Net income for the second quarter of 2004 was $2.3 million ($0.02 per share) which includes a loss on discontinued operations of $9.9 million ($0.08 per share) related to the sale of the Company's Texas Arai business in April 2004, as compared to $3.8 million ($0.03 per share) in last year's second quarter. The loss from the sale of Texas Arai primarily results from the write-off of goodwill allocated to this operation.
Operating Income Margins Increase to 14%
Consolidated revenues increased $44.0 million, or 24%, in the second quarter of 2004 compared to last year's second quarter. Consolidated operating income margins increased from 5% in last year's second quarter to 14% in the second quarter of 2004. These increases were primarily due to increased facility utilization and efficiency improvements related to the Drilling Products rationalization program implemented at the beginning of 2004, and improvements in the Company's recently restructured Tubular Technology and Services segment. Consolidated operating income for the second quarter of 2004 includes other charges of $2.3 million for severance costs related to the Tubular Technology and Services organizational restructuring announced in the first quarter of 2004.
Other operating expenses (sales and marketing, general and administrative, and research and engineering) as a percentage of revenues increased slightly in the second quarter of 2004 to 25% from 24% in last year's second quarter due primarily to increased sales and marketing expenses in the Company's Drill Bits segment.
Other expense increased by $8.0 million, from $2.7 million in last year's second quarter to $10.6 million in the second quarter of 2004. The second quarter of 2003 reflects a $6.6 million gain from favorably renegotiating a liability to the Company's former parent. Also, the earnings from the Company's unconsolidated affiliates decreased to a loss of $0.5 million from income of $1.0 million in last year's second quarter. This decrease reflects increased development spending in the Company's IntelliServ(TM) joint venture, coupled with decreased equity income from the Company's investment in Voest- Alpine.
The Company's year to date effective tax rate was 34%; however, the effective tax rate in the second quarter of 2004 was 31% due to the cumulative effect of a reduction from the first quarter of 2004 tax rate of 37%. The rate decrease resulted from higher forecasted profitability at Voest-Alpine and increased permanent differences.
Drilling Products and Services
Revenues for the Drilling Products and Services segment increased 32% in the second quarter of 2004, to $90.7 million, compared to last year's second quarter. Operating income margins increased from 10% in last year's second quarter to 22% in the second quarter of 2004. These improvements reflect a 24% increase in drill pipe footage sold and increased sales of other products, which include heavyweight drill pipe, tool joints and drill pipe processing. During the second quarter of 2004, this segment's results also benefited from increased operating efficiencies resulting from the rationalization program implemented at the beginning of the year.
Revenues for the Drill Bits segment increased 35% in the second quarter of 2004, to $76.6 million, compared to last year's second quarter. This reflects the worldwide rig count increase of 10% and strong year-over-year growth driven by the continued success of ReedHycalog's rotary steerable bit technologies and directional products, as well as the outstanding performance of ReedHycalog's TReX(TM) diamond technology. More recently, the introduction of the TuffCutter(TM), TuffDuty(TM) and Titan(TM) lines of roller-cone products has added to the revenue growth as those products were deployed worldwide. Operating income margins decreased slightly from 23% in last year's second quarter to 22% in the second quarter of 2004 due to higher incremental sales and marketing expenses.
Tubular Technology and Services
Revenues for the Tubular Technology and Services segment in the second quarter of 2004 were $57.1 million, up from $53.3 million in last year's second quarter. Operating income margins increased from 1% in last year's second quarter, which included an inventory reserve charge of $0.4 million, to 4% in the second quarter of 2004, which includes a severance charge of $2.3 million related to this segment's organizational restructuring. These increases reflect improved results at the Company's TCA and XL Systems divisions due to the increased drilling activity. Also, the second quarter of 2003 includes the results of the Company's Rotator division which the Company sold in the third quarter of 2003.
Revenues for the Other segment in the second quarter of 2004 were $0.9 million compared to $2.6 million in last year's second quarter. The decrease in revenues was due to the exiting of the Company's industrial product lines during 2003, coupled with the sale of the Company's Plexus Ocean System business in the first quarter of 2004.
Operating loss was $0.5 million in the second quarter of 2004 compared to an operating loss of $6.8 million in last year's second quarter. The 2003 operating loss includes an inventory reserve charge of $6.0 million related to the exiting of the industrial product lines.
The Company's Chairman, President and CEO, Michael McShane, commented, "We are happy to report improved earnings this quarter despite the seasonal decline in Canada, which primarily affected revenues in our Drill Bits segment. The Drilling Products Segment contributed nicely with a 32% sequential increase in revenues, and the Tubular Technology and Services Segment is beginning to show signs of improvement resulting from our recent restructuring of that segment. In addition, our overall consolidated backlog improved 9% over the first quarter to $192 million, which is its highest level since 2001.
"For the balance of the year, we expect to benefit from continued strong drilling activity, increased drill pipe demand resulting from lower customer inventory levels and price increases. We expect our earnings for the third quarter to improve sequentially, and we are increasing our earnings estimate from continuing operations for the full year to between $0.45 and $0.50 per share."
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