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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-31339
WEATHERFORD INTERNATIONAL LTD.
------------------------------
(Exact name of Registrant as specified in its Charter)
Bermuda 98-0371344
- -------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 Post Oak Boulevard
Suite 600
Houston, Texas 77027-3415
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 693-4000
--------------------------------------------------
(Registrant's telephone number, include area code)
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common shares, as of the latest practicable date:
Title of Class Outstanding at May 2, 2003
-------------- --------------------------
Common Shares, par value $1.00 120,790,814
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and Cash Equivalents............................................ $ 38,469 $ 48,837
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $17,991 and $18,088, Respectively...................... 514,922 485,178
Inventories.......................................................... 564,359 547,744
Other Current Assets................................................. 179,855 177,480
------------ ------------
1,297,605 1,259,239
------------ ------------
Property, Plant and Equipment, Net...................................... 1,147,677 1,126,162
Goodwill, Net........................................................... 1,511,935 1,497,302
Other Intangible Assets, Net............................................ 269,557 259,733
Equity Investments in Unconsolidated Affiliates......................... 289,314 285,901
Other Assets............................................................ 67,164 66,652
------------ ------------
$ 4,583,252 $ 4,494,989
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-Term Borrowings and Current Portion of Long-Term Debt.......... $ 386,225 $ 364,272
Accounts Payable..................................................... 177,853 186,326
Other Current Liabilities............................................ 341,447 326,879
------------ ------------
905,525 877,477
------------ ------------
Long-Term Debt.......................................................... 571,675 570,991
Zero Coupon Convertible Senior Debentures............................... 544,469 540,416
Deferred Tax Liabilities................................................ 26,253 34,399
Other Liabilities....................................................... 96,305 94,710
5% Convertible Subordinated Preferred
Equivalent Debentures................................................ 402,500 402,500
Commitments and Contingencies
Shareholders' Equity:
Common Shares, $1 Par Value, Authorized 500,000 Shares,
Issued 130,946 and 130,799 Shares, Respectively.................... 130,946 130,799
Capital in Excess of Par Value....................................... 1,990,718 1,987,702
Treasury Shares, Net................................................. (257,970) (258,125)
Retained Earnings.................................................... 295,621 262,020
Accumulated Other Comprehensive Loss................................. (122,790) (147,900)
------------ ------------
2,036,525 1,974,496
------------ ------------
$ 4,583,252 $ 4,494,989
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED MARCH 31,
--------------------------
2003 2002
---------- ----------
Revenues:
Products...................................................................... $ 286,701 $ 269,175
Services and Rentals.......................................................... 302,637 299,074
---------- ----------
589,338 568,249
Costs and Expenses:
Cost of Products.............................................................. 194,138 180,184
Cost of Services and Rentals.................................................. 207,757 195,493
Research and Development...................................................... 19,999 16,984
Selling, General and Administrative Attributable to Segments.................. 92,467 82,925
Corporate General and Administrative.......................................... 9,814 9,280
Equity in Earnings of Unconsolidated Affiliates............................... (4,562) (6,853)
---------- ----------
Operating Income................................................................... 69,725 90,236
---------- ----------
Other Expense:
Interest Expense, Net......................................................... (20,808) (20,956)
Other, Net.................................................................... (2,571) (759)
---------- ----------
Income Before Income Taxes......................................................... 46,346 68,521
Provision for Income Taxes......................................................... (12,745) (23,302)
---------- ----------
Net Income......................................................................... $ 33,601 $ 45,219
========== ==========
Earnings Per Share:
Basic......................................................................... $ 0.28 $ 0.38
Diluted....................................................................... $ 0.27 $ 0.36
Weighted Average Shares Outstanding:
Basic......................................................................... 121,185 119,161
Diluted....................................................................... 126,554 133,807
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
----------------------------------
2003 2002
------------ -----------
Cash Flows from Operating Activities:
Net Income............................................................ $ 33,601 $ 45,219
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization...................................... 56,286 50,034
Gain on Sales of Assets............................................ (5,538) (2,398)
Equity in Earnings of Unconsolidated Affiliates.................... (4,562) (6,853)
Amortization of Original Issue Discount............................ 4,053 3,934
Deferred Income Tax Provision (Benefit)............................ (7,295) 4,310
Other, Net......................................................... (612) 3,172
Change in Operating Assets and Liabilities, Net of Effect
of Businesses Acquired........................................... (50,064) (59,195)
------------ -----------
Net Cash Provided by Operating Activities.................... 25,869 38,223
------------ -----------
Cash Flows from Investing Activities:
Acquisition of Businesses, Net of Cash Acquired....................... (4,804) (19,229)
Capital Expenditures for Property, Plant and Equipment................ (69,899) (57,344)
Acquisition of License................................................ -- (65,000)
Proceeds from Sales of Assets......................................... 8,767 12,143
------------ -----------
Net Cash Used by Investing Activities........................ (65,936) (129,430)
------------ -----------
Cash Flows from Financing Activities:
Borrowings on Short-Term Debt, Net.................................... 23,613 88,192
Repayments of Long-Term Debt, Net..................................... (906) (3,443)
Proceeds from (Repayments on) Asset Securitization.................... 4,807 (26,461)
Proceeds from Exercise of Stock Options............................... 2,580 17,226
Purchases of Treasury Shares, Net..................................... (348) (1,419)
Other Financing Activities, Net....................................... (47) --
------------ -----------
Net Cash Provided by Financing Activities.................... 29,699 74,095
------------ -----------
Net Decrease in Cash and Cash Equivalents............................... (10,368) (17,112)
Cash and Cash Equivalents at Beginning of Period........................ 48,837 88,832
------------ -----------
Cash and Cash Equivalents at End of Period.............................. $ 38,469 $ 71,720
============ ===========
Supplemental Cash Flow Information:
Interest Paid......................................................... $ 9,579 $ 7,618
Income Taxes Paid, Net of Refunds..................................... 12,855 6,408
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
-------------------------
2003 2002
----------- ----------
Net Income.................................................................... $ 33,601 $ 45,219
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment................................. 25,110 (18,263)
----------- ----------
Comprehensive Income.......................................................... $ 58,711 $ 26,956
=========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements of Weatherford
International Ltd. and all majority-owned subsidiaries (the "Company") included
herein are unaudited; however, they include all adjustments of a normal
recurring nature which, in the opinion of management, are necessary to present
fairly the Company's Condensed Consolidated Balance Sheet at March 31, 2003 and
Condensed Consolidated Statements of Income, Condensed Consolidated Statements
of Comprehensive Income and Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2003 and 2002. Although the Company believes
the disclosures in these financial statements are adequate to make the interim
information presented not misleading, certain information relating to the
Company's organization and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States has been condensed or omitted in this Form 10-Q pursuant to
Securities and Exchange Commission rules and regulations. These financial
statements should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2002 and the notes thereto included
in the Company's Annual Report on Form 10-K. The results of operations for the
three months ended March 31, 2003 are not necessarily indicative of the results
expected for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period and disclosure of contingent
liabilities. On an ongoing basis, the Company evaluates its estimates, including
those related to bad debts, inventories, investments, intangible assets and
goodwill, property, plant and equipment, income taxes, insurance, employment
benefits and contingent liabilities. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from those
estimates.
Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding current year classifications.
2. RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
During the third quarter of 2002, the Company recorded $15.4 million, $10.0
million net of taxes, in restructuring and asset impairment charges relating to
a rationalization of its businesses in light of industry conditions. The Company
undertook initiatives to rationalize its business in light of the lower activity
levels and the continued economic uncertainty. The plan approved during 2002
included a reduction in workforce, primarily in the United States, and the
closure of two facilities. During the first quarter of 2003, the Company
modified its plan and reversed $3.1 million of unutilized accruals recorded by
the Completion Systems and Artificial Lift Systems segments. In connection with
this modification, the Company also expensed $2.0 million during the first
quarter for other facility impairments within the Completion Systems segment.
The amounts related to the modification were recorded in Cost of Products in the
accompanying Condensed Consolidated Statements of Income. The charge related to
the 2002 plan is summarized by segments in the following table and described in
greater detail below:
REVERSAL OF
2000
ASSET RESTRUCTURING
SEVERANCE(1) IMPAIRMENT(2) CHARGE(3) TOTAL
------------- -------------- ------------- --------
(IN THOUSANDS)
Drilling and Intervention Services .. $ 1,853 $ 132 $ -- $ 1,985
Completion Systems .................. 4,810 1,580 -- 6,390
Artificial Lift Systems ............. 1,866 5,295 -- 7,161
Corporate ........................... 48 4,592 (4,739) (99)
-------- -------- -------- --------
Total ............................... 8,577 11,599 (4,739) 15,437
Utilized during 2002 ............. (3,748) (11,599) 4,739 (10,608)
Reversal of 2002
Restructuring Charge ......... (3,148) -- -- (3,148)
Utilized during 2003 ............. (1,223) -- -- (1,223)
-------- -------- -------- --------
Balance as of March 31, 2003 ........ $ 458 $ -- $ -- $ 458
======== ======== ======== ========
5
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) In accordance with the Company's announced plan to terminate employees
company-wide, it recorded severance and related costs for 849
specifically identified employees. As of March 31, 2003, 20 employees
remained to be terminated, which is expected to occur in the second
quarter of 2003.
