<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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: 000-31721
W-H ENERGY SERVICES, INC.
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
TEXAS 76-0281502
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
10370 RICHMOND AVENUE
SUITE 990
HOUSTON, TEXAS 77042
(Address of principal executive offices and zip code)
(713) 974-9071
(Registrant's telephone number, including area code)
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 past 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 [ ] No [X]
As of November 13, 2000 there were outstanding 22,252,605 shares of Common
Stock, par value $0.0001 per share, of the Registrant.
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W-H ENERGY SERVICES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 2
Consolidated Balance Sheets --
September 30, 2000 and December 31, 1999.................. 2
Consolidated Statements of Operations and Comprehensive
Income (Loss) --
Three months and nine months ended September 30, 2000 and
1999...................................................... 3
Consolidated Statements of Cash Flows --
Nine months ended September 30, 2000 and 1999............. 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations.................................
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 2. Changes in Securities and Use of Proceeds................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES ........................................................... 18
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
W-H ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 4,631 $ 2,490
Accounts receivable, net of allowance of $3,182 and
$2,897, respectively................................... 54,382 40,439
Deferred income taxes..................................... 2,744 1,907
Inventories............................................... 17,439 13,694
Prepaids expenses and other............................... 1,137 689
-------- --------
Total current assets.............................. 80,333 59,219
Property and Equipment, net................................. 90,091 83,235
Goodwill and Other Intangibles, net......................... 42,268 43,751
Other Assets, net........................................... 7,028 5,399
-------- --------
Total assets...................................... $219,720 $191,604
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt...................... $ 4,900 $ 4,900
Accounts payable.......................................... 16,819 14,772
Accrued liabilities....................................... 18,069 11,125
-------- --------
Total current liabilities......................... 39,788 30,797
Long-term Debt, net of current maturities................... 152,282 142,437
Long-term Debt, related parties............................. 58,654 51,485
Deferred Income Taxes....................................... 3,329 2,347
Commitments and Contingencies
Shareholders' Equity (Deficit):
Common stock, $0.01 par value, 100,000,000 shares
authorized, 9,075,000 and 9,084,900 shares issued and
outstanding, respectively.............................. 91 91
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, none issued and outstanding................ -- --
Additional paid-in capital................................ 13,378 11,792
Deferred compensation..................................... (1,296) (141)
Cumulative translation adjustment......................... (1,182) (43)
Note receivable from shareholder.......................... (45) --
Retained earnings (deficit)............................... (45,279) (47,161)
-------- --------
Total shareholders' equity (deficit).............. (34,333) (35,462)
-------- --------
Total liabilities and shareholders' equity
(deficit)....................................... $219,720 $191,604
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
W-H ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................. $ 62,061 $ 34,311 $ 161,471 $ 85,224
Costs and expenses:
Cost of revenues....................... 33,396 19,088 88,076 45,930
Selling, general and administrative.... 13,073 9,821 36,127 25,569
Depreciation and amortization.......... 4,914 3,957 13,969 11,454
----------- ----------- ----------- -----------
Total costs and expenses....... 51,383 32,866 138,172 82,953
----------- ----------- ----------- -----------
Income from operations......... 10,678 1,445 23,299 2,271
Other expenses:
Interest and other expense, net........ 7,169 6,157 20,846 16,124
Provision for income tax............... 197 112 571 130
----------- ----------- ----------- -----------
Net income (loss).............. $ 3,312 $ (4,824) $ 1,882 $ (13,983)
=========== =========== =========== ===========
Comprehensive income (loss):
Net income (loss)...................... $ 3,312 $ (4,824) $ 1,882 $ (13,983)
Foreign currency translation
adjustment.......................... (191) 299 (1,139) 299
----------- ----------- ----------- -----------
Comprehensive income (loss)............ $ 3,121 $ (4,525) $ 743 $ (13,684)
=========== =========== =========== ===========
Net income (loss) per common share:
Basic.................................. $ 0.27 $ (0.40) $ 0.16 $ (1.26)
Diluted................................ $ 0.21 $ (0.40) $ 0.12 $ (1.26)
Weighted average shares outstanding:
Basic.................................. 12,059,336 12,049,436 12,058,212 11,098,054
Diluted................................ 15,773,182 12,049,436 15,772,058 11,098,054
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
W-H ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 1,882 $(13,983)
Adjustment to reconcile net income (loss) to cash provided
by (used in) operating activities --
Depreciation and amortization.......................... 13,969 11,454
Gain on the sale of assets............................. (4,244) (2,335)
Deferred tax provision (benefit)....................... 145 (2)
Noncash stock-based compensation expense............... 83 --
Amortization of deferred compensation.................. 303 7
Noncash interest expense............................... 1,835 1,266
