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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 number 1-10570
BJ SERVICES COMPANY
(Exact name of registrant as specified in its charter)
Delaware 63-0084140
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.
5500 Northwest Central Drive, Houston, Texas 77092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 462-4239
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
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 158,059,972 shares of the registrant's common stock, $.10 par
value, outstanding as of May 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
and six months ended March 31, 2003 and 2002 3
Consolidated Condensed Statement of Financial Position (Unaudited) -
March 31, 2003 and September 30, 2002 4
Consolidated Statement of Stockholders' Equity (Unaudited) -
Six months ended March 31, 2003 5
Consolidated Condensed Statement of Cash Flows (Unaudited) -
Six months ended March 31, 2003 and 2002 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 34
PART II - OTHER INFORMATION 35
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 Six Months Ended
March 31, March 31,
------------------- ---------------------
2003 2002 2003 2002
-------- -------- ---------- --------
Revenue $534,580 $442,388 $1,007,704 $952,449
Operating expenses:
Cost of sales and services 415,031 342,232 790,764 706,595
Research and engineering 10,365 8,784 19,679 17,598
Marketing 18,345 14,884 35,474 30,668
General and administrative 18,947 15,940 35,322 31,956
-------- -------- ---------- --------
Total operating expenses 462,688 381,840 881,239 786,817
-------- -------- ---------- --------
Operating income 71,892 60,548 126,465 165,632
Interest expense (3,741) (414) (7,742) (2,310)
Interest income 344 303 863 677
Other expense - net (2,113) (508) (3,619) (1,084)
--------- --------- ----------- ---------
Income before income taxes 66,382 59,929 115,967 162,915
Income tax expense 21,574 20,975 37,689 57,020
-------- -------- ---------- --------
Net income $ 44,808 $ 38,954 $ 78,278 $105,895
======== ======== ========== ========
Earnings per share:
Basic $ .28 $ .25 $ .50 $ .67
Diluted $ .28 $ .24 $ .49 $ .66
Weighted average shares outstanding:
Basic 157,813 156,491 157,692 157,249
Diluted 160,985 160,125 160,833 160,476
The accompanying notes are an integral part of these consolidated financial
statements
3
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
(In thousands)
March 31, September 30,
2003 2002
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 122,042 $ 84,727
Receivables - net 438,196 364,214
Inventories:
Products 87,761 95,540
Work in process 3,511 1,971
Parts 71,750 62,339
---------- ----------
Total inventories 163,022 159,850
Deferred income taxes 9,129 10,083
Other current assets 37,238 29,917
---------- ----------
Total current assets 769,627 648,791
Property - net 816,750 798,956
Deferred income taxes 60,186 73,768
Goodwill 874,367 872,959
Other assets 47,989 47,896
---------- ----------
$2,568,919 $2,442,370
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 187,380 $ 168,875
Short-term borrowings 2,659 3,522
Current portion of long-term debt -- 256
Accrued employee compensation and benefits 55,288 59,380
Income and other taxes 38,224 31,582
Accrued insurance 15,644 12,311
Other accrued liabilities 73,290 80,494
---------- ----------
Total current liabilities 372,485 356,420
Commitments and contingencies (Note 6)
Long-term debt 491,399 489,062
Deferred income taxes 11,336 9,213
Other long-term liabilities 172,203 169,047
Stockholders' equity 1,521,496 1,418,628
---------- ----------
$2,568,919 $2,442,370
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
4
BJ SERVICES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share data)
Capital
Common Common In Excess Treasury
Stock Shares Stock of Par Stock
------------ ------- --------- ---------
Balance, September 30, 2002 156,795,191 $17,376 $965,550 $(382,271)
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Cumulative translation adjustments
Comprehensive income
Reissuance of treasury stock for:
Stock options 106,721 2,174
Stock purchase plan 658,912 14,852
Stock performance plan 146,595 (3,812) 3,304
Recognition of unearned compensation
Revaluation of stock performance awards 123
----------- ------- -------- ---------
Balance, December 31, 2002 157,707,419 $17,376 $961,861 $(361,941)
=========== ======= ======== =========
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Cumulative translation adjustments
Comprehensive income
Reissuance of treasury stock for:
Stock options 196,563 4,479
Stock purchase plan 451 10
Recognition of unearned compensation
----------- ------- -------- ---------
Balance, March 31, 2003 157,904,433 $17,376 $961,861 $(357,452)
=========== ======= ======== =========
Accumulated
Other
Unearned Retained Comprehensive
Compensation Earnings Income Total
------------ -------- ------------- ----------
Balance, September 30, 2002 $(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
Reissuance of treasury stock for:
Stock options (999) 1,175
Stock purchase plan (4,889) 9,963
Stock performance plan 507 (1)
Recognition of unearned compensation 277 277
Revaluation of stock performance awards (123)
----- -------- -------- ----------
Balance, December 31, 2002 $(772) $876,861 $(27,697) $1,465,688
===== ======== ======== ==========
Comprehensive income:
Net income 44,808
Other comprehensive income, net of tax:
Cumulative translation adjustments 8,411
Comprehensive income 53,219