(2) The asset impairment primarily relates to the write-down of equipment
and facilities which are held for sale as a result of the decline in
market conditions. These assets, having a carrying amount of $5.1
million and $7.7 million, have been reclassified in Other Current
Assets on the accompanying Condensed Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002, respectively. The Company
anticipates the remaining assets will be sold by September 30, 2003.
(3) In 2000, the Company recorded a non-recurring charge of $56.3 million
in connection with the merger of its Compression Services Division
with Universal, of which $4.7 million of estimated transaction costs
were not incurred.
3. GOODWILL
Goodwill is evaluated for impairment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets ("SFAS No. 142"), which requires that such assets be tested for
impairment on at least an annual basis. The Company completed its annual
goodwill impairment test as of October 1, 2002. The Company's goodwill
impairment test involves a comparison of the fair value of each of the Company's
reporting units, as defined under SFAS No. 142, with its carrying amount. The
Company's reporting units correspond to the Company's business segments, namely
Drilling and Intervention Services, Completion Systems and Artificial Lift
Systems. The fair value is determined using discounted cash flows and other
market-related valuation models. As both calculations indicated that the fair
value of each reporting unit exceeded its carrying amount, none of the Company's
goodwill was impaired. The Company will continue to test its goodwill annually
on a consistent measurement date unless events occur or circumstances change
between annual tests that would more likely than not reduce the fair value of a
reporting unit below its carrying amount.
The changes in the carrying amount of goodwill for the three months ended
March 31, 2003 are as follows:
DRILLING AND
INTERVENTION COMPLETION ARTIFICIAL LIFT
SERVICES SYSTEMS SYSTEMS TOTAL
------------ ---------- --------------- ----------
(in thousands)
As of January 1, 2003 ................. $ 673,709 $ 444,450 $ 379,143 $1,497,302
Goodwill acquired during period ... 3,794 158 19 3,971
Impact of foreign currency
translation .................... 2,037 (2,216) 10,841 10,662
---------- ---------- ---------- ----------
As of March 31, 2003 .................. $ 679,540 $ 442,392 $ 390,003 $1,511,935
========== ========== ========== ==========
6
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INTANGIBLE ASSETS
The Company amortizes identifiable intangible assets, excluding goodwill
and indefinite-lived intangibles, on a straight-line basis over the years
expected to be benefited, ranging from 3 to 20 years. The components of these
other intangible assets are as follows:
MARCH 31, 2003 DECEMBER 31, 2002
------------------------------------------ ---------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
--------- ------------ --------- --------- ------------ ---------
(in thousands)
Patents .......... $ 86,261 $ (13,501) $ 72,760 $ 74,250 $ (12,342) $ 61,908
Licenses ......... 184,627 (15,693) 168,934 184,042 (13,181) 170,861
Covenants not to
compete ....... 19,498 (10,484) 9,014 19,077 (9,432) 9,645
Other ............ 12,932 (2,083) 10,849 11,078 (1,759) 9,319
--------- --------- --------- --------- --------- ---------
$ 303,318 $ (41,761) $ 261,557 $ 288,447 $ (36,714) $ 251,733
========= ========= ========= ========= ========= =========
Amortization expense was $4.7 million for the three months ended March 31,
2003. Estimated amortization expense for the carrying amount of intangible
assets as of March 31, 2003 is expected to be $15.7 million for the remainder of
2003, $20.0 million for 2004, $19.1 million for 2005, $18.0 million for 2006 and
$16.0 million for 2007.
The Company has trademarks associated with its 2001 acquisition of the
Johnson Screens division from Vivendi Environnement, which are considered to
have indefinite lives as the Company has the ability and intent to renew
indefinitely. These trademarks are classified in Other Intangible Assets, Net on
the accompanying Condensed Consolidated Balance Sheets and had a carrying value
of $8.0 million.
5. INVENTORIES
Inventories by category are as follows:
MARCH 31, DECEMBER 31,
2003 2002
---------------- ----------------
(in thousands)
Raw materials, components and supplies............................ $ 169,123 $ 156,294
Work in process................................................... 53,465 50,874
Finished goods.................................................... 341,771 340,576
---------------- ----------------
$ 564,359 $ 547,744
================ ================
Work in process and finished goods inventories include the cost of
materials, labor and plant overhead.
6. ASSET SECURITIZATION
The Company has in place an agreement with a financial institution to sell,
on a continuous basis, an undivided interest in a specific pool of domestic
accounts receivable through December 2003. The Company is permitted to
securitize up to $75.0 million under this agreement. If the Company's credit
rating falls below BBB- from Standard and Poor's or Baa3 from Moody's, the
financial institution has no further obligation to purchase the accounts
receivable. The Company currently pays a program fee on participating interests
at a variable rate based on the financial institution's commercial paper rate
plus other fees. Program fees totaled $0.3 million and $0.7 million for the
three months ended March 31, 2003 and 2002, respectively and are included in
Other Expense on the accompanying Condensed Consolidated Statements of Income.
The Company received $73.7 million and $68.9 million for purchased interests and
had retained interests in receivables sold of $59.1 million and $59.9 million as
of March 31, 2003 and December 31, 2002, respectively.
7
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. SHORT-TERM DEBT
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(in thousands)
2001 Multi-currency revolving credit facility........................ $ 113,438 $ 124,880
1998 Revolving credit facility....................................... 167,997 150,000
Short-term bank loans................................................ 92,270 75,304
------------- -------------
Total short-term borrowings.......................................... 373,705 350,184
Current portion of long-term debt.................................... 12,520 14,088
------------- -------------
Short-Term Borrowings and Current Portion of Long-Term Debt.......... $ 386,225 $ 364,272
============= =============
In April 2001, the Company entered into a $250.0 million, three-year
multi-currency revolving credit facility, with commitment capacity of up to
$400.0 million. As of March 31, 2003, the Company had $136.6 million available
under this agreement.
In May 1998, the Company entered into a five-year unsecured credit
agreement, which provides for borrowings of up to an aggregate of $250.0
million, consisting of $200.0 million in the U.S. and $50.0 million in Canada.
As of March 31, 2003, the Company had $53.9 million available under this
facility due to $28.1 million being used to secure outstanding letters of
credit.
The Company also engages in unsecured short-term borrowings with various
institutions pursuant to uncommitted facilities. As of March 31, 2003, the
Company had $92.3 million in unsecured short-term borrowings outstanding under
these arrangements with interest rates ranging from 1.63% to 8.86%.
8. EARNINGS PER SHARE
Basic earnings per share for all periods presented equals net income
divided by the weighted average number of common shares, $1.00 par value
("Common Shares") outstanding during the period. Diluted earnings per share is
computed by dividing net income, as adjusted for the assumed conversion of
dilutive debentures, by the weighted average number of Common Shares outstanding
during the period adjusted for the dilutive effect of the Company's warrants,
stock option and restricted stock plans and the incremental shares for the
assumed conversion of dilutive debentures.
The following reconciles net income to adjusted net income, adjusting for
the impact of the assumed conversion of the Company's Zero Coupon Convertible
Senior Debentures due 2020 (the "Zero Coupon Debentures") for the periods in
which the debentures are dilutive:
THREE MONTHS
ENDED MARCH 31,
-------------------------
2003 2002
--------- -----------
(in thousands)
Net income........................................................................ $ 33,601 $ 45,219
Amortization of original issue discount, net of taxes............................. -- 2,758
--------- -----------
Adjusted net income............................................................... $ 33,601 $ 47,977
========= ===========
8
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following reconciles basic and diluted weighted average shares
outstanding:
THREE MONTHS
ENDED MARCH 31,
--------------------
2003 2002
------- -------
(in thousands)
Basic weighted average shares outstanding................................. 121,185 119,161
Dilutive effect of warrants and stock option and restricted stock plans .. 5,369 5,549
Dilutive effect of Zero Coupon Debentures................................. -- 9,097
------- -------
Diluted weighted average shares outstanding............................... 126,554 133,807
======= =======
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes investing activities relating to acquisitions
integrated into the Company's operations for the periods shown:
THREE MONTHS
ENDED MARCH 31,
--------------------------------
2003 2002
------------- -------------
(in thousands)
Fair value of assets, net of cash acquired........................... $ 6,069 $ 18,998
Goodwill............................................................. 3,971 3,695
Total liabilities.................................................... (5,236) (3,464)
------------- -------------
Cash consideration, net of cash acquired............................. $ 4,804 $ 19,229
============= =============
10. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure
("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123") to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. As permitted under SFAS No. 123, the Company uses the
intrinsic value method of accounting established by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, to account for its
stock-based compensation programs. Accordingly, no compensation expense is
recognized when the exercise price of an employee stock option is equal to the
Common Share market price on the grant date. The following illustrates the pro
forma effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123:
THREE MONTHS
ENDED MARCH 31,
-------------------------------
2003 2002
------------ -------------
(in thousands, except per share
amounts)
Net income:
As reported ......................................................... $ 33,601 $ 45,219
Pro forma compensation expense, determined under fair value methods
for all awards, net of income tax benefit ......................... (9,971) (10,464)
------------ ------------
Pro forma ........................................................... $ 23,630 $ 34,755
============ ============
Basic earnings per share:
As reported ......................................................... $ 0.28 $ 0.38
Pro forma ........................................................... 0.19 0.29
Diluted earnings per share:
As reported ......................................................... 0.27 0.36
Pro forma ........................................................... 0.19 0.28
9
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For purposes of pro forma disclosures, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model.
