Back to GetFilings.com
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 June 30, 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 August 11, 2003
- ------------------------------ ------------------------------
Common Shares, par value $1.00 131,292,106
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
JUNE 30, DECEMBER 31,
2003 2002
------------- ---------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and Cash Equivalents............................................ $ 49,085 $ 48,837
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $18,239 and $18,088, Respectively...................... 510,664 485,178
Inventories.......................................................... 595,796 547,744
Other Current Assets................................................. 175,190 177,480
------------ ------------
1,330,735 1,259,239
------------ ------------
Property, Plant and Equipment, Net...................................... 1,212,168 1,126,162
Goodwill, Net........................................................... 1,566,111 1,497,302
Other Intangible Assets, Net............................................ 272,332 259,733
Equity Investments in Unconsolidated Affiliates......................... 291,128 285,901
Deferred Tax Assets..................................................... 65,596 18,288
Other Assets............................................................ 50,272 48,364
------------ ------------
$ 4,788,342 $ 4,494,989
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-Term Borrowings and Current Portion of Long-Term Debt.......... $ 415,185 $ 364,272
Accounts Payable..................................................... 215,716 186,326
Other Current Liabilities............................................ 332,256 326,879
------------ ------------
963,157 877,477
------------ ------------
Long-Term Debt.......................................................... 569,165 570,991
Zero Coupon Convertible Senior Debentures............................... 548,522 540,416
Deferred Tax Liabilities................................................ 37,448 34,399
Other Liabilities....................................................... 96,283 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 131,332 and 130,799 Shares, Respectively.................... 131,332 130,799
Capital in Excess of Par Value....................................... 2,000,459 1,987,702
Treasury Shares, Net................................................. (254,912) (258,125)
Retained Earnings.................................................... 324,449 262,020
Accumulated Other Comprehensive Loss................................. (30,061) (147,900)
------------ ------------
2,171,267 1,974,496
------------ ------------
$ 4,788,342 $ 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ------------ -----------
Revenues:
Products........................................... $ 298,980 $ 301,804 $ 585,681 $ 570,979
Services and Rentals............................... 318,723 292,062 621,360 591,136
---------- ---------- ---------- ----------
617,703 593,866 1,207,041 1,162,115
Costs and Expenses:
Cost of Products................................... 221,545 208,660 427,288 401,435
Cost of Services and Rentals....................... 216,957 197,398 421,219 389,332
Research and Development........................... 22,596 18,539 42,595 35,523
Selling, General and Administrative Attributable
to Segments...................................... 92,353 80,687 176,710 154,580
Corporate General and Administrative............... 9,680 14,806 19,494 24,086
Equity in Earnings of Unconsolidated Affiliates.... (302) (6,342) (4,864) (13,195)
---------- ---------- ---------- ----------
Operating Income........................................ 54,874 80,118 124,599 170,354
---------- ---------- ---------- ----------
Other Income (Expense):
Interest Expense, Net.............................. (20,932) (20,041) (41,740) (40,997)
Other, Net......................................... 5,602 (1,215) 3,031 (1,974)
---------- ---------- ---------- ----------
Income Before Income Taxes.............................. 39,544 58,862 85,890 127,383
Provision for Income Taxes ............................. (10,716) (20,010) (23,461) (43,312)
---------- ---------- ---------- ----------
Net Income.............................................. $ 28,828 $ 38,852 $ 62,429 $ 84,071
========== ========== ========== ==========
Earnings Per Share:
Basic.............................................. $ 0.24 $ 0.32 $ 0.51 $ 0.70
Diluted............................................ $ 0.23 $ 0.31 $ 0.49 $ 0.66
Weighted Average Shares Outstanding:
Basic.............................................. 121,471 120,033 121,328 119,597
Diluted............................................ 127,489 135,759 127,021 134,783
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)
SIX MONTHS
ENDED JUNE 30,
------------------------------------
2003 2002
------------- -------------
Cash Flows from Operating Activities:
Net Income............................................................ $ 62,429 $ 84,071
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization...................................... 114,112 103,340
Gain on Sales of Assets............................................ (9,667) (5,260)
Equity in Earnings of Unconsolidated Affiliates.................... (4,864) (13,195)
Amortization of Original Issue Discount............................ 8,106 7,868
Deferred Income Tax Provision (Benefit)............................ (20,792) 2,927
Other, Net......................................................... 1,700 3,115
Change in Operating Assets and Liabilities, Net of Effect
of Businesses Acquired........................................... (56,880) (105,389)
----------- -----------
Net Cash Provided by Operating Activities.................... 94,144 77,477
----------- -----------
Cash Flows from Investing Activities:
Acquisition of Businesses, Net of Cash Acquired....................... (17,644) (18,130)
Capital Expenditures for Property, Plant and Equipment................ (150,919) (124,842)
Purchase of Equity Investment in Unconsolidated Affiliate............. (2,644) -
Acquisition of License................................................ - (65,000)
Proceeds from Sales of Assets......................................... 16,173 19,934
----------- -----------
Net Cash Used by Investing Activities........................ (155,034) (188,038)
----------- -----------
Cash Flows from Financing Activities:
Borrowings on Short-Term Debt, Net.................................... 56,520 104,731
Repayments of Long-Term Debt, Net..................................... (9,274) (5,735)
Proceeds from (Repayments on) Asset Securitization.................... 3,379 (50,090)
Proceeds from Exercise of Stock Options............................... 12,187 23,946
Purchases of Treasury Shares, Net..................................... (1,622) (1,850)
Other Financing Activities, Net....................................... (52) (851)
----------- -----------
Net Cash Provided by Financing Activities.................... 61,138 70,151
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.................... 248 (40,410)
Cash and Cash Equivalents at Beginning of Period........................ 48,837 88,832
----------- -----------
Cash and Cash Equivalents at End of Period.............................. $ 49,085 $ 48,422
=========== ===========
Supplemental Cash Flow Information:
Interest Paid......................................................... $ 38,118 $ 36,369
Income Taxes Paid, Net of Refunds..................................... 30,357 19,458
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- -----------------------------
2003 2002 2003 2002
------------ ----------- ------------- ------------
Net Income ............................................ $ 28,828 $ 38,852 $ 62,429 $ 84,071
Other Comprehensive Income:
Foreign Currency Translation Adjustment........... 92,729 29,548 117,839 11,285
---------- ---------- ---------- ----------
Comprehensive Income................................... $ 121,557 $ 68,400 $ 180,268 $ 95,356
========== ========== ========== ==========
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
(UNAUDITED)
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 June 30, 2003,
Condensed Consolidated Statements of Income and Condensed Consolidated
Statements of Comprehensive Income for the three and six months ended June 30,
2003 and 2002, and Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 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 have 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, as amended on Form 10-K/A. The
results of operations for the three and six month periods ended June 30, 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.
