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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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
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 38,334,265 shares of the registrant's common stock, $.10 par value,
outstanding as of May 13, 1997.
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BJ SERVICES COMPANY
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statement of Operations (Unaudited) - Three
and six months ended March 31, 1997 and 1996 3
Consolidated Condensed Statement of Financial Position -
March 31, 1997 (Unaudited) and September 30, 1996 4
Consolidated Condensed Statement of Cash Flows (Unaudited) -
Six months ended March 31, 1997 and 1996 5
Notes to Unaudited Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
PART II - OTHER INFORMATION 23
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 1996
--------- --------- --------- ---------
Revenue $ 343,698 $ 200,794 $ 684,078 $ 407,295
Operating expenses:
Cost of sales and services 273,651 167,163 544,451 334,249
Research and engineering 6,080 3,858 11,992 7,602
Marketing 12,230 9,600 23,801 17,883
General and administrative 12,548 8,233 24,673 16,722
Goodwill amortization 3,601 1,329 7,385 2,671
--------- --------- --------- ---------
Total operating expenses 308,110 190,183 612,302 379,127
--------- --------- --------- ---------
Operating income 35,588 10,611 71,776 28,168
Interest expense (7,978) (5,557) (16,298) (11,095)
Interest income 262 247 303 326
Other income - net 769 739 852 1,339
--------- --------- --------- ---------
Income before income taxes 28,641 6,040 56,633 18,738
Income taxes 8,444 1,617 16,462 5,170
--------- --------- --------- ---------
Net income $ 20,197 $ 4,423 $ 40,171 $ 13,568
========= ========= ========= =========
Net income per share:
Primary $ .50 $ .15 $ .99 $ .48
Fully diluted $ .49 $ .15 $ .98 $ .46
Average shares outstanding:
Primary 40,797 28,664 40,716 28,560
Fully diluted 40,969 29,281 40,916 29,241
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
MARCH 31, SEPTEMBER 30,
1997 1996
---------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 3,284 $ 2,897
Receivables - net 287,573 271,583
Inventories:
Finished goods 64,166 59,926
Work in process 5,435 9,479
Raw materials 18,942 17,696
---------- ----------
Total inventories 88,543 87,101
Deferred income taxes 13,087 19,349
Other current assets 20,964 37,217
---------- ----------
Total current assets 413,451 418,147
Property - net 569,931 558,156
Deferred income taxes 173,070 132,666
Goodwill - net 539,866 567,260
Other assets 17,116 32,931
---------- ----------
$1,713,434 $1,709,160
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 134,549 $ 141,966
Short-term borrowings and current
portion of long-term debt 80,684 34,358
Accrued employee compensation and benefits 33,918 32,227
Income and other taxes 14,493 13,698
Accrued insurance 13,571 13,282
Other accrued liabilities 53,467 56,494
---------- ----------
Total current liabilities 330,682 292,025
Long-term debt 447,066 523,004
Deferred income taxes 12,574 11,740
Accrued post retirement benefits and other 34,261 40,688
Stockholders' equity 888,851 841,703
---------- ----------
$1,713,434 $1,709,160
========== ==========
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
MARCH 31,
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,171 $ 13,568
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of unearned compensation 750 546
Depreciation and amortization 45,608 29,305
Deferred income taxes 11,884 593
Changes in:
Receivables (14,029) 3,141
Inventories 1,898 (2,111)
Accounts payable (9,730) 1,139
Other current assets and liabilities (274) (17,889)
Other - net (30,688) (9,710)
---------- ----------
Net cash provided by operating activities 45,590 18,582
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (32,241) (21,795)
Proceeds from disposal of assets 25,224 735
Acquisition of business, net of cash acquired (13,464) (3,700)
---------- ----------
Net cash used for investing activities (20,481) (24,760)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - net 3,421
Reduction of borrowings - net (29,612)
Proceeds from issuance of stock 4,890 4,006
---------- ----------
Net cash provided by (used for) financing activities (24,722) 7,427
Increase in cash and cash equivalents 387 1,249
Cash and cash equivalents at beginning of period 2,897 1,842
---------- ----------
Cash and cash equivalents at end of period $ 3,284 $ 3,091
========== ==========
SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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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 March 31, 1997, the results of
operations for each of the three-month and six-month periods ended March 31,
1997 and 1996 and cash flows for each of the six-month periods ended March 31,
1997 and 1996. The consolidated condensed statement of financial position at
September 30, 1996 is derived from the September 30, 1996 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 six-month period ended March 31, 1997 are
not necessarily indicative of the results to be expected for the full year.