Reissuance of treasury stock for:
Stock options (2,174) 2,305
Stock purchase plan (3) 7
Recognition of unearned compensation 277 277
----- -------- -------- ----------
Balance, March 31, 2003 $(495) $919,492 $(19,286) $1,521,496
===== ======== ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements
5
BJ SERVICES COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
March 31,
--------------------
2003 2002
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 78,278 $ 105,895
Adjustments to reconcile net income to cash
provided by operating activities:
Minority interest 2,655 2,234
Amortization of unearned compensation 554 1,454
Depreciation and amortization 57,992 49,612
Deferred income taxes 10,532 36,793
Changes in:
Receivables (73,982) 117,319
Inventories (3,172) (2,414)
Accounts payable 18,505 (48,936)
Other current assets and liabilities (2,515) (64,264)
Other - net 1,711 (11,198)
-------- ---------
Net cash provided by operating activities 90,558 186,495
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (70,915) (96,063)
Proceeds from disposal of assets 3,005 880
-------- ---------
Net cash used for investing activities (67,910) (95,183)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) borrowings - net 1,218 (10,123)
Proceeds from issuance of stock 13,449 5,393
Purchase of treasury stock -- (102,125)
-------- ---------
Net cash provided by (used for) financing activities 14,667 (106,855)
Increase (decrease) in cash and cash equivalents 37,315 (15,543)
Cash and cash equivalents at beginning of period 84,727 84,103
-------- ---------
Cash and cash equivalents at end of period $122,042 $ 68,560
======== =========
The accompanying notes are an integral part of these consolidated 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 March 31, 2003, and its results of operations for each of the
three-month and six-month periods ended March 31, 2003 and 2002 and its cash
flows for each of the six-month periods ended March 31, 2003 and 2002. 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 and six-month periods ended March 31,
2003 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 Six Months Ended
March 31, March 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 44,808 $ 38,954 $ 78,278 $105,895
Weighted-average common shares outstanding 157,813 156,491 157,692 157,249
-------- -------- -------- --------
Basic earnings per share $ .28 $ .25 $ .50 $ .67
======== ======== ======== ========
7
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Weighted-average common and dilutive
potential common shares outstanding:
Weighted-average common shares
outstanding 157,813 156,491 157,692 157,249
Assumed exercise of stock options/(1)/ 3,172 3,634 3,141 3,227
-------- -------- -------- --------
160,985 160,125 160,833 160,476
-------- -------- -------- --------
Diluted earnings per share $ .28 $ .24 $ .49 $ .66
======== ======== ======== ========
/(1)/ For the three and six months ended March 31, 2003, 410 and 315 stock
options were excluded from the computation of diluted earnings per share due to
their antidilutive effect, respectively.
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 45 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, process and pipeline
services and, with the acquisition of OSCA, Inc. ("OSCA") on May 31, 2002,
completion tools and completion fluids services in the U.S. and in select
markets 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. Intersegment sales and
transfers are not significant.
8
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 March 31, 2003
Revenues/(1)/ $232,156 $ 217,671 $ 84,039 $ 714 $ 534,580
Operating income (loss) 38,480 34,152 9,813 (10,553) 71,892
Three Months Ended March 31, 2002
Revenues $207,300 $ 186,493 $ 47,347 $ 1,248 $ 442,388
Operating income (loss) 40,145 21,382 4,568 (5,547) 60,548
Six Months Ended March 31, 2003
Revenues/(1)/ $444,138 $ 396,551 $165,991 $ 1,024 $1,007,704
Operating income (loss) 71,582 53,395 19,644 (18,156) 126,465
Identifiable assets 801,130 1,058,927 366,750 342,112 2,568,919
Six Months Ended March 31, 2002
Revenues $480,426 $ 373,421 $ 97,065 $ 1,537 $ 952,449
Operating income (loss) 122,319 46,113 10,147 (12,947) 165,632
Identifiable assets 656,814 871,172 171,057 198,686 1,897,729
/(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 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.
9
A reconciliation from the segment information to consolidated income before
income taxes is set forth below (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -------------------
2003 2002 2003 2002
------- -------- -------- --------
Total operating profit for
Reportable segments $71,892 $60,548 $126,465 $165,632
Interest expense - net (3,397) (111) (6,879) (1,633)
Other expense - net (2,113) (508) (3,619) (1,084)
------- ------- -------- --------
Income before income taxes $66,382 $59,929 $115,967 $162,915
======= ======= ======== ========
Note 4 Comprehensive Income
The components of comprehensive net income, net of tax, are as follows
(in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2003 2002 2003 2002
------- -------- ------- --------
Net income attributable to common
stockholders $44,808 $38,954 $78,278 $105,895
Change in cumulative translation adjustment 8,411 (5,138) 10,587 (5,659)
------- ------- ------- --------
Comprehensive net income $53,219 $33,816 $88,865 $100,236
======= ======= ======= ========
Note 5 Acquisition
On May 31, 2002, the Company completed the acquisition of 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.
