10-Q 1 d96918e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 -------------------------------------------------------------------------------- UNITED STATES 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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-22664 PATTERSON-UTI ENERGY, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of 75-2504748 incorporation or organization) (I.R.S. Employer Identification No.) P. O. BOX 1416, 4510 LAMESA HIGHWAY, SNYDER, TEXAS, 79550 (Address of principal executive offices) (Zip Code) (915) 574-6300 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report.) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 78,880,056 shares of common stock, $0.01 par value, as of May 13, 2002 -------------------------------------------------------------------------------- PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES INDEX Part I - Financial Information PAGE ---- Item 1. Financial Statements Unaudited condensed consolidated balance sheets................................ 3 Unaudited condensed consolidated statements of income.......................... 4 Unaudited condensed consolidated statement of stockholders' equity............. 5 Unaudited condensed consolidated statements of cash flows...................... 6 Notes to unaudited condensed consolidated financial statements................. 7 Item 2. Changes in Securities and Use of Proceeds...................................... 12 Item 3. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 13 Item 4. Quantitative and Qualitative Disclosures About Market Risk..................... 16 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995................................................... 17 Part II - Other Information Item 1. Legal Proceedings.............................................................. 18 Item 6. Exhibits and Reports on Form 8-K............................................... 18 Signatures....................................................................................... 20
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE FOLLOWING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDE ALL ADJUSTMENTS WHICH, IN THE OPINION OF MANAGEMENT, ARE NECESSARY IN ORDER TO MAKE SUCH FINANCIAL STATEMENTS NOT MISLEADING. PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ..................................................... $ 58,357 $ 33,584 Accounts receivable, net of allowance for doubtful accounts of $3,632 at March 31, 2002 and $4,021 at December 31, 2001 ............................ 92,931 133,837 Inventory ..................................................................... 17,162 16,272 Deferred tax assets ........................................................... 17,625 10,420 Other ......................................................................... 6,217 5,345 ------------ ------------ Total current assets ...................................................... 192,292 199,458 Property and equipment, at cost, net .............................................. 638,316 614,420 Goodwill and intangible assets, net ............................................... 51,501 51,634 Other ............................................................................. 3,894 4,130 ------------ ------------ Total assets .............................................................. $ 886,003 $ 869,642 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade ...................................................................... $ 31,079 $ 47,945 Other ...................................................................... 6,207 4,833 Accrued expenses .............................................................. 29,918 36,508 ------------ ------------ Total current liabilities ................................................. 67,204 89,286 Deferred tax liabilities .......................................................... 103,883 92,859 Other ............................................................................. 285 355 ------------ ------------ Total liabilities ......................................................... 171,372 182,500 ------------ ------------ Commitments and contingencies ..................................................... -- -- Stockholders' equity: Preferred stock, par value $.01; authorized 1,000 shares, no shares issued .... -- -- Common stock, par value $.01; authorized 200,000 shares with 79,801 and 78,463 issued and 78,294 and 76,956 outstanding at March 31, 2002 and December 31, 2001, respectively ...................................... 798 784 Additional paid-in capital .................................................... 465,116 441,475 Retained earnings ............................................................. 262,769 258,834 Accumulated other comprehensive loss .......................................... (2,397) (2,296) Treasury stock, at cost, 1,507 shares ......................................... (11,655) (11,655) ------------ ------------ Total stockholders' equity ................................................ 714,631 687,142 ------------ ------------ Total liabilities and stockholders' equity ................................ $ 886,003 $ 869,642 ============ ============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------ ------------ Operating revenues: Drilling .......................................... $ 101,940 $ 206,059 Drilling and completion fluids .................... 16,146 19,670 Pressure pumping .................................. 7,428 7,337 Other ............................................. 2,709 5,520 ------------ ------------ 128,223 238,586 ------------ ------------ Operating costs and expenses: Drilling .......................................... 