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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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to .
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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
INCORPORATION OR ORGANIZATION) 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 83,047,714 shares of the registrant's common stock, $.10 par
value, outstanding as of August 9, 2000.
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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, 2000 and 1999 3
Consolidated Condensed Statement of Financial Position -
June 30, 2000 (Unaudited) and September 30, 1999 4
Consolidated Statement of Stockholders' Equity - Nine months ended
June 30, 2000 (Unaudited) 5
Consolidated Condensed Statement of Cash Flows (Unaudited) -
Nine months ended June 30, 2000 and 1999 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION 20
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ------------ ------------- ------------
Revenue $ 371,294 $253,093 $1,116,869 $817,129
Operating expenses:
Cost of sales and services 291,365 236,031 873,072 705,569
Research and engineering 6,602 5,538 19,899 18,166
Marketing 13,890 12,313 41,573 38,123
General and administrative 14,446 11,066 43,199 33,887
Goodwill amortization 3,369 3,383 10,106 10,147
Unusual charge 39,695
----------- ----------- ------------- -----------
Total operating expenses 329,672 268,331 987,849 845,587
----------- ----------- ------------- -----------
Operating income (loss) 41,622 (15,238) 129,020 (28,458)
Interest expense (3,845) (7,613) (15,829) (23,014)
Interest income 507 180 756 479
Other income (expense) - net (75) (296) (1,485) (803)
------------ ------------ -------------- ------------
Income (loss) before income taxes 38,209 (22,967) 112,462 (51,796)
Income tax expense (benefit) 12,301 (6,872) 36,768 (17,288)
----------- ------------ ------------- ------------
Net income (loss) $ 25,908 $ (16,095) $ 75,694 $ (34,508)
=========== ============ ============= ============
Earnings (loss) per share:
Basic $ .31 $ (.23) $ .97 $ (.49)
Diluted $ .31 $ (.23) $ .95 $ (.49)
Weighted average shares outstanding:
Basic 82,580 70,778 77,984 70,719
Diluted 84,720 70,778 79,913 70,719
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
2000 1999
------------- ------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,231 $ 3,924
Receivables - net 317,635 297,975
Inventories:
Product 52,482 46,995
Work in process 1,480 2,116
Parts 56,162 48,176
------------- -------------
Total inventories 110,124 97,287
Deferred income taxes 15,455 15,668
Other current assets 29,414 24,109
------------- -------------
Total current assets 476,859 438,963
Property - net 583,769 659,717
Deferred income taxes 193,576 201,774
Goodwill - net 479,613 489,736
Other assets 18,667 34,574
------------- -------------
$ 1,752,484 $ 1,824,764
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 136,453 $ 128,422
Short-term borrowings and current
portion of long-term debt 41,740 150,452
Accrued employee compensation and benefits 46,762 37,749
Income and other taxes 24,721 25,439
Accrued insurance 11,931 12,041
Other accrued liabilities 73,145 91,043
------------- -------------
Total current liabilities 334,752 445,146
Long-term debt 149,998 422,764
Deferred income taxes 6,246 6,578
Other long-term liabilities 132,594 73,187
Stockholders' equity 1,128,894 877,089
------------- -------------
$ 1,752,484 $ 1,824,764
============= =============
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
BJ SERVICES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED
CAPITAL OTHER
COMMON IN EXCESS TREASURY UNEARNED RETAINED COMPREHENSIVE
STOCK OF PAR STOCK COMPENSATION EARNINGS INCOME TOTAL
--------- --------- ----------- ------------ -------- ------------- -------
(IN THOUSANDS)
BALANCE, SEPTEMBER 30, 1999 $ 7,638 $ 765,866 $(170,522) $ (614) $ 269,797 $ 4,924 $ 877,089
Comprehensive income:
Net income 75,694
Other comprehensive income, net of
tax
Cumulative translation adjustments (427)
Comprehensive income 75,267
Issuance of stock for:
Warrants surrendered 956 142,570 143,526
Stock options 94 15,058 15,152
Reissuance of treasury stock for:
Stock options 32,276 (16,875) 15,401
Stock purchase plan 10,959 (6,171) 4,788
Stock performance awards (1,302) 1,579 (277)
Private placement 131,997 12,003 144,000
Treasury stock purchased (148,969) (148,969)
Recognition of unearned compensation 2,640 2,640
Revaluation of stock performance awards 297 (297)