In April 2003, the Company realigned its operating segments as part of its
ongoing productivity initiative. This realignment was undertaken to improve the
Company's ability to serve its customers' interests, better coordinate its
business efforts across segments, accelerate the delivery of strategic
technologies to the marketplace and generate operating efficiencies. The three
historical reporting segments of Drilling and Intervention Services, Completion
Systems and Artificial Lift Systems now operate under two reporting segments:
Drilling Services and Production Systems. Accordingly, all historical segment
results reflect the new operating structure (See Notes 2, 3 and 11).
In connection with the change in the segment structure, the detailed
components of Costs and Expenses were reviewed for classification. In order to
conform to the new reporting structure, select distribution costs were
reclassified to Cost of Products and Cost of Services and Rentals and certain
field administration costs were reclassified to Selling, General and
Administrative Attributable to Segments. All prior periods have been
reclassified to conform to the current period presentation. The following table
summarizes the increase/(decrease) to Cost of Products, Cost of Services and
Rentals and Selling, General and Administrative Attributable to Segments for all
prior periods presented in the accompanying Condensed Consolidated Statements of
Income:
THREE MONTHS THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2002
------------------- ------------------ -----------------
(in thousands)
Cost of Products .................................... $ 11,605 $ 13,496 $ 26,087
Cost of Services and Rentals......................... (3,495) (4,682) (8,241)
Selling, General and Administrative Attributable
to Segments...................................... (8,110) (8,814) (17,846)
5
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. SEVERANCE RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
During the second quarter of 2003, the Company recorded approximately $7.7
million, $5.6 million net of taxes, in severance and severance related costs in
connection with the realignment of its segments. The severance and severance
related costs of $4.3 million, $1.0 million, $0.5 million and $1.9 million are
included in Cost of Products, Cost of Services and Rentals, Research and
Development, and Selling, General and Administrative Attributable to Segments,
respectively, in the accompanying Condensed Consolidated Statements of Income.
Severance and severance related costs are summarized by segment in the following
table and described in greater detail below:
SEVERANCE AND SEVERANCE
RELATED COSTS (1)
-----------------------
(in thousands)
Drilling Services............................. $ 3,970
Production Systems............................ 3,740
------------------
Total......................................... 7,710
Utilized during 2003....................... (2,806)
------------------
Balance as of June 30, 2003................... $ 4,904
==================
(1) In accordance with the Company's announced plan to terminate employees
company-wide, it recorded severance costs for 515 specifically identified
employees. As of June 30, 2003, 259 employees had been terminated, and the
remaining terminations are expected to be completed prior to September 30,
2003.
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 Production Systems segment. In connection with this modification, the
Company also expensed $2.0 million during the first quarter for other facility
impairments within the Production 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 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 Services............ $ 3,073 $ 1,712 $ -- $ 4,785
Production Systems........... 5,456 5,295 -- 10,751
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... (1,491) -- -- (1,491)
----------- ----------- ------------- ------------
Balance as of June 30, 2003.. $ 190 $ -- $ -- $ 190
=========== =========== ============= ============
6
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(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. The Company anticipates all terminations will be
completed by the end of the third 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 $4.8 million and
$7.7 million as of June 30, 2003 and December 31, 2002, respectively, have
been reclassified in Other Current Assets on the accompanying Condensed
Consolidated Balance Sheets.
(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 Services and Production 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 six months ended
June 30, 2003 are as follows:
DRILLING PRODUCTION TOTAL
SERVICES SYSTEMS
--------------- ---------------- -----------------
(in thousands)
As of January 1, 2003................. $ 808,729 $ 688,573 $ 1,497,302
Goodwill acquired during period.. 11,224 997 12,221
Impact of foreign currency
translation.................. 17,362 39,226 56,588
------------- ------------- ---------------
As of June 30, 2003................... $ 837,315 $ 728,796 $ 1,566,111
============= ============= ===============
7
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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:
JUNE 30, 2003 DECEMBER 31, 2002
------------------------------------------ ---------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
----------- ------------- ------------ ------------- ------------- -------------
(in thousands)
Patents......... $ 88,249 $ (16,716) $ 71,533 $ 74,250 $ (12,342) $ 61,908
Licenses........ 192,028 (18,666) 173,362 184,042 (13,181) 170,861
Covenants not to
compete....... 20,088 (11,721) 8,367 19,077 (9,432) 9,645
Other........... 13,348 (2,278) 11,070 11,078 (1,759) 9,319
----------- ------------ ------------ ------------- ------------- -------------
$ 313,713 $ (49,381) $ 264,332 $ 288,447 $ (36,714) $ 251,733
=========== ============ ============ ============= ============= =============
Amortization expense was $5.0 million and $9.7 million for the three and
six months ended June 30, 2003, respectively, and $4.0 million and $6.3 million
for the three and six months ended June 30, 2002, respectively. Estimated
amortization expense for the carrying amount of intangible assets as of June 30,
2003 is expected to be $10.8 million for the remainder of 2003, $20.6 million
for 2004, $19.6 million for 2005, $18.4 million for 2006 and $16.5 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 as of June 30, 2003 and December 31, 2002.
5. INVENTORIES
Inventories by category are as follows:
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
(in thousands)
Raw materials, components and supplies............................ $ 176,403 $ 156,294
Work in process................................................... 48,463 50,874
Finished goods.................................................... 370,930 340,576
------------ ------------
$ 595,796 $ 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 $0.6 million for the
three and six months ended June 30, 2003, respectively, and $0.6 million and
$1.3 million for the three and six months ended June 30, 2002, respectively, and
are included in Other Expense on the accompanying Condensed
8
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Consolidated Statements of Income. The Company received $72.3 million and $68.9
million for purchased interests and had retained interests in receivables sold
of $67.8 million and $59.9 million as of June 30, 2003 and December 31, 2002,
respectively.
7. SHORT-TERM DEBT
JUNE 30, DECEMBER 31,
2003 2002
-------------- ----------------
(in thousands)
2003 Revolving credit facility....................................... $ 362,000 $ --
2001 Multi-currency revolving credit facility........................ -- 124,880
1998 Revolving credit facility....................................... -- 150,000
Short-term bank loans................................................ 44,755 75,304
------------- -------------
Total short-term borrowings.......................................... 406,755 350,184
Current portion of long-term debt.................................... 8,430 14,088
------------- -------------
Short-Term Borrowings and Current Portion of Long-Term Debt.......... $ 415,185 $ 364,272
============= =============
In May 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. Amounts outstanding 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 facility contains 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. The Company was in
compliance with these covenants as of June 30, 2003. As of June 30, 2003, the
Company had $115.6 million available under this agreement due to $22.4 million
being used to secure outstanding letters of credit.
In April 2001, the Company entered into a $250.0 million three-year
multi-currency revolving credit facility with commitment capacity up to $400.0
million. In May 1998, the Company entered into a five-year unsecured credit
agreement, which provided for borrowings up to an aggregate of $250.0 million,
consisting of $200.0 million in the U.S. and $50.0 million in Canada. In May
2003, these credit facilities were terminated and borrowings under these credit
facilities were repaid with proceeds from the Company's new revolving credit
facility.
