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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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 NO. 0-20310
SUPERIOR ENERGY SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
Delaware 75-2379388
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1105 Peters Road
Harvey, Louisiana 70058
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 362-4321
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
---- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
---- ----
The number of shares of the registrant's common stock outstanding on August 5,
2003 was 74,025,259.
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1
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q for
the Quarterly Period Ended June 30, 2003
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
</Table>
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(in thousands, except share data)
<Table>
<Caption>
6/30/03 12/31/02
(Unaudited) (Audited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,992 $ 3,480
Accounts receivable - net 113,874 108,352
Income taxes receivable -- 6,087
Prepaid insurance and other 14,571 11,663
------------ ------------
Total current assets 140,437 129,582
------------ ------------
Property, plant and equipment - net 415,874 418,047
Goodwill - net 168,526 160,366
Investments in affiliates 12,775 12,343
Other assets - net 6,591 7,282
------------ ------------
Total assets $ 744,203 $ 727,620
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,178 $ 21,010
Accrued expenses 44,275 33,871
Income taxes payable 1,046 --
Current maturities of long-term debt 13,727 13,730
------------ ------------
Total current liabilities 75,226 68,611
------------ ------------
Deferred income taxes 75,825 67,333
Long-term debt 240,269 256,334
Stockholders' equity:
Preferred stock of $.01 par value. Authorized,
5,000,000 shares; none issued -- --
Common stock of $.001 par value. Authorized, 125,000,000
shares; issued and outstanding, 74,021,348 shares at
June 30, 2003, and 73,819,341 at December 31, 2002 74 74
Additional paid in capital 370,225 368,746
Accumulated other comprehensive income 270 43
Accumulated deficit (17,686) (33,521)
------------ ------------
Total stockholders' equity 352,883 335,342
------------ ------------
Total liabilities and stockholders' equity $ 744,203 $ 727,620
============ ============
</Table>
See accompanying notes to consolidated financial statements.
3
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2003 and 2002
(in thousands, except per share data)
(unaudited)
<Table>
<Caption>
Three Months Six Months
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 128,857 $ 112,730 $ 252,052 $ 217,556
------------ ------------ ------------ ------------
Costs and expenses:
Cost of services 74,291 62,140 144,448 121,378
Depreciation and amortization 12,072 10,456 23,827 19,978
General and administrative 23,689 21,426 47,378 42,639
------------ ------------ ------------ ------------
Total costs and expenses 110,052 94,022 215,653 183,995
------------ ------------ ------------ ------------
Income from operations 18,805 18,708 36,399 33,561
Other income (expense):
Interest expense, net (5,567) (5,181) (11,082) (10,405)
Equity in income of affiliates, net 305 145 432 145
------------ ------------ ------------ ------------
Income before income taxes 13,543 13,672 25,749 23,301
Income taxes 5,215 5,167 9,914 8,971
------------ ------------ ------------ ------------
Net income $ 8,328 $ 8,505 $ 15,835 $ 14,330
============ ============ ============ ============
Basic earnings per share $ 0.11 $ 0.12 $ 0.21 $ 0.20
============ ============ ============ ============
Diluted earnings per share $ 0.11 $ 0.11 $ 0.21 $ 0.20
============ ============ ============ ============
Weighted average common shares used in
computing earnings per share:
Basic 73,936 73,737 73,882 72,030
Incremental common shares from stock options 1,188 1,233 960 1,112
------------ ------------ ------------ ------------
Diluted 75,124 74,970 74,842 73,142
============ ============ ============ ============
</Table>
See accompanying notes to consolidated financial statements.
4
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002
(in thousands)
(unaudited)
<Table>
<Caption>
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 15,835 $ 14,330
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 23,827 19,978
Deferred income taxes 8,492 11,121
Equity in income of affiliates, net (432) (145)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (5,522) 11,989
Other - net (479) (1,010)
Accounts payable (4,833) (13,707)
Accrued expenses 4,244 (912)
Income taxes 7,133 3,141
------------ ------------
Net cash provided by operating activities 48,265 44,785
------------ ------------
Cash flows from investing activities:
Payments for purchases of property and equipment (22,236) (56,367)
Acquisitions of businesses, net of cash acquired (2,929) (2,065)
------------ ------------
Net cash used in investing activities (25,165) (58,432)
------------ ------------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit facility (9,250) 400
Proceeds from long-term debt -- 9,507
Principal payments on long-term debt (6,817) (31,385)
Debt acquisition costs -- (1,285)
Proceeds from issuance of stock -- 38,836
Proceeds from exercise of stock options 1,479 1,373
------------ ------------
Net cash provided by (used in) financing activities (14,588) 17,446
------------ ------------
Net increase in cash 8,512 3,799
Cash and cash equivalents at beginning of period 3,480 3,769
------------ ------------
Cash and cash equivalents at end of period $ 11,992 $ 7,568
============ ============
</Table>
See accompanying notes to consolidated financial statements.