The estimated fair value of the options is amortized to pro forma expense over
the options' vesting period.
11. SEGMENT INFORMATION
Business Segments
The Company is a diversified international energy service and manufacturing
company that provides a variety of services and equipment to the exploration,
production and transmission sectors of the oil and gas industry. The Company
operates in virtually every oil and gas exploration and production region in the
world. The Company divides its business segments into three separate groups as
defined by the chief operating decision maker: Drilling and Intervention
Services, Completion Systems and Artificial Lift Systems.
The Company's Drilling and Intervention Services segment provides a wide
range of oilfield products and services, including drilling services and
equipment, well installation services and cementing products, fishing and
intervention services and pipeline and specialty services.
The Company's Completion Systems segment provides completion products and
systems including cased hole systems, liner systems, flow control systems, sand
screens, expandable sand screen systems, expandable solid tubular systems and
intelligent completion technologies.
The Company's Artificial Lift Systems segment designs, manufactures, sells
and services a complete line of artificial lift equipment, including progressing
cavity pumps, reciprocating rod lift systems, gas lift systems, electrical
submersible pumps, product optimization services and automation and monitoring
of wellhead production. This segment also provides screens for industrial
applications and total process system solutions for all aspects of natural gas
production.
Financial information by industry segment for each of the three months
ended March 31, 2003 and 2002 is summarized below. The accounting policies of
the segments are the same as those of the Company.
THREE MONTHS
ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
(in thousands)
Revenues from unaffiliated customers:
Drilling and Intervention Services....................................... $ 327,972 $ 313,349
Completion Systems....................................................... 92,736 92,312
Artificial Lift Systems.................................................. 168,630 162,588
---------- ----------
$ 589,338 $ 568,249
========== ==========
Depreciation and amortization:
Drilling and Intervention Services....................................... $ 39,718 $ 37,529
Completion Systems....................................................... 9,596 6,436
Artificial Lift Systems.................................................. 6,244 5,546
Corporate................................................................ 728 523
---------- ----------
$ 56,286 $ 50,034
========== ==========
Operating income (loss):
Drilling and Intervention Services....................................... $ 58,414 $ 64,939
Completion Systems....................................................... (4,658) 6,198
Artificial Lift Systems.................................................. 21,221 21,526
Corporate (a)............................................................ (5,252) (2,427)
---------- ----------
$ 69,725 $ 90,236
========== ==========
(a) Includes Equity in Earnings of Unconsolidated Affiliates.
10
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of March 31, 2003, total assets were $2,121.6 million for Drilling and
Intervention Services, $1,024.0 million for Completion Systems, $976.3 million
for Artificial Lift Systems and $461.4 million for Corporate. Total assets as of
December 31, 2002, were $2,102.0 million for Drilling and Intervention Services,
$1,016.0 million for Completion Systems, $927.5 million for Artificial Lift
Systems and $449.5 million for Corporate.
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Effective June 26, 2002, Weatherford International Ltd. ("Parent"), became
the parent holding company of Weatherford International, Inc. ("Issuer")
following a corporate reorganization. In conjunction with the merger, Parent
fully and unconditionally guaranteed the following obligations of Issuer: (1)
the three-year multi-currency revolving credit facility, (2) the five-year
unsecured credit agreement, (3) the $200.0 million 7 1/4% Senior Notes due 2006
(the "7 1/4% Senior Notes"), (4) the $350.0 million 6 5/8% Senior Notes due
2011, ("the 6 5/8% Senior Notes"), (5) the Zero Coupon Debentures and (6) the 5%
Convertible Subordinated Preferred Equivalent Debentures due 2027 (the
"Convertible Preferred Debentures"). In addition, Parent and Issuer fully and
unconditionally guaranteed certain domestic subsidiaries' performance
obligations relating to the asset securitization (See Note 6), including their
payment obligations. The following condensed consolidating financial information
for Parent and Issuer and all other subsidiaries has been provided.
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------- ------------- ------------
ASSETS
Current Assets:
Cash and Cash Equivalents ................ $ 23 $ 38,446 $ -- $ -- $ 38,469
Intercompany Receivables ................. 37,726 59,839 -- (97,565) --
Other Current Assets ..................... -- 1,259,136 34,152 (34,152) 1,259,136
------------- ------------- ------------- ------------- -------------
37,749 1,357,421 34,152 (131,717) 1,297,605
------------- ------------- ------------- ------------- -------------
Equity Investments in Unconsolidated
Affiliates ............................... 279,146 10,168 -- -- 289,314
Intercompany Investments in Affiliates ...... 700,346 12 2,800,668 (3,501,026) --
Shares Held in Parent ....................... -- 257,970 -- (257,970) --
Intercompany Notes Receivable ............... 1,440,060 254,381 -- (1,694,441) --
Other Assets ................................ -- 2,996,333 -- -- 2,996,333
------------- ------------- ------------- ------------- -------------
$ 2,457,301 $ 4,876,285 $ 2,834,820 $ (5,585,154) $ 4,583,252
============= ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Short-Term Borrowings and Current Portion
of Long-Term Debt ..................... $ -- $ 386,225 $ -- $ -- $ 386,225
Accounts Payable and Other Current
Liabilities ........................... 2,391 551,061 -- (34,152) 519,300
Intercompany Payables ....................... -- -- 97,565 (97,565) --
------------- ------------- ------------- ------------- -------------
2,391 937,286 97,565 (131,717) 905,525
------------- ------------- ------------- ------------- -------------
Long-Term Debt .............................. -- 1,518,644 -- -- 1,518,644
Intercompany Notes Payable .................. 254,381 40,060 1,400,000 (1,694,441) --
Other Long-Term Liabilities ................. -- 122,558 -- -- 122,558
Shareholders' Equity ........................ 2,200,529 2,257,737 1,337,255 (3,758,996) 2,036,525
------------- ------------- ------------- ------------- -------------
$ 2,457,301 $ 4,876,285 $ 2,834,820 $ (5,585,154) $ 4,583,252
============= ============= ============= ============= =============
11
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets:
Cash and Cash Equivalents ................ $ -- $ 48,825 $ 12 $ -- $ 48,837
Intercompany Receivables ................. 92,613 12,886 -- (105,499) --
Other Current Assets ..................... -- 1,210,402 22,904 (22,904) 1,210,402
------------- ------------- ------------- ------------- ------------
92,613 1,272,113 22,916 (128,403) 1,259,239
------------- ------------- ------------- ------------- ------------
Equity Investments in Unconsolidated
Affiliates ............................... 275,983 9,918 -- -- 285,901
Intercompany Investments in Affiliates ...... 700,346 12 2,800,668 (3,501,026) --
Shares Held in Parent ....................... -- 258,125 -- (258,125) --
Intercompany Notes Receivable ............... 1,400,000 299,063 -- (1,699,063) --
Other Assets ................................ -- 2,949,849 -- -- 2,949,849
------------- ------------- ------------- ------------- ------------
$ 2,468,942 $ 4,789,080 $ 2,823,584 $ (5,586,617) $ 4,494,989
============= ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Short-Term Borrowings and Current Portion
of Long-Term Debt ..................... $ -- $ 364,272 $ -- $ -- $ 364,272
Accounts Payable and Other Current
Liabilities ........................... 3,752 532,357 -- (22,904) 513,205
Intercompany Payables .................... -- 40,060 65,439 (105,499) --
------------- ------------- ------------- ------------- ------------
3,752 936,689 65,439 (128,403) 877,477
------------- ------------- ------------- ------------- ------------
Long-Term Debt .............................. -- 1,513,907 -- -- 1,513,907
Intercompany Notes Payable .................. 299,063 -- 1,400,000 (1,699,063) --
Other Long-Term Liabilities ................. -- 129,109 -- -- 129,109
Shareholders' Equity ........................ 2,166,127 2,209,375 1,358,145 (3,759,151) 1,974,496
------------- ------------- ------------- ------------- ------------
$ 2,468,942 $ 4,789,080 $ 2,823,584 $ (5,586,617) $ 4,494,989
============= ============= ============= ============= =============
12
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------- ------------- -------------
Revenues ........................................ $ -- $ 589,338 $ -- $ -- $ 589,338
Costs and Expenses .............................. -- (526,987) -- 2,812 (524,175)
Equity in Earnings of Unconsolidated Affiliates . 3,163 1,399 -- -- 4,562
------------- ------------- ------------- ------------- ------------
Operating Income ................................ 3,163 63,750 -- 2,812 69,725
------------- ------------- ------------- ------------- ------------
Other Income (Expense):
Interest Expense, Net ......................... -- (20,808) -- -- (20,808)
Intercompany Charges, Net ..................... 27,187 4,953 (32,140) -- --
Other, Net .................................... -- (2,571) -- -- (2,571)
------------- ------------- ------------- ------------- ------------
Income (Loss) Before Income Taxes ............... 30,350 45,324 (32,140) 2,812 46,346
(Provision) Benefit for Income Taxes ............ (1,913) (22,082) 11,250 -- (12,745)