The Company also engages in unsecured short-term borrowings with various
institutions pursuant to uncommitted facilities. As of June 30, 2003, the
Company had $44.8 million in unsecured short-term borrowings outstanding under
these arrangements with interest rates ranging from 1.95% 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. The assumed conversion of 7.5 million Common
Shares related to the 5% Convertible Subordinated Preferred Equivalent
Debentures due 2027 (the "Convertible Preferred Debentures") is excluded from
diluted earnings per share for all periods presented because it is
anti-dilutive.
9
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- -----------
(in thousands)
Net income............................................... $ 28,828 $ 38,852 $ 62,429 $ 84,071
Amortization of original issue discount, net of taxes.... -- 2,758 -- 5,516
---------- ---------- ---------- ----------
Adjusted net income...................................... $ 28,828 $ 41,610 $ 62,429 $ 89,587
=========== =========== =========== ==========
The following reconciles basic and diluted weighted average shares
outstanding:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- -----------
(in thousands)
Basic weighted average shares outstanding................ 121,471 120,033 121,328 119,597
Dilutive effect of warrants and stock option and
restricted stock plans............................... 6,018 6,629 5,693 6,089
Dilutive effect of the Zero Coupon Debentures............ -- 9,097 -- 9,097
---------- ---------- ---------- ----------
Dilutive weighted average shares outstanding............. 127,489 135,759 127,021 134,783
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes investing activities relating to acquisitions
integrated into the Company's operations for the periods shown:
SIX MONTHS
ENDED JUNE 30,
--------------------------------
2003 2002
------------- -------------
(in thousands)
Fair value of assets, net of cash acquired........................... $ 13,822 $ 15,053
Goodwill............................................................. 12,221 12,918
Total liabilities.................................................... (8,399) (9,841)
------------- -------------
Cash consideration, net of cash acquired............................. $ 17,644 $ 18,130
============= =============
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.
10
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ------------------------
2003 2002 2003 2002
---------- --------- ---------- ------------
(in thousands, except per share amounts)
Net income:
As reported........................................... $ 28,828 $ 38,852 $ 62,429 $ 84,071
Pro forma compensation expense, determined
under the fair value method for all awards,
net of income tax benefit.......................... (9,808) (11,828) (19,779) (22,292)
---------- ---------- ---------- ----------
Pro forma............................................. $ 19,020 $ 27,024 $ 42,650 $ 61,779
========== ========== ========== ==========
Basic earnings per share:
As reported........................................... $ 0.24 $ 0.32 $ 0.51 $ 0.70
Pro forma............................................. 0.16 0.23 0.35 0.52
Diluted earnings per share:
As reported........................................... 0.23 0.31 0.49 0.66
Pro forma............................................. 0.15 0.22 0.34 0.50
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 two separate groups as
defined by the chief operating decision maker: Drilling Services and Production
Systems.
The Company's Drilling Services segment provides a wide range of oilfield
products and services, including drilling services and equipment, well
installation services and cementing products, underbalanced drilling services,
fishing and intervention services, pipeline and specialty services, liner
systems and expandable solid tubular systems.
The Company's Production 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 certain completion products
and systems including cased hole systems, flow control systems, sand screens,
expandable sand screen systems and intelligent completion technologies.
Production Systems also provides screens for industrial applications and total
process system solutions for all aspects of natural gas production.
11
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Financial information by industry segment for each of the three and six months
ended June 30, 2003 and 2002 is summarized below. The accounting policies of the
segments are the same as those of the Company.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
---------- ----------- ----------- -----------
(in thousands)
Revenues from unaffiliated customers:
Drilling Services....................... $ 362,044 $ 339,944 $ 707,720 $ 678,303
Production Systems...................... 255,659 253,922 499,321 483,812
---------- ---------- ----------- ----------
$ 617,703 $ 593,866 $ 1,207,041 $1,162,115
========== ========== =========== ==========
Depreciation and amortization:
Drilling Services....................... $ 43,927 $ 41,363 $ 86,907 $ 81,158
Production Systems...................... 12,980 11,198 25,558 20,914
Corporate............................... 919 745 1,647 1,268
---------- ---------- ----------- ----------
$ 57,826 $ 53,306 $ 114,112 $ 103,340
========== ========== =========== ==========
Operating income (loss):
Drilling Services....................... $ 50,823 $ 59,515 $ 105,079 $ 125,994
Production Systems...................... 13,429 29,067 34,150 55,251
Corporate (a)........................... (9,378) (8,464) (14,630) (10,891)
---------- ---------- ----------- ----------
$ 54,874 $ 80,118 $ 124,599 $ 170,354
============ ============= ========== ===========
(a) Includes Equity in Earnings of Unconsolidated Affiliates.
As of June 30, 2003, total assets were $2,518.1 million for Drilling
Services, $1,759.4 million for Production Systems, and $510.8 million for
Corporate. Total assets as of December 31, 2002, were $2,437.5 million for
Drilling Services, $1,608.0 million for Production Systems and $449.5 million
for Corporate.
12
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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
Convertible Preferred Debentures.
In May 2003, Parent entered into a new revolving credit facility, and the
three-year multi-currency and five-year unsecured credit facilities were
terminated (see Note 7). The new revolving credit facility is guaranteed by
Issuer. 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
is the condensed consolidating financial information for Parent and Issuer and
all other subsidiaries:
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2003
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------- ------------ -------------
ASSETS
Current Assets:
Cash and Cash Equivalents...................... $ 34 $ 47,805 $ 1,246 $ -- $ 49,085
Intercompany Receivables....................... 285,771 80,688 -- (366,459) --
Other Current Assets........................... 9,221 1,272,429 -- -- 1,281,650
------------ ------------- ------------- ------------ -------------
295,026 1,400,922 1,246 (366,459) 1,330,735
------------ ------------- ------------- ------------ -------------
Equity Investments in Unconsolidated Affiliates... 277,987 13,141 -- -- 291,128