5
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Six Months Ended June 30, 2003 and 2002
(1) Basis of Presentation
Certain information and footnote disclosures normally in 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; however, management believes the disclosures which are made
are adequate to make the information presented not misleading. These financial
statements and footnotes should be read in conjunction with the financial
statements and notes thereto included in Superior Energy Services, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2002 and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The financial information of Superior Energy Services, Inc. and subsidiaries
(the Company) for the three and six months ended June 30, 2003 and 2002 has not
been audited. However, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
results of operations for the periods presented have been included therein. The
results of operations for the first six months of the year are not necessarily
indicative of the results of operations that might be expected for the entire
year. Certain previously reported amounts have been reclassified to conform to
the 2003 presentation.
(2) Stock Based Compensation
The Company accounts for its stock based compensation under the principles
prescribed by the Accounting Principles Board's (Opinion No. 25), "Accounting
for Stock Issued to Employees." However, Statement of Financial Accounting
Standards No. 123 (FAS No. 123), "Accounting for Stock-Based Compensation"
permits the continued use of the intrinsic-value based method prescribed by
Opinion No. 25 but requires additional disclosures, including pro forma
calculations of earnings and net earnings per share as if the fair value method
of accounting prescribed by FAS No. 123 had been applied. No stock based
compensation costs are reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of the grant. As required by Statement of Financial
Accounting Standards No. 148 (FAS No. 148), "Accounting for Stock Based
Compensation - Transition and Disclosure," which amended FAS No. 123, the
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FAS No. 123 to
stock based employee compensation. The pro forma data presented below is not
representative of the effects on reported amounts for future years (amounts are
in thousands, except per share amounts).
6
<Table>
<Caption>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income, as reported $ 8,328 $ 8,505 $ 15,835 $ 14,330
Stock-based employee compensation
expense, net of tax (678) (808) (1,285) (1,457)
------------ ------------ ------------ ------------
Pro forma net income $ 7,650 $ 7,697 $ 14,550 $ 12,873
============ ============ ============ ============
Basic earnings per share:
Earnings, as reported $ 0.11 $ 0.12 $ 0.21 $ 0.20
Stock-based employee compensation
expense, net of tax (0.01) (0.01) (0.02) (0.02)
------------ ------------ ------------ ------------
Pro forma earnings per share $ 0.10 $ 0.11 $ 0.19 $ 0.18
============ ============ ============ ============
Diluted earnings per share:
Earnings, as reported $ 0.11 $ 0.11 $ 0.21 $ 0.20
Stock-based employee compensation
expense, net of tax (0.01) (0.01) (0.02) (0.02)
------------ ------------ ------------ ------------
Pro forma earnings per share $ 0.10 $ 0.10 $ 0.19 $ 0.18
============ ============ ============ ============
Black-Scholes option pricing model
assumptions:
Risk free interest rate 2.42% 2.94% 2.58% 2.94%
Expected life (years) 4 3 3 3
Volatility 58.02% 85.48% 58.63% 85.48%
Dividend yield -- -- -- --
</Table>
(3) Earnings per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed in the same manner as basic
earnings per share except that the denominator is increased to include the
number of additional common shares that could have been outstanding assuming the
exercise of stock options that would have a dilutive effect on earnings per
share.
(4) Business Combinations
In the year ended December 31, 2002, the Company made two acquisitions. In
January, the Company acquired an environmental services company by converting
$18.6 million of notes and other receivables into ownership of the company. In
December, the Company acquired a rental tool business for $5.6 million in cash
consideration. The Company paid an additional $928,000 for this acquisition in
the second quarter of 2003 in conjunction with the receipt of the title to a
facility for this business. Both of these acquisitions have been accounted for
as purchases and the results of operations have been included from the
respective acquisition dates. There have been no acquisitions in 2003.
Most of the Company's acquisitions have involved additional contingent
consideration based upon a multiple of the acquired companies' respective
average earnings before interest, income taxes, depreciation and amortization
expense (EBITDA) over a three-year period from the respective date of
acquisition. In the six months ended June 30, 2003, the Company capitalized
additional consideration of $8.2 million related to three of its acquisitions,
of which $2 million was paid in the second quarter of 2003 and $6.2 million will
be paid in the third quarter of 2003. While the amounts of additional
consideration payable depend upon the acquired company's operating performance
and are difficult to predict accurately, the maximum additional consideration
payable for all of the Company's remaining acquisitions will be approximately
$30 million, with $1.8 million potentially payable in the remainder of 2003 and
$28.2 million in 2004. These amounts are not classified as liabilities under
generally accepted accounting principles and are not reflected in the Company's
financial statements until the amounts are fixed and determinable.