73,432 130,197 Drilling and completion fluids .................... 14,723 16,365 Pressure pumping .................................. 4,157 4,395 Depreciation, depletion and amortization .......... 22,202 19,320 General and administrative ........................ 6,343 7,662 Bad debt expense .................................. -- 400 Other ............................................. 938 1,087 ------------ ------------ 121,795 179,426 ------------ ------------ Operating income ...................................... 6,428 59,160 ------------ ------------ Other income (expense): Interest income ................................... 225 851 Interest expense .................................. (111) (1,530) Other ............................................. 17 68 ------------ ------------ 131 (611) ------------ ------------ Income before income taxes ............................ 6,559 58,549 ------------ ------------ Income tax expense (benefit): Current ........................................... (4,557) 14,929 Deferred .......................................... 7,181 7,009 ------------ ------------ 2,624 21,938 ------------ ------------ Net income ............................................ $ 3,935 $ 36,611 ============ ============ Net income per common share: Basic ............................................. $ 0.05 $ 0.48 ============ ============ Diluted ........................................... $ 0.05 $ 0.46 ============ ============ Weighted average number of common shares outstanding: Basic ............................................. 77,412 75,894 ============ ============ Diluted ........................................... 79,894 79,058 ============ ============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) (in thousands)
Common Stock Accumulated -------------------------- Additional other Number of paid-in Retained comprehensive Treasury shares Amount capital earnings loss stock Total ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2001 .... 78,463 $ 784 $ 441,475 $ 258,834 $ (2,296) $ (11,655) $ 687,142 Issuance of common stock ...... 650 7 16,933 -- -- -- 16,940 Exercise of stock options ..... 688 7 3,607 -- -- -- 3,614 Tax benefit related to exercise of stock options ... -- -- 3,101 -- -- -- 3,101 Foreign currency translation .. -- -- -- -- (101) -- (101) Net income .................... -- -- -- 3,935 -- -- 3,935 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance, March 31, 2002 ....... 79,801 $ 798 $ 465,116 $ 262,769 $ (2,397) $ (11,655) $ 714,631 ============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------ ------------ Cash flows from operating activities: Net income ................................................................. $ 3,935 $ 36,611 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization .................................. 22,202 19,320 Bad debt expense .......................................................... -- 400 Deferred income tax expense ............................................... 7,181 7,009 Tax benefit related to stock options ...................................... 3,101 1,962 Other ..................................................................... (31) (130) Changes in operating assets and liabilities: Accounts receivable ................................................. 40,937 (27,229) Inventory and other current assets .................................. (1,762) 3,470 Accrued federal income taxes receivable ............................. (7,412) 6,004 Accounts payable .................................................... (16,866) 22,142 Other liabilities ................................................... (5,345) (2,090) ------------ ------------ Net cash provided by operating activities ................ 45,940 67,469 ------------ ------------ Cash flows from investing activities: Acquisitions .............................................................. -- (27,045) Purchases of property and equipment ....................................... (25,281) (48,228) Proceeds from sales of property and equipment ............................. 254 426 Change in other assets .................................................... 243 (2,842) ------------ ------------ Net cash used in investing activities ......................... (24,784) (77,689) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of notes payable ................................... -- 9,760 Payments of notes payable ................................................. -- (1,980) Proceeds from exercise of stock options ................................... 3,614 1,784 ------------ ------------ Net cash provided by financing activities ................ 3,614 9,564 ------------ ------------ Net increase (decrease) in cash and cash equivalents ..... 24,770 (656) Foreign currency translation adjustment .................. 3 139 Cash and cash equivalents at beginning of period ............................... 33,584 66,916 ------------ ------------ Cash and cash equivalents at end of period ..................................... $ 58,357 $ 66,399 ============ ============ Supplemental disclosure of cash flow information: Net cash received (paid) during the period for: Interest ................................................................ $ (111) $ (1,530) Income taxes ............................................................ $ 263 $ (3,850)
