Varco Announces Third Quarter 2004 Financial Results

Varco International Inc. (NYSE:VRC) announced that it earned $32.5 million or $0.33 per fully diluted share from continuing operations during its third quarter ended Sept. 30, 2004, including the impact of a $1.1 million or $0.01 per fully diluted share charge related to its previously announced restructuring of its Drilling Equipment Group. Excluding the restructuring charge earnings were $0.34 per fully diluted share. These results compare to net income from continuing operations of $27.3 million or $0.28 per fully diluted share in the third quarter of 2003, before restructuring charges of $0.3 million.

Varco's third quarter 2004 revenues from continuing operations totaled $414.3 million, up 11 percent from the third quarter of 2003. Operating profit from continuing operations was $57.8 million in the third quarter. Excluding Drilling Equipment Group restructuring charges of $1.1 million and $0.3 million, respectively, operating profit from continuing operations was $58.9 million or 14.2 percent of revenue in the third quarter of 2004, and $49.0 million or 13.2 percent of revenue in the third quarter of 2003.

Varco's third quarter 2004 consolidated net income, including discontinued operations, was $34.6 million or $0.35 per fully diluted share, which included a net gain of $0.02 per fully diluted share from the Company's discontinued rig fabrication business related to a favorable resolution of an outstanding contractual issue. This compares to consolidated net income of $26.7 million or $0.27 per fully diluted share in the third quarter of 2003.

Outlook: "Varco performed very well in the third quarter of 2004, and we expect strong financial results to continue through the fourth quarter," stated John Lauletta, Varco's chairman and chief executive officer. "High levels of oilfield activity are spurring demand for the Company's tubular inspection and coating services, as well as solids control and rig instrumentation services. Additionally, Varco's business of supplying capital equipment and drilling and coiled tubing technology to the oilfield is also benefiting from higher demand."

Lauletta noted that the Drilling Equipment Group's aggressive restructuring, strategic focus on aftermarket sales and services, and improving market demand resulted in operating margins in excess of the Company's stated 15 percent target in the third quarter. "We're very proud that the Drilling Equipment Group achieved this important goal earlier than our original timeframe," he stated.

Backlog for the Coiled Tubing & Wireline Group rose to $76.7 million, the highest since the third quarter of 2001. Order rates for the Coiled Tubing & Wireline Group were $68.5 million, the second highest quarter ever. The Drilling Equipment Group had orders of $106.6 million in the third quarter, up from the prior year level but down slightly from the first and second quarter level. Included in the orders was a previously-announced $13 million package of drilling equipment for a new jackup rig being constructed by Keppel Fels for Odfjell Drilling AS of Norway. Drilling Equipment Group backlog fell 9 percent to $114.3 million in the third quarter.

Drilling Equipment: Revenues from continuing operations for the Group were $118.4 million in the third quarter, up six percent from the third quarter of 2003, and up 13 percent from the second quarter of 2004. Operating profit from continuing operations was $18.0 million in the third quarter of 2004. Excluding charges of $1.1 million related to the previously announced restructuring of the Group, operating profit from continuing operations was $19.1 million or 16.2 percent of revenue. This compares to operating profit from continuing operations of $13.0 million or 11.7 percent of revenue in the third quarter of 2003, excluding Group restructuring charges of $0.3 million in the prior period.

Tubular Services: Revenues for the Group were $138.9 million in the third quarter, up 12 percent from the third quarter of 2003. Group operating profit totaled $27.3 million or 19.7 percent of revenue, compared to $22.7 million or 18.3 percent of revenue in the third quarter of 2003. Strong year-over-year demand growth in inspection, coating and mill equipment sales fueled the increase. Operating leverage, or incremental operating profit divided by incremental revenue, was 32 percent for the Group year-over-year.

Drilling Services: Revenues for the Group were $91.6 million in the third quarter, up 17 percent from the third quarter of 2003. However, operating profit and margin declined year-over year. Prior year results included greater sales of drilling control systems, rig instrumentation equipment, and solids control equipment, and a greater mix of offshore service revenue. In addition, wetter weather resulted in lower solids control service revenue in Canada compared to last year. Operating profit in the third quarter was $15.1 million or 16.5 percent of revenue for the Group, down from $16.0 million or 20.5 percent of revenue in the third quarter of 2003.

Coiled Tubing & Wireline Products: Revenues for the Group were $65.4 million in the third quarter, up 13 percent from the third quarter of 2003. Group operating profit totaled $13.6 million or 20.7 percent of revenue, compared to $11.5 million or 19.8 percent of revenue in the third quarter of 2003. Operating leverage for the Group was 28 percent year-over-year.

Balance Sheet: As of Sept. 30, 2004 the Company had $111.9 million in cash, $463.7 million in debt, and stockholder's equity of $1,069.4 million. Capital expenditures were $13.3 million in the quarter.

Merger Update: On Oct. 13, 2004, Varco and National-Oilwell Inc. jointly announced that they have received a request for additional information from the Antitrust Division of the U.S. Department of Justice regarding the proposed merger between the companies. Both companies are gathering information to comply with the request and expect to respond by late November or early December. Closing of the transaction is expected to occur as quickly as possible after regulatory clearance and stockholder approvals are received.
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