------------- ------------- ------------- ------------- ------------
Net Income (Loss) ............................... $ 28,437 $ 23,242 $ (20,890) $ 2,812 $ 33,601
============= ============= ============= ============= =============
13
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------- ------------- -------------
Cash Flows from Operating Activities:
Net Income (Loss) ................................ $ 28,437 $ 23,242 $ (20,890) $ 2,812 $ 33,601
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided (Used) by Operating
Activities:
Equity in Earnings of Unconsolidated
Affiliates.................................... (3,163) (1,399) -- -- (4,562)
Charges from Parent or Subsidiary .............. (27,187) (4,953) 32,140 -- --
Deferred Income Tax Provision (Benefit) ........ (480) 4,435 (11,250) -- (7,295)
Other Adjustments .............................. 2,416 4,533 (12) (2,812) 4,125
------------- ------------- ------------- ------------- ------------
Net Cash Provided (Used) by Operating
Activities ................................. 23 25,858 (12) -- 25,869
------------- ------------- ------------- ------------- ------------
Cash Flows from Investing Activities:
Acquisition of Businesses, Net of Cash Acquired .. -- (4,804) -- -- (4,804)
Capital Expenditures for Property, Plant and
Equipment ...................................... -- (69,899) -- -- (69,899)
Proceeds from Sales of Assets .................... -- 8,767 -- -- 8,767
------------- ------------- ------------- ------------- ------------
Net Cash Used by Investing
Activities ................................. -- (65,936) -- -- (65,936)
------------- ------------- ------------- ------------- ------------
Cash Flows from Financing Activities:
Borrowings on Short-Term Debt, Net ............... -- 23,613 -- -- 23,613
Repayments of Long-Term Debt, Net ................ -- (906) -- -- (906)
Proceeds from Asset Securitization ............... -- 4,807 -- -- 4,807
Proceeds from Exercise of Stock Options .......... -- 2,580 -- -- 2,580
Purchases of Treasury Shares ..................... -- (348) -- -- (348)
Other ............................................ -- (47) -- -- (47)
------------- ------------- ------------- ------------- ------------
Net Cash Provided by Financing
Activities ................................. -- 29,699 -- -- 29,699
------------- ------------- ------------- ------------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents .................................... 23 (10,379) (12) -- (10,368)
Cash and Cash Equivalents at Beginning of Period ... -- 48,825 12 -- 48,837
------------- ------------- ------------- ------------- ------------
Cash and Cash Equivalents at End of Period ......... $ 23 $ 38,446 $ -- $ -- $ 38,469
============= ============= ============= ============= =============
14
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB Interpretation No. 46, Consolidation of Variable
Interest Entities ("FIN No. 46") was issued. FIN No. 46 requires companies that
control another entity through interests other than voting interests to
consolidate the controlled entity. FIN No. 46 applies to variable interest
entities created after January 31, 2003, and applies in the first interim period
beginning after June 15, 2003 to variable interest entities created before
February 1, 2003. The Company is currently evaluating the impact this
interpretation will have on its financial statements.
14. SUBSEQUENT EVENT
Subsequent to March 31, 2003 the Company entered into a three-year
unsecured revolving credit facility agreement that provides for borrowings of up
to an aggregate of $500.0 million. Certain of the proceeds from the credit
facility will be used to repay all amounts due under the Company's existing
revolving credit facilities (See Note 7), at which time those facilities will be
terminated. Amounts outstanding will accrue interest at a variable rate based on
either the U.S. prime rate or LIBOR and the credit rating assigned to the
Company's long-term senior debt. The covenants and conditions of this facility
are substantially the same as the facilities it replaces, and it is guaranteed
by Weatherford International, Inc.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Our business is conducted through three principal operating divisions: (1)
Drilling and Intervention Services, (2) Completion Systems and (3) Artificial
Lift Systems. We conduct operations in approximately 100 countries and have
service and sales locations in nearly all of the oil and natural gas producing
regions in the world.
The following is a discussion of our market, financial condition and
results of operations for the three months ended March 31, 2003 and 2002. This
discussion should be read in conjunction with our financial statements included
with this report and our financial statements and related Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2002 included in our Annual Report on Form 10-K.
This discussion of our results and financial condition includes various
forward-looking statements about our markets, the demand for our products and
services and our future results. These statements are based on certain
assumptions we consider reasonable. For information about these assumptions, you
should refer to the section entitled "Forward-Looking Statements."
We acquire numerous companies every year and focus on integration efforts
to realize the benefits each acquisition provides. We are therefore unable to
provide certain information regarding our results excluding the impact of
acquisitions due to the integration of these acquisitions into our operations.
Comparative revenue trends excluding acquisitions only exclude those
acquisitions for which revenue information has been separately maintained.
MARKET TRENDS AND OUTLOOK
Our businesses serve the oil and gas industry. All of our businesses are
affected by changes in the worldwide demand for and price of oil and natural
gas. Certain of our products and services, such as our well installation
services and well completion services, are dependent on the level of exploration
and development activity and the completion phase of the well life cycle. Other
products and services, such as our artificial lift systems, are dependent on
production activity. We currently estimate approximately two-thirds of our
operations are reliant on drilling activity, with the remainder focused on
production and reservoir enhancement activity.
The following chart sets forth certain statistics that are reflective of
historical market conditions:
HENRY HUB NORTH AMERICAN INTERNATIONAL
WTI OIL (1) GAS (2) RIG COUNT (3) RIG COUNT (3)
----------- ----------- -------------- -------------
March 31, 2003...................... $ 31.04 $ 5.060 1,391 747
December 31, 2002................... 31.20 4.789 1,204 753
March 31, 2002...................... 26.31 3.283 1,183 737
(1) Price per barrel as of March 31 and December 31 - Source: Applied
Reasoning, Inc.
(2) Price per MM/BTU as of March 31 and December 31 - Source: Oil World
(3) Average rig count for the applicable month - Source: Baker Hughes Rig
Count
The demand for our products and services is cyclical due to the nature of
the energy industry. Over the last several years, rig count fluctuated due to
world economic and political trends that influence the supply and demand for
energy, the price of oil and natural gas and the level of exploration and
drilling for those commodities. The price of oil and natural gas has also been
subject to much volatility. International drilling activity is somewhat less
volatile than the North American market. Due to the significant investment and
complexity surrounding international projects, drilling decisions relating to
such projects tend to be evaluated and monitored with a longer-term perspective
in regard to oil and natural gas pricing as most contracts span two to three
years.
In the U.S., the level of rig activity began to decline in the third
quarter of 2001 and continued to decline through the first trimester of 2002.
From the second quarter of 2002 and into the first quarter of 2003, the U.S. rig
count has shown steady improvements. In the last week of March 2003, the U.S.
reported the highest rig count since
16
November 2001 with 962 rigs. Canadian rig count has experienced similar trends
with the exception of the usual seasonal decline related to `spring breakup,'
which usually takes place during the second quarter. The rig count in Canada
reached 558 rigs during the first quarter of 2003, the highest it has been since
the first quarter of 2000. During 2002 and through the first quarter of 2003,
natural gas prices improved from a low of $1.91 in January 2002 to a high of
$9.58 per mcf in February 2003. Recently natural gas prices have averaged
approximately $5.79 per mcf. We expect activity in North America to continue to
improve throughout 2003, after the conclusion of the seasonal decline in Canada.
International rig activity strengthened during 2002, with the exception of
Latin America. Both the Middle East and Asia Pacific regions have shown steady
quarterly improvement since the beginning of 2001. We anticipate improvements in
the eastern hemisphere markets during the latter half of 2003, in particular the
UK North Sea and the Middle East, while the Latin America market is expected to
be flat during 2003.
In general, we expect the markets and our business strategies to affect our
results as follows:
NORTH AMERICA. The markets in the U.S. are in the early stages of
improvement. The level of inquiry, contractual bidding and activity is rising.
If historical leads and lags hold true, we expect to experience more significant
improvements in our U.S. business sometime in mid- to late 2003. Improvements
will first impact our drilling services and then our production and completion
products and services. We anticipate volume increases to be between 10% and 15%
and we expect to increase pricing as volume increases. Prior to the `spring
breakup' Canada had a very strong performance in 2003. Activity after `spring
breakup' is expected to recover quickly and remain strong for the rest of the
year.
