Varco's oilfield service businesses generally benefited from rising activity in the first quarter. However, these gains were offset by lower revenue year-over-year from capital drilling equipment and coiled tubing equipment. Revenues from continuing operations were $342.3 million in the first quarter, down five percent from the first quarter of 2003. Consolidated operating profit from continuing operations was $33.0 million, and excluding the Drilling Equipment Group restructuring charges was $34.8 million in the first quarter. This compares to operating profit from continuing operations of $41.5 million in the prior year period.
Orders of $121.0 million for the Drilling Equipment Group, excluding discontinued operations, were nearly doubled from fourth quarter levels and were the highest since the third quarter of 2002. The first quarter orders included approximately $25 million in previously announced drilling equipment packages on two sophisticated jackup rigs. Varco is tendering bids on several other potential jackup rig packages as well.
Orders for the Coiled Tubing & Wireline Products Group rose to a record $68.3 million during the first quarter. Ending backlog for this group was $54.5 million, up eight percent from the first quarter of 2003, and up 47 percent from the fourth quarter of 2003.
Outlook: "Higher demand for Drilling Equipment and Coiled Tubing & Wireline Products Groups should lead to improving results from these businesses in coming quarters," noted John Lauletta, Varco's chairman and chief executive officer. "We are also encouraged by growth in our Tubular Services and Drilling Services businesses, which performed well with the rising level of drilling and workover activity."
Drilling Equipment: Revenues from continuing operations for the Group were $96.8 million in the first quarter, down 27 percent from the first quarter of 2003, and up about one percent from the fourth quarter of 2003. First quarter 2004 operating profit from continuing operations was $8.9 million excluding restructuring charges, or 9.2 percent of sales, compared to $17.7 million or 13.3 percent of sales from continuing operations in the first quarter of 2003. Higher first quarter 2004 orders, together with the transfer of $6.0 million of work from MIL to a third party subcontractor, led to a 36 percent increase in Group backlog from continuing operations as compared to the ending fourth quarter 2003 backlog. However, as compared to the prior year period, backlog from continuing operations was down 20 percent due to soft drilling equipment demand throughout most of 2003.
The Drilling Equipment Group initiated significant cost reduction measures in the first quarter. Consolidation of the sales, engineering and administrative functions into Houston are well underway. Additionally, significant portions of the most labor-intensive manufacturing processes are being transferred from the Company's plant in Orange, Calif., to Mexico. These actions should be substantially completed by the end of the second quarter of 2004.
In February 2004 the Company announced plans to discontinue its MIL rig fabrication operation in England. During the first quarter, MIL completed its last rig, a $31 million land rig, which is presently drilling in the Middle East. The prior year results have been restated to reflect the MIL operation as discontinued. Previously these results were included as part of the Drilling Equipment Group.
Tubular Services: Group sales were $118.5 million in the first quarter, up 13 percent from $104.8 million in sales during the first quarter of 2003. Tubular inspection, tubular coating and sales of fiberglass pipe led the increase, offset by declines in mill equipment sales and pipeline inspection activity. Operating profit for the Group was $16.2 million, or 13.7 percent of sales in the first quarter of 2004, compared to $13.1 million or 12.5 percent of sales in the first quarter of 2003. The Company expects that rising demand for fiberglass pipe and seasonal improvement in pipeline inspection, offset by seasonal breakup declines for oilfield inspection and coating in Canada, will lead to slightly higher sales for its Tubular Services Group in the second quarter.
Drilling Services: Group sales were $74.5 million in the first quarter, up seven percent from first quarter 2003 sales of $69.5 million. Increases in North America solids control and rig instrumentation services were offset by lower sales of solids control and instrumentation equipment. First quarter 2004 operating profit was $13.4 million or 17.9 percent of sales, compared to $13.4 million or 19.3 percent of sales in the first quarter of 2003. Lower operating margin on the higher sales was due to the shift in mix and the weaker U.S. dollar year-over-year. The Company expects that Drilling Services Group revenues will be roughly flat in the second quarter, as higher instrumentation sales are offset by lower results in Canada due to the seasonal breakup.
Coiled Tubing & Wireline Products: Group sales were $52.6 million, down three percent from first quarter 2003 sales of $54.1 million. Higher year-over-year wireline equipment sales were offset by lower revenue for coiled tubing and coiled tubing equipment. First quarter operating profit was $9.3 million or 17.7 percent of sales, compared to $10.9 million or 20.1 percent of sales in the first quarter of 2003. The Company's wireline equipment manufacturing operations in the U.K. were adversely affected by the weak U.S. dollar compared to the British pound. The strong backlog for the Group is expected to result in higher revenue levels in the second and third quarters of 2004.
Balance Sheet: Varco repurchased approximately 300,000 shares of its common stock in the open market during the first quarter of 2004. As of March 31, 2004 the Company was authorized to purchase at its discretion approximately $130 million of its common stock in the open market. At the end of the first quarter of 2004 the Company had $93.2 million in cash, $458.6 million in debt and stockholder's equity of $1,002.1 million. Capital expenditures were $9.7 million in the quarter.
Since the first of the year Varco completed five acquisitions and outside investments for total consideration of approximately $16 million. Among these was the acquisition of the business and operating assets of Recovery Systems Limited, a division of Weatherford UK Ltd. located in Lowestoft, England. The business has long provided thermal desorption services for drill cuttings from the North Sea, and complements Varco's Brandt Environmental Division waste management operation in Aberdeen, Scotland. "The combination of our facilities, together with Varco's broader offering of waste management services, allows Varco to fully and efficiently serve oil and gas operators in both the northern and southern sectors of the North Sea," noted John Lauletta. Varco operates eight thermal desorption units around the world.
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