors. George will
provide a valuable perspective based on his more than 26 years of experience in
the contract drilling business.
It has been our long-term strategy to develop and introduce new products
which enhance the productivity and safety of the drilling process, and to make
strategic acquisitions which expand the array of products to which these
capabilities may be applied. We believe we have been successful in executing
this strategy, and it appears that we are entering a market which will provide
the opportunity to reap rewards. Our challenge is to seize that opportunity to
generate superior returns for our shareholders. We are dedicated to doing so.
We appreciate your continued support.
[SIGNATURE OF WALTER B. REINHOLD]
Walter B. Reinhold
Chairman
March 14, 1997
[SIGNATURE OF GEORGE BOYADJIEFF]
George Boyadjieff
President and Chief Executive Officer
5
<PAGE>
[GRAPHS]
6
<PAGE>
Varco has achieved growth in revenue and operating profit in a market which has
been relatively flat in recent years. In an expanding market, Varco has the
potential to realize further improvement in its financial performance.
<TABLE>
<CAPTION>
DRILLING FUNCTIONS VARCO RESPONSE
<S> <C>
Drilling Systems Top Drive Drilling Systems
Drill String Compensators
Information Systems "TOTAL" System
Driller's Console
Pipe Handling Pipe Handling Machines
Pipe Transfer Systems
Spinning Wrenches and Iron Roughnecks/(R)/
Casing Elevators/Spiders
Block Control System
Pressure Control Kick Detection Software
Blowout Preventer "Stacks" and Controls
Pressure Control While Drilling Equipment
Solids Control Solids Removal Systems
Drilling Fluids Handling Systems
</TABLE>
OPERATIONS
7
<PAGE>
OPERATIONS REVIEW
PRODUCT OVERVIEW
- --------------------------------------------------------------------------------
Varco enjoys a long standing reputation for successfully developing products
which enhance the safety and productivity of the drilling process. During the
past nine years Varco has made a number of acquisitions which have broadened its
product line and expanded its product development opportunities. Varco's
product line today includes equipment that is central to the drilling process
and the backbone of a modern drilling rig.
Varco's drilling systems and pipe handling products include integrated
systems used to handle and rotate the various sizes and types of pipe used on a
drilling rig, manufactured by the Drilling Systems Division; conventional
drilling rig tools and equipment of the Varco BJ Oil Tools Division; and motion
compensation equipment which is unique to floating offshore rigs and is
manufactured by the Shaffer Division.
Significant among these products is the Top Drive Drilling System ("TDS").
First introduced by Varco in 1982, the TDS changed the means by which the drill
stem is rotated during drilling and has gained widespread acceptance as a more
productive and safer method. Pipe handling products also include systems which
provide for the mechanized or automated handling of the various sizes and types
of pipe on a drilling rig. Vertical pipe racking systems are used to move
sections of pipe between the storage ("racking") area on the rig floor and the
well center. They also provide the spinning and torquing functions necessary to
couple and uncouple sections of pipe. Horizontal pipe racking systems ("Pipe
Transfer Systems") handle sections of pipe while stored on the pipe deck,
transport them up to the rig floor, and raise them to a vertical position from
which they may be passed to a vertical racking system. Together, these systems
virtually eliminate the manual labor associated with the handling of pipe on a
drilling rig.
Solids control equipment and fluid handling systems are used in the
processing of drilling fluid ("mud"). During drilling operations drilling fluid
is circulated through the well bore to contain formation pressure, lubricate the
drill bit and return cuttings to the surface. The Thule Rigtech Division
provides solids removal equipment, primarily shale shakers, which remove
cuttings from the drilling fluid so that it may be recirculated, as well as
equipment and systems which automate the mixing, handling and transport of
drilling fluids on a rig.
8
<PAGE>
Pressure control products, primarily blowout preventers ("BOP's") and the
control systems that enable their remote activation, are manufactured by the
Shaffer Division. BOP's are mechanical devices that seal the well bore in the
event of an unanticipated surge of formation pressure not contained by primary
pressure control techniques. When drilling from a floating offshore rig, the BOP
rests on the ocean floor and is connected to the rig above by a series of large
diameter sections of pipe which, connected together, form a "riser string". The
drill stem is contained within the riser string and the drilling fluid
circulates through it. Shaffer manufactures riser as well as Riser Tensioning
Systems that hold the riser string in tension beneath the ocean surface.
The Martin-Decker/TOTCO Instrumentation Division provides a variety of
information and control systems which span the entire drilling process. Its
product line ranges from traditional analog gauges to computer-based systems.
The nerve center of a modern drilling rig is the "driller's cabin", an
environmentally secure enclosure which houses the driller and his assistants as
well as all of the information displays and physical controls necessary to
operate the drilling rig. Computer systems monitor the collection of critical
data from a variety of points around the rig; analyze, interpret, display and
store this data for the driller and other rig personnel; provide the interface
between the actions of the operator and the various automated components; and
store and/or transmit analytical data to remote locations for subsequent
analysis.
Through a combination of internal development and acquisition, Varco has
significantly increased the dollar value of products which it can potentially
supply to an offshore drilling rig. In the case of a newly constructed harsh
environment jackup rig this total would approximate $16.5 million; with the
addition of riser, subsea BOP and control system, and other specialized
equipment, the total would be approximately $28.0 million for a floating rig
such as a semi-submersible or drillship. Varco has a product line with a dollar
value which represents a majority of the expenditure for drilling equipment on a
typical new offshore rig.
Varco's revenues are derived from the sale of systems and equipment for the
upgrading of existing rigs and the equipping of new rigs, the sale of spare and
expendable parts and replacement equipment, and the rental of certain capital
equipment.
9
<PAGE>
Deepwater drilling operations require the use of a marine riser "string" to
connect the drilling rig to a subsea wellhead on the ocean floor below. The
riser string is comprised of 60 to 80 foot pipe sections connected together. A
significant portion of the Shaffer Division's 1996 Revenue was derived from the
sale of riser.
INDUSTRY TRENDS
- --------------------------------------------------------------------------------
In 1996 several trends accelerated and converged to create the most positive
environment our industry has experienced in more than a decade. While some
industry analysts have been predicting a turnaround for some time and many of
the underlying forces have been increasingly visible, only in recent months has
it begun to significantly benefit oilfield service and equipment companies such
as Varco.
One enabling factor has been the continual growth in worldwide demand for
oil and gas which has substantially eliminated the excess production capacity
that has prevailed for a number of years. As a result, oil prices in 1996 were
considerably above both the 1995 level and the consensus expectation at the
beginning of the year, averaging approximately $22.10 per barrel versus $18.40
last year. Natural gas prices were higher also, averaging approximately $2.50
per thousand cubic feet as compared to $1.45 last year. These unexpectedly
strong commodity prices have extended into early 1997. As a result of these
commodity prices, oil companies have experienced improved profits and cash flow.
At the same time, the average cost for an oil company to find and produce a
barrel of oil has been declining. It is estimated that worldwide finding and
development costs averaged approximately $4.50 per barrel in 1995, versus an
average of $5.15 in the prior year and $6.50 as recently as 1991. This rather
startling decline has resulted from internal restructuring and cost reduction,
combined with the cumulative impact of technological advances within the oil
service industry. Examples include: use of 3-D seismic imaging to better locate
and delineate reservoirs; application of improved bit and drilling fluid
technology, together with top drive drilling, to reduce drilling costs; and
enhanced production through the use of horizontal drilling and related
techniques.
With higher commodity prices and lower costs, major and independent oil
companies have increased worldwide exploration and production spending. Salomon
Brothers' Annual Survey and Analysis of Worldwide Oil and Gas Exploration and
Production Expenditures estimates that 1996 spending was up 15.2 per cent, on
the heels of a 9.0 per cent increase in 1995 over 1994. These expenditures
translate into increased activity for the oilfield service industry.
In addition to this increased demand for products and services, years of
downsizing and consolidation have eroded the excess capacity which has
10
<PAGE>
VARCO BUSINESS DRIVERS
Exploration
& Production
Spending
Oil Company
Finding &
Production
Costs
Oil & Gas
Prices
Oil Company
"Upstream"
Cash Flow
Rig
Availability
Utilization
Day Rates
& Contract
Terms
Rig
Contractor
Cash Flow
Rig
Upgrades
New Rig
Construction
Rig
Demand
Rig
Maintenance
Varco
Revenue
The Diamond Offshore Drilling, Inc. semisubmersible Ocean Quest has recently
undergone a $65 million upgrade, increasing its water depth capacity from 600 to
3,500 feet and enhancing its overall drilling capability.
11
<PAGE>
WHEN DRILLING FROM A FLOATING OFFSHORE RIG, THE BLOWOUT PREVENTER "STACK" RESTS
ON THE OCEAN FLOOR, IN WATER DEPTHS RANGING UP TO 10,000 FEET. IT MUST RELIABLY
SEAL THE WELL BORE IN THE EVENT OF AN UNANTICIPATED SURGE IN FORMATION PRESSURE
NOT CONTROLLED BY PRIMARY METHODS.
plagued the oil service industry for more than a decade. Although an overall
supply-demand balance has not yet been attained, the markets for certain
equipment, services and products are beginning to reach equilibrium and even
display signs of shortages.
It has required the combination of several factors to initiate a recovery
in the oil service industry, and many analysts believe that the conditions
necessary to sustain the upturn exist today. This environment presents Varco
with several unique opportunities.
