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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 March 31, 2002
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 156,642,483 shares of the registrant's common stock, $.10 par value,
outstanding as of May 10, 2002.
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BJ SERVICES COMPANY
INDEX
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statement of Operations (Unaudited) - Three
and six months ended March 31, 2002 and 2001 3
Consolidated Condensed Statement of Financial Position -
March 31, 2002 (Unaudited) and September 30, 2001 4
Consolidated Statement of Stockholders' Equity (Unaudited) -
Six months ended March 31, 2002 5
Consolidated Condensed Statement of Cash Flows (Unaudited) -
Six months ended March 31, 2002 and 2001 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION 22
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
-------- -------- -------- ----------
Revenue $442,388 $549,661 $952,449 $1,039,339
Operating expenses:
Cost of sales and services 342,232 377,743 706,595 725,062
Research and engineering 8,784 8,877 17,598 16,770
Marketing 14,884 15,638 30,668 29,769
General and administrative 15,940 16,903 31,956 32,803
Goodwill amortization 3,375 6,749
-------- -------- -------- ----------
Total operating expenses 381,840 422,536 786,817 811,153
-------- -------- -------- ----------
Operating income 60,548 127,125 165,632 228,186
Interest expense (414) (3,773) (2,310) (7,817)
Interest income 303 470 677 873
Other income (expense) - net (508) (1,471) (1,084) (2,735)
-------- -------- -------- ----------
Income before income taxes 59,929 122,351 162,915 218,507
Income tax expense 20,975 41,599 57,020 74,292
-------- -------- -------- ----------
Net income $ 38,954 $ 80,752 $105,895 $ 144,215
======== ======== ======== ==========
Earnings per share:
Basic $ .25 $ .49 $ .67 $ .88
Diluted $ .24 $ .48 $ .66 $ .86
Weighted average shares outstanding:
Basic 156,491 164,078 157,249 164,088
Diluted 160,125 167,638 160,476 167,742
See Notes to Unaudited Consolidated Condensed Financial Statements
3
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(In thousands)
March 31, September 30,
2002 2001
----------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 68,560 $ 84,103
Receivables - net 358,396 475,715
Inventories:
Products 69,956 67,744
Work in process 1,901 2,850
Parts 65,695 64,544
---------- ----------
Total inventories 137,552 135,138
Deferred income taxes 9,388 15,139
Other current assets 43,066 22,538
---------- ----------
Total current assets 616,962 732,633
Property - net 721,601 676,445
Deferred income taxes 58,046 79,526
Goodwill - net 476,771 476,795
Other assets 24,349 19,968
---------- ----------
$1,897,729 $1,985,367
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 141,867 $ 190,803
Short-term borrowings and current
portion of long-term debt 4,012 13,976
Accrued employee compensation and benefits 49,153 67,079
Income and other taxes 29,621 31,738
Accrued insurance 10,265 10,593
Other accrued liabilities 65,470 75,409
---------- ----------
Total current liabilities 300,388 389,598
Long-term debt 79,234 79,393
Deferred income taxes 6,308 10,172
Other long-term liabilities 136,760 136,123
Stockholders' equity 1,375,039 1,370,081
---------- ----------
$1,897,729 $1,985,367
========== ==========
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) (in thousands)
Balance, September 30, 2001 $17,376 $966,550 $(295,449) $(4,891) $690,128 $(3,633) $1,370,081
Comprehensive income:
Net income 105,895
Other comprehensive income, net of tax:
Cumulative translation adjustments (5,659)
Comprehensive income 100,236
Reissuance of treasury stock for:
Stock options 4,702 (2,939) 1,763
Stock purchase plan 5,330 (1,660) 3,670
Stock performance plan 114 (114)
Cancellation of stock issued for
acquisition (25) (15) (40)
Treasury stock purchased (102,125) (102,125)
Recognition of unearned compensation 1,454 1,454
------- -------- --------- ------- -------- ------- ----------
Balance, March 31, 2002 $17,376 $966,550 $(387,453) $(3,437) $791,295 $(9,292) $1,375,039
======= ======== ========= ======= ======== ======= ==========
See Notes to Unaudited Consolidated Condensed Financial Statements
5
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
March 31,
2002 2001
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 105,895 $144,215
Adjustments to reconcile net income to cash
provided by operating activities:
Minority interest 2,234 3,055
Amortization of unearned compensation 1,454 2,744
Depreciation and amortization 49,612 51,493
Deferred income taxes 36,793 59,299
Changes in:
Receivables 117,319 (94,379)
Inventories (2,414) (15,510)
Accounts payable (48,936) 19,966
Other current assets and liabilities (64,264) (6,131)
Other - net (11,198) 2,974
--------- --------
Net cash provided by operating activities 186,495 167,726
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (96,063) (74,809)
Proceeds from disposal of assets 880 7,718
Acquisition of business, net of cash acquired (10,996)
--------- --------
Net cash used for investing activities (95,183) (78,087)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) borrowings - net (10,123) (23,830)
Proceeds from issuance of stock 5,393 17,114
Purchase of treasury stock (102,125) (81,019)
--------- --------
Net cash used for financing activities (106,855) (87,735)
Increase (decrease) in cash and cash equivalents (15,543) 1,904
Cash and cash equivalents at beginning of period 84,103 6,472
--------- --------
Cash and cash equivalents at end of period $ 68,560 $ 8,376
========= ========
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 of BJ Services Company (the "Company") include all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of its financial position and statement of stockholders' equity as
of March 31, 2002, its results of operations for each of the three-month and
six-month periods ended March 31, 2002 and 2001 and its cash flows for each of
the six-month periods ended March 31, 2002 and 2001. The consolidated condensed
statement of financial position at September 30, 2001 is derived from the
September 30, 2001 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 cash flows for the six-month period
ended March 31, 2002 are not necessarily indicative of the results to be
expected for the full year.