Intercompany Investments in Affiliates............ 700,347 12 2,801,933 (3,502,292) --
Shares Held in Parent............................. -- 254,912 -- (254,912) --
Intercompany Notes Receivable..................... 1,608,343 254,381 -- (1,862,724) --
Other Assets...................................... 1,079 3,165,102 45,558 (45,260) 3,166,479
------------ ------------- ------------- ------------ -------------
$ 2,882,782 $ 5,088,470 $ 2,848,737 $ (6,031,647) $ 4,788,342
============ ============= ============= ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-Term Borrowings and Current Portion of
Long-Term Debt............................... $ 362,000 $ 53,185 $ -- $ -- $ 415,185
Accounts Payable and Other Current Liabilities. 4,679 588,280 273 (45,260) 547,972
Intercompany Payables.......................... 13,938 221,871 130,650 (366,459) --
------------ ------------- ------------- ------------ -------------
380,617 863,336 130,923 (411,719) 963,157
------------ ------------- ------------- ------------ -------------
Long-Term Debt.................................... -- 1,520,187 -- -- 1,520,187
Intercompany Notes Payable........................ 254,381 208,343 1,400,000 (1,862,724) --
Other Long-Term Liabilities....................... -- 133,731 -- -- 133,731
Shareholders' Equity.............................. 2,247,784 2,362,873 1,317,814 (3,757,204) 2,171,267
------------ ------------- ------------- ------------ -------------
$ 2,882,782 $ 5,088,470 $ 2,848,737 $ (6,031,647) $ 4,788,342
============ ============= ============= ============ =============
13
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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
============ ============= ============= ============= =============
14
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------- ------------ -------------
Revenues........................................... $ -- $ 617,703 $ -- $ -- $ 617,703
Costs and Expenses................................. -- (575,880) (61) 12,810 (563,131)
Equity in Earnings of Unconsolidated Affiliates.... (1,159) 1,461 -- -- 302
------------ ---------- ------------ ------------ -------------
Operating Income (Loss)............................ (1,159) 43,284 (61) 12,810 54,874
------------ ---------- ------------ ------------ -------------
Other Income (Expense):
Interest Expense, Net........................... (1,078) (19,854) -- -- (20,932)
Intercompany Interest Income (Expense), Net..... 26,625 5,135 (31,760) -- --
Other, Net...................................... (20) 5,622 -- -- 5,602
------------ ---------- ------------ ------------ -------------
Income (Loss) Before Income Taxes.................. 24,368 34,187 (31,821) 12,810 39,544
(Provision) Benefit for Income Taxes............... (2,001) (19,830) 11,115 -- (10,716)
------------ ---------- ------------ ------------ -------------
Net Income (Loss).................................. $ 22,367 $ 14,357 $ (20,706) $ 12,810 $ 28,828
============ ========== ============ ============ =============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------- ------------ -------------
Revenues........................................... $ -- $ 593,866 $ -- $ -- $ 593,866
Costs and Expenses................................. -- (520,090) -- -- (520,090)
Equity in Earnings of Unconsolidated Affiliates.... 205 6,137 -- -- 6,342
Loss on Sale to Parent............................. -- (186,460) -- 186,460 --
------------ ----------- ----------- ------------ -------------
Operating Income (Loss)............................ 205 (106,547) -- 186,460 80,118
------------ ----------- ------------ ------------ -------------
Other Income (Expense):
Interest Expense, Net........................... -- (20,041) -- -- (20,041)
Intercompany Interest Income (Expense), Net..... 1,187 224 (1,411) -- --
Other, Net...................................... -- (1,215) -- -- (1,215)
------------ ----------- ------------ ------------ -------------
Income (Loss) Before Income Taxes.................. 1,392 (127,579) (1,411) 186,460 58,862
(Provision) Benefit for Income Taxes............... (516) (20,016) 522 -- (20,010)
------------ ----------- ------------ ------------ -------------
Net Income (Loss).................................. $ 876 $ (147,595) $ (889) $ 186,460 $ 38,852
============ =========== ============ ============ =============
15
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------ ------------ -------------
Revenues............................................ $ -- $ 1,207,041 $ -- $ -- $ 1,207,041
Costs and Expenses.................................. -- (1,102,867) (61) 15,622 (1,087,306)
Equity in Earnings of Unconsolidated Affiliates..... 2,004 2,860 -- -- 4,864
------------ ------------- ----------- ------------ -------------
Operating Income (Loss)............................. 2,004 107,034 (61) 15,622 124,599
------------ ------------- ----------- ------------ -------------
Other Income (Expense):
Interest Expense, Net............................ (1,078) (40,662) -- -- (41,740)
Intercompany Interest Income (Expense), Net.... 53,812 10,088 (63,900) -- --
Other, Net....................................... (20) 3,051 -- -- 3,031
------------ ------------- ----------- ------------ -------------
Income (Loss) Before Income Taxes................... 54,718 79,511 (63,961) 15,622 85,890
(Provision) Benefit for Income Taxes................ (3,914) (41,912) 22,365 -- (23,461)
------------ ------------- ----------- ------------ -------------
Net Income (Loss)................................... $ 50,804 $ 37,599 $ (41,596) $ 15,622 $ 62,429
============ ============ =========== ============ =============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------ ------------ -------------
Revenues............................................ $ -- $ 1,162,115 $ -- $ -- $ 1,162,115
Costs and Expenses.................................. -- (1,004,956) -- -- (1,004,956)
Equity in Earnings of Unconsolidated Affiliates..... 205 12,990 -- -- 13,195
Loss on Sale to Parent.............................. -- (186,460) -- 186,460 --
------------ ------------- ----------- ------------ -------------
Operating Income (Loss)............................. 205 (16,311) -- 186,460 170,354
------------ ------------- ----------- ------------ -------------
Other Income (Expense):
Interest Expense, Net............................ -- (40,997) -- -- (40,997)
Intercompany Interest Income (Expense), Net.... 1,187 224 (1,411) -- --
Other, Net....................................... -- (1,974) -- -- (1,974)
------------ ------------- ----------- ------------ -------------
Income (Loss) Before Income Taxes................... 1,392 (59,058) (1,411) 186,460 127,383
(Provision) Benefit for Income Taxes................ (516) (43,318) 522 -- (43,312)
------------ ------------- ----------- ------------ -------------
Net Income (Loss)................................... $ 876 $ (102,376) $ (889) $ 186,460 $ 84,071
============ ============= =========== ============ =============
16
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------ ------------ -------------
Cash Flows from Operating Activities: $ 50,804 $ 37,599 $ (41,596) $ 15,622 $ 62,429
Net Income (Loss)................................
