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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __ to __.
Commission file number 1-10570
BJ SERVICES COMPANY
(Exact name of registrant as specified in its charter)
Delaware 63-0084140
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5500 Northwest Central Drive, Houston, Texas 77092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 462-4239
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act.) YES [X] NO
There were 157,795,283 shares of the registrant's common stock, $.10 par value,
outstanding as of February 12, 2003.
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BJ SERVICES COMPANY
INDEX
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statement of Operations (Unaudited) - Three
months ended December 31, 2002 and 2001 3
Consolidated Condensed Statement of Financial Position (Unaudited) -
December 31, 2002 and September 30, 2002 4
Consolidated Statement of Stockholders' Equity (Unaudited) -
Three months ended December 31, 2002 5
Consolidated Condensed Statement of Cash Flows (Unaudited) -
Three months ended December 31, 2002 and 2001 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 27
PART II - OTHER INFORMATION 28
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended
December 31,
2002 2001
----------- -----------
Revenue $ 473,124 $ 510,061
Operating expenses:
Cost of sales and services 375,733 364,363
Research and engineering 9,314 8,814
Marketing 17,129 15,784
General and administrative 16,375 16,016
---------- ----------
Total operating expenses 418,551 404,977
---------- ----------
Operating income 54,573 105,084
Interest expense (4,001) (1,896)
Interest income 519 374
Other expense - net (1,506) (576)
---------- ----------
Income before income taxes 49,585 102,986
Income tax expense 16,115 36,045
---------- ----------
Net income $ 33,470 $ 66,941
========== ==========
Earnings per share:
Basic $ .21 $ .42
Diluted $ .21 $ .42
Weighted average shares outstanding:
Basic 157,574 157,991
Diluted 160,684 160,839
See Notes to Unaudited Consolidated Condensed Financial Statements
3
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In thousands)
December 31, September 30,
2002 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 92,627 $ 84,727
Receivables - net 387,104 364,214
Inventories:
Products 83,414 95,540
Work in process 3,199 1,971
Parts 71,066 62,339
------------- -------------
Total inventories 157,679 159,850
Deferred income taxes 9,960 10,083
Other current assets 41,850 29,917
------------- -------------
Total current assets 689,220 648,791
Property - net 803,437 798,956
Deferred income taxes 70,060 73,768
Goodwill 871,147 872,959
Other assets 49,957 47,896
------------- -------------
$ 2,483,821 $ 2,442,370
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 155,125 $ 168,875
Short-term borrowings 7,898 3,522
Current portion of long-term debt 126 256
Accrued employee compensation and benefits 53,677 59,380
Income and other taxes 36,861 31,582
Accrued insurance 13,172 12,311
Other accrued liabilities 83,923 80,494
------------- -------------
Total current liabilities 350,782 356,420
Commitments and contingencies (Note 6)
Long-term debt 490,229 489,062
Deferred income taxes 10,243 9,213
Other long-term liabilities 166,879 169,047
Stockholders' equity 1,465,688 1,418,628
------------- -------------
$ 2,483,821 $ 2,442,370
============= =============
See Notes to Unaudited Consolidated Condensed Financial Statements
4
BJ SERVICES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share data)
Common Common Capital Treasury Unearned Retained Accumulated Total
Stock Stock In Stock Compensation Earnings Other
Shares Excess Comprehensive
of Par Income
------------------------------------------------------------------------------------------
Balance, September 30, 2002 156,795,191 $17,376 $965,550 $(382,271) $ (926) $848,772 $ (29,873) $1,418,628
Comprehensive income:
Net income 33,470
Other comprehensive income, net
of tax:
Cumulative translation adjustments 2,176
Comprehensive income 35,646
Ressuance of treasury stock for:
Stock options 106,721 2,174 (999) 1,175
Stock purchase plan 658,912 14,852 (4,889) 9,963
Stock performance plan 146,595 (3,812) 3,304 507 (1)
Recognition of unearned compensation 277 277
Revaluation of stock performance awards 123 (123)
------------------------------------------------------------------------------------------
Balance, December 31, 2002 157,707,419 $17,376 $961,861 $(361,941) $ (772) $876,861 $ (27,697) $1,465,688
=========== ======= ======== ========== ====== ======== ========== ==========
See Notes to Unaudited Consolidated Condensed Financial Statements
5
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
December 31,
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,470 $ 66,941
Adjustments to reconcile net income to cash
provided by operating activities:
Minority interest 1,196 1,502
Amortization of unearned compensation 277 727
Depreciation and amortization 28,462 24,438
Deferred income taxes 5,535 27,324
Changes in:
Receivables (22,890) 79,042
Inventories 2,171 (7,588)
Accounts payable (13,750) (29,885)
Other current assets and liabilities (8,741) (37,887)
Other - net (1,689) (4,326)
---------- ----------
Net cash provided by operating activities 24,041 120,288
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (34,251) (53,503)
Proceeds from disposal of assets 1,560 981
---------- ----------
Net cash used for investing activities (32,691) (52,522)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) borrowings - net 5,413 (9,998)
Proceeds from exercise of stock options and stock purchase plan 11,137 4,267
Purchase of treasury stock - (102,125)
---------- ----------
Net cash provided by (used for) financing activities 16,550 (107,856)
Increase (decrease) in cash and cash equivalents 7,900 (40,090)
Cash and cash equivalents at beginning of period 84,727 84,103
---------- ----------
Cash and cash equivalents at end of period $ 92,627 $ 44,013
========== ==========
See Notes to Unaudited Consolidated Condensed Financial Statements
6
BJ SERVICES COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 General
In the opinion of management, the unaudited consolidated condensed financial
statements of BJ Services Company (the "Company") include all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of its financial position and statement of stockholders' equity as
of December 31, 2002, and its results of operations and cash flows for each of
the three- month periods ended December 31, 2002 and 2001. The consolidated
condensed statement of financial position at September 30, 2002 is derived from
the September 30, 2002 audited consolidated financial statements. Although
management believes the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The results of operations and cash
flows for the three-month period ended December 31, 2002 are not necessarily
indicative of the results to be expected for the full year.
Note 2 Earnings Per Share ("EPS")
Basic EPS excludes dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted EPS
is based on the weighted-average number of shares outstanding during each period
and the assumed exercise of dilutive stock options less the number of treasury
shares assumed to be purchased with the exercise proceeds using the average
market price of the Company's common stock for each of the periods presented.
The following table presents information necessary to calculate earnings per
share for the periods presented (in thousands except per share amounts):
Three Months Ended
December 31,
2002 2001
-------- --------
Net income $ 33,470 $ 66,941
Weighted-average common shares outstanding 157,574 157,991
-------- --------
Basic earnings per share $ .21 $ .42
======== ========
Weighted-average common and dilutive potential common
shares outstanding:
Weighted-average common shares outstanding 157,574 157,991
Assumed exercise of stock options/(1)/ 3,110 2,848
-------- --------
160,684 160,839
-------- --------
Diluted earnings per share $ .21 $ .42
======== ========
/(1)/ For the three months ended December 31, 2002, 102,785 stock options were
excluded from the computation of diluted earnings per share due to their
antidilutive effect.