Our Artificial Lift Systems Division is impacted by the volatility in North
America, primarily related to the oil rig count. Revenues for this division in
the first quarter were approximately 69% North American, with 32% in the U.S.
and 37% in Canada. Due to the high dependency on Canadian activity, the length
and severity of `spring breakup' will have a significant impact on this
division. Our Drilling and Intervention Services Division and Completion Systems
Division will also be impacted by improvements in North America. These divisions
derive approximately 40% to 50% of their revenues from this region.
INTERNATIONAL. Overall, we expect international activity to improve
approximately 4% in 2003 compared to 2002. We anticipate we will experience 10%
growth year-on-year, exhibiting higher dollar sales per rig employed as shown
historically. The largest expected increases in 2003 over 2002 are in the Middle
East/North Africa, Brazil and Mexico markets. In the latter part of 2002, we
experienced declines in the UK North Sea region, Venezuela and Kazakhstan. We
believe the activity in the UK has bottomed out and should begin to see
improvements in the latter half of 2003. An emerging trend is the sale of mature
fields by major oil companies to smaller independent oil companies. Such a trend
bodes well for ongoing development activity and revitalization of the North Sea
market. Further UK North Sea activity improvements should be realized in 2004 if
proposed tax changes are enacted and if such changes are satisfactory to North
Sea operators. Additionally, due to the completion of a major consolidation of a
number of our business segments in the UK North Sea, we believe when the UK
cycle reverses itself we are positioned to take on incremental volume at higher
incremental margins. The declines in Venezuela in the last half of the year are
due to the continuing economic and political uncertainty which culminated in a
strike in the fourth quarter of 2002. The first quarter of 2003 continued to
deteriorate, but we expect a recovery for the balance of the year once a degree
of normalcy returns to operations. Our operations were also impacted by activity
in Kazakhstan, more specifically Chevron's Tengiz project, as the project was
abruptly interrupted in the fourth quarter of 2002. This project officially
restarted at the end of January, and our operations will resume by the end of
April 2003.
We expect our technology products to fuel much of the prospective
performance in our international markets. In 2002, our technology products
increased approximately 30% from their 2001 level. We expect growth from our
expandable products in the current year and beyond. We recently signed a $50
million two-year contract with Shell Malaysia for our expandable sand screens
and announced a $34 million contract for Petrobras offshore projects in 2003 and
2004. In the first quarter of 2003, we commercialized our first expandable
solids for well remediation. Recently, we successfully installed an
all-hydraulic multi-zone completion system under our intelligent well product
line. This installation, in such a high-end downhole application, opens up a
whole market for intelligent zonal isolation at an affordable cost. After
working on the development and marketing of our underbalanced systems for two
years, we are seeing the emergence of repeat business. For 2003, the growth in
underbalanced services is likely to be the Middle East, Latin America and U.S.
tight gas reservoirs as well as the Canadian market. Overall, we expect revenues
from our technology products to grow approximately 50% from 2002 levels.
17
Based on our market expectations and our business strategies, we project
our full year 2003 diluted earnings per share to be in the range of $1.50 -
$1.60.
Overall, the level of market improvements for our businesses for the
remainder of 2003 will continue to be heavily dependent on the timing and
strength of the recovery in the North American markets, our gains in market
share outside North America and the acceptance of our new technologies. The
speed and extent of any recovery in the North American markets is difficult to
predict in light of continued economic uncertainty. In addition, the continued
strength of the industry is uncertain and will be highly dependent on many
external factors, such as world economic and political conditions, member
country quota compliance within OPEC (Organization of Petroleum Exporting
Countries) and weather conditions. The extreme volatility of our markets makes
predictions regarding future results difficult.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements. We
prepare these financial statements in conformity with accounting principles
generally accepted in the United States. As such, we are required to make
certain estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods presented. We base our
estimates on historical experience, available information and various other
assumptions we believe to be reasonable under the circumstances. These estimates
may change as new events occur, as more experience is acquired, as additional
information is obtained and as our operating environment changes. There have
been no material changes or developments in our evaluation of the accounting
estimates and the underlying assumptions or methodologies that we believe to be
Critical Accounting Policies and Estimates as disclosed in our Form 10-K for the
year ending December 31, 2002.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2002
The following charts contain selected financial data comparing our results
for the three months ended March 31, 2003 and March 31, 2002:
THREE MONTHS ENDED
COMPARATIVE FINANCIAL DATA MARCH 31,
----------------------------
2003 2002
---------- ---------
($ in thousands, except per
share data)
Revenues.............................................................. $ 589,338 $ 568,249
Gross Profit %........................................................ 31.8% 33.9%
Research and Development.............................................. $ 19,999 $ 16,984
Selling, General and Administrative Attributable to Segments.......... 92,467 82,925
Corporate General and Administrative.................................. 9,814 9,280
Operating Income...................................................... 69,725 90,236
Net Income............................................................ 33,601 45,219
Net Income per Diluted Share.......................................... 0.27 0.36
Depreciation and Amortization......................................... 56,286 50,034
18
SALES BY GEOGRAPHIC REGION
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
-------- ---------
REGION:
U.S........................................................................ 34% 35%
Canada..................................................................... 18 14
Latin America.............................................................. 8 8
Europe and West Africa..................................................... 19 20
Middle East and North Africa............................................... 12 11
Asia Pacific............................................................... 9 12
--- ---
Total.................................................................. 100% 100%
=== ===
A discussion of our consolidated results for the three months ended March
31, 2003 as compared to the three months ended March 31, 2002 follows:
- Revenues in the first quarter of 2003 increased $21.1 million, or 3.7%,
from the first quarter of 2002. North American revenues improved 10.5%
and international revenues decreased slightly. The international
decrease primarily relates to the decline in Asia Pacific of 19.4% and
Latin America of 5.1%. Acquisitions contributed more than $9 million in
North America and $3 million internationally.
- Our gross profit as a percentage of revenues decreased from 33.9% in
the first quarter of 2002 to 31.8% in the first quarter of 2003. The
decline was primarily due to pricing deterioration in the North
American markets and product mix.
- Selling, general and administrative expenses attributable to segments
increased as a percentage of revenues from 14.6% in the first quarter
of 2002 to 15.7% in the first quarter of 2003 due to increased
intangible amortization and costs associated with the expansion of our
underbalanced drilling systems infrastructure.
- Our equity in earnings for the first quarter of 2003 compared to the
first quarter of 2002 decreased $2.3 million primarily due to a decline
in Universal Compression's net income.
- Our effective tax rate for the first quarter of 2003 was 27.5% compared
to 34.0% for the first quarter of 2002. The decline reflects the
benefits received from our corporate reorganization.
SEGMENT RESULTS
DRILLING AND INTERVENTION SERVICES
Our Drilling and Intervention Services Division has continued to experience
sequential quarterly improvements in revenue since the first quarter of 2002.
This division benefited from gains in North America and acquisitions. The
improved market activity in Canada provided this division with approximately $7
million of incremental revenue.
International revenues for this division were relatively flat in the first
quarter of 2003 compared to the first quarter of 2002. Our Middle East and North
Africa region showed strong improvements with increased revenues of nearly 10%.
Our declines in Latin America and Europe and West Africa are caused by the
political and economic uncertainties in Venezuela, the tax disputes in the UK
and a softer Norwegian rig count.
The following chart sets forth data regarding the results of our Drilling
and Intervention Services Division for the first quarter of 2003 and 2002:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
----------- ----------
($ in thousands)
Revenues.............................................................. $ 327,972 $ 313,349
Gross Profit %........................................................ 31.9% 33.7%
Research and Development.............................................. $ 7,658 $ 6,074
Selling, General and Administrative................................... 38,631 34,496
Operating Income...................................................... 58,414 64,939
19
A discussion of the results of our Drilling and Intervention Services
Division for the first quarter of 2003 compared to the first quarter of 2002
follows:
- Our North American revenues for the first quarter of 2003 improved
12.5%, or 5.4% excluding the impact of acquisitions. This improvement
was attributable to an increase of 16.6% in the quarterly average rig
count. The increase in rig count exceeded our gains due to the timing
of rig count improvements during the first quarter of 2003. Excluding
the impact of acquisitions, our international revenue declined 3.5% in
the first quarter of 2003 compared to the same period of 2002. All
regions, except Middle East and North Africa, experienced slight
declines.
- Gross profit as a percentage of revenues decreased from 33.7% in the
first quarter of 2002 to 31.9% in the first quarter of 2003 primarily
due to product mix, the deterioration in the UK related to E&P tax
disputes between the UK government and the North Sea operators and a
decline in Norwegian drilling activity.
- Selling, general and administrative expenses increased as a percentage
of revenues from 11.0% in the first quarter of 2002 to 11.8% in the
first quarter of 2003. The increase primarily reflects our 2002
acquisitions' higher selling, general and administrative expenses which
are currently being integrated into our operations and costs associated
with the expansion of our underbalanced drilling systems
infrastructure.