Certain amounts for fiscal 1996 have been reclassified in the accompanying
consolidated condensed financial statements to conform to the current year
presentation.
NOTE 2 EARNINGS PER SHARE
Primary earnings per share are 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.
Fully diluted earnings per share are 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 closing market price of the Company's
common stock for each of the periods presented if greater than the average
market price during the period.
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The following table presents information necessary to calculate earnings per
share for the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 1996
--------- --------- --------- ---------
Net income $ 20,197 $ 4,423 $ 40,171 $ 13,568
========= ========= ========= =========
Average primary common and common
equivalent shares outstanding:
Common stock 38,313 28,095 38,260 28,055
Common stock equivalents from assumed
exercise of stock options 833 569 828 505
Common stock equivalents from assumed
exercise of warrants 1,651 1,628
--------- --------- --------- ---------
40,797 28,664 40,716 28,560
========= ========= ========= =========
Primary earnings per share $ .50 $ .15 $ .99 $ .48
========= ========= ========= =========
Average fully diluted common and common
equivalent shares outstanding:
Common stock 38,313 28,095 38,260 28,055
Common stock equivalents from
assumed exercise of stock options 866 685 866 685
Common stock equivalents from
assumed exercise of warrants 1,790 501 1,790 501
--------- --------- --------- ---------
40,969 29,281 40,916 29,241
========= ========= ========= =========
Fully diluted earnings per share $ .49 $ .15 $ .98 $ .46
========= ========= ========= =========
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share." SFAS
128 establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing EPS
previously found in Accounting Principles Board Opinion No. 15, "Earnings Per
Share," and makes them comparable to international EPS standards. The statement
replaces the presentation of Primary EPS and requires presentation of Basic EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. This statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. Proforma basic EPS for the three months ended
March 31, 1997 and 1996 is $ .53 and $ .16, respectively. Proforma basic EPS for
the six months ended March 31, 1997 and 1996 is $1.05 and $ .48, respectively.
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NOTE 3 ACQUISITION OF BUSINESS
Effective December 1, 1996, the Company acquired the remaining 51% ownership of
its previously unconsolidated joint venture in Argentina, for total
consideration of $13.5 million which was funded through borrowings under
existing credit facilities. 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 proforma information is not
presented.
NOTE 4 SUPPLEMENTAL GUARANTOR INFORMATION
In August 1996, the Company exchanged unsecured 7% Series B Notes due 2006 (the
"7% Series B Notes") for its then outstanding unsecured 7% Series A Notes due
2006. Three of the Company's wholly owned subsidiaries, BJ Services Company,
U.S.A., BJ Service International, Inc. and BJ Services Company Middle East
(collectively, the "Guarantor Subsidiaries"), are guarantors of the 7% Series B
Notes. Each of the Guarantor Subsidiaries has fully and unconditionally
guaranteed, on a joint and several basis, the Company's obligation to pay
principal and interest with respect to the 7% Series B Notes.
Substantially all of the Company's operating income and cash flow is generated
by its subsidiaries. As a result, funds necessary to meet the Company's debt
service obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Company's
subsidiaries, could limit the Company's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations, including
the payment of principal and interest on the 7% Series B Notes. Although
holders of the 7% Series B Notes are direct creditors of the Company's
principal direct subsidiaries by virtue of the guarantees, the Company has
subsidiaries ("Non-Guarantor Subsidiaries") that are not included among the
Guarantor Subsidiaries, and such subsidiaries are not obligated with respect to
the 7% Series B Notes. As a result, the claims of creditors of the
Non-Guarantor Subsidiaries will effectively have priority with respect to the
assets and earnings of such companies over the claims of creditors of the
Company, including the holders of the 7% Series B Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed statements of financial position as of
March 31, 1997 and September 30, 1996, consolidating condensed statements of
operations for each of the three-month and six-month periods ended March 31,
1997 and 1996 and consolidating condensed statements of cash flows for each of
the six-month periods ended March 31, 1997 and 1996.