7
Note 3 Segment Information
The Company has three business segments: U.S./Mexico Pressure Pumping,
International Pressure Pumping and Other Oilfield Services. The U.S./Mexico
Pressure Pumping segment includes cementing services and stimulation services
(consisting of fracturing, acidizing, sand control, nitrogen, coiled tubing and
service tools) provided throughout the United States and Mexico. The
International Pressure Pumping segment also includes cementing and stimulation
services provided to customers in over 40 countries in the major international
oil and natural gas producing areas of Latin America, Europe, Russia, Africa,
Southeast Asia, Canada, China and the Middle East. The Other Oilfield Services
segment consists of production chemicals, tubular services, and process and
pipeline services and, with the acquisition of OSCA on May 31, 2002, completion
tools and completion fluids services in the U.S. and internationally.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 2 of the Notes to
Consolidated Financial Statements included in the Company's annual report on
Form 10-K for the fiscal year ended September 30, 2002. Operating segment
performance is evaluated based on operating income excluding unusual charges.
Intersegment sales and transfers are not significant.
Summarized financial information concerning the Company's segments is shown in
the following table. The "Corporate" column includes corporate expenses not
allocated to the operating segments.
Business Segments
U.S./Mexico International Other
Pressure Pressure Oilfield
Pumping Pumping Services Corporate Total
------------- --------------- ----------- ----------- -----------
(in thousands)
Three Months Ended December 31, 2002
Revenues/(1)/ $ 211,982 $ 178,880 $ 82,290 $ (28) $ 473,124
Operating income (loss) 33,102 19,243 9,854 (7,626) 54,573
Identifiable assets 778,964 1,001,681 458,777 244,399 2,483,821
Three Months Ended December 31, 2001
Revenues $ 273,126 $ 186,928 $ 49,972 35 $ 510,061
Operating income (loss) 82,174 24,731 5,619 (7,440) 105,084
Identifiable assets 688,654 853,271 174,248 $ 169,376 1,885,549
/(1)/ As a result of the acquisition of OSCA, beginning in June 2002, certain
products and services, which the Company classifies as completion tools and
completion fluids, are included in the Other Oilfield Services segment. Revenue,
operating income and identifiable asset amounts relating to these products and
service lines in the U.S. prior to the acquisition of OSCA have been
reclassified to conform to the current year presentation. Amounts relating to
these products and service lines sold
8
internationally have not been reclassified as it is impracticable to do so and
such amounts are not considered to be material to the segment information
provided.
A reconciliation from the segment information to consolidated income before
income taxes is set forth below (in thousands):
Three Months Ended
December 31,
2002 2001
---------- ---------
Total operating profit for reportable segments $ 54,573 $ 105,084
Interest expense - net (3,482) (1,522)
Other expense- net (1,506) (576)
---------- ---------
Income before income taxes $ 49,585 $ 102,986
========== =========
Note 4 Comprehensive Income
The components of comprehensive net income, net of tax, are as follows (in
thousands):
Three Months Ended
December 31,
2002 2001
---------- ---------
Net income attributable to common stockholders $ 33,470 $ 66,941
Change in cumulative translation adjustment 2,176 (521)
---------- ---------
Comprehensive net income $ 35,646 $ 66,420
========== =========
Note 5 Acquisition of Businesses
OSCA: On May 31, 2002, the Company completed the acquisition of OSCA, Inc.
("OSCA") for a total purchase price of $470.6 million (including transaction
costs). This acquisition was accounted for using the purchase method of
accounting. Accordingly, the results of OSCA's operations are included in the
consolidated statement of operations beginning June 1, 2002. The assets and
liabilities of OSCA have been recorded in the Company's consolidated statement
of financial position at estimated fair market value as of May 31, 2002 with the
remaining purchase price reflected as goodwill.
The following table reflects (in thousands, except per share amounts) the
Company's results of operations on a pro forma basis as if the acquisition had
been completed on October 1, 2001 utilizing OSCA's historical results for the
periods presented. This unaudited pro forma information excludes the effects of
cost elimination and reduction initiatives directly related to the acquisition.
9
Three Months Ended
December 31
2001
-----------
Revenues $ 551,906
Net income $ 67,013
Earnings per share:
Basic $ .42
Diluted $ .42
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
as of October 1, 2001, nor is it necessarily indicative of future operating
results.
The allocation of the purchase price and estimated goodwill are summarized
as follows (in thousands):
Consideration paid:
Cash to OSCA stockholders $ 416,252
Settlement of options 8,197
Debt assumed 35,000
Transaction costs 11,124
-----------
Total consideration $ 470,573
Allocation of consideration paid:
Cash and cash equivalents $ 5,073
Accounts receivable 24,588
Inventory 25,767
Prepaid expenses 879
Current deferred income taxes 4,031
Property, plant and equipment 51,254
Other assets 8,785
Short-term debt (440)
Accounts payable (25,582)
Other accrued liabilities (21,295)
Accrued income and other taxes 7,416
-----------
Goodwill $ 390,097
===========
The Company is in the process of completing its review and determination of
the fair values of the assets acquired. Accordingly, allocation of the purchase
price is subject to revision based on final determination of these asset values.
Upon finalization of certain real estate appraisals and completion of the
valuation of intangible assets acquired, certain finite lived and/or intangible
assets may be identified or revalued. For each $25 million of additional fair
value allocated to such assets, the effect on related annual depreciation and/or
amortization (assuming an average useful life of 10 years) would result in a
reduction of net income of approximately $1.6 million or $.01 per diluted share.
The Company expects to complete the remaining asset valuations by May 31, 2003.
10
Note 6 Commitments and Contingencies
Litigation: The Company, through performance of its service operations, is
sometimes named as a defendant in litigation, usually relating to claims for
bodily injuries or property damage (including claims for well or reservoir
damage). The Company maintains insurance coverage against such claims to the
extent deemed prudent by management. The Company believes that there are no
existing claims that are likely to have a materially adverse effect on the
Company for which it has not already provided.
Through acquisition the Company assumed responsibility for certain claims
and proceedings made against Western, Nowsco and OSCA in connection with their
businesses. Some, but not all, of such claims and proceedings will continue to
be covered under insurance policies of the Company's predecessors that were in
place at the time of the acquisitions. Although the outcome of the claims and
proceedings against the Company (including Western, Nowsco and OSCA) cannot be
predicted with certainty, management believes that there are no existing claims
or proceedings that are likely to have a materially adverse effect on the
Company
Chevron Phillips Litigation
On July 10, 2002, Chevron Phillips Chemical Company ("Chevron Phillips")
filed a lawsuit against BJ Services Company ("BJ") for patent infringement in
the United States District Court for the Southern District of Texas (Corpus
Christi). The lawsuit relates to a patent issued in 1992 to the Phillips
Petroleum Company ("Phillips"). This patent (the `477 patent) relates to a
method for using enzymes to decompose drilling mud. Although BJ has its own
patents for remediating damage resulting from drill-in fluids (as opposed to
drilling muds) in oil and gas formations (products and services for which are
offered under the "Mudzyme" mark), we approached Phillips for a license of the
`477 patent. BJ was advised that Phillips had licensed this patent on an
exclusive basis to Geo-Microbial Technologies, Inc. ("GMT"), a company co-owned
by a former Phillips employee who is one of the inventors on the `477 patent,
and that BJ should deal with GMT in obtaining a sublicense. BJ entered into a
five (5) year sublicense agreement with GMT in 1997.