COMPLETION SYSTEMS
Our Completion Systems Division's revenues for the first quarter of 2003
were relatively flat with the first quarter of 2002, but were up nearly 15% from
the fourth quarter of 2002. In the first quarter of 2003 gains were made in
Canada and the Europe and West Africa region, with offsetting declines in the
U.S. and the Middle East and North Africa region as compared to the first
quarter of 2002.
The following chart sets forth data regarding the results of our Completion
Systems Division for the first quarter of 2003 and 2002:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
----------- ----------
($ in thousands)
Revenues.............................................................. $ 92,736 $ 92,312
Gross Profit %........................................................ 26.6% 34.2%
Research and Development.............................................. $ 9,398 $ 9,273
Selling, General and Administrative................................... 19,949 16,077
Operating Income (Loss)............................................... (4,658) 6,198
A discussion of the results of our Completion Systems Division for the
first quarter of 2003 compared to first quarter of 2002 follows:
- On a geographical basis, Europe and West Africa experienced the
strongest gains with a 20.1% improvement in revenue contributions in
the first quarter of 2003 as compared to the same period last year.
Revenues in North America decreased 8.3% in the first quarter of 2003
compared to the first quarter of 2002, despite a 52.2% improvement in
Canada.
- Gross profit as a percentage of revenues decreased from 34.2% in the
first quarter of 2002 to 26.6% in the first quarter of 2003 primarily
due to lower volume of products with high fixed costs.
- Selling, general and administrative expenses as a percentage of
revenues increased from 17.4% in the first quarter of 2002 to 21.5% in
the same period in 2003. The increase is primarily due to higher
incremental intangible asset amortization expense of $2.3 million. One
of the drivers for the higher amortization expense is the intangible
asset associated with our worldwide expandable license.
ARTIFICIAL LIFT SYSTEMS
Revenues for our Artificial Lift Systems Division in the first quarter of
2003 increased slightly from first quarter 2002 levels. Nearly all geographic
regions experienced gains, in particular Canada where revenues improved 25%. On
a product line basis, progressing cavity pumps, which earns more than 80% of its
revenues in Canada, showed the strongest improvements.
20
The following chart sets forth data regarding the results of our Artificial
Lift Systems Division for the first quarters of 2003 and 2002:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
------------ ------------
($ in thousands)
Revenues............................................................. $ 168,630 $ 162,588
Gross Profit %....................................................... 34.4% 34.1%
Research and Development............................................. $ 2,943 $ 1,637
Selling, General and Administrative.................................. 33,887 32,352
Operating Income .................................................... 21,221 21,526
A discussion of the results of our Artificial Lift Systems Division as
reflected above for the first quarter of 2003 compared to the first quarter of
2002 follows:
- In the first quarter of 2003 compared to the first quarter of 2002,
revenues in North America increased 14.8% and international revenues
decreased 14.4%, primarily due to declines in Asia Pacific of 35.8%.
- Gross profit and selling, general and administrative expenses
remained flat as a percentage of revenue in the first quarter of 2003
as compared to the same quarter of last year.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
During the third quarter of 2002, we recorded $15.4 million, $10.0 million
net of taxes, in restructuring and asset impairment charges relating to a
rationalization of our businesses in light of industry conditions. We undertook
initiatives to rationalize our business in light of the lower activity levels
and the continued economic uncertainty. The plan approved during 2002 included a
reduction in workforce, primarily in the United States, and the closure of two
facilities. During the first quarter of 2003, we modified our plan and reversed
$3.1 million of unutilized accruals recorded by the Completion Systems and
Artificial Lift Systems segments. In connection with this modification, we also
expensed $2.0 million during the first quarter for other facility impairments
within the Completion Systems segment. The amounts related to the modification
were recorded in Cost of Products in our Condensed Consolidated Statements of
Income. The charge related to the 2002 plan is summarized by segment in the
following table and described in greater detail below:
REVERSAL OF
2000
ASSET RESTRUCTURING
SEVERANCE (1) IMPAIRMENT (2) CHARGE (3) TOTAL
------------- -------------- ------------- ---------
(IN THOUSANDS)
Drilling and Intervention Services.... $ 1,853 $ 132 $ -- $ 1,985
Completion Systems.................... 4,810 1,580 -- 6,390
Artificial Lift Systems............... 1,866 5,295 -- 7,161
Corporate............................. 48 4,592 (4,739) (99)
--------- ---------- ---------- --------
Total................................. 8,577 11,599 (4,739) 15,437
Utilized during 2002................ (3,748) (11,599) 4,739 (10,608)
Reversal of 2002
Restructuring Charge......... (3,148) -- -- (3,148)
Utilized during 2003................ (1,223) -- -- (1,223)
--------- ---------- ---------- --------
Balance as of March 31, 2003.......... $ 458 $ -- $ -- $ 458
========= ========== ========== ========
(1) In accordance with our announced plan to terminate employees
company-wide, we recorded severance and related costs for 849
specifically identified employees. As of March 31, 2003, 20 employees
remained to be terminated, which is expected to occur in the second
quarter of 2003.
(2) The asset impairment primarily relates to the write-down of equipment
and facilities which are held for sale as a result of the decline in
market conditions. These assets, having a carrying amount of $5.1
million and $7.7 million have been reclassified in Other Current Assets
on our Condensed Consolidated Balance Sheets
21
as of March 31, 2003 and December 31, 2002, respectively. We anticipate
the remaining assets will be sold by September 30, 2003.
(3) In 2000, we recorded a non-recurring charge of $56.3 million in
connection with the merger of our Compression Services Division with
Universal of which $4.7 million of estimated transaction costs were not
incurred.
ORGANIZATIONAL CHANGES
In April 2003 we made a strategic decision to realign our divisions. Our
three historical divisions of Drilling and Intervention Services, Completion
Systems and Artificial Lift Systems will now operate under two divisions, namely
Drilling Services and Production Systems. This change was not required to be
reflected in the accompanying condensed consolidated financial statements but
will be reflected retroactively in our Form 10-Q for the quarter ended June 30,
2003.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, Financial Accounting Standards Board Interpretation No.
46, Consolidation of Variable Interest Entities ("FIN No. 46") was issued. FIN
No. 46 requires companies that control another entity through interests other
than voting interests to consolidate the controlled entity. FIN No. 46 applies
to variable interest entities created after January 31, 2003, and applies in the
first interim period beginning after June 15, 2003 to variable interest entities
created before February 1, 2003. We are currently evaluating the impact this
interpretation will have on our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Our current sources of capital are current reserves of cash, cash generated
from operations, proceeds from our asset securitization and borrowings under
bank lines of credit. Our operating cash flow is directly related to our
business and the segments in which we operate. Should market conditions
deteriorate, or should we experience unforeseen declines in results of
operations, cash flows may be reduced. Cash flow from operations is expected to
be our primary source of liquidity during 2003. We anticipate cash flows from
operations, combined with existing credit facilities, will provide sufficient
capital resources and liquidity to manage our operations, meet debt obligations
and fund projected capital expenditures. We are continually reviewing
acquisitions in our markets. Depending on the size and timing of an acquisition,
we could require additional capital in the form of either debt, equity or both.
CASH FLOWS
As of March 31, 2003, our cash and cash equivalents were $38.5 million, a
net decrease of $10.4 million from December 31, 2002, which was primarily
attributable to the following:
- Cash inflows from operating activities of $25.9 million;
- Capital expenditures for property, plant and equipment of $69.9
million;
- Acquisition of new businesses of approximately $4.8 million in cash,
net of cash acquired;
- Proceeds from the sales of assets of $8.8 million;
- Borrowings, net of repayments, on long-term debt and short-term
facilities of $22.7 million;
- Proceeds from our asset securitization of $4.8 million;
- Proceeds from stock option activity of $2.6 million.
SOURCE OF LIQUIDITY
Banking Facilities
In April 2001, we entered into a $250.0 million, three-year multi-currency
revolving credit facility, with commitment capacity of up to $400.0 million. As
of March 31, 2003, $136.6 million was available under this credit facility.
We also have a five-year unsecured revolving credit facility, dated May
1998, that allows us to borrow up to $250.0 million at any time. The facility
consists of a $200.0 million U.S. credit facility and a $50.0 million
22
Canadian credit facility. As of March 31, 2003, $53.9 million was available
under this facility due to amounts outstanding and $28.1 million which was used
to secure outstanding letters of credit.
Our credit facilities contain customary affirmative and negative covenants,
including a maximum debt to capitalization ratio, a minimum interest coverage
ratio, a limitation on liens, a limitation on incurrence of indebtedness and a
limitation on asset dispositions. We are in compliance with all covenants set
forth in the credit facilities. The committed revolving credit facilities do not
contain any provision which makes their availability dependent upon our credit
ratings; however, the interest rates are dependent upon the credit rating of our
long-term senior debt.
