1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly report pursuant to section 13 or 15(d) of the
[X] Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 1-12542
UTI ENERGY CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2037823
- ---------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
SUITE 225N
16800 GREENSPOINT PARK
HOUSTON, TEXAS 77060
- ---------------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(281) 873-4111
----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former Address)
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 registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each class of registrant's common
stock, as of the latest practicable date.
16,501,281 SHARES OF COMMON STOCK AT JULY 23, 1999.
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INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998........................................................ 3
Condensed Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and 1998.......................................... 4
Condensed Consolidated Statements of Cash Flows for the Three and
Six Months Ended June 30, 1999 and 1998...................................... 5
Notes to Condensed Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders........................... 22
Item 6. Exhibits and Reports on Form 8-K.............................................. 23
Signatures.................................................................... 24
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PART I FINANCIAL INFORMATION
ITEM I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
UTI ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 17,957 $ 10,337
Accounts receivable, net of allowance for doubtful accounts
of $2,465 in 1999 and $1,919 in 1998 .................................... 21,500 25,485
Federal income tax receivable ............................................. 1,652 3,200
Deferred income taxes ..................................................... 2,198 --
Materials and supplies .................................................... 628 887
Prepaid expenses and other ................................................ 5,965 4,648
--------- ---------
49,900 44,557
PROPERTY AND EQUIPMENT
Land ...................................................................... 1,224 1,224
Buildings and improvements ................................................ 3,367 3,324
Machinery and equipment ................................................... 198,440 202,698
Oil and gas working interests ............................................. 2,035 1,943
Construction in process ................................................... 2,838 2,729
--------- ---------
207,904 211,918
Less accumulated depreciation and amortization ............................ 52,524 47,070
--------- ---------
155,380 164,848
GOODWILL, less accumulated amortization of $2,851 in 1999
and $2,086 in 1998 ...................................................... 20,026 20,791
OTHER ASSETS .............................................................. 1,516 1,871
--------- ---------
$ 226,822 $ 232,067
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .......................................................... $ 10,784 $ 17,649
Accrued payroll costs ..................................................... 2,814 2,387
Accrued health insurance .................................................. 1,306 1,284
Other accrued expenses .................................................... 2,887 2,599
--------- ---------
17,791 23,919
LONG-TERM DEBT, less current portion ...................................... 31,959 31,721
DEFERRED INCOME TAXES ..................................................... 33,847 31,625
OTHER LIABILITIES ......................................................... 656 656
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value, 5,000 shares authorized,
17,104 issued and 16,501 outstanding in 1999,
16,612 shares issued and 16,009 outstanding in 1998 ..................... 17 17
Additional capital ........................................................ 130,432 128,825
Retained earnings ......................................................... 22,125 25,309
Treasury Stock, 603 shares in 1999 and 1998, at cost ...................... (10,005) (10,005)
--------- ---------
142,569 144,146
--------- ---------
$ 226,822 $ 232,067
========= =========
See notes to condensed consolidated financial statements.
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UTI ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES ......................................... $ 28,884 $ 48,403 $ 61,420 $ 96,720
COST OF REVENUES ................................. 23,016 35,315 48,923 70,705
------------ ------------ ------------ ------------
GROSS PROFIT ..................................... 5,868 13,088 12,497 26,015
OTHER COSTS AND EXPENSES
Selling, general and administrative .............. 2,534 2,734 5,258 5,462
Provisions for bad debts ......................... 256 353 548 782
Other charge (note 5) ............................ -- -- 260 --
Depreciation and amortization .................... 5,773 4,553 11,607 8,354
------------ ------------ ------------ ------------
8,563 7,640 17,673 14,598
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) .......................... (2,695) 5,448 (5,176) 11,417
OTHER INCOME (EXPENSE)
Interest expense ................................. (1,031) (878) (2,059) (1,757)
Interest income .................................. 196 312 322 959
Other, net (note 4) .............................. (126) 326 2,829 429
------------ ------------ ------------ ------------
(961) (240) 1,092 (369)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ................ (3,656) 5,208 (4,084) 11,048
INCOME TAXES ..................................... (728) 2,106 (900) 4,399
------------ ------------ ------------ ------------
NET INCOME (LOSS) ................................ $ (2,928) $ 3,102 $ (3,184) $ 6,649
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE ........... $ (0.18) $ 0.19 $ (0.19) $ 0.41
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE ......... $ (0.18) $ 0.18 $ (0.19) $ 0.39
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING
Basic ............................................ 16,496 16,043 16,353 16,097
Diluted .......................................... 16,496 17,179 16,353 17,218
See notes to condensed consolidated financial statements.