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2. BJ Services Company (the "Parent"), combined Guarantor Subsidiaries
and combined Non-Guarantor Subsidiaries with their investments in subsidiaries
accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of
its subsidiaries.
The Company has not presented separate financial statements and other
disclosures concerning the Guarantor Subsidiaries because management does not
believe that such information is material to investors in the 7% Series B
Notes.
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SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1997
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- -------------- -------------
Revenue $ $ 185,425 $ 164,121 $ (5,848) $ 343,698
Operating expenses:
Cost of sales and services 151,342 128,157 (5,848) 273,651
Research and engineering 2,000 4,080 6,080
Marketing 9,160 3,070 12,230
General and administrative 6,344 6,204 12,548
Goodwill amortization 1,259 2,342 3,601
-------------- ------------- ------------- -------------- -------------
Total operating expenses 170,105 143,853 (5,848) 308,110
-------------- ------------- ------------- -------------- -------------
Operating income 15,320 20,268 35,588
Interest income 1,280 132 (1,150) 262
Interest expense (5,588) (3,540) 1,150 (7,978)
Income from equity investees 20,197 8,401 0 (28,598)
Other income - net 575 194 769
-------------- ------------- ------------- -------------- -------------
Income before income taxes 20,197 19,988 17,054 (28,598) 28,641
Income tax expense (benefit) (209) 8,653 8,444
-------------- ------------- ------------- -------------- -------------
Net income $ 20,197 $ 20,197 $ 8,401 $ (28,598) $ 20,197
============== ============= ============= ============== =============
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SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1996
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- -------------- -------------
Revenue $ $ 133,095 $ 77,141 $ (9,442) $ 200,794
Operating expenses:
Cost of sales and services 118,344 58,261 (9,442) 167,163
Research and engineering 3,638 220 3,858
Marketing 7,105 2,495 9,600
General and administrative 4,921 3,312 8,233
Goodwill amortization 1,167 162 1,329
-------------- ------------- ------------- -------------- -------------
Total operating expenses 135,175 64,450 (9,442) 190,183
-------------- ------------- ------------- --------------- -------------
Operating income (loss) (2,080) 12,691 10,611
Interest income 366 242 (361) 247
Interest expense (4,801) (1,117) 361 (5,557)
Income from equity investees 4,423 8,816 (13,239)
Other income (expense) - net 997 (258) 739
-------------- ------------- ------------- -------------- -------------
Income before income taxes 4,423 3,298 11,558 (13,239) 6,040
Income tax expense (benefit) (1,125) 2,742 1,617
-------------- ------------- ------------- -------------- -------------
Net income $ 4,423 $ 4,423 $ 8,816 $ (13,239) $ 4,423
============== ============= ============= ============== =============
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SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, 1997
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- -------------- -------------
Revenue $ $ 378,073 $ 320,208 $ (14,203) $ 684,078
Operating expenses:
Cost of sales and services 306,068 252,586 (14,203) 544,451
Research and engineering 3,848 8,144 11,992
Marketing 17,312 6,489 23,801
General and administrative 12,629 12,044 24,673
Goodwill amortization 2,381 5,004 7,385
-------------- ------------- ------------- -------------- -------------
Total operating expenses 342,238 284,267 (14,203) 612,302
-------------- ------------- ------------- -------------- -------------
Operating income 35,835 35,941 71,776
Interest income 2,232 483 (2,412) 303
Interest expense (11,335) (7,375) 2,412 (16,298)
Income from equity investees 40,171 16,367 (56,538)
Other income - net 848 4 852
-------------- ------------- ------------- -------------- -------------
Income before income taxes 40,171 43,947 29,053 (56,538) 56,633
Income tax expense 3,776 12,686 16,462
-------------- ------------- ------------- -------------- -------------
Net income $ 40,171 $ 40,171 $ 16,367 $ (56,538) $ 40,171
============== ============= ============= ============== =============
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SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, 1996