We also have unsecured short-term borrowings with various institutions
pursuant to uncommitted facilities. At March 31, 2003, we had $92.3 million in
unsecured short-term borrowings outstanding under these arrangements with
interest rates ranging from 1.63% to 8.86%.
We have entered into a three-year unsecured revolving credit facility
agreement that provides for borrowings of up to an aggregate of $500.0 million.
Certain of the proceeds from the credit facility will be used to repay all
amounts due under our existing revolving credit facilities, at which time those
facilities will be terminated. Amounts outstanding will accrue interest at a
variable rate based on either the U.S. prime rate or LIBOR and the credit rating
assigned to our long-term senior debt. The covenants and conditions of this
facility are substantially the same as the facilities it replaces, and it is
guaranteed by Weatherford International, Inc.
Asset Securitization
We have in place an agreement with a financial institution to sell, on a
continuous basis, an undivided interest in a specific pool of our current
domestic accounts receivable through December 2003. We are permitted to
securitize up to $75.0 million under this agreement. If our credit rating falls
below BBB- from Standard & Poor's or Baa3 from Moody's, the financial
institution has no further obligation to purchase our accounts receivable. We
currently pay a program fee on participating interests at a variable rate based
on the financial institution's commercial paper rate plus other fees. Program
fees totaled $0.3 million and $0.7 million for the three months ended March 31,
2003 and 2002, respectively. We received $73.7 million for purchased interests
and had retained interests in receivables sold of $59.1 million as of March 31,
2003.
CONTRACTUAL OBLIGATIONS
Our contractual obligations at March 31, 2003, and the effect such
obligations are expected to have on our liquidity and cash flow in future
periods have not changed materially, other than as detailed below, since
December 31, 2002.
Capital Expenditures
Our capital expenditures for property, plant and equipment during the three
months ended March 31, 2003 were $64.1 million, net of proceeds from tools lost
down hole of $5.8 million. Our capital expenditures primarily relate to our new
technologies, drilling equipment, fishing tools and tubular service equipment.
Capital expenditures for 2003 are expected to be approximately $250.0 million.
Our depreciation expense during the three months ended March 31, 2003 was $51.6
million.
Zero Coupon Convertible Senior Debentures
On June 30, 2000, we completed the private placement of $910.0 million face
amount of our Zero Coupon Convertible Senior Debentures. These Debentures were
issued at $501.6 million providing the holders with an annual 3% yield to
maturity. As of March 31, 2003, the accreted amount of these debentures was
$544.5 million.
Holders may convert the Zero Coupon Convertible Senior Debentures into our
common shares at any time before maturity at a conversion rate of 9.9970 shares
per $1,000 principal amount at maturity or an initial conversion price of
$55.1425 per common share. The effective conversion price will increase as the
accreted value of the Zero Coupon Convertible Senior Debentures increases. We
may redeem the Zero Coupon Convertible Senior Debentures on or after June 30,
2005 at the accreted discounted amount at the time of redemption as provided for
in the indenture agreement. The holders also may require us to repurchase the
Zero Coupon Convertible Senior
23
Debentures on June 30, 2005, June 30, 2010 and June 30, 2015 at the accreted
discounted amount at the time of repurchase. We may, at our election, repurchase
the debentures in cash, common stock or a combination thereof. The Zero Coupon
Convertible Senior Debentures are unsecured, ranking equal in right of payment
with all other unsecured and unsubordinated indebtedness and will rank senior to
any future subordinated indebtedness.
EXPOSURES
INDUSTRY EXPOSURE
The concentration of our customers in the energy industry may impact our
overall exposure to credit risk as customers may be similarly affected by
prolonged changes in economic and industry conditions. We perform ongoing credit
evaluations of our customers and do not generally require collateral in support
of our trade receivables. While we maintain reserves for potential credit
losses, we can make no assurance that such reserves will be sufficient to meet
write-offs of uncollectible receivables or our losses from such receivables will
be consistent with our expectations.
LITIGATION AND ENVIRONMENTAL EXPOSURE
In the ordinary course of business, we become the subject of various claims
and litigation. We maintain insurance to cover many of our potential losses and
we are subject to various self-retentions and deductibles with respect to our
insurance. Although we are subject to various ongoing items of litigation, we do
not believe any of the items of litigation we are currently subject to will
result in any material uninsured losses to us. However, it is possible an
unexpected judgment could be rendered against us in cases in which we could be
uninsured and beyond the amounts we currently have reserved or anticipate
incurring.
We are also subject to various federal, state and local laws and
regulations relating to the energy industry in general and the environment in
particular. Environmental laws have in recent years become more stringent and
have generally sought to impose greater liability on a larger number of
potentially responsible parties. While we are not currently aware of any
situation involving an environmental claim which would likely have a material
adverse effect on our business, it is always possible an environmental claim
with respect to one or more of our current businesses or a business or property
one of our predecessors owned or used could arise that could involve the
expenditure of a material amount of funds.
TERRORISM EXPOSURE
The terrorist attacks that took place in the U.S. on September 11, 2001
were unprecedented events that have created many economic and political
uncertainties, some of which may materially impact our businesses. The potential
for future terrorist attacks, the national and international responses to
terrorist attacks and other acts of war or hostility have created many economic
and political uncertainties, which could adversely affect our businesses.
INTERNATIONAL EXPOSURE
Like most multinational oilfield service companies, we have operations in
certain international areas, including parts of the Middle East, North and West
Africa, Latin America, the Asia-Pacific region and the Commonwealth of
Independent States that are inherently subject to risks of war, political
disruption, civil disturbance and change in global trade policies that may:
- disrupt oil and gas exploration and production activities;
- negatively impact results of operations;
- restrict the movement and exchange of funds;
- inhibit our ability to collect receivables;
- lead to U.S. government or international sanctions; and
- limit access to markets for periods of time.
TAX EXPOSURE
On June 26, 2002, the stockholders and Board of Directors of Weatherford
International, Inc. approved our corporate reorganization, and Weatherford
International Ltd., a newly formed Bermuda company, became the parent holding
company of Weatherford International, Inc. Our expectation as to the tax
benefits that could result from our reorganization were based upon laws in
effect at the time of the reorganization. Legislation proposed after we began
24
to develop a reorganization plan has included items that could, if enacted,
restrict or eliminate our ability to realize anticipated tax benefits. Changes
in tax laws, tax treaties or tax regulations or the interpretation or
enforcement thereof or differing interpretation or enforcement of applicable law
by the U.S. Internal Revenue Service or other taxing authorities could adversely
impact our ability to realize tax benefits from our reorganization and adversely
impact our results.
CURRENCY EXPOSURE
Approximately 33.0% of our net assets are located outside the U.S. and are
carried on our books in local currencies. Changes in those currencies in
relation to the U.S. dollar result in translation adjustments, which are
reflected as accumulated other comprehensive loss in the shareholders' equity
section on our Condensed Consolidated Balance Sheets. We recognize remeasurement
and transactional gains and losses on currencies in our Condensed Consolidated
Statements of Income. Such remeasurement and transactional gains and losses may
adversely impact our results of operations.
In certain foreign countries, a component of our cost structure is U.S.
dollar denominated, whereas our revenues are partially local currency based;
therefore, a devaluation of the local currency would adversely impact our
operating margins.
FORWARD-LOOKING STATEMENTS
This report as well as other filings made by us with the Securities and
Exchange Commission ("SEC") and our releases issued to the public contain
various statements relating to future results, including certain projections and
business trends. We believe these statements constitute "Forward-Looking
Statements" as defined in the Private Securities Litigation Reform Act of 1995.
Certain of the risks and uncertainties may cause actual results to be
materially different from projected results contained in forward-looking
statements in this report and in our other disclosures. These risks and
uncertainties include, but are not limited to, the following:
- A downturn in market conditions could affect projected results. Any
material changes in oil and gas supply and demand, oil and gas prices,
rig count or other market trends would affect our results and would
likely affect the forward-looking information provided by us. The oil
and gas industry is extremely volatile and subject to change based on
political and economic factors outside our control. Through the
beginning of 2002, there was a general decrease in prices for oil and
natural gas, reflecting diminished demand attributable to political and
economic issues. In the latter part of 2002, there was an increase of
prices for oil and natural gas. However, with the exception of Canada,
producers did not increase drilling due to the political and economic
uncertainty. During the first quarter of 2003, there was an increase in
North American drilling activity; however, if an extended regional
and/or worldwide recession would occur, it would result in even lower
demand and lower prices for oil and gas, which would adversely affect
our revenues and income. At this time, we have assumed increases in
demand will continue at a modest pace throughout 2003. We have assumed
international demand will increase modestly in the latter half of 2003.
- Our results are dependent upon our ability to react to the current
market environment. During the fourth quarter of 2001 and throughout
2002, we implemented a number of programs intended to reduce costs and
align our cost structure with the current market environment. Our
forward-looking statements assume these measures will generate the
savings expected and, if the markets continue to decline, any
additional actions we pursue will be adequate to achieve the desired
savings.