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UTI ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
--------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ........................................................................ $ (3,184) $ 6,649
Adjustments to reconcile net income (loss) to net cash
provided by operations
Depreciation ..................................................................... 10,508 7,555
Amortization ..................................................................... 1,099 799
Deferred income taxes ............................................................ 24 271
Amortization of debt discount .................................................... 238 238
Stock compensation expense ....................................................... -- 22
Provisions for bad debts ......................................................... 546 782
Gain on disposals of fixed assets ................................................ (2,939) (293)
Changes in operating assets and liabilities, net of effect of Acquisition
and disposition
Receivables and prepaids ...................................................... 3,670 4,658
Materials and supplies ........................................................ 11 (121)
Accounts payable and accruals ................................................. (5,949) (2,210)
Other ......................................................................... 21 (3,338)
-------- --------
Net cash provided by operating activities ................................ 4,045 15,012
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ..................................................................... (3,213) (26,454)
Acquisition of businesses, net of cash ................................................... -- (30,756)
Net proceeds from disposition ............................................................ 4,935 --
Proceeds from sale of property and equipment ............................................. 615 531
-------- --------
Net cash provided (used) by investing activities ......................... 2,337 (56,679)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt ............................................................. -- (33)
Repurchased Stock ........................................................................ -- (8,992)
Proceeds from exercise of stock options .................................................. 1,238 147
-------- --------
Net cash provided (used) by financing activities ......................... 1,238 (8,878)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... 7,620 (50,545)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................................... 10,337 58,347
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................... $ 17,957 $ 7,802
======== ========
See notes to condensed consolidated financial statements.
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UTI ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
as of June 30, 1999 have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation of the financial position and operating results for
the interim periods have been included. The results of operations for
the three and six months ended June 30, 1999 are not necessarily
indicative of the results for the entire year ending December 31, 1999.
For further information, refer to the Consolidated Financial Statements
and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and the Company's Quarterly
Report on Form 10-Q for the three months ended March 31, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use. This statement
provides guidance on accounting for the cost of software developed or
obtained for internal use and is effective for fiscal years beginning
after December 15, 1998. The Company adopted this standard in the first
quarter of 1999. The change did not have a significant effect on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133, which is
effective for fiscal years beginning after June 15, 1999, requires all
derivatives to be recognized at fair value on the balance sheet. The
Company plans to adopt SFAS 133 no later than January 1, 2001. The
change is not expected to have a significant effect on the Company's
financial statements.
Reclassifications
Certain items in the prior period's financial statements have been
reclassified to conform with the presentation in the current period.
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UTI ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
3. ACQUISITIONS
On April 26, 1999, the Company and Norton Drilling Services ("Norton")
announced that the boards of both companies approved the sale of Norton
to the Company for shares of the Company's Common Stock. According to
the terms of the transaction, each Norton shareholder will receive one
share of the Company's Common Stock for 3.8 shares of Norton Common
Stock. As of July 12, 1999, Norton reported 4,934,321 shares
outstanding. Norton is holding a shareholder meeting on July 26, 1999
to approve the merger. The transaction will be accounted for under the
purchase method of accounting. Norton's assets include sixteen drilling
rigs as well as related drilling equipment.
On April 9, 1998, the Company acquired Peterson Drilling Company
("Peterson"), for a total purchase price of $20.4 million in cash,
which the Company funded from cash on hand following the Company's
public offering in October 1997. Peterson's assets included eight
drilling rigs, as well as related drilling equipment, office facilities
in Midland, Texas and approximately $4.5 million in net working
capital. The acquisition has been accounted for under the purchase
method of accounting. Goodwill of $3.6 million has been recorded
related to this acquisition.
On June 24, 1998, the Company acquired the land drilling assets of
LaMunyon Drilling Corporation for $12.2 million in cash, which the
Company funded from cash on hand following the Company's public
offering in October 1997. The acquired assets consisted of five land
drilling rigs, related spare parts, office equipment and rolling stock.
The acquisition has been accounted for using the purchase method of
accounting. No goodwill was recorded because the estimated fair market
value of the assets acquired exceeded the purchase price.
On July 31, 1998, the Company acquired Suits Enterprises, Inc.
("Suits") for approximately $11.1 million, comprised of $2.9 million in
cash, $7.8 million in 7% four-year notes and 100,000 five-year warrants
of Common Stock. Warrants to purchase 75,000 shares of Common Stock are
exercisable at $26.50 per share and warrants to purchase 25,000 shares
of Common Stock are exercisable at $35.00 per share. Included in the
acquisition are Suits' seven complete drilling rigs plus assorted spare
parts and drilling equipment and a fleet of rolling stock. The
acquisition has been accounted for using the purchase method of
accounting. No goodwill was recorded because the estimated fair market
value of the assets acquired exceeded the purchase price.
4. DISPOSITIONS
In March 1999, the Company sold certain assets of International
Petroleum Service Company, its wholly owned Pennsylvania subsidiary, to
an unrelated party for $5.6 million. A pre-tax gain of $2.8 million was
realized as a result of the sale. Included in the sale were five
drilling rigs, related support equipment, rolling stock, spare parts,
tools and inventory.
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UTI ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
5. OTHER CHARGE
In the first quarter of 1999, the Company incurred a charge related to
a series of actions taken to improve efficiency, increase productivity
and make the Company more competitive in the market place. The actions
included the reduction of regional operating offices from seven to four
and reduced the Company's administrative staff by twenty-six
individuals. The other charge of approximately $.3 million consisted
primarily of employee-related expenses associated with those
reductions.
