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 and controls, 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, sold and rented by the Varco Drilling Systems Division while oil tools are manufactured and sold by the Varco BJ Oil Tools Division. Drilling rig instrumentation and control products are manufactured, sold and rented by the Martin-Decker/TOTCO 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:
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 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 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 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. In the fourth quarter of 1997 the first TDS-8S was delivered. The TDS-8S is the AC motor version of Drilling Systems' most popular Top Drive, the TDS-4S. 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 for sale or rental 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. Fifteen TDS-9S units were shipped in 1997. During 1997 the TDS-10S was introduced. The TDS-10S is a smaller version of the TDS-9S designed for use in a variety of smaller land and workover rig applications. The TDS-10S has a 250-ton hoisting capacity as compared to the 400-ton hoisting capacity of the TDS-9S. Two units of the TDS- 10S were shipped in 1997.
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. The current version of the PRS was introduced in 1996. Seven units of the PRS were delivered in 1997.
Vertical pipe racking systems are used predominantly on offshore rigs and are virtually mandatory on floating rigs such as semisubmersibles. 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, spring or hydraulically 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 and PS 30 Hydraulic Power Slips. 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 and PS 30 Power Slips improve 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 1997 48 BX elevators, 17 PS 21's and 4 PS 30's were delivered to customers.
Rotary equipment products consist of kelly bushings and master bushings. The kelly bushing applies torque to 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
The Martin-Decker/TOTCO 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 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 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."
In 1997 Martin-Decker/TOTCO introduced a product called SWIFT ("Secure Wellsite Information Forwarding Technology") which provides for the transmission of drilling information collected at the rig site to a remote location over the Internet, thus creating a closer linkage between the drilling operation and those responsible for its management. The initial SWIFT is expected to be delivered in early 1998.
In 1997 Martin-Decker/TOTCO also introduced the Varco Integrated Control and Information System ("V-ICIS"), a computer-based system which combines the physical control of all of Varco's automated equipment,
and potentially that of third parties, into a common, user-friendly system which also integrates the analytical capabilities of the TOTAL system. The initial system is expected to be delivered in early 1998.
Products of the Martin-Decker/TOTCO 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, and recently, the V-ICIS product, 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; riser; 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.
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 1997 PCWD revenue was approximately $500,000.
Shaffer sells conventional 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. With the recent increase in deep-water drilling depths, traditional hydraulic control systems are inadequate to activate BOPs, which rest on the ocean floor and may be 5,000 feet or more below the surface. In 1997, Shaffer introduced the IVth Generation MUX, an electronic control system designed specifically for deep-water applications. One such system was delivered in 1997.
Riser is large diameter pipe which, when drilling from a floating rig such as a semisubmersible or drillship, connects the rig to the well on the ocean floor. Therefore, the riser string, which consists of sections approximately 75 feet in length connected together, may extend to as much as 10,000 feet. Shaffer purchases the blank pipe, manufactures and attaches connectors to each section, and completes it with the attachment of related components.
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. During 1997 Thule Rigtech introduced the VSM 300, a new generation shale shaker designed to operate more efficiently in a wider variety of geologic conditions. In 1997 32 units were sold.
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. During 1997 Thule Rigtech booked orders for three automated systems, all of which are expected to be completed in 1998.
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, 1997 the Company employed 330 persons on its engineering and design staffs who were principally engaged in research and development. Total expenditures for research and development were $21.1 million in 1997, $14.3 million in 1996 and $13.2 million in 1995.
As of December 31, 1997 the Company held 125 United States patents and had 3 patent applications pending. Expiration dates of such patents range from 1998 to 2014. As of such date the Company also had 168 foreign patents and 19 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 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 Division.
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.
International Operations
The Company's products are sold for use in approximately 89 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 56%, 67% and 69% of the Company's total revenues for the years ended December 31,
1997, 1996, and 1995, 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 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.
There were no sales to a single customer in 1997 and 1995 in excess of 10% of total sales. During 1996 sales to a single customer, Diamond Offshore Drilling Inc., amounted to $45,228,000, 12.3% of total revenues.
Backlog
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:
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, 1997 backlog is longer than in prior years. The Company expects that approximately 90% of the backlog will be shipped by December 31, 1998. At December 31, 1997 the Company had received $67.7 million in customer cash deposits related to orders included in backlog. In addition to, and not included in the December 31, 1997 backlog, the Company has received non-binding letters of intent for 1999 deliveries totaling $107.5 million against which the Company has received cash deposits of $11.4 million. In accordance with industry practice, orders and commitments generally are cancelable by customers at any time.