Change in operating assets and liabilities, excluding
effects of acquisitions --
Increase in accounts receivable, net................. (13,943) (10,098)
(Increase) decrease in inventories................... (3,745) 1,419
(Increase) decrease in prepaid expenses and other.... (448) 28
Increase in other assets, net........................ (146) (2,106)
Increase in accounts payable and accrued
liabilities......................................... 8,991 10,068
-------- --------
Net cash provided by (used in) operating
activities...................................... 4,682 (4,282)
-------- --------
Cash Flows from Investing Activities:
Acquisition of business, net of cash acquired............. -- (27,173)
Additions to property and equipment....................... (23,012) (17,267)
Proceeds from sale of property and equipment.............. 6,431 3,267
-------- --------
Net cash used in investing activities............. (16,581) (41,173)
-------- --------
Cash Flows from Financing Activities:
Proceeds from the issuance of debt........................ 32,884 55,325
Payments on debt.......................................... (17,705) (19,313)
Proceeds from the issuance of warrants, net of offering
costs.................................................. -- 11,175
-------- --------
Net cash provided by financing activities......... 15,179 47,187
-------- --------
Translation Adjustment...................................... (1,139) 299
Net Increase in Cash and Cash Equivalents................... 2,141 2,031
Cash and Cash Equivalents, beginning of period.............. 2,490 1,466
-------- --------
Cash and Cash Equivalents, end of period.................... $ 4,631 $ 3,497
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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W-H ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION:
Description of Company
W-H Energy Services, Inc. and its subsidiaries (collectively, W-H) is a
diversified oilfield service company that provides products and services used
primarily for the drilling, completion and production of oil and natural gas
wells. W-H has the following three primary lines of business: (i) drilling
related products and services, which include logging-while-drilling,
measurement-while-drilling, rental tools (including drill pipe), downhole
drilling motors and drilling fluids; (ii) completion and workover related
products and services, which include cased-hole wireline logging and
perforating, polymers and specialty chemicals and tubing; and (iii) maintenance
and safety related products and services, which include integrated on-site
cleaning and waste management and safety equipment.
On October 16, 2000, W-H closed its initial public offering of 10,000,000
shares of its common stock at an offering price of $16.50 per share. Concurrent
with the close of the offering, W-H executed a $115,000,000 credit facility (See
Note 4). The net proceeds of the offering along with borrowings under our new
credit facility were utilized to repay in full the outstanding balances,
including accrued and unpaid interest, under our existing senior secured credit
facility, senior subordinated notes and other long term debt obligations,
reducing our outstanding debt at October 16, 2000 from approximately $226
million to approximately $80 million.
Basis of Presentation
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all necessary adjustments (which include only
normal recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three months and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information, refer to
the December 31, 1999 consolidated financial statements and footnotes thereto
included in W-H's Registration Statement filed on Form S-1 with the Securities
and Exchange Commission.
2. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is computed
considering the dilutive effect of stock options and warrants. A total of
2,974,436 warrants issued in connection with our 13% senior subordinated notes
are considered to be outstanding as of the date of issuance and included in the
computation of basic and diluted earnings per share as the warrants are
exercisable for nominal consideration and are not contingent. For the three
months and nine months ended September 30, 2000, 3,713,846 shares resulting from
the assumed exercise of options or warrants, with the exception of the warrants
exercisable for nominal consideration discussed above, were added to the
denominator because the inclusion of such shares would be dilutive. For the
three months and nine months ended September 30, 1999, 3,631,795 shares were
excluded from the denominator because inclusion of such shares would be
antidilutive, due to the losses for such periods included in the consolidated
statements of operations and comprehensive income (loss).
5
<PAGE> 7
W-H ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITION
PathFinder Energy Services
On March 29, 1999, W-H acquired the logging-while-drilling (LWD) and
related measurement-while-drilling (MWD) businesses from Halliburton Company
(Halliburton), located in the United States and North Sea (the U.S. and North
Sea PathFinder Assets) and certain LWD, MWD and other related assets in other
foreign locations (the Foreign PathFinder Assets) for a consideration of $33.3
million in cash, including acquisition costs. Management allocated $27.2 million
and $6.1 million to the U.S. and North Sea PathFinder Assets and the Foreign
PathFinder Assets, respectively, based on the relative fair value of the assets
acquired. W-H funded the acquisition of the U.S. and North Sea PathFinder Assets
and the Foreign PathFinder Assets (the PathFinder acquisition) through the
issuance of its 13% senior subordinated notes (see Note 4).
The PathFinder acquisition has been accounted for as a purchase; therefore,
the accompanying consolidated statements of operations and comprehensive income
(loss) reflect the results of PathFinder's operations since its acquisition
date. The purchase price and direct acquisition costs were allocated based on
the fair value of the assets acquired and liabilities assumed.