Stock performance grant 3,651 (3,651)
----------- --------- --------- ------------ --------- ----------- ----------
BALANCE, JUNE 30, 2000 $ 8,688 $ 926,140 $(142,680) $ (1,922) $ 334,171 $ 4,497 $1,128,894
=========== ========= ========= ============ ========= =========== ==========
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,
2000 1999
--------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 75,694 $ (34,508)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Amortization of unearned compensation 2,640 360
Depreciation and amortization 76,376 73,261
Deferred income taxes (benefit) 22,947 (32,338)
Unusual charge - non cash 23,051
Changes in:
Receivables (17,337) 53,519
Inventories (14,257) 12,681
Accounts payable 7,997 (55,530)
Other current assets and liabilities (21,720) (1,313)
Other - net 6,473 (10,872)
------------- --------------
Net cash provided by operating activities 138,813 28,311
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (53,295) (93,436)
Proceeds from disposal of assets 125,609 4,097
Acquisition of business, net of cash acquired (3,240) (73,568)
------------- -------------
Net cash provided by (used for) investing activities 69,074 (162,907)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) borrowings - net (381,478) 136,261
Purchase of treasury stock (148,969)
Proceeds from warrant exercise 143,526 54
Proceeds from issuance of stock 179,341 4,333
------------- -------------
Net cash provided by (used for) financing activities (207,580) 140,648
Increase in cash and cash equivalents 307 6,052
Cash and cash equivalents at beginning of period 3,924 1,625
------------- -------------
Cash and cash equivalents at end of period $ 4,231 $ 7,677
============= =============
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6
BJ SERVICES COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 GENERAL
In the opinion of management, the unaudited consolidated condensed financial
statements for BJ Services Company (the "Company") include all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the financial position and stockholders' equity as of June 30,
2000, and the results of operations for each of the three-month and nine-month
periods ended June 30, 2000 and 1999 and cash flows for each of the nine-month
periods ended June 30, 2000 and 1999. The consolidated condensed statement of
financial position at September 30, 1999 is derived from the September 30, 1999
audited consolidated financial statements. Although management believes the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The results of
operations and the cash flows for the nine-month period ended June 30, 2000 are
not necessarily indicative of the results to be expected for the full year.
Certain amounts for fiscal 1999 have been reclassified to conform to the current
year presentation.
NOTE 2 EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS is based on the weighted-average number of 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
from the proceeds using the average market price of the Company's common stock
for each of the periods presented.
7
The following table presents information necessary to calculate earnings per
share for the periods presented (in thousands except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income (loss) $ 25,908 $ (16,095) $ 75,694 $ (34,508)
Weighted-average common shares outstanding 82,580 70,778 77,984 70,719
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ .31 $ (.23) $ .97 $ (.49)
=========== =========== =========== ===========
Weighted-average common and dilutive potential
common shares outstanding:
Weighted-average common shares
outstanding 82,580 70,778 77,984 70,719
Assumed exercise of stock options 2,140 (1) 1,929 (1)
Assumed exercise of warrants (1) (1)
----------- ------------ ----------- ------------
84,720 70,778 79,913 70,719
----------- ----------- ----------- -----------
Diluted earnings (loss) per share $ .31 $ (.23) $ .95 $ (.49)
=========== =========== =========== ===========
(1) Antidilutive because the Company incurred a net loss in this period.
As discussed in Note 7, in fiscal 2000 the Company has executed common stock
transactions, including the April 2000 issuance of 9,575,704 shares of common
stock upon exercise of warrants. Had these transactions occurred on October 1,
1999, basic earnings per share for the three and nine-month periods ended June
30, 2000 would have been $.31 and $.92, respectively, while diluted earnings per
share would have been $.30 and $.90, respectively.