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- -------------- -------------
Revenue $ $ 273,122 $ 152,226 $ (18,053) $ 407,295
Operating expenses:
Cost of sales and services 236,640 115,662 (18,053) 334,249
Research and engineering 7,196 406 7,602
Marketing 13,647 4,236 17,883
General and administrative 10,098 6,624 16,722
Goodwill amortization 2,334 337 2,671
-------------- ------------- ------------- -------------- -------------
Total operating expenses 269,915 127,265 (18,053) 379,127
-------------- ------------- ------------- -------------- -------------
Operating income 3,207 24,961 28,168
Interest income 729 320 (723) 326
Interest expense (9,609) (2,209) 723 (11,095)
Income from equity investees 13,568 16,585 (30,153)
Other income (expense) - net 1,620 (281) 1,339
-------------- ------------- ------------- -------------- -------------
Income before income taxes 13,568 12,532 22,791 (30,153) 18,738
Income tax expense (benefit) (1,036) 6,206 5,170
-------------- ------------- ------------- -------------- -------------
Net income $ 13,568 $ 13,568 $ 16,585 $ (30,153) $ 13,568
============== ============= ============= ============== =============
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SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF FINANCIAL POSITION
(IN THOUSANDS)
MARCH 31, 1997
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- ---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ $ 3,284 $ $ $ 3,284
Receivables - net 116,180 171,393 287,573
Inventories - net 40,903 47,640 88,543
Deferred income taxes 13,087 13,087
Other current assets 7,755 13,209 20,964
-------------- ------------- ------------- ---------------- --------------
Total current assets 181,209 232,242 413,451
Investment in subsidiaries 254,315 168,113 (422,428)
Intercompany advances 635,124 (635,124)
Property - net 304,424 265,507 569,931
Deferred income taxes 140,158 32,912 173,070
Goodwill - net 128,604 411,262 539,866
Other assets 11,004 6,112 17,116
-------------- ------------- ------------- ---------------- --------------
$ 889,439 $ 933,512 $ 948,035 $ (1,057,552) $ 1,713,434
============== ============= ============= ================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ $ 76,458 $ 58,091 $ $ 134,549
Short-term borrowings and
current portion of long-term debt 14,810 65,874 80,684
Accrued employee
compensation and benefits 19,315 14,603 33,918
Income and other taxes 1,467 13,026 14,493
Other accrued liabilities 588 30,091 36,066 293 67,038
-------------- ------------- ------------- ---------------- --------------
Total current liabilities 588 142,141 187,660 293 330,682
Long-term debt 257,502 189,564 447,066
Deferred income taxes 12,574 12,574
Accrued post retirement benefits
and other long-term liabilities 34,375 (114) 34,261
Intercompany advances-net 245,179 390,238 (635,417)
Stockholders' equity 888,851 254,315 168,113 (422,428) 888,851
-------------- ------------- ------------- ---------------- --------------
$ 889,439 $ 933,512 $ 948,035 $ (1,057,552) $ 1,713,434
============== ============= ============= ================ ==============
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SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF FINANCIAL POSITION
(IN THOUSANDS)
SEPTEMBER 30, 1996
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ---------------- ------------- ---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ $ 2,897 $ $ $ 2,897
Receivables - net 109,110 162,473 271,583
Inventories - net 39,222 47,879 87,101
Deferred income taxes 19,349 19,349
Other current assets 5,379 31,838 37,217
------------- ---------------- ------------- ---------------- --------------
Total current assets 175,957 242,190 418,147
Investment in subsidiaries 213,404 150,339 (363,743)
Intercompany advances - net 628,979 (628,979)
Property - net 292,075 266,081 558,156
Deferred income taxes 112,574 20,092 132,666
Goodwill - net 171,551 395,709 567,260
Other assets 13,467 19,464 32,931
------------- ---------------- ------------- ---------------- --------------
$ 842,383 $ 915,963 $ 943,536 $ (992,722) $ 1,709,160
============= ================ ============= ================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ $ 78,740 $ 63,226 $ $ 141,966
Short-term borrowings and
current portion of long-term debt 6,015 28,343 34,358
Accrued employee
compensation and benefits 20,548 11,679 32,227
Income and other taxes 2,635 11,063 13,698
Other accrued liabilities 680 35,428 33,668 69,776
