================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ to ______.
COMMISSION FILE NUMBER 1-10570
BJ SERVICES COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-0084140
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5500 NORTHWEST CENTRAL DRIVE, HOUSTON, TEXAS 77092
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 462-4239
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
_____ _____
There were 163,929,592 shares of the registrant's common stock, $.10 par value,
outstanding as of August 8, 2001.
================================================================================
BJ SERVICES COMPANY
INDEX
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statement of Operations (Unaudited) - Three
and nine months ended June 30, 2001 and 2000 3
Consolidated Condensed Statement of Financial Position -
June 30, 2001 (Unaudited) and September 30, 2000 4
Consolidated Statement of Stockholders' Equity (Unaudited) -
Nine months ended June 30, 2001 5
Consolidated Condensed Statement of Cash Flows (Unaudited) -
Nine months ended June 30, 2001 and 2000 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION 20
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BJ SERVICES COMPANY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
-------- -------- ---------- ----------
Revenue $579,839 $371,294 $1,619,178 $1,116,869
Operating expenses:
Cost of sales and services 382,226 292,841 1,107,288 877,290
Research and engineering 8,530 6,570 25,300 19,854
Marketing 16,269 13,025 46,038 39,172
General and administrative 15,695 13,867 48,498 41,427
Goodwill amortization 3,376 3,369 10,125 10,106
-------- -------- ---------- ----------
Total operating expenses 426,096 329,672 1,237,249 987,849
-------- -------- ---------- ----------
Operating income 153,743 41,622 381,929 129,020
Interest expense (4,292) (3,845) (12,109) (15,829)
Interest income 739 507 1,612 756
Other income (expense) - net 8,611 (75) 5,876 (1,485)
-------- -------- ---------- ----------
Income before income taxes 158,801 38,209 377,308 112,462
Income tax expense 53,992 12,301 128,284 36,768
-------- -------- ---------- ----------
Net income $104,809 $ 25,908 $ 249,024 $ 75,694
======== ======== ========== ==========
Earnings per share:
Basic $.64 $.16 $1.52 $.49
Diluted $.63 $.15 $1.49 $.45
Weighted average shares outstanding:
Basic 164,544 165,160 164,240 155,968
Diluted 167,585 169,440 167,669 168,176
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
2001 2000
---------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 60,189 $ 6,472
Receivables - net 463,306 348,106
Inventories:
Product 65,967 57,988
Work-in-process 2,773 1,408
Parts 63,454 53,399
---------- ----------
Total inventories 132,194 112,795
Deferred income taxes 14,014 15,632
Other current assets 26,038 23,373
---------- ----------
Total current assets 695,741 506,378
Property - net 642,476 585,394
Deferred income taxes 99,222 199,795
Goodwill - net 479,594 476,237
Other assets 16,274 17,429
---------- ----------
$1,933,307 $1,785,233
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 178,181 $ 147,581
Short-term borrowings and current
portion of long-term debt 6,573 34,100
Accrued employee compensation and benefits 54,846 48,536
Income and other taxes 29,846 22,771
Accrued insurance 12,419 11,557
Other accrued liabilities 76,372 72,546
---------- ----------
Total current liabilities 358,237 337,091
Long-term debt 79,472 141,981
Deferred income taxes 9,460 7,966
Other long-term liabilities 127,143 128,424
Stockholders' equity 1,358,995 1,169,771
---------- ----------
$1,933,307 $1,785,233
========== ==========
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
BJ SERVICES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED
CAPITAL OTHER
COMMON IN EXCESS TREASURY UNEARNED RETAINED COMPREHENSIVE
STOCK OF PAR STOCK COMPENSATION EARNINGS INCOME TOTAL
------- ---------- ---------- ------------- --------- ------------- -----------
(IN THOUSANDS)
Balance, September 30, 2000 $ 8,688 $948,859 $(165,154) $(3,433) $376,270 $4,541 $ 1,169,771
Comprehensive income:
Net income 249,024 249,024
Other comprehensive income, net of
tax:
Cumulative translation adjustments 871 871
-----------
Comprehensive income 249,895
Issuance of stock for:
Stock split 8,688 (8,688)
Reissuance of treasury stock for:
Stock options 35,309 (23,003) 12,306
Stock purchase plan 8,052 (2,727) 5,325
Stock performance awards (1,815) 1,397 418
Acquisition 267 171 438
Treasury stock purchased (82,118) (82,118)
Recognition of unearned compensation 3,378 3,378
Revaluation of stock performance
awards (1,245) 1,245
Stock performance grant 4,141 (4,141)