Non-cash investing and financing activities: In March 2002, the Company acquired five SCR Electric land-based drilling rigs through the acquisition of Odin Drilling, Inc., for a purchase price of $16.9 million. The purchase price consisted of 650,000 shares of common stock valued at $26.06 per share. A deferred tax liability of $4.1 million was recorded as a result of the transaction. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF CONSOLIDATION AND PRESENTATION Patterson Energy, Inc. ("Patterson") and UTI Energy Corp. ("UTI") consummated a merger on May 8, 2001, with Patterson as the surviving entity, which was treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and accounted for as a pooling of interests for financial accounting purposes. Historical financial statements as presented herein, have been restated to provide for the retroactive effect of the merger. At the time of the merger, the name of Patterson Energy, Inc. was changed to "Patterson-UTI Energy, Inc." ("Patterson-UTI"). The consolidated financial statements include the accounts of Patterson-UTI and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The interim condensed consolidated financial statements have been prepared by management of the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for presentation of the information have been included. The unaudited condensed consolidated balance sheet as of December 31, 2001, as presented herein, was derived from the audited balance sheet of the Company, but does not include all disclosures required by generally accepted accounting principles. The U.S. dollar is the functional currency for all of the Company's operations except for its Canadian operations, which use the Canadian dollar as functional currency. The effects of exchange rate changes are reflected in accumulated other comprehensive income, which is a separate component of stockholders' equity (See Note 4). The Company provides a dual presentation of its earnings per share in its Consolidated Statements of Income: Basic Earnings per Share ("Basic EPS") and Diluted Earnings per Share ("Diluted EPS"). Basic EPS is computed using the weighted average number of shares outstanding during the periods presented. Diluted EPS includes common stock equivalents, generally stock options and warrants that are "in the money", which are dilutive to earnings per share. For the three months ended March 31, 2002 and 2001, dilutive securities included in the calculation of Diluted EPS were 2.5 million shares and 3.2 million shares, respectively. There are 470,000 potentially dilutive options and warrants outstanding at March 31, 2002 which have been excluded from the calculation of Diluted EPS as their exercise price is greater than the average market price for the three-month period ended March 31, 2002. The results of operations for the three months ended March 31, 2002, are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the 2001 consolidated financial statements in order for them to conform with the 2002 presentation. 2. RECENT ACQUISITION Odin Drilling, Inc. -- In March 2002, the Company acquired five SCR Electric land-based drilling rigs through the acquisition of Odin Drilling, Inc., for a purchase price of $16.9 million. The purchase price consisted of 650,000 shares of common stock valued at $26.06 per share. A deferred tax liability of $4.1 million was recorded as a result of the transaction. The purchase price was allocated among the rigs based on their estimated fair values. 7 PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 2. RECENT ACQUISITION - (CONTINUED) This transaction was accounted for as a purchase. Odin had conducted no operations prior to its acquisition by the Company. No goodwill was recorded in connection with this acquisition. 3. STOCKHOLDERS' EQUITY In March 2002, the Company issued 650,000 shares of its common stock as consideration for the acquisition of Odin Drilling, Inc. (see Note 2). The common stock was valued at $26.06 per share, its fair market value on the date the terms of the transaction were agreed upon. 4. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME The following table illustrates the Company's comprehensive income including the effects of foreign currency translation adjustments for the three months ended March 31, 2002 and 2001 (in thousands):
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------ ------------ Net income ....................................... $ 3,935 $ 36,611 Other comprehensive loss: Foreign currency translation adjustment ..... (101) (1,622) ------------ ------------ Comprehensive income ............................. $ 3,834 $ 34,989 ============ ============
All accumulated other comprehensive income at March 31, 2002 and December 31, 2001 consists of foreign currency translation adjustments. 5. PRO FORMA FINANCIAL INFORMATION The merger between Patterson and UTI was treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and was accounted for as a pooling of interests for financial accounting purposes. The consolidated financial statements give retroactive effect to the merger, which includes combining the companies' historical consolidated financial statements for the period ended March 31, 2001. Certain adjustments were made in that period to conform the previous accounting policies of UTI with those of Patterson. Selected unaudited pro forma information related to the operations of Patterson and UTI for the three months ended March 31, 2001 follows (in thousands):
PATTERSON UTI ADJUSTMENTS COMBINED ------------ ------------ ------------ ------------ Revenues ................ $ 129,936 $ 108,390 $ 260 $ 238,586 Operating income ........ $ 32,702 $ 26,431 $ 27 $ 59,160 Net Income .............. $ 20,544 $ 16,050 $ 17 $ 36,611
8 PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 6. BUSINESS SEGMENTS Our revenues, operating profits and identifiable assets are primarily attributable to three industry segments: contract drilling, drilling and completion fluid services and pressure pumping services. Separate financial data for each of our three business segments is provided below.