7
When amounts are determined, they are capitalized as part of the purchase price
of the related acquisition. With the exception of the Company's guarantee of
Lamb Energy Services' credit facility (see note 6 to the unaudited consolidated
financial statements), the Company does not have any other financing
arrangements that are not required under generally accepted accounting
principles to be reflected in its financial statements.
(5) Segment Information
The Company's reportable segments are as follows: well intervention group,
marine, rental tools and other oilfield services. Each segment offers products
and services within the oilfield services industry. The well intervention group
segment provides plug and abandonment services, coiled tubing services, well
pumping and stimulation services, data acquisition services, gas lift services,
electric wireline services, hydraulic drilling and workover services, well
control services and mechanical wireline services that perform a variety of
ongoing maintenance and repairs to producing wells, as well as modifications to
enhance the production capacity and life span of the well. The marine segment
operates liftboats for oil and gas production facility maintenance, construction
operations and platform removals, as well as production service activities. The
rental tools segment rents and sells specialized equipment for use with onshore
and offshore oil and gas well drilling, completion, production and workover
activities. The other oilfield services segment provides contract operations and
maintenance services, interconnect piping services, sandblasting and painting
maintenance services, transportation and logistics services, offshore oil and
gas cleaning services, oilfield waste treatment services, dockside cleaning of
items, including supply boats, cutting boxes, and process equipment, and
manufactures and sells drilling instrumentation and oil spill containment
equipment. All of the segments operate primarily in the Gulf of Mexico.
Summarized financial information concerning the Company's segments for the three
and six months ended June 30, 2003 and 2002 is shown in the following tables (in
thousands):
Three Months Ended June 30, 2003
<Table>
<Caption>
Other
Well Rental Oilfield Unallocated Consolidated
Intervention Marine Tools Services Amount Total
-------------- ---------- ---------- -------------- -------------- --------------
Revenues $ 46,416 $ 18,487 $ 36,396 $ 27,558 $ -- $ 128,857
Cost of services 28,329 12,667 11,382 21,913 -- 74,291
Depreciation and amortization 3,012 1,684 6,269 1,107 -- 12,072
General and administrative 9,724 1,921 8,312 3,732 -- 23,689
Operating income 5,351 2,215 10,433 806 -- 18,805
Interest expense, net -- -- -- -- (5,567) (5,567)
Equity in income of affiliates, net -- -- 305 -- -- 305
-------------- ---------- ---------- -------------- -------------- --------------
Income (loss) before income taxes $ 5,351 $ 2,215 $ 10,738 $ 806 $ (5,567) $ 13,543
============== ========== ========== ============== ============== ==============
</Table>
8
Three Months Ended June 30, 2002
<Table>
<Caption>
Other
Well Rental Oilfield Unallocated Consolidated
Intervention Marine Tools Services Amount Total
-------------- ---------- ---------- -------------- -------------- --------------
Revenues $ 40,186 $ 17,760 $ 29,310 $ 25,474 $ -- $ 112,730
Cost of services 22,282 10,961 9,200 19,697 -- 62,140
Depreciation and amortization 2,645 1,680 4,930 1,201 -- 10,456
General and administrative 9,070 1,699 7,065 3,592 -- 21,426
Operating income 6,189 3,420 8,115 984 -- 18,708
Interest expense, net -- -- -- -- (5,181) (5,181)
Equity in income of affiliates, net -- -- 145 -- -- 145
-------------- ---------- ---------- -------------- -------------- --------------
Income (loss) before income taxes $ 6,189 $ 3,420 $ 8,260 $ 984 $ (5,181) $ 13,672
============== ========== ========== ============== ============== ==============
</Table>
Six Months Ended June 30, 2003
<Table>
<Caption>
Other
Well Rental Oilfield Unallocated Consolidated
Intervention Marine Tools Services Amount Total
-------------- ---------- ---------- -------------- -------------- --------------
Revenues $ 87,815 $ 37,152 $ 70,996 $ 56,089 $ -- $ 252,052
Cost of services 53,083 25,334 22,496 43,535 -- 144,448
Depreciation and amortization 6,030 3,282 12,304 2,211 -- 23,827
General and administrative 19,260 3,920 16,505 7,693 -- 47,378
Operating income 9,442 4,616 19,691 2,650 -- 36,399
Interest expense, net -- -- -- -- (11,082) (11,082)
Equity in income of affiliates, net -- -- 432 -- -- 432
-------------- ---------- ---------- -------------- -------------- --------------
Income (loss) before income taxes $ 9,442 $ 4,616 $ 20,123 $ 2,650 $ (11,082) $ 25,749
============== ========== ========== ============== ============== ==============
</Table>
Six Months Ended June 30, 2002
<Table>
<Caption>
Other
Well Rental Oilfield Unallocated Consolidated
Intervention Marine Tools Services Amount Total
-------------- --------- --------- -------------- -------------- --------------
Revenues $ 76,474 $ 32,346 $ 61,275 $ 47,461 $ -- $ 217,556
Cost of services 45,075 20,509 18,388 37,406 -- 121,378
Depreciation and amortization 5,211 3,142 9,395 2,230 -- 19,978
General and administrative 17,396 3,374 14,990 6,879 -- 42,639
Operating income 8,792 5,321 18,502 946 -- 33,561
Interest expense, net -- -- -- -- (10,405) (10,405)
Equity in income of affiliates, net -- -- 145 -- -- 145
-------------- --------- --------- -------------- -------------- --------------
Income (loss) before income taxes $ 8,792 $ 5,321 $ 18,647 $ 946 $ (10,405) $ 23,301
============== ========= ========= ============== ============== ==============
</Table>
(6) Debt
The Company has outstanding $200 million of 8 7/8% senior notes due 2011. The
indenture governing the senior notes requires semi-annual interest payments,
which commenced November 15, 2001 and continue through the maturity date of May
15, 2011. The indenture governing the senior notes contains certain covenants
that, among other things, prevent the Company from incurring additional debt,
paying dividends or making other distributions, unless its ratio of cash flow to
interest expense is at least 2.25 to 1, except that the Company may incur
additional
9
debt in an amount equal to 30% of its net tangible assets, which was
approximately $134 million at June 30, 2003. The indenture also contains
covenants that restrict the Company's ability to create certain liens, sell
assets or enter into certain mergers or acquisitions. At June 30, 2003, the
Company was in compliance with all such covenants.