------- -------- --------- ------------ -------- ------------- -----------
Balance, June 30, 2001 $17,376 $949,940 $(202,247) $ (2,951) $591,465 $ 5,412 $1, 358,995
======= ======== ========= ============ ======== ============= ===========
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 249,024 $ 75,694
Adjustments to reconcile net income to cash
provided by operating activities:
Minority interest 4,587 2,470
Amortization of unearned compensation 3,378 2,640
Depreciation and amortization 77,547 76,376
Deferred income taxes 101,954 22,947
Changes in:
Receivables (111,774) (17,337)
Inventories (18,912) (14,257)
Accounts payable 30,206 7,997
Other current assets and liabilities 14,637 (21,720)
Other - net (3,999) 4,003
--------- ---------
Net cash provided by operating activities 346,648 138,813
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (128,542) (53,295)
Proceeds from disposal of assets 10,339 125,609
Acquisition of business, net of cash acquired (10,996) (3,240)
--------- ---------
Net cash provided by (used for) investing activities (129,199) 69,074
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings - net (99,245) (381,478)
Proceeds from issuance of stock 17,631 179,341
Proceeds from warrant exercise 143,526
Purchase of treasury stock (82,118) (148,969)
--------- ---------
Net cash used for financing activities (163,732) (207,580)
Increase in cash and cash equivalents 53,717 307
Cash and cash equivalents at beginning of period 6,472 3,924
--------- ---------
Cash and cash equivalents at end of period $ 60,189 $ 4,231
========= =========
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6
BJ SERVICES COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 GENERAL
In the opinion of management, the unaudited consolidated condensed financial
statements for BJ Services Company (the "Company") include all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the financial position and statement of stockholders' equity as
of June 30, 2001, and the results of operations for each of the three-month and
nine-month periods ended June 30, 2001 and 2000 and cash flows for each of the
nine-month periods ended June 30, 2001 and 2000. The consolidated condensed
statement of financial position at September 30, 2000 is derived from the
September 30, 2000 audited consolidated financial statements. Although
management believes the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The results of operations and the cash flows for the nine-month
period ended June 30, 2001 are not necessarily indicative of the results to be
expected for the full year.
Certain amounts for fiscal 2000 have been reclassified to conform to the current
year presentation.
NOTE 2 EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS is based on the weighted-average number of common
shares outstanding during each period and the assumed exercise of dilutive stock
options and warrants less the number of treasury shares assumed to be purchased
with the exercise proceeds using the average market price of the Company's
common stock for each of the periods presented.
7
The following table presents information necessary to calculate earnings per
share for the periods presented (in thousands except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net income $104,809 $ 25,908 $249,024 $ 75,694
Weighted-average common shares outstanding 164,544 165,160 164,240 155,968
-------- -------- -------- --------
Basic earnings per share $ .64 $ .16 $ 1.52 $ .49
======== ======== ======== ========
Weighted-average common and dilutive potential
common shares outstanding:
Weighted-average common shares
outstanding 164,544 165,160 164,240 155,968
Assumed exercise of stock options 3,041 4,280 3,429 4,421
Assumed exercise of warrants 7,787
-------- -------- -------- --------
167,585 169,440 167,669 168,176
-------- -------- -------- --------
Diluted earnings per share $ .63 $ .15 $ 1.49 $ .45
======== ======== ======== ========
At a special meeting on May 10, 2001, the Company's stockholders approved an
amendment to the Company's charter increasing the number of authorized shares of
common stock from 160 million to 380 million shares. As a result, a 2 for 1
stock split (to be effected in the form of a stock dividend) approved by the
Board of Directors on March 22, 2001 was distributed on May 31, 2001 to
stockholders of record as of May 17, 2001. Accordingly, all references in the
financial statements to numbers of shares outstanding and earnings per share
amounts have been retroactively restated for all periods presented to reflect
the increased number of common shares outstanding resulting from the stock
split.