Early in 2000, Phillips advised BJ that Phillips had reportedly terminated
the license agreement between Phillips and GMT for non-payment of royalties and
that BJ's sublicense had also terminated. Even though BJ believes that its
sublicense with GMT has not been properly terminated and BJ's Mudzyme treatments
may not be covered by the `477 patent, in 2000, BJ stopped offering its enzyme
product for use on drilling mud and drill-in fluids in the U.S. Nevertheless,
Chevron Phillips is claiming that the use of enzymes in fracturing fluids and
other applications in the oil and gas industry falls under the `477 patent.
Further, even though their patent is valid only in the United States, Chevron
Phillips is requesting that the court award it damages for BJ's use of enzymes
in foreign countries on the theory that oil produced from wells treated with
enzymes is being imported into the United States.
The Company disputes Chevron Phillips' interpretation of the `477 patent
and its theory of damages, and will vigorously defend itself against the
allegations. Further, it is the Company's position that Chevron Phillips should
be bound by the terms of the sublicense agreement between
11
BJ and GMT. On November 25/th/ and 26/th/ of 2002, the Court conducted a hearing
regarding the scope and the interpretation of the claims in the `477 patent. BJ
has requested that the court adopt an interpretation of the `477 patent that
would remove fracturing fluids from this case. The Judge has this matter under
consideration. As with any lawsuit, the outcome of this case is uncertain. Given
the scope of the claims made by Chevron Phillips, an adverse ruling against BJ
could result in a substantial verdict. However, the Company does not presently
believe it is likely that the results of this litigation will have a material
adverse impact on the Company's financial position or the results of operations.
Halliburton - Python Litigation
On June 27, 2002, Halliburton Energy Services, Inc. filed suit against BJ
and Weatherford International, Inc. for patent infringement in connection with
drillable bridge plug tools. These tools are used to isolate portions of a well
for stimulation work, after which the plugs are milled out using coiled tubing
or a workover rig. Halliburton claims that tools offered by BJ (under the trade
name "Python") and Weatherford infringed two of its patents for a tool
constructed of composite material. The lawsuit has been filed in the United
States District Court for the Northern District of Texas (Dallas). Halliburton
has requested that the District court issue a temporary restraining order
against both Weatherford and BJ to prevent either company from selling competing
tools. In addition, Halliburton has requested expedited discovery and a hearing
on a preliminary injunction. BJ and Weatherford have filed responses to the
various Halliburton requests and the matter is currently under consideration by
the Court.
The Company believes that the current design of the Python plug offered by
BJ does not infringe any of the valid claims in the two Halliburton patents. The
Company also believes the Halliburton patents are invalid based upon prior art
demonstrated in products offered well before Halliburton filed for its patents.
BJ's revenue from the sale of its Python tools since the inception of this
product in the summer of 2001 is approximately $2.5 million. The Company
believes that we have no liability for infringement of the Halliburton patents.
Moreover, even if the patent is found to be enforceable and the Company is found
to have infringed it, the Company does not believe it is likely that the results
of this litigation will have a material adverse impact on the Company's
financial position or the results of our operations.
Halliburton - Vistar Litigation
On March 17, 2000, BJ Services Company filed a lawsuit against Halliburton
Energy Services in the United Sates District Court for the Southern District of
Texas (Houston). In the lawsuit BJ alleged that a well fracturing fluid system
used by Halliburton infringes a patent issued to BJ in January 2000 for a method
of well fracturing referred to by BJ as "Vistar(TM)". This case was tried in
March and April of 2002. The jury reached a verdict in favor of BJ on April 12,
2002. The jury determined that BJ's patent was valid and that Halliburton's
competing fluid system, Phoenix, infringed the BJ patent. The District Court has
entered a judgment for $101.1 million and a permanent injunction preventing
Halliburton from using its Phoenix system. The case is now on appeal to the
Court of Appeals for the Federal Circuit in Washington, D.C.
12
Newfield Litigation
On April 4, 2002, a jury rendered a verdict adverse to OSCA in connection
with litigation pending in the United States District Court for the Southern
District of Texas (Houston). The lawsuit arose out of a blowout that occurred in
1999 on an offshore well owned by Newfield Exploration. The jury determined that
OSCA's negligence caused or contributed to the blowout and that it was
responsible for 86% of the damages suffered by Newfield. The total damage amount
awarded to Newfield was $15.5 million. OSCA's share of the judgment would be
$13.3 million. The Court has delayed entry of the final judgment in this case
pending the completion of the related insurance coverage litigation filed by
OSCA against certain of its insurers and its former insurance broker. The Court
elected to conduct the trial of the insurance coverage issues based upon the
briefs of the parties. The briefs have been submitted and the parties are
awaiting a ruling from the Court. In the interim, the related litigation filed
by OSCA against its former insurance brokers for errors and omissions in
connection with the policies at issue in this case has been stayed. Great Lakes
Chemical Corporation, which formerly owned the majority of the outstanding
shares of OSCA, has agreed to indemnify BJ for 75% of any uninsured liability in
excess of $3 million arising from the Newfield litigation. The Company believes
it is adequately reserved for this contingency.
Environmental: Federal, state and local laws and regulations govern the
Company's operation of underground fuel storage tanks. Rather than incur
additional costs to restore and upgrade tanks as required by regulations,
management has opted to remove the existing tanks. The Company has completed the
removal of these tanks and has remedial cleanups in progress related to the tank
removals. In addition, the Company is conducting environmental investigations
and remedial actions at current and former company locations and, along with
other companies, is currently named as a potentially responsible party at three
third-party owned waste disposal sites. An accrual of approximately $5 million
has been established for such environmental matters, which is management's best
estimate of the Company's portion of future costs to be incurred. Insurance is
also maintained for environmental liabilities in amounts which the Company's
management believes are reasonable based on its knowledge of potential
exposures.
The Company's production chemical division, Unichem, notified the EPA in
2001 that it had failed to timely file reports related to toxic releases for the
2000 reporting year. These reports are required under Section 313 of the
Emergency Planning and Community Right-to-Know Act of 1986. Unichem subsequently
submitted these reports and EPA has conducted a review of Unichem's facilities.
In the course of these facility reviews, the EPA has preliminarily determined
that, in addition to the late filing of the 2000 reports, Unichem also failed to
properly report the volumes of toxic releases for certain chemicals in the years
1998, 1999 and 2000. The EPA has estimated the potential fines for all of
Unichem's facilities at approximately $240,000. BJ is contesting the potential
fines and is re-calculating the volumes of the involved chemicals in an effort
to reduce the number and severity of alleged violations. The EPA has not issued
a formal Notice of Violation to Unichem, although the Company expects to receive
such a Notice in the near future, after submission of the re-calculated volumes
to the EPA.
Lease and Other Long-Term Commitments: In December 1999, the Company
completed a transaction involving the transfer of certain pumping service
equipment assets and received $120.0
13
million that was used to pay outstanding bank debt. The equipment is used to
provide services to customers and the Company pays a service fee over a period
of at least six, but not more than 13 years. The transaction generated a
deferred gain, included in other long-term liabilities, of approximately $63
million, which is being amortized over 13 years. The balance of the deferred
gain was $46.6 and $47.8 million as of December 31, 2002 and September 30, 2002,
respectively.