NOTE 3 SEGMENT INFORMATION
The Company has three business segments: U.S./Mexico Pressure Pumping,
International Pressure Pumping and Other Oilfield Services. The U.S./Mexico
Pressure Pumping Services segment includes cementing services and stimulation
services (consisting of fracturing, acidizing, sand control, nitrogen, coiled
tubing and downhole tools services) which are provided throughout the United
States and Mexico. The International Pressure Pumping Services segment also
includes cementing and stimulation services which are provided to over 40
countries in the major international oil and natural gas producing areas of
Latin America, Europe, Africa, Southeast Asia, Canada and the Middle East. The
Other Oilfield Services segment consists of specialty chemicals, tubular
services and process and pipeline services, provided in selected U.S. and
international regions.
8
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the Company's annual
report. The Company evaluates the performance of its operating segments based
on operating income excluding goodwill amortization and unusual charges.
Intersegment sales and transfers are not significant.
Summarized financial information concerning the Company's segments is shown
in the following table. The "Corporate" column includes corporate general and
administrative expenses, goodwill amortization and unusual charges not
allocated to segments.
BUSINESS SEGMENTS
U.S./MEXICO INTERNATIONAL OTHER
PRESSURE PRESSURE OILFIELD
PUMPING PUMPING SERVICES CORPORATE TOTAL
----------------- ----------------- ------------ -------------- ---------------
(IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2000
Revenues $ 184,525 $ 140,363 $ 46,249 $ 157 $ 371,294
Operating income (loss) 35,612 6,281 5,780 (6,051) 41,622
THREE MONTHS ENDED JUNE 30, 1999
Revenues $ 101,377 $ 106,752 $ 43,361 $ 1,603 $ 253,093
Operating income (loss) (5,507) (8,785) 4,330 (5,276) (15,238)
NINE MONTHS ENDED JUNE 30, 2000
Revenues $ 525,026 $ 462,514 $128,842 $ 487 $1,116,869
Operating income (loss) 93,001 51,756 10,102 (25,839) 129,020
Identifiable assets 321,047 575,816 115,219 740,402 1,752,484
NINE MONTHS ENDED JUNE 30, 1999
Revenues $ 325,677 $ 363,957 $125,391 $ 2,104 $ 817,129
Operating income (loss) (10,430) 13,751 13,033 (44,812) (28,458)
Identifiable assets 359,482 577,013 113,304 756,819 1,806,618
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------------
2000 1999 2000 1999
------------ -------------- ---------------- ----------------
Total operating profit (loss) for
reportable segments $ 41,622 $ (15,238) $ 129,020 $ (28,458)
Interest income (expense) - net (3,338) (7,433) (15,073) (22,535)
Other income (expense) - net (75) (296) (1,485) (803)
----------- ------------ -------------- ------------
Income (loss) before income taxes $ 38,209 $ (22,967) $ 112,462 $ (51,796)
========= =========== ============== ===========
9
NOTE 4 COMPREHENSIVE INCOME
The components of comprehensive net income (loss), net of tax, are as follows in
thousands:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------------- ----------- ------------ --------
Net income (loss) attributable to
common stockholders $ 25,908 $ (16,095) $ 75,694 $ (34,508)
Change in cumulative translation adjustment 200 (2,018) (427) (5,518)
------------ ------------ ------------ ------------
Comprehensive net income (loss) $ 26,108 $ (18,113) $ 75,267 $ (40,026)
============ ============ =========== ============
NOTE 5 UNUSUAL CHARGE
During the nine months ended June 30, 1999, the Company recorded a pretax
unusual charge of $39.7 million ($26.0 million after tax, or $.36 per diluted
share) to reflect changes in its operations as a result of the downturn in
oilfield drilling activity. The components of the unusual charge were as
follows (in thousands):
Asset impairments (non cash) $23,051
Severance and related benefits 12,798
Facility closures and other 3,846
---------
$39,695
=========
The asset impairment of $23.1 million primarily related to certain equipment
previously utilized in the Company's U.S. operations which was held for sale,
or had been decommissioned and salvaged for spare parts. The severance and
related benefits costs related to the involuntary termination of
approximately 1,100 employees worldwide. The facility closures and other
costs primarily represent remaining lease obligations related to the closure
of several locations in the oil producing regions of the U.S. and also one
location in Latin America, and costs incurred during the first nine months of
fiscal 1999 for the relocation of equipment and personnel resulting from the
closing of these facilities. Except for the remaining lease obligations of
$.5 million related to the closure of locations, all expenditures for this
provision were made as of September 30, 1999. The unexpended provision for
remaining lease obligations related to the closure of locations was $.1
million at June 30, 2000.
