Varco International (VRC) 8-K Varco Announces Fourth Quarter and Full Year 2003 Financial Results

EXHIBIT 99.1

Varco Announces Fourth Quarter and Full Year 2003 Financial Results

HOUSTON, Texas, February 3, 2004 (BUSINESS WIRE) — Varco International, Inc. (NYSE:VRC) today announced that it earned $4.6 million or $0.05 per fully diluted share during its fourth quarter ended December 31, 2003, compared to $21.4 million or $0.22 per fully diluted share in the fourth quarter of 2002. The fourth quarter 2003 results include $0.15 per share in charges and losses from the Company’s drilling rig fabrication business, Morinoak International Limited or MIL, which the Company previously announced it is exiting. The fourth quarter of 2002 included $0.01 per share in acquisition charges, and $0.01 per share in losses from MIL. Consolidated revenues were $349.7 million in the fourth quarter of 2003, compared to $354.5 million in the fourth quarter of 2002.

Varco’s net income for its fiscal year ended December 31, 2003 was $67.2 million or $0.68 per fully diluted share, including MIL losses and charges of $0.22 per share. This compares to net income of $79.8 million or $0.82 per fully diluted share in 2002, which included $0.04 per share in merger and acquisition charges, and $0.02 per share in MIL losses. Varco’s consolidated revenues for 2003 totaled $1,449.6 million, up 9 percent from 2002 revenues of $1,335.1 million. Most of the increase was due to the Company’s September 2002 acquisition of the tubular services business of ICO, and to higher drilling activity levels year-over-year.

Varco’s fourth quarter 2003 results also reflect declining market demand in the Company’s Drilling Equipment Sales business, which led to lower margins. As a result of its lowered outlook for rig equipment sales, particularly in the offshore rig construction market, the Company has undertaken a significant restructuring of its Drilling Equipment Sales Group. Plans to reduce its technical and administrative workforce by approximately 200 employees are underway, and are expected to be completed by the end of the second quarter. The Company is consolidating sales, engineering and administrative functions of the Drilling Equipment Sales Group from California into Houston, and is moving certain manufacturing operations between its plants to improve efficiency. The Company expects to save approximately $20 million annually in Drilling Equipment Sales Group overhead expenses, and expects to recognize severance and relocation charges in the range of $5 million related to these measures during the first half of 2004. The Company is also evaluating the potential closing of other manufacturing facilities, in addition to the closure of MIL, and may have additional restructuring charges in 2004 depending upon the additional actions it is considering.

“Our entrance into large-scale, turnkey rig fabrication two years ago through our acquisition of MIL was a mistake,” remarked Varco Chairman and CEO John Lauletta, who noted that the Company’s strong results from most of its businesses in 2003 were overshadowed by continuing challenges in achieving target margins in Drilling Equipment Sales, and difficulties in executing rig fabrication projects.

“We are pleased with the strong showing from our Tubular Services, Drilling Services, and Coiled Tubing & Wireline Products divisions in 2003. However, the softening market for capital drilling equipment and the fabrication problems we’ve seen dictate the need for significant changes in our Drilling Equipment business. We are confident these are the right steps to position it for long term profitability,” noted Lauletta. “The Company is committed to achieving an acceptable margin, and these measures will set the Drilling Equipment operation back on track.”

Lauletta outlined the Company’s strategy for the Drilling Equipment Sales Group going forward. “We are sizing the business for the current market; emphasizing aftermarket spare parts and services to take care of our customers; introducing innovative, new products to upgrade existing rigs, including land rigs, to improve efficiency; and positioning the business to capitalize on opportunities to place Varco drilling equipment on new rig construction projects, when this market rebounds.

Lauletta stated that the outlook for drilling activity is good for 2004, fueled by strong commodity prices. “We believe high levels of North American gas drilling, and Latin American and Middle East drilling should permit our services businesses to perform well in 2004. However, we do not foresee much new offshore rig construction in the coming year, and are focusing our efforts on rig upgrades and aftermarket spares and services.”