------------- ---------------- ------------- ---------------- --------------
Total current liabilities 680 143,366 147,979 292,025
Long-term debt 276,461 246,543 523,004
Deferred income taxes 11,740 11,740
Accrued post retirement
benefits and other 39,343 1,345 40,688
Intercompany advances - net 243,389 385,590 (628,979)
Stockholders' equity 841,703 213,404 150,339 (363,743) 841,703
------------- ---------------- ------------- ---------------- --------------
$ 842,383 $ 915,963 $ 943,536 $ (992,722) $ 1,709,160
============= ================ ============= ================ ==============
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SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, 1997
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,171 $ 40,171 $ 16,367 $ (56,538) $ 40,171
Adjustments to reconcile net income to
cash provided by (used for) operating
activities:
Depreciation and amortization 20,267 25,341 45,608
Recognition of unearned compensation 750 750
Deferred income taxes 3,434 8,450 11,884
Income of equity investees (40,171) (16,367) 56,538
Changes in:
Receivables (7,070) (6,959) (14,029)
Accounts payable (2,282) (7,448) (9,730)
Inventories (1,681) 3,579 1,898
Other current assets and liabilities (92) (3,852) 3,377 293 (274)
Advances, net (4,798) (49,559) 54,650 (293)
Other, net 22,138 (52,826) (30,688)
-------------- ------------- ------------- -------------- -------------
Net cash provided by (used for)
operating activities (4,890) 5,949 44,531 45,590
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (17,784) (14,457) (32,241)
Proceeds from disposal of assets 22,386 2,838 25,224
Acquisition of business,
net of cash acquired (13,464) (13,464)
-------------- ------------- ------------- -------------- -------------
Net cash used for
investing activities 4,602 (25,083) (20,481)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 4,890 4,890
Proceeds from borrowings-net (10,164) (19,448) (29,612)
-------------- ------------- ------------- -------------- -------------
Net cash provided by (used for)
financing activities 4,890 (10,164) (19,448) (24,722)
Increase in cash and cash equivalents 387 387
Cash and cash equivalents
at beginning of period 2,897 2,897
-------------- ------------- ------------- -------------- -------------
Cash and cash equivalents
at end of period $ $ 3,284 $ $ $ 3,284
============== ============= ============= ============== =============
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SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT
OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, 1996
COMBINED COMBINED
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,568 $ 13,568 $ 16,585 $ (30,153) $ 13,568
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 18,066 11,239 29,305
Recognition of unearned compensation 546 546
Deferred income taxes 593 593
Income of equity investees (13,568) (16,585) 30,153
Changes in:
Receivables 6,340 (3,199) 3,141
Accounts payable 20,174 (19,035) 1,139
Inventories 107 (2,218) (2,111)
Other current assets and liabilities (205) (17,701) (2,820) 2,837 (17,889)
Advances, net (3,801) (13,522) 20,160 (2,837)
Other, net (3,415) (6,295) (9,710)
-------------- ------------- ------------- -------------- -------------
Net cash provided by (used for)
operating activities (4,006) 8,171 14,417 18,582
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (11,081) (10,714) (21,795)
Proceeds from disposal of assets 479 256 735
Acquisition on business, net of
cash acquired (3,700) (3,700)
-------------- ------------- ------------- -------------- -------------
Net cash used for
investing activities (10,602) (14,158) (24,760)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 4,006 4,006
Proceeds from (reduction of)
borrowings-net 3,680 (259) 3,421
-------------- ------------- ------------- -------------- -------------
Net cash provided by (used for)
financing activities 4,006 3,680 (259) 7,427
Increase in cash and cash equivalents 1,249 1,249
Cash and cash equivalents
at beginning of period 1,842 1,842
-------------- ------------- ------------- -------------- -------------
Cash and cash equivalents
at end of period $ $ 3,091 $ $ $ 3,091
============== ============= ============= ============== =============
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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 is
expected to generate approximately one-half of its revenues during fiscal 1997.