10
Three Months Ended Six Months Ended
March 31, 2002 March 31, 2002
------------------ ----------------
Revenues $477,958 $1,029,864
Net income $ 29,525/(1)/ 96,538/(1)/
Earnings per share:
Basic $ .19 $ .61
Diluted $ .18 $ .60
/(1)/ Includes a $13.5 million (before tax) charge for the Newfield litigation
(see Note 6)
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 25,483
Prepaid expenses 879
Current deferred income taxes 4,031
Property, plant and equipment 50,564
Other assets 8,785
Short-term debt (440)
Accounts payable (25,582)
Other accrued liabilities (23,541)
Accrued income and other taxes 7,416
--------
Goodwill $393,317
========
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
11
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.
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 material adverse effect on the
Company's financial position or results of operations for which it has not
already provided.
Through acquisition the Company assumed responsibility for certain claims
and proceedings made against the Western Company of North America, Nowsco Well
Service Ltd. 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 material adverse effect on the Company's financial position or
results of operations for which it has not already provided.
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 used 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" trademark), 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 GMT's non-payment of royalties
and that BJ's sublicense had also been 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.
12
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 BJ and GMT. On
November 25th and 26th of 2002, the Court conducted a hearing regarding the
scope and the interpretation of the claims in the '477 patent. Following the
hearing, the Court issued a ruling on March 16, 2003, which we believe
interprets the '477 patent in a manner that is consistent with BJ's position.
Based on this ruling, BJ has filed a Motion for Summary Judgment seeking a
determination that fracturing fluids with enzymes do not come within the scope
of the '477 patent. The Judge has this matter under consideration. As with any
lawsuit, the outcome of this case is uncertain. Even a favorable ruling by the
Court would not completely dispose of this case and could be reviewed on appeal.
Given the scope of the claims made by Chevron Phillips, the possibility of very
costly litigation and even a substantial adverse verdict still exists. 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 infringe 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
requested that the District Court issue a temporary restraining order and a
preliminary injunction against both Weatherford and BJ to prevent either company
from selling competing tools. On March 4, 2003, the District Court issued its
opinion denying Halliburton's requests. Halliburton has asked the Court to
re-consider its ruling, and the Court has that request under review. Unless the
Court re-considers its initial ruling, this case will proceed into the discovery
phase. A trial date has not been set.
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 $3 million. The Company believes
that it has no liability for infringement of the Halliburton patents. Moreover,
even if the patents are 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 operations.
13
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. and an oral
argument was held on May 7, 2003. The Company expects to have a ruling in the
next few months.
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 (excluding pre- and post-judgement
interest). The Court 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. 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. On February 28, 2003, the
Court issued its Final Judgement in connection with the Newfield claims, based
upon the jury's verdict. The total amount of the verdict against OSCA is $15.6
million, inclusive of interest. At the same time, the Court issued it ruling on
the related insurance dispute finding that OSCA's coverage for this loss is
limited to $3.8 million. We have filed a Notice of Appeal with respect to the
liability finding and a Motion for a New Trial with respect to the insurance
coverage issues, which remains pending. Based upon the current rulings, the
uninsured portion of verdict against OSCA totals approximately $11.8 million.
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. Taking
this indemnity into account, the Company's share of the uninsured portion of the
verdict is approximately $5.2 million. The Company is fully reserved for its
share of this liability.
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
14
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 originally estimated the potential fines for all of
Unichem's facilities at approximately $240,000. BJ submitted additional
information to the EPA and requested that the agency re-assess its calculation
of the number and severity of alleged violations. The EPA has not issued a
formal Notice of Violation to Unichem, however, based on discussions to date, we
believe that the EPA will issue a final penalty assessment of less than
$100,000.
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 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 $45.4 and $47.8 million as of March
31, 2003 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 $17.4 and $18.8 million as
of March 31, 2003 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
15
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 March 31, 2003 (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 $ 19,283 $19,209 $ 74
Bank Guarantees and Performance Bonds 118,589 75,001 33,598 $6,377 $3,613
-------- ------- ------- ------ ------
Total Other Commercial Commitments $137,872 $94,210 $33,672 $6,377 $3,613
======== ======= ======= ====== ======
Note 7 Employee Stock Plans
At March 31, 2003, the Company has a Stock Option Plan and a Stock Purchase
Plan, which are described more fully in Note 12 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. Statement of Financial Accounting
Standards ("SFAS") 123, Accounting for Stock-Based Compensation, encourages, but
does not require, companies to record compensation cost for employee stock-based
compensation plans at fair value as determined by generally recognized option
pricing models such as the Black-Scholes model or the binomial model. Because of
the inexact and subjective nature of deriving stock option values using these
methods, the Company has adopted the disclosure-only provisions of SFAS 123 and
continues to account for stock-based compensation as it has in the past using
the intrinsic value method prescribed in Accounting Principles Board ("APB") 25,
Accounting for Stock Issued to Employees. Accordingly, no compensation expense
has been recognized in the consolidated condensed statement of operations for
the Company's employee stock option plans. In December 2002, the Financial
Accounting Standards Board ("FASB") issued SFAS No.148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123, Accounting for Stock-Based Compensation". This statement
requires pro forma disclosures on an interim basis as if the Company had applied
the fair value recognition provisions of SFAS 123.