Note 2 Earnings Per Share ("EPS")
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 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.
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 shares to 380 million shares. As a result, a 2 for
1 stock split (effected in the form of a stock dividend) 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.
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 Six Months Ended
March 31, March 31,
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 38,954 $ 80,752 $105,895 $144,215
Weighted-average common shares outstanding 156,491 164,078 157,249 164,088
-------- -------- -------- --------
Basic earnings per share $ .25 $ .49 $ .67 $ .88
======== ======== ======== ========
Weighted-average common and dilutive potential
common shares outstanding:
Weighted-average common shares
outstanding 156,491 164,078 157,249 164,088
Assumed exercise of stock options 3,634 3,560 3,227 3,654
-------- -------- -------- --------
160,125 167,638 160,476 167,742
-------- -------- -------- --------
Diluted earnings per share $ .24 $ .48 $ .66 $ .86
======== ======== ======== ========
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 segment includes cementing services and stimulation services
(consisting of fracturing, acidizing, sand control, nitrogen, coiled tubing and
downhole tools services) provided throughout the United States and Mexico. The
International Pressure Pumping segment also includes cementing and stimulation
services provided to customers in over 40 countries in the major international
oil and natural gas producing areas of Latin America, Europe, Russia, 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.
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. Operating segment performance is evaluated 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 expenses not
allocated to the operating segments.
8
Business Segments
U.S./Mexico International Other
Pressure Pressure Oilfield
Pumping Pumping Services Corporate Total
----------- ------------- -------- --------- ----------
(in thousands)
Three Months Ended March 31, 2002
Revenues $207,300 $186,493 $ 47,347 $ 1,248 $ 442,388
Operating income (loss) 40,145 21,382 4,568 (5,547) 60,548
Three Months Ended March 31, 2001
Revenues $290,964 $211,410 $ 46,839 $ 448 $ 549,661
Operating income (loss) 95,649 40,179 6,001 (11,329) 130,500
Six Months Ended March 31, 2002
Revenues $480,426 $373,421 $ 97,065 $ 1,537 $ 952,449
Operating income (loss) 122,319 46,113 10,147 (12,947) 165,632
Identifiable assets 468,271 624,823 129,154 675,481 1,897,729
Six Months Ended March 31, 2001
Revenues $544,878 $399,173 $ 94,748 $ 540 $1,039,339
Operating income (loss) 171,561 68,864 12,205 (17,695) 234,935
Identifiable assets 432,955 623,972 119,872 696,835 1,873,634
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2002 2001 2002 2001
------- -------- -------- --------
Total operating profit for
reportable segments $60,548 $130,500 $165,632 $234,935
Goodwill amortization (3,375) (6,749)
Interest income (expense) - net (111) (3,303) (1,633) (6,944)
Other income (expense) - net (508) (1,471) (1,084) (2,735)
------- -------- -------- --------
Income before income taxes $59,929 $122,351 $162,915 $218,507
======= ======== ======== ========
9
Note 4 Comprehensive Income
The components of comprehensive net income, net of tax, are as follows (in
thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
------- -------- -------- --------
Net income attributable to common
stockholders $38,954 $80,752 $105,895 $144,215
Change in cumulative translation adjustment (5,138) (699) (5,659) (597)
------- ------- -------- --------
Comprehensive net income $33,816 $80,053 $100,236 $143,618
======= ======= ======== ========
Note 5 Acquisition
On February 20, 2002, the Company announced that it had entered into a
definitive merger agreement to acquire OSCA, Inc. ("OSCA") for approximately
$450 million (including debt to be assumed). OSCA, based in Lafayette,
Louisiana, is a major provider of oil and gas well completion fluids, completion
services and downhole completion tools in the United States and select
international markets.