6. INCOME TAXES
The provision (credit) for income taxes was different than would result
from applying the U.S. statutory rate to income (loss) before income
taxes primarily due to nondeductible expenses and the tax benefit of
operating losses being partially offset by state tax expenses for
certain subsidiaries with taxable income.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Numerator:
----------
Net income (loss) ................................ $ (2,928) $ 3,102 $ (3,184) $ 6,649
======== ======== ======== ========
Denominator:
------------
Denominator for basic earning (loss) per
share - weighted-average shares ................ 16,496 16,043 16,353 16,097
Effect of dilutive securities:
Stock options ............................... -- 968 -- 968
Warrants .................................... -- 168 -- 153
-------- -------- -------- --------
Dilutive potential common shares ............ -- 1,136 -- 1,121
-------- -------- -------- --------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions ............ 16,496 17,179 16,353 17,218
======== ======== ======== ========
Basic earnings (loss) per share .................. $ (0.18) $ 0.19 $ (0.19) $ 0.41
======== ======== ======== ========
Diluted earnings (loss) per share ................ $ (0.18) $ 0.18 $ (0.19) $ 0.39
======== ======== ======== ========
Due to the Company being in a net loss position, the effect of dilutive
securities is antidilutive and therefore not included in the
composition of diluted earnings per share.
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UTI ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
8. CONTINGENCIES
The Company is involved in several claims arising in the ordinary
course of business. In the opinion of management, all of these claims
are covered by insurance or these matters will not have a material
adverse effect on the Company's financial position.
The Company is partially self-insured for employee health insurance
claims. The Company was partially self-insured for workers compensation
for years prior to 1999. The Company incurs a maximum of $100,000 per
employee under medical claims and a maximum of $250,000 per event for
workers compensation claims. Although the Company believes that
adequate reserves have been provided for expected liabilities arising
from its self-insured obligations, it is reasonably possible that
management's estimates of these liabilities will change over the near
term as circumstances develop.
9. INDUSTRY SEGMENT INFORMATION
Reportable segments are business units that offer different services.
The Company has two reportable segments: land drilling and pressure
pumping.
The Company evaluates performance and allocates resources to the
reportable segments based on profit or loss from their operations
before other income (expense) and income taxes. The accounting policies
of the reportable segments are the same as those described in the
summary of significant accounting policies.
The other category in the segment breakdown is attributable to
investments in oil and gas properties. This segment has not met the
quantitative thresholds for determining reportable segments. There are
no intersegment sales and transfers.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- ------------- ------------- -------------
(in thousands)
Revenues:
---------
Land Drilling............................... $ 25,289 $ 42,611 $ 52,861 $ 85,992
Pressure Pumping............................ 3,552 5,745 8,479 10,629
Other....................................... 43 47 80 99
-------------- ------------- ------------- -------------
$ 28,884 $ 48,403 $ 61,420 $ 96,720
============== ============= ============= =============
Selling, General and Administrative:
------------------------------------
Land Drilling............................... $ 687 $ 865 $ 1,569 $ 1,842
Pressure Pumping............................ 830 804 1,739 1,603
Other....................................... - - - -
-------------- ------------- ------------- -------------
1,517 1,669 3,308 3,445
Corporate................................... 1,017 1,065 1,950 2,017
-------------- ------------- ------------- -------------
$ 2,534 $ 2,734 $ 5,258 $ 5,462
============== ============= ============= =============
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UTI ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
9. INDUSTRY SEGMENT INFORMATION (CONTINUED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- ------------- ------------- -------------
(in thousands)
Operating Income (Loss):
------------------------
Land Drilling (1)........................... $ (1,776) $ 5,241 $ (3,636) $ 11,322
Pressure Pumping (1)........................ 120 1,287 736 2,133
Other (1)................................... 11 3 19 14
------------- ------------ ------------ ------------
(1,645) 6,531 (2,881) 13,469
Other Charge................................ -- -- (260) --
Corporate................................... (1,050) (1,083) (2,035) (2,052)
------------- ------------ ------------ ------------
$ (2,695) $ 5,448 $ (5,176) $ 11,417
============= ============ ============ ============
Depreciation and Amortization:
------------------------------
Land Drilling............................... $ 5,402 $ 4,282 $ 10,846 $ 7,811
Pressure Pumping............................ 321 238 643 478
Other....................................... 18 15 33 30
------------- ------------ ------------ ------------
5,741 4,535 11,522 8,319
Corporate................................... 32 18 85 35
------------- ------------ ------------ ------------
$ 5,773 $ 4,553 $ 11,607 $ 8,354
============= ============ ============ ============
Capital Expenditures:
---------------------
Land Drilling............................... $ 1,903 $ 12,951 $ 2,238 $ 23,915
Pressure Pumping............................ 303 2,119 967 2,502
Other....................................... -- -- -- --
------------- ------------ ------------ ------------
2,206 15,070 3,205 26,417
Corporate................................... 8 32 8 37
------------- ------------ ------------ ------------
$ 2,214 $ 15,102 $ 3,213 $ 26,454
============= ============ ============ ============
- ----------------
(1) Operating income (loss) is total operating revenues less operating
expenses, depreciation and amortization and does not include general
corporate expenses, other charge, other income (expense) or income
taxes.
