1
================================================================================
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 DECEMBER 31, 1995
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 28,076,896 shares of the registrant's common stock, $.10 par value,
outstanding as of February 9, 1996.
================================================================================
2
BJ SERVICES COMPANY
INDEX
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statement of Operations (Unaudited) - Three
months ended December 31, 1995 and 1994 3
Consolidated Condensed Statement of Financial Position -
December 31, 1995 (Unaudited) and September 30, 1995 4
Consolidated Condensed Statement of Cash Flows (Unaudited) -
Three months ended December 31, 1995 and 1994 5
Notes to Unaudited Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II - OTHER INFORMATION 11
2
3
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
DECEMBER 31,
1995 1994
-------- --------
Revenue $206,501 $119,415
Operating expense:
Cost of sales and services 167,086 99,599
Research and engineering 3,744 2,063
Marketing 8,283 3,944
General and administrative 8,489 6,104
Goodwill amortization 1,342 289
-------- --------
Total operating expense 188,944 111,999
-------- --------
Operating income 17,557 7,416
Interest expense (5,538) (2,307)
Interest income 79 137
Other income - net 600 836
-------- --------
Income before income taxes 12,698 6,082
Income taxes 3,553 1,338
-------- --------
Net income $ 9,145 $ 4,744
======== =======
Net income per share $ .33 $ .30
======== ========
Average shares outstanding 28,015 15,716
======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
4
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 3,799 $ 1,842
Receivables - net 173,633 168,771
Inventories:
Finished goods 56,949 50,665
Work in process 2,543 2,394
Raw materials 13,348 13,792
------------ ------------
Total inventories 72,840 66,851
Deferred income taxes 11,135 9,370
Other current assets 11,591 10,101
------------ ------------
Total current assets 272,998 256,935
Property - net 414,792 416,810
Deferred income taxes 106,800 107,889
Goodwill and other assets 207,508 208,049
------------ ------------
$ 1,002,098 $ 989,683
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,534 $ 85,675
Short-term borrowings and current
portion of long-term debt 47,681 37,600
Accrued employee compensation and benefits 21,169 24,885
Income and other taxes 13,481 11,375
Accrued insurance 10,755 12,867
Other accrued liabilities 29,674 31,869
------------ ------------
Total current liabilities 213,294 204,271
Long-term debt 252,181 259,566
Deferred income taxes 11,877 11,496
Accrued post retirement benefits and other 46,475 47,555
Stockholders' equity 478,271 466,795
------------ ------------
$ 1,002,098 $ 989,683
============ ============
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
5
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,145 $ 4,744
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of unearned compensation 330 330
Depreciation and amortization 14,371 6,675
Deferred income taxes (benefit) 571 (1,057)
(Gain) loss on disposal of property 16 (687)
Changes in:
Receivables (1,918) 844
Inventories (3,958) (166)
Accounts payable 4,002 (8,881)
Other current assets and liabilities (9,860) 5,744
Other, net 398 1,923
------------ ------------
Net cash provided by operating activities 13,097 9,469
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (10,408) (6,093)
Proceeds from disposal of assets 319 3,328
Acquisition of business, net of cash acquired (3,700)
------------ ------------
Net cash used for investing activities (13,789) (2,765)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 987
Reduction of borrowings (3,737)
Proceeds from issuance of stock 1,662 749
------------ ------------
Net cash provided by (used for) financing activities 2,649 (2,988)
Increase in cash and cash equivalents 1,957 3,716
Cash and cash equivalents at beginning of period 1,842 3,218
------------ ------------
Cash and cash equivalents at end of period $ 3,799 $ 6,934
============ ============
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
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 as of December 31, 1995, and the results
of operations and cash flows for each of the three month periods ended December
31, 1995 and 1994. The consolidated condensed statement of financial position
at September 30, 1995 is derived from the September 30, 1995 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 three-month period ended December 31,
1995 are not necessarily indicative of the results to be expected for the full
year.
Certain amounts for fiscal 1995 have been reclassified in the accompanying
consolidated condensed financial statements to conform to the current year
presentation.
