Varco's revenue from continuing operations in the second quarter totaled $368.9 million, up four percent from the second quarter of 2003. Operating profit from continuing operations totaled $44.9 million, including a litigation net gain of $3.8 million offset by restructuring charges of $1.1 million. Excluding these items operating profit was $42.3 million or 11.5 percent of revenue. This compares to $39.4 million or 11.1 percent of revenue from continuing operations in the second quarter of 2003.
Outlook: "We project further strengthening in the second half of 2004," stated John Lauletta, Varco's Chairman and Chief Executive Officer. "Demand for Varco's tubular inspection and coating services is benefiting from higher oilfield activity levels and new drillpipe flowing into the marketplace. We expect seasonal resumption of activity following the breakup in Canada to benefit the second half of 2004, particularly in our Drilling Services Group," he stated.
Lauletta highlighted significant margin improvement in the Drilling Equipment Group as a result of rising demand and the Company's cost restructuring initiatives. Backlog in continuing operations of the Drilling Equipment Group has risen in both the first and second quarter, resulting in the Company's strengthening outlook for future periods. Similarly, the Company's Coiled Tubing & Wireline Products Group generated a record level of orders in the second quarter, further underscoring that demand for Varco technology is rising with activity in the oilfield. "Back-to-back record order quarters for the Coiled Tubing & Wireline business, and a backlog up 51 percent since the first of the year for continuing operations of the Drilling Equipment Group, point to a strong finish for the year," stated Lauletta.
Drilling Equipment: Revenues from continuing operations for the Group were $104.3 million in the second quarter, down 14 percent from the second quarter of 2003, but up eight percent from the first quarter of 2004. Second quarter 2004 operating profit from continuing operations was $13.5 million. Excluding restructuring charges of $1.1 million related to the previously announced restructuring of the Group, operating profit from continuing operations was $14.6 million or 14.0 percent of revenue. This compares to operating profit from continuing operations of $15.1 million or 12.4 percent of revenue in the second quarter of 2003.
Demand for equipment to upgrade drilling rigs, and aftermarket spares and services, resulted in strong order levels for the second quarter despite the absence of orders for any major new-build offshore drilling rig packages. Orders for the Group's continuing operations totaled $116.8 million in the second quarter, up three percent from orders in the second quarter of 2003, but down slightly from the first quarter of 2004, which included two new jackup drilling rig packages. Although backlog was down seven percent from the prior year, backlog rose 11 percent from the preceding quarter.
Following the end of the second quarter Varco secured an order for a package of drilling equipment for sophisticated offshore jackup drilling rig for Odfjell Drilling AS of Norway, as manager for Odfjell Invest Ltd. Total value for the package; which includes a top drive, AC drawworks, solids control equipment, rotary table, control systems and handling tools; is approximately $13 million. The rig is being constructed by Keppel FELS shipyard in Singapore, and is scheduled for April 2006 delivery. The Company continues to pursue additional equipment packages for several drilling rig projects being considered for construction.
Tubular Services: Group revenues were $132.5 million in the second quarter, up 23 percent from the second quarter of 2003. Tubular inspection and coating, sales of fiberglass pipe and mill equipment, and inspection of pipelines all posted year-over-year gains. Group operating profit totaled $22.6 million or 17.0 percent of revenue, compared to $15.4 million or 14.2 percent of revenue in the second quarter of 2003.
Drilling Services: Revenues for the Group were $75.6 million in the second quarter, up eight percent from the second quarter of 2003. Gains in Africa, the Rockies, and instrumentation equipment sales were partially offset by declines in Latin America, the Far East, and solids control equipment sales. Operating profit was $9.8 million or 12.9 percent of revenue for the Group in the second quarter, down from $11.5 million or 16.5 percent of revenue in the second quarter of 2003. Margins in the second quarter of 2004 declined from the second quarter of 2003 due to a lower mix of offshore services and large Latin America projects, and unfavorable foreign currency exchange movements as compared to the same period a year ago.
Coiled Tubing & Wireline Products: Orders for the Group were a record $75.6 million, up 46 percent from the second quarter of 2003. Ending backlog was $73.6 million, the highest level since the third quarter of 2001 and up 61 percent from the second quarter of 2003. Group revenues for the second quarter of 2004 were $56.5 million, approximately the same as the second quarter of 2003. Higher year-over-year coiled tubing sales were offset by lower equipment sales. Group operating profit was $11.0 million or 19.5 percent of revenue in the second quarter, approximately equivalent to the second quarter of 2003.
Balance Sheet: Varco repurchased approximately 530,000 shares of its common stock for $10.4 million during the second quarter of 2004. Since initiating its share repurchase program in September 2003 the Company has repurchased 1.6 million shares for $30.9 million, and remains authorized to buy back an additional $119 million. As of June 30, 2004, the Company had $86.7 million in cash, $461.1 million in debt, and stockholder's equity of $1,021.8 million. Capital expenditures were $12.8 million in the quarter.
Varco completed seven acquisitions since the first of the year for total consideration of approximately $44 million. Among the more recent of these was the acquisition of the business of Wildcat Services, L.P., which sells and rents its proprietary Automatic Drilling System (ADS). Drilling contractors and E&P operators use the ADS to automatically maximize the rate of drilling penetration achieved by rigs. Varco also recently acquired Wellsite Gas Detection, Inc., a provider of proprietary infrared gas detectors. Both Wildcat and Wellsite will be integrated into Varco's Drilling Services Group.
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