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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 June 30, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 156,750,751 shares of the registrant's common stock, $.10 par value,
outstanding as of August 9, 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 nine months ended June 30, 2002 and 2001 3
Consolidated Condensed Statement of Financial Position (Unaudited) -
June 30, 2002 and September 30, 2001 4
Consolidated Statement of Stockholders' Equity (Unaudited) -
Nine months ended June 30, 2002 5
Consolidated Condensed Statement of Cash Flows (Unaudited) -
Nine months ended June 30, 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 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II - OTHER INFORMATION 29
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 Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ----------- ------------ -------------
Revenue $ 439,646 $ 579,839 $ 1,392,095 $ 1,619,178
Operating expenses:
Cost of sales and services 352,430 382,226 1,059,025 1,107,288
Research and engineering 9,439 8,530 27,037 25,300
Marketing 16,280 16,269 46,948 46,038
General and administrative 17,188 15,695 49,144 48,498
Goodwill amortization 3,376 10,125
----------- ----------- ------------ -------------
Total operating expenses 395,337 426,096 1,182,154 1,237,249
----------- ----------- ------------ -------------
Operating income 44,309 153,743 209,941 381,929
Interest expense (2,695) (4,292) (5,005) (12,109)
Interest income 1,047 739 1,724 1,612
Other (expense) income - net (1,631) 8,611 (2,715) 5,876
------------ ----------- ------------- -------------
Income before income taxes 41,030 158,801 203,945 377,308
Income tax expense 13,341 53,992 70,361 128,284
----------- ----------- ------------ -------------
Net income $ 27,689 $ 104,809 $ 133,584 $ 249,024
=========== =========== ============ =============
Earnings per share:
Basic $ .18 $ .64 $ .85 $ 1.52
Diluted $ .17 $ .63 $ .83 $ 1.49
Weighted average shares outstanding:
Basic 156,671 164,544 157,056 164,240
Diluted 160,817 167,585 160,590 167,669
See Notes to Unaudited Consolidated Condensed Financial Statements
3
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In thousands)
June 30, September 30,
2002 2001
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 66,486 $ 84,103
Receivables - net 377,392 475,715
Inventories:
Products 69,527 67,744
Work in process 1,174 2,850
Parts 93,713 64,544
------------- -------------
Total inventories 164,414 135,138
Deferred income taxes 10,654 15,139
Other current assets 42,709 22,538
------------- -------------
Total current assets 661,655 732,633
Property - net 794,580 676,445
Deferred income taxes 72,086 79,526
Goodwill - net 862,894 476,795
Other assets 40,272 19,968
------------- -------------
$ 2,431,487 $ 1,985,367
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 158,811 $ 190,803
Short-term borrowings and current
portion of long-term debt 36,412 13,976
Accrued employee compensation and benefits 56,398 67,079
Income and other taxes 40,163 31,738
Accrued insurance 12,181 10,593
Other accrued liabilities 81,286 75,409
------------- -------------
Total current liabilities 385,251 389,598
Long-term debt 488,231 79,393
Deferred income taxes 7,918 10,172
Other long-term liabilities 137,772 136,123
Stockholders' equity 1,412,315 1,370,081
------------- -------------
$ 2,431,487 $ 1,985,367
============= =============
See Notes to Unaudited Consolidated Condensed Financial Statements
4
BJ SERVICES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands)
Accumulated
Capital Other
Common In Excess Treasury Unearned Retained Comprehensive
Stock Of Par Stock Compensation Earnings Income Total
---------- ---------- ---------- ------------ ---------- ------------- ----------
Balance, September 30, 2001 $ 17,376 $ 966,550 $ (295,449) $ (4,891) $ 690,128 $ (3,633) $1,370,081
Comprehensive income:
Net income 133,584
Other comprehensive income, net of
tax:
Cumulative translation adjustments 1,742
Comprehensive income 135,326
Reissuance of treasury stock for:
Stock options 8,541 (5,146) 3,395
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 2,008 2,008
Revaluation of stock performance
awards (895) 895
---------- ---------- ---------- ------------ ---------- ------------- ----------
Balance, June 30, 2002 $ 17,376 $ 965,655 $ (383,614) $ (1,988) $ 816,777 $ (1,891) $1,412,315
========== ========== ========== ============ ========== ============= ==========
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,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 133,584 $ 249,024
Adjustments to reconcile net income to cash
provided by operating activities:
Minority interest 3,560 4,587
Amortization of unearned compensation 2,008 3,378
Depreciation and amortization 76,588 77,547
Deferred income taxes 41,893 101,954
Changes in:
Receivables 121,137 (111,774)
Inventories 1,504 (18,912)
Accounts payable (57,574) 30,206
Other current assets and liabilities (57,837) 14,637
Other - net (16,382) (3,999)
--------- ---------
Net cash provided by operating activities 248,481 346,648
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (132,903) (128,542)
Proceeds from disposal of assets 5,350 10,339
Acquisition of businesses, net of cash acquired (474,279) (10,996)
--------- ---------
Net cash used for investing activities (601,832) (129,199)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) borrowings - net 430,834 (99,245)
Proceeds from issuance of stock 7,025 17,631