The purchase price and estimated fair market value of the assets acquired
and liabilities assumed with the U.S. and North Sea PathFinder Assets are as
follows (in thousands):
<TABLE>
<S> <C>
Purchase price:
Cash paid............................................... $26,673
Acquisition costs....................................... 500
-------
Total purchase price............................ $27,173
=======
Net assets acquired:
Current assets.......................................... $ 8,240
Property and equipment.................................. 23,233
Current liabilities..................................... (4,300)
-------
Net assets acquired............................. $27,173
=======
</TABLE>
The following table reflects on an unaudited consolidated pro forma basis
the results of operations as though PathFinder had been acquired as of the
beginning of W-H's 1999 fiscal year. Adjustments have been made to reflect the
accounting basis used in recording the acquisition. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of the results of operations that would have resulted had the acquisition been
in effect on the date indicated, that have resulted since the date of
acquisition or that may result in the future. Pro forma amounts are as follows
(in thousands, unaudited):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
Total revenues.................................... $ 94,725
Net loss.......................................... (16,749)
Net loss per share -- basic and diluted........... (1.39)
</TABLE>
4. DEBT
Credit Facility
In August 1997, Perf-O-Log, Inc., a wholly owned subsidiary of W-H, entered
into a senior secured credit facility. The senior secured credit facility
includes a revolving credit line and has been amended since August 1997 to
include additional term loan facilities. The credit facility has been utilized
to finance acquisitions and for working capital purposes. As of December 31,
1999 and September 30, 2000 the
6
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W-H ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding balance on the senior secured credit facility was $147.3 million and
$157.1 million, respectively. The credit facility is secured by substantially
all of the assets of W-H. On October 16, 2000, the outstanding balance under the
senior secured credit facility, including accrued and unpaid interest, was
repaid in full with the net proceeds of our initial public offering along with
borrowings under our new credit facility (see Note 7).
Subordinated Debt
In connection with the PathFinder acquisition in March 1999, W-H issued 13%
senior subordinated notes with a face value of $40 million to DLJ Merchant
Banking Partners II, L.P. and its affiliated investment funds. The 13% senior
subordinated notes are unsecured and subordinated in the right of payment and
liquidation preference to the senior secured credit facility. Additionally, W-H
issued the noteholders warrants to purchase shares of its common stock. The 13%
senior subordinated notes were recorded at a discount of $11.2 million from face
value, which represented the amount allocated to the warrants. As of December
31, 1999 and September 30, 2000, excluding unamortized discount of $9.3 million
and $7.4 million, respectively, the outstanding balance on the 13% senior
subordinated notes was $35.0 million and $37.3 million, respectively. The
balance as of September 30, 2000 includes $2.3 million relating to a 14%
payment-in-kind note issued in lieu of making an interest payment in April 2000.
On October 16, 2000, the outstanding balances under the 13% senior subordinated
notes and the 14% payment-in-kind notes, including accrued and unpaid interest,
were repaid in full with the net proceeds of our initial public offering along
with borrowings under our new credit facility (see Note 7).
In August 1997, W-H issued $24 million of 12 1/2% senior subordinated notes
to a related party. The 12 1/2% senior subordinated notes are unsecured and
subordinated in right of payment and liquidation preference to our senior
secured credit facility. As of December 31, 1999 and September 30, 2000 the
outstanding balance on the 12 1/2% senior subordinated notes was $24.0 million
and $27.1 million, respectively. The balance as of September 30, 2000 includes
$3.1 million relating to two 14 1/2% payment-in-kind notes issued in lieu of
making interest payments in March and September 2000. On October 16, 2000, the
outstanding balances under the 12 1/2% senior subordinated notes and the 14 1/2%
payment-in-kind notes, including accrued and unpaid interest, were repaid in
full with the net proceeds of our initial public offering along with borrowings
under our new credit facility (see Note 7).
5. STOCK DIVIDEND
In May 2000, W-H's Board of Directors declared a stock dividend to effect a
stock split of 33 shares for every one share of common stock then outstanding.
The accompanying consolidated financial statements and footnotes have been
restated to reflect the stock split, including an assumed increase in the
authorized shares of common stock. The par value of the shares of common stock
to be issued in connection with the stock dividend was credited to common stock
and a like amount charged to additional paid-in capital.
6. SEGMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires that companies report separately information about each
significant operating segment reviewed by the chief operating decision maker.
Management has elected to organize segments based on differences in each
segment's customers and the products and services offered without aggregating
operating segments. All segments that meet a threshold of 10% of revenues,
reported profit or loss, or combined assets are defined as significant segments.
Based on these requirements, management has identified three reportable
segments, drilling related products and services, completion and workover
related products and services, and maintenance and safety related products and
services.
7
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W-H ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Drilling Related Products and Services:
The drilling related products and services segment provides products and
services used by oil and natural gas companies, drilling contractors and other
oilfield service companies for the drilling of oil and natural gas wells. These
products and services are used primarily onshore in the Gulf Coast region and
offshore in the Gulf of Mexico and the North Sea. This segment consists of five
primary business lines: (i) LWD; (ii) MWD; (iii) rental tools; (iv) downhole
drilling motors; and (v) drilling fluids.
Completion and Workover Related Products and Services:
The completion and workover related products and services segment provides
products and services primarily to customers onshore in the Gulf Coast region
and offshore in the Gulf of Mexico. These products include: (i) wireline logging
and perforating; (ii) polymers and specialty chemicals; and (iii) tubing.
Maintenance and Safety Related Products and Services:
The maintenance and safety related products and services segment provides
safety products and maintenance products and services primarily for refinery and
petrochemical plant applications and major and independent oil and natural gas
companies, including: (i) integrated on-site cleaning and waste management; and
(ii) safety equipment.