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------ ------------ (IN THOUSANDS) Revenues: Contract drilling ...................... $ 101,940 $ 206,059 Drilling and completion fluids ......... 16,146 19,670 Pressure pumping ....................... 7,428 7,337 Corporate and other .................... 2,709 5,520 ------------ ------------ Total operating revenues ................... $ 128,223 $ 238,586 ============ ============ Income (loss) from operations: Contract drilling ...................... $ 7,327 $ 57,563 Drilling and completion fluids ......... (842) 1,006 Pressure pumping ....................... 1,481 1,647 Corporate and other .................... (1,538) (1,056) ------------ ------------ 6,428 59,160 Interest income ............................ 225 851 Interest expense ........................... (111) (1,530) Other ...................................... 17 68 ------------ ------------ Income before income taxes ................. $ 6,559 $ 58,549 ============ ============
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ (IN THOUSANDS) Identifiable assets: Contract drilling ...................... $ 693,478 $ 681,700 Drilling and completion fluids ......... 35,560 41,724 Pressure pumping ....................... 30,493 29,473 Corporate and other (a) ................ 126,472 116,745 ------------ ------------ $ 886,003 $ 869,642 ============ ============
---------- (a) Corporate and other assets primarily includes cash on hand managed by the parent and oil and natural gas properties. 7. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS No. 142") in June 2001. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." The provisions of SFAS No. 142, which the Company adopted on January 1, 2002, are not expected to have a material impact on the Company's consolidated financial statements. Approximately $944,000 in amortization expenses recognized during the first quarter of 2001 would not have been recognized under SFAS No. 142. 9 PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 7. RECENTLY ISSUED ACCOUNTING STANDARDS - (CONTINUED) The FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS No. 143") in July 2001. SFAS No. 143 addresses financial accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 is effective beginning June 15, 2002. The provisions of SFAS No. 143 are not expected to have a material impact on the Company's consolidated financial statements. The FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," (SFAS No. 144) in August 2001. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of SFAS No. 144, which the Company adopted on January 1, 2002, did not have an impact on the Company's consolidated financial statements. 8. GOODWILL AND INTANGIBLE ASSETS Effective January 1, 2002 we adopted Statement of Financial Accounting Standards 142, "Goodwill and Other Intangible Assets". This accounting pronouncement requires that the Company cease amortization of all intangible assets having indefinite useful economic lives. Such assets, including goodwill, are not to be amortized until their lives are determined to be finite, however, a recognized intangible asset with an indefinite useful life should be tested for impairment annually or on an interim basis if events or circumstances indicated that the fair value of the asset has decreased below its carrying value. As of March 31, 2002, the Company had not completed a transitional test for goodwill impairment, but it intends to complete such test during the second quarter 2002. Other intangible assets include covenants-not-to-compete and other agreements. All of our intangible assets, having definite lives, are being amortized on a straight-line basis over their estimated useful lives. SFAS Nos. 141 and 142 also require disclosure of the following information related to goodwill and other intangible assets (in thousands):
MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ Goodwill ................................... $ 69,860 $ 69,860 Accumulated amortization ................... (19,661) (19,661) ------------ ------------ Goodwill, net .............................. 50,199 50,199 ------------ ------------ Covenants-not-to-compete and other ......... $ 3,629 $ 3,635 Accumulated amortization ................... (2,327) (2,200) ------------ ------------ Other intangible assets, net ............... 1,302 1,435 ------------ ------------ Total goodwill and intangible assets, net... $ 51,501 $ 51,634 ============ ============
Change in the net carrying amount of goodwill for the quarter ended March 31, 2002 is as follows (in thousands):
DRILLING & COMPLETION DRILLING FLUIDS TOTAL ------------ ------------ ------------ Balance at December 31, 2001 ............... $ 40,265 $ 9,934 $ 50,199 Changes to goodwill ........................ -- -- -- ------------ ------------ ------------ Balance at March 31, 2002 .................. $ 40,265 $ 9,934 $ 50,199 ============ ============ ============