Under the terms of the agreement, OSCA shareholders will receive $28.00 in cash
per share in a merger with a subsidiary of the Company. Great Lakes Chemical
Corporation, which owns approximately 53% of OSCA's common stock, has delivered
its written stockholder consent approving the transaction. The Great Lakes
consent constitutes sufficient action by OSCA stockholders to approve the
transaction. The transaction received early termination of the Hart-Scott-Rodino
antitrust waiting period on March 8, 2002, and is currently expected to close on
May 31, 2002. The Company will fund the cash purchase price of the transaction
substantially with the net proceeds received from the sale of senior convertible
notes that occurred on April 24, 2002.
Note 6 Commitments and Contingencies
The Company recently entered into two long-term vessel charter operating lease
agreements. Annual commitments under these agreements for the years ending
September 30, 2002, 2003, 2004, 2005 and 2006 are $20.8 million, $6.0 million,
$6.1 million, $6.3 million and $6.0 million, respectively, and $30.2 million in
the aggregate thereafter.
Note 7 New Accounting Standards
Effective October 1, 2001, the Company adopted Financial Accounting Standards
Board Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 142 requires that goodwill no longer be amortized to earnings, but instead
must be reviewed for possible impairment annually, or more frequently if certain
indicators arise. The Company ceased amortizing goodwill on October 1, 2001. The
Company is required to complete the initial step of a transitional impairment
test within six months of adopting of SFAS 142 and to complete the final step of
the transitional
10
impairment test by the end of the fiscal year. The Company has performed a
transitional fair value based impairment test on its goodwill and determined
that the fair value exceeded the recorded value at October 1, 2001. Therefore,
no impairment loss has been recorded.
Had the Company been accounting for its goodwill under SFAS 142 for all periods
presented, the Company's net income (in thousands) and earnings per share would
have been as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
------- -------- -------- --------
Reported net income $38,954 $80,752 $105,895 $144,215
Goodwill amortization 3,375 6,749
------- ------- -------- --------
Adjusted net income $38,954 $84,127 $105,895 $150,964
======= ======= ======== ========
Basic earnings per share:
Reported net income $ .25 $ .49 $ .67 $ .88
Goodwill amortization .02 .04
------- ------- -------- --------
Adjusted net income $ .25 $ .51 $ .67 $ .92
======= ======= ======== ========
Diluted earnings per share:
Reported net income $ .24 $ .48 $ .66 $ .86
Goodwill amortization .02 .04
------- ------- -------- --------
Adjusted net income $ .24 $ .50 $ .66 $ .90
======= ======= ======== ========
Note 8 Subsequent Event
On April 24, 2002 the Company sold convertible senior notes with a face value at
maturity of $449.0 million (gross proceeds of $355.1 million). The Company also
granted an over-allotment option of 15%, which was exercised in full for an
additional face value at maturity of $67.4 million (gross proceeds of $53.3
million). The notes are unsecured senior obligations that rank equally in right
of payment with all of the Company's existing and future senior unsecured
indebtedness. The Company intends to use the aggregate net proceeds of $400.1
million to fund a substantial portion of its proposed acquisition of OSCA, Inc.
(expected to close on May 31, 2002) and for general corporate purposes.
The notes will mature in 20 years and cannot be called by the Company for three
years after issuance. The redemption price must be paid in cash if the notes are
called. Holders of the notes can require the Company to repurchase the notes on
the third, fifth, tenth and fifteenth anniversaries of the issuance. The Company
has the option to pay the repurchase price in cash or stock. The issue price of
the notes was $790.76 for each $1,000 in face value, which represents a yield to
maturity of 1.625%. Of this 1.625% yield to maturity, 50 basis points of the
issue price will be paid in cash interest for the life of the security.
11
The notes are convertible into BJ Services common stock at an initial rate
of 14.9616 shares for each $1,000 note. This rate results in an initial
conversion price of $52.85 per share and represents a premium of 45% over the
closing sale price of the Company's common stock on the New York Stock Exchange
of $36.45 per share on April 18, 2002. The Company has the option to settle
notes that are surrendered for conversion using cash. Generally, except upon the
occurrence of specified events, holders of the notes are not entitled to
exercise their conversion rights until the Company's stock price is greater than
a specified percentage (beginning at 120% and declining to 110% at the maturity
of the notes) of the accreted conversion price per share.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company's worldwide 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.
