Operating Income Margins Increase to 21%
Consolidated revenues increased by $100.6 million, or 53%, in the first quarter of 2005 compared to last year's first quarter. Consolidated operating income margins almost doubled to 21.3% from 10.9% in last year's first quarter. The improved margins reflect increased volumes and better pricing, primarily at the Company's Drilling Products and Services and Tubular Technology and Services segments, and manufacturing efficiencies implemented in 2004.
Other operating expenses (sales and marketing, general and administrative and research and engineering) increased $8.0 million compared to last year's first quarter primarily due to increased sales and marketing expenses in the Company's Drill Bits segment and increased costs related to compliance with Section 404 of the Sarbanes-Oxley Act. However, as a percentage of revenues operating expenses were reduced to 21.2% from 28.2% in last year's first quarter, reflecting the positive effects from the Company's restructuring programs implemented during 2004.
Interest expense decreased by $0.5 million due to lower debt balances. Equity income from the Company's unconsolidated affiliates increased by $2.2 million, which reflects increased earnings at Voest-Alpine partially offset by increased development spending in the Company's IntelliServ(TM) joint venture. Other income decreased to $1.1 million from $2.0 million in last year's first quarter due primarily to a smaller gain on sales of assets.
The Company's tax rate in the first quarter of 2005 was 31% compared to 38% in last year's first quarter. The improvement was primarily attributable to increased utilization of foreign tax credits due to higher U.S. profitability and increased earnings at Voest-Alpine that is recorded net of tax.
The Company's debt to book capitalization was 33.8% at March 31, 2005 and cash balance was $74.3 million bringing the net debt to book capitalization to 27.2%.
SEGMENT RESULTS Drilling Products and Services
Revenues for the Drilling Products and Services segment increased by 84% to a record $128.4 million compared to the prior year's first quarter of $69.8 million. Operating income increased to $36.3 million, compared to $8.6 million in last year's first quarter. These improvements reflect a 68% increase in drill pipe footage sold and an 11% increase in average sales price per foot. In addition, this segment's results include the benefits from the rationalization program implemented at the beginning of 2004 that streamlined manufacturing processes and reduced costs. Backlog for this segment increased to $274.7 million compared to $210.0 million at year-end 2004.
Revenues for the Drill Bits segment increased by 14% to $90.6 million, compared to the prior year's first quarter revenues of $79.3 million. This improvement primarily reflects drilling activity increases of 14% in the U.S. rig count and 10% internationally. Year-over-year operating income margins remained relatively flat at 24%. Importantly, operating income margins improved from the 2004's fourth quarter due to overhead reduction efforts and completion of the Singapore facility expansion.
Tubular Technology and Services
Revenues for the Tubular Technology and Services segment increased by 76% to $73.1 million compared to the prior year's first quarter of $41.5 million. Operating income margins increased to 21% from 2% in last year's first quarter. All product lines within this segment improved due to better pricing and increased volumes and the 14% increase in the U.S. rig count. TCA pricing has been particularly strong reflecting strong mill activity. Additionally, this segment's results reflect the benefit of cost cutting initiatives implemented during 2004.
Corporate expenses for the first quarter of 2005 were $10.8 million compared to $6.5 million in prior year's first quarter. The increase was primarily due to higher incentive expenses and costs related to compliance with Section 404 of the Sarbanes-Oxley Act (which totaled $2.1 million) during the first quarter.
Chairman and CEO, Michael McShane commented, "The quarter's results reflect improving market demand across each of our operating segments. Drilling Products and Services segment reported record revenues and sold more drill pipe than in any quarter since we became a public company. Restructuring efforts and continuing pricing initiatives fueled our Tubular Technology segment to its highest-ever operating income margin despite continued weakness in the Gulf of Mexico. Additionally, we are pleased with the improvement in operating margins achieved at ReedHycalog through recent cost and efficiency initiatives.
"Our earnings outlook appears promising with strong market conditions expected to continue for the remainder of the year. With our backlog increasing by over $100 million since the beginning of the year, we now expect our full year earnings to be in the range of $1.20 to $1.25 per share, excluding unusual charges. For the next quarter, we anticipate our earnings will be relatively flat compared to the current quarter as the seasonal breakup in Canada is offset by continued price leverage and overhead expense reductions."
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