In 1997, the Company completed a transaction involving the transfer of
certain pumping service equipment assets. The Company received $100.0 million
that was used to pay outstanding bank debt. The equipment is used to provide
services to the Company's customers for which the Company pays a service fee
over a period of at least eight, but not more than 14 years. The transaction
generated a deferred gain of approximately $38 million, which is being amortized
over 12 years. The balance of the deferred gain was $18.1 and $18.8 million as
of December 31, 2002 and September 30, 2002, respectively.
Guarantees: The Company routinely issues Parent Company Guarantees ("PCG's)
in connection with service contracts entered into by the Company's subsidiaries.
The issuance of these PCG's is frequently a condition of the bidding process
imposed by the Company's customers for work in countries outside of North
America. The PCG's typically provide that the Company guarantees the performance
of the services by the Company's local subsidiary. The term of these PCG's
varies with length of the services contract.
The Company arranges for the issuance of a variety of bank guarantees,
performance bonds and standby letters of credit. The vast majority of these are
issued in connection with contracts the Company, or a subsidiary, has entered
into with its customers. The customer has the right to call on the bank
guarantee, performance bond or standby letter of credit in the event that the
Company, or the subsidiary, defaults in the performance of the services. These
instruments are required as a condition to the Company, or the subsidiary, being
awarded the contract, and are released upon completion of the contract. The
balance of these instruments are predominantly standby letters of credit issued
in connection with a variety of the Company's financial obligations, such as in
support of fronted insurance programs, claims administration funding, certain
employee benefit plans and temporary importation bonds. The following table
summarizes the Company's other commercial commitments as of December 31, 2002
(in thousands):
Amount of commitment expiration per period
------------------------------------------
Total
Amounts Less than 1-3 4-5 Over 5
Other Commercial Commitments Committed 1 Year Years Years Years
- ---------------------------- --------- ------ ----- ----- -----
Standby Letters of Credit............... $ 19,197 $ 19,118 $ 79
Bank Guarantees and performance bonds 52,515 15,944 25,812 $ 6,573 $ 4,187
---------- ---------- ---------- --------- ---------
Total Commercial Commitments............ $ 71,712 $ 35,062 $ 25,891 $ 6,573 $ 4,187
========== ========== ========== ========= =========
Note 7 New Accounting Standards
In August 2001, the Financial Accounting Standards Board "FASB" issued SFAS
No. 143,
14
"Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires
the fair value of a liability for an asset retirement legal obligation to be
recognized in the period in which it is incurred. When the liability is
initially recorded, associated costs are capitalized by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period and the capitalized cost is depreciated over the
useful life of the related asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. SFAS 143 requires entities to record the
cumulative effect of a change in accounting principle in the income statement in
the period of adoption. The Company adopted SFAS 143 on October 1, 2002. The
Company has an asset retirement obligation ("ARO") with respect to machinery and
equipment permanently affixed to the decks of certain leased vessels. The
Company is obligated to remove the machinery and equipment and restore the
vessel to its original condition upon returning the vessel to the owner. The
Company determined the fair value of the ARO by using the "expected cash flow"
approach and probability weighting multiple scenarios and related outcomes. The
cumulative effect of the adoption of SFAS 143 had no effect on earnings per
share. The ARO was $3.1 million at October 1, 2002 and $3.1 million at December
31, 2002. Due to the immaterial effects that this new standard had on a
cumulative basis as of October 1, 2002 and for the comparative quarters ended
December 31, 2002 and 2001, we are not presenting pro forma ARO disclosures.
Based on our ARO's as of December 31, 2002, on an annual basis, we expect
depreciation expense to increase by approximately $0.1 million and to incur
accretion expense of approximately $0.2 million as a result of adopting SFAS
143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides new
guidance on the recognition of impairment losses on long-lived assets to be held
and used or to be disposed and also broadens the definition of what constitutes
a discontinued operation and how the results of a discontinued operation are to
be measured and presented. SFAS 144 supercedes SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
APB Opinion 30, while retaining many of the requirements of these two
statements. Under SFAS 144, assets held for sale that are a component of an
entity will be included in discontinued operations if the operations and cash
flows will be or have been eliminated from ongoing operations and the reporting
entity will not have any significant continuing involvement in the discontinued
operations prospectively. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. SFAS 144 did not materially change the methods used by the
Company to measure impairment losses on long-lived assets but may result in
future dispositions being reported as discontinued operations to a greater
extent than is currently permitted. The Company adopted SFAS 144 on October 1,
2002.
In November 2002, Financial Accounting Standards Board ("FASB")
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34" ("FIN 45") was issued. The interpretation requires that
upon issuance of a guarantee, the entity must recognize a liability for the fair
value of the obligation it assumes under that obligation. This interpretation is
intended to improve the comparability of financial reporting by requiring
identical accounting for guarantees issued with separately identified
consideration and guarantees issued without separately identified consideration.
The Interpretation's provisions for initial recognition and measurement should
be applied on a prospective basis to
15
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
that were issued before the date of FIN 45's initial application may not be
revised or restated to reflect the effect of the recognition and measurement
provisions of the Interpretation. The Company is currently evaluating the impact
of FIN No. 45 on its financial statements, however the Company's current
guarantees are disclosed in Note 6.
In December 2002, issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123, Accounting for Stock-Based Compensation" ("SFAS 148"). This Statement
amends SFAS 123, to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. This statement also
requires that those effects be disclosed more prominently by specifying the
form, content and location of those disclosures. SFAS 148 improves the
prominence and clarity of the pro forma disclosures required by SFAS 123 by
prescribing a specific tabular format and by requiring disclosure in the
"Summary of Significant Accounting Policies" or its equivalent. In addition,
this statement improves the timeliness of those disclosures by requiring their
inclusion in financial reports for interim periods. SFAS 148 also amends certain
disclosure requirements under APB 25. This statement is effective for financial
statements for fiscal years ending after December 15, 2002 and is effective for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The Company does not expect to change to
using the fair value based method of accounting for stock-based employee
compensation; and therefore, adoption of SFAS 148 is expected to impact only the
future disclosures, not the financial results, of the Company.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin No. 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
interest 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 is in the
process of determining what impact, if any, the adoption of the provisions of
FIN 46 will have upon its financial condition or results of operations.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company's worldwide operations are primarily driven by the number of
oil and natural gas wells being drilled, the depth and drilling conditions of
such wells, the number of well completions and the level of workover activity.
Drilling activity, in turn, is largely dependent on the price of crude oil and
natural gas. This situation often leads to volatility in the Company's revenues
and profitability, especially in the United States and Canada, where the Company
historically has generated in excess of 50% of its revenues.
Due to "aging" oilfields and lower-cost sources of oil internationally,
drilling activity in the United States has declined more than 75% from its peak
in 1981. Depressed drilling activity levels were experienced in 1986 and 1992
and record low drilling levels were experienced in early 1999. Despite a
recovery in the latter half of fiscal 1999, the U.S. average fiscal 1999 rig
count of 601 active rigs represented the lowest in history. A recovery in U.S.
drilling occurred in fiscal 2000 and 2001 due to exceptionally strong oil and
natural gas prices, yet drilling activity retreated in fiscal 2002. For the
three months ended December 31, 2002, the active U.S. rig count averaged 847
rigs, a 16% decrease in activity compared to the same period in fiscal 2002.