Purchase of treasury stock (102,125) (82,118)
--------- ---------
Net cash provided by (used for) financing activities 335,734 (163,732)
(Decrease) increase in cash and cash equivalents (17,617) 53,717
Cash and cash equivalents at beginning of period 84,103 6,472
--------- ---------
Cash and cash equivalents at end of period $ 66,486 $ 60,189
========= =========
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 June 30, 2002, its results of operations for each of the three-month and
nine-month periods ended June 30, 2002 and 2001 and its cash flows for each of
the nine-month periods ended June 30, 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 nine-month period
ended June 30, 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 Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 27,689 $ 104,809 $ 133,584 $ 249,024
Weighted-average common shares outstanding 156,671 164,544 157,056 164,240
----------- ----------- ----------- -----------
Basic earnings per share $ .18 $ .64 $ .85 $ 1.52
=========== =========== =========== ===========
Weighted-average common and dilutive potential
common shares outstanding:
Weighted-average common shares
outstanding 156,671 164,544 157,056 164,240
Assumed exercise of stock options 4,146 3,041 3,534 3,429
----------- ----------- ----------- -----------
160,817 167,585 160,590 167,669
----------- ----------- ----------- -----------
Diluted earnings per share $ .17 $ .63 $ .83 $ 1.49
=========== =========== =========== ===========
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, completion tools, completion fluids, tubular
services, and process and pipeline services provided in the U.S. and
internationally. The completion tools and completion fluids business operations
were added to the Other Oilfield Services Segment beginning in June 2002 as a
result of the acquisition of OSCA, Inc.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 2 of the Notes to
Consolidated Financial Statements included in the Company's annual report on
Form 10-K. Operating segment performance is evaluated based on operating income
excluding goodwill amortization and unusual charges. Intersegment sales and
transfers are not significant.
8
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.
9
Business Segments
U.S./Mexico International Other
Pressure Pressure Oilfield
Pumping Pumping Services Corporate Total
----------------- ----------------- ------------ -------------- --------------
(in thousands)
Three Months Ended June 30, 2002
Revenues $ 213,103 $ 158,519 $ 68,020 $ 4 $ 439,646
Operating income (loss) 36,541 7,086 9,130 (8,448) 44,309
Three Months Ended June 30, 2001
Revenues $ 343,209 $ 182,752 $ 53,776 $ 102 $ 579,839
Operating income (loss) 134,596 23,765 7,669 (8,911) 157,119
Nine Months Ended June 30, 2002
Revenues $ 693,529 $ 531,940 $ 165,809 $ 817 $ 1,392,095
Operating income (loss) 158,860 53,199 19,398 (21,516) 209,941
Identifiable assets 460,574 625,349 246,383 1,099,181 2,431,487
Nine Months Ended June 30, 2001
Revenues $ 888,087 $ 581,925 $ 148,807 $ 359 $ 1,619,178
Operating income (loss) 306,157 92,629 19,894 (26,626) 392,054
Identifiable assets 502,918 598,586 125,538 706,265 1,933,307
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- ----------------------------------
2002 2001 2002 2001
------------ -------------- --------------- ---------------
(in thousands)
Total operating profit for
reportable segments $ 44,309 $ 157,119 209,941 $ 392,054
Goodwill amortization (3,376) (10,125)
Interest expense - net (1,648) (3,553) (3,281) (10,497)
Other (expense) income- net (1,631) 8,611 (2,715) 5,876
---------- ----------- ------------ -------------
Income before income taxes $ 41,030 $ 158,801 $ 203,945 $ 377,308
========== =========== ============ =============
10
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,
2002 2001 2002 2001
------------ ----------- ----------- -----------
Net income $ 27,689 $ 104,809 $ 133,584 $ 249,024
Change in cumulative translation adjustment 7,401 1,468 1,742 871
------------ ----------- ----------- -----------
Comprehensive net income $ 35,090 $ 106,277 $ 135,326 $ 249,895
============ =========== =========== ===========
Note 5 Business Acquisitions
OSCA: On May 31, 2002, the Company completed the acquisition of OSCA, Inc.
("OSCA") for a total purchase price of $470.3 million (including transaction
costs). This acquisition was accounted for using the purchase method of
accounting. Accordingly, the results of OSCA's operations are included in the
consolidated condensed statement of operations beginning June 1, 2002. The
assets and liabilities of OSCA have been recorded in the Company's consolidated
condensed statement of financial position at estimated fair market value as of
May 31, 2002 with the remaining purchase price reflected as goodwill.
The following table reflects (in thousands, except per share amounts) the
results of operations on a pro forma basis as if the acquisition had been
completed on October 1, 2000. This unaudited pro forma information excludes the
effects of cost elimination and reduction initiatives directly related to the
acquisition.
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ----------- ----------- -----------
Revenues $ 462,101 $ 621,721 $ 1,491,965 $ 1,747,259
Net income $ 23,579 $ 105,412 $ 116,498 $ 258,945
Earnings per share:
Basic $ .15 $ .64 $ .74 $ 1.53
Diluted $ .15 $ .63 $ .73 $ 1.50
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
as of October 1, 2000, nor are they necessarily indicative of future operating
results.