Drilling activity, in turn, is largely dependent on the price of crude 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 more than 75% from its peak
in 1981. Record low drilling activity levels were experienced in 1986, 1992 and
again in early 1999. Despite a recovery that began in the latter half of fiscal
1999, the U.S. average fiscal 1999 count of 601 active rigs represented the
lowest in history. The recovery in U.S. drilling that began in 1999 continued
throughout fiscal 2000 and into fiscal 2001 due to exceptionally strong oil and
natural gas prices. Crude oil and natural gas prices began dropping early in
fiscal 2002. Rig counts began falling in the summer of 2001 and continued to
fall through March 31, 2002. For the three-month period ended March 31, 2002,
the active U.S. rig count averaged 818, a 28% decrease in activity compared to
the same period in fiscal 2001. For the six-month period ended March 31, 2002,
the active U.S. rig count averaged 911 , an 18% decrease from the same period in
fiscal 2001. The Company's management expects such activity levels to stabilize
or decline slightly over the remainder of this fiscal year.
Drilling activity outside North America has historically been less volatile
than domestic drilling activity. International drilling activity also reached
record low levels during 1999 due to low oil prices. While Canadian drilling
activity began to recover during the latter part of fiscal 1999, activity in
most of other international regions did not begin to significantly recover until
the latter half of fiscal 2001. Active international drilling rigs (excluding
Canada) averaged 736 during fiscal 2001, an increase of 19% over fiscal 2000.
Oil and natural gas prices remained strong throughout most of fiscal 2001 and
Canadian drilling activity continued the recovery begun in late 1999, averaging
365 active drilling rigs during fiscal 2001, up 9% from the previous fiscal
year. For the three-month period ended March 31, 2002, international drilling
rigs (excluding Canada) averaged 731, relatively unchanged from the same period
of the prior year and Canadian drilling activity averaged 383 rigs, 26% lower
than the same period of the prior year. During the six-month period ended March
31, 2002, active international drilling rigs averaged 1,070, a decline of 8%
from the same period of fiscal 2001. Such decrease was due primarily to a 26%
decrease in activity in Canada, which averaged 331 active rigs during the first
six-months of fiscal 2002 compared to 445 during the comparable year earlier
period. The sharp decline in Canadian drilling activity was caused by decreased
natural gas prices. The Company expects Canadian drilling activity in fiscal
2002 to remain below comparative periods of fiscal 2001 and for drilling
activity outside North America to be relatively unchanged year-over-year.
13
Acquisition
On February 20, 2002, the Company announced that it had entered into a
definitive merger agreement to acquire OSCA, Inc. ("OSCA") for approximately
$450 million including the assumption of approximately $27 million in debt.
OSCA, based in Lafayette, Louisiana, is a major provider of oil and gas well
completion fluids, completion services and downhole completion tools in the
United States and select international markets.
Under the terms of the agreement, OSCA shareholders will receive $28.00 in
cash per share in a merger with a subsidiary of the Company. Great Lakes
Chemical Corporation, which owns approximately 53% of OSCA's common stock, has
delivered its written stockholder consent approving the transaction. The Great
Lakes consent constitutes sufficient action by OSCA stockholders to approve the
transaction. The transaction received early termination of the Hart-Scott-Rodino
antitrust waiting period on March 8, 2002, and is currently expected to close on
May 31, 2002. The Company will fund the cash purchase price of the transaction
substantially with the net proceeds received from the sale of senior convertible
notes that occurred on April 24, 2002. Based on the information currently
available, the Company believes it can achieve $15 to $20 million in operating
cost synergies in the combination and it is expected to be earnings accretive in
fiscal 2003.
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 Six Months Ended
March 31, March 31,
------------------ ----------------
2002 2001 2002 2001
------ ------ ------ ------
Rig Count: /(1)/
U.S. 818 1,139 911 1,106
International 1,114 1,239 1,070 1,162
Revenue per rig (in thousands) $228.9 $231.1 $480.8 $458.2
Revenue per employee (in thousands) $ 41.7 $ 55.7 $ 88.4 $111.9
Percentage of gross profit to revenue /(2)/ 22.6% 31.3% 25.8% 30.2%
Percentage of research and engineering
expense to revenue 2.0% 1.6% 1.8% 1.6%
Percentage of marketing expense to revenue 3.4% 2.8% 3.2% 2.9%
Percentage of general and administrative
expense to revenue 3.6% 3.1% 3.4% 3.2%
/(1)/ Industry estimate of drilling activity as measured by average active rigs.
/(2)/ Gross profit represents revenue less cost of sales and services.
14
Revenue: The Company's revenue for the quarter ended March 31, 2002 was
$442.4 million, a decrease of 19.5% from the previous year's second fiscal
quarter. For the six-month period ended March 31, 2002, revenue was $952.4
million, an 8.4% decrease from the same period of fiscal 2001. The
year-over-year revenue decrease is attributable to reductions in North American
drilling activity resulting from declines in natural gas and crude oil prices
compared to prior year prices. Management expects the Company's revenues in
fiscal 2002 to decrease approximately 15% from the record levels of 2001.