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Equity in Earnings of Unconsolidated Affiliates.. (2,004) (2,860) -- -- (4,864)
Charges from Parent or Subsidiary................ (53,812) (10,088) 63,900 -- --
Deferred Income Tax Provision (Benefit).......... (480) 2,053 (22,365) -- (20,792)
Other Adjustments................................ 5,526 67,396 71 (15,622) 57,371
------------ ------------- ----------- ------------ -------------
Net Cash Provided by Operating Activities........ 34 94,100 10 -- 94,144
------------ ------------- ----------- ------------ -------------
Cash Flows from Investing Activities:
Acquisition of Businesses, Net of Cash Acquired.. -- (17,644) -- -- (17,644)
Capital Expenditures for Property, Plant and
Equipment........................................ -- (150,919) -- -- (150,919)
Proceeds from Sales of Assets.................... -- 16,173 -- -- 16,173
Other ........................................... -- (2,644) -- -- (2,644)
------------ ------------- ----------- ------------ -------------
Net Cash Used by Investing
Activities....................................... -- (155,034) -- -- (155,034)
------------ ------------- ----------- ------------ -------------
Cash Flows from Financing Activities:
Borrowings (Repayments) on Short-Term Debt, Net.. 362,000 (305,480) -- -- 56,520
Repayments of Long-Term Debt, Net................ -- (9,274) -- -- (9,274)
Proceeds from Asset Securitization............... -- 3,379 -- -- 3,379
Borrowings (Repayments) Between Subsidiaries..... (362,000) 360,776 1,224 -- --
Proceeds from Exercise of Stock Options.......... -- 12,187 -- -- 12,187
Purchases of Treasury Shares, Net................ -- (1,622) -- -- (1,622)
Other............................................ -- (52) -- -- (52)
------------ ------------- ----------- ------------ -------------
Net Cash Provided by Financing
Activities....................................... -- 59,914 1,224 -- 61,138
------------ ------------- ----------- ------------ -------------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... 34 (1,020) 1,234 -- 248
Cash and Cash Equivalents at Beginning of Period.... -- 48,825 12 -- 48,837
------------ ------------- ----------- ------------ -------------
Cash and Cash Equivalents at End of Period.......... $ 34 $ 47,805 $ 1,246 $ -- $ 49,085
============ ============= =========== ============ =============
17
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------- ------------- ------------ ------------ -------------
Cash Flows from Operating Activities:
Net Income (Loss)................. ................ $ 876 $ (102,376) $ (889) $ 186,460 $ 84,071
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Equity in Earnings of Unconsolidated Affiliates.... (205) (12,990) -- -- (13,195)
Loss on Sale to Parent............................. -- 186,460 -- (186,460) --
Deferred Income Tax Provision...................... -- 2,927 -- -- 2,927
Charges from Parent or Subsidiary.................. (1,187) (224) 1,411 -- --
Other Adjustments.................................. 516 3,680 (522) -- 3,674
------------ ------------- ----------- ------------ -------------
Net Cash Provided by Operating Activities.......... -- 77,477 -- -- 77,477
------------ ------------- ----------- ------------ -------------
Cash Flows from Investing Activities:
Acquisition of Businesses, Net of Cash Acquired.... -- (18,130) -- -- (18,130)
Capital Expenditures for Property, Plant and
Equipment.......................................... -- (124,842) -- -- (124,842)
Acquisition of License............................. -- (65,000) -- -- (65,000)
Proceeds from Sales of Assets...................... -- 19,934 -- -- 19,934
Capital Contribution to Subsidiary................. (12) (12) -- 24 --
------------ ------------- ----------- ------------ -------------
Net Cash Provided (Used) by Investing
Activities......................................... (12) (188,050) -- 24 (188,038)
------------ ------------- ----------- ------------ -------------
Cash Flows from Financing Activities:
Borrowings on Short-Term Debt, Net................. -- 104,731 -- -- 104,731
Repayments of Long-Term Debt, Net.................. -- (5,735) -- -- (5,735)
Repayment on Asset Securitization.................. -- (50,090) -- -- (50,090)
Proceeds from Exercise of Stock Options............ -- 23,946 -- -- 23,946
Purchases of Treasury Shares, Net.................. -- (1,850) -- -- (1,850)
Proceeds from Capital Contribution................. 12 -- 12 (24) --
Other.............................................. -- (851) -- -- (851)
------------ ------------- ----------- ------------ -------------
Net Cash Provided (Used) by Financing
Activities......................................... 12 70,151 12 (24) 70,151
------------ ------------- ----------- ------------ -------------
Net Increase (Decrease) in Cash and Cash
Equivalents........................................ -- (40,422) 12 -- (40,410)
Cash and Cash Equivalents at Beginning of Period...... -- 88,832 -- -- 88,832
------------ ------------- ----------- ------------ -------------
Cash and Cash Equivalents at End of Period............ $ -- $ 48,410 $ 12 $ -- $ 48,422
============ ============= =========== ============ =============
18
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
13. NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." EITF No. 00-21 provides guidance on how to determine
when an arrangement that involves multiple revenue-generating activities or
deliverables should be divided into separate units of accounting for revenue
recognition purposes, and if this division is required, how the arrangement
consideration should be allocated among the separate units of accounting. The
guidance in the consensus is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company does not expect the
adoption of EITF No. 00-21 to have a material effect on its consolidated
financial statements.
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 consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The Company does not expect the adoption of SFAS No. 149 to have a
material effect on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as liabilities.
The financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003 and must be applied to
the Company's existing financial instruments effective July 1, 2003, the
beginning of the first fiscal period after June 15, 2003. The Company is
currently evaluating the impact the adoption of SFAS No. 150 will have on its
consolidated financial statements.
14. SUBSEQUENT EVENT
On July 3, 2003, the Company completed a public offering of ten million
Common Shares in exchange for $400.0 million in cash proceeds. The Common Shares
were sold through Lehman Brothers, an investment banking firm in which two
directors of the Company are managing directors. The arrangements associated
with this transaction were on customary terms in the industry.
Concurrent with the offering, the Company redeemed all of its outstanding
$402.5 million Convertible Preferred Debentures at a price of 102.5% of the
principal amount. The Convertible Preferred Debentures plus accrued interest
were repaid in August 2003 with the proceeds from the sale of Common Shares and
cash on hand. In the third quarter of 2003, in connection with the early
extinguishment of the Convertible Preferred Debentures, the Company expensed
$10.1 million related to the call premium and $10.9 million relating to the
remaining unamortized debt issuance costs.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following is a discussion of our market, financial condition and
results of operations for the three and six months ended June 30, 2003 and 2002
to assist readers in understanding our financial performance during those
periods and significant trends which may impact future performance. 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, as
amended on Form 10-K/A.
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 are one of the world's leading providers of equipment and services used
for drilling, intervention, completion and production of oil and gas wells. 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. Our offerings include drilling services and equipment, well installation
services, fishing and intervention services, completion systems and all forms of
artificial lift. We offer step change technologies, including expandable solid
tubular systems, expandable sand screens, underbalanced drilling systems,
drilling with casing and intelligent completion technologies.
In April 2003, we made a strategic decision to realign our segments from
three segments to two. We undertook this realignment to improve our ability to
serve our customers' interests, better coordinate our business efforts across
segments, accelerate the delivery of strategic technologies to the marketplace
and generate operating efficiencies. Our three historical segments of Drilling
and Intervention Services, Completion Systems and Artificial Lift Systems now
operate under two segments: (1) Drilling Services and (2) Production Systems.
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. Changes in the worldwide
demand for and price of oil and natural gas affect all of our businesses.
Certain of our products and services, such as our well installation services and
well completion services, depend 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, depend on production activity. We
currently estimate that approximately two-thirds of our operations rely on
drilling activity, with the remainder focused on production and reservoir
enhancement activity.
The following chart sets forth certain statistics that reflect historical
market conditions:
HENRY HUB NORTH AMERICAN INTERNATIONAL
WTI OIL (1) GAS (2) RIG COUNT (3) RIG COUNT (3)
--------------- ---------------- ---------------- ----------------
June 30, 2003....................... $ 30.19 $ 5.411 1,375 769
December 31, 2002................... 31.20 4.789 1,204 753
June 30, 2002....................... 26.86 3.245 1,047 730
(1) Price per barrel as of June 30 and December 31 - Source: Applied
Reasoning, Inc.