16
The following pro forma table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation (in thousands,
except per share amounts):
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- --------
Net income, as reported $44,808 $38,954 $78,278 $105,895
Less: total stock-based employee compensation
expense determined under SFAS 123 for
all awards, net of tax 496 497 13,683 15,800
------- ------- ------- --------
Net income, pro forma $44,312 $38,457 $64,595 $ 90,095
======= ======= ======= ========
Earnings per share:
Basic, as reported $ .28 $ .25 $ .50 $ .67
======= ======= ======= ========
Basic, pro forma $ .28 $ .25 $ .41 $ .57
======= ======= ======= ========
Diluted, as reported $ .28 $ .24 $ .49 $ .66
======= ======= ======= ========
Diluted, pro forma $ .28 $ .24 $ .40 $ .56
======= ======= ======= ========
Note 8 New Accounting Standards
In August 2001, the 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. 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 March 31, 2003 and 2002, we are not
presenting pro forma ARO disclosures. Based on our ARO's as of October 1, 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.
17
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, 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
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 adopted FIN 45 on January 1, 2003.
No liabilities were required to be recognized upon adoption and the Company's
current guarantees are disclosed in Note 6.
In December 2002, the FASB 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 is intended to improve
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 is intended to improve 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
18
financial statements for interim periods beginning after December 15, 2002. The
Company did not adopt the method of using the fair value based method of
accounting for stock-based employee compensation; and therefore, adoption of
SFAS 148 on January 1, 2003 impacted the disclosures only (see Note 7), 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.
19
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.
For the three-month period ended March 31, 2003, the active U.S. rig count
averaged 901 rigs, a 10% increase in activity compared to the same period in
fiscal 2002. For the six-month period ended March 31, 2003, the active U.S. rig
count averaged 874 rigs, a 4% decrease in activity compared to the same period
in fiscal 2002. This 4% decrease in activity was primarily driven by strong
drilling activity in the first quarter of 2002. The Company's management
believes that U.S. drilling activity will increase 14-17% for the remainder of
fiscal 2003, compared to the average rig count of 901 in the second quarter of
fiscal 2003.
Drilling activity outside North America has historically been less volatile
than domestic drilling activity. During the three months ended March 31, 2003,
active international drilling rigs (excluding Canada) averaged 744 rigs, an
increase of 2% in activity compared to the same period in fiscal 2002. During
the six months ended March 31, 2003, active international drilling rigs
(excluding Canada) averaged 749 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 March 31, 2003 averaging 493 active drilling rigs, up 29%
from the same period of fiscal year 2002. During the six months ended March 31,
2003, active Canadian drilling rigs averaged 388 rigs, an increase of 17% in
activity compared to the same period in fiscal 2002. The Company expects a
modest increase in international drilling activity outside of Canada for the
remainder of fiscal 2003. While experiencing a normal spring break-up in the
third quarter of fiscal 2003, drilling activity in Canada is expected to
increase approximately 15% for the remainder of fiscal 2003 over prior year.
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 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
20
assumptions or methodologies that we believe to be Critical Accounting Policies
and Estimates as disclosed in our Form 10-K for the fiscal year ending September
30, 2002.
Acquisition
On May 31, 2002, the Company completed the acquisition of 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 5 in these Consolidated Condensed Financial Statements
included in this filing and 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.
21
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 Six Months Ended
March 31, March 31,
------------------ -----------------
2003 2002 2003 2002
------ ------ -------- ------
Rig Count:/(1)/
U.S. 901 818 874 911
International 1,237 1,114 1,137 1,070
Consolidated revenue (in millions) $534.6 $442.4 $1,007.7 $952.4
Revenue by business segment (in millions):
U.S./Mexico Pressure Pumping 232.2 207.3 444.1 480.4
International Pressure Pumping 217.7 186.5 396.6 373.4
Other Oilfield Services 84.0 47.3 166.0 97.1
Corporate 0.7 1.3 1.0 1.5
Percentage of research and engineering expense to
revenue 1.9% 2.0% 2.0% 1.8%
Percentage of marketing expense to revenue 3.4% 3.4% 3.5% 3.2%
Percentage of general and administrative expense
to revenue 3.5% 3.6% 3.5% 3.4%
Consolidated operating income (in millions) $ 71.9 $ 60.5 $ 126.5 $165.6
Operating income by business segment (in millions):
U.S./Mexico Pressure Pumping 38.5 40.1 71.6 122.3
International Pressure Pumping 34.2 21.4 53.4 46.1
Other Oilfield Services 9.8 4.6 19.6 10.1
Corporate (10.6) (5.6) (18.1) (12.9)
- ----------
/(1)/ Estimate of drilling activity as measured by average active drilling rigs
based on Baker Hughes Incorporated rig count information.