Drilling Equipment Sales: New orders for the Group in the fourth quarter of 2003 fell 39 percent to $64.6 million, and backlog totaled $126.5 million at year-end, down 42 percent from the prior year fourth quarter. The ending backlog includes $43.2 million in MIL work, consisting mostly of one large land rig Varco is fabricating. Compared to the fourth quarter of 2002, sales fell 21 percent to $97.2 million. Operating profit was $1.5 million, including MIL operating losses of $5.7 million. Excluding the MIL losses and revenues, operating profit was $7.2 million, or 7.5 percent of sales in the fourth quarter of 2003. This compares to $16.1 million or 13.1 percent of sales including MIL, and $16.9 million or 14.2 percent of sales excluding MIL, in the fourth quarter of 2002.

Tubular Services: Group sales were $118.9 million, an increase of five percent from the fourth quarter of 2002. Year-over-year increases in inspection and coating services due to higher levels of rig activity were partially offset by declines in the Company’s fiberglass pipe sales, mill equipment sales, and pipeline inspection services. Operating profit was $18.2 million or 15.3 percent of sales in the fourth quarter of 2003, compared to $17.6 million or 15.6 percent of sales in the fourth quarter of 2002.

Drilling Services: Sales for the Group rose five percent from the fourth quarter of 2002, to $75.3 million in the fourth quarter of 2003. Solids control, rig instrumentation and sales of rig control packages all grew due to higher levels of drilling activity year-over-year. Operating profit was $13.6 million or 18.0 percent of sales in the fourth quarter of 2003, compared to $12.9 million or 18.1 percent of sales in the fourth quarter of 2002.

Coiled Tubing & Wireline Products: Group sales rose 23 percent to $58.3 million in the fourth quarter of 2003, compared to $47.3 million in the fourth quarter of 2002. Demand for coiled tubing and related equipment, and wireline equipment were all up year-over-year. Operating profit was $9.9 million or 17.0 percent of revenue in the fourth quarter of 2003, compared to $8.2 million or 17.3 percent of revenue in the fourth quarter of 2002. Orders were $52.9 million in the fourth quarter of 2003, down 5 percent from the prior year period. Backlog was $37.0 million at yearend, compared to $49.1 million at the end of 2002.

Varco repurchased 798,580 shares of its common stock in the open market during the fourth quarter of 2003 for $14.7 million. As of December 31, 2003 the Company had $85.7 million in cash, $456.9 million in debt, and stockholder’s equity of $994.2 million. Capital expenditures were $23.7 million in the quarter, which included approximately $7.1 million for the acquisition of a facility previously subject to an operating lease.

Varco will hold a conference call on Tuesday, February 3, 2004 at 10:00AM CST to discuss fourth quarter results. The dial-in number for the call is 866-482-6974 and the password number is 3987605. A replay will be available through February 10, 2004 at 866-219-1444 with the same password, or on the Company’s website at www.varco.com.

Varco International, Inc. is a leading provider of services, products, and highly-engineered equipment to the world’s oil and gas industry. With operations in over 350 locations in over 40 countries across six continents, the Company provides oilfield tubular inspections and internal tubular coating services; drill cuttings separation, management and disposal services; rig instrumentation and communication services; in-service pipeline inspection services; and sucker rod inspection and reclamation services. Additionally, the Company manufactures and supplies innovative drilling systems and technology; coiled tubing and pressure control equipment; high-pressure fiberglass and composite tubing; and in-line inspection equipment for the makers of oilfield tubing.

The foregoing contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements are those that do not state historical facts and are inherently subject to risk and uncertainties. Among these forward looking statements are statements regarding the expected activities associated with the Company’s decision to exit the rig fabrication business, future restructuring activities and expected future oilfield activity levels. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, general economic, financial and business conditions, the ultimate realization of revenue and profit from existing backlogs, risks associated with growth through acquisitions, risks associated with foreign currency exchange rate fluctuations, and other factors discussed in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2002, under the caption “Factors Affecting Future Operating Results.”