NOTE 6 COMMITMENTS AND CONTINGENCIES
In December 1999, the Company completed a transaction involving the transfer
of certain pumping service equipment assets. The Company received $120.0
million, which was used to pay outstanding bank debt. The equipment will be
used to provide services to the Company's customers for which the Company
will pay a service fee over a period of at least six, but not more than
twelve years. The transaction generated a deferred gain for book purposes,
included in other long-term liabilities, of approximately $63 million, which
is being amortized over ten years. Minimum annual
10
service fee commitments related to this transaction are $12,865,000 for each
of the years ended September 30, 2000, 2001, 2002, 2003 and 2004, and
$59,814,000 in the aggregate thereafter.
NOTE 7 STOCKHOLDERS' EQUITY
In October 1999, the Company reissued 4,027,972 shares of treasury stock
through a private placement with certain financial institutions. The proceeds
from the private placement of $144.0 million were used to pay down
outstanding debt. The Company also entered into privately negotiated option
agreements pursuant to which it repurchased an equivalent number of shares in
April 2000 for a total of $149.0 million. The Company utilized proceeds of
$143.5 million from the exercise of outstanding warrants to fund the
repurchase. These warrants were exercised in April 2000 at an exercise price
of $15 per share. Each warrant represented the right to purchase two shares.
A total of 9,575,704 shares of common stock were issued upon exercise of
these warrants.
NOTE 8 NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. This statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 and therefore had no effect on the Company's fiscal 2000
financial statements. Management does not believe that the adoption of this
standard at the beginning of fiscal year 2001 will have a material impact on
the Company's financial position.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's operations are primarily driven by the number of oil
and natural gas wells being drilled, the depth and drilling conditions of
such wells, the number of well completions and the level of workover activity
worldwide. Drilling activity, in turn, is largely dependent on the price of
oil and natural gas. This situation often leads to volatility in the
Company's revenues and profitability, especially in the United States and
Canada, where the Company historically has generated in excess of 50% of its
revenues.
Due to "aging" oilfields and lower-cost sources of oil
internationally, drilling activity in the United States has declined more
than 75% from its peak in 1981. Record low drilling activity levels were
experienced in 1986, 1992 and again in early-1999. U.S. drilling activity
levels bottomed out in April 1999 and subsequently recovered to exceed the
previous year's levels by October 1999. Despite the recovery in the latter
half of fiscal 1999, the U.S. average fiscal 1999 active rig count
represented the lowest in history and was down 34% from the average level of
both fiscal 1997 and 1998. The recovery in U.S. drilling has continued in
fiscal 2000. For the nine-month period ended June 30, 2000, the active U.S.
rig count averaged 795 rigs, a 35% increase over the same period in fiscal
1999. Most of this increase came from rigs drilling for gas, which increased
42% from the same period of the previous year. The average number of rigs
drilling for oil increased 16% during the same period.
Drilling activity outside North America has historically been less
volatile than domestic drilling activity. Due to low oil prices during most
of the year, international drilling activity also reached record low levels
during 1999 as each of the Company's international regions experienced
double-digit activity declines. While Canadian drilling activity began to
recover during the last half of 1999, drilling activity in many other
international regions is not expected to significantly recover until 2001.
Active international drilling rigs (excluding Canada) averaged 592 rigs
during the nine-month period ended June 30, 2000, a decrease of 7% from the
same period of the previous year. The North Sea and Asia Pacific regions have
experienced the largest declines. Due primarily to the recovery in oil
prices, however, Canadian drilling activity continued the recovery begun in
late 1999. Canada averaged 342 active drilling rigs for the nine-month period
ended June 30, 2000, up 72% from the same period of the previous year.
ACQUISITION
On June 28, 1999, the Company completed the acquisition of selected
assets and subsidiaries of Fracmaster Ltd. ("Fracmaster"), an oilfield
services company based in Calgary, Alberta with operations in Canada, the
United States, Russia and China. The acquisition was completed for a total
purchase price of $78.4 million. To date, the acquisition of Fracmaster has
primarily impacted the Company's operations in Canada and Russia.
