spn-20140930 10Q Q3_Taxonomy2013

 

Table Of Contents

 

 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2014

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from          to

 

Commission File No. 001-34037

 

 

 

SUPERIOR ENERGY SERVICES, INC.

 

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware

 

75-2379388

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1001 Louisiana Street, Suite 2900

 

77002

Houston, TX

 

(Zip Code)

(Address of principal executive offices)

 

 

 

Registrant’s telephone number, including area code: (713)  654-2200

 

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    No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer  

 

Accelerated filer                           

Non-accelerated filer    

(do not check if smaller reporting company)

Smaller reporting company          

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  

 

The number of shares of the registrant’s common stock outstanding on October 30, 2014 was 152,171,006.

 

 

 

 


 

 

Table Of Contents

 

SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q for

the Quarterly Period Ended September 30, 2014

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

16 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

20 

Item 4.

Controls and Procedures

21 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22 

Item 6.

Exhibits

23 

 

 

2

 


 

 

Table Of Contents

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2014 and December 31, 2013

(in thousands, except share data)

 

 

9/30/2014

 

12/31/2013

 

 

(unaudited)

 

(audited)

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

320,042 

 

$

196,047 

Accounts receivable, net of allowance for doubtful accounts of $27,366 and

 

 

 

 

 

 

$31,030 as of September 30, 2014 and December 31, 2013, respectively

 

 

967,943 

 

 

937,195 

Income taxes receivable

 

 

 -

 

 

5,532 

Deferred income taxes

 

 

27,024 

 

 

8,785 

Prepaid expenses

 

 

72,072 

 

 

70,421 

Inventory and other current assets

 

 

185,613 

 

 

258,449 

Assets held for sale

 

 

285,759 

 

 

 -

Total current assets

 

 

1,858,453 

 

 

1,476,429 

Property, plant and equipment, net of accumulated depreciation and depletion of 

    $2,159,166 and $1,827,011 as of September 30, 2014 and December 31, 2013, respectively

 

 

2,702,532 

 

 

3,002,194 

Goodwill

 

 

2,456,522 

 

 

2,458,109 

Notes receivable

 

 

25,560 

 

 

23,708 

Intangible and other long-term assets, net of accumulated amortization of $110,115

    and $84,567 as of September 30, 2014 and December 31, 2013, respectively

 

 

420,873 

 

 

450,867 

Total assets

 

$

7,463,940 

 

$

7,411,307 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

207,242 

 

$

216,029 

Accrued expenses

 

 

367,476 

 

 

376,049 

Income taxes payable

 

 

37,417 

 

 

 -

Current maturities of long-term debt

 

 

20,344 

 

 

20,000 

Current portion of decommissioning liabilities

 

 

 -

 

 

27,322 

Liabilities held for sale

 

 

76,849 

 

 

 -

Total current liabilities

 

 

709,328 

 

 

639,400 

Deferred income taxes

 

 

729,246 

 

 

736,080 

Decommissioning liabilities

 

 

87,443 

 

 

56,197 

Long-term debt, net

 

 

1,630,834 

 

 

1,646,535 

Other long-term liabilities

 

 

165,379 

 

 

201,651 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock of $0.01 par value.  Authorized - 5,000,000 shares; none issued

 

 

 -

 

 

 -

Common stock of $0.001 par value.

 

 

 

 

 

 

Authorized - 250,000,000, Issued - 153,958,963, Outstanding - 154,019,882 as of September 30, 2014

Authorized - 250,000,000, Issued - 158,976,784, Outstanding - 159,158,022 as of December 31, 2013

 

 

154 

 

 

159 

Additional paid in capital

 

 

2,724,777 

 

 

2,873,579 

Accumulated other comprehensive loss, net

 

 

(25,067)

 

 

(17,500)

Retained earnings

 

 

1,441,846 

 

 

1,275,206 

Total stockholders’ equity

 

 

4,141,710 

 

 

4,131,444 

Total liabilities and stockholders’ equity

 

$

7,463,940 

 

$

7,411,307 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

3

 


 

 

Table Of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2014 and 2013

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

 

2014

 

2013

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

935,560 

 

$

848,941 

 

$

2,574,565 

 

$

2,552,792 

Rentals

 

 

273,466 

 

 

247,471 

 

 

803,431 

 

 

721,621 

Total revenues

 

 

1,209,026 

 

 

1,096,412 

 

 

3,377,996 

 

 

3,274,413 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of items shown separately below)

 

 

597,992 

 

 

581,556 

 

 

1,704,165 

 

 

1,706,188 

Cost of rentals (exclusive of items shown separately below)

 

 

123,700 

 

 

90,076 

 

 

319,425 

 

 

263,742 

Depreciation, depletion, amortization and accretion

 

 

170,154 

 

 

152,028 

 

 

493,437 

 

 

446,432 

General and administrative expenses

 

 

154,859 

 

 

147,364 

 

 

457,631 

 

 

440,812 

Income from operations

 

 

162,321 

 

 

125,388 

 

 

403,338 

 

 

417,239 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(24,169)

 

 

(25,564)

 

 

(72,610)

 

 

(81,610)

Other income (expense)

 

 

(2,051)

 

 

(1,697)

 

 

(1,480)

 

 

41 

Loss on early extinguishment of debt

 

 

 -

 

 

 -

 

 

 -

 

 

(884)

Income from continuing operations before income taxes

 

 

136,101 

 

 

98,127 

 

 

329,248 

 

 

334,786 

Income taxes

 

 

50,358 

 

 

30,658 

 

 

121,822 

 

 

112,620 

Net income from continuing operations

 

 

85,743 

 

 

67,469 

 

 

207,426 

 

 

222,166 

Income (loss) from discontinued operations, net of income tax

 

 

(5,886)

 

 

2,366 

 

 

(15,735)

 

 

(20,045)

Net income

 

$

79,857 

 

$

69,835 

 

$

191,691 

 

$

202,121 

Earnings (loss) per share information:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.55 

 

$

0.42 

 

$

1.33 

 

$

1.40 

Discontinued operations

 

 

(0.03)

 

 

0.02 

 

 

(0.10)

 

 

(0.13)

Basic earnings per share

 

$

0.52 

 

$

0.44 

 

$

1.23 

 

$

1.27 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.55 

 

$

0.42 

 

$

1.31 

 

$

1.38 

Discontinued operations

 

 

(0.04)

 

 

0.01 

 

 

(0.10)

 

 

(0.12)

Diluted earnings per share

 

$

0.51 

 

$

0.43 

 

$

1.21 

 

$

1.26 

Cash dividends per share

 

$

0.08 

 

$

 -

 

$

0.24 

 

$

 -

Weighted average common shares used in computing

 

 

 

 

 

 

 

 

 

 

 

 

earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

154,530 

 

 

159,326 

 

 

156,424 

 

 

159,204 

Incremental common shares from stock based compensation

 

 

1,806 

 

 

1,557 

 

 

1,644 

 

 

1,600 

Diluted

 

 

156,336 

 

 

160,883 

 

 

158,068 

 

 

160,804 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2014 and 2013

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

 

2014

 

2013

 

2014

 

2013

Net income

 

$

79,857 

 

$

69,835 

 

$

191,691 

 

$

202,121 

Unrealized net gain (loss) on available-for-sale securities, net of tax

 

 

 -

 

 

1,007 

 

 

 -

 

 

(448)

Reclassification adjustment, net of tax

 

 

 -

 

 

 -

 

 

1,153 

 

 

 -

Change in cumulative translation adjustment, net of tax

 

 

(14,439)

 

 

10,942 

 

 

(8,720)

 

 

(2,203)

Comprehensive income

 

$

65,418 

 

$

81,784 

 

$

184,124 

 

$

199,470 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 


 

 

Table Of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2014 and 2013

(in thousands)

(unaudited)

 

 

2014

 

2013

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

191,691 

 

$

202,121 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion

 

 

494,801 

 

 

462,627 

Loss on early extinguishment of debt

 

 

 -

 

 

884 

Deferred income taxes

 

 

(15,767)

 

 

113,207 

Stock based compensation expense

 

 

32,899 

 

 

26,788 

Amortization of debt issuance costs

 

 

6,126 

 

 

6,819 

Other reconciling items, net

 

 

(20,884)

 

 

(6,562)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

(60,611)

 

 

140 

Inventory and other current assets

 

 

29,495 

 

 

(54,924)

Accounts payable

 

 

30,198 

 

 

7,085 

Accrued expenses

 

 

36,802 

 

 

24,721 

Income taxes

 

 

43,214 

 