Revenue and Net Income: For the three-month period ended March 31, 2003,
operating income was $71.9 million on $534.6 million of revenue compared to
operating income for the same period in 2002 of $60.5 million on $442.4 million
of revenue. Revenue increased in the U.S./Mexico Pressure Pumping, International
Pressure Pumping and Other Oilfield Services segments. The increase in operating
income is primarily from the International Pressure Pumping and Other Oilfield
22
Services segments. For the six-month period ended March 31, 2003, operating
income was $126.5 million on $1,007.7 million of revenue compared to operating
income for the same period in 2002 of $165.6 million on $952.4 million of
revenue. The increase in revenue is primarily from the International Pressure
Pumping and Other Oilfield Services segments. Operating income decreased for
this period as a result of the U.S./Mexico Pressure Pumping segment.
Other Expenses: Interest expense, net, increased $3.3 million and $5.2
million, for the three-month period ended and the six-month period ended March
31, 2003, respectively, compared to the same periods in fiscal 2002. This is a
result of the issuance of convertible debt in April 2002, used to finance the
OSCA acquisition.
Income Taxes: Primarily as a result of higher profitability in certain
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 March 31,
2003, compared with 35.0% for the same period in fiscal 2002.
U.S./Mexico Pressure Pumping Segment
The U.S. and Mexico Pressure Pumping segment primarily provides stimulation
and cementing services to the petroleum industry in the U.S. and Mexico.
Stimulation services are designed to improve the flow of oil and natural gas
from producing formations. Cementing services pump a cement slurry into a well
between the casing and the wellbore to isolate fluids that might otherwise
damage the casing and/or affect productivity, or that could migrate to different
zones, during the drilling and completion phase of a well.
Results for the three-month period ended March 31, 2003 and 2002
Revenues were $232.2 million, an increase of $24.9 million, or 12% compared
to the second quarter of the prior fiscal year. Compared to the second quarter
of fiscal 2003, revenues increased due to an improvement in drilling activity
and market share, partially offset by a decline in pricing for pressure pumping
services.
Operating income for the Company's U.S./Mexico pressure pumping segment was
$38.5 million, a decrease of $1.6 million, or 4% from the same period of the
prior year. The decline in operating income was due to the significant price
deterioration experienced year over year that was not completely offset by the
increases in drilling activity and gains in market share.
Results for the six-month period ended March 31, 2003 and 2002
Revenues were $444.1 million, a decline of $36.3 million, or 8% compared to
the same period of the prior fiscal year. Revenue declined due to deterioration
in our prices for pressure pumping services and a decline in drilling activity
compared to the prior period. The decline in revenue occurred primarily in the
first quarter of fiscal 2003.
23
Operating income was $71.6 million, a decrease of $50.7 million, or 41%
from the same period of the prior year. The decrease was due primarily to lower
prices for the Company's products and services and a decline in drilling
activity.
Outlook
Despite disappointing activity to date in the Gulf of Mexico, we anticipate
U.S. drilling activity for the remainder of fiscal 2003 to increase 14-17% above
the average rig count of 901 experienced in the second quarter of fiscal 2003.
Effective May 1, 2003, the Company will implement a price book increase of 7%,
which will be phased in over the next several quarters. The degree of customer
acceptance of the price book increase will depend on activity levels and
competitive pressures.
International Pressure Pumping Segment
The International Pressure Pumping segment primarily provides stimulation
and cementing services to the petroleum industry outside of the U.S. and Mexico.
Stimulation services are designed to improve the flow of oil and natural gas
from producing formations. Cementing services pump a cement slurry into a well
between the casing and the wellbore to isolate fluids that might otherwise
damage the casing and/or affect productivity, or that could migrate to different
zones, during the drilling and completion phase of a well.
Results for the three-month period ended March 31, 2003 and 2002
International revenues were $217.7 million for the three-month period ended
March 31, 2003, an increase of $31.2 million, or 17% from the same period in the
prior year. Canadian revenues increased 21% compared to the prior period as a
result of improved drilling activity driven by strong natural gas price
fundamentals and favorable weather conditions. Revenues in Europe and Africa
increased 22% compared to prior year, as a result of increases in drilling
activity and market share. Revenues in Russia increased more than 100% due to
revenues associated with service rigs acquired in the third quarter of fiscal
2002. Revenues in Latin America declined 3% as a result of depressed activity in
Venezuela caused by the national labor strikes; however, this was mostly offset
by increased activity and improved exchange rates in Argentina and market share
increases in Brazil with the acquisition of a local coiled tubing company
(Maritima) in June 2002 and increased revenue from the stimulation vessel, Blue
Shark, that was put into service in April 2002.