11
The preliminary allocation of the purchase price and estimated goodwill are
summarized as follows (in thousands):
Consideration paid:
Cash to OSCA stockholders $ 416,252
Settlement of options 8,000
Debt assumed 35,000
Transaction costs 11,000
--------------
Total consideration $ 470,252
Allocation of consideration paid:
Cash and cash equivalents $ 5,073
Accounts receivable 22,814
Inventory 30,780
Prepaid expenses 1,283
Current deferred income taxes 2,463
Property, plant and equipment 57,452
Other assets 8,785
Short-term debt (440)
Accounts payable (25,582)
Other accrued liabilities (16,827)
Accrued income and other taxes 7,456
Long-term deferred taxes (5,028)
--------------
Goodwill $ 382,023
==============
The Company expects to complete its review and determination of the fair values
of the assets acquired and liabilities assumed in its fiscal quarter ending
September 30, 2002. Accordingly, allocation of the purchase price is subject to
revision based on final determination of appraised and other fair values. Upon
completion of the valuation of assets purchased, certain finite lived tangible
and/or intangible assets may be identified or revalued. For each $25 million of
additional fair value allocated to such assets, the effect on related annual
amortization (assuming an average useful life of 10 years) would result in a
reduction of net income of approximately $1.6 million or $.01 per diluted share.
Other: On June 24, 2002, the Company completed a $9.1 million acquisition of the
coiled tubing assets and business of Maritima Petroleo E Engenharia, LTDA
("Maritima"), a leading provider of coiled tubing services in Brazil. This
acquisition was accounted for using the purchase method of accounting.
Note 6 Commitments and Contingencies
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,
12
respectively, and $30.2 million in the aggregate thereafter.
Note 7 Goodwill and Intangibles
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 SFAS 142 and to complete the final step of
the transitional 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 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 and earnings per share would have been as
follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Reported net income $ 27,689 $ 104,809 $ 133,584 $ 249,024
Goodwill amortization 3,376 10,125
----------- ----------- ----------- -----------
Adjusted net income $ 27,689 $ 108,185 $ 133,584 $ 259,149
=========== =========== =========== ===========
Basic earnings per share:
Reported net income $ .18 $ .64 $ .85 $ 1.52
Goodwill amortization .02 .06
----------- ---------- ----------- -----------
Adjusted net income $ .18 $ .66 $ .85 $ 1.58
=========== ========== =========== ===========
Diluted earnings per share:
Reported net income $ .17 $ .63 $ .83 $ 1.49
Goodwill amortization .02 .06
----------- ---------- ----------- -----------
Adjusted net income $ .17 $ .65 $ .83 $ 1.55
=========== ========== =========== ===========
13
Note 8 Long-Term Debt
Long-term debt at June 30, 2002 and September 30, 2001 consisted of the
following (in thousands):
June 30, 2002 September 30, 2001
--------------- ------------------
Convertible Senior Notes due 2002 $ 409,074
7% Notes due 2006, net of discount 78,826 $ 78,791
Notes payable to banks
Other 649 920
-------------- --------------
488,549 79,711
Less current maturities of long-term debt 318 318
-------------- --------------
Long-term debt $ 488,231 $ 79,393
============== ==============
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 used the aggregate net proceeds of $400.1 million to
fund a substantial portion of its acquisition of OSCA 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, 0.50% per year on 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 face amount note. This rate results in an initial
conversion price of $52.85 per share (based on purchaser's original issue
discount) and represents a premium of 45% over the April 18, 2002 closing sale
price of the Company's common stock on the New York Stock Exchange of $36.45 per
share. 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. At June 30, 2002, the accreted conversion price per share would
have been $52.96.
14
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 June 30, 2002. For the three-month period ended June 30, 2002, the
active U.S. rig count averaged 806, a 35% decrease in activity compared to the
same period in fiscal 2001. For the nine-month period ended June 30, 2002, the
active U.S. rig count averaged 876, a 24% decrease from the same period in
fiscal 2001. The Company's management expects such activity levels to stabilize
from current levels over the remainder of this calendar 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. During most of fiscal 2001, oil and natural gas prices remained
strong 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 June 30, 2002, international
drilling rigs (excluding Canada) averaged 725, down 4% from the same period of
the prior year and Canadian drilling activity averaged 147 rigs, 42% lower than
the same period of the prior year. During the nine-month period ended June 30,
2002, active international drilling rigs averaged 1,004, a decline of 10% from
the same period of fiscal 2001. Such decrease was due primarily to a 29%
decrease in activity in Canada, which averaged 269 active rigs during the first
nine months of fiscal 2002 compared to 381 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 the last
quarter of fiscal 2002 to remain below comparative periods of fiscal 2001 and
for drilling activity outside North America to be relatively unchanged
year-over-year.