 

(183,420)

Other, net

 

 

(3,653)

 

 

36,627 

Net cash provided by operating activities

 

 

764,311 

 

 

636,113 

Cash flows from investing activities:

 

 

 

 

 

 

Payments for capital expenditures

 

 

(438,349)

 

 

(466,831)

Sale of available-for-sale securities

 

 

10,622 

 

 

 -

Acquisitions of businesses, net of cash acquired

 

 

(2,380)

 

 

(23,797)

Cash proceeds from insurance settlement

 

 

 -

 

 

22,650 

Other

 

 

20,575 

 

 

2,709 

Net cash used in investing activities

 

 

(409,532)

 

 

(465,269)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from revolving line of credit

 

 

14,736 

 

 

561,771 

Payments on revolving line of credit

 

 

(14,736)

 

 

(561,771)

Principal payments on long-term debt

 

 

(15,000)

 

 

(165,000)

Purchase and retirement of common stock

 

 

(185,552)

 

 

 -

Cash dividends

 

 

(37,586)

 

 

 -

Proceeds from exercise of stock options

 

 

10,554 

 

 

5,551 

Other

 

 

(89)

 

 

(9,924)

         Net cash used in financing activities

 

 

(227,673)

 

 

(169,373)

         Effect of exchange rate changes on cash

 

 

(3,111)

 

 

(2,019)

         Net increase (decrease) in cash and cash equivalents

 

 

123,995 

 

 

(548)

Cash and cash equivalents at beginning of period

 

 

196,047 

 

 

91,199 

Cash and cash equivalents at end of period

 

$

320,042 

 

$

90,651 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table Of Contents

 

 

SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2014

(1)Basis of Presentation

 

Certain information and footnote disclosures normally in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission; however, management believes the disclosures that are made are adequate to make the information presented not misleading.  These financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Superior Energy Services, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013, and Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.

 

The financial information of Superior Energy Services, Inc. and subsidiaries (the Company) for the three and nine months ended September 30, 2014 and 2013 has not been audited.  However, in the opinion of management, all adjustments necessary to present fairly the results of operations for the periods presented have been included therein.  The results of operations for the first nine months of the year are not necessarily indicative of the results of operations that might be expected for the entire year.  Certain previously reported amounts have been reclassified to conform to the 2014 presentation.

 

Due to the nature of the Company’s business, the Company is involved, from time to time, in routine litigation or subject to disputes or claims regarding its business activities. Legal costs related to these matters are expensed as incurred.  In management’s opinion, none of the pending litigation, disputes or claims is expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

 

The Company evaluates events that occur after the balance sheet date but before the financial statements are issued for potential recognition or disclosure.  Based on the evaluation, the Company determined that there were no material subsequent events for recognition or disclosure other than those disclosed herein.

 

(2)Discontinued Operations

 

During the first quarter of 2014, the Company conducted a strategic review and analysis of its subsea construction business.  As of September  30, 2014, the Company was committed to sell the assets of and exit its subsea construction business.  The disposition of assets is expected to be completed by the end of the first half of 2015.

 

During the first quarter of 2014, the Company also made a decision to discontinue its conventional decommissioning business.  As of September  30, 2014, the Company was committed to sell the assets of and exit its conventional decommissioning business.  The disposition of the assets is expected to be completed by the end of the first half of 2015.

 

Both of the subsea construction business and conventional decommissioning business were included in the Technical Solutions segment, formerly referred to as the Subsea and Technical Solutions segment.  As of September 30, 2014, the assets and liabilities of these businesses were classified as held for sale.  For the three and nine months ended September 30, 2014 and 2013, the results of operations of these businesses are reported as discontinued operations in the consolidated statements of operations.  

 

The following summarizes certain financial information of the businesses reported as discontinued operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

2014

 

2013

Revenues

 

$

34,210 

 

$

92,203 

 

 

 

 

 

 

 

Income/(loss) from discontinued operations, net of tax benefit of $4,063 and
tax expense of $485, respectively

 

 

(5,886)

 

 

2,366 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2014

 

2013

Revenues

 

$

111,735 

 

$

209,394 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax benefit of $10,131 and
$3,786, respectively

 

 

(15,735)

 

 

(20,045)

 

 

 

 

 

 

 

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Table Of Contents

 

The following summarizes the assets and liabilities related to the businesses reported as discontinued operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

Accounts receivable, net

 

$

25,415 

 

$

26,858 

Prepaid expenses

 

 

5,810 

 

 

8,164 

Inventory and other current assets

 

 

30,891 

 

 

63,618 

Current assets

 

$

62,116 

 

$

98,640 

Property, plant and equipment, net

 

 

219,223 

 

 

217,089 

Intangible and other long-term assets, net

 

 

4,420 

 

 

4,854 

Long-term assets

 

$

223,643 

 

$

221,943 

Accounts payable

 

 

21,478 

 

 

13,449 

Accrued expenses

 

 

37,362 

 

 

52,133 

Current liabilities

 

$

58,840 

 

$

65,582 

Other long-term liabilities

 

$

18,009 

 

$

21,801 

 

Assets and liabilities held for sale include a capital lease for a dynamically positioned subsea vessel.  Such amounts are recorded at the present value of the lease payments.  The vessel’s gross asset value under the capital lease was approximately $37.6 million at inception and accumulated depreciation through September 30, 2014 and December 31, 2013 was approximately $17.4 million and $16.4 million, respectively.  As of September 30, 2014,  $18.0 million of other long-term liabilities and $4.5 million of accounts payable related to this capital lease are included in the liabilities held for sale.  As of December 31, 2013,  $21.4 million of other long-term liabilities and $4.2 million of accounts payable related to this capital lease are included in the liabilities held for sale

 

(3)Acquisitions

 

In March 2013, the Company acquired all of the equity interests in a company that provides cementing services in Colombia.  The Company paid approximately $20.4 million at closing and repaid $3.0 million of the acquired company’s debt.  During the nine months ended September 30, 2014, the Company paid $2.4 million as a result of a post-closing process to reconcile the net working capital of the acquired company and settlement of certain liabilities.  The Company will pay up to an additional $1.3 million during the first half of 2015, subject to the settlement of certain liabilities.  Goodwill of approximately $15.1 million was recognized as a result of this acquisition and was calculated as the excess of the consideration paid over the net assets recognized and represents estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. None of the goodwill related to this acquisition will be deductible for tax purposes. All of the goodwill was assigned to the Production Services segment.

 

In October 2014, the Company acquired all of the equity interests in a company that provides well testing and slickline services in India.  The purchase price of the acquisition was approximately $25.0 million. 

 

(4)Accelerated Share Repurchase Program

 

In March 2014, the Company entered into an accelerated share repurchase program with a third-party financial institution to purchase $75.0 million aggregate amount of shares of the Company’s outstanding common stock.  The Company paid $75.0 million and received and retired an initial delivery of 1,899,055 shares that represented approximately 75% of the total number of shares repurchased under the agreement.  In April 2014, the accelerated share repurchase program was completed and the Company received and retired 633,485 additional shares.

 

(5)Earnings per Share

 

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional common shares that could have been outstanding assuming the exercise of stock options and the conversion of restricted stock units.

 

Stock options for approximately 284,000 and 1,100,000 shares of the Company’s common stock for the three months ended September 30, 2014 and 2013, respectively, and approximately 1,054,000 and 1,210,000 shares of the Company’s common stock for the nine months ended September 30, 2014 and 2013, respectively, were excluded in the computation of diluted earnings per share for these periods as the effect would have been anti-dilutive.

 

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(6)Stock-Based Compensation Plans

 

The Company maintains various stock incentive plans that provide long-term incentives to the Company’s key employees, including officers, directors, consultants and advisors (Eligible Participants).  Under the stock incentive plans, the Company may grant incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-based awards or any combination thereof to Eligible Participants.  The Company’s total compensation expense related to these plans was approximately $33.5 million and $27.7 million for the nine months ended September 30, 2014 and 2013, respectively, which is reflected in general and administrative expenses.