The Company has a bank credit facility consisting of term loans in an aggregate
amount of $34.4 million at June 30, 2003 and a revolving credit facility of $75
million. The term loans require quarterly principal installments in the amount
of $3.2 million through March 31, 2005. A balance of $12 million is due on the
facility maturity date of May 2, 2005. The credit facility bears interest at a
LIBOR rate plus margins that depend on the Company's leverage ratio.
Indebtedness under the credit facility is secured by substantially all of the
Company's assets, including the pledge of the stock of the Company's principal
subsidiaries. The credit facility contains customary events of default and
requires that the Company satisfy various financial covenants. It also limits
the Company's capital expenditures, its ability to pay dividends or make other
distributions, make acquisitions, make changes to the Company's capital
structure, create liens or incur additional indebtedness. At June 30, 2003, the
Company was in compliance with all such covenants.
The Company has $19.4 million outstanding in U. S. Government guaranteed
long-term financing under Title XI of the Merchant Marine Act of 1936 which is
administered by the Maritime Administration (MARAD) for two 245-foot class
liftboats. The debt bears an interest rate of 6.45% per annum and is payable in
equal semi-annual installments of $405,000, which began December 3, 2002, and
matures on June 3, 2027. The Company's obligations are secured by mortgages on
the two liftboats. In accordance with the agreement, the Company is required to
comply with certain covenants and restrictions, including the maintenance of
minimum net worth and debt-to-equity requirements. At June 30, 2003, the Company
was in compliance with all such covenants.
The Company owns a 54.3% interest in Lamb Energy, which has a credit facility
with a syndicate of banks that matures in 2005 consisting of a term loan in the
amount of $11 million at June 30, 2003, and a revolving credit facility of $3
million. The Company fully guarantees amounts due under the credit facility. The
Company does not expect to incur any losses as a result of the guarantee. As of
June 30, 2003, Lamb Energy had $11 million outstanding on this credit facility.
(7) Commitments and Contingencies
As the result of a tropical storm, one of the Company's 200-foot class liftboats
sank in the Gulf of Mexico on June 30, 2003. The vessel is fully insured and
management does not believe it or any related unasserted claims will have a
material effect on the financial position, results of operations or liquidity of
the Company.
From time to time, the Company is involved in litigation and other disputes
arising out of operations in the normal course of business. In management's
opinion, the Company is not involved in any litigation or disputes, the outcome
of which would have a material effect on the financial position, results of
operations or liquidity of the Company.
(8) Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities."