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 division of Acker Maritime 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 TDS-9S and TDS-10S. Since its introduction in 1982 and as of December 31, 1997, Varco had sold and delivered over 550 Top Drive Drilling Systems, and the Company believes that its competitors had sold and delivered less than 250 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 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, Hydril Company, a privately held company, and Stewart and Stevenson Services, Inc. Shaffer's principal competitors with respect to motion compensation equipment are Maritime Hydraulics A/S and A/S Hydralift.
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, 1997 the Company had a total of 2,852 employees (of which 415 were temporary employees). Of such employees, 619 employees were engaged in sales and marketing, 330 employees were engaged in engineering and design, 175 employees were engaged in administrative or clerical capacities, and 1,728 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.
MANAGEMENT
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Varco are as follows:
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.
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, Chief Accounting Officer in May 1995 and Vice President of the Company in 1998. 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. Gondek has served as President of Martin-Decker/TOTCO 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.
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 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.
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 "Houston Facilities"). 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 Houston Facilities are 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. During 1997 Varco Drilling Systems Division leased an additional 19,000 square foot manufacturing building located nearby for a term of five years. The Orange 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 in excess of a two shift operation for 1997 as compared to approximately 95% of capacity in 1996 and 1995.
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 1997 and 1996 as compared to 80% of capacity in 1995.
The Martin-Decker/TOTCO 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 in excess of a two shift operation in 1997 and approximately 95% of capacity during each of the two years ended December 31, 1996.
The Shaffer Division's products are principally 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 located in Houston, Texas. 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 in 1992. The Company estimates that based upon direct labor hours and a two shift operation, utilization of this facility for 1997 and 1996 was in excess of a two shift operation as compared to 80% in 1995. In February 1997, Shaffer purchased all of 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. During 1997 Shaffer further expanded its manufacturing space by acquiring additional satellite facilities in the Houston area. At the end of 1997 Shaffer leased the above
80,000 square foot facility plus four additional satellite facilities ranging in size from 8,000 square feet to 33,000 square feet (together with the Shaffer Facility, the "Houston Facilities.")
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 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 the 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 Brazil, Canada, China, Mexico and Venezuela.
ITEM 3.
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.
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 1997.
PART II
ITEM 5.
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 38 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997, is hereby incorporated by reference.
During the fiscal year ended December 31, 1997 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.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth under the caption "Five-Year Financial and Operating Highlights" on page 16 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997, is hereby incorporated by reference.
ITEM 7.
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 18 through 22 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997, is hereby incorporated by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is hereby incorporated by reference to pages 23 through 36 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997. The Report of Independent Auditors is included in Item 14(d).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
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 subcaptions "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 19, 1998, 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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to the information set forth under the subcaptions "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 19, 1998.
ITEM 12.
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 19, 1998.
ITEM 13.
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 19, 1998.
ITEM 14.
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, 1997, are incorporated by reference in Item 8:
The Report of Independent Auditors and the following consolidated financial statement schedule of Varco International, Inc., and subsidiaries are included in Item 14(d):
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
On November 13, 1997 the Company filed a Form 8-K dated as of November 6, 1997, reporting the adoption by the Board of Directors of the Company of a Shareholder Rights Plan under Item 5.
(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 "+".
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 Waiver and consent to Note Agreement, dated as of June 23, 1997, to Note Agreement included as Exhibit 4.1 hereto.
*4.7 Waiver and Fourth Amendment to Note Agreement, dated as of September 30, 1997, to Note Agreement included as Exhibit 4.1 hereto.
*4.8 Credit Agreement, dated as of June 27, 1997, among Varco International, Inc., the financial institutions listed therein as Lenders, and Union Bank of California, N.A., as Agent.
*4.9 First Amendment to Credit Agreement, dated as of July 15, 1997, to Credit Agreement included as Exhibit 4.8 hereto.
*4.10 Second Amendment to Credit Agreement dated as of August 13, 1997, to Credit Agreement included as Exhibit 4.8 hereto.
*4.11 Third Amendment to Credit Agreement dated as of November 7, 1997 to Credit Agreement included as Exhibit 4.8 hereto.
*4.12 Fourth Amendment to Credit Agreement dated as of February 18, 1998 to Credit Agreement included as Exhibit 4.8 hereto.