 

(7)Inventory and Other Current Assets

 

Inventory and other current assets includes approximately $164.0 million and $162.9 million of inventory as of September 30, 2014 and December 31, 2013, respectively.  Inventories are stated at the lower of cost or market.  Cost is determined using the first-in, first-out or weighted-average cost methods for finished goods and work-in-process.  Supplies and consumables consist principally of products used in our services provided to customers. The components of the inventory balances are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

Finished goods

 

$

66,340 

 

$

65,621 

Raw materials

 

 

33,281 

 

 

20,764 

Work-in-process

 

 

18,445 

 

 

20,064 

Supplies and consumables

 

 

45,936 

 

 

56,470 

Total

 

$

164,002 

 

$

162,919 

 

 

 

 

 

 

 

 

As of December 31, 2013, inventory and other current assets also included approximately $8.8 million of available-for-sale securities recorded at fair value. These available-for-sale securities consisted of approximately 1.4 million shares of SandRidge Energy, Inc. (SandRidge) common stock held by the Company.  During the second quarter of 2014, the Company sold all of the remaining shares of SandRidge common stock for approximately $10.6 million. In connection with the sale, the Company reversed approximately $1.2 million of previously recorded unrealized losses, of which approximately $1.8 million was reclassified out of accumulated other comprehensive loss, net of tax benefit of approximately $0.6 million. During the nine months ended September 30, 2013, the Company recorded an unrealized loss related to the fair value of these securities of approximately $0.7 million, of which approximately $0.5 million was reported within accumulated other comprehensive loss, net of tax expense of approximately $0.2 million.

 

(8)Goodwill

 

Goodwill is tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value.  During the third quarter of 2014, the Company changed its annual goodwill impairment testing date from December 31 to October 1 of each year. Management considers this accounting change preferable because it allows the Company additional time to complete the annual goodwill impairment test.  This change does not accelerate, delay, avoid, or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. The Company will complete its annual goodwill impairment test during the fourth quarter of 2014.

 

 

(9)Debt

 

Credit Facility

 

The Company has a $1.0 billion bank credit facility, comprised of a $600 million revolving credit facility and a $400 million term loan.  The principal balance of the term loan is payable in installments of $5.0 million on the last day of each fiscal quarter, which began on June 30, 2012.  As of September 30, 2014, the Company had $350 million outstanding under the term loan and had no amounts outstanding under the revolving portion of its credit facility.  The Company also had approximately $48.2 million of letters of credit outstanding that reduce the Company’s borrowing availability under the revolving portion of the credit facility.     

 

All amounts outstanding under the bank credit facility are due on February 7, 2017.  Amounts borrowed under the credit facility bear interest at LIBOR plus margins that depend on the Company’s leverage ratio.  Indebtedness under the credit facility is secured by substantially all of the Company’s assets, including the pledge of the stock of the Company’s principal domestic subsidiaries. 

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Senior Unsecured Notes

 

The Company has outstanding $500 million of 6 3/8% unsecured senior notes due 2019.  The indenture governing the 6 3/8% senior notes requires semi-annual interest payments on May 1st and November 1st of each year through the maturity date of May 1, 2019. 

 

The Company also has outstanding $800 million of 7 1/8% unsecured senior notes due 2021.  The indenture governing the 7 1/8% senior notes requires semi-annual interest payments on June 15th and December 15th of each year through the maturity date of December 15, 2021. 

 

(10)Decommissioning Liabilities

 

The Company records estimated future decommissioning liabilities in accordance with the authoritative guidance related to asset retirement obligations, which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, with a corresponding increase in the carrying amount of the related long-lived asset.  Subsequent to initial measurement, the decommissioning liability is required to be accreted each period to present value. 

 

The Company has decommissioning liabilities associated with its Bullwinkle platform and related assets that consist of costs related to the plugging of wells, the removal of the related facilities and equipment, and site restoration.  Whenever practical, the Company utilizes its own equipment and labor services to perform well abandonment and decommissioning work.  When the Company performs these services, all recorded intercompany revenues and related costs of services are eliminated in the condensed consolidated financial statements.  The recorded decommissioning liability associated with a specific property is fully extinguished when the property is abandoned.  The recorded liability is first reduced by all cash expenses incurred to abandon and decommission the property.  If the recorded liability exceeds (or is less than) the Company’s total costs, then the difference is reported as an increase or decrease in revenue during the period in which the work is performed. 

 

The Company reviews the adequacy of its decommissioning liabilities whenever indicators suggest that the estimated cash flows needed to satisfy the liabilities have changed materially.  During the fourth quarter of 2013, as a result of an increase in third party drilling activity in the vicinity of the Bullwinkle platform, the Company believed new economic opportunities existed for additional production handling agreements with those third party production companies utilizing the Bullwinkle platform.  As a result, the Company revised its estimates relating to the timing of decommissioning work on its Bullwinkle assets, including a 10 year postponement of the platform decommissioning to an estimated date of 2038.  This change in estimate resulted in a reduction in the present value of decommissioning liabilities.  Further, as of December 31, 2013, the Company anticipated that it would be able to decommission several depleted wells that are part of the Bullwinkle assets based on the estimates received from engineers regarding platform availability during 2014.  As a result, as of December 31, 2013, the decommissioning liabilities associated with those wells were classified as current liabilities on the consolidated balance sheet.  Based on revised estimates received during the second quarter of 2014, the Company does not anticipate decommissioning any of the wells during the next twelve months.  As a result, all of the decommissioning liabilities were classified as long-term liabilities on the consolidated balance sheet as of September 30, 2014.  

 

The following table summarizes the activity for the Company’s decommissioning liabilities for the nine months ended September 30, 2014 and 2013 (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2014

 

2013

Decommissioning liabilities, December 31, 2013 and 2012, respectively

 

$

83,519 

 

$

93,053 

Liabilities acquired and incurred

 

 

866 

 

 

360 

Liabilities settled

 

 

 -

 

 

(87)

Accretion

 

 

3,324 

 

 

4,269 

Revision in estimated liabilities

 

 

(266)

 

 

 -

Total decommissioning liabilities, September 30, 2014 and 2013, respectively

 

$

87,443 

 

$

97,595 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11) Notes Receivable

 

Notes receivable consist of a commitment from the seller of an oil and gas property acquired by the Company towards costs associated with the abandonment of the acquired property.  Pursuant to an agreement with the seller, the Company will invoice the seller an agreed upon amount at the completion of certain decommissioning activities.  The gross amount of this obligation totals  $115.0 million and is recorded at present value using an effective interest rate of 6.58%.  The related discount is amortized to interest income based on the expected timing of completion of the decommissioning activities.  The Company recorded interest income related to notes receivable of $1.2 million and $2.2 million for the nine months ended September 30, 2014 and 2013, respectively.

 

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(12) Segment Information

 

Business Segments

 

The Drilling Products and Services segment rents and sells bottom hole assemblies, premium drill pipe, tubulars and specialized equipment for use with onshore and offshore oil and gas well drilling, completion, production and workover activities.  It also provides on-site accommodations and bolting and machining services.  The Onshore Completion and Workover Services segment provides pressure pumping services used to complete and stimulate production in new oil and gas wells, fluid handling services and well servicing rigs that provide a variety of well completion, workover and maintenance services.  The Production Services segment provides intervention services such as coiled tubing, cased hole and mechanical wireline, hydraulic workover and snubbing, production testing and optimization, and remedial pumping services. It also provides specialized pressure control tools used to manage and control pressure throughout the life of a well.    The Technical Solutions segment provides services typically requiring specialized engineering, manufacturing or project planning, including well control services, well containment systems, stimulation and sand control services and well plug and abandonment services. It also includes production handling arrangements and the production and sale of oil and gas. 

 

For the three and nine months ended September 30, 2014 and 2013, operating results for the Company’s subsea construction and conventional decommissioning businesses are reported in discontinued operations (see note 2).  Previously those operating results were reported within the Technical Solutions segment, which was named the Subsea and Technical Solutions segment.

 

The Company evaluates the performance of its reportable segments based on income or loss from operations.  The segment measure is calculated as follows: segment revenues less segment operating expenses, depreciation expense and allocated general and administrative expenses.  General and administrative expenses are allocated to the segments based primarily on specific identification and, to the extent that such identification is not practical, other methods which the Company believes to be a reasonable reflection of the utilization of services provided.  The Company believes this segment measure is useful in evaluating the performance of its reportable segments because it highlights operating trends and aids analytical comparisons.