FIN 46 clarifies the application of Accounting Research Bulletin Number 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable entities in which an enterprise holds
a variable interest that it acquired before February 1, 2003. FIN 46 applies to
public enterprises as of the beginning of the applicable interim or annual
period. The Company does not expect the adoption of FIN 46 to have a significant
effect on the Company's financial position or results of operations.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149 (FAS No. 149), "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." FAS No. 149 amends and
clarifies financial accounting and reporting for derivative
10
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under Statement of Financial Accounting Standards No. 133 (FAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities." FAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company does not expect the adoption of FAS No. 149 to have a significant effect
on the Company's financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 (FAS No. 150), "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." FAS
No. 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. FAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003. The Company does not expect the adoption of FAS No. 150 to have a
significant effect on the Company's financial position or results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains forward-looking statements which involve risks and
uncertainties. All statements other than statements of historical fact included
in this section regarding our financial position and liquidity, strategic
alternatives, future capital needs, business strategies and other plans and
objectives of our management for future operations and activities, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by our management in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate under the
circumstances. Such forward-looking statements are subject to uncertainties that
could cause our actual results to differ materially from such statements. Such
uncertainties include but are not limited to: the volatility of the oil and gas
industry, including the level of offshore exploration, production and
development activity; risks of our growth strategy, including the risks of rapid
growth and the risks inherent in acquiring businesses; changes in competitive
factors affecting our operations; operating hazards, including the significant
possibility of accidents resulting in personal injury, property damage or
environmental damage; the effect on our performance of regulatory programs and
environmental matters; seasonality of the offshore industry in the Gulf of
Mexico; and our dependence on certain customers. These and other uncertainties
related to our business are described in detail in our Annual Report on Form
10-K for the year ended December 31, 2002. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we can
give no assurance that such expectations will prove to be correct. You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. We undertake no obligation to update any of
our forward-looking statements for any reason.
OVERVIEW
We are a leading provider of specialized oilfield services and equipment focused
on serving the production-related needs of oil and gas companies primarily in
the Gulf of Mexico. We believe that we are one of the few companies in the Gulf
of Mexico capable of providing most of the post wellhead products and services
necessary to maintain offshore producing wells, as well as the plug and
abandonment services necessary at the end of their life cycle. We believe that
our ability to provide our customers with multiple services and to coordinate
and integrate their delivery from our liftboats allows us to maximize
efficiency, reduce lead time and provide cost-effective services for our
customers.
Over the past several years, we have significantly expanded the range of
production-related services we provide and the geographic scope of our
operations through both internal growth and strategic acquisitions. We have
expanded our geographic focus to select international market areas and added
complementary product and service offerings. Currently, we provide a full range
of products and services for our customers, including well intervention
services, marine services, rental tools and other oilfield services. For
additional segment financial information, see note 5 to our unaudited
consolidated financial statements.
Our financial performance is impacted by the broader economic trends affecting
our customers. The demand for our services and equipment is cyclical due to the
nature of the energy industry. Our operating results are directly tied to
industry demand for our services, most of which are performed on the outer
continental shelf in the Gulf of Mexico. While we have focused on providing
production-related services where, historically, demand has not been as volatile
as for exploration-related services, we expect our operating results to be
highly dependent upon industry activity levels in the Gulf of Mexico.
In the second quarter of 2003, we experienced an increased demand for many of
our well intervention services in comparison to the first quarter of 2003. For
the quarter ended June 30, 2003, revenue increased 5% to $128.9 million and net
income increased 11% to $8.3 million from the first quarter of 2003.
Our well intervention group segment's revenue increased to $46.4 million in the
second quarter of 2003 as compared to $41.4 million in the first quarter of
2003. Activity increased for most well intervention services, led by sharp
increases in hydraulic workover and plug and abandonment services, including the
completion of our first subsea well intervention project. These were offset by
lower well control activity.
12
There was little change in our marine segment's revenue which was $18.5 million
in the second quarter of 2003, as compared to $18.7 million in the first quarter
of 2003. This change is attributable to a slight decrease in the utilization for
our liftboat fleet to 66% in the second quarter of 2003 from 67% in the first
quarter of 2003. Our fleet's average dayrate declined to $6,430 in the second
quarter of 2003 from $6,550 in the first quarter of 2003. The lower average
dayrate was attributable to lower activity in some of our mid-sized liftboat
classes, particularly the 160-foot to 175-foot class liftboats.
Our rental tools segment's revenue increased to $36.4 million in the second
quarter of 2003, as compared to $34.6 million in the first quarter of 2003.
Rentals of drill pipe, on-site accommodations and handling tools and accessories
were the key drivers to revenue growth during the period. The segment also
benefited from additional rentals in international markets.
Our other oilfield services segment's revenue was $27.6 million, a 3% decrease
over the first quarter of 2003. During the second quarter of 2003, we had a
decrease in revenue from non-hazardous oilfield waste treatment and sales of oil
spill response equipment. These decreases were partially offset by seasonal
increases in construction and fabrication projects.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003
AND 2002
For the three months ended June 30, 2003, our revenues were $128.9 million
resulting in net income of $8.3 million or $0.11 diluted earnings per share. For
the three months ended June 30, 2002, revenues were $112.7 million and net
income was $8.5 million or $0.11 diluted earnings per share. Our increase in
revenue and slight decrease in net income is primarily the result of a change in
the mix of demand for our services. The following discussion analyzes our
operating results on a segment basis.
WELL INTERVENTION GROUP SEGMENT
Revenue for our well intervention group was $46.4 million for the three months
ended June 30, 2003, as compared to $40.2 million for the same period in 2002.