NOTE 3 SEGMENT INFORMATION
The Company has three business segments: U.S./Mexico Pressure Pumping,
International Pressure Pumping and Other Oilfield Services. The U.S./Mexico
Pressure Pumping Services segment includes cementing services and stimulation
services (consisting of fracturing, acidizing, sand control, nitrogen, coiled
tubing and downhole tools services) that are provided throughout the United
States and Mexico. The International Pressure Pumping Services segment also
includes cementing and stimulation services provided in over 40 countries in the
major oil and natural gas producing areas of Latin America, Europe, Africa,
Southeast Asia, Canada and the Middle East. The Other Oilfield Services segment
consists of specialty chemicals, tubular services and process and pipeline
services provided in the U.S. and internationally.
8
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Company's annual financial
statement footnotes. The Company evaluates the performance of its operating
segments based on operating income excluding goodwill amortization and unusual
charges. Intersegment sales and transfers are not significant.
Summarized financial information concerning the Company's segments is shown in
the following table. The "Corporate" column includes corporate general and
administrative expenses and goodwill amortization.
BUSINESS SEGMENTS
U.S./MEXICO INTERNATIONAL OTHER
PRESSURE PRESSURE OILFIELD
PUMPING PUMPING SERVICES CORPORATE TOTAL
------------- ------------- ---------- ------------ ------------
(IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2001
Revenues $343,209 $182,752 $ 53,604 $ 274 $ 579,839
Operating income (loss) 134,596 23,739 7,650 (12,242) 153,743
THREE MONTHS ENDED JUNE 30, 2000
Revenues $184,525 $140,363 $ 46,249 $ 157 $ 371,294
Operating income (loss) 35,612 6,281 5,835 (6,106) 41,622
NINE MONTHS ENDED JUNE 30, 2001
Revenues $888,087 $581,925 $148,352 $ 814 $1,619,178
Operating income (loss) 306,157 92,551 19,855 (36,634) 381,929
Identifiable assets 502,918 598,586 125,538 706,265 1,933,307
NINE MONTHS ENDED JUNE 30, 2000
Revenues $525,026 $462,514 $128,842 $ 487 $1,116,869
Operating income (loss) 93,001 51,756 10,157 (25,894) 129,020
Identifiable assets 321,047 575,816 115,219 740,402 1,752,484
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ----------------------------------
2001 2000 2001 2000
----------- ----------- ----------- ----------
Total operating profit for
reportable segments $153,743 $41,622 $381,929 $129,020
Interest income (expense) - net (3,553) (3,338) (10,497) (15,073)
Other income (expense) - net 8,611 (75) 5,876 (1,485)
-------- ------- -------- --------
Income before income taxes $158,801 $38,209 $377,308 $112,462
======== ======= ======== ========
9
NOTE 4 COMPREHENSIVE INCOME
The components of comprehensive net income, net of tax, are as follows in
thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2001 2000 2001 2000
-------- ------- -------- -------
Net income attributable to common
stockholders $104,809 $25,908 $249,024 $75,694
Change in cumulative translation adjustment 1,468 200 871 (427)
-------- ------- -------- -------
Comprehensive net income $106,277 $26,108 $249,895 $75,267
======== ======= ======== =======
NOTE 5 NEW ACCOUNTING STANDARDS
Effective October 1, 2000, the Company adopted Financial Accounting Standards
Board Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended ("SFAS 133"). SFAS 133 established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. This statement
requires recognition of all derivatives as either assets or liabilities in the
statement of financial position and their measurement at fair value. The
Company's adoption of SFAS 133 did not have a material impact on its financial
position or results of operations.
On July 20, 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" ("SFAS 141"), and Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS requires all business combinations
to be accounted for using the purchase method. Use of the pooling-of-interests
method is no longer permitted. SFAS 141 requires the purchase method to be used
for business combinations initiated after June 30, 2001. SFAS 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The amortization of goodwill ceases upon adoption of SFAS 142,
which is effective for fiscal years beginning after December 15, 2001, with
early adoption permitted for companies with fiscal years beginning after March
15, 2001. The Company currently intends to adopt SFAS 142 effective October 1,
2001, the beginning of the Company's next fiscal year. The Company's cessation
of goodwill amortization under the guidelines of SFAS 142 will result in
(assuming no impairment of goodwill) a reduction in operating expenses of $3.4
million per quarter ($13.5 million annually), as compared to fiscal 2001.