 

Summarized financial information for the Company’s segments for the three and nine months ended September 30, 2014 and 2013 is shown in the following tables (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Onshore

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Drilling

 

Completion

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and

 

and Workover

 

Production

 

Technical

 

 

 

 

Consolidated

 

 

Services

 

Services

 

Services

 

Solutions

 

Unallocated

 

Total

Revenues

 

$

239,204 

 

$

470,849 

 

$

348,793 

 

$

150,180 

 

$

 -

 

$

1,209,026 

Cost of services and rentals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(exclusive of items shown separately below)

 

 

76,277 

 

 

317,433 

 

 

248,567 

 

 

79,415 

 

 

 -

 

 

721,692 

Depreciation, depletion, amortization
    and accretion

 

 

47,904 

 

 

59,009 

 

 

41,225 

 

 

22,016 

 

 

 -

 

 

170,154 

General and administrative expenses

 

 

36,913 

 

 

39,625 

 

 

45,627 

 

 

32,694 

 

 

 -

 

 

154,859 

Income from operations

 

 

78,110 

 

 

54,782 

 

 

13,374 

 

 

16,055 

 

 

 -

 

 

162,321 

Interest expense, net

 

 

 -

 

 

 -

 

 

 -

 

 

404 

 

 

(24,573)

 

 

(24,169)

Other expense

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,051)

 

 

(2,051)

Income (loss) from continuing operations
    before income taxes

 

$

78,110 

 

$

54,782 

 

$

13,374 

 

$

16,459 

 

$

(26,624)

 

$

136,101 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Three Months Ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Onshore

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Drilling

 

Completion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and

 

and Workover

 

Production

 

Technical

 

 

 

 

Consolidated

 

 

Services

 

Services

 

Services

 

Solutions

 

Unallocated

 

Total

Revenues

 

$

215,523 

 

$

398,016 

 

$

359,722 

 

$

123,151 

 

$

 -

 

$

1,096,412 

Cost of services and rentals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(exclusive of items shown separately below)

 

 

73,873 

 

 

275,676 

 

 

251,575 

 

 

70,508 

 

 

 -

 

 

671,632 

Depreciation, depletion, amortization
    and accretion

 

 

42,390 

 

 

52,576 

 

 

45,554 

 

 

11,508 

 

 

 -

 

 

152,028 

General and administrative expenses

 

 

35,864 

 

 

37,216 

 

 

46,735 

 

 

27,549 

 

 

 -

 

 

147,364 

Income from operations

 

 

63,396 

 

 

32,548 

 

 

15,858 

 

 

13,586 

 

 

 -

 

 

125,388 

Interest expense, net

 

 

 -

 

 

 -

 

 

 -

 

 

743 

 

 

(26,307)

 

 

(25,564)

Other expense

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,697)

 

 

(1,697)

Income (loss) from continuing operations
    before income taxes

 

$

63,396 

 

$

32,548 

 

$

15,858 

 

$

14,329 

 

$

(28,004)

 

$

98,127 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Onshore

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Drilling

 

Completion

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and

 

and Workover

 

Production

 

Technical

 

 

 

 

Consolidated

 

 

Services

 

Services

 

Services

 

Solutions

 

Unallocated

 

Total

Revenues

 

$

685,396 

 

$

1,258,774 

 

$

1,013,904 

 

$

419,922 

 

$

 -

 

$

3,377,996 

Cost of services and rentals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(exclusive of items shown separately below)

 

 

216,166 

 

 

876,575 

 

 

706,911 

 

 

223,938 

 

 

 -

 

 

2,023,590 

Depreciation, depletion, amortization
    and accretion

 

 

140,265 

 

 

174,995 

 

 

123,213 

 

 

54,964 

 

 

 -

 

 

493,437 

General and administrative expenses

 

 

117,026 

 

 

114,604 

 

 

138,058 

 

 

87,943 

 

 

 -

 

 

457,631 

Income from operations

 

 

211,939 

 

 

92,600 

 

 

45,722 

 

 

53,077 

 

 

 -

 

 

403,338 

Interest expense, net

 

 

 -

 

 

 -

 

 

 -

 

 

1,167 

 

 

(73,777)

 

 

(72,610)

Other expense

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,480)

 

 

(1,480)

Income (loss) from continuing operations
    before income taxes

 

$

211,939 

 

$

92,600 

 

$

45,722 

 

$

54,244 

 

$

(75,257)

 

$

329,248 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Onshore

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Drilling

 

Completion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and

 

and Workover

 

Production

 

Technical

 

 

 

 

Consolidated

 

 

Services

 

Services

 

Services

 

Solutions

 

Unallocated

 

Total

Revenues

 

$

614,924 

 

$

1,222,215 

 

$

1,096,185 

 

$

341,089 

 

$

 -

 

$

3,274,413 

Cost of services and rentals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(exclusive of items shown separately below)

 

 

205,502 

 

 

819,472 

 

 

756,954 

 

 

188,002 

 

 

 -

 

 

1,969,930 

Depreciation, depletion, amortization
    and accretion

 

 

125,768 

 

 

158,021 

 

 

133,361 

 

 

29,282 

 

 

 -

 

 

446,432 

General and administrative expenses

 

 

104,002 

 

 

116,786 

 

 

143,349 

 

 

76,675 

 

 

 -

 

 

440,812 

Income from operations

 

 

179,652 

 

 

127,936 

 

 

62,521 

 

 

47,130 

 

 

 -

 

 

417,239 

Interest expense, net

 

 

 -

 

 

 -

 

 

 -

 

 

2,195 

 

 

(83,805)

 

 

(81,610)

Other income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

41 

 

 

41 

Loss on early extinguishment of debt

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(884)

 

 

(884)

Income (loss) from continuing operations
    before income taxes

 

$

179,652 

 

$

127,936 

 

$

62,521 

 

$

49,325 

 

$

(84,648)

 

$

334,786 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Identifiable Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Onshore

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Drilling

 

Completion

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and

 

and Workover

 

Production

 

Technical

 

 

 

 

Consolidated

 

 

Services

 

Services

 

Services

 

Solutions

 

Unallocated

 

Total

September 30, 2014

 

$

1,282,129 

 

$

3,012,785 

 

$

2,123,888 

 

$

1,045,138 

 

$

 -

 

$

7,463,940 

December 31, 2013

 

$

1,245,501 

 

$

2,973,916 

 

$

2,176,785 

 

$

1,015,105 

 

$

 -

 

$

7,411,307 

 

As of September 30, 2014, the Technical Solutions segment included $285.8 million of identifiable assets of the subsea construction and conventional decommissioning businesses that were classified as assets held for sale on the consolidated balance sheet.

 

Geographic Segments

 

The Company attributes revenue to various countries based on the location of where services are performed or the destination of the drilling products or equipment sold or leased.  Long-lived assets consist primarily of property, plant and equipment and are attributed to various countries based on the physical location of the asset at the end of a period.  As of September 30, 2014, the assets of the subsea construction and conventional decommissioning businesses were classified as assets held for sale on the consolidated balance sheet.  The Company’s revenue by geographic area for the three and nine months ended September 30, 2014 and 2013 and long-lived assets by geographic area as of September 30, 2014 and December 31, 2013 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

United States

 

$

1,024,919 

 

$

932,686 

 

$

2,850,179 

 

$

2,783,756 

Other Countries

 

 

184,107 

 

 

163,726 

 

 

527,817 

 

 

490,657 

Total

 

$

1,209,026 

 

$

1,096,412 

 

$

3,377,996 

 

$

3,274,413 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Lived Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

United States

 

 

 

 

 

 

 

$

2,343,365 

 

$

2,476,792 

Other Countries

 

 

 

 

 

 

 

 

359,167 

 

 

525,402 

Total, net

 

 

 

 

 

 

 

$

2,702,532 

 

$

3,002,194 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13Fair Value Measurements

 

The Company follows the authoritative guidance for fair value measurements relating to financial and nonfinancial assets and liabilities, including presentation of required disclosures herein.  This guidance establishes a fair value framework requiring the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:

 

Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.

 

Level 2: Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical assets or liabilities in inactive markets; or model-derived valuations or other inputs that can be corroborated by observable market data.

 

Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

 

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Table Of Contents

 

The following tables provide a summary of the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

September 30, 2014

 

Level 1

 

Level 2

 

Level 3

Intangible and other long-term assets, net

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified deferred compensation assets

 

$

11,830 

 

$

342 

 

$

11,488 

 

 

 -

Interest rate swaps

 

$

2,642 

 

 

 -

 

$

2,642 

 

 

 -

Accounts payable

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified deferred compensation liabilities

 

$

2,667 

 

 

 -

 

$

2,667 

 

 

 -

Other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified deferred compensation liabilities

 

$

14,052 

 

 

 -

 

$

14,052 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

Level 1

 

Level 2

 

Level 3

Inventory and other current assets

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

$

8,817 

 

$

8,817 

 

 

 -

 

 

 -

Intangible and other long-term assets, net

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified deferred compensation assets

 

$

13,731 

 

$

2,330 

 

$

11,401 

 

 

 -

Interest rate swap

 

$

337 

 

 

 -

 

$

337 

 

 

 -

Accounts payable

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified deferred compensation liabilities

 

$

1,944 

 

 

 -

 

$

1,944 

 

 

 -

Other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified deferred compensation liabilities

 

$

14,986 

 

 

 -

 

$

14,986 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013,  available-for-sale securities was comprised of approximately 1.4 million shares of SandRidge common stock.  The securities were reported at fair value based on the closing price of the shares as reported on the New York Stock Exchange (see note 7).