15
Critical Accounting Policies
The Company has defined a critical accounting policy as one that is
both important to the portrayal of the Company's financial condition and results
of operations and requires the management of the Company to make difficult,
subjective or complex judgments. Estimates and assumptions about future events
and their effects cannot be perceived with certainty. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments. These estimates may change as new events occur, as
more experience is acquired, as additional information is obtained and as the
Company's operating environment changes. The Company believes the following are
the most critical accounting policies used in the preparation of the Company's
consolidated financial statements and the significant judgments and
uncertainties affecting the application of these policies. For information
concerning the Company's other significant account policies, see Note 2 of the
Notes to Consolidated Financial Statements included in the Company's annual
report on Form 10-K.
Accounts Receivable: We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the customer's
current credit worthiness, as determined by our review of their current credit
information. We continuously monitor collections and payments from our customers
and maintain a provision for estimated uncollectible accounts based upon our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot give any assurances that
we will continue to experience the same credit loss rates that we have in the
past. The cyclical nature of our industry may affect our customers' operating
performance and cash flows, which could impact our ability to collect on these
obligations. In addition, many of our customers are located in certain
international areas that are inherently subject to risks of economic, political
and civil instabilities, which may impact our ability to collect these accounts
receivables.
Inventory: The Company records inventory at the lower of cost or
market. The Company regularly reviews inventory quantities on hand and records
provisions for excess or obsolete inventory based primarily on its estimated
forecast of product demand, market conditions, production requirements and
technological developments. Significant or unanticipated changes to the
Company's forecasts could require additional provisions for excess or obsolete
inventory.
Income Taxes: We provide for income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
This standard takes into account the differences between financial statement
treatment and tax treatment of certain transactions. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates is recognized
16
as income or expense in the period that includes the enactment date. This
calculation requires us to make certain estimates about our future operations.
Changes in state, federal and foreign tax laws as well as changes in our
financial condition could affect these estimates.
Valuation Allowance for Deferred Tax Assets: We record a valuation
allowance to reduce our deferred tax assets when it is more likely than not that
some portion or all of the deferred tax assets will expire before realization of
the benefit or that future deductibility is not probable. The ultimate
realization of the deferred tax assets depends on the ability to generate
sufficient taxable income of the appropriate character in the future.
Impairment of Long-Lived Assets: Long-lived assets, which include
property, plant and equipment, goodwill and other intangibles, and other assets
comprise a significant amount of the Company's total assets. The Company makes
judgments and estimates in conjunction with the carrying value of these assets,
including amounts to be capitalized, depreciation and amortization methods and
useful lives. Additionally, the carrying values of these assets are periodically
reviewed for impairment or whenever events or changes in circumstances indicate
that the carrying amounts may not be recoverable. An impairment loss is recorded
in the period in which it is determined that the carrying amount is not
recoverable. This requires the Company to make long-term forecasts of its future
revenues and costs related to the assets subject to review. These forecasts
require assumptions about demand for the Company's products and services, future
market conditions and technological developments. Significant and unanticipated
changes to these assumptions could require a provision for impairment in a
future period.
Self Insurance Accruals: The Company is self-insured for certain losses
relating to workers' compensation, general liability, property damage and
employee medical benefits. As such, the Company makes judgements based on
historical experience and current events to estimate our liability for such
claims. Significant and unanticipated changes in future actual payouts could
result in additional increases or decreases to the recorded accruals. We have
purchased stop-loss coverage in order to limit, to the extent feasible, our
aggregate exposure to certain claims. There is no assurance that such coverage
will adequately protect the Company against liability from all potential
consequences.
Contingencies: Contingencies are accounted for in accordance with the
Financial Accounting Standards Board's SFAS No. 5, "Accounting for
Contingencies" ("SFAS"). SFAS No. 5 requires that we record an estimated loss
from a loss contingency when information available prior to the issuance of our
financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies such as environmental, legal, and income tax matters requires
us to use our judgment. While we believe that our accruals for these matters are
adequate, if the actual loss from a loss contingency is significantly different
than the estimated loss, our results of operations may be over or understated.
Acquisition
17
On May 31, 2002, the Company completed its acquisition of OSCA, Inc.
("OSCA") for total consideration of $470.3 million (including transaction
costs). 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 received $28.00 in
cash per share in a merger with a subsidiary of the Company. The Company funded
the majority of the cash purchase price of the transaction with net proceeds
received from the sale of senior convertible notes that occurred on April 24,
2002. The Company has identified and implemented approximately $21 million in
operating cost reductions in the combination. In connection with its cost
reduction efforts, the Company recorded in June 2002 a $1.2 million
restructuring charge related to the consolidation of OSCA's pressure pumping
operations into those of the Company. The acquisition is expected to be earnings
accretive in fiscal 2003. This estimate is subject to numerous uncertainties,
and actual amounts could differ materially from this estimate.
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,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Rig Count: /1)/
U.S. 806 1,237 876 1,150
International 871 1,004 1,004 1,109
Revenue per rig (in thousands) $ 262.1 $ 258.8 $ 740.5 $ 716.8
Revenue per employee (in thousands) 40.8 55.0 129.1 161.8
Percentage of gross profit to revenue /(2)/ 19.8% 34.1% 23.9% 31.6%
Percentage of research and engineering expense to
revenue 2.1% 1.5% 1.9% 1.6%
Percentage of marketing expense to revenue 3.7% 2.9% 3.4% 2.8%
Percentage of general and administrative expense to
revenue 3.9% 2.7% 3.5% 3.0%
/(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, 2002 was
$439.6 million, a decrease of 24.2% from the previous year's third fiscal
quarter. For the nine-month period ended June 30, 2002, revenue was $1.4
billion, a 14.0% 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.