MARKET CONDITIONS
- --------------------------------------------------------------------------------
The offshore drilling market, in particular, has demonstrated significant
improvement in recent months. Increasingly, oil companies are looking to the
offshore areas of the world, especially those in deep water and harsh
environments where prior exploration has been limited, as a source of large oil
and gas deposits. In mid-1995 this trend, magnified by generally higher overall
exploration and production spending, began to be reflected in increased offshore
drilling. As a result, the average utilization of the mobile offshore rig fleet
was 84.3 per cent in 1995, the highest since 1982. The trend has continued
during the past twelve months, as utilization averaged 90.0 per cent for 1996 as
a whole, and 91.4 per cent over the second half of the year. This strength has
been widespread, with virtually every offshore area demonstrating year-to-year
improvement.
The tighter rig market has resulted in higher day rates, with recently
reported rates for "premium" rigs running 50 per cent or more above those of the
comparable period a year ago. Additionally, contract terms have lengthened as
oil companies have become concerned with rig availability. The stronger market
has resulted in sharply increased profits and cash flow for offshore drilling
contractors.
The land rig market has firmed as well during 1996. However, since it
suffers a much greater supply overhang than the offshore rig market, its
improvement has been much less pronounced.
The impact on Varco of the offshore market recovery has been threefold.
First, increased demand has led to a shortage of certain types of rigs, i.e.
floating rigs capable of drilling in deep water (in excess of 3,000 feet). In
response, rig owners have returned to service rigs which had been removed from
the rig fleet, and have upgraded the water depth capacity of existing rigs. In
each case, a significant amount of equipment of the kind supplied by Varco is
re-
12
<PAGE>
POTENTIAL REVENUE PER NEW DRILLING RIG
[GRAPH]
The PRS-4 is a semi-automated vertical pipe racking system. It is operated
remotely from a control chair located in the driller's cabin and is designed to
handle all sizes of tubulars, including drill pipe, drill collars and casing.
13
<PAGE>
A BOP Control System is used to remotely activate the Blowout Preventers when
well pressure is not controlled by ordinary means. Pictured is a Shaffer surface
mounted electro-hydraulic system being readied for customer delivery at the
Houston plant.
quired. Second, the brighter outlook and improved financial results have
encouraged drilling contractors to upgrade their rigs with newer technology
equipment. Third, the increase in drilling activity has stimulated the sale of
spare and replacement parts and equipment.
Despite the recovery in the offshore rig market, sufficient excess supply
still exists that day rates generally remain well below the level that would
justify the building of new rigs, except for those designed to operate in deep
water and harsh environments. The day rates and contract terms that they command
are sufficient that plans to build several such rigs have been recently
announced. Construction of new offshore rigs affords significant opportunity to
Varco. Not only do such rigs require equipment of the type supplied by each of
Varco's five divisions, but they are strong candidates for Varco's newest
technology equipment.
Varco's market environment and outlook are brighter today than at any time
in the past fifteen years. The combination of rising demand and diminished
supply across our industry has substantially improved the economics for all
participants. Therefore, we believe Varco is uniquely positioned to capitalize
on the strategies we have pursued in recent years.
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
1996 total Revenue of $368.4 million represents a 35 per cent increase from
$273.7 million in 1995. More dramatic, and reflective of the strength of the
market, were incoming orders which totaled $478.5 million, 62 per cent above the
$294.9 million booked last year. Net Income for 1996 increased 70 percent, to
$24.5 million from $14.4 million a year ago.
Most of the increase in Revenue and orders can be traced to the Shaffer
Division. Shaffer's Revenues of $123.8 million were more than double the $60.9
million of a year ago; and incoming orders rose even more--to $211.5 million
from $89.0 million last year. This growth is being driven by the increase in
deep water drilling, as either upgrading the water depth capacity of an existing
rig or constructing a new deep-water rig require significant equipment of the
kind manufactured by Shaffer.
Varco Drilling Systems also contributed to the year-to-year increases, as
order bookings totaled $137.7 million in 1996 versus $95.5 million last year,
and Revenues increased to $117.7 million from $101.4 million. The Varco BJ Oil
Tools Division likewise experienced significant growth, recording orders
14
<PAGE>
SOURCES OF REVENUE GROWTH
-------------------------
[GRAPH]
A modern drilling rig is operated remotely from an environmentally secure
driller's cabin containing the information displays and physical controls
necessary for its effective and safe operation.
15
<PAGE>
of $56.3 million versus $42.3 million a year ago, and Revenues of $53.8 million
as compared to $41.7 million in 1995. In each Division the increases related
primarily to rig upgrades and refurbishment and to the overall increase in
offshore drilling activity.
Operating income (Earnings Before Interest and Taxes), as a percentage of
Revenue, improved to 11.1 per cent in 1996 from 9.2 per cent in 1995. This
represents 16 cents of additional operating profit per $1.00 of Revenue
increase--somewhat below our target, but a positive accomplishment nevertheless.
Although gross margin as a per cent of Revenue was 34.3 per cent for 1996, as
compared to 36.4 per cent in 1995, the decline was more than offset by Selling,
General and Administrative expenses as a percent of Revenue, which fell to 19.3
percent from 22.4 per cent last year. Research and Development expenses of 3.9
per cent were below the 4.8 per cent of a year ago due to the sharp increase in
Revenues.
The lower gross margin percentage resulted primarily from the large
increase in Shaffer's Revenue. Its product line is less differentiated than that
of our other Divisions, and its market is the most competitive in which we
participate. As a result, Shaffer's products carry lower gross margins than the
average of the other Divisions. The decline in Selling, General and
Administrative costs as a percentage of Revenue is the result of fixed cost
leverage associated with increased volume, coupled with the effect of large
individual customer orders characteristic of the increased Revenue at Shaffer.
Such orders typically carry proportionately lower selling and administrative
costs per dollar of Revenue than the remainder of the business.
The average net investment (debt plus equity less cash) in the business was
$203 million during 1996, an increase of approximately $23 million from the
average for the prior year despite a Revenue increase of $94.6 million. Coupled
with improved profit margins, the relatively low incremental investment provided
substantially improved returns on investment. Cash flow (Earnings Before
Interest, Taxes, Depreciation and Amortization) return on average net investment
(Shareholders' Equity, plus Debt, minus Cash) improved to 27.2 per cent from
21.2 per cent last year, marking the highest return in more than a decade.
Our financial performance in 1996 reflects both the success of our long-
term strategies and a stronger market. The opportunity exists for further
improvement, although not without significant challenges.
16
<PAGE>
RETURN ON CAPITAL
-----------------
[GRAPH]
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATION
($MILLIONS)
DEBT + EQUITY -- CASH AND SHORT-TERM INVESTMENTS
($MILLIONS)
PERCENT RETURN
17
<PAGE>
FIVE YEAR FINANCIAL AND OPERATING HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND EMPLOYEES)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994/(1)/ 1993/(1)/ 1992/(1)/
- ----------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ---------------------
<S> <C> <C> <C> <C> <C>
Revenues $368,422 $273,731 $223,601 $193,480 $173,069
Gross profit 125,816 99,214 86,761 72,010 63,049
Research and development 14,331 13,156 11,438 9,479 9,818
Selling, general and
administrative expenses 70,891 61,014 53,798 48,423 49,067
Interest expense 3,948 4,516 4,766 5,010 3,918
Income before income taxes 38,088 21,908 18,917 10,811 852
Income taxes 13,546 7,469 6,756 3,715 530
Income before cumulative
effect of change in accounting
for income taxes/(2)/ 24,542 14,439 12,161 7,096 322
Net income 24,542 14,439 12,161 7,096 2,358
As a percent of revenues 6.7% 5.3% 5.4% 3.7% 1.4%
Return on average shareholders'
equity 14.2% 9.2% 7.7% 4.8% 1.6%
PER SHARE OF COMMON STOCK
- -------------------------
Income before cumulative
effect of change in accounting
for income taxes/(2)/ .77 .46 .36 .21 .01
Net income .77 .46 .36 .21 .07
Book value 6.19 5.01 4.91 4.58 4.37
=======================================================================================
YEAR-END FINANCIAL POSITION
- ---------------------------
Working capital 120,246 89,187 112,342 113,241 102,953
Current ratio 2.4 2.5 3.4 3.9 4.1
Property and equipment -- net 62,312 50,622 47,659 47,241 49,797
Total assets 316,021 246,571 257,641 248,021 232,301
Long-term debt 22,715 29,539 39,349 49,164 51,326
Shareholders' equity 195,508 151,179 163,728 152,608 144,366
Long-term debt as percent of
total capitalization 10.4% 16.3% 19.4% 24.4% 26.2%
=======================================================================================
OTHER
- -----
Capital expenditures 11,023 10,517 5,195 2,559 3,839
Depreciation and amortization 13,249 12,347 10,996 10,687 10,964
Number of employees 1,936 1,636 1,410 1,261 1,198
Average shares used in
computing earnings per share 31,726 31,729 33,522 33,400 32,996
=======================================================================================
</TABLE>
(1) INCLUDES THE ACQUISITIONS OF SHAFFER AS OF JULY 17, 1992; METROX AS OF
AUGUST 17, 1993 AND RIG TECHNOLOGY LIMITED AS OF NOVEMBER 30, 1994.
(2) 1992 CUMULATIVE EFFECT OF ADOPTING STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 109.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
MANAGEMENT REPORT OF FINANCIAL RESPONSIBILITIES
The management of Varco International, Inc. is responsible for the preparation
and integrity of the accompanying consolidated financial statements and other
financial information contained in this Annual Report. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and include amounts that are based on management's
informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial information,
management maintains and relies on the Company's system of internal control.