10
NOTE 6 BUSINESS ACQUISITION
In February 2001, the Company completed the acquisition of Preeminent Energy
Services ("Preeminent") for a total purchase price of $21.4 million (including
transaction costs) in cash and Company common stock. The transaction may be
summarized as follows:
Cash paid $11,614
Stock issued 438
Debt assumed 9,311
-------
Total purchase price 21,363
Fair value of net assets acquired 7,902
-------
Goodwill $13,461
=======
This acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of Preeminent's operations are included in the
consolidated condensed statement of operations beginning February 1, 2001. The
assets and liabilities of Preeminent have been recorded in the Company's
consolidated condensed statement of financial position at estimated fair market
value as of February 1, 2001 with the remaining purchase price reflected as
goodwill, which is currently being amortized on a straight-line basis over 40
years (See Note 5 New Accounting Standards). Proforma financial information is
not presented as the Company's management does not believe this acquisition is
material to the Company's consolidated financial statements.
NOTE 7 LONG-TERM DEBT
In June 2001, the Company replaced its existing credit facility with a new $400
million committed line of credit ("Committed Credit Facility"). In connection
with the replacement of the existing credit facility, the Company prepaid the
remaining $30.3 million of borrowings which were outstanding under the term loan
portion of the credit facility and accelerated recognition of $1.2 million of
unamortized debt issuance costs. The new Committed Credit Facility consists of
a $200 million, 364-day commitment that renews annually at the option of the
lenders, and a $200 million three-year commitment. The Committed Credit
Facility includes various customary covenants, including the maintenance of
certain financial ratios.
Also in June 2001, the Company repurchased and retired $46 million of its 7%
notes maturing in 2006 and recorded debt extinguishment costs of $1.7 million
(classified as other expense), consisting mainly of a $1.3 million early payment
premium.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's operations are primarily driven by the number of oil and
natural gas wells being drilled, the depth and drilling conditions of such
wells, the number of well completions and the level of workover activity
worldwide. Drilling activity, in turn, is largely dependent on the price of oil
and natural gas. This situation often leads to volatility in the Company's
revenues and profitability, especially in the United States and Canada, where
the Company historically has generated in excess of 50% of its revenues.
Due to "aging" oilfields and lower-cost sources of oil internationally,
drilling activity in the United States has declined significantly from its peak
in 1981. Record low drilling activity levels were experienced in 1986, 1992 and
again in early 1999. Despite a recovery in the latter half of fiscal 1999, the
U.S. average fiscal 1999 active rig count represented the lowest in history. The
recovery in U.S. drilling continued throughout fiscal 2000 and into fiscal 2001
due to exceptionally strong oil and natural gas prices. For the nine-month
period ended June 30, 2001, the active U.S. rig count averaged 1,150 rigs, a 45%
increase over the same period in fiscal 2000. For the three-month period ended
June 30, 2001, the active U.S. rig count averaged 1,237 rigs, which is the
highest average quarterly U.S. rig count since 1986. Natural gas prices have
lowered over the past few months, however, and Company management believes that
U.S. drilling activity may moderate during the next several quarters as a
result.
Drilling activity outside North America has historically been less volatile
than domestic drilling activity and the downturn and recovery cycles tend to lag
those of North America. While Canadian drilling activity began to recover
during the latter part of fiscal 1999, activity in most of the other
international regions has only recently begun to recover from the 1999 record
lows. The recovery in Canadian drilling activity continued into fiscal 2001 with
active rigs averaging 381 rigs during the nine-month period ending June 30,
2001, an 11% increase over the same period of the previous fiscal year. For the
quarter ended June 30, 2001, Canadian drilling activity averaged 252 rigs, 21%
higher than the same period of the prior year. Active international drilling
rigs (excluding Canada) averaged 729 rigs during the nine-month period ended
June 30, 2001, a 23% increase over the comparable period of fiscal 2000. For
the three-month period ended June 30, 2001, international drilling rigs
(excluding Canada) averaged 751 rigs, a 20% increase over the same period of
fiscal 2000.