18
Operating Income: For the quarter ended June 30, 2002, the Company's
operating income was $44.3 million, compared to operating income of $153.7
million in the comparable quarter of fiscal 2001. For the nine months ended June
30, 2002, the Company recorded operating income of $209.9 million compared to
$381.9 million in the same period of fiscal 2001. Gross profit margins declined
from 34.1% in the prior year's third quarter to 19.8% in the current year's
comparable quarter. For the nine months ended June 30, 2002, the Company's gross
profit margins declined to 23.9% from 31.6% 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 in North America and a decline
in U.S. pricing. Also contributing to the decline in gross margins was a $1.2
million restructuring charge recorded in cost of sales in June 2002 relating to
the consolidation of OSCA's pressure pumping operations into those of the
Company. Management believes U.S. pricing will stabilize over the remainder of
calendar 2002. Other operating expenses for the first nine months of fiscal 2002
increased over the comparable period in the prior year due to the addition of
operating costs incurred by the former OSCA operations in June. In addition,
research and engineering and marketing department costs had been expanded to
support the higher fiscal 2001 revenue levels and have not been reduced to
reflect lower activity levels experienced in 2002. The Company's management will
continue to assess the need to reduce overhead costs based on expected future
activity levels. Also, general and administrative expenses increased over the
same time period as a result of legal costs associated with the Company's patent
infringement lawsuit against Halliburton (See Part II Other Information -Item 1.
Legal Proceedings). The prior year's operating earnings included goodwill
amortization of $3.4 million and $10.1 million, respectively, for the three and
nine-month periods ended June 30, 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 $1.6 million and $7.1 million,
respectively, compared with the same three and nine-month periods of the
previous year due to lower outstanding debt during the majority of the period.
Due primarily to the April 2002 issuance of convertible senior notes, however,
interest-bearing debt was $524.6 million at June 30, 2002, compared to $83.0
million at June 30, 2001.
Income Taxes: The Company's effective tax rate increased to 34.5% from
34.0% in the first nine months of the previous fiscal year, primarily because a
larger portion of the Company's profitability is generated 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
nine-month periods ended June 30, 2002 decreased by 38% and 22%, respectively,
from the same prior year periods. This revenue decrease was due primarily to
corresponding declines in U.S. drilling activity, which fell 35% and 24%,
respectively, compared to the same three and nine-month periods of fiscal 2001.
In addition to the decline in drilling activity, U.S. workover activity also
fell, decreasing 12%
19
during the first nine months of fiscal 2002 compared to the same period of
fiscal 2001. Because of weakness in natural gas prices and the resulting
slowdown in U.S. drilling activity, the Company's U.S. prices have declined
approximately 17% from September 30, 2001 to June 30, 2002. 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 $36.5 million in the
third quarter of fiscal 2002 compared to $134.6 million in the same period of
fiscal 2001. For the nine-month period ended June 30, 2002, U.S./Mexico pressure
pumping operating income was $158.9 million, compared to $306.2 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 third quarter of fiscal 2002 declined
approximately 7% from the previous quarter and approximately 17% compared to
that of the same quarter of fiscal 2001 (the quarter in which the U.S. pricing
reached its peak level for the year). Also contributing to the margin decline
was a restructuring charge of $1.2 million recorded in cost of sales in June
2002 related to the consolidation of OSCA's pressure pumping operations into
those of the Company. Management believes operating income margins as a
percentage of revenue in the U.S./Mexico segment will remain below prior year
levels during 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 June 30, 2002 decreased 13% from the previous year's third quarter
as the international rig count decreased 13%. Excluding Canada, where revenues
decreased 45% due to a 42% reduction in drilling activity, international
pressure pumping revenues declined 4% compared to the same quarter of fiscal
2001. Revenue from operations in the Eastern Hemisphere increased 9% in the
third quarter of fiscal 2002 compared to the same year earlier period led by
increases in the Middle East and Asia-Pacific. Increased activity in India and
stimulation activity in Saudi Arabia contributed to the Middle East growth. The
largest contributor to revenue growth in Asia-Pacific was Thailand due to recent
activity increases there. Offsetting the revenue gains in the Eastern Hemisphere
was a year-over-year revenue decline in the Latin America operations due
primarily to activity declines in Argentina and Venezuela as a result of
political uncertainties and economic declines. For the nine-month period ended
June 30, 2002, international pressure pumping revenue declined 9% from the same
period of the previous year, corresponding to a 10% decrease in the
international rig count. Canada was the largest contributor to the revenue
decline with a 26% decrease in revenue corresponding to a 29% drop in drilling
activity for the nine months ended June 30, 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 $7.1
20
million for the third quarter of fiscal 2002, a decrease of $16.7 million from
the same quarter of the previous year. For the nine months ended June 30, 2002,
operating income was $53.2 million, a decrease of $39.4 million from the same
period of fiscal 2001. The decrease was due primarily to reduced activity levels
due to a prolonged spring break-up period in Canada and political and economic
declines and uncertainty in Argentina and Venezuela, combined with approximately
$4 million of combined costs from the devaluation of Argentina's currency and
severance costs incurred in connection with reductions in personnel in Canada
and Latin America during the second quarter of fiscal 2002.