 

The Company’s non-qualified deferred compensation plans allow officers, certain highly compensated employees and non-employee directors to defer receipt of a portion of their compensation and contribute such amounts to one or more hypothetical investment funds.  The Company entered into separate trust agreements, subject to general creditors, to segregate assets of each plan and reports the accounts of the trusts in its condensed consolidated financial statements.  These investments are reported at fair value based on unadjusted quoted prices in active markets for identifiable assets and observable inputs for similar assets and liabilities, which represent Levels 1 and 2, respectively, in the fair value hierarchy. 

 

The Company has three interest rate swap agreements related to its fixed rate debt maturing in 2021 for notional amounts of $100 million each, whereby the Company is entitled to receive semi-annual interest payments at a fixed rate of 7 1/8% per annum and is obligated to make semi-annual interest payments at floating rates, which are adjusted every 90 days, based on LIBOR plus a fixed margin. The swap agreements, scheduled to terminate on December 15, 2021, are designated as fair value hedges of a portion of the Company’s 7 1/8% senior notes, as the derivatives have been tested to be highly effective in offsetting changes in the fair value of the underlying note.  As these derivatives are classified as fair value hedges, the changes in the fair value of the derivatives are offset against the changes in the fair value of the underlying note in interest expense, net (see note 14). 

 

The fair value of the Company’s cash equivalents, accounts receivable and current maturities of long-term debt approximates their carrying amounts.  The fair value of the Company’s long-term debt was approximately $1,753.2 million and $1,789.0 million as of September 30, 2014 and December 31, 2013, respectively.  The fair value of these debt instruments is determined by reference to the market value of the instruments as quoted in over-the-counter markets, which are Level 1 inputs.

 

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(14Derivative Financial Instruments

 

From time to time, the Company may employ interest rate swaps in an attempt to achieve a more balanced debt portfolio between fixed and variable interest.  The Company does not use derivative financial instruments for trading or speculative purposes.

 

The Company has three interest rate swaps for notional amounts of $100 million each related to its 7 1/8% senior notes maturing in December 2021.  These interest rate swaps are accounted for as fair value hedges since the swaps hedge against the change in fair value of fixed rate debt resulting from changes in interest rates.  The Company recorded a derivative asset relating to these swaps of $2.6 million and $0.3 million within intangible and other long term assets in the consolidated balance sheets as of September 30, 2014 and December 31, 2013, respectively

 

The changes in fair value of the interest rate swaps are included in the adjustments to reconcile net income to net cash provided by operating activities in the consolidated statement of cash flows. The effect and location of the derivative instruments in the condensed consolidated statement of operations, presented on a pre-tax basis, are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

Effect of derivative instrument

 

Location of (gain) loss 
recognized

 

 

2014

 

 

2013

Interest rate swap

 

Interest expense, net

 

 

$

1,907 

 

 

$

(513)

Hedged item - debt

 

Interest expense, net

 

 

 

(2,639)

 

 

 

615 

 

 

 

 

 

$

(732)

 

 

$

102 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2014

 

 

2013

Interest rate swap

 

Interest expense, net

 

 

$

(6,727)

 

 

$

7,383 

Hedged item - debt

 

Interest expense, net

 

 

 

4,422 

 

 

 

(6,886)

 

 

 

 

 

$

(2,305)

 

 

$

497 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2014 and 2013,  approximately $2.3 million of interest income and $0.5 million of interest expense, respectively, was related to the ineffectiveness associated with these fair value hedges.  Hedge ineffectiveness represents the difference between the changes in fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rate. 

 

(15Income Taxes

 

The Company follows authoritative guidance with respect to accounting for uncertainty in income taxes. It is the Company’s policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense.  The Company had approximately $29.9 million of unrecorded tax benefits as of September 30, 2014 and December 31, 2013, all of which would impact the Company’s effective tax rate if recognized. 

 

(16Related Party Disclosures

 

The Company purchases services, products and equipment, as well as leases certain facilities, from companies affiliated with an officer of one of its subsidiaries.  The Company believes the transactions reflected below with these related parties are on terms and conditions no less favorable to the Company than transactions with unaffiliated parties.  For the nine months ended September 30, 2014 and 2013, these purchases totaled approximately $146.8 million and $140.7 million, respectively.  For the nine months ended September 30, 2014, approximately $56.7 million was purchased from ORTEQ Energy Services, a heavy equipment construction company which also manufactures pressure pumping equipment, approximately $0.6 million was purchased from Ortowski Construction, primarily related to the manufacture of pressure pumping units, approximately $15.2 million was paid to Resource Transport, LLC, related to the transportation of sand used in pressure pumping activities, approximately $51.6 million was purchased from Texas Specialty Sands, LLC, primarily for the purchase of sand used for pressure pumping activities, approximately $21.1 million was purchased from ProFuel, LLC, primarily related to the purchase of diesel used to operate equipment and trucks, and approximately $1.6 million was related to leasehold improvements and facilities leased from Timber Creek Real Estate Partners.  For the nine months ended September 30, 2013, approximately $41.1 million was purchased from ORTEQ Energy Services, approximately $0.1 million was purchased from Ortowski Construction, approximately $11.9 million was paid to Resource Transport, LLC, approximately $64.6 million was purchased from Texas Specialty Sands, LLC, approximately $22.6 million was purchased from ProFuel, LLC and approximately $0.4 million was related to facilities leased from Timber Creek Real Estate Partners. 

 

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As of September 30, 2014, the Company’s trade accounts payable includes amounts due to these companies totaling approximately $29.0 million, of which approximately $4.6 million was due ORTEQ Energy Services, approximately $4.0 million was due Resource Transport, LLC, approximately $16.2 million was due Texas Specialty Sands, LLC and approximately $4.2 million was due ProFuel, LLC.  As of December 31, 2013, the Company’s trade accounts payable includes amounts due to these companies totaling approximately $14.6 million, of which approximately $7.8 million was due ORTEQ Energy Services, approximately $0.9 million was due Resource Transport, LLC, approximately $2.0 million was due Texas Specialty Sands, LLC, approximately $2.6 million was due ProFuel, LLC and approximately $1.3 million was due Timber Creek Real Estate Partners.

 

 

The Company’s President and Chief Executive Officer serves as an independent director of the board of Linn Energy, LLC (Linn), an independent oil and gas development company with focus areas in the Rockies, Mid-Continent, the Hugoton Basin, California, the Permian Basin, Michigan, Illinois and east Texas.  The Company recorded revenues from Linn and its subsidiaries of approximately $15.3 million and $15.9 million for the nine months ended September 30, 2014 and 2013, respectively.  The Company had trade receivables from Linn and its subsidiaries of approximately $1.3 million and $2.9 million as of September 30, 2014 and December 31, 2013, respectively.

 

(17Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in GAAP.  The guidance in this update requires an entity to recognize the amount of revenue that it expects to be entitled for the transfer of promised goods or services to customers. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the accounting guidance on its ongoing financial reporting.