Operating Income: For the quarter ended March 31, 2002, the Company's
operating income was $60.5 million compared to operating income of $127.1
million in the second quarter of fiscal 2001. For the six months ended March 31,
2002, the Company recorded operating income of $165.6 million compared to $228.2
million in the first half of fiscal 2001. Gross profit margins declined from
31.3% in the prior year's second quarter to 22.6% in the current year's
comparable quarter. For the six months ended March 31, 2002, the Company's gross
profit margins declined to 25.8% from 30.2% for the same period of the prior
year. The margin deterioration was primarily the result of revenue declines
caused by reduced drilling and workover activity and a decline in U.S. pricing.
Management believes pricing may decline further as activity levels remain
unchanged or decline further during the remainder of fiscal 2002, and that the
combination of reduced activity and pricing may result in further margin
deterioration. Other operating expenses for the first six months of fiscal 2002
increased slightly in total over the comparable period in the prior year due to
increased research and engineering and marketing department costs that were
expanded to support the higher fiscal 2001 revenue levels. This was partially
offset by reduced general and administrative expenses resulting from lower
accruals for incentive plans that are based upon the Company's earnings and
stock price. The prior year's operating earnings included goodwill amortization
of $3.4 million and $6.7 million, respectively, for the three and six-month
periods ended March 31, 2001. The Company ceased amortizing goodwill at the
beginning of the current fiscal year with its adoption of Financial Accounting
Standards Board Statement No. 142, "Goodwill and Other Intangible Assets" (See
Accounting Pronouncements).
Other: Interest expense decreased by $3.4 million and $5.5 million,
respectively, compared with the same three and six-month periods of the previous
year due to lower outstanding debt. Interest-bearing debt was $83.2 million at
March 31, 2002, compared to $161.5 million at March 31, 2001.
Income Taxes: The Company's effective tax rate increased to 35% from 34% in
the first half of the prior fiscal year, primarily as a result of higher
profitability in North America where tax rates are somewhat higher than some
international jurisdictions.
U.S./Mexico Pressure Pumping Segment
The Company's U.S./Mexico pressure pumping revenues for the three and
six-month periods ended March 31, 2002 decreased by 29% and 12%, respectively,
from the same prior year periods. This revenue decrease was due primarily to
corresponding declines in U.S. drilling
15
activity that fell 28% and 17%, respectively, compared to the same three and
six-month periods of fiscal 2001. In addition to the decline in drilling
activity, U.S. workover activity also fell, decreasing 8% during the first six
months of fiscal 2002 compared to the same period of fiscal 2001. Because of
recent weakness in natural gas prices and the resulting slowdown in U.S.
drilling activity, the Company's U.S. prices have declined approximately 10%
during the first half of 2002 compared to September 30, 2001. Management
believes fiscal 2002 U.S./Mexico pressure pumping revenue will decline from
fiscal 2001 revenue by approximately 25% because of declining drilling activity
and its impact on U.S. pricing.
U.S./Mexico pressure pumping operating income was $40.1 million in the
second quarter of fiscal 2002 compared to $95.6 million in the same period of
fiscal 2001. For the six-month period ended March 31, 2002, U.S./Mexico pressure
pumping operating income was $122.3 million, compared to $171.6 million during
the same year earlier period. The decrease in operating income resulted
primarily from pricing deterioration because of reduced activity combined with
increased labor and equipment costs incurred to meet the rapid activity growth
in fiscal 2001. U.S. pricing in the second quarter of fiscal 2002 declined
approximately 6% from the previous quarter and approximately 3% compared to that
of the same quarter of fiscal 2001. Management believes operating income margins
as a percentage of revenue in the U.S./Mexico segment will remain below prior
year levels over the remainder of fiscal 2002 because of reduced drilling
activity and pricing.
International Pressure Pumping Segment
Revenue for the Company's international pressure pumping operations for the
quarter ended March 31, 2002 decreased 12% from the previous year's second
quarter as the international rig count decreased 10%. Excluding Canada, where
revenues decreased 27% due to a 26% reduction in drilling activity,
international pressure pumping revenues declined 2% compared to the same quarter
of fiscal 2001. Latin America revenue was down 17%, with the largest declines
occurring in Argentina and Venezuela. Year-over-year revenue increases achieved
for the quarter were $5.6 million in the Middle East (up 30%) and $1.7 million
in Asia-Pacific (up 8%). The Middle East growth was spurred by increased
activity in India and expansion into Kazakhstan. The largest contributor to
revenue growth in Asia-Pacific was Thailand due to recent activity increases
there. For the six-month period ended March 31, 2002, international pressure
pumping revenue declined 6% from the same period of the previous year,
corresponding to a 8% decrease in the international rig count. Canada was the
largest contributor to the revenue decline with a 20% decrease in revenue
resulting from a 26% drop in drilling activity for the six months ended March
31, 2002, compared to the same period of the prior year. International pressure
pumping revenues are expected to decline slightly from 2001 levels during the
remainder of fiscal 2002, due mostly to the effects of the slowing Canadian
drilling activity.