W-H recognizes revenues, cost of products and services, selling, general
and administrative, and depreciation and amortization by segment. Interest
expense and other income (expense) are not monitored by segment. Summarized
information for W-H's reportable segments is contained in the following tables
(in thousands):
As of and for the three months ended September 30, 2000 (unaudited):
<TABLE>
<CAPTION>
MAINTENANCE
DRILLING COMPLETION AND SAFETY OTHER TOTAL
-------- ---------- ----------- ------ --------
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 44,398 $11,938 $ 5,725 $ -- $ 62,061
Operating Income................ 9,281 2,247 131 (981) 10,678
EBITDA(a)....................... 12,655 3,155 735 (993) 15,552
Total assets.................... 147,962 46,953 19,401 5,404 219,720
Capital expenditures............ 4,573 2,042 978 59 7,652
</TABLE>
As of and for the three months ended September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
MAINTENANCE
DRILLING COMPLETION AND SAFETY OTHER TOTAL
-------- ---------- ----------- ------ --------
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 22,257 $ 7,415 $ 4,639 $ -- $ 34,311
Operating Income................ 1,131 1,035 112 (833) 1,445
EBITDA(a)....................... 3,765 1,820 622 (944) 5,263
Total assets.................... 121,726 36,678 18,355 3,549 180,308
Capital expenditures............ 4,476 1,364 596 46 6,482
</TABLE>
8
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W-H ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of and for the nine months ended September 30, 2000 (unaudited):
<TABLE>
<CAPTION>
MAINTENANCE
DRILLING COMPLETION AND SAFETY OTHER TOTAL
-------- ---------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................ $112,451 $31,502 $17,518 $ -- $161,471
Operating Income........ 20,018 5,160 1,244 (3,123) 23,299
EBITDA(a)............... 29,586 7,727 3,006 (2,983) 37,336
Total assets............ 147,962 46,953 19,401 5,404 219,720
Capital expenditures.... 13,751 6,007 2,987 267 23,012
</TABLE>
As of and for the nine months ended September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
MAINTENANCE
DRILLING COMPLETION AND SAFETY OTHER TOTAL
-------- ---------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................ $50,795 $19,305 $15,124 $ -- $ 85,224
Operating Income........ 1,326 2,062 801 (1,918) 2,271
EBITDA(a)............... 8,793 4,503 2,261 (2,252) 13,305
Total assets............ 121,726 36,678 18,355 3,549 180,308
Capital expenditures.... 12,750 2,654 1,764 99 17,267
</TABLE>
---------------
(a) W-H calculates EBITDA as earnings before interest expense, income taxes,
depreciation and amortization, and non-cash stock-based compensation
expense. EBITDA should not be considered as an alternative to net income or
any other measure of operating performance calculated in accordance with
generally accepted accounting principles. EBITDA is widely used by
financial analysts as measure of financial performance. W-H's calculation
of EBITDA may not be comparable to similarly titled measures reported by
other companies.
W-H operates in the United States, the North Sea and other geographic
regions. The following is summary information by geographic region (in
thousands):
Revenues:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2000
--------------------- ------------------------
2000 1999 2000 1999
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
The United States........................ $54,981 $29,973 $146,403 $75,813
The North Sea............................ 5,575 4,338 12,345 9,411
Other.................................... 1,505 -- 2,723 --
------- ------- -------- -------
Total.......................... $62,061 $34,311 $161,471 $85,224
======= ======= ======== =======
</TABLE>
Operating Income:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
The United States.......................... $13,813 $ 872 $20,797 $ 914
The North Sea.............................. 1,334 573 1,611 1,357
Other...................................... 405 -- 891 --
------- ------ ------- -------
Total............................ $15,552 $1,445 $23,299 $ 2,271
======= ====== ======= =======
</TABLE>
9
<PAGE> 11
W-H ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
The United States........................................... $81,889 $73,993
The North Sea............................................... 8,080 9,242
Other....................................................... 122 --
------- -------
Total............................................. $90,091 $83,235
======= =======
</TABLE>
7. SUBSEQUENT EVENTS
New Credit Facility
On October 16, 2000, W-H closed on a $115,000,000 credit facility that
replaced W-H's existing $173.5 million credit facility. The new credit facility
consists of a Term A loan facility of $40 million, a Term B loan facility of $35
million and a revolving credit facility of $40 million. The Term A loan facility
will mature on October 16, 2005 and requires payments escalating from 0% of the
original loan amount in the first year to 35% in the fifth year. The Term B loan
facility will mature on April 16, 2007 and requires principal payments of 1% of
the original loan amount in the first six years with the outstanding balance
being due on the maturity date. The revolving credit facility may be borrowed,
prepaid and reborrowed from time to time and matures on October 16, 2005.
Amounts borrowed under the credit facility will bear interest at a variable rate
equal to the reserve-based LIBOR or alternate base rate, plus, in each case, an
applicable margin. The new credit facility requires, among other things, that we
maintain certain financial ratios and limits the amount of capital expenditures
we may make, the amount of debt we may incur outside of the credit facility, our
ability to pay dividends and future investments.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our Consolidated
Financial Statements and related notes appearing elsewhere in this Form 10-Q.