Operating income was $34.2 million, an increase of $12.8 million, or 60%
from the same period of the prior year. This was due to the overall revenue
increases noted above and reduced headcount in Canada.
Results for the six-month period ended March 31, 2003 and 2002
Revenues were $396.6 million, an increase of $23.2 million, or 6% from the
same period of the prior year. Asia Pacific revenue increased 17% as a result of
activity and market share increases in Malaysia and Brunei. Revenues in Russia
increased 36% due to revenues associated with service
24
rigs acquired in the third quarter of fiscal 2002, partially offset by activity
delays as a result of extremely cold weather during the first quarter of fiscal
2003. Europe and Africa revenues increased 11% due to strong coiled tubing and
cementing activity in Norway and Africa. Revenues in Latin America declined 7%
primarily as a result of the national labor strike in Venezuela. This was
partially offset by increased market share in Brazil with the acquisition of
Maritima in June 2002 and the commissioning of the Blue Shark in April 2002.
Operating income was $53.4 million, an increase of $7.3 million, or 16%
from the same period of the prior year primarily driven by revenue increases in
the Asia Pacific and Europe and Africa regions as noted above.
Outlook
The Company expects a modest increase in international drilling activity
outside of Canada for the remainder of fiscal 2003. While experiencing a normal
spring break-up in the third quarter of fiscal 2003, drilling activity in Canada
is expected to increase approximately 15% for the remainder of fiscal 2003 over
prior year.
Other Oilfield Services Segment
The other oilfield services segment consists of specialty chemicals,
tubular services, 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 select markets internationally.
Results for the three-month period ended March 31, 2003 and 2002
Revenues were $84.0 million, an increase of $36.7 million, or 78% when
compared to the same period in fiscal 2002. The increase was due primarily to
the addition of completion fluids and completion tools service lines acquired
with OSCA on May 31, 2002.
Operating income for the Company's Other Oilfield Services segment was $9.8
million, an increase of $5.2 million, or 113% 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 on May 31, 2002.
Results for the six-month period ended March 31, 2003 and 2002
Revenues were $166.0 million, an increase of $68.9 million, or 71% when
compared to the same period in fiscal 2002. The increase was due primarily to
the addition of completion fluids and completion tools service lines acquired
with OSCA on May 31, 2002.
25
Operating income for the Company's Other Oilfield Services segment was
$19.6 million for the six-month period ended March 31, 2003, an increase of $9.5
million, or 94% 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 on May 31, 2002.
Outlook
We expect activity and revenues for this segment to increase approximately 10%
for the remainder of the fiscal year compared to revenues for the first six
months of fiscal 2003. This is primarily due to seasonal increases in our
process and pipeline services business.
Capital Resources and Liquidity
Cash
At March 31, 2003, cash and cash equivalents equaled $122.0 million,
compared with $84.7 million at September 30, 2002.
Net cash from operating activities for the first six months of fiscal 2003
totaled $90.6 million, a decrease of $95.9 million from the comparable period of
the prior year. The decrease is driven by changes in working capital. The first
six months of fiscal 2002 was a period of declining activity and the Company was
therefore liquidating working capital. Whereas the first six months of fiscal
2003 was a period of increasing activity and the Company was building working
capital.
Cash used for investing activities for the first six months of fiscal 2003
totaled $67.9 million, a decrease of $27.3 million compared to the same period
of the previous year. This is primarily attributable to lower capital
expenditures in 2003 versus 2002. The Company anticipates spending approximately
$174 million in fiscal 2003, compared to $179 million spent in 2002. The 2003
capital expenditure 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 from financing activities for the first six months ended March 31,
2003 was $14.7 million, compared to cash used for financing activities of $106.9
million in the same period of the previous year. Cash from financing activities
during the first six months of fiscal 2003 was primarily from the $13.4 million
of proceeds from the exercise of stock options and the employee stock purchase
plan. Cash used in financing activities during the first six months of fiscal
2002 was used to repurchase the Company's common stock. During the first quarter
of 2002, the Company purchased 4.4 million shares of its common stock at a cost
of $102.1 million under a share repurchase program
26
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 million of which was available for future purchase as of March 31, 2003.
Liquidity and Capital Resources
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 March 31, 2003. The Company anticipates the renewal of its
364-day commitment during the third quarter of fiscal 2003.