VARCO INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

	December 31, 2003			December 31, 2002
	(Unaudited)
	(in thousands)
A S S E T S
Current assets:
Cash and cash equivalents	$	85,748		$	105,997
Accounts receivable, net		331,665			323,456
Inventory, net		339,317			279,958
Deferred tax assets		16,897			15,727
Prepaid expenses and other		23,798			22,840
Total current assets		797,425			747,978
Property and equipment, net		489,031			450,131
Identified intangibles, net		31,493			32,918
Goodwill, net		433,916			418,659
Other assets, net		12,474			11,374
Total assets	$	1,764,339		$	1,661,060
L I A B I L I T I E S   A N D   E Q U I T Y
Current liabilities:
Accounts payable	$	98,389		$	90,604
Accrued liabilities		125,701			111,430
Income taxes payable		7,842			9,252
Current portion of long-term debt and short-term borrowings		6,447			7,045
Total current liabilities		238,379			218,331
Long-term debt		450,471			460,883
Pension liabilities and post-retirement obligations		29,514			24,899
Deferred taxes payable		46,221			35,252
Other liabilities		5,512			1,413
Total liabilities		770,097			740,778
Common stockholders’ equity:
Common stock, $.01 par value, 200,000,000 shares authorized, 99,150,487 shares issued and 96,908,207 shares outstanding at December 31, 2003 (98,416,012 shares issued and 96,991,312 shares outstanding at December 31, 2002)		992			984
Paid in capital		535,244			525,782
Retained earnings		494,598			427,355
Accumulated other comprehensive loss		(6,243	)		(18,509	)
Less: treasury stock at cost (2,242,280 shares)		(30,349	)		(15,330	)
Total common stockholders’ equity		994,242			920,282
Total liabilities and equity	$	1,764,339		$	1,661,060

VARCO INTERNATIONAL, INC.

QUARTERLY STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended December 31,						Years Ended December 31,
	2003			2002 (restated)			2003			2002
	(in thousands, except share and per share data)
Revenue:
Drilling Equipment Sales	$	97,189		$	122,635		$	474,173		$	486,695
Tubular Services		118,943			113,194			455,898			355,966
Drilling Services		75,300			71,421			292,663			278,617
Coiled Tubing & Wireline Products		58,265			47,254			226,873			213,786
Total Revenue		349,697			354,504			1,449,607			1,335,064
Total Gross Profit		90,314			100,485			393,496			383,007
Total Gross Profit Percent		25.8	%		28.3	%		27.1	%		28.7	%
Selling, General and Administration		44,676			45,754			180,840			163,383
Research and Engineering		14,994			14,895			61,506			57,072
Merger, Transaction, and Impairment Costs		11,169			1,289			11,169			6,487
Operating Profit		19,475			38,547			139,981			156,065
Interest Expense		7,097			7,251			30,168			25,608
Other expense (income)		(211	)		(222	)		2,243			7,678
Income Before Taxes		12,589			31,518			107,570			122,779
Income Tax Provision		8,034			10,113			40,327			42,972
Net Income	$	4,555		$	21,405		$	67,243		$	79,807
Earnings Per Common Share:
Basic Earnings Per Common Share	$	0.05		$	0.22		$	0.69		$	0.83
Dilutive Earnings Per Common Share	$	0.05		$	0.22		$	0.68		$	0.82
Weighted Average Number of Common Shares Outstanding:
Basic		97,190,313			96,922,426			97,298,862			96,628,664
Dilutive		98,004,179			97,663,657			98,165,369			97,430,990

VARCO INTERNATIONAL, INC.

OPERATING PROFIT—SUPPLEMENTAL SCHEDULE

(Unaudited)

	Three Months Ended December 31,						Years Ended December 31,
				2002
	2003			(restated)			2003			2002
	(in thousands, except share and per share data)
Revenue:
Drilling Equipment Sales	$	97,189		$	122,635		$	474,173		$	486,695
Tubular Services		118,943			113,194			455,898			355,966
Drilling Services		75,300			71,421			292,663			278,617
Coiled Tubing & Wireline Products		58,265			47,254			226,873			213,786
Total Revenue		349,697			354,504			1,449,607			1,335,064
Operating Profit:
Drilling Equipment Sales		1,491			16,121			37,792			71,630
Tubular Services		18,170			17,613			69,335			54,405
Drilling Services		13,568			12,948			54,483			50,476
Coiled Tubing & Wireline Products		9,905			8,177			43,269			39,455
Other Unallocated		(12,490	)		(15,023	)		(53,729	)		(53,414	)
Operating Profit (Before Merger, Transaction and Impairment Costs Note 1)	$	30,644		$	39,836		$	151,150		$	162,552
Operating profit %:
Drilling Equipment Sales		1.5	%		13.1	%		8.0	%		14.7	%
Tubular Services		15.3	%		15.6	%		15.2	%		15.3	%
Drilling Services		18.0	%		18.1	%		18.6	%		18.1	%
Coiled Tubing & Wireline Products		17.0	%		17.3	%		19.1	%		18.5	%
Operating Profit % (Before Merger, Transaction and Impairment Costs Note 1)		8.8	%		11.2	%		10.4	%		12.2	%