NOTE 2 ACQUISITION OF BUSINESS
Effective December 1, 1995, the Company acquired the remaining 60% ownership of
its previously unconsolidated joint venture in Brazil, for total consideration
of $5.4 million consisting of $3.7 million in cash and $1.7 million in debt
assumed by the Company. This acquisition was accounted for as a purchase and,
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair values at the date of acquisition. The consolidated statement
of operations includes operating results of the subsidiary acquired since the
date of acquisition. This acquisition is not material to the Company's
financial statements and therefore pro forma information is not presented.
6
7
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 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 is especially true in the United States, where the Company
generates approximately 60% of its revenues.
Due to weak energy prices 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 and
1992. As a result, pumping service companies have been unable to recapitalize
their aging United States fleets due to the inability, under current market
conditions, to generate adequate returns on new capital investments. The
Company believes it is important to operate with a greater "critical mass" in
the key U.S. markets to improve returns in this environment. This conclusion
led to the decision to withdraw from certain low activity areas in the past
several years and to consolidate its remaining operations with those acquired
in April 1995 from The Western Company of North America ("Western"), which had
a larger presence in the United States.
The rig count in the United States averaged 765 active drilling rigs during the
three months ended December 31, 1995, a 7% decline compared with the prior
year's first fiscal quarter. Much of the activity decline was the result of a
reduction in drilling for natural gas in the central U.S.
International drilling activity (excluding Canada) has historically been less
volatile than domestic drilling activity. International drilling activity
increased by 5% during the most recent quarter compared with the prior year's
first fiscal quarter on the strength of development work in Latin America,
especially Argentina and Venezuela, and renewed exploration programs in the
U.K. North Sea.
In both the U.S. and internationally, there has been a continuing trend by oil
and gas companies toward "alliances" with the service companies. These
alliances take various forms including packaged or integrated services, single
source suppliers and turnkey agreements. Approximately 20% of the Company's
revenues are generated under such alliances.
EXPANSIONS AND ACQUISITIONS
Management believes the primary opportunities for geographic and service line
expansion remain in international markets. As a result, other than the
acquisition of Western (the "Acquisition"), the Company's capital spending and
expansion efforts have been primarily focused outside of the United States.
The Company's expansion efforts during the past year have included the
expansion of pumping services into several key international markets, including
Saudi Arabia and Vietnam; expanding tubular services and commissioning
and leak detection services into geographic regions outside the North Sea;
adding additional pumping service capacity in key Latin American markets and
the acquisition of the remaining 60% of the Company's Brazilian joint venture.
7
8
On April 13, 1995, the Company completed the Acquisition for a total purchase
price of $511.4 million (including transaction costs of $7.2 million), which
was paid approximately half in cash and half in shares of the Company's common
stock and warrants to purchase common stock. The Acquisition provides the
Company with a greater critical mass with which to compete in domestic and
international markets and the opportunity to realize significant consolidation
benefits. The Acquisition has increased the Company's existing total revenue
base by approximately 75% and has more than doubled the Company's domestic
revenue base beginning in the June 1995 quarter. In addition, approximately
$40 million of overhead and redundant operating costs have been eliminated
annually by combining the two companies.
RESULTS OF OPERATIONS
Revenue: Revenue increased by 73% during the quarter, primarily as a result of
the acquisition of Western and continued strong international operations.
U.S. revenue more than doubled during the quarter as a result of adding the
former Western operations. On a pro forma basis, however, U.S. revenue
declined by 14%, primarily as a result of the significant activity
reductions in natural gas drilling activity, especially by independent
operators in the Rocky Mountain region, which comprised a significant portion
of the former Western operations. In addition, weather-related disruptions in
the Gulf of Mexico resulted in the loss of approximately 10 working days in
that area. Management expects U.S. natural gas drilling activity to remain
weak during at least the next fiscal quarter.