This segment's gross margin percentage decreased to 39% in the three months
ended June 30, 2003 from 45% in the three months ended June 30, 2002 due to a
change in the segment's business mix. The increase in revenue is the result of
increased demand for our hydraulic workover, plug and abandonment, pumping and
stimulation, electric line and coiled tubing services. These increases were
partially offset by a decrease in the demand for our higher margin well control
services.
MARINE SEGMENT
Our marine revenue for the three months ended June 30, 2003 increased 4% over
the same period in 2002 to $18.5 million. The fleet's average dayrate increased
to $6,430 in the second quarter of 2003 from $5,850 in the second quarter of
2002, and the average utilization decreased to 66% for the second quarter of
2003 from 72% in the same period in 2002. The gross margin percentage for the
three months ended June 30, 2003 decreased to 31% from 38% for the same period
in 2002. While revenues and the average dayrate increased because of additions
of three larger liftboats to the fleet, a drop-off in utilization and the
increased costs of the new liftboats resulted in a lower gross margin
percentage. Increased costs, including maintenance and insurance, also
contributed to the decline in gross margin percentage.
RENTAL TOOLS SEGMENT
Revenue for our rental tools segment for the three months ended June 30, 2003
was $36.4 million, a 24% increase over the same period in 2002. The increase in
this segment's revenue was primarily due to an increased demand for our expanded
inventory of rental tool equipment and our geographic expansion. During the
quarter, revenue from international markets grew as we continue to diversify
outside of the Gulf of Mexico market area. The gross margin percentage for both
periods was 69%.
13
OTHER OILFIELD SERVICES SEGMENT
Other oilfield services revenue for the three months ended June 30, 2003 was
$27.6 million, an 8% increase over the $25.5 million in revenue for the same
period in 2002. The gross margin percentage decreased slightly to 20% in the
three months ended June 30, 2003 from 23% in the same period in 2002. This
segment generated more revenue from construction and field management services
which have lower margins.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $12.1 million in the three months
ended June 30, 2003 from $10.5 million in the same period in 2002. The increase
resulted mostly from our larger asset base as a result of our capital
expenditures during 2002 and 2003.
GENERAL AND ADMINISTRATIVE
General and administrative expenses as a percentage of revenue decreased to 18%
for the quarter ended June 30, 2003 from 19% for the quarter ended June 30,
2002. General and administrative expenses increased to $23.7 million for the
three months ended June 30, 2003 from $21.4 million for the same period in 2002.
The increase is primarily the result of our internal growth and expansion.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003
AND 2002
For the six months ended June 30, 2003, our revenues were $252.1 million
resulting in net income of $15.8 million or $0.21 diluted earnings per share.
For the six months ended June 30, 2002, our revenues were $217.6 million and our
net income was $14.3 million or $0.20 diluted earnings per share. Our increase
in revenue and net income is the result of an overall increased demand for most
of our services due to increased activity by our customers. The following
discussion analyzes our operating results on a segment basis.
WELL INTERVENTION GROUP SEGMENT
Revenue for our well intervention group was $87.8 million for the six months
ended June 30, 2003, as compared to $76.5 million for the same period in 2002.
This segment's gross margin percentage decreased slightly to 40% in the six
months ended June 30, 2003 from 41% in the six months ended June 30, 2002. The
increase in revenue is the result of increased demand for our hydraulic
workover, pumping and stimulation and electric line as production-related
activity in the Gulf of Mexico increased. These increases were partially offset
by decreased demand for coiled tubing services. The slight decrease in gross
margin percentage is due to a change in the mix of the demand for our services.
MARINE SEGMENT
Our marine revenue for the six months ended June 30, 2003 increased 15% over the
same period in 2002 to $37.2 million. The fleet's average dayrate increased to
$6,490 in the six months ended June 30, 2003 from $5,650 in the same period in
2002, and the average utilization decreased to 66% for the six months ended June
30, 2003 from 70% in the same period in 2002. The gross margin percentage for
the six months ended June 30, 2003 decreased to 32% from 37% for the same period
in 2002. While revenues and the average dayrate increased because of additions
of three larger liftboats to the fleet, a drop-off in utilization and the
increased costs of the new liftboats resulted in a lower gross margin
percentage. Increased costs, including maintenance and insurance, also
contributed to the decline in gross margin percentage.
RENTAL TOOLS SEGMENT
Revenue for our rental tools segment for the six months ended June 30, 2003 was
$71 million, a 16% increase over the same period in 2002. The increase in this
segment's revenue was primarily due to an increased demand for our expanded
inventory of rental tool equipment and our geographic expansion. During the six
months ended June 30, 2003, revenue from international markets grew as we
continue to diversify outside of the Gulf of Mexico market
14
area. The gross margin percentage decreased slightly to 68% in the six months
ended June 30, 2003 from 70% in the same period in 2002 due primarily to a
change in the mix of the demand for our rental tools.