Note 1: Excluding merger, transaction, and impairment costs of $2.8 million, $2.4 million, and $1.3 million recorded in the first quarter, third quarter, and fourth quarter of 2002, respectively, and $11.2 million in the fourth quarter of 2003. The first quarter 2002 charge was related to the May 2000 merger of Tuboscope Inc. and Varco International, Inc. The third quarter and fourth quarter 2002 charge was related to merger and transaction costs associated with the acquisition of ICO in September 2002. The fourth quarter 2003 charge of $11.2 million was related to the goodwill impairment and write-off of fixed assets associated with the Company’s MIL business. The Company believes that reporting operating profit excluding merger, transaction and impairment costs provides useful supplemental information regarding the Company’s on-going economic performance and, therefore, uses this financial measure internally to evaluate and manage the Company’s operations. The Company has chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results and as a means to emphasize the results of on-going operations.

VARCO INTERNATIONAL, INC.

PROFORMA RECONCILIATION EXCLUDING MERGER, TRANSACTION AND IMPAIRMENT COSTS

(Unaudited)

	Three Months Ended December 31, 2003				Years Ended December 31, 2003
	2003		2002 (restated)		2003			2002
	(in thousands, except shares and per share data)
Reconciliation of EBITDA:
GAAP Net Income	$	4,555	$	21,405	$	67,243		$	79,807
Provision for Income Taxes		8,034		10,113		40,327			42,972
Interest Expense		7,097		7,251		30,168			25,608
Depreciation and Amortization		17,571		16,201		67,199			59,246
Merger, Transaction, and Impairment Costs:
ICO Acquisition Costs		—		1,289		—			3,658
Severance Costs from Merger Agreement		—		—		—			2,829
Impairment Costs		11,169		—		11,169			—
EBITDA Before Merger, Transaction, and Impairment Costs	$	48,426	$	56,259	$	216,106		$	214,120
Reconciliation of GAAP Net Income Before Merger, Transaction, and Impairment Costs:
GAAP Net Income	$	4,555	$	21,405	$	67,243		$	79,807
Merger, Transaction, and Impairment Costs (net of tax):
ICO Acquisition costs		—		862		—			2,378
Severance costs from Merger employment agreements		—		—		—			1,839
Impairment Costs		11,169		—		11,169			—
Net Income Before Merger, Transaction and Impairment Costs	$	15,724	$	22,267	$	78,412		$	84,024
Weighted Average Dilutive Shares Outstanding		98,004,179		97,663,657		98,165,369			97,430,990
Dilutive Earnings Per Share Before Merger, Transaction and Impairment Costs	$	0.16	$	0.23	$	0.80		$	0.86
Summary Statement of Cash Flow Information:
Net Cash Provided by Operating Activities					$	100,763		$	101,783
Net Cash Used for Investing Activities						(106,591	)		(202,333	)
Net Cash Provided by (Used for) Financing Activities Activities						(14,421	)		149,048
Net Increase (Decrease) in Cash						(20,249	)		48,498
Cash, Beginning of Period						105,997			57,499
Cash, End of Period					$	85,748		$	105,997

(1) The Company believes that reporting EBITDA, net income and dilutive EPS excluding merger, transaction and impairment costs provides useful supplemental information regarding the Company’s on-going economic performance and, therefore, uses these financial measures internally to evaluate and manage the Company’s operations. The Company has chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results and as a means to emphasize the results of on-going operations.

(2) EBITDA means earnings before interest, taxes, depreciation and amortization, and is a non-GAAP measurement. Management reports EBITDA because it believes that it is a widely accepted financial indicator used by investors and analysts to analyze and compare companies on the basis of operating performance and that it may be used by some investors and others to make informed investment decisions.

CONTACT: Varco International, Inc., Houston Clay Williams, (281) 953-2200 ccwilliams@varco.com