This system includes a program of financial and operational reviews by a
professional corporate staff and the independent auditors. The system is
designed to provide reasonable assurance that assets are safeguarded,
transactions are executed in accordance with management's authorization and
accounting records are reliable as a basis for the preparation of the
consolidated financial statements. Management believes that, as of December 31,
1996, the Company's internal control system provides reasonable assurance that
material errors or irregularities will be prevented or detected within a timely
period and is cost effective.
The Board of Directors, through its Audit Committee composed solely of non-
employee directors, reviews the Company's financial reporting and accounting
practices. The Audit Committee recommends to the Board of Directors the
selection of independent auditors and reviews their fee arrangements. It meets
periodically with the independent auditors and management to review the work of
each and the propriety of the discharge of their responsibilities. The
independent auditors have full and free access to the Audit Committee, without
management present, to discuss auditing and financial reporting matters.
[SIGNATURE OF GEORGE BOYADJIEFF]
GEORGE BOYADJIEFF
PRESIDENT & CHIEF EXECUTIVE OFFICER
FEBRUARY 12, 1997
[SIGNATURE OF RICHARD A. KERTSON]
RICHARD A. KERTSON
VICE PRESIDENT -- FINANCE & CHIEF FINANCIAL OFFICER
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
- --------------------------------------------------------------------------------
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.
The price of oil has averaged approximately $22.10, $18.40 and $17.20 a barrel
for 1996, 1995 and 1994, respectively. The price of natural gas has averaged
approximately $2.50, $1.45 and $1.70 per thousand cubic feet for 1996, 1995 and
1994, respectively. These higher commodity prices have resulted in improved
profits and cash flows for oil companies. Due in part to these stronger
financial results, oil companies have increased exploration and production
expenditures, leading to increased drilling activity.
Rig counts, as reported by industry sources, for each of the past three years
are summarized in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
APPROXIMATE AVERAGE ANNUAL RIG COUNT:
- ------------------------------------
WORLDWIDE AVERAGE RIG COUNT 1,836 1,712 1,766
UNITED STATES & CANADA AVERAGE RIG COUNT 1,043 953 1,033
INTERNATIONAL AVERAGE RIG COUNT 793 759 733
APPROXIMATE AVERAGE NUMBER OF OFFSHORE RIGS UNDER CONTRACT 550 542 535
</TABLE>
Overall drilling activity, as reflected by the average number of rigs drilling
worldwide, grew by approximately 7.2% in 1996, reaching its highest level in
five years. Significant in its impact on the Company is the increased worldwide
utilization of offshore rigs (rigs under contract as a percent of available
rigs), which in 1996 reached its highest level since 1982 (utilization rates
were 90%, 84%, and 81% for the years 1996, 1995 and 1994, respectively), driven
both by increased demand and by a continually shrinking supply of available
offshore rigs. The higher utilization was accompanied by increasing day rates
and longer contract periods, particularly among the "premium" offshore rigs.
This resulted in increased cash flow for the Company's major customers, the
drilling contractors.
ACQUISITION
- ----------
On November 30, 1994 the Company acquired all of the outstanding shares of Rig
Technology Limited ("Thule Rigtech"), a company incorporated in Scotland, for a
cost of approximately $9.0 million. Thule Rigtech provides equipment and
systems used in the handling, mixing, transport and conditioning of drilling
fluids and operates as the Company's Thule Rigtech Division.
For further information concerning this acquisition see Note K of Notes to
Consolidated Financial Statements.
20
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
The Company operates principally in the oil and gas well drilling equipment
segment of the oilfield service industry. Set forth below are the annual net
orders for the Company's five Divisions which serve this segment.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C>
NET ORDERS
----------
VARCO DRILLING SYSTEMS $137,722 $ 95,519 $ 98,044
VARCO BJ OIL TOOLS 56,308 42,252 41,201
MARTIN-DECKER/TOTCO INSTRUMENTATION 63,950 57,967 54,341
SHAFFER 211,539 88,961 46,708
THULE RIGTECH 8,969 10,242 1,191
-----------------------------------------------------------------------
TOTAL $478,488 $294,941 $241,485
=======================================================================
</TABLE>
Order bookings increased $183.5 million, 62%, in 1996 as compared to 1995. This
increase is 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. During 1996 Shaffer secured several orders to
provide pressure control, motion compensation and related equipment, and
Drilling Systems obtained several orders to provide vertical and horizontal pipe
handling systems and Top Drive Drilling Systems ("TDS's") to these rigs. The
increase in order bookings for the Varco BJ Oil Tools and Martin-Decker/TOTCO
Instrumentation Divisions also resulted, in part, from the offshore rig upgrades
and new construction.
In addition to the upgrading of offshore drilling rigs, Varco benefited from
the increase in worldwide drilling activity. The Company estimates that
approximately 20% to 25% of its 1996 order growth is the result of such
increase.
Order bookings increased $53.5 million, 22%, in 1995 as compared to 1994.
Most of the increase occurred at the Shaffer Division and included orders to
upgrade several offshore rigs with pressure control, motion compensation and
related equipment. Secondarily, the increase from 1994 was due to the full year
impact of Thule Rigtech and increased orders for the TOTAL product line of
Martin-Decker/TOTCO.
Set forth below are the annual revenues for the Company's five Divisions.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
--------
VARCO DRILLING SYSTEMS $117,658 $101,440 $ 74,405
VARCO BJ OIL TOOLS 53,830 41,663 41,309
MARTIN-DECKER/TOTCO INSTRUMENTATION 62,227 58,013 54,176
SHAFFER 123,846 60,925 50,900
THULE RIGTECH 9,419 10,310 653
-----------------------------------------------------------------------
TOTAL $366,980 $272,351 $221,443
=======================================================================
</TABLE>
21
<PAGE>
The Company's revenues increased by 35% in 1996 to $367.0 million, from 1995
revenues of $272.4 million. The Shaffer Division's revenues demonstrated the
largest increase, to $123.8 million from $60.9 million in 1995. Approximately
70% of this increase is due to the offshore rig upgrades and the balance is due
to the overall increase in drilling activity. The Drilling Systems' revenue
increase reflects the general increase in offshore drilling activity, together
with increased sales of the land Top Drive System ("TDS-9S") introduced in 1995.
The increase in revenues for Varco BJ Oil Tools is primarily the result of the
higher level of overall drilling activity.
The Company's revenues increased by 23% in 1995, to $272.4 million, from
$221.4 million in the prior year. The increase was concentrated in the Drilling
Systems and Shaffer Divisions, along with the full-year impact of Thule Rigtech.
TDS unit shipments increased to 48 (including the initial 8 units of the TDS-
9S), from 41 in 1994; and pipe handling systems revenues totaled $17.8 million
in 1995 versus $3.6 million in 1994. The year-to-year increase at Shaffer
resulted primarily from the upgrading of offshore rigs.
The Company's backlog of unshipped orders was $186.9 million at December 31,
1996 as compared to $75.4 million at December 31, 1995 and $52.8 million at
December 31, 1994. 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 December 31, 1996 backlog is longer than in prior
years. The Company expects that substantially all of the backlog will be shipped
by December 31, 1997, with approximately 40% to 45% being shipped subsequent to
June 30, 1997. In accordance with industry practice, orders and commitments
generally are cancelable by customers at any time.
Other income decreased in 1995 as compared to 1994 due to a decline in
investment earnings as the Company used approximately $29.6 million of cash and
cash equivalents and short-term investments to repurchase approximately 3.5
million shares of the Company's Common Stock.
Gross margins (net sales and rental income less costs of sales and rental
income) as a percentage of net sales and rental income for the Company were
34.3% for 1996, 36.4% for 1995 and 39.2% for 1994. The decline in 1996 is
primarily the result of the large increase in Shaffer's revenue. Shaffer's
products carry lower gross margins (due principally to price competition) than
the combined gross margins of the other Divisions. The combined gross margin
for the other Divisions was 38.9% for both 1996 and 1995. Approximately 2.3% of
the 2.8% margin decline in 1995 as compared to 1994 is due to lower margins on
Drilling Systems' newer products. This decline is due to a slightly negative
margin on TDS-9S units ($5.1 million in revenue) and to lower than average
margins on newer pipe handling products. The balance of the margin decline is
primarily due to general cost increases at all Divisions, such as labor and
material costs. These cost increases were partially offset by a favorable
impact on gross margins of 1.0% resulting from increased utilization of the
Company's manufacturing facilities, from 75% in 1994 to approximately 90% in
1995.
The Company believes that new product development is significant to the future
growth of the Company. Research and development expenses were $14.3 million,
$13.2 million and $11.4 million for the years 1996, 1995 and 1994 respectively,
and represented 3.9%, 4.8%, and 5.1% of revenue, respectively, for those same
years. The Company expects that research and development expenses will continue
at approximately 4.0% to 4.5% of revenue in 1997.
22
<PAGE>
Selling, general and administrative expenses were $70.9 million in 1996 (19.3%
of revenues) as compared to $61.0 million in 1995 (22.4% of revenues) and $53.8
million (24.3% of revenues) in 1994. The increases in 1996 as compared to 1995
and 1995 as compared to 1994 are mostly due to selling and marketing expenses
associated with increased revenue levels and to the full-year impact of Thule
Rigtech in 1995.
At December 31, 1996 overall Company employment was 1,936 (including 220
temporary employees) as compared to 1,636 (including 221 temporary employees) at
December 31, 1995. The employment increase is mostly due to an increase in
manufacturing employees to meet the higher level of shipments.