 

In April 2014, the Financial Accounting Standards Board issued ASU No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment, which changes the definition of discontinued operations.  The guidance permits only those disposed components (or components held-for-sale) representing a strategic shift that have (or will have) a major effect on operations and financial results to be reported in discontinued operations.  The new standard is effective prospectively for disposals (or classifications as held-for-sale) that occur after December 31, 2014.  The Company elected not to early adopt the accounting guidance.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties.  Generally, the words “expects,” “anticipates,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions identify forward-looking statements, although not all forward-looking statements contain these identifying words.  All statements other than statements of historical fact included in this section regarding our financial position and liquidity, strategic alternatives, future capital needs, business strategies and other plans and objectives of our management for future operations and activities are forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current market and industry conditions, expected future developments and other factors it believes are appropriate under the circumstances. Such forward-looking statements are subject to uncertainties that could cause our actual results to differ materially from such statements. Such uncertainties include, but are not limited to: risks inherent in acquiring businesses, the effect of regulatory programs and environmental matters on our performance, including the risk that future changes in the regulation of hydraulic fracturing could reduce or eliminate demand for our pressure pumping services; risks associated with business growth outpacing the capabilities of our infrastructure and workforce; risks associated with the uncertainty of macroeconomic and business conditions worldwide; the cyclical nature and volatility of the oil and gas industry, including the level of exploration, production and development activity and the volatility of oil and gas prices; changes in competitive factors affecting our operations; political, economic and other risks and uncertainties associated with international operations; the impact that unfavorable or unusual weather conditions could have on our operations; the potential shortage of skilled workers; our dependence on certain customers; the risks inherent in long-term fixed-price contracts; and, operating hazards, including the significant possibility of accidents resulting in personal injury or death, property damage or environmental damage. These risks and other uncertainties related to our business are described in detail in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Investors are cautioned that many of the assumptions on which our forward-looking statements are based are likely to change after our forward-looking statements are made, including for example the market prices of oil and natural gas and regulations affecting oil and gas operations, which we cannot control or anticipate. Further, we may make changes to our business plans that could or will affect our results. We undertake no obligation to update any of our forward-looking statements and we do not intend to update our forward-looking statements more frequently than quarterly, notwithstanding any changes in our assumptions, changes in our business plans, our actual experience, or other changes. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

 

Executive Summary

 

For the three months ended September 30, 2014, revenue was $1,209.0 million and income from continuing operations was $85.7 million, or $0.55 diluted earnings per share.  Net income was $79.9 million, or $0.51 diluted earnings per share.

 

Third quarter 2014 revenue in our Drilling Products and Services segment increased 6% sequentially to $239.2 million, as compared to $226.0 million in the second quarter of 2014.  The primary factor driving the higher sequential revenue in this segment was a 24% increase in international revenue to $63.7 million due to increased rentals of premium drill pipe and accommodations.  U.S. land revenue increased 5% sequentially to $85.9 million due to increased rentals of bottom hole assemblies and accommodations.  Gulf of Mexico revenue decreased 3% sequentially to $89.6 million due to decreased  specialty rentals.

 

Third quarter 2014 revenue in our Onshore Completion and Workover Services segment increased 18% sequentially to $470.8 million, as compared to $398.1 million in the second quarter of 2014.  All of this segment’s revenue is derived from the U.S. land market area.  On a sequential basis, the revenue increase was driven by higher demand for pressure pumping services. 

 

Third quarter 2014 revenue in our Production Services segment increased 1% sequentially to $348.8 million, as compared to $343.9 million in the second quarter of 2014. U.S. land revenue increased 5% sequentially to $225.0 million primarily due to increased activity for coiled tubing and wireline.  International revenue decreased 5% sequentially to $86.6 million primarily due to decreased activity for hydraulic workover and snubbing services and pressure control tools.    Gulf of Mexico revenue decreased 3% sequentially to $37.2 million primarily due to decreased coiled tubing activity.     

 

Third quarter 2014 revenue in our Technical Solutions segment increased to $150.2 million, which represents an 8% sequential increase from second quarter 2014 revenue of $139.6 million.  U.S. land revenue increased 20% sequentially to $32.4 million primarily due to an increase in demand for completion tools and products and an increase in well control services.  Gulf of Mexico revenue increased 4% sequentially to $84.0 million primarily due to an increase in well control services, which was partially offset by a decline in demand for completion tools and products.  International revenue increased 5% sequentially to $33.8  million as a result of an increase in well service activity.    Operating results for our subsea construction and conventional decommissioning businesses are reported in discontinued operations.  Previously those operating results were reported within the Technical Solutions segment, which was named the Subsea and Technical Solutions segment.

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Comparison of the Results of Operations for the Three Months Ended September 30, 2014 and 2013 

 

For the three months ended September 30, 2014, our revenues were $1,209.0 million, resulting in income from continuing operations of $85.7 million, or $0.55 diluted earnings per share.  Net income was $79.9 million, or $0.51 diluted earnings per share.  For the three months ended September 30, 2013, revenues were $1,096.4 million and income from continuing operations was $67.5 million, or $0.42 diluted earnings per share.  Net income was $69.8 million, or $0.43 diluted earnings per share.    

 

The following table compares our operating results for the three months ended September 30, 2014 and 2013 (in thousands, except percentages).  Cost of services and rentals excludes depreciation, depletion, amortization and accretion. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

Cost of Services and Rentals

 

 

2014

 

2013

 

Change

 

2014

 

%

 

2013

 

%

 

Change

Drilling Products and Services

 

$

239,204 

 

$

215,523 

 

$

23,681 

 

$

76,277 

 

32% 

 

$

73,873 

 

34% 

 

$

2,404 

Onshore Completion and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workover Services

 

 

470,849 

 

 

398,016 

 

 

72,833 

 

 

317,433 

 

67% 

 

 

275,676 

 

69% 

 

 

41,757 

Production Services

 

 

348,793 

 

 

359,722 

 

 

(10,929)

 

 

248,567 

 

71% 

 

 

251,575 

 

70% 

 

 

(3,008)

Technical Solutions

 

 

150,180 

 

 

123,151 

 

 

27,029 

 

 

79,415 

 

53% 

 

 

70,508 

 

57% 

 

 

8,907 

Total

 

$

1,209,026 

 

$

1,096,412 

 

$

112,614 

 

$

721,692 

 

60% 

 

$

671,632 

 

61% 

 

$

50,060 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following provides a discussion of our results on a segment basis:

 

Drilling Products and Services Segment

 

Revenue from our Drilling Products and Services segment increased 11% to $239.2 million for the three months ended September 30, 2014, as compared to $215.5 million for the same period in 2013.  Cost of services as a percentage of revenue decreased to 32% of segment revenue for the three months ended September 30, 2014, as compared to 34% in the same period in 2013, primarily due to an increase in revenues from a more favorable product mix.  Revenue from our Gulf of Mexico market area increased approximately 15% due to increased activity in most of our product lines within this segment, particularly premium drill pipe and accommodations.  Revenue generated from our U.S. land market area increased 18% primarily due to increases in accommodations rentals and bottom hole assemblies.  These increases were partially offset by a 2% decrease in revenue derived from our international market area primarily due to a decreased activity in rentals of bottom hole assemblies.

 

Onshore Completion and Workover Services Segment

 

Revenue from our Onshore Completion and Workover Services segment increased 18% to  $470.8 million for the three months ended September 30, 2014, as compared to $398.0 million for the same period in 2013.  All of this segment’s revenue is derived from the U.S. land market area.  The increase in revenue was driven by higher demand for pressure pumping services and fluid management.  Cost of services as a percentage of revenue decreased to 67% of segment revenue for the three months ended September 30, 2014 as compared to 69% in the same period in 2013, primarily due to the improved cost efficiencies in our pressure pumping activities.    

 

Production Services Segment

 

Revenue from our Production Services segment for the three months ended September 30, 2014 decreased by 3% to $348.8 million, as compared to $359.7 million for the same period in 2013.  Cost of services as a percentage of revenue increased to 71% from 70% in the third quarter of 2013.  Revenue derived from the Gulf of Mexico market area decreased 29% due to decreased activity for pressure control and hydraulic workover and snubbing services.  Revenue from the U.S. land market area remained flat for the three months ended September 30, 2014 as compared to the same period in 2013, as increases in revenue from coiled tubing and wireline services were offset by a decrease in revenue from remedial pumping activity.  Revenue from international market areas increased 6% primarily due to an increase in hydraulic workover and snubbing activity and increased activity for remedial pumping services in Latin America. 

 

Technical Solutions Segment

 

Revenue from our Technical Solutions segment increased 22% to $150.2 million for the three months ended September 30, 2014, as compared to $123.2 million for the same period in 2013.  Cost of services decreased to 53% of segment revenue from 57% in the third quarter of 2013, primarily due to an increase in revenues from a more favorable product mix.  Revenue in our international market areas increased as a result of an increase in completion tools and products.  Revenue in our U.S. land market area increased 45% primarily due to an increase in demand for completion tools and products.   Revenue in our Gulf of Mexico market area remained flat for the three months ended September 30, 2014, as compared to the same period in 2013.

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Depreciation, Depletion, Amortization and Accretion

 

Depreciation, depletion, amortization and accretion increased to $170.2 million for the three months ended September 30, 2014 from $152.0 million for the same period in 2013.  Depreciation and amortization expense for our Drilling Products and Services segment for the three months ended September 30, 2014 increased by $5.5 million, or 13%, due to 2013 and 2014 capital expenditures.  Depreciation and amortization expense for our Onshore Completion and Workover Services segment for the three months ended September 30, 2014 increased by $6.5 million, or 12%, due to 2013 and 2014 capital expenditures.  Depreciation and amortization expense for our Production Services segment for the three months ended September 30, 2014 decreased by $4.3 million, or 10%, as a result of certain assets being fully depreciated.  Depreciation, depletion, amortization and accretion expense for our Technical Solutions segment for the three months ended September 30, 2014 increased by approximately $10.5 million, or 91%, primarily due to 2013 and 2014 capital expenditures. 