21
Other Oilfield Services Segment
Revenue for the Company's other service lines, which consist of specialty
chemicals, tubular services, completion fluids, completion tools and process and
pipeline services, was $68.0 million in the third quarter of fiscal 2002, an
increase of $14.2 million over the comparable year earlier period. Such increase
was due primarily to the completion fluids and completion tools operations
acquired with OSCA that contributed revenues in the month of June 2002 of $4.4
million and $4.2 million, respectively. In addition, revenue from the Company's
process and pipeline services operations increased 14% in the third quarter of
fiscal 2002 compared to the same period of fiscal 2001. For the nine months
ended June 30, 2002, revenue for these combined service lines increased $17.0
million over the comparable period of the previous year. In addition to the
impact from the quarterly revenue increases above, the Company's tubular
services revenues increased 18% for the nine-month period ended June 30, 2002
over the same period of fiscal 2001 due to activity improvements, particularly
in Europe and the Middle East and expansion in West Africa. Revenues from the
Unichem specialty chemicals division were essentially unchanged.
Operating income for the Company's other service lines for the quarter
ended June 30, 2002 was $9.1 million, a $1.5 million increase over the same
period of fiscal 2001 due primarily to the increased revenue in the process and
pipeline services operations. For the nine-month period ended June 30, 2002,
operating income for the Company's other service lines was $19.4 million,
relatively unchanged from the same period of the prior year despite the
year-over-year revenue increase due 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 nine months of
fiscal 2002 was $248.5 million, a decrease of $98.2 million from the comparable
period of the prior year due primarily to reduced profitability.
Net cash used for investing activities in the first nine months of fiscal
2002 was $601.8 million, an increase of $472.6 million compared to the same
period of the previous year, due primarily to the acquisition of OSCA. Capital
expenditures for fiscal 2002 are expected to be approximately $175 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 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 provided by financing activities for the nine months ended June
30, 2002 were $335.7 million, compared to $163.7 million in net cash used for
financing activities in the same year earlier period. The Company generated
proceeds of $400.1 million, net of transaction costs, through the issuance of
convertible senior notes on April 24, 2002. Other financing activities in the
first nine months of fiscal 2002, include the purchase of 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.
22
The share repurchase program, as amended, authorizes purchases up to $750
million, $251.0 million of which remained available for future purchases as of
June 30, 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. The 364-day commitment that expired in
June 2002 was renewed for an additional 364 days. Interest on outstanding
borrowings is charged based on prevailing market rates, which at June 30, 2002
was 2.47%. The Company is charged various fees in connection with the Committed
Credit Facility, including a commitment fee based on the average daily unused
portion of the commitment. There were $35.0 million in outstanding borrowings
under the Committed Credit Facility at June 30, 2002.
In addition to the Committed Credit Facility, the Company had $130.6
million in various unsecured, discretionary lines of credit at June 30, 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 June 30, 2002,
there were no 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.
In December 1999, the Company completed a transaction involving the
transfer of certain pumping service equipment assets and received $120.0 million
that was used to pay outstanding bank debt. The equipment is used to provide
services to customers for which the Company pays a service fee over a period of
at least six, but not more than 13 years. The transaction generated a deferred
gain, included in other long-term liabilities, of approximately $63 million,
which is being amortized over 13 years.
In 1997, the Company completed a transaction involving the transfer of
certain pumping service equipment assets and received $100.0 million that was
used to pay outstanding bank debt. The equipment is used to provide services to
the Company's customers for which the Company pays a service fee over a period
of at least eight, but not more than 14 years. The transaction generated a
deferred gain, included in other long-term liabilities, of approximately $38
million, which is being amortized over 12 years.
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
23
indebtedness. The Company used the aggregate net proceeds of $400.1 million to
fund a substantial portion of the purchase price of its acquisition of OSCA,
Inc. which closed 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% annual yield to
maturity, 0.50 % per year on the issue price will be paid semi-annually 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 face amount note. This rate results in an
initial conversion price of $52.85 per share (based on purchaser's original
issue discount) and represents a premium of 45% over the April 18, 2002 closing
sale price of the Company's common stock on the New York Stock Exchange of
$36.45 per share. 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. At June 30, 2002, the accreted conversion price per
share would have been $52.96.
Due primarily to the April 2002 issuance of convertible senior notes, the
Company's total interest-bearing debt increased to 27.1% of its total
capitalization (total capitalization equals the sum of interest-bearing debt and
stockholders' equity) at June 30, 2002, compared to 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.