The Company's effective income tax rate was 35.6% in 1996 as compared to 34.1%
in 1995 and 35.7% in 1994. The lower 1995 effective income tax rate resulted
from a foreign tax loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
On May 29, 1996 the Company completed the sale of 989,406 shares of Common Stock
at a price to the public of $15.875 per share. A portion of the net proceeds
from the sale of approximately $14.6 million was used to make the $10.0 million
principal payment due June 30, 1996 on the Senior Notes. At December 31, 1996
the Company had cash and cash equivalents of $5.8 million as compared to $6.8
million at December 31, 1995. This decrease was primarily due to increases in
receivables and inventory.
In July 1992 the Company sold $50.0 million aggregate principal amount of its
8.95% Senior Notes Due June 30, 1999 (the "Senior Notes") to a group of ten
institutional investors pursuant to a Note Agreement dated as of July 1, 1992
(the "Note Agreement"). The principal of the Senior Notes is payable in five
equal annual installments of $10.0 million, the first of which was made on June
30, 1995. Effective as of March 8, 1995, the holders of the Senior Notes waived
compliance with certain covenants contained in the Note Agreement in order to
permit certain purchases of the Company's Common Stock and amended certain
financial covenants. The Senior Notes include a yield maintenance prepayment
penalty if any principal is repaid prior to the installment due date. Had the
entire outstanding principal amount been prepaid at December 31, 1996 the
prepayment penalty would have been approximately $965 thousand.
On February 25, 1993 the Company entered into an unsecured revolving credit
agreement with Citicorp USA, Inc. and Citibank, N.A. (the "Credit Agreement").
Effective as of March 17, 1995 the Credit Agreement was amended to (1) extend
the maturity date from March 31, 1996 to October 31, 1998; (2) increase the
total maximum facility from $20.0 to $35.0 million, consisting of a loan
facility of $25.0 million and a letter of credit facility of $10.0 million; and
(3) amend certain covenants to permit certain purchases of Company stock and to
amend certain financial ratios. At December 31, 1996 there were $3.0 million in
advances outstanding 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 25% of
the Company's consolidated net income arising after January 1, 1992, computed on
a cumulative basis. In addition, pursuant to a December 31, 1995 amendment to
the Credit Agreement, the Company could repurchase prior to December 31, 1996
shares of its Common Stock for an aggregate cost not exceeding $50.0 million,
including the 3,150,560 shares purchased pursuant to the Company's 1995 tender
offer. The Company may also purchase or otherwise acquire shares of Common
Stock from the proceeds of the substantially concurrent sale of shares of Common
Stock.
23
<PAGE>
On May 26, 1994 the Company announced that its Board of Directors authorized
the repurchase of up to one million shares of the Company's Common Stock for an
aggregate purchase price not exceeding $6.0 million (the "Repurchase Program").
On May 26, 1995 the Company announced an increase and extension of the above
Repurchase Program. The total number of shares authorized for repurchase was
increased to 1,500,000; the maximum aggregate purchase price was increased to
$11.0 million and the purchase period was extended through December 31, 1996.
Prior to the termination of this program the Company repurchased on the open
market 627,600 shares of its Common Stock at an average price of approximately
$8.00 per share. No repurchases were made in 1996.
Working capital was $120.2 million at December 31, 1996 compared to $89.2
million at December 31, 1995. The Company's current ratio has decreased from
2.5 to 1.0 at December 31, 1995 to 2.4 to 1.0 at December 31, 1996 and long-term
debt as a percentage of total capitalization has decreased to 10% at December
31, 1996 from 16% at December 31, 1995. The increase in working capital is due
to the higher level of receivables and inventory needed to support the Company's
higher revenue levels. The lower debt to total capitalization ratio is
primarily due to the sale of Common Stock and to the June 30 principal payment
on the Senior Notes.
The increase in the Company's equipment held for rental of $8.2 million is
primarily due to the addition of TDS-9S units to the rental fleet.
Capital expenditures were $11.0 million in 1996 as compared to $10.5 million
in 1995. The Company expects to increase its capital expenditures in 1997 to
approximately $30 million, primarily to purchase machinery and equipment to
increase manufacturing capacity. The Company believes that its December 31, 1996
cash and cash equivalents and its credit facility will be insufficient to meet
its capital expenditures and operating cash needs and the principal payment on
the Senior Notes in 1997. Accordingly, the Company anticipates increasing its
credit facility by $10 million in 1997.
24
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
- --------------
<S> <C> <C>
Cash and cash equivalents $ 5,794 $ 6,762
Receivables -- principally trade, less allowances for
doubtful accounts of $1,756 (1996) and $1,585 (1995) 95,160 60,683
Inventories -- Note B 91,873 70,832
Deferred tax assets -- Note D 9,678 5,130
Prepaid expenses 4,157 3,533
- ----------------------------------------------------------------------------------
Total Current Assets 206,662 146,940
Property, plant and equipment -- at cost,
less accumulated depreciation -- Note C 48,711 45,260
Rental equipment -- at cost less accumulated depreciation 13,601 5,362
Cost in excess of net assets acquired, less accumulated
amortization of $6,493 (1996) and $5,331 (1995) 35,879 36,371
Other assets 11,168 12,638
- ----------------------------------------------------------------------------------
Total Assets $316,021 $246,571
==================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable -- principally trade $ 37,815 $ 21,356
Accrued payroll and related costs 10,913 7,299
Accrued warranty 4,067 2,637
Taxes payable 5,853 1,885
Other accrued liabilities 17,768 14,576
Current portion of long-term debt -- Note E 10,000 10,000
- ----------------------------------------------------------------------------------
Total Current Liabilities 86,416 57,753
Long-term debt, less current portion -- Note E 22,715 29,539
Postretirement obligations -- Note H 6,087 5,647
Other non-current liabilities 5,295 2,453
- ----------------------------------------------------------------------------------
Total Liabilities 120,513 95,392
SHAREHOLDERS' EQUITY -- NOTE F
- ------------------------------
Preferred Stock: 10,000,000 shares authorized, none issued
and outstanding
Common Stock: 80,000,000 shares authorized, 31,599,616 (1996)
and 30,161,365 (1995) issued and outstanding, stated value 21,968 20,529
Additional paid-in capital 121,565 104,023
Retained earnings 51,975 26,627
- ----------------------------------------------------------------------------------
Total Shareholders' Equity 195,508 151,179
Commitments and contingencies -- Note G
Total Liabilities and Shareholders' Equity $316,021 $246,571
==================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
- --------
Net sales $336,120 $247,114 $197,956
Rental income 30,860 25,237 23,487
Other income 1,442 1,380 2,158
- --------------------------------------------------------------------------------
368,422 273,731 223,601
COSTS AND EXPENSES
- ------------------
Cost of sales 231,792 165,835 127,752
Cost of rental income 9,372 7,302 6,930
Selling, general and administrative expenses 70,891 61,014 53,798
Research and development costs 14,331 13,156 11,438
Interest expense 3,948 4,516 4,766
- --------------------------------------------------------------------------------
330,334 251,823 204,684
- --------------------------------------------------------------------------------
Income before income taxes 38,088 21,908 18,917
Income taxes -- Note D 13,546 7,469 6,756
- --------------------------------------------------------------------------------
Net income $ 24,542 $ 14,439 $ 12,161
================================================================================
Net income per share $ .77 $ .46 $ .36
================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
COMMON STOCK
ISSUED AND OUTSTANDING ADDITIONAL
------------------------ PAID-IN RETAINED
YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994 SHARES AMOUNT CAPITAL EARNINGS TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 33,304 $23,672 $102,630 $26,306 $152,608
Net income 12,161 12,161
Common Stock repurchased (264) (264) (1,395) (1,659)
Common Stock issuances 296 296 958 1,254
Unrealized losses on investments (462) (462)
Foreign currency translation adjustment (174) (174)
- ---------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 33,336 23,704 102,193 37,831 163,728
Net income 14,439 14,439
Common Stock issuances 339 339 1,830 2,169
Common Stock repurchased (363) (363) (3,020) (3,383)
Self tender (3,151) (3,151) (23,025) (26,176)
Unrealized gains on investments 462 462
Foreign currency translation adjustment (60) (60)
- ---------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 30,161 20,529 104,023 26,627 151,179
Net income 24,542 24,542
Common Stock issuances 1,439 1,439 17,542 18,981
Foreign currency translation adjustment 806 806
- ---------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 31,600 $21,968 $121,565 $51,975 $195,508
=========================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
- --------------------
Net income $ 24,542 $ 14,439 $ 12,161
Items included in net income
not requiring (providing) cash:
Depreciation 10,928 9,557 8,250
Amortization 2,321 2,790 2,746
Deferred income taxes (2,772) (1,802) (517)
Post retirement obligations 840 868 1,174
Other 365 473 557
Changes in operating assets
and liabilities:
Receivables (34,477) (8,433) (10,491)
Inventories (22,667) (10,533) (7,761)
Additions to rental equipment (10,204) (2,739) (3,393)
Prepaids (624) (998) 215
Accounts payable 16,459 6,011 982
Taxes payable 3,968 733 (2,353)
Accrued liabilities 8,236 4,574 (2,053)
Other 1,967 516 725
- --------------------------------------------------------------------------------------------
Net Cash (used in) from Operating Activities (1,118) 15,456 242
INVESTING ACTIVITIES
- --------------------
Property, plant and equipment purchases (11,023) (10,517) (5,195)
Proceeds from equipment sales 659 511 178
Acquisitions (8,954)
Purchases of short-term investments (87,548)
Proceeds from sale of short-term investments 21,131 5,221
Proceeds from maturities of short-term investments 9,407 82,779
- --------------------------------------------------------------------------------------------
Net Cash (used in) from Investing Activities (10,364) 20,532 (13,519)
FINANCING ACTIVITIES
- --------------------
Proceeds from long-term debt and line of credit 72,000 17,500
Payments on long-term debt and line of credit (79,000) (27,500)
Proceeds from issuance of Common Stock 17,514 1,540 1,169
Common Stock repurchased (29,559) (1,659)
- -------------------------------------------------------------------------------------------
Net Cash from (used in) Financing Activities 10,514 (38,019) (490)
Net decrease in cash and cash equivalents (968) (2,031) (13,767)
Cash and cash equivalents at beginning of year 6,762 8,793 22,560
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,794 $ 6,762 $ 8,793
==========================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
DESCRIPTION OF BUSINESS Varco International, Inc. and its subsidiaries (the
"Company") are engaged in the design, manufacture, sale and rental of tools,
equipment and instrumentation used primarily in the worldwide oil and gas well
drilling equipment segment of the oil field service industry. The Company
operates through five divisions: Varco Drilling Systems, whose products include
integrated systems for rotating and handling pipe on a drilling rig; Varco BJ
Oil Tools, whose products include pipe handling tools, hoisting equipment and
rotary equipment; Martin-Decker/TOTCO Instrumentation, whose instrumentation
products are used in the management of drilling operations; Shaffer, whose
products include pressure control and motion compensation equipment and flow
devices; and Thule Rigtech, whose products are used in the handling, mixing,
transport and conditioning of drilling fluids.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Varco International, Inc. and its wholly-owned subsidiaries. All
material intercompany items and transactions have been eliminated in
consolidation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts could differ from those estimates.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
SHORT-TERM INVESTMENTS The appropriate classification of debt securities is
determined at the time of purchase and reevaluated as of each balance sheet
date. Debt securities that the Company has both the positive intent and ability
to hold to maturity are carried at amortized cost. Debt securities that the
Company does not have the positive intent and ability to hold to maturity and
all marketable equity securities are classified as available-for-sale and
carried at fair value.