 

General and Administrative Expenses

 

General and administrative expenses were $154.9 million for the three months September 30, 2014, as compared to $147.4 million for the same period in 2013.    The increase is primarily attributable to an increase in employee-related expenses and expanding infrastructure to support our growth in both U.S. and international markets.

 

Discontinued Operations

 

Discontinued operations include operating results for both our subsea construction business and our conventional decommissioning business.  Loss from discontinued operations, net of tax, was $5.9 million for the three months ended September 30, 2014, as compared to an income from discontinued operations, net of tax of $2.4 million for the same period in 2013.

 

Comparison of the Results of Operations for the Nine Months Ended September 30, 2014 and 2013 

 

For the nine months ended September 30, 2014, our revenues were $3,378.0 million, resulting in income from continuing operations of $207.4 million, or $1.31 diluted earnings per share.  Net income was $191.7 million, or $1.21 diluted earnings per share.  For the nine months ended September 30, 2013, revenues were $3,274.4 million and income from continuing operations was $222.2 million, or $1.38 diluted earnings per share.  Net income was $202.1 million, or $1.26 diluted earnings per share.    

 

The following table compares our operating results for the nine months ended September 30, 2014 and 2013 (in thousands, except percentages).  Cost of services and rentals excludes depreciation, depletion, amortization and accretion. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

Cost of Services and Rentals

 

 

2014

 

2013

 

Change

 

2014

 

%

 

2013

 

%

 

Change

Drilling Products and Services

 

$

685,396 

 

$

614,924 

 

$

70,472 

 

$

216,166 

 

32% 

 

$

205,502 

 

33% 

 

$

10,664 

Onshore Completion and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workover Services

 

 

1,258,774 

 

 

1,222,215 

 

 

36,559 

 

 

876,575 

 

70% 

 

 

819,472 

 

67% 

 

 

57,103 

Production Services

 

 

1,013,904 

 

 

1,096,185 

 

 

(82,281)

 

 

706,911 

 

70% 

 

 

756,954 

 

69% 

 

 

(50,043)

Technical Solutions

 

 

419,922 

 

 

341,089 

 

 

78,833 

 

 

223,938 

 

53% 

 

 

188,002 

 

55% 

 

 

35,936 

Total

 

$

3,377,996 

 

$

3,274,413 

 

$

103,583 

 

$

2,023,590 

 

60% 

 

$

1,969,930 

 

60% 

 

$

53,660 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following provides a discussion of our results on a segment basis:

 

Drilling Products and Services Segment

 

Revenue from our Drilling Products and Services segment increased 11% to $685.4 million for the nine months ended September 30, 2014, as compared to $614.9 million for the same period in 2013.  Cost of services as a percentage of revenue decreased to 32% of segment revenue for the nine months ended September 30, 2014, as compared to 33% in the same period in 2013, primarily due to an increase in revenues from a more favorable product mix.  Revenue from our Gulf of Mexico market area increased approximately 27% due to increases in rentals of premium drill pipe and accommodationsRevenue generated from our U.S. land market area increased 6% primarily due to increases in revenue from rentals of accommodations and bottom hole assemblies.  These increases were partially offset by a 3% decrease in revenue generated from our international market areas, which was due to decreases in rentals of accommodations and premium drill pipe.  

 

Onshore Completion and Workover Services Segment

 

Revenue from our Onshore Completion and Workover Services segment increased by 3% to $1,258.8 million for the nine months ended September 30, 2014, as compared to $1,222.2 million for the same period in 2013.  All of this segment’s revenue is derived from the U.S. land market area.  The increase in revenue was driven by  higher demand for pressure pumping services and fluid management. 

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Cost of services as a percentage of revenue increased to 70% of segment revenue for the nine months ended September 30, 2014, as compared to 67% in the same period in 2013, primarily due to increased repair and maintenance expenses for pressure pumping services

 

Production Services Segment

 

Revenue from our Production Services segment for the nine months ended September 30, 2014 decreased by 8% to $1,013.9 million, as compared to $1,096.2 million for the same period in 2013Cost of services as a percentage of revenue increased to 70% of segment revenue as compared to 69% in the same period in 2013.  Revenue derived from the Gulf of Mexico market area decreased 31% due to decreased activity for pressure control, hydraulic workover and snubbing and wireline services.  Revenue from international market areas remained flat for the nine months ended September 30, 2014 as compared to the same period in 2013.  Revenue from the U.S. land market area decreased 5% as we experienced declines in coiled tubing, remedial pumping, and hydraulic workover and snubbing activity. 

 

Technical Solutions Segment

 

Revenue from our Technical Solutions segment increased 23% to $419.9 million for the nine months ended September 30, 2014, as compared to $341.1 million for the same period in 2013.  Cost of services as a percentage of revenue decreased to 53% of segment revenue for the nine months ended September 30, 2014 as compared to 55% in the same period of 2013, primarily due to an increase in revenues from a more favorable product mix.  Revenue in our international market areas increased 77% as a result of an increase in demand for well control work and completion tools and products.  Revenue in our Gulf of Mexico market area increased 6% primarily due to an increase in our oil and gas activities.  Revenue in our U.S. land market area increased 39% primarily due to an increase in demand for completion tools and products.

 

Depreciation, Depletion, Amortization and Accretion

 

Depreciation, depletion, amortization and accretion increased to $493.4 million for the nine months ended September 30, 2014 from $446.4 million for the same period in 2013.  Depreciation and amortization expense for our Drilling Products and Services segment for the nine months ended September 30, 2014 increased by $14.5 million, or 12%, due to 2013 and 2014 capital expenditures.  Depreciation and amortization expense for our Onshore Completion and Workover Services segment for the nine months ended September 30, 2014 increased by $17.0 million, or 11%, due to 2013 and 2014 capital expenditures.  Depreciation and amortization expense for our Production Services segment for the nine months ended September 30, 2014 decreased by $10.2 million, or 8% as a result of certain assets being fully depreciated.  Depreciation, depletion, amortization and accretion expense for our Technical Solutions segment for the nine months ended September 30, 2014 increased by approximately $25.7 million, or 88%, primarily due to 2013 and 2014 capital expenditures. 

 

General and Administrative Expenses

 

General and administrative expenses were $457.6 million for nine months ended September 30, 2014, as compared to $440.8 million for the same period in 2013. The increase is primarily attributable to an increase in employee-related expenses and expanding infrastructure to support our growth in both U.S. and international markets.

 

Discontinued Operations

 

Discontinued operations include operating results for both our subsea construction business and conventional decommissioning business.  Losses from discontinued operations, net of tax, were $15.7 million for the nine months ended September 30, 2014, as compared to $20.0 million for the same period in 2013.

 

Liquidity and Capital Resources

 

In the nine months ended September 30, 2014, we generated net cash from operating activities of $764.3 million, as compared to $636.1 million in the same period of 2013.  Our primary liquidity needs are for working capital and to fund capital expenditures, debt service, dividend payments, share repurchases and acquisitions.  Our primary sources of liquidity are cash flows from operations and available borrowings under the revolving portion of our credit facility.  We had cash and cash equivalents of $320.0 million as of September 30, 2014, compared to $196.0 million as of December 31, 2013As of September 30, 2014, approximately $129.9 million of our cash balance was held outside the U.S.  Cash balances held in foreign jurisdictions can be repatriated to the U.S.; however, they would be subject to federal income taxes, less applicable foreign tax credits.  The Company has not provided U.S. income tax expense on earnings of its foreign subsidiaries because it expects to reinvest the undistributed earnings indefinitely.  In October 2014, we acquired all of the equity interests in a company in India using approximately $25.0 million of cash which was held outside of the U.S.    

 

We spent $438.3 million of cash on capital additions during the nine months ended September 30, 2014.  Approximately $96.7 million, $64.5 million and $58.3 million were used to expand and maintain the asset bases of our Onshore Completion and Workover Services, Production Services and Technical Solutions segments, respectively, and approximately $218.8 million was used to expand and maintain our Drilling Products and Services segment’s equipment inventory. 