Crude oil and natural gas prices have stabilized over the past several months
and U.S. drilling activity has leveled out. The Company's management believes
that such activity will remain flat for the next quarter and will begin
increasing sometime in the Spring of 2003.
Drilling activity outside North America has historically been less volatile
than domestic drilling activity. International drilling activity also reached
record low levels during 1999 due to low oil prices during most of the year.
While Canadian drilling activity began to recover during the latter part of
fiscal 1999, activity in most of the other international regions did not begin
to significantly recover until the latter half of fiscal 2001. During fiscal
2002, active international drilling rigs (excluding Canada) decreased 1%
compared to fiscal 2001 and Canadian drilling activity decreased 27% from the
previous fiscal year. During the three months ended December 31, 2002, active
international drilling rigs (excluding Canada) averaged 753 rigs, an increase of
1% in activity compared to the same period in fiscal 2002. Canadian drilling
activity also increased during the three months ended December 31, 2002
averaging 283 active drilling rigs, up 2% from the same period of fiscal year
2002. The Company expects international drilling activity (including Canada) in
fiscal 2003 to be consistent with levels experienced in fiscal 2002.
Critical Accounting Policies
The Company has defined a critical accounting policy as one that is both
important to the portrayal of the Company's financial condition and results of
operations and requires the management of the Company to make difficult,
subjective or complex judgments. Estimates and assumptions about future events
and their effects cannot be perceived with certainty. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be
17
reasonable under the circumstances, the results of which form the basis for
making judgments. These estimates may change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company's operating environment changes. There have been no material changes or
developments in our evaluation of the accounting estimates and the underlying
assumptions or methodologies that we believe to be Critical Accounting Policies
and Estimates as disclosed in our Form 10-K for the year ending September 30,
2002.
Acquisition
On May 31, 2002, the Company completed the acquisition of OSCA, Inc.
("OSCA"), a completion services (pressure pumping), completion tools and
completion fluids company based in Lafayette, Louisiana, with operations
primarily in the U.S. Gulf of Mexico, Brazil and Venezuela for a total purchase
price of $470.6 million. See Note 3 of the Notes to the Consolidated Financial
Statements included in the Company's annual report on Form 10-K for the fiscal
year ended September 30, 2002 for additional information regarding this
acquisition.
18
Results of Operations
The following table sets forth selected key operating statistics reflecting
industry rig count and the Company's financial results:
Three Months Ended
December 31,
2002 2001
---- ----
Rig Count:/(1)/
U.S. 847 1,004
International 1,036 1,026
Consolidated revenue (in millions): $ 473.1 $ 510.1
Revenue by business segment (in millions):
U.S./Mexico Pressure Pumping $ 212.0 $ 273.1
International Pressure Pumping 178.9 186.9
Other Oilfield Services 82.3 50.0
Percentage of gross profit to revenue/(2)/ 20.6% 28.6%
Percentage of research and engineering expense to revenue 2.0% 1.7%
Percentage of marketing expense to revenue 3.6% 3.1%
Percentage of general and administrative expense to revenue 3.5% 3.1%
Consolidated operating income (in millions): $ 54.6 $ 105.1
Operating income by business segment (in millions)
U.S./Mexico Pressure Pumping $ 33.1 $ 82.2
International Pressure Pumping 19.2 24.7
Other Oilfield Services 9.9 5.6
- ------------
/(1)/ Industry estimate of drilling activity as measured by average active
drilling rigs.
/(2)/ Gross profit represents revenue less cost of sales and services.
Revenue: Compared to prior year's first quarter, U.S./Mexico pressure
pumping services revenues declined 22% and International pressure pumping
services revenues declined 4%. Revenues from Other Oilfield Services increased
65%, due primarily to the addition of the completion fluids and completion tools
service lines acquired with OSCA in May 2002.
Operating Income: Operating income margins were 11.5%, relatively unchanged
from the preceding quarter. Compared to the prior year's first quarter,
operating income margins declined from 20.6% due to market activity declines and
price deterioration in U.S./Mexico pressure pumping services.
Other: Interest expense, net, increased $2.0 million from prior year's
first quarter as a result of the issuance of convertible debt in April 2002,
used to finance the OSCA acquisition.
19
Income Taxes: Primarily as a result of profitability in international
jurisdictions where the statutory tax rate is less than the U.S. tax rate, the
effective tax rate was 32.5% for the three months ended December 31, 2002 and
35.0% for the same period in fiscal 2002.
U.S./Mexico Pressure Pumping Segment
Compared to the first quarter of the prior fiscal year, revenue declined
$61.1 million, or 22% due to a 16% decline in drilling activity, a 10% decline
in workover activity, and price deterioration. Management believes that fiscal
2003 revenues generated by its U.S./Mexico pressure pumping operations will
increase slightly as drilling activity levels are not expected to improve until
sometime in the Spring of 2003.
During the quarter ended December 31, 2002, operating income for the
Company's U.S./Mexico pressure pumping segment decreased $49.1 million, or 60%
from the same period of the prior year. The decrease was due primarily to
decreased revenues resulting from the decline in drilling and workover activity
and lower prices for the Company's products and services.
International Pressure Pumping Segment
International revenues were $178.9 million, a decrease of 4% from the prior
year's first quarter. Revenues in Russia declined due to activity delays as a
result of extremely cold weather. Revenues in Latin America declined as a result
of depressed activity in Argentina and Venezuela caused by economic
uncertainties and PDVSA (state oil company) labor strikes, respectively. These
decreases were offset by activity increases in the Asia Pacific and Middle East
regions. In Canada, revenues decreased 21% compared to prior year's first
quarter even though the average active drilling rigs in Canada increased 2% from
prior year's first fiscal quarter. The activity increase was primarily in
shallow drilling areas of Southern Canada as warm weather delayed rig movement
into the North, an area with historically higher revenue per job. Based on
expected drilling and activity levels, revenues for the Company's international
pressure pumping operations are expected to improve slightly for the remainder
of fiscal 2003 from fiscal 2002 levels.
During the quarter ended December 31, 2002, operating income for the
Company's International pressure pumping segment decreased $5.5 million, or 22%
from the same period of the prior year. The decrease was due primarily to
reduced service revenues in Russia which were not sufficient to recover the
expanded fixed cost base from the additional service rigs acquired in the third
quarter of fiscal 2002. Additionally, Canadian margins declined due to warmer
weather which delayed rig movement to the North. As a result, activity was
concentrated in the less profitable southern area of Canada.
Other Oilfield Services Segment
Revenues increased 65% from the prior year's first quarter, due primarily
to the addition of completion fluids and completion tools service lines acquired
with OSCA. In addition, revenues from process and pipeline services, tubular
services and production chemicals increased 13%, 14%,
20
and 3%, respectively, when compared to the same quarter of the prior fiscal
year.
During the quarter ended December 31, 2002, operating income for the
Company's Other Oilfield Services segment increased $4.3 million, or 75% from
the same period of the prior year. The increase was due primarily to the
addition of completion fluids and completion tools service lines acquired with
OSCA.