This discussion and analysis may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risks,
uncertainties and assumptions. The words "believe," "expect," "plan," "intend,"
"estimate," "plan," "intend," "estimate," "project," "will," "could," "may," and
similar expressions are intended to identify forward-looking statements. No
assurance can be given that actual results may not differ materially from the
results discussed in the forward-looking statements as a result of important
risk factors including, but not limited to, the current and expected future
prices of crude oil and natural gas, capital expenditures by customers, the
development and implementation of new technologies, weather conditions in
offshore markets, risks associated with the occurrence of personal injuries,
loss of life, damage or destruction of property, equipment or the environment
and suspension of operations, our ability to attract and retain skilled workers,
the loss of key members of management, competition in our industry, compliance
with and developments in environmental and other governmental regulations, the
loss of the use of certain technologies, the concentration of customers in the
energy industry, our ability to successfully integrate future acquisitions,
political and economic risks, a change in the estimated life of good will and
restrictions on our ability to raise additional funds. For additional discussion
of these risks, please see the discussion set forth under the heading "Risk
Factors," contained in our Registration Statement on Form S-1 (Registration No.
333-43411) filed with the Securities and Exchange Commission. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any forward-looking statement is based.
OVERVIEW OF THE MARKETS FOR OUR PRODUCTS AND SERVICES
We are a diversified oilfield service company that provides drilling
related products and services, completion and workover related products and
services and maintenance and safety related products and services. Our customers
include major and independent oil and natural gas companies, other oilfield
service companies and refining and petrochemical companies.
Prices for oil and natural gas are subject to large fluctuations in
response to relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and a variety of other factors. Any prolonged
increase or decrease in oil and natural gas prices affects the levels of
exploration, development and production activity as well as the entire health of
the oil and natural gas industry. Demand for our drilling related products and
services is directly affected by the level of exploration, development and
production activity of, and the corresponding capital spending by, oil and
natural gas companies. Demand for our completion and workover related products
and services depends more on oil and natural gas production activity, which is
less immediately affected by changes in oil and natural gas prices. Demand for
our maintenance and safety related products and services is affected by the rate
of plant overhauls and maintenance turnarounds as well as the overall health of
the refining and petrochemical industries.
RESULTS OF OPERATIONS
The following information should be read in conjunction with our
Consolidated Financial Statements and the accompanying notes presented elsewhere
in this Form 10-Q.
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
Revenues. Revenues increased by $27.8 million, or approximately 80.9%, to
$62.1 million for the three months ended September 30, 2000 from $34.3 million
for the three months ended September 30, 1999. This increase was attributable to
increased activity levels within the oil and natural gas industry, higher
utilization, enhanced pricing and the benefit of additional equipment, which was
added to our rental fleet in 2000.
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<PAGE> 13
Revenues from our drilling related products and services increased by $22.1
million, or approximately 99.5%, to $44.4 million for the three months ended
September 30, 2000 from $22.3 million for the three months ended September 30,
1999. This increase was primarily attributable to an increase in drilling
activity, higher utilization rates and the benefit of additional equipment,
which was added to our rental fleet in 2000.
Revenues from our completion and workover related products and services
increased by $4.5 million, or approximately 61.0%, to $11.9 million for the
three months ended September 30, 2000 from $7.4 million for the three months
ended September 30, 1999. Revenue increased as a result of an increase in
workover rig activity, higher utilization rates and the benefit of additional
equipment, which was added to our rental fleet in 2000.
Revenues from our maintenance and safety related products and services
increased by $1.1 million, or approximately 23.4%, to $5.7 million for the three
months ended September 30, 2000 from $4.6 million for the three months ended
September 30, 1999. This increase was primarily the result of an increase in the
number of plant overhauls and turnarounds and the benefit of additional
equipment that was added in 2000.
Cost of Revenues. As a percentage of revenues, cost of revenues decreased
to 53.8% for the three months ended September 30, 2000 from 55.6% for the three
months ended September 30, 1999. This decrease was primarily attributable to
enhanced pricing for our products and services and higher facilities
utilization.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.3 million, or approximately 33.1%, to
$13.1 million for the three months ended September 30, 2000 from $9.8 million
for the three months ended September 30, 1999. Of the total increase, $227,000
of the increase was related to research and development expenses. The remaining
increase was attributable to our expansion of sales and marketing personnel in
2000. As a percentage of revenues, selling, general and administrative expenses
decreased to 21.1% for the three months ended September 30, 2000 from 28.6% for
the three months ended September 30, 1999.
Depreciation and Amortization. Depreciation and amortization increased by
$1.0 million, or approximately 24.2%, to $4.9 million for the three months ended
September 30, 2000 from $3.9 million for the three months ended September 30,
1999. This increase was the result of depreciation associated with our capital
expenditures in 2000.
Interest and Other Expense. Interest expense for the three months ended
September 30, 2000 was $7.2 million, an increase of $1.0 million, or
approximately 16.4%, from $6.2 million for the three months ended September 30,
1999. The increase was primarily due to increased borrowing related to our
capital expenditures.