(2) Price per MM/BTU as of June 30 and December 31 - Source: Oil World
(3) Average rig count for the applicable month - Source: Baker Hughes
Rig Count
20
The demand for our products and services is cyclical due to the nature of
the energy industry. The price of oil and natural gas is subject to much
volatility. Over the last several years, rig counts have 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. 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 April of 2002. From the second
quarter of 2002 through the remainder of the year, the U.S. rig activity
sustained an approximate count of 850 rigs. Throughout 2003, the U.S. rig count
has shown steady improvements. As of late July, the U.S. reported the highest
rig count since November 2001 with 1,091 rigs. Canadian rig count has
experienced similar trends with the exception of the usual seasonal decline
related to `spring breakup', which took place during the second quarter. Prior
to breakup, the rig count in Canada peaked at 554 rigs, the highest it has been
since the first quarter of 2001. During 2002 and through the first quarter of
2003, natural gas prices improved, peaking at $9.58 per mcf in February 2003.
Recently, natural gas prices have averaged approximately $5.93 per mcf. We
expect activity in the United States to remain at the current level for the
remainder of 2003. Furthermore, we believe the Canadian market will strengthen
throughout the remainder of 2003.
International rig activity continues to strengthen. Both the Middle East
and Asia Pacific regions have shown steady improvement since the beginning of
2001. We anticipate continued improvements in the eastern hemisphere and Latin
American markets during the latter half of 2003, in particular the UK North Sea,
the Middle East, Russia and selected areas of Latin America.
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.
Second quarter 2003 activity proved historical leads and lags continue to hold
true, and we expect to experience more significant improvements in our U.S.
business sometime in late 2003. We expect improvements will first impact our
drilling services and then our production and completion products and services.
We anticipate volume increases 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 recovering and is
expected to remain strong for the rest of the year.
The volatility in North America significantly impacts our Production
Systems Division. Artificial lift products, which are approximately 70% of this
division's revenues, depend heavily upon the oil rig count. Revenues for this
division in the second quarter were approximately 59% North American, with 33%
in the U.S. and 26% in Canada. Due to the high dependency on Canadian activity,
the speed of recovery from `spring breakup' will have a significant impact on
this division. Improvements in North America will also impact our Drilling
Services Division. This division derives approximately 44% of its revenues from
this region.
INTERNATIONAL. Overall, we expect international activity to improve
approximately 4% in 2003 compared to 2002. We anticipate experiencing 10% growth
year-on-year, exhibiting higher dollar sales per rig employed than 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 we are
positioned to take on incremental volume at higher margins when the UK cycle
reverses itself. The declines in Venezuela in the last half of the year were due
to the continuing economic and political uncertainty which culminated in a
strike in the fourth quarter of 2002. We began to see a recovery in the second
quarter of 2003 as operations began to return to normal. 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
resumed in late April 2003.
21
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 continued growth
from these products in the current year and beyond. During the second quarter of
2003, we achieved milestones in both our expandable and fiber optic technology
products. Early in the quarter, we installed our 200th Expandable Sand Screen
(ESS). We also had our first combined Expandable Liner Hanger and ESS
installation during the quarter. This success is evidence of increasing customer
acceptance of the new technology.
In the first quarter of 2003, we commercialized our first expandable solids
for well remediation. We had increasing success with this technology in the
second quarter of 2003 and completed our first international application. During
the second quarter of 2003, we also successfully installed the world's first
three-phase fiber optic downhole flow meter. We are seeing the emergence of
repeat business for our underbalanced systems product offering. For 2003, the
growth in underbalanced services is likely to occur in the Middle East, Russia,
and the U.S., particularly in tight gas reservoirs, as well as China.
Our results depend upon a number of factors, many of which are beyond our
control. For a discussion of these factors, please see "Exposures" and
"Forward-Looking Statements" in this Quarterly Report on Form 10-Q as well as
"Item 1. Business - Risk Factors" in our Annual Report on Form 10-K, as amended
on Form 10-K/A, for the year ended December 31, 2002.
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, as
amended on Form 10-K/A, for the year ended December 31, 2002.
RESULTS OF OPERATIONS
SEGMENT REALIGNMENT
In April 2003, we made a strategic decision to realign our segments. Our
three historical segments of Drilling and Intervention Services, Completion
Systems and Artificial Lift Systems now operate under two segments: (1) Drilling
Services and (2) Production Systems. As a result of this realignment, the
discussion of our results of operations is based on the new segments.
Furthermore, our reporting units used in our annual goodwill impairment test
performed as of October 1 have changed. Our reporting units correspond to our
business segments, namely Drilling Services and Production Systems.
In connection with the realignment of our segments, we recorded
approximately $7.7 million, $5.6 million net of taxes, in severance and
severance related costs during the second quarter of 2003. The severance and
severance related costs of $4.3 million, $1.0 million, $0.5 million and $1.9
million are included in Cost of Products, Cost of Services and Rentals, Research
and Development, and Selling, General and Administrative Attributable to
Segments, respectively. We expect the annual savings from these terminations
will be approximately $20 million.
22
Severance and severance related costs are summarized by segment in the
following table and described in greater detail below:
TOTAL SEVERANCE AND
SEVERANCE RELATED
COSTS (1)
--------------------
Drilling Services...................... $ 3,970
Production Systems..................... 3,740
--------------------
Total.................................. 7,710
Utilized during 2003................ (2,806)
--------------------
Balance as of June 30, 2003............ $ 4,904
====================
(1) In accordance with our announced plan to terminate employees company-wide,
we recorded severance costs for 515 specifically identified employees. As
of June 30, 2003, 259 employees had been terminated, and the remaining
terminations are expected to be completed prior to September 30, 2003.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2002
The following charts contain selected financial data comparing our results
for the three months ended June 30, 2003 and June 30, 2002:
COMPARATIVE FINANCIAL DATA THREE MONTHS ENDED
JUNE 30,
--------------------------------
2003 2002
-------------- --------------
($ in thousands, except per
share data)
Revenues.............................................................. $ 617,703 $ 593,866
Gross Profit %........................................................ 29.0% 31.6%
Research and Development.............................................. $ 22,596 $ 18,539
Selling, General and Administrative Attributable to Segments.......... 92,353 80,687
Corporate General and Administrative.................................. 9,680 14,806
Operating Income...................................................... 54,874 80,118
Net Income............................................................ 28,828 38,852
Net Income per Diluted Share.......................................... 0.23 0.31
Depreciation and Amortization......................................... 57,826 53,306
23
SALES BY GEOGRAPHIC REGION
THREE MONTHS ENDED
JUNE 30,
---------------------------
2003 2002
----------- ------------
REGION:
U.S........................................................................ 35% 33%
Canada..................................................................... 15 12
Latin America.............................................................. 10 9
Europe and West Africa..................................................... 19 20
Middle East and North Africa............................................... 12 14
Asia Pacific............................................................... 9 12
--------- ---------
Total.................................................................. 100% 100%
========= =========
A discussion of our consolidated results for the three months ended June 30,
2003 as compared to the three months ended June 30, 2002 follows:
o Revenues in the second quarter of 2003 increased $23.8 million, or
4.0%, from the second quarter of 2002. North American revenues improved
15.1%, or $40.4 million, due to higher activity levels in both Canada
and the U.S. The international decline in revenue of 5.1% primarily
relates to the decline in Asia Pacific of 17.5% and Middle East and
North Africa of 10.0%. Acquisitions contributed approximately $9
million in North America and $3 million internationally.