CONCENTRATIONS OF CREDIT RISK Substantially all of the Company's accounts
receivable are due from customers in the oil and gas industry, both in the
United States and internationally. The Company performs periodic credit
evaluations of its customers and generally does not require collateral. In
certain circumstances, the Company requires letters of credit to further ensure
credit worthiness.
INVENTORIES Inventories are stated at the lower of cost or market. The
Company determines the cost of inventories using the last-in, first-out ("LIFO")
method.
RENTAL EQUIPMENT Rental equipment is stated at the lower of cost or market,
net of accumulated depreciation of $14,136,000 and $12,249,000 at December 31,
1996 and 1995, respectively. Rental equipment is depreciated over estimated
useful lives ranging from 3 to 7 years. The equipment is generally leased under
short-term arrangements, usually not exceeding 90 days in duration.
DEPRECIATION Depreciation is provided using the straight-line method over
estimated useful lives ranging from 3 to 30 years.
INTANGIBLE ASSETS The excess of cost over net assets of businesses acquired
("goodwill") is amortized on a straight-line basis over periods ranging from 10
to 40 years. The carrying value of goodwill will be reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of cash flows. Included in Other Assets are other intangible assets
totaling $3,846,000, net of accumulated amortization of $5,156,000 at December
31, 1996, which are being amortized on a straight-line basis over estimated
useful lives ranging from 5 to 17 years.
29
<PAGE>
INCOME TAXES The liability method is used to account for income taxes.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts which are more likely than not to be
realized. The provision for income taxes is the tax payable or refundable for
the period plus or minus the change during the period in deferred tax assets and
liabilities.
IMPAIRMENT OF LONG-LIVED ASSETS Impairment losses are recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Long-lived assets expected to be disposed of,
including excess equipment and a production facility held for sale, are stated
at their estimated fair value less cost to sell.
REVENUE RECOGNITION The Company recognizes revenue upon shipment of product,
upon the use of rented equipment and upon the completion of installation work.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial
instruments including cash and cash equivalents, accounts receivable and
accounts payable approximated fair value as of December 31, 1996 and 1995
because of the relatively short maturity of these instruments. The carrying
value of debt approximated fair value as of December 31, 1996 and 1995, based
upon quoted market prices for similar debt issues.
FOREIGN CURRENCY The Company has determined that the United States dollar is
the functional currency of all its foreign subsidiaries except for Rig
Technology Limited whose functional currency is the British pound sterling.
Accordingly, the financial statements of most foreign operations are remeasured
in terms of the United States dollar and exchange gains and losses are
recognized in operations. Exchange gains in 1996 were $283,000 while the
exchange losses were $673,000 and $68,000 in 1995 and 1994, respectively.
Financial statements of Rig Technology Limited are translated at current rates
of exchange, with gains or losses resulting from translation included as a
separate component of shareholders' equity.
STOCK BASED COMPENSATION The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees".
PER SHARE DATA Per share amounts are computed by dividing net income by the
weighted average number of common shares and dilutive common share equivalents,
mainly stock options, which were 31,725,950, 31,729,423 and 33,522,209 in 1996,
1995 and 1994, respectively.
RECLASSIFICATION Certain amounts in the 1995 and 1994 financial statements
have been reclassified to conform with current year classification.
NOTE B INVENTORIES
- --------------------------------------------------------------------------------
Inventories classified as current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1996 1995
----------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS $ 6,545 $ 5,480
WORK IN PROCESS 22,646 18,061
FINISHED GOODS 77,150 61,052
EXCESS OF CURRENT COST OVER LIFO VALUE (14,468) (13,761)
----------------------------------------------------------------
$ 91,873 $ 70,832
================================================================
</TABLE>
In 1995 and 1994 LIFO layers of preceding years were reduced which decreased
cost of goods sold by $359,000 and $246,000, respectively. There was no such
reduction in 1996. A portion of the Company's inventory is not expected to be
sold or used within one year and, accordingly has been reclassified as other
assets. The amount of inventory estimated to exceed one year's usage was
$3,500,000 at December 31, 1996 and 1995.
30
<PAGE>
NOTE C PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
DECEMBER 31, (IN THOUSANDS) 1996 1995 (YEARS)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LAND $ 2,574 $ 2,434
BUILDING AND IMPROVEMENTS 25,115 22,616 3-30
MACHINERY AND EQUIPMENT 59,911 56,113 5-12
FURNITURE AND FIXTURES 14,764 11,671 3-5
AUTOS AND TRUCKS 881 802 3-5
---------------------------------------------------------------------------------------------
103,245 93,636
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 54,534 48,376
---------------------------------------------------------------------------------------------
$ 48,711 $45,260
=============================================================================================
</TABLE>
NOTE D INCOME TAXES
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
TAX OVER BOOK DEPRECIATION $ 3,720 $ 4,036
DEFERRED TAX ASSETS:
INTERCOMPANY PROFIT ELIMINATION 4,547 3,275
POSTRETIREMENT BENEFIT OBLIGATION 2,131 1,976
ALLOWANCE FOR LOSS ON SALE OF ASSETS 1,853 1,769
ALLOWANCE FOR EXCESS INVENTORY 1,798 1,667
FOREIGN NET OPERATING LOSS CARRYFORWARD 1,099 2,100
ALLOWANCE FOR WARRANTY COST 1,128 715
ACCRUALS 1,576 862
OTHER 1,132 444
-----------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 15,264 12,808
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS (3,206) (3,206)
-----------------------------------------------------------------------------
NET DEFERRED TAX ASSETS 12,058 9,602
-----------------------------------------------------------------------------
NET DEFERRED TAXES 8,338 5,566
=============================================================================
CURRENT DEFERRED TAX ASSETS $ 9,678 $ 5,130
NONCURRENT DEFERRED TAX (LIABILITIES) ASSETS (1,340) 436
-----------------------------------------------------------------------------
NET DEFERRED TAXES $ 8,338 $ 5,566
=============================================================================
</TABLE>
United States and foreign income (loss) before income taxes and the components
of income tax expense are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES:
---------------------------------
U.S. $28,347 $23,260 $17,376
FOREIGN 9,741 (1,352) 1,541
-------------------------------------------------------------------------
$38,088 $21,908 $18,917
=========================================================================
</TABLE>
31
<PAGE>
Income tax expense (benefit):
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
-------
U.S. $13,137 $ 8,450 $ 7,042
FOREIGN 2,913 881 660
STATE 850 545 559
UTILIZATION OF NET OPERATING LOSSES AND CREDITS (1,750) (899) (1,258)
TAX BENEFITS CREDITED TO PAID-IN CAPITAL 1,168 294 270
------------------------------------------------------------------------------------
16,318 9,271 7,273
DEFERRED:
--------
U.S. (3,773) (655) (517)
FOREIGN 1,001 (1,147)
------------------------------------------------------------------------------------
$13,546 $ 7,469 $ 6,756
====================================================================================
</TABLE>
Differences between the Company's income tax expense and an amount calculated
utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
AT FEDERAL STATUTORY RATE $13,331 $7,668 $6,621
INCREASES (REDUCTIONS) IN TAXES:
-------------------------------
FSC BENEFIT (1,278) (973) (767)
FINANCIAL STATEMENT BENEFIT FROM CREDIT CARRYOVERS (418)
TAX IMPACT OF NON-DEDUCTIBLE EXPENSES 664 797 605
STATE TAXES, NET OF FEDERAL BENEFIT 552 354 363
TAX RATE DIFFERENTIAL ON FOREIGN EARNINGS
AND LOSSES RECORDED WITHOUT TAX BENEFIT 504 206 120
OTHER (227) (165) (186)
------------------------------------------------------------------------------------
TOTAL TAX PROVISION $13,546 $7,469 $6,756
====================================================================================
</TABLE>
The Company has net operating losses available for Netherlands tax purposes of
approximately $3,100,000. These net operating losses can be carried forward for
an indefinite period of time.