Net Income (Loss). Net income for the three months ended September 30,
2000 was $3.3 million, an improvement of $8.1 million, from the $(4.8) million
loss reported for the three months ended September 30, 1999.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended
September 30, 1999
Revenues. Revenues increased by $76.2 million, or approximately 89.5%, to
$161.5 million for the nine months ended September 30, 2000 from $85.3 million
for the nine months ended September 30, 1999. Approximately $15.7 million of our
increase in revenues was attributable to the PathFinder acquisition in March
1999, and the remaining $60.5 million increase in revenues was attributable to
an increase in drilling and workover rig activity and the benefit of additional
equipment which was added to our rental fleet in 2000.
Revenues from our drilling related products and services increased by $61.7
million, or approximately 121.4%, to $112.5 million for the nine months ended
September 30, 2000 from $50.8 million for the nine months ended September 30,
1999. Approximately $15.7 million of this increase was attributable to the
PathFinder acquisition, and the remaining $46.0 million of this increase was
primarily attributable to an increase in drilling activity and the benefit of
additional equipment, which was added to our rental fleet in 2000.
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<PAGE> 14
Revenues from our completion and workover related products and services
increased by $12.2 million, or approximately 63.2%, to $31.5 million for the
nine months ended September 30, 2000 from $19.3 million for the nine months
ended September 30, 1999. Our revenue increased as a result of an increase in
workover rig activity and the benefit of additional equipment, which was added
to our rental fleet in 2000.
Revenues from our maintenance and safety related products and services
increased by $2.4 million, or approximately 15.8%, to $17.5 million for the nine
months ended September 30, 2000 from $15.1 million for the nine months ended
September 30, 1999. This increase was primarily the result of increased plant
overhauls and turnarounds and the benefit of additional equipment that was added
in 2000.
Cost of Revenues. As a percentage of revenues, cost of revenues increased
to 54.5% for the nine months ended September 30, 2000 from 53.9% for the nine
months ended September 30, 1999. This increase was primarily attributable to
lower pricing for our products and services during the first two quarters of
2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $10.6 million, or approximately 41.3%, to
$36.1 million for the nine months ended September 30, 2000 from $25.6 million
for the nine months ended September 30, 1999. Our selling, general and
administrative expenses increased by $2.1 million as a result of the PathFinder
acquisition. An additional $2.0 million of the increase was related to research
and development expenses. The remaining increase was attributable to our
expansion of sales and marketing personnel in 2000. As a percentage of revenues,
selling, general and administrative expenses decreased to 22.4% for the nine
months ended September 30, 2000 from 30.0% for the nine months ended September
30, 1999.
Depreciation and Amortization. Depreciation and amortization increased by
$2.5 million, or approximately 22.0%, to $14.0 million for the nine months ended
September 30, 2000 from $11.5 million for the nine months ended September 30,
1999. This increase was the result of depreciation associated with our capital
expenditures in 2000 and the PathFinder acquisition.
Interest and Other Expense. Interest expense for the nine months ended
September 30, 2000 was $20.8 million, an increase of $4.7 million, or
approximately 29.3%, from $16.1 million for the nine months ended September 30,
1999. The increase was primarily due to increased borrowing related to our
capital expenditures and the PathFinder acquisition.
Net Income (loss). Net income was $1.9 million for the nine months ended
September 30, 2000, an improvement of $15.9 million, from the $(14.0) million
net loss reported for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our primary uses for cash are working capital, capital expenditures,
acquisitions and principal and interest payments on indebtedness. To the extent
our cash requirements for working capital, capital expenditures, acquisitions
and principal and interest payments on indebtedness exceed cash flow from
operations, we must finance our cash requirements primarily through debt and
equity financing activities.
Net cash provided by (used in) operating activities was $4.7 million for
the nine months ended September 30, 2000 and $(4.3) million for the nine months
ended September 30, 1999. Increases in cash flow from operating activities are
principally the result of increased revenue generation.
Net cash used in investing activities was $16.6 million for the nine months
ended September 30, 2000 and $41.2 million for the nine months ended September
30, 1999. Net cash used in investing activities was principally the result of
capital expenditures and the PathFinder acquisition.
Net cash provided by financing activities was $15.2 million for the nine
months ended September 30, 2000 and $47.2 million for the nine months ended
September 30, 1999. Net cash provided by financing activities was primarily due
to debt issuances used to fund capital expenditures and the PathFinder
acquisition.
In August 1997, we issued $24.0 million of our 12 1/2% senior subordinated
notes, the proceeds of which were used to fund our recapitalization. In March
2000, in lieu of making the interest payment on our
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<PAGE> 15
12 1/2% senior subordinated notes due on March 15, 2000, we issued to the
holders of these notes additional notes in an aggregate principal amount of $1.5
million, bearing interest initially at the rate of 14 1/2% per annum, and
maturing on September 15, 2007. On September 15, 2000, in lieu of making the
interest payment on our 12 1/2% senior subordinated notes due on September 15,
2000 and our 14 1/2% payment-in-kind notes issued in March 2000, we issued to
the holders of these notes additional notes in an aggregate principal amount of
$1.6 million, bearing interest initially at the rate of 14 1/2% per annum, and
maturing on September 15, 2007.