12
RESULTS OF OPERATIONS
The following table sets forth selected key operating statistics reflecting
industry rig count and the Company's financial results:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------- -------------- ------------- ----------------
Rig Count: (1)
U.S. 842 523 795 588
International 837 701 934 831
Revenue per rig (in thousands) $221.1 $206.8 $ 645.9 $ 575.8
Revenue per employee (in thousands) $ 42.9 $ 36.9 $ 134.2 $ 110.3
Percentage of gross profit to revenue (2) 21.5% 6.7% 21.8% 13.7%
Percentage of research and engineering
expense to revenue 1.8% 2.2% 1.8% 2.2%
Percentage of marketing expense to revenue 3.7% 4.9% 3.7% 4.7%
Percentage of general and administrative
expense to revenue 3.9% 4.4% 3.9% 4.1%
(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, 2000
was $371.3 million, an increase of 47% from prior year's third fiscal
quarter. For the nine-month period ended June 30, 2000, the Company's revenue
was $1.1 billion, an increase of 37% from the same period of fiscal 1999. The
increases were primarily due to increased North American drilling and
workover activity and benefits from the acquisition of Fracmaster in June
1999. Also contributing to the revenue increases was an improvement in U.S.
revenue per active rig. This occurred because independent oil companies, with
whom the Company has a stronger market position, contributed most of the
increase in U.S. drilling activity. In addition, the Company's average job
size increased during this period due to larger fracturing treatments.
Management expects the Company to continue to achieve revenue improvement in
each of the remaining quarters of calendar 2000 compared with the comparable
quarters of the previous year.
OPERATING INCOME: For the quarter ended June 30, 2000, the Company's
operating income was $41.6 million compared to an operating loss of $15.2
million in the same period of the previous year. Prior year's third quarter
operating loss was due primarily to $16.7 million of costs resulting from the
acquisition of Fracmaster, and additional severance costs and asset
writedowns primarily associated with the Company's international operations,
all of which were included in cost of sales. For the nine months ended June
30, 2000, the Company recorded operating income of $129.0 million compared to
an operating loss of $28.5 million in the comparable period of fiscal 1999.
The prior year's loss for the nine-month period was primarily a result of the
Company's recording a pretax unusual charge of $39.7 million ($.36 per
diluted share after-tax), comprised of $12.8 million of
13
severance costs, $23.1 million of asset writedowns and $3.8 million of other
costs associated with the downturn in the oilfield services industry, as well
as the $16.7 million charge discussed above.
The Company's gross profit margins for the quarter increased to
21.5% from 6.7% in the prior year's third fiscal quarter. Increased
profitability in the U.S. resulting from increased activity, improved pricing
and the impact of prior year's cost reduction programs more than offset a
higher loss in Canada for the quarter compared to the same quarter of 1999.
The increased loss in Canada during the third quarter was due to a greater
impact of the decreased revenues during the "Spring breakup period" since the
Company's Canadian overhead is much larger following the acquisition of
Fracmaster in June 1999. Gross margins for the third fiscal quarter of 1999
were also negatively impacted by the $16.7 million non-recurring charge which
was reflected in cost of sales. For the nine-month period ended June 30,
2000, the Company's gross profit margins increased to 21.8% from 13.7% for
the same period of fiscal 1999. The margin improvement for the nine-month
period is primarily a result of increased North American drilling and
workover activity, pricing improvement in the U.S., the impact of cost
reduction programs implemented during 1999 and the $16.7 million charge that
reduced operating margins in the comparable 1999 period.
The margin improvement was partially offset by increased research
and engineering, marketing and general and administrative expenses which
increased by $6.0 million and $14.5 million compared with the prior year's
third quarter and nine-month periods, respectively, due primarily to higher
accruals for incentive bonuses which are based upon the Company's earnings
and stock price. Each of these other operating expenses, however, declined as
a percentage of revenue for both the three and nine-month periods.
OTHER: Interest expense decreased by $3.8 million and $7.2 million,
respectively, compared with the same three and nine-month periods of the
previous year due to lower borrowings resulting from improved cash flows; as
well as debt reduction using proceeds from an equipment refinancing
transaction and a private placement of common stock, both of which were
completed in the Company's first fiscal quarter (see also Capital Resources
and Liquidity).