Income taxes paid net of refunds received in 1996, 1995 and 1994 were
$11,222,000, $7,007,000 and $8,957,000, respectively.
The Company is currently under examination by the Internal Revenue Service for
the years ended December 31, 1992, 1991 and 1990. Management believes the
resolution of this examination will not have a material adverse effect on the
Company's financial position.
32
<PAGE>
NOTE E LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consists of notes payable to institutional investors under an
8.95% Senior Note Agreement (the "Note Agreement.") Principal is due in five
equal annual installments which commenced June 30, 1995 and interest is payable
semiannually. The Note Agreement contains restrictive covenants requiring the
maintenance of certain financial ratios, limitations on additional borrowings
and capital expenditures, and restrictions on distribution of cash or other
property.
The Company has an unsecured revolving credit and term loan agreement with two
Citicorp affiliates which provides for advances up to $25,000,000 and letters of
credit up to $10,000,000, subject to reduction in certain events. Advances
under the loan agreement bear interest at either a prime rate plus 1/2% or a
rate based on the Eurodollar Market. The agreement requires a commitment fee of
.375% of the unused portion of the credit facility, restricts additional
borrowings if minimum asset levels are not met and contains restrictive
covenants requiring the maintenance of certain financial ratios, limitations on
additional borrowings and capital expenditures, and restrictions on distribution
of cash or other property. The agreement terminates in October 1998. The
borrowings outstanding under the agreement at December 31, 1996 were $3,000,000.
Required principal payments on long-term debt as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------
<S> <C>
1997 $10,000
1998 13,000
1999 9,715
----------------------------
$32,715
============================
</TABLE>
Interest paid during 1996, 1995 and 1994 was $5,470,000, $2,504,000 and
$4,766,000, respectively.
NOTE F SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The Varco 1980 Employee Stock Purchase Plan permits its employees to purchase
Common Stock at a price equal to 85% of the fair market value at the beginning
or end of a six month plan period. As of December 31, 1996, 1,122,322 shares
have been sold under this plan with a maximum of 2,000,000 shares available for
sale under this plan.
The Varco International, Inc. Stock Bonus Plan (the "Bonus Plan") authorizes
the Compensation Committee of the Board of Directors to award additional
compensation to selected key employees of the Company in the form of stock
awards payable in shares of Common Stock of the Company to a maximum of
1,000,000 shares. Through December 31, 1996, 362,976 shares have been granted
and issued to key employees under the Bonus Plan.
The Varco International, Inc. 1990 Stock Option Plan permits and predecessor
plans permitted, the grant of incentive and non-statutory options to key
employees and officers. Options granted under the plans must be not less than
the fair market value of the stock on the date of grant. Options are
exercisable during such periods as determined by the Compensation Committee and
expire not later than ten years from the date of the grant.
The Varco International, Inc. 1994 Directors' Stock Option Plan provides for
the grant of a 5,000 share stock option on the initial date of election as a
director plus an annual grant of a 5,000 share stock option to each non-employee
director. Options granted under this plan are at fair market value of the stock
on the date of grant. Options are exercisable for ten years from the date of
the grant unless sooner terminated.
33
<PAGE>
Stock option activity for the plans was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING AT BEGINNING OF YEAR 1,264,669 $ 6.00 1,108,622 $5.55 1,062,732 $4.85
GRANTED 369,859 11.07 330,157 6.91 255,750 6.63
EXERCISED 320,944 5.09 170,310 4.81 194,960 3.11
CANCELED 19,600 7.47 3,800 7.22 14,900 6.05
-----------------------------------------------------------------------------------------------------
OUTSTANDING AT END OF YEAR 1,293,984 $ 7.59 1,264,669 $6.00 1,108,622 $5.55
-----------------------------------------------------------------------------------------------------
EXERCISABLE AT END OF YEAR 515,010 606,952 590,132
-----------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.375 TO $5.0625 276,980 4.18 YEARS $ 4.54 209,880 $ 4.53
$6.25 TO $9.25 613,695 6.99 6.69 287,430 6.98
$10.50 TO $15.8125 403,309 9.09 11.05 17,700 10.75
-------------------------------------------------------------------------------------------------------
$3.375 TO $15.8125 1,293,984 7.04 $ 7.59 515,010 $ 6.11
-------------------------------------------------------------------------------------------------------
</TABLE>
The Financial Accounting Standards Board has issued a new accounting standard,
FASB No. 123 "Accounting for Stock-Based Compensation", effective for fiscal
years beginning after December 15, 1995. As permitted in the standard, the
Company will not adopt the recognition provisions and will provide the pro forma
net income and earnings per share disclosures required by the standard. The
Company will continue to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" in accounting for its plans.
Accordingly, no compensation expense has been recognized for its stock option
plans and its stock purchase plan. The compensation cost that has been charged
against income for its stock bonus plan was $343,000 and $334,000 for the years
1996 and 1995 respectively. Had compensation costs for the Company's stock
option plans and stock purchase plan been determined based upon fair value at
the grant date under these plans consistent with FASB Statement No. 123
methodology, the Company's net income and earnings per share would have been
reduced to the pro forma amounts shown below:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------
<S> <C> <C>
NET INCOME - AS REPORTED $24,542,000 $14,439,000
NET INCOME - PRO FORMA $23,833,000 $14,052,000
EARNINGS PER SHARE - AS REPORTED $ .77 $ .46
EARNINGS PER SHARE-PRO FORMA $ .75 $ .44
</TABLE>
Because FASB No. 123 is applicable only to options granted subsequent to
December 31, 1994, its proforma effect will not be fully reflected until 1997.
The fair value of shares is estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions.
<TABLE>
<CAPTION>
1990 STOCK 1994 DIRECTORS 1980 STOCK
OPTION PLAN STOCK OPTION PLAN PURCHASE PLAN
--------------------------------------------------------------------------
<S> <C> <C> <C>
EXPECTED LIFE (YEARS) 6 3 .5
RISK-FREE INTEREST RATE 6.2% 6% 5.2%
VOLATILITY 42% 42% 42%
</TABLE>
34
<PAGE>
For the options granted during 1996 and 1995, the weighted-average fair value at
date of grant was $5.30 and $3.28 per option, respectively. The weighted-
average fair value at date of grant for stock purchase shares during 1996 and
1995 was $1.91 and $1.14 per share, respectively. The discounted value of the
stock purchase plan shares granted in 1996 and 1995 using the Black-Scholes
option-pricing model was $178,000 and $146,000, respectively. At December 31,
1996, the Company had reserved 3,338,686 shares of Common Stock for future
issuance in connection with the four stock-based compensation plans.
On March 24, 1995, the Company commenced a "Dutch Auction" type tender
offer (the "Tender Offer") to purchase up to 5,300,000 shares of its Common
Stock. Pursuant to the Tender Offer, which terminated on April 21, 1995, the
Company purchased 3,150,560 shares of its Common Stock at a purchase price of
$8.00 per share. The aggregate cost to the Company of the Tender Offer,
including expenses, was approximately $26.2 million. In addition, the Board of
Directors had authorized a stock repurchase program allowing the repurchase of
up to 1,500,000 shares of the Company's Common Stock for an aggregate purchase
price not exceeding $11,000,000. This program terminated on December 31, 1996.
Prior to the termination of this program, the Company had repurchased on the
open market 627,600 shares of its Common Stock at an average price of
approximately $8.00 per share.
On May 29, 1996, the Company completed the sale of 989,406 shares of its
Common Stock at a price to the public of $15.875 per share. A portion of the
net proceeds from the sale of approximately $14.6 million was used to make the
$10.0 million principal payment due June 30, 1996 on the Senior Notes.
NOTE G COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
The Company leases land and its executive offices in Orange, California under
two operating leases, from certain officers, directors, and shareholders of the
Company. The land lease expires in 2012, has an annual aggregate rental of
$480,000 (subject to upward adjustment in 2002 based on appraisals) plus real
estate taxes and other expenses. The Company has the option to purchase the
leased land at a price equal to the greater of the original cost of the property
to the lessors or the fair market value at the time of purchase. The office
lease expires in 2005 and has an aggregate annual rental of $363,000 (subject to
periodic upward adjustments based upon the consumer price index.) The Company
has an option to extend this lease for 60 months based on the then fair market
rent of the building.
The Company leases most of its sales, service and distribution facilities
under agreements ranging from one to eight years.
Approximate minimum annual rental payments under noncancelable operating
leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) REAL ESTATE EQUIPMENT TOTAL
----------------------------------------------------
<S> <C> <C> <C>
1997 1,703 2,737 4,440
1998 1,261 2,107 3,368
1999 1,078 1,124 2,202
2000 922 386 1,308
2001 907 111 1,018
THEREAFTER 7,478 4 7,482
----------------------------------------------------
$13,349 $6,469 $19,818
</TABLE>
Rent expense amounted to $5,185,000, $4,641,000, and $4,428,000 for 1996, 1995,
and 1994, respectively.
The Company was obligated to make royalty payments to Baker Hughes, a former
shareholder of the Company, each year for which sales of certain products
("royalty products") exceed $40,000,000. Royalty payments were required until
the earlier of such time as the discounted value (discount rate 12.5%) of all
such payments equaled $15,000,000 or September 29, 1996. Royalty expense
attributable to Baker Hughes amounted to $763,000, $895,000, and $1,763,000, in
1996, 1995, and 1994, respectively.