The Company's international operations continue to show significant
quarter-over-quarter revenue increases with a 25% increase from the prior year
(18% on a pro forma basis). This represents the twelfth consecutive quarter of
international revenue improvement. Each of the Company's international regions
and service lines experienced revenue increases during the quarter. Much of
the revenue improvement occurred in Latin America (up 46%) from strong activity
increases in Argentina as well as revenue increases in Venezuela and Colombia
from recent capital investments. Revenue from the Company's expansions into
Vietnam, Saudi Arabia and Brazil, combined with improving activity in the U.K.
and Nigeria, also contributed to the international revenue growth. Management
expects the year over year international revenue increases to continue over the
next several quarters, however, at a much lower growth rate. The Company
recently decided to "warm stack" a stimulation vessel acquired from Western,
the Renaissance. The vessel's hull will ultimately be liquidated with the
proceeds used to reduce outstanding debt, while the vessel's fracturing
equipment will be redeployed to more profitable opportunities. The Company
believes that the liquidation of the vessel, if consummated, will not have a
material adverse impact on the Company's operating results.
Operating Income: Operating income more than doubled as a result of the
revenue increase and higher operating margins resulting from efficiencies
derived from the combination of the Company's and former Western operations and
the continued growth of the Company's international operations. The cost of
sales and services as a percentage of revenue during the quarter was 2.5% lower
than the prior year's first quarter primarily as a result of cost reduction
efforts implemented after the acquisition of Western and the economies of scale
in having a larger U.S. operation. Other operating
8
9
expenses, excluding goodwill amortization, increased by 69% primarily as a
result of additional overhead from the former Western operations, along with
increased marketing expenses related to international expansions. Marketing
expenses represent a higher percentage of revenue than previously due to the
higher concentration of the additional revenues being in the U.S., which
requires a relatively greater marketing effort. The increase in goodwill
amortization also resulted from the Acquisition, which was accounted for under
the purchase method of accounting.
Interest expense increased by $3.2 million from the prior year's first quarter
due to increased borrowings to fund the Acquisition. See "Financial Condition
- - Capital Resources and Liquidity." Other income was a net gain in both
periods primarily as a result of royalty income from one of the Company's
proprietary products.
The effective tax rate increased to 28% from 22% in the prior year's first
quarter primarily due to marginal tax rates on higher U.S. profitability.
FINANCIAL CONDITION
Capital resources and liquidity: Net cash provided from operating activities
increased by $3.6 million from the prior year's first quarter. Higher
profitability and depreciation was partially offset by increased inventory
levels from international expansions, payment of several large litigation
settlements and the payment of merger related expenses previously accrued for.
Management strives to maintain low cash balances while utilizing available
credit facilities to meet the Company's capital needs. Excess cash generated
is used to pay down outstanding borrowings. In April 1995, the Company
replaced its existing credit facility with a committed, unsecured bank credit
facility (the "Bank Credit Facility") executed to accommodate the Acquisition.
The Bank Credit Facility consists of a five-year $175.0 million revolving
credit facility and a six-year $225.0 million term loan, providing an aggregate
of $400.0 million in available principal borrowings to the Company. At
December 31, 1995, borrowings outstanding under the Bank Credit Facility
amounted to $271.0 million consisting of $221.0 million under the term loan and
$50.0 million borrowed under the revolver. At December 31, 1995, principal
reductions of term loans under the Bank Credit Facility are due in aggregate
installments of $25,600,000; $31,200,000; $43,200,000; $48,400,000; $48,400,000
and $24,200,000 in the years ending September 30, 1996, 1997, 1998, 1999, 2000
and 2001, respectively.
The outstanding balance of the Company's 9.2% Notes, issued in 1991, was $18.0
million at December 31, 1995. Principal reductions of $6.0 million are
required annually each August until maturity on August 1, 1998.
The Company's interest-bearing debt represented 38.5% of its total
capitalization at December 31, 1995, a slight decrease from 38.9% at the
previous fiscal year-end. The Company's Bank Credit Facility and 9.2% Notes
contain various customary covenants, including the maintenance of certain
profitability and solvency ratios and restrictions on dividend payments.
Management believes that the Bank Credit Facility, combined with other
discretionary credit facilities and cash flow from
9
10
operations, will provide the Company with sufficient capital resources and
liquidity to manage its routine operations and fund projected capital
expenditures.