o Our gross profit as a percentage of revenues decreased from 31.6% in
the second quarter of 2002 to 29.0% in the second quarter of 2003. The
decline was primarily due to $5.3 million in severance and related
expenses incurred in the second quarter of 2003, pricing pressure in
the U.S. and product mix.
o Research and development expenses increased 21.9% reflecting our
commitment to step-change technologies and $0.5 million of severance
expenses recorded in the second quarter.
o Selling, general and administrative expenses attributable to segments
increased as a percentage of revenues from 13.6% in the second quarter
of 2002 to 15.0% in the second quarter of 2003 due to severance
expenses of $1.9 million, costs associated with the expansion of our
Drilling Services infrastructure and a 23.7% increase in intangible
amortization.
o Corporate general and administrative expenses decreased $5.1 million
primarily due to approximately $4.5 million of expenses incurred in the
second quarter of 2002 related to our corporate reorganization.
o Our equity in earnings for the second quarter of 2003 compared to the
second quarter of 2002 decreased $6.0 million primarily due to a debt
extinguishment charge incurred by Universal Compression.
o Our effective tax rate for the second quarter of 2003 was 27.1%
compared to 34.0% for the second quarter of 2002. The decline reflects
the benefits realized from our corporate reorganization in June 2002.
SEGMENT RESULTS
DRILLING SERVICES
The following chart sets forth data regarding the results of our Drilling
Services Division for the second quarter of 2003 and 2002:
THREE MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
------------- --------------
($ in thousands)
Revenues.............................................................. $ 362,044 $ 339,944
Gross Profit %........................................................ 31.2% 32.8%
Research and Development.............................................. $ 10,914 $ 7,609
Selling, General and Administrative................................... 51,343 44,331
Operating Income...................................................... 50,823 59,515
24
A discussion of the results of our Drilling Services Division for the
second quarter of 2003 compared to the second quarter of 2002 follows:
o Our North American revenues for the second quarter of 2003 improved
15.1% as compared to the same period of the prior year due to higher
activity levels as evidenced by a 29% increase in the quarterly average
North American rig count. International revenues for this division were
flat in the second quarter of 2003 compared to the second quarter of
2002. Our Middle East and North Africa region showed strong
improvements with increased revenues of over 10%, which were offset by
a 6% decline in Europe and West Africa caused in part by the
deterioration in the UK related to E&P tax disputes between the UK
government and the North Sea operators and by lower activity in Nigeria
due to political unrest.
o Gross profit as a percentage of revenues decreased from 32.8% in the
second quarter of 2002 to 31.2% in the second quarter of 2003 primarily
due to $3.5 million of severance and related expenses incurred in the
second quarter of 2003, pricing pressure in the U.S., product mix and
the deterioration in the UK and West Africa markets.
o Research and development expenses increased 43.4% as compared to the
second quarter of 2002. This division continues to focus on its
expandable solids technology.
o Selling, general and administrative expenses increased as a percentage
of revenues from 13.0% in the second quarter of 2002 to 14.2% in the
second quarter of 2003. The increase primarily reflects $0.5 million of
severance expenses incurred in the second quarter and costs associated
with the expansion of our underbalanced services infrastructure and our
well intervention services group.
PRODUCTION SYSTEMS
The following chart sets forth data regarding the results of our Production
Systems Division for the second quarter of 2003 and 2002:
THREE MONTHS ENDED
JUNE 30,
------------------------------
2003 2002
------------- -------------
($ in thousands)
Revenues.............................................................. $ 255,659 $ 253,922
Gross Profit %........................................................ 25.9% 30.1%
Research and Development.............................................. $ 11,682 $ 10,930
Selling, General and Administrative................................... 41,010 36,356
Operating Income ..................................................... 13,429 29,067
A discussion of the results of our Production Systems Division for the second
quarter of 2003 compared to second quarter of 2002 follows:
o Our Production Systems Division's revenues for the second quarter of
2003 were relatively flat with the second quarter of 2002. In the
second quarter of 2003, activity-based gains of 15.0% and 30.5% were
made in the North America and Latin America regions, respectively, with
offsetting declines in the Asia Pacific and the Middle East and North
Africa regions.
o Gross profit as a percentage of revenues decreased from 30.1% in the
second quarter of 2002 to 25.9% in the second quarter of 2003 due to
lower absorption in locations where manufacturing facilities are in the
process of being closed, product mix, and severance and severance
related costs of $1.8 million incurred in the second quarter of 2003.
o Selling, general and administrative expenses as a percentage of
revenues increased from 14.3% in the second quarter of 2002 to 16.0% in
the same period in 2003. The increase is primarily due to $1.4 million
severance incurred in the second quarter of 2003.
25
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
The following charts contain selected financial data comparing our results
for the six months ended June 30, 2003 and June 30, 2002:
COMPARATIVE FINANCIAL DATA SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
------------- --------------
(in thousands, except
percentages and per share
data)
Revenues.............................................................. $1,207,041 $1,162,115
Gross Profit %........................................................ 29.7% 32.0%
Research and Development.............................................. $ 42,595 $ 35,523
Selling, General and Administrative Attributable to Segments.......... 176,710 154,580
Corporate General and Administrative.................................. 19,494 24,086
Operating Income...................................................... 124,599 170,354
Net Income............................................................ 62,429 84,071
Net Income per Diluted Share ......................................... 0.49 0.66
Depreciation and Amortization......................................... 114,112 103,340
SALES BY GEOGRAPHIC REGION
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
------------- --------------
REGION:
U.S.................................................................... 34% 34%
Canada................................................................. 17 14
Latin America.......................................................... 9 9
Europe and West Africa................................................. 19 19
Middle East and North Africa........................................... 12 12
Asia Pacific........................................................... 9 12
----------- -----------
Total.............................................................. 100% 100%
=========== ===========
A discussion of our consolidated results for the six months ended June 30,
2003 compared to the six months ended June 30, 2002 follows:
o Consolidated revenues for the first six months of 2003, excluding our
incremental revenues from 2002 acquisitions, increased 1.7% over the
same period of 2002. On the same basis, revenues in North America
increased approximately $50 million, while international revenues
decreased approximately $31 million.
o Gross profit as a percentage of revenues decreased from 32.0% for the
first half of 2002 to 29.7% in the first half of 2003. The decline is
primarily attributable to severance and related expenses, pricing
pressures which occurred in the latter half of 2002 in the U.S. market
and a shift in our product mix.
o Research and development expenses increased 19.9% primarily due to
costs incurred to further develop our technology-related product lines.
o Selling, general and administrative expenses attributable to segments
increased as a percentage of revenues from 13.3% for the first half of
2002 to 14.6% in the same period this year due to severance expenses
and higher intangible amortization.
o Our equity in earnings in unconsolidated affiliates for the first six
months of 2003 was $8.3 million lower than the comparable period last
year. The decrease is primarily related to a debt extinguishment charge
taken by Universal Compression in the quarter ended June 30, 2003 and
to the lower activity levels experienced by a Middle East entity in
which we have an equity interest.
o Our effective tax rate for the six months ended June 30, 2003 was
27.3%, compared to 34.0% for the same period of 2002, primarily due to
the benefits of our corporate reorganization.