24
The following table summarizes the Company's contractual cash obligations and
other commercial commitments as of June 30, 2002 (in thousands):
Payments Due by Period
----------------------
Less than 1-3 4-5 After 5
Contractual Cash Obligations Total 1 year Years Years Years
----- ------ ----- ----- -----
Long term debt $ 487,900 $ 78,826 $ 409,074
Capital lease obligations 649 $ 318 $ 331
Operating leases 143,465 31,901 61,580 22,704 27,280
Obligations under equipment financing
arrangements 190,216 22,160 71,400 48,513 48,143
------------ --------- --------- ---------- ----------
Total Contractual Cash Obligations $ 822,230 $ 54,379 $ 133,311 $ 150,043 $ 484,497
============ ========= ========= ========== ==========
Amount of commitment expiration per period
------------------------------------------
Total
Amounts Less than 1-3 4-5 Over 5
Other Commercial Commitments Committed 1 Year Years Years Years
- ---------------------------- --------- ------ ----- ----- -----
Lines of Credit /(1)/ $ 35,000 $ 35,000
Standby Letters of Credit 18,689 18,601 $ 88
Guarantees 48,693 18,566 19,517 $ 8,560 $ 2,050
------------ --------- --------- ---------- ----------
Total Commercial Commitments $ 102,382 $72,167 $19,605 $ 8,560 $ 2,050
============ ========= ========= ========== ==========
/(1)/ Represents outstanding borrowings under the Company's Committed Credit
Facility.
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 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 the 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.
25
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 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." The
purpose of this statement is to update, clarify and simplify existing accounting
standards. We adopted this statement effective April 30, 2002 and determined
that it did not have any significant impact on our financial statements as of
that date.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). This standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146
replaces Issue 94-3. SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 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
26
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. Other than as required under the
Securities laws, the Company does not assume a duty to update these forward
looking statements. Please see "Risk Factors" included in the Company's 2001
Annual Report on Form 10-K.
27
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 June 30, 2002 rates, the Company's combined interest
expense to third parties would increase by a total of $7,673 each month in which
such increase continued. At June 30, 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
$23.3 million if interest rates were to decline by 10% from their rates at June
30, 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 June 30,
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 2006 Thereafter Total June 30, 2002
---- ---- ---- ---- ---- ---------- ----- -------------
SHORT-TERM BORROWINGS
Bank borrowings; US $ denominated $36,094 $ 36,094
Average variable interest rate - 2.55%
at June 30, 2002
LONG-TERM BORROWINGS
Current leases; US $ denominated 318 318
Variable interest rate - 6.18% at
June 30, 2002
Non-current leases; US $ denominated $331 331
Variable interest rate - 6.18% at
June 30, 2002
7% Series B Notes - US $ denominated $78,826 78,826 83,732
Fixed interest rate - 7%
1.625% Convertible Notes - US $
denominated 409,074 409,074 409,367
Fixed interest rate - 1.625%
28
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Chevron Phillips Litigation
On July 10, 2002, Chevron Phillips Chemical Company ("Chevron
Phillips) filed a lawsuit against BJ Services Company ("BJ") for
patent infringement. The lawsuit relates to a patent issued in
1992 to the Phillips Petroleum Company ("Phillips"). This patent
(the `477 patent) relates to a method for using enzymes to
decompose drilling mud. Although BJ has its own patents for
remediating damage resulting from drill-in fluids (not drilling
muds) in oil and gas formations (products and services for which
are offered under the "Mudzyme" mark), we approached Phillips for
a license of the `477 patent. BJ was advised that Phillips had
licensed this patent on an exclusive basis to Geo-Microbial
Technologies, Inc. ("GMT"), a company co-owned by a former
Phillips employee who is one of the inventors on the `477 patent,
and that BJ should deal with GMT in obtaining a sublicense. BJ
entered into a five (5) year sublicense agreement with GMT in
1997.
Early in 2000, Phillips advised BJ that Phillips had reportedly
terminated the license agreement between Phillips and GMT for
non-payment of royalties and that BJ's sublicense had also
terminated. Even though BJ believes that its sublicense with GMT
has not been properly terminated and BJ's Mudzyme treatments may
not be covered by the `477 patent, in 2000, BJ stopped offering
its Enzyme product for use on drilling mud Nevertheless, Chevron
Phillips is claiming that any use of enzymes in any application
in the oil and gas industry falls under the `477 patent. Further,
even though their patent is valid only in the United States,
Chevron Phillips is requesting that the court award it damages
for BJ's use of enzymes in foreign countries on the theory that
oil produced from wells treated with enzymes is being imported
into the United States.
BJ disputes Chevron Phillips' interpretation of the `477 patent
and its theory of damages, and will vigorously defend itself
against the allegations. Further, it is BJ's position that
Phillips should be bound by the terms of the sublicense agreement
between BJ and GMT. As with any lawsuit, the outcome of this case
is uncertain. Given the scope of the claims made by Chevron
Phillips, an adverse ruling against BJ could result in a
substantial verdict. However, BJ management does not presently
believe it is likely that the results of this litigation will have
a material adverse impact on BJ's financial position or the
results of our operations.