Capital Resources and Liquidity
At December 31, 2002, cash and cash equivalents equaled $92.6 million
compared with $84.7 million at September 30, 2002.
Net cash provided from operating activities for the first quarter of fiscal
2003 totaled $24.0 million, a decrease of $96.2 million from the comparable
period of the prior year. This is primarily due to reduced profitability and a
higher percentage of international revenue where the collection period is
typically longer.
Cash flows used in investing activities for the three months ended December
31, 2002 totaled $32.7 million, a decrease of $19.8 million compared to the same
period of the previous year. This is primarily attributable to a decrease in the
Company's capital expenditures, however, capital expenditures for fiscal 2003
are expected to be at a level consistent with fiscal 2002 spending at
approximately $180 million. The 2003 capital program is expected to consist
primarily of spending for the enhancement of the Company's existing pressure
pumping equipment, continued investment in the U.S. fracturing fleet
recapitalization initiative and stimulation expansion internationally. The
actual amount of 2003 capital expenditures will be primarily dependent on
maintenance requirements and expansion opportunities and is expected to be
funded by cash flows from operating activities.
Cash flows provided by financing activities for the three months ended
December 31, 2002 were $16.6 million, compared to cash flows used for financing
activities of $107.9 million in the same period of the previous year. Cash flows
provided by financing activities during the first quarter of fiscal 2003 were
primarily from proceeds from the exercise of stock options and the employee
stock purchase plan. Cash flows used in financing activities during the first
quarter of fiscal 2002, were used to repurchase the Company's common stock.
During that quarter, the Company purchased 4.4 million shares of its common
stock at a cost of $102.1 million under a share repurchase program initially
approved by the Company's Board of Directors in December 1997. The share
repurchase program, as amended, authorizes purchases up to $750 million, $251.0
million of which was available for future purchase as of December 31, 2002.
In June 2001, the Company replaced its existing credit facility with a new
$400 million committed line of credit ("Committed Credit Facility"). The
Committed Credit Facility consists of a $200 million, 364-day commitment that
renews annually at the option of the lenders and a $200 million three-year
commitment. The 364-day commitment that expired in June 2002 was renewed for an
additional 364 days. There were no outstanding borrowings under the Committed
Credit Facility at December 31, 2002.
21
In addition to the Committed Credit Facility, the Company had $129.0
million in various unsecured, discretionary lines of credit at December 31,
2002, which expire at various dates in 2003. There are no requirements for
commitment fees or compensating balances in connection with these lines of
credit, and interest on borrowings is based on prevailing market rates. There
was $7.9 million and $3.5 million in outstanding borrowings under these lines of
credit at December 31, 2002 and September 30, 2002, respectively.
On April 24, 2002 the Company sold convertible senior notes with a face
value at maturity of $516.4 million (gross proceeds of $408.4 million). The
notes are unsecured senior obligations that rank equally in right of payment
with all of the Company's existing and future senior unsecured indebtedness. The
Company used the aggregate net proceeds of $400.1 million to fund a substantial
portion of the purchase price of its acquisition of OSCA which closed on May 31,
2002 and for general corporate purposes.
The notes will mature in 2022 and cannot be called by the Company for three
years after issuance. If the Company exercises its right to call the notes, the
redemption price must be paid in cash. Holders of the notes can require the
Company to repurchase the notes on the third, fifth, tenth and fifteenth
anniversaries of the issuance. The Company has the option to pay the repurchase
price in cash or stock. The issue price of the notes was $790.76 for each $1,000
in face value, which represents a yield to maturity of 1.625%. Of this 1.625%
annual yield to maturity, 0.50% per year on the issue price will be paid
semi-annually in cash for the life of the security.
The notes are convertible into BJ Services common stock at an initial rate
of 14.9616 shares for each $1,000 face amount note. This rate results in an
initial conversion price of $52.85 per share (based on the purchaser's original
issue discount) and represents a premium of 45% over the April 18, 2002 closing
sale price of the Company's common stock on the New York Stock Exchange of
$36.45 per share. The Company has the option to settle notes that are
surrendered for conversion using cash. Generally, except upon the occurrence of
specified events, including a credit rating downgrade to below investment grade,
holders of the notes are not entitled to exercise their conversion rights until
the Company's stock price is greater than a specified percentage (beginning at
120% and declining to 110% at the maturity of the notes) of the accreted
conversion price per share. At December 31, 2002, the accreted conversion price
per share would have been $53.26.
The Company's total interest-bearing debt was 25.4% of its total
capitalization (total capitalization equals the sum of interest-bearing debt and
stockholders' equity) at December 31, 2002, compared to 25.8% at September 30,
2002. The Committed Credit Facility includes various customary covenants and
other provisions including the maintenance of certain profitability and solvency
ratios, none of which materially restrict the Company's activities. Management
believes that the Committed Credit Facility, combined with other discretionary
credit facilities and cash flows from operations, provides the Company with
sufficient capital resources and liquidity to manage its routine operations,
meet debt service obligations and fund projected capital expenditures. If the
discretionary lines of credit are not renewed, or if borrowings under these
lines of credit otherwise become unavailable, the Company expects to refinance
this debt by arranging additional committed bank facilities or through other
long-term borrowing alternatives.
22
Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board "FASB" issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
requires the fair value of a liability for an asset retirement legal obligation
to be recognized in the period in which it is incurred. When the liability is
initially recorded, associated costs are capitalized by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period and the capitalized cost is depreciated over the
useful life of the related asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. SFAS 143 requires entities to record the
cumulative effect of a change in accounting principle in the income statement in
the period of adoption. The Company adopted SFAS 143 on October 1, 2002. The
Company has an asset retirement obligation ("ARO") with respect to machinery and
equipment permanently affixed to the decks of certain leased vessels. The
Company is obligated to remove the machinery and equipment and restore the
vessel to its original condition upon returning the vessel to the owner. The
Company determined the fair value of the ARO by using the "expected cash flow"
approach and probability weighting multiple scenarios and related outcomes. The
cumulative effect of the adoption of SFAS 143 had no effect on earnings per
share. The ARO was $3.1 million at October 1, 2002 and $3.1 million at December
31, 2002. Due to the immaterial effects that this new standard had on a
cumulative basis as of October 1, 2002 and for the comparative quarters ended
December 31, 2002and 2001, we are not presenting pro forma ARO disclosures.
Based on our ARO's as of December 31, 2002, on an annual basis, we expect
depreciation expense to increase by approximately $0.1 million and to incur
accretion expense of approximately $0.2 million as a result of adopting SFAS
143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides new
guidance on the recognition of impairment losses on long-lived assets to be held
and used or to be disposed and also broadens the definition of what constitutes
a discontinued operation and how the results of a discontinued operation are to
be measured and presented. SFAS 144 supercedes SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
APB Opinion 30, while retaining many of the requirements of these two
statements. Under SFAS 144, assets held for sale that are a component of an
entity will be included in discontinued operations if the operations and cash
flows will be or have been eliminated from ongoing operations and the reporting
entity will not have any significant continuing involvement in the discontinued
operations prospectively. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. SFAS 144 did not materially change the methods used by the
Company to measure impairment losses on long-lived assets but may result in
future dispositions being reported as discontinued operations to a greater
extent than is currently permitted. The Company adopted SFAS 144 on October 1,
2002.