In addition to the Committed Credit Facility, the Company had $131.8
million in various unsecured, discretionary lines of credit at March 31, 2003,
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 were $2.7
million and $3.5 million in outstanding borrowings under these lines of credit
at March 31, 2003 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. There were $412.5 and $410.2
outstanding under the convertible senior notes at March 31, 2003 and September
30, 2002, respectively.
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 an annual yield to maturity of 1.625%. Of this
1.625% 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
27
at 120% and declining to 110% at the maturity of the notes) of the accreted
conversion price per share. At March 31, 2003, the accreted conversion price per
share would have been $53.41.
At March 31, 2003 and September 30, 2002, the Company had issued and
outstanding $78.8 million of unsecured 7% Series B Notes due in 2006, net of
discount.
The Company's total debt (net of cash) was 19.6% of its total
capitalization (total capitalization equals the sum of debt and stockholders'
equity) at March 31, 2003, compared to 22.3% 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, provide 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.
Off Balance Sheet Transactions
In December 1999, the Company completed a transaction involving the
transfer of certain pumping service equipment assets and received $120.0 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
$45.4 and $47.8 million as of March 31, 2003 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 $17.4 and $18.8 million as
of March 31, 2003 and September 30, 2002, respectively.
Accounting Pronouncements
In August 2001, the 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
28
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. 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
March 31, 2003 and 2002, we are not presenting pro forma ARO disclosures. Based
on our ARO's as of October 1, 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, 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
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 adopted FIN No. 45 on January 1,
2003. No liabilities were required to be recognized upon adoption and the
Company's current guarantees are disclosed in Note 6 of the Notes to Unaudited
Consolidated Condensed Financial Statements.
29
In December 2002, the FASB 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 is intended to improve
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 is intended to improve 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
did not adopt the method of using the fair value based method of accounting for
stock-based employee compensation; and therefore, adoption of SFAS 148 on
January 1, 2003 impacted the disclosures only, not the financial results of the
Company (see Note 7 of the Notes to Unaudited Consolidated Condensed Financial
Statements).
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.
Non-GAAP Financial Measures
A non-GAAP financial measure is a numerical measure of a registrant's
historical or future financial performance, financial position or cash flows
that 1) excludes amounts, or is subject to adjustments that have the effect of
excluding amounts, that are included in the most directly comparable measure
calculated and presented in accordance with GAAP in the statement of income,
balance sheet, or statement of cash flows, or 2) includes amounts, or is subject
to adjustments that have the effect of including amounts, that are excluded from
the most directly comparable measure so calculated and presented.
30
From time to time, the Company utilizes non-GAAP financial measures. The
most common non-GAAP financial measures used by the Company include EBITDA,
EBITDA margin, free cash flow, net debt, and net interest expense.
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is
computed by starting with net income, adding income tax expense, adding interest
expense, deducting interest income and adding depreciation and amortization. The
most comparable GAAP measure is cash flow from operating activities as depicted
in the Consolidated Condensed Statement of Cash Flows. EBITDA less income tax
expense, less interest expense, plus interest income, plus or minus changes in
working capital, plus minority interest, plus unearned compensation, plus
deferred taxes reconciles to cash flow from operating activities. EBITDA margin
is simply EBITDA as a percentage of revenues. Management believes EBITDA and
EBITDA margin provide useful information to investors as it represents the
unlevered pre-tax cash flow of the Company.
Free cash flow is computed by starting with net income, adding depreciation
and amortization and deducting capital expenditures. The most comparable GAAP
measure is cash flow from operating activities. Free cash flow plus capital
expenditures, plus changes in working capital, plus minority interest, plus
unearned compensation, plus deferred taxes reconciles to cash flow from
operating activities. Management believes free cash flow provides useful
information to investors as it represents the cash available to the Company to
run the business, excluding the capital commitments.
Net debt and net interest expense are easily calculated from GAAP measures.
Net debt is computed by adding short-term and long-term debt, less cash. Net
interest expense is computed by subtracting interest income from interest
expense.
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,
31
. 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 Form
10-K for the fiscal year ending September 30, 2002.
32
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 and
changing interest rates. 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 March 31, 2003 rates, the Company's combined
interest expense to third parties would increase by a total of $1,153 each month
in which such increase continued. At March 31, 2003, the Company had issued
fixed-rate debt of $491.4 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 $21.2 million if interest rates were to decline by 10% from
their rates at March 31, 2003.
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 March 31, 2003. 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 March 31, 2003. 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 March 31, 2003
------ ---- ---- ------- ---------- -------- --------------
SHORT-TERM BORROWINGS
Bank borrowings; US $ denominated $2,659 $ 2,659 $ 2,659
Average variable interest rate - 5.25%
at March 31, 2003
LONG-TERM BORROWINGS
7% Series B Notes - US $ denominated $78,864 $ 78,864 $ 86,110
Fixed interest rate - 7%
1.625% Convertible Notes
US denominated $412,535 $412,535 $431,987
Fixed interest rate - 1.625%
------ --- --- ------- -------- -------- --------
Total $2,659 -- -- $78,864 $412,535 $494,058 $520,756
====== === === ======= ======== ======== ========
33
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 in ensuring that the information
required to be disclosed by the Company in the reports that it files or
submits under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms.