10 PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 8. GOODWILL AND INTANGIBLE ASSETS - (CONTINUED) Amortization expense consists of the following (in thousands):
THREE MONTHS ENDED MARCH 31, ----------------------------- 2002 2001 ------------ ------------ Goodwill ................................... $ -- $ 944 Covenants-not-to-compete and other ......... 127 214 ------------ ------------ $ 127 $ 1,158 ============ ============
Our weighted average amortization period for intangible assets is approximately 10 years. The following table shows the estimated amortization expense for these assets for each of the five succeeding fiscal years (in thousands): 2003...................$ 134 2004...................$ 97 2005...................$ 97 2006...................$ 97 2007...................$ 97
Had SFAS No. 142 been in effect prior to January 1, 2002, our reported net income and net income per share would have been as follows (in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31, ----------------------------- 2002 2001 ------------ ------------ Net income: Reported ............................... $ 3,935 $ 36,611 Goodwill amortization .................. -- 944 ------------ ------------ Adjusted ............................... $ 3,935 $ 37,555 ============ ============ Basic net income per common share: Reported ............................... $ 0.05 $ 0.48 Effect of goodwill amortization ........ -- 0.01 ------------ ------------ Adjusted ............................... $ 0.05 $ 0.49 ============ ============ Diluted net income per common share: Reported ............................... $ 0.05 $ 0.46 Effect of goodwill amortization ........ -- 0.01 ------------ ------------ Adjusted ............................... $ 0.05 $ 0.47 ============ ============
11 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Since year-end 2001, the Company has issued 650,000 shares of common stock that were not registered under the Securities Act of 1993, as amended, at the time of issuance. The securities were issued in March 2002 as consideration for the acquisition of Odin Drilling, Inc. The common stock was valued at $26.06 per share. No underwriter was involved in the transaction and no sales commissions, fees or similar compensation were paid to any person in connection with the issuance of the shares. The Company believes that the issuance of the securities was exempt from the registration requirements of Section 5 of the Securities Act by virtue of Section 4(2) of the Securities Act and/or under Rule 506 of Regulation D promulgated thereunder. 12 ITEM 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING SUMMARY OF LIQUIDITY AND CAPITAL RESOURCES AND RESULTS OF OPERATIONS IS BASED ON CONSOLIDATED FINANCIAL INFORMATION THAT HAS BEEN RESTATED TO REFLECT THE MERGER OF UTI INTO PATTERSON-UTI ON MAY 8, 2001, UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2002, we had working capital of approximately $125.1 million including cash and cash equivalents of $58.4 million. For the three months ended March 31, 2002, our primary sources and uses of cash flow were: o $45.9 million provided by operations and o $3.6 million from the exercise of stock options. Correspondingly, we used approximately $25.3 million: o to make capital expenditures for the betterment and refurbishment of our drilling rigs, o for the acquisition and procurement of drilling equipment, o to fund leasehold acquisition and exploration and development of oil and natural gas properties and o to fund capital expenditures for our drilling and completion fluids and pressure pumping divisions. In March 2002, the Company acquired five SCR Electric land-based drilling rigs through the acquisition of Odin Drilling, Inc., for a purchase price of $16.9 million. The purchase price consisted of 650,000 shares of common stock valued at $26.06 per share. A deferred tax liability of $4.1 million was recorded as a result of the transaction. The purchase price was allocated among the rigs based on their estimated fair values. The shares were not registered under the Securities Act of 1993 in reliance on a private placement exemption pursuant to Section 4(2) of that Act (See ITEM 2). As of March 31, 2002, there were no amounts drawn under the Company's $100.0 million revolving line of credit. The line of credit carries a floating interest rate of LIBOR plus 1.75% to 2.75% based on twelve-month trailing EBITDA. The facility has no financial covenants unless availability under the facility is less than $20.0 million. We believe that the current level of cash and short-term investments, together with cash generated from operations should be sufficient to meet our immediate capital needs. From time to time, acquisition opportunities are reviewed. The timing, size or success of any acquisition and the associated capital commitments are unpredictable. Should further opportunities for growth requiring capital arise, we believe we would be able to satisfy these needs through a combination of working capital, cash generated from operations, and either debt or equity financing. However, there can be no assurance that such capital would be available. 13 RESULTS OF OPERATIONS The following tables summarize operations for the three months ended March 31, 2002 and 2001:
CONTRACT DRILLING 2002 2001 % CHANGE ------------ ------------ ------------ (IN THOUSANDS) Revenues .............................................. $ 101,940 $ 206,059 (50.5)% Direct operating costs ................................ $ 73,432 $ 130,197 (43.6)% Selling, general and administrative ................... $ 1,183 $ 1,737 (31.9)% Depreciation and amortization ......................... $ 19,998 $ 16,562 20.7% Operating income ...................................... $ 7,327 $ 57,563 (87.3)% Operating days ........................................ 10,550 20,753 (49.2)% Average revenue per operating day ..................... $ 9.66 $ 9.93 (2.7)% Average direct operating cost per operating day ....... $ 6.96 $ 6.27 11.0% Average margin per operating day ...................... $ 2.70 $ 3.66 (26.2)% Number of owned rigs at end of period ................. 324 302 7.3% Average number of rigs owned during period ............ 320 299 7.0% Average rigs operating ................................ 117 231 (49.4)% Rig utilization percentage ............................ 37% 77% (51.9)% Capital expenditures .................................. $ 21,667 $ 42,829 (49.4)%
Deteriorating industry conditions, which began in the third quarter of 2001 and continued into the first quarter of 2002 have had an adverse impact on the market prices of oil and natural gas. Accordingly, the demand for our contract drilling services has been negatively impacted. Market prices for oil fell from an average of $29.12 per barrel during the first quarter of 2001 to an average of $21.72 per barrel during the first quarter of 2002 and natural gas prices fell from an average of $6.23 per Mcf during the first quarter of 2001 to an average of $2.51 per Mcf for the same three-month period in 2002. We expect demand for our contract drilling services to increase as industrial demand improves and the economy strengthens. The decreased operating results were reflective of a significant decline in demand for our contract drilling services as evidenced by: o decreases in average rig utilization and in the number of operating days and o decreases in average daily margin due to declines in day rates and increases in average costs per day. The increased costs are largely attributable to our efforts to maintain our most experienced field personnel despite the significant decline in rig utilization.
DRILLING AND COMPLETION FLUIDS 2002 2001 % CHANGE ------------ ------------ ------------ (IN THOUSANDS) Revenues .................................... $ 16,146 $ 19,670 (17.9)% Direct operating costs ...................... $ 14,723 $ 16,365 (10.0)% Selling, general and administrative ......... $ 1,727 $ 1,713 0.8% Depreciation and amortization ............... $ 538 $ 586 (8.2)% Operating income (loss) ..................... $ (842) $ 1,006 (183.7)% Total jobs .................................. 321 484 (33.7)% Average revenue per job ..................... $ 50.30 $ 40.64 23.8% Average costs per job ....................... $ 45.87 $ 33.81 35.7% Average margin per job ...................... $ 4.43 $ 6.83 (35.1)% Capital expenditures ........................ $ 663 $ 929 (28.6)%
The decreases noted were primarily attributable to deteriorating industry conditions, as noted above, and the resulting decline in demand for our drilling and completion fluid services, which is further illustrated by the 33.7% decline in the number of jobs completed in the 2002 quarter versus the 2001 quarter. As commodity prices improve, we expect to begin to see increases in the demand for our contract drilling and completion fluids services. 14
PRESSURE PUMPING 2002 2001 % CHANGE ------------ ------------ ------------ (IN THOUSANDS) Revenues .................................... $ 7,428 $ 7,337 1.2% Direct operating costs ...................... $ 4,157 $ 4,395 (5.4)% Selling, general and administrative ......... $ 1,181 $ 918 28.6% Depreciation ................................ $ 609 $ 377 61.5% Operating income ............................ $ 1,481 $ 1,647 (10.1)% Total jobs .................................. 839 968 (13.3)% Average revenue per job ..................... $ 8.85 $ 7.58 16.8% Average costs per job ....................... $ 4.95 $ 4.54 9.0% Average margin per job ...................... $ 3.90 $ 3.04 28.3% Capital expenditures ........................ $ 936 $ 1,734 (46.0)%
Increased general and administrative expense and depreciation for our pressure pumping operations can be attributed to significant growth of the pressure pumping segment during 2001, with additions to personnel as well as equipment and facilities.