12
RESULTS OF OPERATIONS
The following table sets forth selected key operating statistics reflecting
industry rig counts and the Company's financial results:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2001 2000 2001 2000
---------- ----------- ----------- -----------
Rig Count: (1)
U.S. 1,237 842 1,150 795
International 1,004 837 1,109 934
Revenue per rig (in thousands) $258.8 $221.1 $716.8 $645.9
Revenue per employee (in thousands) $ 54.9 $ 43.1 $163.2 $134.3
Percentage of gross profit to revenue (2) 34.1% 21.1% 31.6% 21.5%
Percentage of research and engineering
expense to revenue 1.5% 1.8% 1.6% 1.8%
Percentage of marketing expense to revenue 2.8% 3.5% 2.8% 3.5%
Percentage of general and administrative
expense to revenue 2.7% 3.7% 3.0% 3.7%
(1) Industry estimate of drilling activity as measured by average active rigs.
(2) Gross profit represents revenue less cost of sales and services.
Revenue: The Company's revenue for the quarter ended June 30, 2001 was
$579.8 million, an increase of 56% from the previous year's third fiscal quarter
and the highest quarterly revenue in the Company's history. For the nine-month
period ended June 30, 2001, the Company's revenue was $1.6 billion, an increase
of 45% from the same period of fiscal 2000. These record results were
attributable to continued improvements in U.S. drilling activity and pricing,
and gradually increasing international drilling activity. Although revenue in
the U.S. is expected to decrease slightly during the next several quarters,
management believes that this should be mostly offset by the continuing recovery
occurring in the international market.
Operating Income: For the quarter ended June 30, 2001, the Company's
operating income was $153.7 million, compared to operating income of $41.6
million in the third quarter of fiscal 2000. The Company's gross profit margins
for the quarter increased to 34.1% from 21.1% in the prior year's third fiscal
quarter. For the nine months ended June 30, 2001, the Company recorded
operating income of $381.9 million compared to $129.0 million in the same period
of fiscal 2000. For the nine months ended June 30, 2001, the Company's gross
profit margins increased to 31.6% from 21.5% for the same period of fiscal 2000.
The margin improvements were primarily a result of improved U.S. pricing, better
equipment utilization, and labor efficiencies. These efficiencies are reflected
in the increases in both revenue per rig and revenue per employee during the
first nine months of fiscal 2001 compared to the same period of fiscal 2000.
Partially offsetting the improved margins were increases in research and
engineering, marketing and general and administrative
13
expenses, which increased $7.0 million and $19.4 million compared with the prior
year's third quarter and nine-month period, respectively, due primarily to
higher accruals for employee incentive compensations plans that are based upon
the Company's earnings and stock price. Each of these operating expenses,
however, declined as a percentage of revenue for both the three and nine-month
periods.
Other: Interest expense for the quarter ended June 30, 2001 increased by
$.4 million compared with the same three-month period of the previous year due
to the accelerated recognition of $1.2 million of unamortized debt issuance
costs related to the replacement of the Company's existing credit facility with
a new $400.0 million committed line of credit. Recurring interest charges
decreased by $.7 million and $4.9 million compared with the same quarter and
nine-month periods of the previous year, respectively. This was a result of the
application of improved cash flow from operations to reduce outstanding debt.
The proceeds of the exercise of warrants reduced outstanding debt in the
previous fiscal year. Borrowings and interest expense are expected to continue
to decrease throughout calendar 2001 because of expected continued strong cash
flow from operations.
Income Taxes: The Company's effective tax rate for the nine-month period
ended June 30, 2001 increased to 34% from 33% in the same period of last year,
primarily as a result of increased profitability in the higher tax jurisdictions
of North America.
U.S./Mexico Pressure Pumping Segment
The Company's U.S./Mexico pressure pumping revenues for the three and nine-
month periods ended June 30, 2001 increased by 86% and 69%, respectively, from
the same prior year periods. Each of the Company's major U.S. service lines,
including cementing, stimulation, coiled tubing and downhole tools, showed
revenue increases, and all U.S. operating regions realized revenue increases in
excess of 50% compared with the prior year's third quarter. These increases are
primarily due to increased drilling activity and improved pricing. U.S.
drilling activity for the quarter ended June 30, 2001 increased by 47% over the
same quarter of fiscal 2000, to an average of 1,237 active rigs (81% of which
were drilling for natural gas) during the quarter. This represents the highest
average quarterly rig count since 1986. For the nine months ended June 30,
2001, the U.S. active rig count averaged 1,150, a 45% increase over the same
period of the previous fiscal year. U.S. workover activity levels also
increased, up 16% during the first nine months of fiscal 2001 compared to the
same period of fiscal 2000. The stronger activity levels also allowed the
Company to capture most of its September 2000 and March 2001 price book
increases. The Company's management believes that U.S. drilling activity may
moderate somewhat during the next several quarters because of lower natural gas
prices. As a result, management expects U.S. revenues during the remainder of
calendar 2001 to decline slightly from the levels experienced during the first
three quarters of this fiscal year.