In November 2002, Financial Accounting Standards Board ("FASB")
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34" ("FIN 45") was issued. The interpretation requires that
upon issuance of a guarantee, the entity must recognize a liability for the fair
value of the obligation
23
it assumes under that obligation. This interpretation is intended to improve the
comparability of financial reporting by requiring identical accounting for
guarantees issued with separately identified consideration and guarantees issued
without separately identified consideration. The Interpretation's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
that were issued before the date of FIN 45's initial application may not be
revised or restated to reflect the effect of the recognition and measurement
provisions of the Interpretation. The Company is currently evaluating the impact
of FIN 45 on its financial statements, however the Company's current guarantees
are disclosed in Note 6 of the Notes to Unaudited Consolidated Condensed
Financial Statements.
In December 2002, issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123, Accounting for Stock-Based Compensation" ("SFAS 148"). This Statement
amends SFAS 123, to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. This statement also
requires that those effects be disclosed more prominently by specifying the
form, content and location of those disclosures. SFAS 148 improves the
prominence and clarity of the pro forma disclosures required by SFAS 123 by
prescribing a specific tabular format and by requiring disclosure in the
"Summary of Significant Accounting Policies" or its equivalent. In addition,
this statement improves the timeliness of those disclosures by requiring their
inclusion in financial reports for interim periods. SFAS 148 also amends certain
disclosure requirements under APB 25. This statement is effective for financial
statements for fiscal years ending after December 15, 2002 and is effective for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The Company does not expect to change to
using the fair value based method of accounting for stock-based employee
compensation; and therefore, adoption of SFAS 148 is expected to impact only the
future disclosures, not the financial results, of the Company.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin No. 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
interest 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 is in the
process of determining what impact, if any, the adoption of the provisions of
FIN 46 will have upon its financial condition or results of operations.
24
Forward Looking Statements
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934 concerning, among other things, the Company's
prospects, expected revenues, expenses and profits, developments and business
strategies for its operations, all of which are subject to certain risks,
uncertainties and assumptions. These forward-looking statements are identified
by their use of terms and phrases such as "expect," "estimate," "project,"
"believe," "achievable," "anticipate" and similar terms and phrases. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate under the circumstances. Such statements are subject to
. general economic and business conditions,
. international political and security conditions,
. conditions in the oil and natural gas industry, including drilling
activity,
. fluctuating prices of crude oil and natural gas,
. weather conditions that affect conditions in the oil and natural gas
industry,
. the business opportunities that may be presented to and pursued by the
Company,
. the Company's ability to expand the businesses of OSCA outside the
U.S., and
. changes in law or regulations and other factors, many of which are
beyond the control of the Company.
If one or more of these risks or uncertainties materializes, or if
underlying assumptions prove incorrect, actual results may vary materially from
those expected, estimated or projected. Other than as required under the
Securities laws, the Company does not assume a duty to update these forward
looking statements. Please see "Risk Factors" included in the Company's 2002
Annual Report on Form 10-K.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The
Company's major market risk exposure is to foreign currency fluctuations
internationally and changing interest rates, primarily in the United States and
Europe. The Company's policy is to manage interest rates through use of a
combination of fixed and floating rate debt. If the floating rates were to
increase by 10% from December 31, 2002 rates, the Company's combined interest
expense to third parties would increase by a total of $3,500 each month in which
such increase continued. At December 31, 2002, the Company had issued fixed-rate
debt of $490.2 million. These instruments are fixed-rate and, therefore, do not
expose the Company to the risk of loss in earnings due to changes in market
interest rates. However, the fair value of these instruments would increase by
$21.6 million if interest rates were to decline by 10% from their rates at
December 31, 2002.
Periodically, the Company borrows funds which are denominated in foreign
currencies, which exposes the Company to market risk associated with exchange
rate movements. There were no such borrowings denominated in foreign currencies
at December 31, 2002. When necessary, the Company enters into forward foreign
exchange contracts to hedge the impact of foreign currency fluctuations. There
were no foreign exchange contracts outstanding at December 31, 2002. All items
described are non-trading and are stated in U.S. dollars (in thousands).
Expected Maturity Dates Fair Value
2003 2004 2005 2006 Thereafter Total December 31, 2002
---- ---- ---- ---- ---------- ----- -----------------
SHORT-TERM BORROWINGS
Bank borrowings; US $ denominated $7,898 $ 7,898
Average variable interest rate - 5.25%
at December 31, 2002
LONG-TERM BORROWINGS
Current leases; US $ denominated 126 126
Variable interest rate - 6.18% at
December 31, 2002
7% Series B Notes - US $ denominated $78,851 78,851 $ 86,695
Fixed interest rate - 7%
1.625% Convertible Notes
US denominated $ 411,378 411,378 420,438
Fixed interest rate - 1.625%
26
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures as of a
date within 90 days of the filing of this report, the Chief Executive
Officer and Chief Financial Officer of the Company have concluded that the
disclosure controls and procedures are effective.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
27
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company, through performance of its service operations, is sometimes
named as a defendant in litigation, usually relating to claims for bodily
injuries or property damage (including claims for well or reservoir damage). The
Company maintains insurance coverage against such claims to the extent deemed
prudent by management. The Company believes that there are no existing claims
that are likely to have a materially adverse effect on the Company for which it
has not already provided.
Through acquisition the Company assumed responsibility for certain claims
and proceedings made against Western, Nowsco and OSCA in connection with their
businesses. Some, but not all, of such claims and proceedings will continue to
be covered under insurance policies of the Company's predecessors that were in
place at the time of the acquisitions. Although the outcome of the claims and
proceedings against the Company (including Western, Nowsco and OSCA) cannot be
predicted with certainty, management believes that there are no existing claims
or proceedings that are likely to have a materially adverse effect on the
Company.
Chevron Phillips Litigation
On July 10, 2002, Chevron Phillips Chemical Company ("Chevron Phillips")
filed a lawsuit against BJ Services Company ("BJ") for patent infringement in
the United States District Court for the Southern District of Texas (Corpus
Christi). The lawsuit relates to a patent issued in 1992 to the Phillips
Petroleum Company ("Phillips"). This patent (the `477 patent) relates to a
method for using enzymes to decompose drilling mud. Although BJ has its own
patents for remediating damage resulting from drill-in fluids (as opposed to
drilling muds) in oil and gas formations (products and services for which are
offered under the "Mudzyme" mark), we approached Phillips for a license of the
`477 patent. BJ was advised that Phillips had licensed this patent on an
exclusive basis to Geo-Microbial Technologies, Inc. ("GMT"), a company co-owned
by a former Phillips employee who is one of the inventors on the `477 patent,
and that BJ should deal with GMT in obtaining a sublicense. BJ entered into a
five (5) year sublicense agreement with GMT in 1997.
Early in 2000, Phillips advised BJ that Phillips had reportedly terminated
the license agreement between Phillips and GMT for non-payment of royalties and
that BJ's sublicense had also terminated. Even though BJ believes that its
sublicense with GMT has not been properly terminated and BJ's Mudzyme treatments
may not be covered by the `477 patent, in 2000, BJ stopped offering its enzyme
product for use on drilling mud and drill-in fluids in the U.S. Nevertheless,
Chevron Phillips is claiming that the use of enzymes in fracturing fluids and
other applications in the oil and gas industry falls under the `477 patent.