In March 1999, our wholly-owned subsidiary, Perf-O-Log, Inc., issued $40.0
million of 13% senior subordinated notes. The proceeds of these notes were used
to fund the PathFinder acquisition. In May 1999, we redeemed $5.0 million of
these notes. As of December 31, 1999, there were $35.0 million in aggregate
principal amount of our 13% senior subordinated notes outstanding. In April
2000, in lieu of making the interest payment on our 13% senior subordinated
notes due on April 1, 2000, we issued to the holders of these notes additional
notes in an aggregate principal amount of $2.275 million, bearing interest at
the rate of 14% per annum, and maturing on April 1, 2006.
In March 2000, we amended our senior secured credit facility to increase
total availability of borrowings from $150.0 million to $173.5 million. As of
September 30, 2000, $147.1 million in principal amount of term loan borrowings
under our credit facility were outstanding. Our credit facility also provided
for a revolving line of credit of up to $20.0 million that was scheduled to
mature in August 2002 and bore interest at an annual rate of LIBOR plus a margin
that depended on our leverage ratio. As of September 30, 2000, we had $10.0
million in principal amount of borrowings outstanding under the revolving line
of credit.
On October 16, 2000, we closed our initial public offering of 10,000,000
shares of our common stock at an offering price of $16.50 per share. Concurrent
with the close of the offering, we executed a $115,000,000 credit facility. The
net proceeds of the offering along with borrowings under our new credit facility
were utilized to repay in full the outstanding balances, including accrued and
unpaid interest, under our senior secured credit facility, senior subordinated
notes and other long term debt obligations, reducing our outstanding debt at
October 16, 2000 from approximately $226 million to approximately $80 million.
The new credit facility includes the following features:
- a $40 million Term A loan facility that will amortize over five years,
will mature on the fifth anniversary of the closing of the new credit
facility and will require that we make annual principal repayments
ranging from 0% of the original loan amount in the first year of the new
credit facility to 35% of the original loan amount in the fifth year of
the new credit facility;
- a $35 million Term B original loan facility that will amortize over six
and one-half years, will mature on the six and one-half year anniversary
of the closing of the new credit facility and will require that we make
annual principal repayments of 1% of the original loan amount in the
first six years of the new credit facility with the outstanding balance
being due on the maturity date; and
- a $40 million revolving credit facility that may be borrowed, prepaid and
reborrowed from time to time and will mature on the fifth anniversary of
the closing of the new credit facility.
At our option, amounts borrowed under the new credit facility will bear
interest at either a variable rate equal to the reserve-adjusted LIBOR or an
alternate base rate, plus, in each case, an applicable margin. The applicable
margin ranges from 1.75% to 3.00% in the case of a LIBOR based loan under the
revolving credit facility or the Term A loan facility and is 3.25% in the case
of a LIBOR based loan under the Term B loan facility. For alternate base rate
loans, the applicable margin ranges from 0.75% to 2.00% under the revolving
credit facility and the Term A loan facility and is 2.25% under the Term B loan
facility. The foregoing margins are subject to adjustment based on a leverage
ratio.
Our new credit facility is secured by a lien on all of our property and
assets, a pledge of all of the capital stock of our domestic subsidiaries and a
pledge of not greater than 65% of the capital stock of each of our foreign
subsidiaries. In addition, our new credit facility is guaranteed by all of our
domestic subsidiaries.
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The new credit facility requires, among other things, that we maintain
certain financial ratios and limits the amount of capital expenditures we may
make, the amount of debt we may incur outside of the credit facility, our
ability to pay dividends and future investments.
We have made capital expenditures, primarily for additional rental tool
inventory, additional LWD and MWD tools and wireline equipment, of $23.0
million, including expenditures for the replacement of equipment lost in hole,
during the nine months ended September 30, 2000. In addition, we have incurred
$4.6 million in research and development expenses for the nine months ended
September 30, 2000. Management believes that cash generated from operations and
amounts available under our new revolving credit facility will provide
sufficient funds for our identified capital projects, debt service and working
capital requirements. However, part of our strategy involves the acquisition of
companies that have products and services complementary to our existing
strategic base of operations. Depending on the size of any future acquisitions,
we may require additional debt financing, possibly in excess of the limits of
the new credit facility, or additional equity financing. Although we are
continually evaluating potential acquisitions, currently we do not have any
contracts, understandings or arrangements with respect to any material
acquisitions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks. Market risk is the potential loss arising
from adverse changes in market prices and rates. We do not enter into derivative
or other financial instruments for trading or speculative purposes. Our market
risk could arise from changes in interest rates and foreign currency exchange
rates.
Interest Rate Risk. We are subject to market risk exposure related to
changes in interest rates. Assuming our current level of borrowings, a 100 basis
point increase in interest rates under these borrowings would increase our 2000
as adjusted interest expense by approximately $680,000.