CORPORATE AND OTHER 2002 2001 % CHANGE ------------ ------------ ------------ (IN THOUSANDS) Revenues ......................................... $ 2,709 $ 5,520 (50.9)% Other expenses ................................... $ 938 $ 1,087 (13.7)% Bad debt expense ................................. $ -- $ 400 (100.0)% Selling, general and administrative .............. $ 2,252 $ 3,294 (31.6)% Depreciation, depletion and amortization ......... $ 1,057 $ 1,795 (41.1)% Operating loss ................................... $ (1,538) $ (1,056) (45.6)% Capital expenditures ............................. $ 3,042 $ 2,722 11.8%
The decrease in revenues in Corporate and Other is largely attributable to the impact of the weakened commodity prices on our oil and natural gas operations. The following table summarizes certain industry data for the three months ended March 31, 2002 and 2001:
INDUSTRY DATA 2002 2001 % CHANGE ------------ ------------ ------------ Average US natural gas spot price per Mcf (a) ......... $ 2.51 $ 6.23 (59.7)% Average West Texas intermediate crude oil spot Price per BBL (a) ................................. $ 21.72 $ 29.12 (25.4)% Average weekly US land rig count (b) .................. 814 1,141 (28.7)% Average weekly Canadian land rig count (b) ............ 371 504 (26.4)%
-------------- (a) Source: 2002-Raymond James; 2001-Market Energy (b) Source: Baker Hughes VOLATILITY OF OIL AND NATURAL GAS PRICES AND ITS IMPACT ON OPERATIONS Our revenue, profitability and future rate of growth are substantially dependent upon prevailing prices for oil and natural gas, with respect to all of our operating segments. Historically, oil and natural gas prices and markets have been volatile. Prices are affected by market supply and demand factors as well as actions of state and local agencies, the United States and foreign governments and international cartels. All of these are beyond our control. Any significant or extended decline in oil and/or natural gas prices would have a material adverse effect on our financial condition and results of operations. Due to a decline in oil and natural gas prices beginning in the second quarter of 2001, demand for drilling rigs declined beginning in the third quarter of 2001 and continued into the first quarter of 2002. This decline in demand has resulted in a steep decline in drilling rig utilization and day rates, which in turn has adversely impacted our operations. 15 IMPACT OF INFLATION We believe that inflation will not have a significant near-term impact on our financial position. ITEM 4. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We currently have no exposure to interest rate market risk because we have no outstanding balance under our credit facility. Should we incur a balance in the future, we would have some exposure associated with the floating rate of the interest charged on that balance. The credit facility, which expires on June 29, 2005, bears interest at LIBOR plus 1.75 % to 2.75% based on the Company's twelve-month trailing EBITDA. Our exposure to interest rate risk due to changes in LIBOR is not expected to be material. We conduct some business in Canadian dollars through our Canadian land-based drilling operations. The exchange rate between Canadian dollars and U.S. dollars has fluctuated over the last ten years. If the value of the Canadian dollar against the U.S. dollar weakens, revenues and earnings of our Canadian operations will be reduced when they are translated to U.S. dollars. Also, the value of our Canadian net assets in U.S. dollars may decline. 16 --------------- CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 2 of this Report contains forward-looking statements which are made pursuant to the "safe harbor" provisions of The Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements relating to: liquidity; financing of operations; continued volatility of oil and natural gas prices; source and sufficiency of funds required for immediate capital needs and additional rig acquisitions (if further opportunities arise); and such other matters. The words "believes," "plans," "intends," "expected," "estimates" or "budgeted" and similar expressions identify forward-looking statements. The forward-looking statements are based on certain assumptions and analyses we make in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. We do not undertake to update, revise or correct any of the forward-looking information. Factors that could cause actual results to differ materially from our expectations expressed in the forward-looking statements include, but are not limited to, the following: o Swings in prices and demand for oil and natural gas; o Swings in demand for contract drilling, pressure pumping and drilling and completion fluids services; o Shortages of drill pipe and other drilling equipment; o Labor shortages, primarily qualified drilling personnel; o Effects of competition from other drilling contractors and providers of pressure pumping and drilling and completion