At December 31, 1995, the Company had approximately $512 million of U.S. tax
net operating loss carryforwards expiring between 2000 and 2010. With the
Acquisition, the Company acquired approximately $375 million of tax net
operating loss carryforwards, subject to certain limitations, expiring between
2000 and 2008. Under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), the Company is required to record a
deferred tax asset for the future tax benefit of these tax net operating loss
carryforwards, as well as other items, if realization is "more likely than
not." As previously discussed, the Acquisition gives the Company a greater
critical mass with which to compete in the U.S. as it has more than doubled the
Company's U.S. revenue base. In addition, with the combination of the Company
and Western, the Company has realized significant consolidation benefits.
Management estimates that approximately $40 million of overhead and redundant
operating costs have been eliminated annually as a result of the combination of
the two companies. Management has concluded that the Company's future U.S.
taxable income will be sufficient over the remaining carryforward periods to
realize the tax benefits represented by approximately $332 million of tax net
operating loss carryforwards acquired with Western and generated by the
Company's operations prior to the Acquisition. The tax benefits resulting from
the Acquisition have been included in the approximately $84 million net
deferred tax asset recognized in the purchase price allocation at the
acquisition date. Valuation allowances have been established for the benefits
of the tax net operating loss carryforwards that are estimated to expire prior
to their utilization.
Requirements for Capital: Excluding acquisitions, capital expenditures during
the quarter were $10.4 million, or $4.3 million higher than the spending in the
comparable quarter of the prior year. The current quarter's spending related
primarily to international expansion opportunities, primarily in Latin America,
and upgrades of the Company's information systems. Other investing activities
included the acquisition of the remaining 60% interest in the Company's joint
venture in Brazil for total consideration of $5.4 million consisting of $3.7
million of cash and $1.7 million of debt assumed by the Company.
Capital expenditures for fiscal 1996 are projected to be approximately $45
million, excluding acquisitions, and are expected to include spending for
continued geographic expansions of all service lines, construction or upgrading
of at least two offshore vessels, additional capacity in certain high margin
locations and normal levels of replacement capital. The actual amount of
fiscal 1996 capital expenditures will be primarily dependent upon the
availability of expansion opportunities and will be funded by cash flows from
operating activities and available credit facilities. Management believes cash
flows from operating activities and available lines of credit, if necessary,
will be sufficient to fund projected capital expenditures.
10
11
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
The Company held its Annual Meeting of Stockholders on January 25,
1996, in Houston, Texas. All nominated directors were elected, and
the amendment of the Company's 1995 Incentive Plan was approved.
Votes in Votes
Favor Withheld
-------- --------
25,186,916 341,702
(i) Directors elected at the Annual Meeting:
Class III Directors
-------------------
L. William Heiligbrodt
James E. McCormick
J.W. Stewart
Directors with terms of office continuing after the Annual
Meeting:
Class I Directors
-----------------
John R. Huff
R. A. LeBlanc
Michael E. Patrick
Class II Directors
------------------
William J. Johnson
Don D. Jordan
Michael McShane
Votes in Votes Broker
Favor Against Abstain Nonvotes
-------- ------- ------- --------
(ii) Amendment of Article IV
of the Company's 1995 Incentive
Plan 19,712,850 5,661,782 153,986 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Bylaws, as amended, effective December 7, 1995.
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed by the Company on
February 6, 1996, to report the pro forma statement of
operations of the Company and The Western Company of North
America as of September 30, 1995.
11
12
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: February 14, 1996 BY /s/ Margaret Barrett Shannon
----------------------------------
Margaret Barrett Shannon
Vice President and
General Counsel
Date: February 14, 1996 BY /s/ Matthew D. Fitzgerald
----------------------------------
Matthew D. Fitzgerald
Controller and Chief
Accounting Officer
12
13
EXHIBIT INDEX
3.1 Bylaws, as amended, effective December 7, 1995.
21.1 Subsidiaries of the Registrant.
27 Financial Data Schedule