Operating income for the Company's international pressure pumping
operations was $21.4 million for the second quarter of fiscal 2002, a decrease
of $18.8 million from the same quarter of the previous year. For the six months
ended March 31, 2002, operating income was $46.1 million, a decrease of $22.8
million from the same period of fiscal 2001. The decrease was due
16
primarily to reduced activity combined with approximately $4 million of combined
costs from the devaluation of Argentina's currency and severance costs incurred
in Canada and Latin America during the second quarter of fiscal 2002.
Other Services Segment
Revenue for the Company's other service lines, which consist of specialty
chemicals, tubular services and process and pipeline services, was $47.3 million
in the second quarter of fiscal 2002, relatively unchanged from that of the same
period of the previous year. For the six months ended March 31, 2002, revenue
for these combined service lines increased 2% over the comparable period of the
previous year. Tubular services revenues increased $3.4 million (or 21%) for the
first half of fiscal 2002 over the same period of fiscal 2001 due to activity
improvements, particularly in Europe and the Middle East and expansion in West
Africa. Reduced revenues from the pipeline inspection service line offset this
increase while revenue from the Unichem specialty chemicals division was
essentially unchanged.
Operating income for the Company's other service lines for the quarter
ended March 31, 2002 was $4.6 million, a 24% decrease from the same period of
fiscal 2001. For the six-month period ended March 31, 2002, operating income for
the Company's other service lines was $10.1 million, a 17% decrease from the
same period of fiscal 2001. These decreases were mostly attributable to slightly
reduced profit margins in the process and pipeline services operations.
Capital Resources and Liquidity
- -------------------------------
Net cash provided from operating activities for the first half of fiscal
2002 was $186.5 million, an increase of $18.8 million from the comparable period
of the prior year due primarily to a reduction of working capital, particularly
accounts receivable.
Net cash used for investing activities in the first six months of fiscal
2002 was $95.2 million, an increase of $17.1 million compared to the same period
of the previous year, mostly because of increased capital expenditures. Capital
expenditures for fiscal 2002 are expected to be approximately $195 million
compared to fiscal 2001 spending of $183.4 million. The 2002 capital program is
being used primarily for replacement and enhancement of U.S. fracturing
equipment and expansion of stimulation services internationally. The actual
amount of 2002 capital expenditures will be somewhat dependent on the
identification of service expansion opportunities. The capital program is
expected to be funded by cash flows from operating activities and available
credit facilities, which management believes will be sufficient to fund
projected expenditures.
Cash flows used for financing activities for the six months ended March 31,
2002 were $106.9 million, compared to $87.7 million in the first half of fiscal
2001. During the first quarter of fiscal 2002, the Company purchased 4.4 million
shares of its common stock at a cost of $102.1 million under a share repurchase
program approved by the Company's Board of Directors. The Company did not
purchase any additional shares in the quarter ended March 31, 2002. The share
repurchase program, as amended, authorizes purchases up to $750 million, $251.0
million of
17
which was available for future purchases as of March 31, 2002.
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 share 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 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. There were no outstanding borrowings
under the Committed Credit Facility at March 31, 2002.
In addition to the Committed Credit Facility, the Company had $115.9
million in various unsecured, discretionary lines of credit at March 31, 2002,
which expire at various dates in 2002. There are no requirements for commitment
fees or compensating balances in connection with these lines of credit and
interest on borrowings is based on prevailing market rates. At March 31, 2002,
there were $4.4 million in outstanding borrowings under these lines of credit.
In fiscal 2002, the Company entered into two long-term vessel charter
operating lease agreements. Annual commitments under these agreements for the
years ending September 30, 2002, 2003, 2004, 2005 and 2006 are $20.8 million,
$6.0 million, $6.1 million, $6.3 million and $6.0 million, respectively, and
$30.2 million in the aggregate thereafter.
Due to repayment of borrowings from cash flows from operations, the
Company's total interest-bearing debt decreased to 5.7% of its total
capitalization (total capitalization equals the sum of interest-bearing debt and
stockholders' equity) at March 31, 2002, compared to 11.4% at March 31, 2001 and
6.4% at September 30, 2001. The Committed Credit Facility includes various
customary covenants and other provisions including the maintenance of certain
profitability and solvency ratios, none of which materially restrict the
Company's activities. 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.