4.13 Rights Agreement, dated as of November 6, 1997, between Varco International, Inc. and Harris Trust Company of California as Rights Agent, which includes: as Exhibit A thereto, the Form of Certificate of Determination of Rights, Preferences, and Privileges of Series A Participating Preferred Stock of Varco International, Inc.; as Exhibit B thereto, the Form of Rights Certificate; and, as Exhibit C thereto, the Summary of Rights, incorporated by reference to Exhibit 1 to the Corporation's Form 8-A Registration Statement filed November 13, 1997.
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, incorporated by reference to Exhibit 10.3 to Varco's annual report on Form 10-K for the year ended December 31, 1996.
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, incorporated by reference to Exhibit 10.6 to Varco's annual report on Form 10-K for the year ended December 31, 1996.
*10.7+ Second Amendment to the Varco International, Inc. Supplemental Executive Retirement Plan. included as Exhibit 10.5 hereto.
10.8+ 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.
10.9+ Amendment to Varco International, Inc. Stock Bonus Plan included as Exhibit 10.8 hereto, incorporated by reference to Exhibit 10.7 to Varco's annual report on Form 10-K for the year ended December 31, 1995.
10.10+ Amendment to Varco International, Inc. Stock Bonus Plan included as Exhibit 10.8 hereto. incorporated by reference to Exhibit 10.9 to Varco's annual report on Form 10-K for the year ended December 31, 1996.
10.11 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.
10.12 Agreement dated as of January 1, 1984, with respect to Lease included as Exhibit 10.11 hereto, incorporated by reference to Exhibit 10.13 to Varco's annual report on Form 10-K for the year ended December 31, 1984.
10.13 Agreement dated as of February 8, 1985, with respect to Lease included as Exhibit 10.11 hereto, incorporated by reference to Exhibit 10.14 to Varco's annual report on Form 10-K for the year ended December 31, 1984.
10.14 Agreement dated as of April 12, 1985 to Lease included as Exhibit 10.11 hereto, incorporated by reference to Exhibit 10.2 to Varco's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985.
10.15 Amendment dated as of January 11, 1995 to Lease included as Exhibit 10.11 hereto, incorporated by reference to Exhibit 10.12 to Varco's annual report on Form 10-K for the year ended December 31, 1995.
10.16 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.
10.17 First amendment dated as of January 11, 1995 to Lease included as Exhibit 10.16 hereto, incorporated by reference to Exhibit 10.15 to Varco's annual report on Form 10-K for the year ended December 31,1995.
10.18+ 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. incorporated by reference to Exhibit 10.21 to Varco's annual report on Form 10-K for the year ended December 31, 1996.
*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+ 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+ Amendment to Varco International Inc. 1994 Directors' Stock Option Plan, included as Exhibit 10.25 hereto.
10.27+ 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.
10.28+ 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.
*12 Statement re computation of ratios.
*13 1997 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.
*27.1 Financial Data Schedule December 31, 1997
*27.2 Restated Financial Data Schedule, December 31, 1996
*27.3 Restated Financial Data Schedule, December 31, 1995
- -----------
* 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.
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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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, 1998
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(1) Uncollectible accounts written off, net of recoveries. (2) Obsolete inventories written off. (3) Slow moving inventories sold.
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 24, 1998 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:
GEORGE I. BOYADJIEFF President and Chief March 24, 1998 - ------------------------- Executive Officer George I. Boyadjieff
Principal Financial Officer:
RICHARD A. KERTSON Vice President- March 24, 1998 - ------------------------- Finance Richard A. Kertson
Principal Accounting Officer:
DONALD L. STICHLER Vice President, Controller- March 24, 1998 - ------------------------- Treasurer and Secretary Donald L. Stichler
Other Directors:
WALTER B. REINHOLD Director-Chairman March 24, 1998 - ------------------------ Walter B. Reinhold
GEORGE S. DOTSON Director March 24, 1998 - ------------------------ George S. Dotson
ANDRE R. HORN Director March 24, 1998 - ------------------------ Andre R. Horn
JACK W. KNOWLTON Director March 24, 1998 - ------------------------ Jack W. Knowlton
LEO J. PIRCHER Director March 24, 1998 - ------------------------ Leo J. Pircher
CARROLL W. SUGGS Director March 24, 1998 - ------------------------ Carroll W. Suggs
ROBERT A. TEITSWORTH Director March 24, 1998 - ------------------------ Robert A. Teitsworth
EUGENE R. WHITE Director March 24, 1998 - ------------------------ Eugene R. White
JAMES D. WOODS Director March 24, 1998 - ------------------------ James D. Woods