OTHER OILFIELD SERVICES SEGMENT
Other oilfield services revenue for the six months ended June 30, 2003 was $56.1
million, an 18% increase over the $47.5 million in revenue in the same period in
2002. The gross margin percentage increased slightly to 22% in the six months
ended June 30, 2003 from 21% in the same period in 2002. This segment generated
more revenue and a higher gross margin percentage primarily from sales of higher
margin oil spill containment equipment and growth in our oilfield waste
treatment business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $23.8 million in the six months ended
June 30, 2003 from $20 million in the same period in 2002. The increase resulted
mostly from our larger asset base as a result of our capital expenditures during
2002 and 2003.
GENERAL AND ADMINISTRATIVE
General and administrative expenses as a percentage of revenue decreased to 19%
for the six months ended June 30, 2003 from 20% for the same period in 2002.
General and administrative expenses increased to $47.4 million for the six
months ended June 30, 2003 from $42.6 million for the same period in 2002. The
increase is primarily the result of our internal growth and expansion.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are for working capital, capital expenditures, debt
service and acquisitions. Our primary sources of liquidity are cash flows from
operations and borrowings under our revolving credit facility. We had cash and
cash equivalents of $12 million at June 30, 2003 compared to $3.5 million at
December 31, 2002. In the six months ended June 30, 2003, we generated net cash
from operating activities of $48.3 million.
We made $22.2 million of capital expenditures during the six months ended June
30, 2003, of which approximately $11.2 million was used to expand and maintain
our rental tool equipment inventory, approximately $3.8 million was used on
facilities construction (including our facility in Broussard, Louisiana) and
approximately $1.2 million was on our marine segment. We also made $6 million of
capital expenditures to expand and maintain the asset base of our well
intervention group and other oilfield services group. We currently believe that
we will make approximately $28 million of capital expenditures, excluding
acquisitions and targeted asset purchases, during the remaining six months of
2003 primarily to further expand our rental tool asset base. We believe that our
current working capital, cash generated from our operations and availability
under our revolving credit facility will provide sufficient funds for our
identified capital projects.
We have outstanding $200 million of 8 7/8% senior notes due 2011. The indenture
governing the senior notes requires semi-annual interest payments, which
commenced November 15, 2001 and continue through the maturity date of May 15,
2011. The indenture governing the senior notes contains certain covenants that,
among other things, prevent us from incurring additional debt, paying dividends
or making other distributions, unless our ratio of cash flow to interest expense
is at least 2.25 to 1, except that we may incur additional debt in an amount
equal to 30% of our net tangible assets, which was approximately $134 million at
June 30, 2003. The indenture also contains covenants that restrict our ability
to create certain liens, sell assets or enter into certain mergers or
acquisitions.
We also have a bank credit facility with term loans in an aggregate amount of
$34.4 million at June 30, 2003 and a revolving credit facility of $75 million.
The credit facility bears interest at a LIBOR rate plus margins that depend on
our leverage ratio. As of August 5, 2003, the amount outstanding under the term
loans was $34.4 million, none was outstanding under our revolving credit
facility, and the weighted average interest rate on amounts outstanding under
the credit facility was 3.9% per annum. Indebtedness under the credit facility
is secured by substantially all of our assets, including the pledge of the stock
of our principal subsidiaries. The credit facility contains customary events of
default and requires that we satisfy various financial covenants. It also limits
our capital expenditures, our
15
ability to pay dividends or make other distributions, make acquisitions, make
changes to our capital structure, create liens or incur additional indebtedness.
We have $19.4 million outstanding at June 30, 2003 in U. S. Government
guaranteed long-term financing under Title XI of the Merchant Marine Act of 1936
which is administered by the Maritime Administration (MARAD) for two 245-foot
class liftboats. This debt bears an interest rate of 6.45% per annum and is
payable in equal semi-annual installments of $405,000, which began December 3,
2002, and matures on June 3, 2027. Our obligations are secured by mortgages on
the two liftboats. In accordance with the agreement, we are required to comply
with certain covenants and restrictions, including the maintenance of minimum
net worth and debt-to-equity requirements.
The following table summarizes our contractual cash obligations and commercial
commitments at June 30, 2003 (amounts in thousands) for our long-term debt and
operating leases. We do not have any other material obligations or commitments.