35
<PAGE>
At December 31, 1996 the Company was obligated under outstanding letters of
credit in the face amount of approximately $5,943,000.
The Company is sometimes named as a defendant in litigation relating to the
products and services it provides. The Company insures against these risks to
the extent deemed prudent by its management, but no assurance can be given that
the nature and amount of such insurance will in every case fully indemnify the
Company against liabilities arising out of pending and future legal proceedings
relating to its ordinary business activities. The Company provides for costs
related to these contingencies when a loss is probable. It is the opinion of
management that it is remote that there will be an unfavorable resolution in
excess of amounts previously provided.
The Company has been designated as a potentially responsible party ("PRP") for
two separate waste disposal sites. With respect to both of the sites, numerous
other PRPs have similarly been designated. In one case the Company has a
contribution agreement with other PRPs, and settlements and costs paid by the
Company have not been significant. In the opinion of the Company's management
neither these nor other environmental matters would have a material adverse
effect on the consolidated financial position of the Company.
NOTE H BENEFIT PLANS
- --------------------------------------------------------------------------------
The Company has a contributory profit sharing plan covering eligible U.S.
employees and certain foreign employees with more than one year's service.
Under the plan, the Company contributes from 2% to 20% of its net income (as
defined) at the discretion of the Board of Directors. The total contribution
may not exceed the maximum amount allowable for income tax purposes.
Contributions to the plan amounted to $2,400,000, $1,450,000, and $1,200,000,
for 1996, 1995 and 1994, respectively. In 1993, the Company amended its Profit
Sharing Plan to designate a portion of profit sharing contributions for retiree
healthcare and life insurance benefits for certain eligible employees retiring
after December 31, 1993. In 1995 the plan was further amended to include an
employer matching contribution. The Company's matching contribution amounted to
$651,000 and $280,000 in 1996 and 1995, respectively.
The Company also has a supplemental defined benefits plan providing retirement
and death benefits for a number of key employees. The plan is unfunded and the
net pension liability was $2,241,000 and $1,719,000 at December 31, 1996 and
1995, respectively. Expense under the plan was $602,000, $300,000, and $300,000
in 1996, 1995, and 1994, respectively.
For certain former employees who retired prior to December 31, 1993,
healthcare and life insurance benefits are provided through insurance companies.
In 1993 the Company adopted FASB Statement No. 106, Accounting for
Postretirement Benefits Other Than Pensions. The transition obligation is being
amortized over 20 years.
The following table presents the funded status of the defined benefit health
care and life insurance plan, reconciled with amounts recognized in the
Company's balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1996 1995
-------------------------------------------------------------------------
<S> <C> <C>
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATIONS $(12,172) $(12,236)
UNRECOGNIZED NET GAIN (6,110) (6,369)
UNRECOGNIZED TRANSITION OBLIGATION 12,195 12,958
-------------------------------------------------------------------------
$ (6,087) (5,647)
-------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST
INCLUDES THE FOLLOWING COMPONENTS:
INTEREST COST $ 854 $ 1,011
AMORTIZATION OF TRANSITION OBLIGATION 763 763
AMORTIZATION OF (GAIN) (382) (293)
-------------------------------------------------------------------------
$1,235 $ 1,481
=========================================================================
</TABLE>
36
<PAGE>
The assumed weighted-average annual rate of increase in the per capita cost of
covered benefits is 8 1/2% for 1997 and is assumed to decrease gradually to 5.5%
for 2011 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 by $1,282,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1996 by $87,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1996 and 1995.
The Company has an Executive Management Savings Plan and a Directors Saving
Plan (the Plans) which permit eligible executives and the Company's non-employee
directors to defer a portion of their compensation. Participants in the Plans
may also participate in the Company's "split-dollar" life insurance program
pursuant to which the Company will purchase a life insurance policy for a
premium equal to the amounts deferred plus any additional amount required to
provide a minimum death benefit. Amounts payable to a participant under the
Plans are offset by any benefits paid under the participant's life insurance
policy. The life insurance policies are intended to provide security for the
payment of benefits under the Plans.
NOTE I SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
----
REVENUES $ 70,969 $90,350 $98,112 $108,991
GROSS PROFIT 24,746 29,976 32,969 38,125
INCOME BEFORE INCOME TAXES 4,765 8,491 11,232 13,600
PROVISION FOR INCOME TAXES 1,737 2,812 4,065 4,932
NET INCOME 3,028 5,679 7,167 8,668
NET INCOME PER SHARE OF COMMON STOCK .10 .18 .22 .27
1995
----
REVENUES $ 57,645 $76,787 $68,053 $ 71,246
GROSS PROFIT 23,787 28,017 24,780 22,630
INCOME BEFORE INCOME TAXES 4,721 8,289 5,457 3,441
PROVISION FOR INCOME TAXES 1,808 2,886 1,776 999
NET INCOME 2,913 5,403 3,681 2,442
NET INCOME PER SHARE OF COMMON STOCK .09 .17 .12 .08
</TABLE>
37
<PAGE>
NOTE J GEOGRAPHIC INFORMATION
- --------------------------------------------------------------------------------
Information about the Company's worldwide operations for 1996, 1995 and 1994
follows:
<TABLE>
<CAPTION>
ADJUSTMENTS &
(IN THOUSANDS) UNITED STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
----
SALES AND RENTALS TO UNAFFILIATED CUSTOMERS $271,519 $62,011 $33,450 $366,980
INTERCOMPANY SALES 42,538 25,533 1,552 (69,623)
TOTAL SALES AND RENTALS 314,057 87,544 35,002 (69,623) 366,980
EARNINGS BEFORE TAXES 25,691 11,703 694 38,088
IDENTIFIABLE ASSETS 237,195 60,109 18,717 316,021
1995
----
SALES AND RENTALS TO UNAFFILIATED CUSTOMERS $194,941 $57,081 $20,329 $272,351
INTERCOMPANY SALES 33,974 19,684 1,000 (54,658)
TOTAL SALES AND RENTALS 228,915 76,765 21,329 (54,658) 272,351
EARNINGS BEFORE TAXES 15,174 5,248 1,486 21,908
IDENTIFIABLE ASSETS 181,027 53,326 12,444 246,797
1994
----
SALES AND RENTALS TO UNAFFILIATED CUSTOMERS $159,812 $39,189 $22,442 $221,443
INTERCOMPANY SALES 34,257 15,484 1,085 (50,826)
TOTAL SALES AND RENTALS 194,069 54,673 23,527 (50,826) 221,443
EARNINGS BEFORE TAXES 12,521 4,037 2,359 18,917
IDENTIFIABLE ASSETS 191,273 49,924 16,444 257,641
</TABLE>
Intercompany sales are transferred at prices that approximate those charged to
third party distributors.
International sales from all of the Company's operating locations are
principally to the following geographic areas:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C>
EUROPE $101,993 $ 83,496 $ 49,783
ASIA AND AUSTRALIA 57,702 45,480 38,761
AFRICA AND MIDDLE EAST 30,418 21,217 18,544
SOUTH AMERICA 27,277 22,797 25,515
CANADA 16,606 8,539 7,401
MEXICO 4,483 1,125 3,438
FORMER SOVIET UNION 8,501 6,359 6,376
MISCELLANEOUS 107 174 276
----------------------------------------------------------------
$247,087 $189,187 $150,094
================================================================
</TABLE>
During 1996 sales to one customer amounted to $45,228,000. There were no sales
to a single customer in 1995 and 1994 in excess of 10% of total sales.
NOTE K ACQUISITION
- --------------------------------------------------------------------------------
On November 30, 1994 the Company acquired all of the outstanding shares of Rig
Technology Limited ("Thule Rigtech"), a company incorporated in Scotland, for
approximately $8,954,000 consisting of cash, the assumption of Thule Rigtech's
debt and the payment of certain expenses. Thule Rigtech provides equipment and
systems used in the handling, mixing, transport and conditioning of drilling
fluids.
The acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair values at the date
of acquisition and operating results are included in the consolidated statements
of income from the date of acquisition. Supplemental unaudited information is
not presented for Rig Technology Limited because it would not have a material
impact on previously reported results.
38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Varco International, Inc.
We have audited the consolidated balance sheets of Varco International, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Varco International, Inc. and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Orange County, California
February 12, 1997
39
<PAGE>
STOCK INFORMATION
PRICE RANGE OF VARCO COMMON STOCK
- --------------------------------------------------------------------------------
The following table sets forth for the periods indicated the high and low sale
prices per share of Common Stock reported by the New York Stock Exchange. There
were 1,433 holders of record of the Common Stock as of the close of business on
March 1, 1997.
<TABLE>
<CAPTION>
HIGH LOW HIGH LOW
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995
FIRST QUARTER 12 7/8 8 3/4 FIRST QUARTER 7 3/4 6
SECOND QUARTER 18 7/8 12 1/8 SECOND QUARTER 9 1/2 7 5/8
THIRD QUARTER 19 3/8 14 THIRD QUARTER 11 7/8 8 1/8
FOURTH QUARTER 24 3/4 17 1/2 FOURTH QUARTER 12 7/8 8 3/8
</TABLE>
DIVIDEND POLICY
- --------------------------------------------------------------------------------
The payment of dividends (other than dividends payable solely in shares of
Common Stock) on, and repurchases of, Common Stock are restricted by the note
agreement between Varco and its institutional lenders and Varco's revolving
credit agreement with two financial institutions. Under the revolving credit
agreement, which is generally the more restrictive, the amount available for the
payment of dividends on, and repurchases of, Common Stock is limited to 25% of
Varco's consolidated net income arising after January 1, 1992, computed on a
cumulative basis. At December 31, 1996, the amount available for dividends and
repurchases under the credit agreement was $16,640,000. The Company may also
purchase or otherwise acquire shares of Common Stock from the proceeds of the
substantially concurrent sale of shares of Common Stock.