INCOME TAXES: The Company's effective tax rate was 33% for both the
nine-month periods ended June 30, 2000 and 1999.
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, 2000 increased by 82% and 61%,
respectively, from the comparable prior year periods. The Company's U.S.
operations contributed all of the increase, up 97% for the quarter and 71%
for the first nine months of fiscal 2000 compared to the same periods of
fiscal 1999 despite drilling activity increasing only 61% and 35% during the
same periods, respectively. The improvement resulted primarily from a
resumption of business from independent operators due to higher commodity
prices and from larger fracturing treatments. U.S. workover activity,
especially coiled tubing and acidizing work, also was strong during the three
and nine-month periods ended June 30, 2000, increasing 37% and 26%,
respectively, over the same periods of the previous year.
14
U.S./Mexico pressure pumping operating income was $35.6 million in
the third quarter of fiscal 2000 compared to an operating loss of $5.5
million in the same period of the previous year. For the nine-month period
ended June 30, 2000, U.S./Mexico pressure pumping operating income was $93.0
million, compared to an operating loss of $10.4 million during the same year
earlier period. The improvements were due primarily to increased drilling and
workover business, combined with better utilization of personnel and
equipment as a result of cost reduction measures implemented in fiscal 1999.
On a year-over-year basis, pricing improved approximately 9% primarily as a
result of the aforementioned higher activity levels and a price book increase
implemented during November 1999. Since the US drilling market has improved,
the Company expects to realize increased pricing for its services. As a
result, the Company is implementing a 14% price book increase in the US
effective September 1, 2000. The ultimate realization of improved pricing,
however, will be dependent on the level of discounts off this price book that
will be offered to customers.
INTERNATIONAL PRESSURE PUMPING SEGMENT
Revenues for the Company's international pressure pumping operations
for the quarter ended June 30, 2000 were $140.4 million, an increase of 31%
compared with the third fiscal quarter of 1999. This increase was due mostly
to the addition of the former Fracmaster operations in Canada and Russia
where quarterly revenues for both countries more than doubled those of the
same quarter of 1999. In addition, Latin America revenues increased by 32%.
For the nine-month period ended June 30, 2000, international pressure pumping
revenue increased by 27% over the same period of fiscal 1999. Excluding
Canada, where revenues increased 142%, international pressure pumping
revenues for the nine-month period ended June 30, 2000 were up 2% compared
with the same period of the prior year despite a 7% decline in drilling
activity. Continued weakness in drilling activity most significantly impacted
the Company's operations in its Asia Pacific region. As a result of new
contracts and improving activity in selected locations, management believes
activity levels have reached bottom and expects quarterly revenue increases
over the prior year's comparable periods in its international pressure
pumping revenues during the remainder of calendar 2000.
Operating income margins for the Company's international pressure
pumping operations were 4.5% of revenue for the quarter ended June 30, 2000
compared to a loss of 8.2% for the same fiscal quarter of 1999. Excluding the
Company's Canadian operations, which had a higher loss in the third quarter
of 2000 compared to the same period of 1999, operating income for the
Company's international pressure pumping operations was $10.0 million,
compared to a loss of $2.0 million for the same quarter of 1999. The
improvement was primarily due to the non-recurring charge which reduced
operating margins for the Company's international pressure pumping operations
by $9.5 million in the third quarter of fiscal 1999. The higher loss in
Canada in the quarter ended June 30, 2000 resulted from carrying greater
overhead during the "Spring breakup period" due to the increased size of the
operations following the acquisition of Fracmaster in 1999. For the
nine-month period ended June 30, 2000, operating income margins were 11.2%
compared to 3.8% for the same period of the prior year. In addition to the
impact on improved margins from the non-recurring charge made in 1999,
operating income margins in Canada for the nine-month period ended June 30,
2000 increased as a result of efficiencies gained through full equipment and
personnel utilization leading up to the seasonal Spring breakup period. These
gains, however, were partially offset by lower pricing outside North America
and margin decreases in the Company's Europe/Africa region due to reduced
North Sea activity (where the Company's vessel operations have a relatively
high fixed cost base), and shutdown costs incurred in closing a facility in
Germany during the first quarter
15
of fiscal 2000. Additionally, the operating income margins for the Company's
Middle East region were negatively impacted by startup costs incurred for
delayed projects.