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UTI ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
9. INDUSTRY SEGMENT INFORMATION (CONTINUED)
June 30, December 31,
1999 1998
------------------ -----------------
Segment Assets:
---------------
Land Drilling............................... $ 187,290 $ 204,283
Pressure Pumping............................ 12,916 14,799
Other....................................... 367 404
------------------ -----------------
200,573 219,486
Corporate................................... 26,249 12,581
------------------ -----------------
$ 226,822 $ 232,067
================== =================
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
UTI is a leading provider of onshore contract drilling services to
exploration and production companies and operates one of the largest land
drilling rig fleets in the United States. The Company's drilling operations are
currently concentrated in the prolific oil and natural gas producing basins of
Texas, Oklahoma and New Mexico. The Company's rig fleet consists of 104 land
drilling rigs that are well suited to the requirements of its markets. The
Company's contract drilling services are performed through four regional
drilling units and are marketed under the names FWA Drilling Company,
FWA/Peterson Drilling Company, Southland Drilling Company and Triad Drilling
Company. The Company also provides pressure pumping services in the Appalachian
Basin under the name of Universal Well Services.
Beginning in 1995, the Company made a strategic decision to focus its
efforts on the expansion of its land drilling operations to take advantage of
improving market conditions and the benefits arising from consolidation in the
land drilling industry. To effect this strategy, the Company disposed of its
oilfield distribution business in September 1995 and immediately embarked on a
directed acquisition program aimed at expanding the Company's presence in the
oil and natural gas producing regions in the United States. Pursuant to this
strategy, the Company has acquired 86 rigs since 1995. As a result of these
acquisitions and increased rig utilization and dayrates caused by favorable
market conditions, the Company's revenues grew substantially during 1996 and
1997. During the latter part of 1997 and during 1998, however, the Company and
the United States contract drilling industry, in general, experienced
significant declines in demand and pricing for their services. These depressed
market conditions have resulted in the Company's fleet utilization decreasing to
35% during the first six months of 1999 from 62% for the first six months of
1998.
The Company currently does not expect market conditions in the contract
drilling industry to improve until commodity prices of oil and natural gas
increase substantially and such increases result in increased capital
expenditures by exploration and development companies in the regions in which
the Company operates. Although conditions in the contract drilling industry have
significantly declined over prior periods and further declines are possible, the
Company believes that its strong liquidity position and balance sheet provide it
with the financial flexibility to withstand continued or additional
deterioration in market conditions and the ability to react quickly to
opportunities in the contract drilling industry.
In response to these depressed industry conditions, the Company
undertook a series of actions during the first quarter of 1999 designed to
improve efficiency, increase productivity and make the Company more competitive
in the market place. These actions included the streamlining of certain contract
drilling operations and certain personnel changes. This consolidation of
operations reduced the Company's number of regional operating units from seven
to four and reduced the Company's administrative staff by twenty-six
individuals. As a result of these actions, the Company recorded a one-time other
charge during 1999 of $.3 million, which consisted primarily of employee-related
expenses. In addition, the Company sold certain non-strategic assets of its
Appalachian Basin contract drilling division for $5.6 million, which resulted in
the Company recording a one-time gain of approximately $2.8 million during the
first quarter of 1999. As a result of these initiatives, the Company believes
that it has brought its cost and operating structure more in line with current
industry conditions and has strengthened its balance sheet.
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During April of 1999, the Company and Norton Drilling Services, Inc.
("Norton") jointly announced that the boards of both companies have approved the
sale of Norton to the Company for shares of the Company's Common Stock. Norton's
assets consist of 16 drilling rigs which operate in the Permian Basin, South
Texas and the Rockies. Completion of this transaction is subject to approval by
Norton's stockholders and various other governmental approvals and other
customary closing conditions. Closing is anticipated to occur on July 26, 1999.
RESULTS OF OPERATIONS
The Company views the number of rigs actively drilling in the United
States as a barometer of the overall strength of the domestic oilfield service
industry. Without giving effect to acquisitions, variations in revenues and
gross margins of the Company's core business generally follow the rig count
trend.
The following table presents certain results of operations data for the
Company and average U.S. land rig count for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- ------------- ------------- -------------
(dollars in thousands)
Contract Drilling:
- ------------------
Revenues............................................. $ 25,289 $ 42,611 $ 52,861 $ 85,992
Cost of revenues..................................... $ 20,721 $ 31,870 $ 43,527 $ 64,260
Selling, general and administrative.................. $ 687 $ 865 $ 1,569 $ 1,842
Operating days (1)................................... 3,396 5,329 6,683 10,601
Average revenue per operating day.................... $ 7.447 $ 7.996 $ 7.910 $ 8.112
Average costs per operating day...................... $ 6.102 $ 5.980 $ 6.513 $ 6.062
Average margin per operating day..................... $ 1.345 $ 2.016 $ 1.397 $ 2.050
Average U.S. land rig count (2)...................... 411 688 417 738
Number of owned rigs at end of period................ 104 102 104 102
Average number of rigs owned during period........... 104 97 106 93
Rig utilization percentage (3)....................... 36% 59% 35% 62%
Capital expenditures................................. $ 1,903 $ 12,951 $ 2,238 $ 23,915
Capital expenditures per operating day............... $ 0.560 $ 2.430 $ 0.335 $ 2.256
Pressure Pumping:
- -----------------
Revenues............................................. $ 3,552 $ 5,745 $ 8,479 $ 10,629
Cost of revenues..................................... $ 2,282 $ 3,416 $ 5,369 $ 6,390
Selling, general and administrative.................. $ 830 $ 804 $ 1,739 $ 1,603
Total jobs........................................... 463 799 1,154 1,516
Average revenue per job.............................. $ 7.672 $ 7.190 $ 7.347 $ 7.011
Average costs per job................................ $ 4.929 $ 4.275 $ 4.653 $ 4.215
Average margin per job............................... $ 2.743 $ 2.915 $ 2.694 $ 2.796
Capital expenditures................................. $ 303 $ 2,119 $ 967 $ 2,502
Other and Corporate:
- --------------------
Revenues............................................. $ 43 $ 47 $ 80 $ 99
Cost of revenues..................................... $ 13 $ 29 $ 27 $ 55
Selling, general and administrative.................. $ 1,017 $ 1,065 $ 1,950 $ 2,017
Capital expenditures................................. $ 8 $ 32 $ 8 $ 37
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- ----------------
(1) An operating day is defined as a day during which a rig is being
operated, mobilized, assembled or dismantled while under contract.