The Company has not paid a dividend on the Common Stock since 1982, and the
Board of Directors presently has no plans to resume the payment of dividends.
ANNUAL MEETING
- --------------------------------------------------------------------------------
The Varco International, Inc. 1997 Annual Meeting will be held May 20, 1997 at
the Doubletree Hotel, 100 The City Drive, Orange, California. All shareholders
are cordially invited to attend.
ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
The Company's Annual Report on Form 10-K for the year ended December 31, 1996,
as filed with the Securities and Exchange Commission, is available by writing to
Donald L. Stichler, Controller-Treasurer, Varco International, Inc., 743 North
Eckhoff Street, Orange, California 92868.
COMMON STOCK
- --------------------------------------------------------------------------------
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol VRC.
TRANSFER AGENT & REGISTRAR
- --------------------------------------------------------------------------------
Harris Trust Company of California
Los Angeles, California
E-MAIL
- --------------------------------------------------------------------------------
[email protected]
WEB SITE
- --------------------------------------------------------------------------------
http://www.varco.com
40
<PAGE>
CORPORATE
HEADQUARTERS
- -------------------------
Varco International, Inc.
743 North Eckhoff Street
Orange, California 92868
(714) 978-1900
OPERATING UNITS
- -------------------------
Martin-Decker/TOTCO
1200 Cypress Creek Road
Cedar Park, Texas 78613
(512) 331-0411
Shaffer
12950 West Little York
Houston, Texas 77041
(713) 937-5000
Thule Rigtech
South College Street
Aberdeen, Scotland
AB1 2LP
Varco BJ Oil Tools
Nijverheidsweg 45
4879 AP Etten-Leur
The Netherlands
and
12950 West Little York
Houston, Texas 77041
(713) 937-5000
Varco Drilling Systems
743 North Eckhoff Street
Orange, California 92868
(714) 978-1900
INDEPENDENT
ACCOUNTANTS
- -------------------------
Ernst & Young LLP
Orange County
GENERAL COUNSEL
- -------------------------
Pircher, Nichols & Meeks
Los Angeles
BOARD OF DIRECTORS
- -------------------------
Walter B. Reinhold
Chairman of the Board
George Boyadjieff
President and
Chief Executive Officer
of the Company
George S. Dotson
President
Helmerich & Payne
International Drilling Co.
Talton R. Embry
Chairman
Magten Asset Management Co.
Andre R. Horn*
Chairman Emeritus
Needham & Company, Inc.
Maurice E. Jacques
Vice President
Varco Drilling Systems
Jack W. Knowlton*+
President
The Knowlton Co.
Leo J. Pircher
Partner
Pircher, Nichols & Meeks
Carroll W. Suggs
Chairman of the Board
Petroleum Helicopters, Inc.
Robert A. Teitsworth*+
Independent Oil & Gas
Producer
Eugene R. White
Retired Chairman of the Board
Amdahl Corporation
James D. Woods+
Chairman Emeritus and Consultant to
Baker Hughes Incorporated
* Member of the Audit Committee
+ Member of the Compensation Committee
VARCO
INTERNATIONAL, INC.
- -------------------------
Walter B. Reinhold
Chairman of the Board
George Boyadjieff
President and
Chief Executive Officer
Marshall G. Bailey
Vice President
Robert J. Gondek
Vice President
Richard A. Kertson
Vice President -- Finance
Mark A. Merit
Vice President
Roger D. Morgan
Vice President
Michael W. Sutherlin
Vice President
Donald L. Stichler
Controller -- Treasurer
and Secretary
VARCO
DRILLING SYSTEMS
- -------------------------
Roger D. Morgan
President
Wallace K. Chan
Vice President -- Finance
Brian L. Eidem
Vice President --
R&D Engineering
Jerry A. Gill
Vice President
Maurice E. Jacques
Vice President -- Marketing
Andrew P. Lesko
Vice President --
Application Engineering
James Gregory Renfro
Vice President --
Manufacturing
Michael Williams
Vice President -- Sales
VARCO BJ OIL TOOLS
- -------------------------
Michael W. Sutherlin
President
Mark D. Galagaza
Vice President -- Western
Hemisphere Operations
James P. Lawler
Vice President --
Manufacturing
David B. Mason
Vice President --Product
Development
Robert R.D. deVries
Vice President --
Sales and Marketing
Rob C. Voesenek
Vice President -- Finance
MARTIN-DECKER/TOTCO
- -------------------------
Robert J. Gondek
President
Clement G. Bleil
Vice President --
Manufacturing
Ellis Greg Hottle
Vice President --
International Operations
Charles A. Shamburg
Vice President -- Finance
Terry L. Tarvin
Vice President --
North American Operations
Keith A. Womer
Vice President --
Research and Development
SHAFFER
- -------------------------
Mark A. Merit
President
Thomas E. Bishop
Vice President --
Sales and Service
John J. Clemens
Vice President --
Quality Assurance
E. J. Devine
Vice President -- Finance
Tri C. Le
Vice President --
Engineering
Lowell B. Stouder
Vice President --
Manufacturing
THULE RIGTECH
- -------------------------
Marshall G. Bailey
Managing Director
R. Alan Oswald
Secretary
41
<PAGE>
VARCO
Varco International, Inc.
743 North Eckhoff Street
Orange, California 92868
42
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF VARCO INTERNATIONAL, INC.
ALL 100% OWNED
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION ADDRESS
-------------- -------
<S> <C> <C>
Best Industries, Inc. Texas 12950 West Little York
Houston. Texas 77041
--------------------
Varco de Mexico California 743 No. Eckhoff Street
Holdings, Inc. Orange. California 92868
------------------------
Martin-Decker TOTCO, Inc. Texas 1200 Cypress Creek Road
Cedar Park, Texas 78613
-----------------------
Metfox, Inc. California 743 No. Eckhoff Street
Orange. California 92868
------------------------
Varco Shaffer, Inc. Texas 12950 W. Little York
Houston. Texas 77041
--------------------
Varco International Inc Singapore No. 8 Sixth Lok Yang Road
Pte Ltd Jurong
Singapore 2262
--------------
Varco BJ 0il Tools B.V. The Netherlands Nijverheidsweg 45
4879 AP Etten-Leur
P.O. Box 17, 4870 AA Etten-Leur
The Netherlands
---------------
Varco (U.K.) Limited United Kingdom Forties Road, Montrose
Angus. Scotland
---------------
Varco BJ FSC Inc. Barbados 743 No. Eckhoff Street
Orange, California 92868
------------------------
304774 Alberta Ltd. Alberta, Canada Bay 15 - 2916 5th Ave. N.E.
Calgary, Alberta T2A 6M7
Canada
------
Rig Technology Limited United Kingdom South College Street
Aberdeen, Scotland
------------------
</TABLE>
<PAGE>
EXHIBIT 21
PAGE 2 OF 2
<TABLE>
<CAPTION>
JURISDICTION OF
INACTIVE SUBSIDIARIES INCORPORATION ADDRESS
- --------------------- --------------- -------
<S> <C> <C>
Varco Marine Tools Texas 12950 West Little York
International, Inc. Houston, Texas 77041
--------------------
Varco-Disc California 743 No. Eckhoff Street
Orange, California 92868
------------------------
Best Disc Texas 12950 West Little York
Houston, Texas 77041
----------------------
Varco Eastern, Inc. California 743 NO. Eckhoff Street
Orange, California 92868
------------------------
Varco International Netherlands P.O. Box 507
Finance N.V. Antilles Curacao
-------
Varco Singapore, Ltd. California 743 No. Eckhoff Street
Orange, California 92868
------------------------
Varco Middle East California 743 No. Eckhoff Street
Orange, California 92868
------------------------
Varco Electronics, Inc. California 743 No. Eckhoff Street
Orange, California 92868
------------------------
Varco Electronics Disc California 743 No. Eckhoff Street
Orange, California 92868
------------------------
Varco Del Venezuela CA Venezuela 743 No. Eckhoff Street
Orange, California 92868
------------------------
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements Number
2-66830, 2-96290, 33-36841, 33-62118, 33-61861, 33-61939 and 333-21681 on
Form S-8 of Varco International, Inc. and in the related Prospectuses of our
report dated February 12, 1997, with respect to the consolidated financial
statements and schedule of Varco International, Inc. included in the annual
report on Form 10-K for the year ended December 31, 1996.
Orange County, California
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS OF THE REGISTRANT INCLUDED IN ITS ANNUAL REORT TO
SHAREHOLDERS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,794,000
<SECURITIES> 0
<RECEIVABLES> 95,160,000
<ALLOWANCES> (1,756,000)
<INVENTORY> 91,873,000
<CURRENT-ASSETS> 206,662,000
<PP&E> 103,245,000
<DEPRECIATION> (54,534,000)
<TOTAL-ASSETS> 316,021,000
<CURRENT-LIABILITIES> 86,416,000
<BONDS> 22,715,000
<COMMON> 143,533,000
0
0
<OTHER-SE> 51,975,000
<TOTAL-LIABILITY-AND-EQUITY> 316,021,000
<SALES> 366,980,000
<TOTAL-REVENUES> 368,422,000
<CGS> 241,164,000
<TOTAL-COSTS> 312,055,000
<OTHER-EXPENSES> 14,331,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,948,000
<INCOME-PRETAX> 38,088,000
<INCOME-TAX> 13,546,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,542,000
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0
</TABLE>