OTHER SERVICES SEGMENT
Revenue during the third fiscal quarter for the Company's other
service lines, which primarily consist of specialty chemicals, tubular
services and process and pipeline services, increased 7% from the same period
of the previous year. Revenue for these service lines increased 3% for the
nine-month period ended June 30, 2000 compared to the same period of fiscal
1999. Operating income margins as a percentage of revenue for these service
lines declined to 7.8% in the nine-month period ended June 30, 2000 versus
10.4% in the same period of the prior year. The tubular services line
contributed most of the decrease since this service line, which normally
contributes a higher profit margin percentage than the others in this
segment, experienced revenue declines from the previous year as it was more
heavily impacted by the drop in international drilling activity, most
significantly in the North Sea. Also contributing to the operating income
decline were job delays and higher startup costs in the process and pipeline
services group for new projects that began in the third fiscal quarter.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided from operating activities for the nine months
ended June 30, 2000 was $138.8 million, an increase of $110.5 million from
the comparable prior year's figure. Higher profitability was partially offset
by increases in working capital, as a result of the rapid revenue growth in
North America. This is in contrast to the liquidation of working capital
balances in the same year-earlier period, due to the activity downturn in
1999.
Net cash provided by investing activities for the nine-month period
was $69.1 million, compared to a net use of cash for investing activities in
the year earlier period of $162.9 million. The increase is due primarily to
proceeds received from a transaction involving the transfer of certain
pumping service equipment assets in the first quarter of fiscal 2000.
Subsequent to the transfer of equipment, the Company received $120.0 million,
which was used to repay outstanding bank debt. As a result of the reduced
debt, the Company is realizing a reduction in annual interest expense of
approximately $7 million. The equipment is being used to provide services to
the Company for its customers for which the Company is paying a service fee
for a period of at least six, but not more than twelve, years. The
transaction generated a deferred gain for book purposes of approximately $63
million, which is carried in "Other long-term liabilities", and is being
amortized over a ten-year period. The taxable gain of $79.7 million was
completely offset with net operating loss carryforwards. Excluding this
transaction, investing activities declined by $112.0 million due to the
curtailment of capital spending beginning in mid-year 1999 caused by the
depressed business environment, and because the prior year's investing
activities included the acquisition of Fracmaster. Capital expenditures for
fiscal 2000 are expected to be well below the fiscal 1999 spending of $110.6
million. The actual amount of 2000 capital expenditures, currently estimated
at $70 -80 million (excluding acquisitions), will be primarily geared towards
maintenance capital and U.S. offshore and
16
international expansion opportunities and are expected to be funded by cash
flows from operating activities.
Cash flows used for financing activities for the nine months ended
June 30, 2000 was $207.6 million, compared to cash flows provided by
financing activities in the comparable year earlier period of $140.6 million.
Financing activities included a private placement of 4.0 million shares of
common stock in October 1999 and the exercise of stock option, which together
generated proceeds of $179.3 million. In connection with the private
placement, the Company also entered into privately negotiated option
agreements pursuant to which it repurchased an equivalent number of shares in
April 2000 for a total of $149.0 million. In April 2000, the Company utilized
proceeds of $143.5 million from the exercise of outstanding warrants,
combined with borrowings under existing credit facilities, to fund the
repurchase. A total of 4,787,852 warrants, at an exercise price of $15 per
share (each warrant represented the right to purchase two shares), were
exercised before their expiration date of April 13, 2000, leaving only 8,224
issued and outstanding warrants which expired unexercised. The exercise of
the warrants resulted in the issuance of 9,575,704 shares of common stock.
These financing activities, along with the cash provided by operating and
investing activities, allowed the Company to reduce outstanding borrowings by
$381.5 million.