(2) Average U.S. land rig count is compiled from data reported by Baker
Hughes, Inc. Baker Hughes, Inc. is an international oilfield service
and equipment company which, for more than twenty years, has conducted
and published a weekly census of active drilling rigs. Its active rig
count is generally regarded as an industry standard for measuring
industry activity levels.
(3) Utilization rates are based on a 365-day year and are calculated by
dividing the number of rigs utilized by the total number of rigs in the
Company's drilling fleet, including stacked rigs. A rig is considered
utilized when it is being operated, mobilized, assembled or dismantled
while under contract. For the quarter ended June 30, 1999, the
utilization rate of the Company's rigs, excluding stacked rigs, was
42%.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues by business segment for the three months ended June 30, 1999
and 1998 are as follows:
Three Months
Ended June 30, %
------------------------------------------ Increase
1999 1998 (Decrease)
---------------- -------------- -----------
(in thousands)
Revenues:
---------
Land Drilling $ 25,289 $ 42,611 (40.7)
Pressure Pumping 3,552 5,745 (38.2)
Other 43 47 (8.5)
---------------- --------------
$ 28,884 $ 48,403 (40.3)
================ ==============
Land drilling revenues decreased as a result of depressed market
conditions resulting in decreased utilization rates and dayrates and prices
received on footage and turnkey contracts during 1999. The decrease in pressure
pumping revenue is a result of depressed market conditions.
Gross profit and gross profit percentage by business segment for the
three months ended June 30, 1999 and 1998 are as follows:
Three Months
Ended June 30,
---------------------------------------------------------------
1999 % 1998 %
---------------- ----- -------------- -----
(in thousands)
Gross Profit:
-------------
Land Drilling $ 4,568 18.1 $ 10,741 25.2
Pressure Pumping 1,270 35.8 2,329 40.5
Other 30 69.8 18 38.3
---------------- --------------
$ 5,868 20.3 $ 13,088 27.0
================ ==============
- 14 -
15
Land drilling gross profit decreased due to depressed market
conditions. Gross profit per job decreased in pressure pumping for the three
months ended June 30, 1999, compared to the same period of 1998, due to mix of
jobs performed.
Depreciation and amortization expense increased $1.2 million during the
three months ended June 30, 1999, compared to the three months ended
June 30, 1998, primarily due to acquisitions consummated during 1998.
Interest expense increased $.2 million during the quarter ended
June 30, 1999 compared to the quarter ended June 30, 1998. This increase was
primarily due to an increase in outstanding debt for the three months ended
June 30, 1999 compared to the same period of 1998. Average debt outstanding was
$31.9 million during the quarter ended June 30, 1999 compared to $23.7 million
for the quarter ended June 30, 1998. The effective interest rate for the quarter
ended June 30, 1999 was 12.9% compared to 14.9% for the quarter ended
June 30, 1998.
Other expense increased by $.5 million during the quarter ended
June 30, 1999 compared to the quarter ended June 30, 1998. $.2 million of the
increase relates to the Company's unsuccessful bid, in partnership with its
largest shareholder, to purchase all or substantially all of the assets of
Fracmaster, Ltd. The remaining $.3 million increase was the result of asset
dispositions occurring in 1998 which did not occur in 1999.
Income taxes decreased $2.8 million during the quarter ended
June 30, 1999, compared to the quarter ended June 30, 1998, primarily due to
lower taxable income in 1999. The Company's effective tax rate for the quarter
ended June 30, 1999 was 20% and 40% for the quarter ended June 30, 1998, with
the decrease primarily attributable to the impact of goodwill amortization
associated with acquisitions that are nondeductible for tax purposes.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues by business segment for the six months ended June 30, 1999 and
1998 are as follows:
Six Months
Ended June 30, %
------------------------------------------ Increase
1999 1998 (Decrease)
---------------- -------------- -----------
(in thousands)
Revenues:
---------
Land Drilling $ 52,861 $ 85,992 (38.5)
Pressure Pumping 8,479 10,629 (20.2)
Other 80 99 (19.2)
---------------- --------------
$ 61,420 $ 96,720 (36.5)
================ ==============
Land drilling revenues decreased as a result of depressed market
conditions resulting in decreased utilization rates and dayrates and prices
received on footage and turnkey contracts during 1999. The decrease in pressure
pumping revenue is a result of depressed market conditions.