Operating income for the Company's U.S./Mexico pressure pumping operations
was $134.6 million in the third quarter of fiscal 2001 compared to $35.6 million
in the same period of fiscal 2000. For the nine-month period ended June 30,
2001, U.S./Mexico pressure pumping
14
operating income was $306.2 million, compared to $93.0 million during the same
year earlier period. The improvements were due primarily to improved pricing,
better equipment utilization, and labor efficiencies. On a year-over-year basis,
pricing improved approximately 31% as a result of price book increases
implemented during September 2000 and March 2001. On a sequential basis, pricing
improved approximately 8% from the previous quarter.
International Pressure Pumping Segment
Revenue for the Company's international pressure pumping operations for the
quarter and nine-month periods ended June 30, 2001 increased 30% and 26%,
respectively, compared with the same periods of the previous fiscal year. These
were the result of an increase in Canadian gas drilling, increased stimulation
activity in several international regions and contributions from geographic
expansions. For the quarter ended June 30, 2001, each of the Company's
international regions showed year-over-year revenue increases, with its
Russia/China region up 69%, Middle East region up 57%, Canada region up 36%,
Asia Pacific region up 34%, Europe/Africa region up 22%, and Latin America
region up 17%. For the nine-month period ended June 30, 2001, all of the
Company's international regions showed year-over-year revenue increases. As a
result of new contracts and improving activity in selected locations, management
expects revenue to increase for each of its international regions in the fourth
quarter of fiscal 2001 when compared to the same quarter of fiscal 2000.
As a result of the improved activity, operating income for the Company's
international pressure pumping operations was $23.7 million in the third quarter
of fiscal 2001 compared to $6.3 million in the same quarter of fiscal 2000. For
the nine months ended June 30, 2001, operating income was $92.6 million, an
increase of $40.8 million over the same period of fiscal 2000. In addition to
the increased activity, operating margins improved due to startup costs in
selected international locations that negatively impacted operating margins in
the first nine months of the previous year.
Other Services Segment
Revenue for the Company's other service lines, which consist of specialty
chemicals, tubular services and process and pipeline services, increased 16% in
the third quarter of fiscal 2001 compared to the same period of the prior year
with each line having increases of 12% or more. The process and pipeline
inspection service line grew by 12% on increased projects in several regions,
while tubular services revenues increased 39% through activity improvements and
expansions in the Far East and West Africa. For the nine months ended June 30,
2001, revenue for these combined service lines increased 15% over the same
period of fiscal 2000, due primarily to geographic expansions.
Operating income for these service lines was $7.7 million (14.3% of
revenue) in the three-month period ended June 30, 2001 compared to $5.8 million
(12.6% of revenue) in the same period of fiscal 2000. For the nine-month period
ended June 30, 2001, operating income for the Company's other service lines was
$19.9 million, an increase of $9.7 million over the same period of fiscal
15
2000. Operating income margins in the Company's tubular service and process and
pipeline service lines benefited most from the increased revenue as they were
better able to cover their relatively high fixed cost base. Also contributing to
the percentage increase in margins for the nine-month period was the impact of
startup costs incurred during the first half of fiscal 2000 for new projects in
the process and pipeline services group that were delayed until the prior year's
third fiscal quarter.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided from operating activities for the first nine months of
fiscal 2001 was $346.6 million, an increase of $207.8 million from the
comparable period of the prior year, due primarily to higher profitability and
non-cash U.S. tax expense due to loss carryforwards. This was partially offset
by increases in working capital, particularly accounts receivable, caused by the
rapid revenue growth in North America.