- A material disruption in our manufacturing could adversely affect our
business. Our forward-looking statements assume any manufacturing
expansion and consolidation will be completed without material
disruptions. If there are disruptions or excess costs associated with
manufacturing changes, our results could be adversely affected.
- Our success is dependent upon the integration of acquisitions. We have
consummated acquisitions of several product lines and businesses. The
success of our acquisitions will be dependent on our ability to
integrate the product lines and businesses with our existing businesses
and eliminate duplicative costs. We incur various duplicative costs
during the integration of the operations of acquired businesses into
our operations. Our forward-looking statements assume the successful
integration of the operations of the acquired businesses; however,
there can be no assurance the expected benefits of these acquisitions
will materialize. Integration of acquisitions is something that cannot
occur in the short-term and requires
25
constant effort at the local level to be successful. Accordingly, there
can be no assurance as to the ultimate success of these integration
efforts.
- Our long-term growth is dependent upon technological advances. Our
ability to deliver our long-term growth strategy is dependent in part
on the commercialization of new technology. A central aspect of our
growth strategy is to innovate our products and services, to obtain
technologically advanced products through internal research and
development and/or acquisitions, and to expand the markets for new
technology through leverage of our worldwide infrastructure. Key to our
success will be our ability to commercialize the technology we have
acquired and demonstrate the enhanced value our technology brings to
our customers' operations. Our major technological advances include,
but are not limited to, those related to underbalanced drilling,
expandable well construction and intelligent well completion. Our
forward-looking statements have assumed successful commercialization of
and above-average growth from these new products and services.
- Nonrealization of expected benefits from our corporate reorganization
could affect our projected results. An inability to realize expected
benefits of the reorganization within the anticipated time frame, or at
all, would likely affect the financial benefit of our corporate
reorganization.
- Nonrealization of expected benefits of our recent change in divisional
structure could adversely affect our projected results. We recently
announced a realignment of our product lines from three divisions to
two divisions. Our forward-looking statements assume there will be no
material disruption to our operations and we will realize anticipated
cost savings.
- A decline in the fair value of our investment in Universal that is
other than temporary would adversely affect our projected results. In
the third quarter of 2002, we determined the decline in Universal's
stock price was other than temporary and recorded a write-down in the
carrying value of the investment. In connection with the reduction in
the carrying value, we recognized a tax benefit related to the
difference between the book carrying value and the tax basis of the
investment. We can make no assurances there will not be an additional
decline in value of our investment in Universal and that any such
decline would be temporary. Any decline may result in an additional
write-down in the carrying value of our investment in Universal and
would adversely affect our results.
- The cyclical nature of or a prolonged downturn in our industry could
affect the carrying value of our goodwill. As of March 31, 2003, we had
approximately $1.5 billion of goodwill. Our estimates of the value of
our goodwill could be reduced in the future as a result of various
factors in or beyond our control. Any reduction in the value of our
goodwill may result in an impairment charge and therefore adversely
affect our results.
- Currency fluctuations could have a material adverse financial impact on
our business. A material decline in currency rates in our markets could
affect our future results as well as affect the carrying values of our
assets. World currencies have been subject to much volatility. Our
forward-looking statements assume no material impact from future
changes in currencies.
- Political disturbances, war, or terrorist attacks and changes in global
trade policies could adversely impact our operations. We have assumed
there will be no material political disturbances or terrorist attacks
and there will be no material changes in global trade policies. In
March 2003 the President of the United States initiated hostilities
against Iraq. Any further military action undertaken by the United
States or other countries against Iraq or other countries could
adversely affect our results of operations.
Finally, our future results will depend upon various other risks and
uncertainties, including, but not limited to, those detailed in our other
filings with the SEC. For additional information regarding risks and
uncertainties, see our other filings with the SEC under the Securities Exchange
Act of 1934, as amended, and the Securities Act of 1933, as amended, available
free of charge at the SEC's website at www.sec.gov. We will generally update our
assumptions in our filings as circumstances require.
AVAILABLE INFORMATION
We make available, free of charge, on our website (www.weatherford.com) our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file or furnish them to the SEC.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are currently exposed to market risk from changes in foreign currency
rates and changes in interest rates. A discussion of our market risk exposure in
financial instruments follows.
FOREIGN CURRENCY EXCHANGE RATES
Because we operate in virtually every oil and gas exploration and
production region in the world, we conduct a portion of our business in
currencies other than the U.S. dollar. The functional currency for most of our
international operations is the applicable local currency. Although most of our
international revenues are denominated in the local currency, the effects of
foreign currency fluctuations are partly mitigated because local expenses of
such foreign operations are also generally denominated in the same currency.
Assets and liabilities of which the functional currency is the local
currency are translated using the exchange rates in effect at the balance sheet
date, resulting in translation adjustments that are reflected as accumulated
other comprehensive loss in the shareholders' equity section on our Condensed
Consolidated Balance Sheets. Approximately 33.0% of our net assets are impacted
by changes in foreign currencies in relation to the U.S. dollar. We recorded a
$25.1 million adjustment to our equity account for the three months ended March
31, 2003 to reflect the net impact of the strengthening in various foreign
currencies against the U.S. dollar.
INTEREST RATES
We are subject to interest rate risk on our long-term fixed interest rate
debt and, to a lesser extent, variable-interest rate borrowings. Our long-term
borrowings subject to interest rate risk primarily consist of the $350.0 million
principal of the 6 5/8% Senior Notes due 2011, $200.0 million principal of the
7 1/4% Senior Notes due 2006, the $402.5 million principal of the 5% Convertible
Subordinated Preferred Equivalent Debentures due 2027 and the $910.0 million
Zero Coupon Senior Convertible Debentures due 2020. Changes in interest rates
would, assuming all other things being equal, cause the fair market value of
debt with a fixed interest rate to increase or decrease, and thus increase or
decrease the amount required to refinance the debt. As of March 31, 2003, the
fair market value of the 6 5/8% Senior Notes was $380.5 million and the fair
value of the 7 1/4% Senior Notes was $227.0 million. The fair value of both
Senior Notes is principally dependent on changes in prevailing interest rates.
As of March 31, 2003, the fair market value of the Convertible Preferred
Debentures was $390.5 million, and the fair market value of the Zero Coupon
convertible Debentures was $581.3 million. The fair market value of the
Convertible Preferred Debentures and the Zero Coupon Debentures is principally
dependent on both prevailing interest rates and our current share price as it
relates to the conversion price of $53.34 per share and $55.1425 per share,
respectively.
We have various other long-term debt instruments but believe the impact of
changes in interest rates in the near term will not be material to these
instruments. Short-term borrowings of $373.7 million at March 31, 2003
approximate fair market value.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Quarterly Report on
Form 10-Q, the Company carried out an evaluation, under the supervision and with
the participation of management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-14 (c) and 15d-14 (c) under the
Exchange Act). Based upon that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded the Company's disclosure controls and
procedures are effective to timely alert them to material information relating
to the Company (including its consolidated subsidiaries) required to be included
in the Company's Exchange Act filings. There were no significant changes in the
Company's internal controls, or in other factors that could significantly affect
the Company's internal controls, subsequent to the date of the Company's
evaluation.
27
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, the
certifications of Bernard J. Duroc-Danner, Chief Executive Officer of the
Company, and Lisa W. Rodriguez, Chief Financial Officer of the Company, are
included with this Form 10-Q. Copies of these certifications are available on
the Company's website at www.weatherford.com.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
certifications of Bernard J. Duroc-Danner, Chief Executive Officer of the
Company, and Lisa W. Rodriguez, Chief Financial Officer of the Company, are
filed with this Form 10-Q as Exhibit Numbers 99.1 and 99.2. Copies of these
certifications are available on the Company's website at www.weatherford.com.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
+99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
+99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
+ Filed herewith
(b) Reports on Form 8-K:
1. Current Report on Form 8-K dated January 17, 2003, announcing earnings
expectations for the quarter ended December 31, 2002.
2. Current Report on Form 8-K dated February 3, 2003, announcing earnings
for the quarter ended December 31, 2002.
3. Current Report on Form 8-K dated March 31, 2003, announcing the
availability of an investor presentation on the Company's website.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Weatherford International Ltd.
By: /s/ Bernard J. Duroc-Danner
---------------------------------------------
Bernard J. Duroc-Danner
Chief Executive Officer, Chairman of the Board
and Director
(Principal Executive Officer)
/s/ Lisa W. Rodriguez
---------------------------------------------
Lisa W. Rodriguez
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
Date: May 7, 2003
29
CERTIFICATIONS
I, Bernard J. Duroc-Danner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Weatherford
International Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ Bernard J. Duroc-Danner
----------------------------------------
Bernard J. Duroc-Danner
Chief Executive Officer, Chairman of the
Board and Director
30
I, Lisa W. Rodriguez, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Weatherford
International Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ Lisa W. Rodriguez
----------------------------------------
Lisa W. Rodriguez
Senior Vice President and Chief Financial
Officer
31
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
+99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
+99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
+ Filed herewith
32