- 15 -
16
Gross profit and gross profit percentage by business segment for the
six months ended June 30, 1999 and 1998 are as follows:
Six Months
Ended June 30,
-----------------------------------------------------
1999 % 1998 %
---------------- ---- -------------- ----
(in thousands)
Gross Profit:
-------------
Land Drilling $ 9,334 17.7 $ 21,732 25.3
Pressure Pumping 3,110 36.7 4,239 39.9
Other 53 66.3 44 44.4
---------------- --------------
$ 12,497 20.3 $ 26,015 26.9
================ ==============
Land drilling gross profit decreased during the six months ended
June 30, 1999, compared to the same period of 1998, due to depressed market
conditions along with three abnormal events in the first quarter of 1999: a rig
move from one market to another, a Department of Labor audit assessment and an
unfavorable court decision on a workers compensation claim. Each event was
approximately $.2 million. Gross profit per job decreased in pressure pumping
for the six months ended June 30, 1999, compared to the same period of 1998, due
to mix of jobs performed.
The other charge of $.3 million for the six months ended June 30, 1999
was related to a series of actions taken to improve efficiency, increase
productivity and make the Company more competitive in the market place. The
actions included the reduction of regional operating offices from seven to four
and reduced the Company's administrative staff by twenty-six individuals. The
other charge consisted primarily of employee-related expenses associated with
these reductions.
Depreciation and amortization expense increased $3.3 million during the
six months ended June 30, 1999, compared to the six months ended June 30, 1998,
primarily due to acquisitions consummated during 1998.
Interest expense increased $.3 million during the six months ended
June 30, 1999 compared to the six months ended June 30, 1998. This increase was
primarily due to an increase in outstanding debt for the six months ended
June 30, 1999 compared to the same period of 1998. Average debt outstanding was
$31.8 million during the six months ended June 30, 1999 compared to
$23.7 million for the six months ended June 30, 1998. The effective interest
rate for the six months ended June 30, 1999 was 12.9% compared to 14.9% for
the six months ended June 30, 1998.
Other income increased $2.4 million during the six months ended
June 30, 1999 compared to the six months ended June 30, 1998. During the first
quarter of 1999, the Company sold certain assets of its Appalachian drilling
subsidiary resulting in a $2.8 million gain. In addition, during the second
quarter of 1999, the Company incurred $.2 million of expenses related to its
unsuccessful bid, in partnership with its largest shareholder, to purchase all
or substantially all of the assets of Fracmaster, Ltd.
- 16 -
17
Income taxes decreased $5.3 million during the six months ended June
30, 1999, compared to the six months ended June 30, 1998, primarily due to lower
taxable income in 1999. The Company's effective tax rate for the six months
ended June 30, 1999 was 22% and 40% for the six months ended June 30, 1998, with
the decrease primarily attributable to the impact of goodwill amortization
associated with acquisitions that are nondeductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Working capital as of June 30, 1999 was $32.1 million compared to $20.6
million as of December 31, 1998. The Company's primary cash needs historically
have been to fund working capital requirements, make capital expenditures to
replace and expand its drilling rig fleet and for acquisitions. The Company's
ongoing operations have been funded through available cash, cash provided from
operations and borrowings under the Company's line of credit with Mellon Bank,
N.A., as amended (the "Working Capital Line"). To date, acquisitions have been
funded with available cash, borrowings and issuances of Common Stock and
warrants to purchase Common Stock.
The Company had $18.0 million in cash and cash equivalents and no
borrowings under the Working Capital Line as of June 30, 1999, compared to $10.3
million in cash and cash equivalents and no borrowings under the Working Capital
Line as of December 31, 1998. In March 1999, the Company sold certain
non-strategic assets located in the Appalachian Basin for $5.6 million in cash.
The Company intends to utilize these available cash resources, together with its
cash flow from operations, to continue to fund its operations and to fund its
stock repurchase program of up to $10.0 million.
Net cash provided by operations was $4.0 million and $15.0 million, for
the six months ended June 30, 1999 and 1998, respectively. Such funds were
retained in 1999 and primarily utilized to fund capital expenditures in 1998.
Capital expenditures for the six months ended June 30, 1999 and 1998 were $3.2
million and $26.5 million, respectively.
Long Term Debt Facilities
Working Capital Line. On June 19, 1998, the Company entered into an
amended Working Capital Line, which now provides for maximum borrowings of up to
$30.0 million. Under the Working Capital Line, up to $1.6 million may be
utilized for letters of credit. Borrowings under the Working Capital Line bear
interest at the lower of the bank's prime rate or a LIBOR-based rate. Borrowings
under the Working Capital Line mature on June 30, 2000 and are secured by all of
the Company's accounts receivable and inventory (excluding the Company's
drilling rigs, drilling equipment or drill pipe). The Working Capital Line
contains covenants and restrictions customary in financial instruments of this
type, including covenants relating to the maintenance of financial ratios,
changes in control of the Company and limits on capital expenditures. Although
the Company has not borrowed any money under the Working Capital Line during at
least the past twelve months and had a working capital balance of $32.1 million
as of June 30, 1999, during the second quarter, the Company amended certain of
its financial covenants so that it would be in compliance with the terms of the
credit agreement in the event the Company desires to borrow any funds in the
future.