Net cash used for investing activities in the first nine months of fiscal
2001 was $129.2 million, compared to net cash of $69.1 million provided by
investing activities in the comparable period of 2000. The prior year's net cash
provided by investing activities was due primarily to proceeds received from a
transaction involving the transfer of certain pumping service equipment assets
in the first quarter of fiscal 2000. Subsequent to the transfer of equipment,
the Company received $120.0 million that was used to repay outstanding bank
debt. Excluding this prior year transaction, net cash used for 2001 investing
activities increased by $78.3 million due mostly to increased capital spending
and the acquisition of Preeminent Energy Services in February 2001 for net cash
of $11.0 million. Capital expenditures for fiscal 2001 have increased
significantly from 2000 and are currently planned to be $160 - 180 million. The
2001 capital program has primarily been spent on replacing and enhancing the
U.S. fracturing equipment and expanding stimulation resources internationally.
Management believes cash flows from operating activities and available lines of
credit, if necessary, will be sufficient to fund projected capital expenditures.
Cash flows used for financing activities for the nine months ended June 30,
2001, were $163.7 million compared to $207.6 million in the comparable period of
fiscal 2000. In connection with the replacement of its existing credit facility
in June 2001, the Company prepaid the remaining $30.3 million of borrowings that
were outstanding under the term loan portion of the credit facility. Also in
June 2001, the Company repurchased and retired $46 million of its 7% notes
maturing in 2006 and recorded debt extinguishment costs of $1.7 million
(classified as other expense), consisting mainly of a $1.3 million early payment
premium. In addition to the repayment of debt, the Company purchased 1.4
million shares of its common stock at a cost of $82.1 million during the first
nine months of fiscal 2001. Financing activities in the first nine months of
fiscal 2000 included a private placement of 4.0 million shares of common stock
in October 1999 and the exercise of stock options, which together generated
proceeds of $179.3 million. In connection with the private placement, the
Company also entered into privately negotiated option agreements pursuant to
which it repurchased an equivalent number of shares in April 2000 for a total of
$149.0 million. In April 2000, the Company utilized proceeds of $143.5 million
from the exercise of outstanding warrants, combined with borrowings under
existing credit facilities, to fund the repurchase.
16
Management strives to maintain low cash balances while utilizing available
credit facilities to meet the Company's capital needs. Any excess cash
generated has historically been used to pay down outstanding borrowings or fund
the Company's stock repurchase program. In June 2001, the Company replaced its
existing credit facility with a new $400 million committed line of credit
("Committed Credit Facility"). The new Committed Credit Facility consists of a
$200 million, 364-day commitment that renews annually at the option of the
lenders and a $200 million three-year commitment. At June 30, 2001, there were
no borrowings outstanding under the Committed Credit Facility.
The Committed Credit Facility includes various customary covenants and other
provisions including the maintenance of certain profitability and solvency
ratios.
In addition to the committed facility, the Company had approximately $150
million in various unsecured, discretionary lines of credit at June 30, 2001,
which expire at various dates in 2001. There are no requirements for commitment
fees or compensating balances in connection with these lines of credit.
Interest on borrowings is based on prevailing market rates. At June 30, 2001,
there was $7.3 million in outstanding borrowings under these lines of credit.
Because of improved free cash flows from operations and despite the early
repayment of long-term debt and the repurchase of the Company's common stock
during the first three quarters of fiscal 2001, the Company's total interest-
bearing debt decreased to 6.0% of its total capitalization at June 30, 2001,
compared to 13.1% at September 30, 2000. Management believes that the Committed
Credit Facility, combined with other discretionary credit facilities and cash
flows from operations, provides the Company with sufficient capital resources
and liquidity to manage its routine operations, meet debt service obligations
and fund projected capital expenditures. If the discretionary lines of credit
are not renewed, or if borrowings under these lines of credit otherwise become
unavailable, the Company expects to refinance this debt by arranging additional
committed bank facilities or through other long-term borrowing alternatives.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. This statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The Company's adoption of SFAS 133 at the beginning of fiscal year 2001 did not
have a material impact on its financial position or results of operations.