On April 24, 2002 the Company sold convertible senior notes with a face
value at maturity of $449.0 million (gross proceeds of $355.1 million). The
Company also granted an over-allotment option of 15%, which was exercised in
full for an additional face value at maturity of $67.4 million (gross proceeds
of $53.3 million). The notes are unsecured senior obligations that rank equally
in right of payment with all of the Company's existing and future senior
unsecured indebtedness. The Company intends to use the aggregate net proceeds of
$400.1 million to fund the cash purchase price of its proposed acquisition of
OSCA, Inc. (expected to close on May 31, 2002) and for general corporate
purposes.
18
The notes will mature in 20 years and cannot be called by the Company for
three years after issuance. The redemption price must be paid in cash if the
notes are called. Holders of the notes can require the Company to repurchase the
notes on the third, fifth, tenth and fifteenth anniversaries of the issuance.
The Company has the option to pay the repurchase price in cash or stock. The
issue price of the notes was $790.76 for each $1,000 in face value, which
represents a yield to maturity of 1.625%. Of this 1.625% yield to maturity, 50
basis points of the issue price will be paid in cash for the life of the
security.
The notes are convertible into BJ Services common stock at an initial rate of
14.9616 shares for each $1,000 note. This rate results in an initial conversion
price of $52.85 per share and represents a premium of 45% over the closing sale
price of the Company's common stock on the New York Stock Exchange of $36.45 per
share on April 18, 2002. The Company has the option to settle notes that are
surrendered for conversion using cash. Generally, except upon the occurrence of
specified events, including a credit rating downgrade to below investment grade,
holders of the notes are not entitled to exercise their conversion rights until
the Company's stock price is greater than a specified percentage (beginning at
120% and declining to 110% at the maturity of the notes) of the accreted
conversion price per share.
Accounting Pronouncements
Effective October 1, 2001, the Company adopted Financial Accounting
Standards Board Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 142 requires that goodwill no longer be amortized to earnings, but
instead must be reviewed for possible impairment. The Company ceased the
amortization of goodwill beginning October 1, 2001. According to the
requirements of SFAS 142, the Company has performed a transitional fair value
based impairment test on its goodwill and determined that the fair value
exceeded the recorded value at October 1, 2001, therefore no impairment loss has
been recorded.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires the fair value of a
liability for an asset retirement legal obligation to be recognized in the
period in which it is incurred. When the liability is initially recorded,
associated costs are capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period and the capitalized cost is depreciated over the useful life
of the related asset. SFAS 143 is effective for fiscal years beginning after
June 15, 2002, with earlier application encouraged. SFAS 143 requires entities
to record a cumulative effect of a change in accounting principle in the income
statement in the period of adoption. The Company plans to adopt SFAS 143 on
October 1, 2002 and is in the process of determining the effect of adoption on
its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides new
guidance on the recognition of impairment losses on long-lived assets to be held
and used or to be disposed and also broadens the definition of what constitutes
a discontinued operation and how the results of a
19
discontinued operation are to be measured and presented. SFAS 144 supercedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, while retaining
many of the requirements of these two statements. Under SFAS 144, assets held
for sale that are a component of an entity will be included in discontinued
operations if the operations and cash flows will be or have been eliminated from
ongoing operations and the reporting entity will not have any significant
continuing involvement in the discontinued operations prospectively. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, with early
adoption encouraged. SFAS 144 is not expected to materially change the methods
used by the Company to measure impairment losses on long-lived assets, but may
result in future dispositions being reported as discontinued operations to a
greater extent than is currently permitted. The Company plans to adopt SFAS 144
on October 1, 2002.
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," "anticipate" 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, fluctuating prices of crude oil and natural gas, 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, the Company's
ability to consummate the merger with OSCA and to integrate its business, to
realize the costs synergies it expects to realize in the merger with OSCA and
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.
20
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 to foreign currency fluctuations
internationally and changing interest rates, primarily in the United States and
Europe. The Company's policy is to manage interest rates through use of a
combination of fixed and floating rate debt. If the floating rates were to
increase by 10% from March 31, 2002 rates, the Company's combined interest
expense to third parties would increase by a total of $1,770 each month in which
such increase continued. At March 31, 2002, the Company had issued fixed-rate
debt of $78.8 million. These instruments are fixed-rate and, therefore, do not
expose the Company to the risk of loss in earnings due to changes in market
interest rates. However, the fair value of these instruments would increase by
$1.7 million if interest rates were to decline by 10% from their rates at March
31, 2002.
A portion of the Company's borrowings are denominated in foreign currencies,
which exposes the Company to market risk associated with exchange rate
movements. When the Company believes it to be prudent, the Company enters into
forward foreign exchange contracts to hedge the impact of foreign currency
fluctuations. There were no foreign exchange contracts outstanding at March 31,
2002. All items described are non-trading and are stated in U.S. dollars (in
thousands).