Management strives to maintain low cash balances while utilizing
available credit facilities to meet the Company's capital needs. Any excess
cash generated has historically been used to pay down outstanding borrowings
or fund the Company's stock repurchase program. The Company has a committed,
unsecured bank credit facility (the "Bank Credit Facility") which consists of
a six-year term loan of approximately $55.2 million (currently drawn
partially in Canadian dollars under a provision which is renewable annually
at the option of the banks), which is repayable in 22 quarterly installments
that began in March 1997, and a five year U.S. $225.0 million revolving
facility available through June 2001. At June 30, 2000, borrowings
outstanding under the Bank Credit Facility totaled $55.2 million, consisting
solely of borrowings under the term loan. Principal reductions of term loans
under the Bank Credit Facility are due in aggregate annual installments of
$7.7 million, $30.8 million and $16.7 million in the years ending September
30, 2000, 2001 and 2002, respectively.
In addition to the committed facility, the Company had $152.3
million in various unsecured, discretionary lines of credit at June 30, 2000,
which expire at various dates in 2000. There are no requirements for
commitment fees or compensating balances in connection with these lines of
credit. Interest on borrowings is based on prevailing market rates. At June
30, 2000, there was $11.9 million in outstanding borrowings under these lines
of credit.
The Company also has issued and outstanding $125.0 million of
unsecured 7% Notes due 2006.
The Company's interest-bearing debt decreased to 14.5% of its total
capitalization June 30, 2000, compared to 39.5% at September 30, 1999, due to
repayment of borrowings from cash flows from operations, the proceeds
received from the equipment sale, the private placement of common stock,
warrant exercises and stock option exercises. The Bank Credit Facility
includes various
17
customary covenants and other provisions including the maintenance of certain
profitability and solvency ratios and restrictions on dividend payments under
certain circumstances, none of which materially restrict the Company's
activities. Management believes that the Bank 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.
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 and Year 2000 readiness, 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," 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, the business opportunities that may be presented to and
pursued by the Company, changes in law or regulations and other factors, many
of which are beyond the control of the Company. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those expected, estimated
or projected.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The
Company's major market risk exposure is changing interest rates, primarily in
the United States and Canada. The Company's policy is to manage interest rates
through use of a combination of fixed and floating rate debt. A portion of the
Company's borrowings are denominated in foreign currencies which exposes the
Company to market risk associated with exchange rate movements. When necessary,
the Company enters into forward foreign exchange contracts to hedge the impact
of foreign currency fluctuations. There were no foreign exchange contracts
outstanding at June 30, 2000. All items described are non-trading and are stated
in U.S. dollars (in thousands).
EXPECTED MATURITY DATES FAIR VALUE
2000 2001 2002 2003 THEREAFTER TOTAL JUNE 30, 2000
---- ---- ---- ---- ---------- ----- -------------
SHORT TERM BORROWINGS
Bank borrowings; US $ denominated $ 6,385 $ 6,385 $ 6,385
Average variable interest rate -
10.50% at June 30, 2000
Bankers' acceptance notes; Canadian $
denominated $ 3,272 $ 3,272 $ 3,272
Average variable interest rate - 7.5%
at June 30, 2000
Bank borrowings; Deutsche mark
denominated $ 967 $ 967 $ 967
Average variable interest rate - 4.75%
at June 30, 2000
LONG TERM BORROWINGS
Current term loan; Canadian $
denominated $ 7,700 23,098 $ 30,798 $ 30,798
Variable interest rate - 6.30% at
June 30, 2000
Current leases: US $ denominated $ 318 $ 318 $ 318
Variable interest rate - 6.18% at
June 30, 2000
Non-current term loan; Canadian $
denominated $ 7,700 16,682 $ 24,382 $ 24,382
Variable interest rate - 6.30% at
June 30, 2000
Non-current leases; US $ denominated $ 531 383 128 $ 1,042 $ 1,042
Variable interest rate - 6.18% at
June 30, 2000
7% Series B Notes - US $ denominated $124,574 $124,574 $119,314
Fixed interest rate - 7%
19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(A) EXHIBITS.
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
None
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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 14, 2000 BY\s\Margaret Barrett Shannon
----------------------------------------
Margaret Barrett Shannon
Vice President and General Counsel
Date: August 14, 2000 BY\s\Matthew D. Fitzgerald
----------------------------------------
Matthew D. Fitzgerald
Vice President and Controller
(Principal Accounting Officer)
21