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 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 in April 1995 to consolidate its U.S. operations with those
of The Western Company of North America ("Western"), which had a larger
presence in the United States. The Company's U.S. critical mass was further
increased through the acquisition of Nowsco Well Service Ltd. ("Nowsco") in
June 1996 which added operations in the mid-continental and northeastern U.S.,
the latter being an area in which the Company did not have an existing
presence.
Relatively stronger oil and gas prices have recently caused U.S. exploration
and development companies to be more optimistic about the industry. As a
result, the normal seasonal drilling decline did not occur during the March
1997 quarter and drilling activity reached 900 rigs for the first time since
1993. U.S. exploration and production spending is forecast to increase 8-10% in
1997 from 1996. The rig count in the United States averaged 856 and 851 active
drilling rigs during the respective three and six -month periods ended March
31, 1997. Such activity represents a 21% and 16% increase over the same three
and six-month periods of the prior fiscal year, respectively. The activity
increase during the quarter was due to an increase in both oil and natural gas
drilling.
With the exception of Canada, international drilling activity has historically
been less volatile than domestic drilling activity. International drilling
activity increased by 8% compared with the prior year's three and six-month
periods primarily on the strength of development work in Canada and exploration
programs in the Middle East.
In both the U.S. and internationally, there has been a continuing trend by oil
and gas companies toward alliances with service companies. These alliances take
various forms including packaged or integrated services, single source
suppliers and turnkey agreements. More than 20% of the Company's revenues are
generated under such alliances.
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19
EXPANSIONS AND ACQUISITIONS
The Company's expansion and acquisition efforts over the past several years
have been focused on adding critical mass to its U.S. operations and
international geographic expansions of its existing product lines. The
acquisition of Nowsco in June 1996 (the "Nowsco Acquisition") contributed
towards both these efforts by giving the Company the number one pumping
services market position in Canada, where the Company had not operated since
1992, and adding to the Company's existing market positions in several key U.S.
and international markets. The Nowsco Acquisition added approximately 40% to
the Company's existing revenue base. The Company strengthened its market
position in Argentina in December 1996 by acquiring the remaining 51% interest
in its Argentine joint venture, NASA. The Company's original 49% share was
acquired through the Nowsco Acquisition.
RESULTS OF OPERATIONS
Revenue: Revenue increased by 71% and 68% over the same three and six-month
periods of the previous fiscal year, primarily as a result of the Nowsco
Acquisition and a strong recovery in the U.S. oil and gas markets.
The Company's U.S. pressure pumping operations continued its strong year over
year improvement with a 48% revenue increase over the prior year's second
quarter. Taking into account the prior year's Nowsco revenues, these operations
showed a pro forma revenue increase of 22%, benefiting from a 21% increase in
the active rig count. For the six-month period ended March 31, 1997, U.S.
revenues increased 47% over the same period of the prior year. Revenues in most
of the central U.S. regions were up sharply, most significantly South Texas,
East Texas and the Permian Basin regions. Management expects U.S. drilling
activity to remain strong during the remainder of fiscal 1997 in relation to
the prior year.
The Company's international pressure pumping operations continued their strong
growth with revenues increasing by over 100% (16% on a pro forma basis) from
the prior year's second quarter and first six-month period. This represents the
seventeenth consecutive quarter of international revenue improvement. The
Company's newly acquired Canadian operations achieved their highest ever
quarterly revenue level increasing 27% and 23% on a pro forma basis over the
prior year's three and six-month periods, respectively. Such activity increase
was primarily a result of a later than usual Spring breakup and particularly
strong fracturing and coiled tubing activity. Other international areas showing
significant revenue increases were UK (mainly coiled tubing), Indonesia and
Thailand. The Company's Middle East region also had another strong quarter
reflecting new contracts in India, Egypt and Saudi Arabia. The Company's
operations in Venezuela continued to benefit from increased coiled tubing
revenues resulting from the addition of one coiled tubing barge since the
previous year. Partially offsetting these gains were revenue declines in
Argentina, due to a slowdown in drilling activity by YPF. Management expects
the year over year international revenue increases to continue over the next
several quarters.