Further, even though their patent is valid only in the United States, Chevron
Phillips is requesting that the court award it damages for BJ's use of enzymes
in foreign countries on the theory that oil produced from wells treated with
enzymes is being imported into the United States.
The Company disputes Chevron Phillips' interpretation of the `477 patent
and its theory of
28
damages, and will vigorously defend itself against the allegations. Further, it
is the Company's position that Chevron Phillips should be bound by the terms of
the sublicense agreement between BJ and GMT. On November 25/th/ and 26/th/ of
2002, the Court conducted a hearing regarding the scope and the interpretation
of the claims in the `477 patent. BJ has requested that the court adopt an
interpretation of the `477 patent that would remove fracturing fluids from this
case. The Judge has this matter under consideration. As with any lawsuit, the
outcome of this case is uncertain. Given the scope of the claims made by Chevron
Phillips, an adverse ruling against BJ could result in a substantial verdict.
However, the Company does not presently believe it is likely that the results of
this litigation will have a material adverse impact on the Company's financial
position or the results of operations.
Halliburton - Python Litigation
On June 27, 2002, Halliburton Energy Services, Inc. filed suit against BJ
and Weatherford International, Inc. for patent infringement in connection with
drillable bridge plug tools. These tools are used to isolate portions of a well
for stimulation work, after which the plugs are milled out using coiled tubing
or a workover rig. Halliburton claims that tools offered by BJ (under the trade
name "Python") and Weatherford infringed two of its patents for a tool
constructed of composite material. The lawsuit has been filed in the United
States District Court for the Northern District of Texas (Dallas). Halliburton
has requested that the District court issue a temporary restraining order
against both Weatherford and BJ to prevent either company from selling competing
tools. In addition, Halliburton has requested expedited discovery and a hearing
on a preliminary injunction. BJ and Weatherford have filed responses to the
various Halliburton requests and the matter is currently under consideration by
the Court.
The Company believes that the current design of the Python plug offered by
BJ does not infringe any of the valid claims in the two Halliburton patents. The
Company also believes the Halliburton patents are invalid based upon prior art
demonstrated in products offered well before Halliburton filed for its patents.
BJ's revenue from the sale of its Python tools since the inception of this
product in the summer of 2001 is approximately $2.5 million. The Company
believes that we have no liability for infringement of the Halliburton patents.
Moreover, even if the patent is found to be enforceable and the Company is found
to have infringed it, the Company does not believe it is likely that the results
of this litigation will have a material adverse impact on the Company's
financial position or the results of our operations.
Halliburton - Vistar Litigation
On March 17, 2000, BJ Services Company filed a lawsuit against Halliburton
Energy Services in the United Sates District Court for the Southern District of
Texas (Houston). In the lawsuit BJ alleged that a well fracturing fluid system
used by Halliburton infringes a patent issued to BJ in January 2000 for a method
of well fracturing referred to by BJ as "Vistar(TM)". This case was tried in
March and April of 2002. The jury reached a verdict in favor of BJ on April 12,
2002. The jury determined that BJ's patent was valid and that Halliburton's
competing fluid system, Phoenix, infringed the BJ patent. The District Court has
entered a judgment for $101.1 million and a permanent injunction preventing
Halliburton from using its Phoenix system. The case is now on appeal to the
Court of Appeals for the Federal Circuit in Washington, D.C.
29
Newfield Litigation
On April 4, 2002, a jury rendered a verdict adverse to OSCA in connection
with litigation pending in the United States District Court for the Southern
District of Texas (Houston). The lawsuit arose out of a blowout that occurred in
1999 on an offshore well owned by Newfield Exploration. The jury determined that
OSCA's negligence caused or contributed to the blowout and that it was
responsible for 86% of the damages suffered by Newfield. The total damage amount
awarded to Newfield was $15.5 million. OSCA's share of the judgment would be
$13.3 million. The Court has delayed entry of the final judgment in this case
pending the completion of the related insurance coverage litigation filed by
OSCA against certain of its insurers and its former insurance broker. The Court
elected to conduct the trial of the insurance coverage issues based upon the
briefs of the parties. The briefs have been submitted and the parties are
awaiting a ruling from the Court. In the interim, the related litigation filed
by OSCA against its former insurance brokers for errors and omissions in
connection with the policies at issue in this case has been stayed. Great Lakes
Chemical Corporation, which formerly owned the majority of the outstanding
shares of OSCA, has agreed to indemnify BJ for 75% of any uninsured liability in
excess of $3 million arising from the Newfield litigation. The Company believes
it is adequately reserved for this contingency.
Environmental: Federal, state and local laws and regulations govern the
Company's operation of underground fuel storage tanks. Rather than incur
additional costs to restore and upgrade tanks as required by regulations,
management has opted to remove the existing tanks. The Company has completed the
removal of these tanks and has remedial cleanups in progress related to the tank
removals. In addition, the Company is conducting environmental investigations
and remedial actions at current and former company locations and, along with
other companies, is currently named as a potentially responsible party at three
third-party owned waste disposal sites. An accrual of approximately $5 million
has been established for such environmental matters, which is management's best
estimate of the Company's portion of future costs to be incurred. Insurance is
also maintained for environmental liabilities in amounts which the Company's
management believes are reasonable based on its knowledge of potential
exposures.
The Company's production chemical division, Unichem, notified the EPA in
2001 that it had failed to timely file reports related to toxic releases for the
2000 reporting year. These reports are required under Section 313 of the
Emergency Planning and Community Right-to-Know Act of 1986. Unichem subsequently
submitted these reports and EPA has conducted a review of Unichem's facilities.
In the course of these facility reviews, the EPA has preliminarily determined
that, in addition to the late filing of the 2000 reports, Unichem also failed to
properly report the volumes of toxic releases for certain chemicals in the years
1998, 1999 and 2000. The EPA has estimated the potential fines for all of
Unichem's facilities at approximately $240,000. BJ is contesting the potential
fines and is re-calculating the volumes of the involved chemicals in an effort
to reduce the number and severity of alleged violations. The EPA has not issued
a formal Notice of Violation to Unichem, although the Company expects to receive
such a Notice in the near future, after submission of the re-calculated volumes
to the EPA.
Item 2. Changes in Securities
None
30
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
On January 24, 2003, the Company filed a Form 8-K (i) disclosing
certain financial information under Item 9 and (ii) attaching
press releases with respect to (a) announcement of the financial
results for the first quarter ended December 31, 2002, and (b)
appointment of William H. White to the Board of Directors.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BJ Services Company
(Registrant)
Date: February 14, 2003 BY /s/ J. W. Stewart
------------------------------
J. W. Stewart
Chairman of the Board
Date: February 14, 2003 BY /s/ T. M. Whichard
------------------------------
T. M. Whichard
Chief Financial Officer
32
CERTIFICATION
I, J.W. Stewart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BJ Services Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
33
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
BY /s/ J. W. Stewart
---------------------------------
J.W. Stewart
Chief Executive Officer
34
CERTIFICATION
I, T. M. Whichard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BJ Services Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
35
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
BY /s/ T. M. Whichard
-------------------------------
T. M. Whichard
Chief Financial Officer
36