Expected Maturity Dates Fair Value
2002 2003 2004 2005 Thereafter Total March 31, 2002
------ ---- ---- ---- ---------- ------- --------------
SHORT-TERM BORROWINGS
Bank borrowings; US $ denominated $3,694 $ 3,694 $ 3,694
Average variable interest rate - 5.75% at
March 31, 2002
LONG-TERM BORROWINGS
Current leases; US $ denominated $ 318 $ 318 $ 318
Variable interest rate - 6.18% at
March 31, 2002
Non-current leases; US $ denominated $209 $210 $ 419 $ 419
Variable interest rate - 6.18% at
March 31, 2002
7% Series B Notes - US $ denominated $78,815 $78,815 $80,983
Fixed interest rate - 7%
21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
BJ Services Company ("BJ") filed a patent infringement suit against
Halliburton Energy Services ("Halliburton") in March of 2000 in
connection with BJ's patented method of well fracturing using the
Vistar(TM) fracturing fluid. BJ alleged in the suit that Halliburton's
use of a competing fracturing method infringes BJ's patent. The suit
alleged that damages adequate to compensate for Halliburton's
infringement exceed $100 million. On April 12, 2002, a Federal Court
jury in Houston, Texas rendered a verdict in the Company's favor. The
jury found that Halliburton's competing system, known as Phoenix,
infringed the Company's patent and that the patent is valid. The jury
awarded the Company the sum of $98.1 million in damages, plus
prejudgment interest in the amount of $3.0 million and the Court
issued a permanent injunction prohibiting Halliburton from continuing
to sell or offer for sale its Phoenix system. Halliburton has filed a
motion for a new trial and has stated it plans to appeal the award.
Item 2. Changes in Securities
On April 24, 2002 the Company sold convertible senior notes with a
face value at maturity of $516.4 million (gross proceeds of $408.4
million). The notes are unsecured senior obligations that rank equally
in right of payment with all of the Company's existing and future
senior unsecured indebtedness. The Company intends to use the
aggregate net proceeds of $400.1 million to fund its proposed
acquisition of OSCA, Inc. (expected to close on May 31, 2002) and for
general corporate purposes. The notes were initially sold in a private
placement in reliance upon the exemption from registration in
Section 4(2) of the Securities Act of 1933.
The notes will mature in 20 years and cannot be called by the Company
for three years after issuance. The redemption price must be paid in
cash if the notes are called. Holders of the notes can require the
Company to repurchase the notes on the third, fifth, tenth and
fifteenth anniversaries of the issuance. The Company has the option to
pay the repurchase price in cash or stock. The issue price of the
notes was $790.76 for each $1,000 in face value, which represents a
yield to maturity of 1.625%. Of this 1.625% yield to maturity, 50
basis points of the issue price will be paid in cash for the life of
the security.
The notes are convertible into BJ Services common stock at an initial
rate of 14.9616 shares for each $1,000 note. This rate results in an
initial conversion price of $52.85
22
per share and represents a premium of 45% over the closing sale price
of the Company's common stock on the New York Stock Exchange of $36.45
per share on April 18, 2002. The Company has the option to settle
notes that are surrendered for conversion using cash. Generally,
except upon the occurrence of specified events, including a credit
downgrade to below investment grade, holders of the notes are not
entitled to exercise their conversion rights until the Company's stock
price is greater than a specified percentage (beginning at 120% and
declining to 110% at the maturity of the notes) of the accreted
conversion price per share.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on January 24,
2002 in Houston, Texas. All nominated directors were elected. .
(i) Directors elected at the Annual Meeting:
Votes in Votes
Favor Withheld
----------- --------
Class III Directors
-------------------
L. William Heiligbrodt 144,628,320 287,801
---------------------- ----------- -------
James L. Payne 144,643,003 273,118
-------------- ----------- -------
J. W. Stewart 144,655,936 260,185
------------- ----------- -------
Directors with terms of office continuing after the Annual Meeting:
Class I Directors
-----------------
John R. Huff
R. A. LeBlanc
Michael E. Patrick
Class II Directors
------------------
Don D. Jordan
Michael McShane
Item 5. Other Information
23
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
*3.4 Bylaws of the Company, as amended as of March 28, 2002.
*10.28 Indenture dated as of April 24, 2002, by and between BJ
Services Company and The Bank of New York, as Trustee, with
respect to the Convertible Senior Notes due 2022.
* Filed herewith
(b) Reports on Form 8-K.
On February 20, 2002, the Company filed a Form 8-K attaching a
press release announcing that the Company had signed a definitive
merger agreement to acquire OSCA, Inc. for $28.00 per share.
24
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: May 14, 2002 By \s\ Margaret B. Shannon
---------------------------------------
Margaret B. Shannon
Vice President and General Counsel
Date: May 14, 2002 By \s\ James Horsch
---------------------------------------
James Horsch
Controller and
Chief Accounting Officer
25