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20
The Company's other service lines, which include tubular services,
commissioning and pipeline inspection and production chemical businesses showed
an overall revenue increase of 87% and 84% for the three and six-month periods
ended March 31, 1997, respectively, over the same periods of the previous year
due mainly to the Nowsco Acquisition, as well as activity gains in each of
these service lines on a pro forma basis.
Operating Income: Operating income more than doubled for both the three and
six-month periods as a result of the revenue increase and higher operating
margins resulting from efficiencies derived from the combination of the
Company's and former Nowsco operations and the operating leverage realized from
the increase in U.S. business. The cost of sales and services as a percentage
of revenue during the three and six-month periods was 3.7% and 2.5% lower,
respectively, than in the same periods of the prior year primarily as a result
of cost reduction efforts implemented after the Nowsco Acquisition and the
economies of scale in having a larger U.S. operation. Other operating expenses,
excluding goodwill amortization, increased by 42% and 43% over the same three
and six-month periods of fiscal 1996 primarily as a result of additional
overhead from the former Nowsco operations. The increase in goodwill
amortization resulted from the Nowsco Acquisition, which was accounted for
under the purchase method of accounting.
Interest expense increased by $2.4 million and $5.2 million, respectively, over
the same three and six-month periods of the previous year due to increased
borrowings to fund the Nowsco Acquisition. See "Capital Resources and
Liquidity."
The year-to-date effective tax rate increased to 29% due to the higher U.S.
profitability which is taxed at a 35% statutory rate.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided from operating activities for the six months ended March 31,
1997 increased by $27.0 million from the prior year's figure. Higher
profitability, depreciation and amortization were partially offset by higher
receivable balances and the payment of merger related expenses previously
accrued. Net cash used for investing activities for the six-month period was
$20.5 million, a $4.3 million decrease from the first six months of the prior
year due to higher capital spending and the acquisition of the remaining 51%
ownership of the Company's previously unconsolidated joint venture in
Argentina, offset by the receipt of $20.3 million in cash on the sale of the
hull from the Renaissance, one of the Company's stimulation vessels. As a
result of cash received from the sale of the hull of the Renaissance and
because net cash flows from operating activities were sufficient to cover the
Company's capital requirements, the Company was able to reduce net borrowings
by $29.6 million during the current six-month period.
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 June 1996, the Company replaced its
existing credit facility with a committed, unsecured bank credit facility (the
"New Bank Credit Facility") executed to accommodate the Nowsco Acquisition.
20
21
The New Bank Credit Facility consists of a Canadian $320.0 million
(approximately U.S. $234 million) six-year term loan, which is repayable in 22
quarterly installments which began in March 1997, and a five-year U.S. $325.0
million revolving facility. At March 31, 1997, borrowings outstanding under the
New Bank Credit Facility amounted to $348.4 million consisting of $223.4
million under the term loan and $125.0 million borrowed under the revolver. At
March 31, 1997, principal reductions of term loans under the New Bank Credit
Facility are due in aggregate installments of $17,056,000; $34,113,000;
$43,616,000; $46,783,000; $46,783,000 and $35,062,000 in the years ending
September 30, 1997, 1998, 1999, 2000, 2001 and 2002, respectively.
The outstanding balance of the Company's 9.2% Notes, issued in 1991, was $12.0
million at March 31, 1997. Principal reductions of $6.0 million are required
annually each August until maturity on August 1, 1998.
In addition to the committed facility, the Company had $100.0 million in
various unsecured, discretionary lines of credit at March 31, 1997 which expire
at various dates in 1998. 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 March 31, 1997 and September
30, 1996, there were $40.4 million and $2.5 million, respectively, in
outstanding borrowings under these lines of credit.