(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.
34
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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 material adverse effect on the
Company's financial position or results of operations for which it has not
already provided.
Through acquisition the Company assumed responsibility for certain claims
and proceedings made against the Western Company of North America, Nowsco Well
Service Ltd 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 material adverse effect on the Company's financial position or
results of operations for which it has not already provided..
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 used 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" trademark), 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 GMT's non-payment of
royalties and that BJ's sublicense had also been 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.
35
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 BJ and GMT. On
November 25th and 26th of 2002, the Court conducted a hearing regarding the
scope and the interpretation of the claims in the '477 patent. Following the
hearing, the Court issued a ruling on March 16, 2003, which we believe
interprets the '477 patent in a manner that is consistent with BJ's position.
Based on this ruling, BJ has filed a Motion for Summary Judgment seeking a
determination that fracturing fluids with enzymes do not come within the scope
of the '477 patent. The Judge has this matter under consideration. As with any
lawsuit, the outcome of this case is uncertain. Even a favorable ruling by the
Court would not completely dispose of this case and could be reviewed on appeal.
Given the scope of the claims made by Chevron Phillips, the possibility of very
costly litigation and even a substantial adverse verdict still exists. 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 infringe 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
requested that the District Court issue a temporary restraining order and a
preliminary injunction against both Weatherford and BJ to prevent either company
from selling competing tools. On March 4, 2003, the District Court issued its
opinion denying Halliburton's requests. Halliburton has asked the Court to
re-consider its ruling, and the Court has that request under review. Unless the
Court re-considers its initial ruling, this case will proceed into the discovery
phase. A trial date has not been set.
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 $3 million. The Company believes
that it has no liability for infringement of the Halliburton patents. Moreover,
even if the patents are 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 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
36
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. and an oral argument was held on May
7, 2003. The Company expects to have a ruling in the next few months.
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 (excluding pre- and post-judgement
interest). The Court 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. 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. On February 28, 2003, the
Court issued its Final Judgement in connection with the Newfield claims, based
upon the jury's verdict. The total amount of the verdict against OSCA is $15.6
million, inclusive of interest. At the same time, the Court issued it ruling on
the related insurance dispute finding that OSCA's coverage for this loss is
limited to $3.8 million. We have filed a Notice of Appeal with respect to the
liability finding and a Motion for a New Trial with respect to the insurance
coverage issues, which remains pending. Based upon the current rulings, the
uninsured portion of verdict against OSCA totals approximately $11.8 million.
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. Taking
this indemnity into account, the Company's share of the uninsured portion of the
verdict is approximately $5.2 million. The Company is fully reserved for its
share of this liability.
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.
37
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 originally
estimated the potential fines for all of Unichem's facilities at approximately
$240,000. BJ submitted additional information to the EPA and requested that the
agency re-assess its calculation of the number and severity of alleged
violations. The EPA has not issued a formal Notice of Violation to Unichem,
however, based on discussions to date, we believe that the EPA will issue a
final penalty assessment of less than $100,000.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on January 22,
2003 in Houston, Texas. All nominated directors were elected.
(a) Directors elected at the Annual Meeting:
Class I Directors Votes in Favor Votes Withheld
------------------ -------------- --------------
Michael E. Patrick 113,667,691 29,744,796
John R. Huff 113,659,720 29,752,757
(b) Directors with terms of office continuing after the Annual
Meeting:
Class I Directors
-----------------
William H. White
Class II Directors
------------------
Don D. Jordan
Class III Directors
----------------------
L. William Heiligbrodt
J. W. Stewart
James L. Payne
38
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
+ 10.1 Amendment to Directors' Benefit Plan
99.1 Section 906 certification furnished for J. W. Stewart
99.2 Section 906 certification furnished for T. M. Whichard
+ Management contract or compensatory plan or arrangement.
(b) Reports furnished on Form 8-K.
On April 30, 2003, the Company furnished a Form 8-K (i)
disclosing certain financial information under Item 9 and
(ii) attaching a press release with respect to an announcement of
the financial results for the second quarter ended
March 31, 2003.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BJ Services Company
(Registrant)
Date: May 14, 2003 BY \s\ J. W. Stewart
------------------------------
J. W. Stewart
Chairman of the Board
Date: May 14, 2003 BY \s\ T. M. Whichard
------------------------------
T. M. Whichard
Chief Financial Officer
40
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
41
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: May 14, 2003
BY \s\ J. W. Stewart
------------------------------
J. W. Stewart
Chief Executive Officer
42
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
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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: May 14, 2003
BY /s/ T. M. Whichard
------------------------------
T. M. Whichard
Chief Financial Officer
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