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We have a $1.0 billion bank credit facility which is comprised of a $600 million revolving portion and a $400 million term loan.  The principal balance of the term loan is payable in installments of $5.0 million on the last day of each fiscal quarter.  As of September 30, 2014, we had $350 million outstanding under the term loan. As of September 30, 2014, we had no amounts outstanding under the revolving portion of our credit facility and approximately $48.2 million of letters of credit outstanding, which reduce our borrowing capacity under this portion of the credit facility.  As of October 30, 2014, we had no amounts outstanding under the revolving portion of our credit facility, and approximately $47.7 million of letters of credit outstanding.  All amounts outstanding under the bank credit facility are due on February 7, 2017.  Borrowings under the credit facility bear interest at LIBOR plus margins that depend on our leverage ratio.  Indebtedness under the credit facility is secured by substantially all of our assets, including the pledge of the stock of our principal domestic subsidiaries.  The credit facility contains customary events of default and requires that we satisfy various financial covenants.  As of September 30, 2014, we were in compliance with all such covenants.

 

We have outstanding $500 million of 6 3/8% unsecured senior notes due 2019. The indenture governing the 6 3/8% senior notes requires semi-annual interest payments on May 1st and November 1st of each year through the maturity date of May 1, 2019.  The indenture contains customary events of default and requires that we satisfy various covenants. As of September 30, 2014, we were in compliance with all such covenants.

 

We also have outstanding $800 million of 7 1/8% unsecured senior notes due 2021.  The indenture governing the 7 1/8% senior notes requires semi-annual interest payments on June 15th and December 15th of each year through the maturity date of December 15, 2021.  The indenture contains customary events of default and requires that we satisfy various covenants. As of September 30, 2014, we were in compliance with all such covenants.

 

 

We currently believe that we will spend approximately $180 million to $235 million on capital expenditures, excluding acquisitions, during the remaining three months of 2014.  We believe that our current working capital and cash generated from our operations will provide sufficient funds for our identified capital projects.

 

We continue to focus on operational efficiency and returning cash to shareholders.  Year to date through October 30, 2014, we have repurchased $242.3 million of our common stock.  As of October 30, 2014, $147.0 million was available under our existing share repurchase program.  During 2014, we have paid $37.6 million of dividends to stockholders.  In October 2014, we declared a quarterly dividend of $0.08 per share on our outstanding common stock, which will be paid on November 19, 2014.

 

We intend to continue implementing our growth strategy of increasing our scope of services through both internal growth and strategic acquisitions.  We expect to continue to make the capital expenditures required to implement our growth strategy in amounts consistent with the amount of cash generated from our operating activities. 

 

Hedging Activities

 

We have three interest rate swap agreements for notional amounts of $100 million each related to our 7 1/8% senior notes maturing in December 2021, whereby we are entitled to receive semi-annual interest payments at a fixed rate of 7 1/8% per annum and are obligated to make semi-annual interest payments at variable rates.  The variable interest rates, which are adjusted every 90 days, are based on LIBOR plus a fixed margin and are scheduled to terminate on December 15, 2021.

 

Recently Issued Accounting Pronouncements

 

See Part I, Item 1, “Financial Statements – Note 17 – Recently Issued Accounting Pronouncements.”

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risks associated with foreign currency fluctuations and changes in interest rates.  A discussion of our market risk exposure in financial instruments follows.

 

Foreign Currency Exchange Rates Risk

 

Because we operate in a number of countries throughout the world, we conduct a portion of our business in currencies other than the U.S. dollar.  The functional currency for our international operations, other than certain operations in Canada, the United Kingdom and Europe, is the U.S. dollar, but a portion of the revenues from our international operations is paid in foreign currencies.  The effects of foreign currency fluctuations are partly mitigated because local expenses of such international operations are also generally denominated in the same currency.  We continually monitor the currency exchange risks associated with all contracts not denominated in the U.S. dollar. 

 

Assets and liabilities of certain subsidiaries in Canada, the United Kingdom and Europe are translated at end of period exchange rates, while income and expenses are translated at average rates for the period.  Translation gains and losses are reported as the foreign currency translation component of accumulated other comprehensive loss in stockholders’ equity. 

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We do not hold derivatives for trading purposes or use derivatives with complex features. When we believe prudent, we enter into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations. We do not enter into forward foreign exchange contracts for trading purposes.  As of September 30, 2014, we had no outstanding foreign currency forward contracts.

 

Interest Rate Risk

 

As of September 30, 2014, our debt was comprised of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed
Rate Debt

 

Variable
Rate Debt

Term loan due 2017

 

$

 -

 

$

350,000 

6 3/8 % Senior notes due 2019

 

 

500,000 

 

 

 -

7 1/8% Senior notes due 2021

 

 

500,000 

 

 

300,000 

Other

 

 

1,178 

 

 

 -

Total Debt

 

$

1,001,178 

 

$

650,000 

 

 

 

 

 

 

 

 

Based on the amount of this debt outstanding as of September 30, 2014, a 10% increase in the variable interest rate would have increased our interest expense for the nine months ended September 30, 2014 by approximately $1.7 million, while a 10% decrease would have decreased our interest expense by approximately $1.7 million. 

 

Commodity Price Risk

 

Our revenues, profitability and future rate of growth significantly depend upon the market prices of oil and natural gas.  Lower prices may also reduce the amount of oil and natural gas that can economically be produced. 

 

For additional discussion, see Part 1, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

Item 4.  Controls and Procedures

 

a.

Evaluation of disclosure controls and procedures.    As of the end of the period covered by this quarterly report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation, that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

b.

Changes in internal control.  There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

(a)
Total Number
of Shares
Purchased (1)

 

(b)
Average Price Paid per Share

 

(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)

 

(d)
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Programs (2)

July 1 - 31, 2014

 

1,328,937 

 

$

35.81 

 

1,328,437 

 

$

225,216,717 

August 1 - 31, 2014

 

627,108 

 

$

34.29 

 

626,300 

 

$

203,741,093 

September 1 - 30, 2014

 

1,897 

 

$

33.93 

 

 -

 

$

203,741,093 

Total

 

1,957,942 

 

$

35.32 

 

1,954,737 

 

$

203,741,093 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Through our stock incentive plans, 3,205 shares were delivered to us by our employees to satisfy their tax withholding requirements upon vesting of restricted stock and restricted stock units.

(2)

On October 14, 2013, we announced that our Board of Directors authorized a $400 million share repurchase program of our common stock, which will expire on December 31, 2015.

 

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Item 6.   Exhibits

 

(a)

The following exhibits are filed with this Form 10-Q:

 

 

 

 

 

 

 

 

Exhibit No.

Description

3.1

Restated Certificate of Incorporation of Superior Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to Superior Energy Services, Inc.’s Quarterly Report on Form 10-Q filed August 7, 2013 (File No. 001-34037)).

3.2

Amended and Restated Bylaws of Superior Energy Services, Inc. (as amended through March 7, 2012) (incorporated herein by reference to Exhibit 3.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed March 12, 2012 (File No. 001-34037))

 

 

4.1

Indenture, dated April 27, 2011, among SESI, L.L.C., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed April 27, 2011 (File No. 001-34037)), as amended by Supplemental Indenture, dated February 29, 2012, by and among SESI, L.L.C., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed March 1, 2012 (File No. 001-34037)), as further amended by Supplemental Indenture dated May 7, 2012, by and among SESI, L.L.C. the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed May 8, 2012 (File No. 001-34037)), as further amended by Supplemental Indenture dated August 29, 2014, by and among SESI, L.L.C. the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed September 2, 2014 (File No. 001-34037)).

4.2

Indenture, dated December 6, 2011, among SESI, L.L.C., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed December 12, 2011 (File No. 001-34037)), as amended by Supplemental Indenture, dated February 29, 2012, by and among SESI, L.L.C., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed March 1, 2012 (File No. 001-34037)), as further amended by Supplemental Indenture dated May 7, 2012, by and among SESI, L.L.C. the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed May 8, 2012 (File No. 001-34037)), as further amended by Supplemental Indenture dated August 29, 2014, by and among SESI, L.L.C. the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Superior Energy Services, Inc.’s Current Report on Form 8-K filed September 2, 2014 (File No. 001-34037)).

18.1*

Preferability letter regarding change in accounting policy relating to goodwill.

31.1*

Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 

31.2*

Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Officer’s certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 

32.2*

Officer’s certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

 

    *Filed herein

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SUPERIOR ENERGY SERVICES, INC.

 

 

 

 

 

Date: 

November 4, 2014

By:

/s/ Robert S. Taylor

 

 

 

Robert S. Taylor

 

 

 

Executive Vice President, Treasurer and

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 

 

 

 

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