Varco's net income from continuing operations for its fiscal year ended December 31, 2004 was $107.4 million or $1.09 per fully diluted share, compared to $88.8 million or $0.90 per fully diluted share in 2003. Excluding a litigation gain and National Oilwell transaction expenses in 2004, and excluding Drilling Equipment group restructuring expenses from both periods, net income from continuing operations was $1.15 per fully diluted share in 2004, up 26 percent from $0.91 per fully diluted share in 2003. Varco's consolidated revenues from continuing operations for 2004 totaled $1,568.1 million, an increase of nine percent from 2003 revenues from continuing operations of $1,437.6 million. Three of Varco's four business segments posted revenue improvement year-over-year, and all four posted increases in operating profit from continuing operations.
Varco achieved record levels of revenue and operating profit in its fourth quarter, benefiting from higher levels of oilfield drilling and well servicing activity in several important markets, and rising levels of expenditures for capital equipment by its customers. Operating profit from continuing operations excluding merger and restructuring charges totaled $69.3 million or 15.7 percent of revenue, compared to $36.9 million or 10.6 percent of revenue for the fourth quarter of 2003. The Company also benefited from the collection of a prior-year insurance claim for $2.9 million or $0.02 per fully diluted share in the fourth quarter of 2004.
"Varco posted excellent financial results for its fourth quarter to top off an outstanding year," stated John Lauletta, Varco's Chairman and Chief Executive Officer. "In particular, we are pleased that the aggressive restructuring of our Drilling Equipment group, coupled with higher volumes, enabled it to achieve fourth quarter 2004 operating margins in excess of 18 percent. Our Tubular Services group and our Coiled Tubing & Wireline Products group posted record revenue and operating profit for the quarter and year. Our Drilling Services group also posted substantially improved margins during the fourth quarter, both sequentially and year-over-year, on record revenue." Lauletta also noted that 2004 earnings from continuing operations for the Company were the highest since 1998, excluding merger and restructuring charges, and a litigation gain booked this year.
"The outlook for the Company's business for 2005 is solid, and we are pleased to see our customers purchasing Varco equipment to enhance their capabilities," stated Lauletta, who noted that sustained high oil and gas prices appear to be driving continued high levels of drilling and well remediation activity. Backlog for the Coiled Tubing & Wireline Products group rose to the highest level ever recorded by the Company, $98.1 million, on record orders of $93.9 million in the fourth quarter. Backlog for continuing operations of the Drilling Equipment group continued to trend upward to $140.8 million, on the strength of $152.4 million in new orders, the highest since 2001. A large riser order for a major offshore drilling contractor and a package of equipment for a jack-up rig for Gulf Drilling International contributed to the high order rate for the group in the quarter.
Drilling Equipment: Revenues from continuing operations for the group were $125.9 million in the fourth quarter, up 31 percent from the fourth quarter of 2003, and up six percent from the third quarter of 2004. Operating profit from continuing operations was $21.1 million in the fourth quarter of 2004. Excluding charges of $1.7 million related to the previously announced restructuring of the group, operating profit from continuing operations was $22.8 million or 18.1 percent of revenue. This compares to operating profit from continuing operations of $7.7 million or eight percent of revenue in the fourth quarter of 2003, excluding group restructuring charges of $0.6 million. Operating leverage, or incremental operating profit divided by incremental revenue, was 50 percent for the group year-over-year (fourth quarter 2004 vs. fourth quarter 2003), excluding the restructuring charges from both periods. Sales of units, spares, repair and rental services all increased compared to the fourth quarter of 2003.
Tubular Services: Revenues for the group were a record $147.0 million in the fourth quarter, up 24 percent from the fourth quarter of 2003. Group operating profit rose to an all time high of $28.0 million, compared to $18.1 million in the fourth quarter of 2003. Group operating margins were 19.0 percent of revenue in the fourth quarter of 2004, compared to 15.3 percent of revenue in the fourth quarter of 2003. Operating leverage was 35 percent for the group year-over-year. Tubular inspection and coating services revenue and operating profit improved to record levels on higher pipe mill activity and higher demand for new drill pipe. Sales of fiberglass and composite pipe, and pipeline inspection services also achieved record revenue levels.
Drilling Services: Revenues for the group were a record $97.2 million in the fourth quarter, up 29 percent from the fourth quarter of 2003. Operating profit for the group was $20.4 million or 21.0 percent of revenue, compared to $13.6 million or 18.0 percent of revenue in the fourth quarter of 2003. Operating leverage was 31 percent year-over-year. Higher levels of drilling activity and the impact of acquisitions led to improvements in most areas compared to the prior year, and to record revenues and operating profit for the Company's rig instrumentation business.
Coiled Tubing & Wireline Products: Revenues for the group were a record $72.5 million in the fourth quarter, up 24 percent from the fourth quarter of 2003. Group operating profit in the fourth quarter of 2004 was $14.4 million, the highest ever for the group, which compares to $9.9 million in the fourth quarter of 2003. Group operating margins were 20.0 percent in the fourth quarter of 2004, compared to 17.0 percent in the fourth quarter of 2003. Operating leverage for the group was 32 percent year-over-year. Rising demand for pressure pumping equipment, coiled tubing and perforating guns led to record revenue, operating profit, orders, and backlog for the group.
Balance Sheet: As of December 31, 2004 the Company had $118.5 million in cash, $461.8 million in debt, and stockholder's equity of $1,118.6 million. Capital expenditures were $16.2 million in the quarter.
Merger Update: Varco has set a record date of February 3, 2005 and scheduled a special meeting of its shareholders for March 11, 2005 to vote on the proposed merger with National-Oilwell, Inc. Both companies continue to assist the U.S. Department of Justice Antitrust Division in its review of the transaction pursuant to the Hart Scott Rodino Antitrust Improvements Act of 1976, and continue to expect a favorable outcome. Closing of the transaction is expected to occur as quickly as possible after regulatory clearance and stockholder approvals are received.
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