Foreign Currency Exchange Risk. Our earnings and financial position are
affected by foreign exchange rate fluctuations. We currently do not hedge
against foreign currency translation risks, and we believe that foreign currency
exchange risk is not significant to our operations.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of certain previously disclosed legal proceedings to
which we are a party, please see the discussion set forth under the headings
"Business - Legal Proceedings" and "Business - Licenses, Patents and Trademarks"
contained in our Registration Statement on Form S-1 (Registration No. 333-43411)
filed with the Securities and Exchange Commission.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The effective date of the Registration Statement on Form S-1 (Registration
No. 333-43411) filed under the Securities Act of 1933, as amended, relating to
the initial public offering of our common stock was October 10, 2000. On the
same date, we signed an underwriting agreement with Credit Suisse First Boston
Corporation, Morgan Stanley & Co. Incorporated, Donaldson, Lufkin, & Jenrette
Securities Corporation, UBS Warburg LLC, Simmons & Company International and
DLJdirect Inc., the managing underwriters for the initial public offering and
the representatives of the underwriters named in the underwriting agreement, for
the initial public offering of 10,000,000 shares of our common stock at an
initial public offering price of $16.50 per share. The offering commenced on
October 11, 2000 and was closed on October 16, 2000. The initial public offering
resulted in gross proceeds of $165.0 million. We received net proceeds of $149.6
million after deducting underwriting discounts of $11.6 million and offering
expenses of approximately $3.8 million.
Because the initial public offering occurred after September 30, 2000, we
had not used any of the net proceeds from the offering through the end of the
period covered by this report on Form 10-Q. On the closing of the offering, we
used the net proceeds of the offering along with borrowings under our new credit
facility as follows:
- $157.9 million to repay in full the outstanding balance under our senior
secured credit facility, including accrued and unpaid interest.
- $27.4 million to repay in full the outstanding balance, including accrued
and unpaid interest, under our 12 1/2% senior subordinated notes and the
related payment-in-kind notes, issued to and held by JZ Equity Partners
PLC. JZ Equity Partners PLC, a publicly traded U.K. investment trust, may
be deemed to be our affiliate. It is a limited partner of W-H Investment,
L.P., one of our principal shareholders, and a general partner of W-H
Investment II, G.P., also one of our principal shareholders. For
additional information describing these relationships, please read the
discussion under the caption "Relationships and Related
Transactions -- Transactions with The Jordan Company, its Affiliates and
Related Entities" contained in our Registration Statement on Form S-1, as
described above.
- $39.9 million to repay in full the outstanding balance, including accrued
and unpaid interest, under our 13% senior subordinated notes and the
related payment-in-kind notes, issued to and held by DLJ Merchant Banking
Partners II, L.P. and its affiliated investment funds. DLJ Merchant
Banking Partners II, L.P. and its affiliated investment funds are,
collectively, one of our principal shareholders and, as such, may be
deemed to be our affiliate. Each of DLJ Merchant Banking Partners II,
L.P. and its affiliated investment funds is an affiliate of Donaldson,
Lufkin & Jenrette Securities Corporation. For additional information
describing these relationships, please read the discussion under the
caption "Relationships and Related Transactions -- Transactions with
Donaldson, Lufkin & Jenrette Securities Corporation and its Affiliates"
contained in our Registration Statement on Form S-1, as described above.
- $1.8 million to repay other long term debt.
- $2.6 million to pay fees to DLJ Capital Funding Inc. associated with
obtaining the commitment and arranging and administrative services for
our new credit facility. DLJ Capital Funding Inc. is an affiliate of
Donaldson Lufkin & Jenrette Securities Corporation and DLJ Merchant
Banking Partners II, L.P. and its affiliated investment funds and may be
deemed to be our affiliate. For additional information describing these
relationships, please read the discussion under the caption
"Relationships
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and Related Transactions -- Transactions with Donaldson, Lufkin &
Jenrette Securities Corporation and its Affiliates" contained in our
Registration Statement on Form S-1, as described above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. IDENTIFICATION OF EXHIBIT
------- -------------------------
<C> <S>
1.1 -- Underwriting Agreement dated October 10, 2000 among W-H,
the Underwriters and Selling Shareholders set forth
therein.
11.1 -- Computation of Earnings Per Share
10.1 -- Credit Agreement dated as of October 16, 2000 among W-H,
the Financial Institutions named therein, as lenders, DLJ
Capital Funding, Inc., as Syndication Agent, and Wells
Fargo Bank Texas, N.A., as Administrative Agent.
27.1 -- Financial Data Schedule
</TABLE>
b. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
W-H ENERGY SERVICES, INC.
By: /s/ KENNETH T. WHITE, JR.
----------------------------------
Kenneth T. White, Jr.
Chairman of the Board, President,
Chief Executive officer and
Director
(Principal Executive Officer)
Date: November 22, 2000
By: /s/ JEFFREY L. TEPERA
----------------------------------
Jeffrey L. Tepera
Vice President, Secretary and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 22, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. IDENTIFICATION OF EXHIBIT
------- -------------------------
<C> <S>
1.1 -- Underwriting Agreement dated October 10, 2000 among W-H,
the Underwriters and Selling Shareholders set forth
therein.
11.1 -- Computation of Earnings Per Share
10.1 -- Credit Agreement dated as of October 16, 2000 among W-H,
the Financial Institutions named therein, as lenders, DLJ
Capital Funding, Inc., as Syndication Agent, and Wells
Fargo Bank Texas, N.A., as Administrative Agent.
27.1 -- Financial Data Schedule
</TABLE>