- 17 -
18
Subordinated Notes. On April 11, 1997, the Company issued $25.0 million
principal amount of 12.0% Subordinated Notes due 2001 (the "Subordinated
Notes"). The Subordinated Notes were issued at a 2.0% discount along with
seven-year warrants to purchase 1.2 million shares of Common Stock at an
exercise price of $10.83 per share, of which warrants to purchase 720,000 shares
of Common Stock were exercised in connection with the Company's October 1997
public offering. The Subordinated Notes contain various affirmative and negative
covenants customary in such private placements, including restrictions on
additional indebtedness (unless certain pro forma financial coverage ratios are
met), restrictions on dividends, distributions and other restricted payments.
Promissory Notes. On July 31, 1998, the Company issued $7.8 million
principal amount of unsecured promissory notes. The notes bear interest at 7.0%
and mature on July 31, 2002. The notes were issued in connection with an
acquisition.
Acquisitions
Peterson. On April 9, 1998, the Company acquired Peterson Drilling
Company ("Peterson"), for a total purchase price of $20.4 million in cash, which
the Company funded from cash on hand following the Company's public offering in
October 1997. Peterson's assets included eight drilling rigs, as well as related
drilling equipment, office facilities in Midland, Texas and approximately $4.5
million in net working capital. The acquisition has been accounted for under the
purchase method of accounting. Goodwill of $3.6 million has been recorded
related to this acquisition.
LaMunyon. On June 24, 1998, the Company acquired the land drilling
assets of LaMunyon Drilling Corporation for $12.2 million in cash, which the
Company funded from cash on hand following the Company's public offering in
October 1997. The acquired assets consisted of five land drilling rigs, related
spare parts, office equipment and rolling stock. The acquisition has been
accounted for using the purchase method of accounting. No goodwill was recorded
because the estimated fair market value of the assets acquired exceeded the
purchase price.
Suits. On July 31, 1998, the Company acquired Suits Enterprises, Inc.
("Suits") for a total of approximately $11.1 million, comprised of $2.9 million
in cash, $7.8 million in 7% four-year notes and 100,000 five-year warrants of
Common Stock. Warrants to purchase 75,000 shares of Common Stock are exercisable
at $26.50 per share and warrants to purchase 25,000 shares of Common Stock are
exercisable at $35.00 per share. Included in the acquisition are Suits' seven
complete drilling rigs plus assorted spare parts, drilling equipment and a fleet
of rolling stock. The acquisition has been accounted for using the purchase
method of accounting. No goodwill was recorded because the estimated fair market
value of the assets acquired exceeded the purchase price.
Stock Repurchase Program
On February 18, 1998, the Board of Directors of the Company approved a
stock repurchase by the Company of up to $10.0 million of Common Stock pursuant
to transactions effected from time to time in the open market. As of
July 23, 1999, the Company had utilized $3.3 million to repurchase 293,900
shares of Common Stock at an average purchase price of $11.15 per share.
The Company expects to continue this stock repurchase program during 1999.
- 18 -
19
Future Acquisitions and Capital Needs
Management believes its internally generated cash, availability under
the Working Capital Line and cash balances on hand will be sufficient to meet
its working capital, capital expenditure and debt service requirements for the
next twelve months, including the Company's proposed repayment of Norton's debt
upon the closing of that transaction. The Company believes that its strong
liquidity position also provides it with the financial flexibility to react
quickly to opportunities in the contract drilling industry, including
opportunities to make strategic acquisitions that the Company deems advisable
given current industry conditions.
Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company's
computer programs or hardware that have date- sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing and implementation. To
date, the Company has fully completed its assessment of all systems that it
believes could be significantly affected by the Year 2000. The completed
assessment indicated that most of the Company's significant information
technology systems could be affected, particularly the general ledger accounting
system. The Company does not believe that the Year 2000 Issue presents a
material exposure as it relates to the Company's services. In addition, the
Company has gathered information about the Year 2000 compliance status of its
significant suppliers and subcontractors and continues to monitor their
compliance.
For its information technology exposures, to date, the Company is 50%
complete on the remediation phase and expects to complete software reprogramming
and replacement no later than October 31, 1999. Once software is reprogrammed or
replaced for a system, the Company begins testing and implementation. These
phases run concurrently for different systems with all remediated systems
expected to be fully tested and implemented with 100% completion targeted for
November 30, 1999.
The Company has contacted its significant suppliers and subcontractors
and, to date, the Company is not aware of any third parties with a Year 2000
Issue that would materially impact the Company's results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that third parties will be Year 2000 ready. The inability of third parties to
complete their Year 2000 resolution process in a timely fashion could materially
impact the Company by causing such third parties to fail to timely deliver or
supply needed material and services to or on behalf of the Company, thereby
materially adversely affecting the Company's ability to deliver its services in
a timely and cost-effective manner in accordance with Company standards or by
causing third party customer's operations to temporarily shutdown or delay
operations, thereby materially affecting demand for the Company's services. The
effect of non-compliance by third parties is not determinable.
- 19 -
20
The Company will utilize both internal and external resources to
reprogram or replace, test and implement the software and operating equipment
for Year 2000 modifications. The total cost of the Year 2000 Project is
estimated at $1.0 million and is being funded through operating cash flows. To
date, the Company has incurred approximately $.4 million for new systems related
to all phases of the Year 2000 Project, which has been capitalized. The total
remaining project costs is attributable to the implementation of new software
and purchase of operating equipment, which will also be capitalized.