<Table>
<Caption>
Remaining
Six
Months
Description 2003 2004 2005 2006 2007 2008 Thereafter
-------------- ------------ ------------ ------------ ------------ ------------ ------------
Long-term debt $ 6,913 $ 13,629 $ 16,031 $ 827 $ 810 $ 810 $ 214,976
Operating leases 1,656 2,326 1,493 859 708 286 450
-------------- ------------ ------------ ------------ ------------ ------------ ------------
Total $ 8,569 $ 15,955 $ 17,524 $ 1,686 $ 1,518 $ 1,096 $ 215,426
============== ============ ============ ============ ============ ============ ============
</Table>
The table does not include our guarantee of the Lamb Energy Services credit
facility consisting of a term loan in the amount of $11 million and a revolving
credit facility of $3 million, under which $11 million was outstanding as of
June 30, 2003. This table also does not include any potential additional
consideration that may be payable as a result of our acquisitions. Additional
consideration is generally based on the acquired company's operating performance
after the acquisition as measured by earnings before interest, income taxes,
depreciation and amortization (EBITDA) and other adjustments intended to exclude
extraordinary items. In the six months ended June 30, 2003, we capitalized
additional consideration of $8.2 million related to three of our acquisitions,
of which $2 million was paid in the second quarter of 2003 and $6.2 million will
be paid in the third quarter of 2003. While the amounts payable depend upon the
acquired company's operating performance and are difficult to predict
accurately, the maximum additional consideration payable for all of our
remaining acquisitions is approximately $30 million, with $1.8 million
potentially payable in the remainder of 2003 and $28.2 million in 2004. These
amounts are not classified as liabilities under generally accepted accounting
principles and are not reflected in our financial statements until the amounts
are fixed and determinable. When amounts are determined, they are capitalized as
part of the purchase price of the related acquisition. We have no other
financing arrangements that are not required under generally accepted accounting
principles to be reflected in our financial statements.
We intend to continue implementing our growth strategy of increasing our scope
of services through both internal growth and strategic acquisitions. In 2003, we
expect to continue to make the capital expenditures required to implement our
growth strategy in amounts consistent with the amount of cash generated from
operating activities, the availability of additional financing and our credit
facility. Depending on the size of any future acquisitions, we may require
additional equity or debt financing in excess of our current working capital and
amounts available under our revolving credit facility.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities."
FIN 46 clarifies the application of Accounting Research Bulletin Number 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
applies immediately to
16
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. FIN 46 applies to public enterprises as of
the beginning of the applicable interim or annual period. We do not expect the
adoption of FIN 46 to have a significant effect on our financial position or
results of operations.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149 (FAS No. 149), "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." FAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
Statement of Financial Accounting Standards No. 133 (FAS No. 133), "Accounting
for Derivative Instruments and Hedging Activities." FAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. We do not expect the
adoption of FAS No. 149 to have a significant effect on our financial position
or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 (FAS No. 150), "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." FAS
No. 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. FAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003. We do not expect the adoption of FAS No. 150 to have a significant
effect on our financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our market risks since the year ended
December 31, 2002. For more information, please read the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report on Form 10-Q, based
on the evaluation conducted by our chief financial officer and chief executive
officer, they have concluded that our disclosure controls and procedures (as
defined in rules 13a-14c promulgated under the Securities Exchange Act of 1934,
as amended) are effective and designed to alert them to material information
relating to the Company.
There were no material changes to the Company's system of internal controls over
financial reporting or in other factors that have materially affected or are
reasonably likely to materially affect those internal controls subsequent to the
date of our most recent evaluation.
17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The annual meeting of our stockholders was held on May 19,
2003.
(b) At the annual meeting, the stockholders elected Richard A.
Bachmann, Joseph R. Edwards, Ben A. Guill, Terence E. Hall,
Richard A. Pattarozzi and Justin L. Sullivan to serve as
directors until the next annual meeting of stockholders.
(c) The voting tabulation for the election of the six directors is
as follows:
<Table>
<Caption>
Director For Withheld
------------------- ---------- -----------
Richard A. Bachmann 42,886,168 8,590,447
Joseph R. Edwards 48,179,800 3,296,815
Ben A. Guill 50,582,538 894,077
Terence E. Hall 50,389,213 1,087,402
Richard A. Pattarozzi 41,019,708 10,456,907
Justin L. Sullivan 41,219,858 10,256,737
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this Form 10-Q:
3.1 Certificate of Incorporation of the Company (incorporated
herein by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1996).
3.2 Certificate of Amendment to the Company's Certificate of
Incorporation (incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
3.3 Amended and Restated Bylaws (incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999).
31.1 Officer's certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Officer's certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Officer's certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Officer's certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during the quarter ended June 30, 2003:
On May 2, 2003, the Company filed a current report on Form 8-K reporting,
under item 5, the announcement of earnings for the first quarter ended
March 31, 2003.
On May 6, 2003, the Company filed a current report on Form 8-K reporting,
under item 5, that it has established a wholly owned subsidiary, SPN
Resources, LLC.
18
SIGNATURE
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.
SUPERIOR ENERGY SERVICES, INC.
Date: August 11, 2003 By: /s/ Robert S. Taylor
------------------------ --------------------------------------------
Robert S. Taylor
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of the Company (incorporated
herein by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1996).
3.2 Certificate of Amendment to the Company's Certificate of
Incorporation (incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
3.3 Amended and Restated Bylaws (incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999).
31.1 Officer's certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Officer's certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Officer's certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Officer's certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>