Halliburton Litigation - Composite Bridge Plug
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On June 27, 2002, Halliburton Energy Services, Inc. filed suit
against BJ and Weatherford International, Inc. for patent
infringement in connection with drillable bridge plug tools. These
tools are used to isolate portions of a well for service or
stimulation work, after which the plugs are drilled out using
coiled tubing or a workover rig. Halliburton claims that tools
offered by BJ (under the trade name "Python") and Weatherford
infringe two of its patents for a tool constructed of composite
material. The composite material is easier to drill-out than steel
or iron. The lawsuit has been field in the United States District
Court for the Northern District of Texas (Dallas). Halliburton has
requested that the District Court issue a temporary restraining
order against both Weatherford and BJ to prevent either company
from selling competing tools. In addition, Halliburton has
requested expedited discovery and a hearing on a preliminary
injunction. BJ and Weatherford have filed responses to the various
Halliburton requests and the matter is currently under
consideration by the Court.
We believe that the current design of the Python plug offered by
BJ does not infringe any of the valid claims in the two
Halliburton patents. We also believe the Halliburton patents are
invalid based upon prior art demonstrated in products offered well
before Halliburton filed for its patents. BJ has sold
approximately 150 Python tools since the inception of this product
in the summer of 2001. We believe that we have no liability for
infringement of the Halliburton patents. Moreover, even if the
patent is found to be enforceable and we are found to have
infringed it, BJ management does not believe it is likely that the
results of this litigation will have a material adverse impact on
BJ's financial position or the results of our operations.
Halliburton Litigation - Vistar(TM)
On March 17, 2000, BJ Services Company filed a lawsuit against
Halliburton Energy Services in the United States District Court
for the Southern District of Texas (Houston). In the lawsuit BJ
alleged that a well fracturing fluid system used by Halliburton
infringes a patent issued to BJ in January 2000 for a method of
well fracturing referred to by BJ as "Vistar(TM)". This case was
tried in March and April of 2002. The jury reached a verdict in
favor of BJ on April 12, 2002. The jury determined that BJ's
patent was valid and that Halliburton's competing fluid system,
Phoenix, infringed the BJ patent. The District Court has entered a
judgment for $101.1 million and a permanent injunction preventing
Halliburton from using its Phoenix system. The case is now on
appeal to the Court of Appeals for the Federal Circuit in
Washington, D.C.
Newfield Litigation
On April 4, 2002, a jury rendered a verdict adverse to OSCA in
connection with litigation pending in the United States District
Court for the Southern District of Texas (Houston). The lawsuit
arose out of a blowout that occurred in 1999 on an offshore well
owned by Newfield Exploration. The jury determined that OSCA's
30
negligence caused or contributed to the blowout and that it was
responsible for 86% of the damages suffered by Newfield. The total
damage amount awarded to Newfield was $15.5 million. OSCA's share
of the judgment would be $13.3 million. The Court has delayed
entry of the final judgment in this case pending the completion of
the related insurance coverage litigation filed by OSCA against
certain of its insurers and its former insurance broker. The Court
elected to conduct the trial of the insurance coverage issues
based upon the briefs of the parties. The briefs have been
submitted and the parties are awaiting a ruling from the Court. In
the interim, the related litigation filed by OSCA against its
former insurance brokers for errors and omissions in connection
with the policies at issue in this case has been stayed. Great
Lakes Chemical Corporation, which formerly owned the majority of
the outstanding shares of OSCA, has agreed to indemnify BJ for 75%
of any uninsured liability in excess of $3 million arising from
the Newfield litigation.
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 used the
aggregate net proceeds of $400.1 million to fund a substantial
portion of its acquisition of OSCA, Inc., which closed 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 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.
31
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
* 99.1 Certification pursuant to 18U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* 99.2 Certification pursuant to 18U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* filed herewith
(b) Reports on Form 8-K.
On May 1, 2002, the Company filed a Form 8-K attaching press
releases with respect to the sale of Convertible Notes.
On June 14, 2002, the Company filed a Form 8-K to report the
acquisition of OSCA, Inc. under Item 2; and under Item 5, the
amendment to the Bylaws of the Company. Attached as exhibits
were the Agreement and Plan of Merger, dated as of February
20, 2002, among BJ Services Company, BJTX, Co. and OSCA, Inc.
(incorporated by reference to Annex A of the Definitive
Information Statement on Schedule 14C filed by OSCA, Inc. on
April 29, 2002) and the Bylaws of the Company, as amended as
of March 28, 2002.
32
On July 17, 2002, the Company filed a Form 8-K/A to amend the
report on Form 8-K filed June 14, 2002 to include Item 7 (a)(i)
Audited Financial Statements of the Business Acquired, Item 7
(a)(ii) Unaudited Financial Statements of Business Acquired, and
Item 7 (b) Pro Forma Financial Information, and certain events
under Item 5: to update disclosures concerning litigation against
OSCA, Inc. and other defendants and also supply agreement between
OSCA, Inc. and Great Lakes Corporation.
33
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 13, 2002 By /s/ Margaret B. Shannon
-----------------------------------------
Margaret B. Shannon
Vice President and General Counsel
Date: August 13, 2002 By /s/ James Horsch
-----------------------------------------
James Horsch
Controller and
Chief Accounting Officer
34