The Company's interest-bearing debt represented 37.3% of its total
capitalization at March 31, 1997, a decrease from 39.8% at the previous fiscal
year-end. The Company's New 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 New Bank Credit Facility, combined with other discretionary credit
facilities and cash flow from operations, will provide the Company with
sufficient capital resources and liquidity to manage its routine operations and
fund projected capital expenditures.
At March 31, 1997, the Company had approximately $648 million of United States
tax net operating loss carryforwards expiring between 2000 and 2011. With the
Nowsco Acquisition, the Company acquired approximately $33 million of U.S. tax
net operating loss carryforwards, subject to certain limitations, expiring
between 2000 and 2011; approximately $115 million of non-U.S. tax net operating
loss carryforwards expiring in varying amounts beginning in 1997; and
approximately $7 million in non-U.S. tax credits which expire in varying
amounts between 1999 and 2009. 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." The 1995 acquisition of The Western Company of North
America (the "Western Acquisition") provided the Company with a greater
critical mass with which to compete in the United States as it more than
doubled the Company's United States revenue base. In addition, with the
combination of Nowsco and Western, the Company has realized significant
consolidation benefits. Management estimates that in excess of $64 million of
overhead and redundant
21
22
operating costs have been eliminated annually as a result of the combination of
the three companies. Management has concluded that the Company's future taxable
income will be sufficient over the remaining carryforward periods to realize the
tax benefits represented by approximately $510 million of U.S. tax net operating
loss carryforwards acquired with the acquisitions of Western and Nowsco and
generated by the Company's operations prior to such acquisitions. Net tax
benefits resulting from the acquisitions approximate $160 million and have been
included as a deferred tax asset recognized in the purchase price allocation.
Valuation allowances have been established for the benefits of the tax net
operating loss carryforwards that are estimated to expire prior to their
utilization. In March 1997, the Company increased its estimate of the amount of
pre-acquisition losses of Western and Nowsco for which it is more likely than
not that tax benefits will ultimately be realized. Accordingly, the Company has
recorded a $41.0 million increase in the deferred tax asset along with a
corresponding decrease in goodwill. Management estimates that the utilization of
net operating loss carryforwards will result in cash taxes equal to
approximately one-half of the book tax rate over the next several years.
Excluding acquisitions, capital expenditures during the first six months of the
fiscal year were $32.2 million, or $10.4 million higher than the spending in
the comparable period of the prior year. The current year'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 51% interest in the Company's joint
venture in Argentina for total consideration of $13.5 million.
Capital expenditures for fiscal 1997 are projected to be approximately $70-80
million, excluding acquisitions, and are expected to include spending for
continued geographic expansions of all service lines, construction of an
additional coiled tubing vessel, additional capacity in certain high margin
locations and normal levels of replacement capital. The actual amount of fiscal
1997 capital expenditures (excluding acquisitions) will be primarily dependent
upon the availability of expansion opportunities and are expected to 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.
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 concerning, among other
things, the Company's prospects, 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," and
similar terms and phrases. 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.
22
23
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 23, 1997, in Houston, Texas. All nominated directors
were elected.
(i) Directors elected at the Annual Meeting:
Votes in Votes Broker
Class I Directors Favor Withheld Non-Votes
- ----------------- --------- -------- ---------
John R. Huff 34,994,047 390,927 0
R. A. LeBlanc 34,993,537 391,437 0
Michael E. Patrick 34,994,038 390,936 0
Directors with terms of office continuing after the Annual
Meeting:
Class II Directors
------------------
Don D. Jordan
Michael McShane
Class III Directors
-------------------
L. William Heiligbrodt
James E. McCormick
J.W. Stewart
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Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Bylaws of the Company, as amended
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: May 15, 1997 BY \s\ Margaret Barrett Shannon
-----------------------------------
Margaret Barrett Shannon
Vice President and General
Counsel
Date: May 15, 1997 BY \s\ Matthew D. Fitzgerald
-----------------------------------
Matthew D. Fitzgerald
Controller and Chief
Accounting Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Bylaws of the Company, as amended
27.1 Financial Data Schedule