Management of the Company believes that we have an effective program in
place to resolve the Year 2000 Issues in a timely manner. However, the Company
has not yet completed all necessary phases of the Year 2000 Project. Disruptions
in the economy generally resulting from Year 2000 Issues could also materially
adversely affect the Company. The Company could be subject to litigation for
computer systems product failure, including equipment shutdown or failure to
properly date business records. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 Project. The Company plans to
evaluate the status of completion in August 1999 and determine whether such
plans are necessary.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995). Words such as "anticipate", "believe", "expect",
"estimate", "project" and similar expressions are intended to identify such
forward-looking statements. Forward-looking statements may be made by management
orally or in writing, including but not limited to, in press releases, as part
of the "Business", "Properties" and "Management's Discussion and Analysis of
Financial Condition and Results of Operation" contained in this report and in
the Company's other filings with the Securities and Exchange Commission under
the Securities Act of 1933 and the Securities Exchange Act of 1934.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Such forward-looking statements
are subject to certain risks, uncertainties and assumptions, including without
limitation those identified below. Should one or more of these risks or
uncertainties materialize or should any of the underlying assumptions prove
incorrect, actual results of current and future operations may vary materially
from those anticipated, estimated or projected. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
their dates.
Among the factors that will have a direct bearing on the Company's
results of operations and the contract drilling service industry in which it
operates are changes in the price of oil and natural gas and the volatility of
the contract drilling service industry in general, including the effects of
recent downturns in prices for oil and natural gas; and risks that a
continuation of current industry conditions or further decline in industry
conditions will adversely effect the demand for and pricing of the Company's
services; any difficulties associated with the Company's ability to successfully
integrate recent acquisitions and uncertainties that the Company can complete
its pending transactions which are subject to various
- 20 -
21
regulatory and other approvals; contractual risk associated with turnkey and
footage contracts; the presence of competitors with greater financial resources;
labor shortages; operating risks inherent in the contract drilling service
industry, such as blowouts, explosions, cratering, sour gas, well fires and
spills; domestic and world-wide political stability and economic growth; risks
associated with the Year 2000 Issue and other risks associated with the
Company's successful execution of internal operating plans as well as regulatory
uncertainties and legal proceedings.
The risks related to the Year 2000 Issue and the dates on which the
Company believes its Year 2000 Project will be completed are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, or that there will not be a
delay in, or increased costs associated with the implementation of the Company's
Year 2000 Project. Specific factors that might cause differences between the
estimates and actual results, include but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer codes, timely responses to and corrections by third
parties and suppliers, the ability to implement interfaces between the new
systems and the systems not being replaced and similar uncertainties. Due to the
general uncertainty inherent in the Year 2000 Project, resulting in part from
uncertainty of the Year 2000 readiness of third parties and the interconnection
of global businesses, the Company cannot ensure its ability to timely and cost
effectively resolve problems associated with the Year 2000 Issue that may affect
its operations and business or expose it to third-party liability.
- 21 -
22
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in several claims arising in the ordinary
course of business. In the opinion of management, all of these claims are
covered by insurance or these matters will not have a material adverse effect on
the Company's financial position.
The Company and its operating subsidiaries are sometimes named as a
defendant in litigation usually relating to personal injuries alleged to result
from negligence. The Company maintains insurance coverage against such claims to
the extent deemed prudent by management.
There can be no assurance that the Company will be able to maintain
adequate insurance in the future at rates it considers reasonable and there can
be no assurance that insurance will continue to be available on terms as
favorable as those that currently exist. The occurrence of an adverse claim in
excess of the coverage limits maintained by the Company could have a material
adverse effect on the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 30, 1999,
the following members were elected to the Board of Directors in the class
specified:
AFFIRMATIVE VOTES
VOTES WITHHELD
Class II Mark S. Siegel 14,041,062 705,976
Kenneth H. Berns 14,043,147 703,891
In addition, the following proposal was approved at the Company's
Annual Meeting:
AFFIRMATIVE VOTES VOTES BROKER
VOTES AGAINST ABSTAINED NON-VOTES
Approve an amendment to
the UTI Energy Corp. 1987
Long-Term Incentive Plan 8,263,432 1,947,475 56,283 4,479,848
- 22 -
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Title or Description
10.1 Third Amendment to Credit Agreement with Mellon Bank,
dated June 30, 1999.
27.1 * Financial Data Schedule.
* Filed herewith.
(b) Reports on 8-K
None filed.
- 23 -
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UTI ENERGY CORP.
(REGISTRANT)
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John E. Vollmer Vice President, Treasurer and
- ------------------------------ Chief Financial Officer July 26, 1999
John E. Vollmer III
Signed on behalf of the registrant and as principal financial officer.
/s/ Bruce Sauers Vice President and Chief July 26, 1999
- ------------------------------ Accounting Officer
Bruce Sauers
- 24 -
25
INDEX TO EXHIBITS
Exhibit
Number Title or Description
------ --------------------
10.1 Third Amendment to Credit Agreement with Chase Mellon,
dated June 30, 1999.
27.1 * Financial Data Schedule.
* Filed herewith.