On July 20, 2001, the Financial Accounting Standards Board issued Statement
No. 141, "Business Combinations" ("SFAS 141"), and Statement No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142"). SFAS 141 requires all business
combinations to be accounted for using the purchase method. Use of the pooling-
of-interests method is no longer permitted. SFAS 141 requires
17
the purchase method to be used for business combinations initiated after
June 30, 2001. SFAS 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The amortization of goodwill
ceases upon adoption of SFAS 142, which is effective for fiscal years beginning
after December 15, 2001 with early adoption permitted for companies with fiscal
years beginning after March 15, 2001. The Company currently intends to adopt
SFAS 142 effective October 1, 2001, the beginning of the Company's next fiscal
year. The cessation of goodwill amortization under the guidelines of SFAS 142
will result in a reduction in operating expenses of $3.4 million per quarter
($13.5 million annually), as compared to fiscal 2001.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934 concerning, among other things, the Company's
prospects, expected revenues, expenses and profits, developments and business
strategies for its operations, all of which are subject to certain risks,
uncertainties and assumptions. These forward-looking statements are identified
by their use of terms and phrases such as "expect," "estimate," "project,"
"believe," "achievable" and similar terms and phrases. These statements are
based on certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes are appropriate under the
circumstances. Such statements are subject to general economic and business
conditions, conditions in the oil and natural gas industry, weather conditions
that affect conditions in the oil and natural gas industry, the business
opportunities that may be presented to and pursued by the Company, changes in
law or regulations and other factors, many of which are beyond the control of
the Company. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those expected, estimated or projected.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The
Company's major market risk exposure is changing interest rates, primarily in
the United States and Canada. The Company's policy is to manage interest rates
through use of a combination of fixed and floating rate debt. A portion of the
Company's borrowings is denominated in foreign currencies, which exposes the
Company to market risk associated with exchange rate movements. When necessary,
the Company enters into forward foreign exchange contracts to hedge the impact
of foreign currency fluctuations. There was one such foreign exchange contract
outstanding at June 30, 2001 in the amount of $23.0 million. This contract was
settled on July 3, 2001 with no gain or loss. On June 26, 2001, the Company
entered into a forward contract to purchase $7.6 million of fixed rate foreign
currency with a settlement date of July 31, 2001. This contract was designated
as a cash flow hedge of a specific transaction expected to be completed during
the fourth fiscal quarter. All items described are non-trading and are stated
in U.S. dollars.
EXPECTED MATURITY DATES FAIR VALUE
2001 2002 2003 2004 THEREAFTER TOTAL JUNE 30, 2001
---------- ---------- ------- ------- ---------- ----------- --------------
(in thousands)
SHORT TERM BORROWINGS
Bank borrowings; US$ $3,006 $ 3,006 $ 3,006
denominated
Average variable interest
rate - 7.75% at
June 30, 2001
Bank borrowings: Italian $ 612 $ 612 $ 612
lira denominated
Average variable interest
rate - 6.638% at June 30,
2001
Bank borrowings; Deutsche $2,637 $ 2,637 $ 2,637
mark denominated
Average variable interest
rate - 6.638% at June 30,
2001
LONG TERM BORROWINGS
Current Leases: US $ $ 318 $ 318 $ 318
denominated
Variable interest rate -
6.18% at
June 30, 2001
Non-current leases; US $ $ 343 350 $ 693 $ 693
denominated
Variable interest rate -
6.18% at
June 30, 2001
7% Series B Notes - US$ $78,779 $78,779 $80,525
denominated
Fixed interest rate - 7%
19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 10, 2001, the Company held a special meeting of the
stockholders to vote on an amendment to its certificate of
incorporation to increase the total number of shares of common stock
that the Company is authorized to issue from 160,000,000 shares to
380,000,000 shares and amendments to the director stock option
provisions of the BJ Services Company 1995, 1997 and 2000 Incentive
Plans. All of the proposed amendments were approved.
VOTES IN VOTES
FAVOR WITHHELD
----------- ----------
(i) Amendment to the Company's
Certificate of incorporation 69,068,031 7,731,608
(ii) Amendment to the BJ Services
Company 1995 Incentive Plan 61,732,855 15,066,784
(iii) Amendment to the BJ Services
Company 1997 Incentive Plan 63,385,454 13,414,185
(iv) Amendment to the BJ Services
Company 2000 Incentive Plan 63,327,994 13,471,645
ITEM 5. OTHER INFORMATION
None
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BJ Services Company
(Registrant)
Date: August 10, 2001 By /s/ Michael McShane
----------------------------------------
Michael McShane
Senior Vice President, Finance, Chief
Financial Officer and Director
(Principal Financial Officer)
Date: August 10, 2001 By /s/ James Horsch
----------------------------------------
James Horsch
Controller
(Principal Accounting Officer)
22