fluids services; o Occurrence of operating hazards and uninsured losses inherent in our business operations; and o Environmental and other governmental regulation. For a more complete explanation of these various factors and others, see "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995" included in our Annual Report on Form 10-K for the year ended December 31, 2001, beginning on page 13. You are cautioned not to place undue reliance on any of our forward-looking statements, which speak only as of the date of the document or in the case of documents incorporated by reference, the date of those documents. --------------- 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Westfort Energy LTD and Westfort Energy (US) LTD f/k/a Canadian Delta, Inc. ("Westfort"), filed a lawsuit against two Patterson-UTI subsidiaries, Patterson Petroleum LP and Patterson Drilling Company LP, in the Circuit Court, Rankin County, Mississippi, Case No. 2002-18. The lawsuit relates to a letter agreement entered into in July 2000 between Patterson Petroleum and Westfort concerning the drilling of a daywork well in Mississippi. This lawsuit was filed by Westfort after Patterson Petroleum made demand on Westfort for payment of the contract drilling services. There have been no significant developments in these proceedings since year-end 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. The following exhibits are filed herewith or incorporated by reference: 2.1 Plan and Agreement of Merger dated October 14, 1993, between Patterson Energy, Inc., a Texas corporation, and Patterson Energy, Inc., a Delaware corporation, together with related Certificates of Merger.(1) 2.2 Agreement and Plan of Merger, dated April 22, 1996 among Patterson Energy, Inc., Patterson Drilling Company and Tucker Drilling Company, Inc.(2) 2.2.1 Amendment to Agreement and Plan of Merger, dated May 16, 1996 among Patterson Energy, Inc., Patterson Drilling Company and Tucker Drilling Company, Inc.(3) 2.3 Agreement and Plan of Merger, dated February 4, 2001, by and between UTI Energy Corp. and Patterson Energy, Inc.(4) 2.4 Agreement and Plan of Merger, dated March 10, 2002 among Patterson-UTI Energy, Inc., Patterson-UTI Drilling Company LP, LLLP and Odin Drilling, Inc. 3.1 Restated Certificate of Incorporation.(5) 3.1.1 Certificate of Correction of Restated Certificate of Incorporation.(10) 3.2 Amended and Restated Bylaws.(10) 3.3 Rights Agreement dated January 2, 1997, between Patterson Energy, Inc. and Continental Stock Transfer & Trust Company.(6) 3.3.1 Amendment to Rights Agreement dated as of October 23, 2001.(8) 4.1 Excerpt from Restated Certificate of Incorporation of Patterson-UTI Energy, Inc. regarding authorized Common Stock and Preferred Stock.(7) 4.2 Certificate of Designation.(9) 4.2.1 Amendment to Certificate of Designation.(10) 18 4.3 Registration Rights Agreement with Bear, Stearns and Co. Inc., dated March 25, 1994, as assigned to REMY Capital Partners III, L.P.(10) ---------- (1) Incorporated herein by reference to Item 27, "Exhibits" to Amendment No. 2 to Registration Statement on Form SB-2 (File No. 33-68058-FW) filed on October 28, 1993. (2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to Form 8-K dated April 22, 1996 and filed on April 30, 1996. (3) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to Form 8-K dated May 16, 1996 and filed on May 22, 1996. (4) Incorporated herein by reference to Joint Proxy Statement/Prospectus filed on March 14, 2001. (5) Incorporated herein by reference to Item 7, "Financial Statements and Exhibits" to Form 8-K dated and filed on May 8, 2001. (6) Incorporated by reference to Item 2, "Exhibits" to Registration Statement on For 8-A filed on January 14, 1997. (7) Incorporated herein by reference to Item 6, "Exhibits and Reports on Form 8-K" to Form 10-Q for the quarterly period ended June 30, 2001, filed on August 1, 2001. (8) Incorporated herein by reference to Item 6, "Exhibits and Reports on Form 8-K" to Form 10-Q for the quarterly period ended September 30, 2001, filed on October 31, 2001. (9) Incorporated herein by reference to Item 2, "Exhibits" to Registration Statement on Form 8-A (File No. 000-22664) filed on January 14, 1997. (10) Incorporated herein by reference to Item 14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 2001. (b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed during the three months ended March 31, 2002. 19 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. PATTERSON-UTI ENERGY, INC. By: /s/ Cloyce A. Talbott ----------------------------------------- Cloyce A. Talbott Chief Executive Officer By: /s/ Jonathan D. Nelson ----------------------------------------- Jonathan D. Nelson Vice President, Chief Financial Officer, Secretary and Treasurer DATED: May 14, 2002 20 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.4 Agreement and Plan of Merger, dated March 10, 2002 among Patterson-UTI Energy, Inc., Patterson-UTI Drilling Company LP, LLLP and Odin Drilling, Inc.