26
SEGMENT RESULTS
DRILLING SERVICES
The following chart sets forth data regarding the results of our Drilling
Services Division for the six months ended June 30, 2003 and 2002:
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
------------- -------------
(in thousands, except
percentages)
Revenues.............................................................. $ 707,720 $ 678,303
Gross Profit %........................................................ 31.9% 33.5%
Research and Development.............................................. $ 20,991 $ 15,028
Selling, General and Administrative................................... 99,681 86,084
Operating Income...................................................... 105,079 125,994
A discussion of the results of our Drilling Services Division for the six
months ended June 30, 2003 compared to the six months ended June 30, 2002
follows:
o Our North American revenues for the first six months of 2003 increased
10.4% as compared to the same period last year. An increase in the
six-month average North American rig count of 22.0% contributed to the
increase in revenues in this region. Despite the decline in the UK
North Sea region, our international revenues remained flat or decreased
1.7% excluding incremental revenue from our 2002 acquisitions.
o Gross profit as a percentage of revenues declined 4.8% in the first
half of 2003 from the same period last year. The decline in margins
primarily reflects the impact of the pricing pressures felt in the U.S.
market, as well as a change in product mix.
o Research and development expenses increased $6.0 million in the first
six months of 2003 compared to the same period of 2002. This increase
primarily relates to this division's focus on the development of
expandable solids technology.
o Selling, general and administrative expenses as a percentage of
revenues increased from 12.7% in the first six months of 2002 to 14.1%
in the first six months of 2003. The increase is primarily related to
severance expense associated with our initiative to permanently reduce
our cost structure and those costs associated with the expansion of our
underbalanced services infrastructure and our well interventions group.
PRODUCTION SYSTEMS
The following chart sets forth data regarding the results of our Production
Systems Division for the six months ended June 30, 2003 and 2002:
SIX MONTHS ENDED
JUNE 30,
--------------------------------
2003 2002
-------------- --------------
Revenues.............................................................. $ 499,321 $ 483,812
Gross Profit %........................................................ 26.6% 29.8%
Research and Development.............................................. $ 21,604 $ 20,495
Selling, General and Administrative................................... 77,029 68,496
Operating Income...................................................... 34,150 55,251
A discussion of the results of our Production Systems Division for the six
months ended June 30, 2003 compared to the six months ended June 30, 2002
follows:
o Our North American revenues increased 15.3%, or 8.1% excluding
incremental revenues associated with our 2002 acquisitions. Our
international revenues decreased 11.0% as compared to the first six
months of 2002 primarily due to decreased activity in the Asia Pacific
and Middle East and North Africa regions.
27
o Gross profit as a percent of revenues decreased from 29.8% in the first
six months of 2002 to 26.6% in the first six months of 2003 due to the
impact of severance expense and product mix.
o Selling, general and administrative expenses increased as a percentage
of revenues from 14.2% in the first half of 2002 to 15.4% in the same
period this year primarily due to $1.4 million of severance expense and
higher intangible amortization expense.
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 Production Systems segment.
In connection with this modification, we also expensed $2.0 million during the
first quarter for other facility impairments within the Production 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 Services........................ $ 3,073 $ 1,712 $ -- $ 4,785
Production Systems....................... 5,456 5,295 -- 10,751
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................... (1,491) -- -- (1,491)
------------ ------------- ----------- -------------
Balance as of June 30, 2003.............. $ 190 $ -- $ -- $ 190
============ ============= =========== =============
(1) In accordance with our announced plan to terminate employees
company-wide, we recorded severance and related costs for 849
specifically identified employees. We anticipate all terminations will
be completed by the end of the third 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 $4.8
million and $7.7 million as of June 30, 2003 and December 31, 2002,
respectively, have been reclassified in Other Current Assets on our
Condensed Consolidated Balance Sheets.
(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.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force reached a consensus on
EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables". EITF No. 00-21 provides guidance on how to determine when an
arrangement that involves multiple revenue-generating activities or deliverables
should be divided into separate units of accounting for revenue recognition
purposes, and if this division is required, how the arrangement consideration
should be allocated among the separate units of accounting. The guidance in the
consensus is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. We do not expect the adoption of EITF No. 00-21
will have a material effect on our consolidated financial statements.
28
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.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. We do not expect the
adoption of SFAS No. 149 to have a material effect on our consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as liabilities.
The financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003 and must be applied to
existing financial instruments effective July 1, 2003, the beginning of the
first fiscal period after June 15, 2003. We are currently evaluating the impact
the adoption of SFAS No. 150 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 our existing credit facility, 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 June 30, 2003, our cash and cash equivalents were $49.1 million, a
net increase of $0.2 million from December 31, 2002, which was primarily
attributable to the following:
o Cash inflows from operating activities of $94.1 million;
o Capital expenditures for property, plant and equipment of $150.9
million;
o Acquisition of new businesses of approximately $17.6 million in cash,
net of cash acquired;
o Proceeds from the sales of assets of $16.2 million;
o Borrowings, net of repayments, on long-term debt and short-term
facilities of $47.2 million;
o Proceeds from our asset securitization of $3.4 million;
o Proceeds from stock option activity of $12.2 million.
SOURCE OF LIQUIDITY
Banking Facility
In May 2003, we 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 were used to repay all
amounts due under our previously existing revolving credit facilities, at which
time those facilities were terminated. As of June 30, 2003, we had $115.6
million available under this agreement.
29
This credit facility contains 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 facility. The committed revolving credit facility does not
contain any provision which makes its availability dependent upon our credit
ratings; however, the interest rates are dependent upon the credit rating of our
long-term senior debt. The facility is guaranteed by Weatherford International,
Inc.
We also have unsecured short-term borrowings with various institutions
pursuant to uncommitted facilities. At June 30, 2003, we had $44.8 million in
unsecured short-term borrowings outstanding under these arrangements with
interest rates ranging from 1.95% to 8.86%.
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 $0.6 million for the three and six months ended
June 30, 2003, respectively. We received $72.3 million for purchased interests
and had retained interests in receivables sold of $67.8 million as of June 30,
2003.
Equity Offering
On July 3, 2003, we completed a public offering of ten million common
shares in exchange for approximately $400.0 million in cash proceeds. The common
shares were sold through Lehman Brothers, an investment banking firm in which
two of our directors are managing directors. The arrangements associated with
this transaction were on customary terms in the industry. The proceeds were used
in August 2003 to redeem our outstanding 5% Convertible Preferred Debentures due
2027.
CONTRACTUAL OBLIGATIONS
Our contractual obligations at June 30, 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 six
months ended June 30, 2003 were $139.6 million, net of proceeds from tools lost
down hole of $11.3 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 $270.0 million.
Our depreciation expense during the three and six months ended June 30, 2003 was
$52.8 million and $104.4 million.
Convertible Preferred Debentures
On July 3, 2003, we called the outstanding $402.5 million Convertible
Preferred Debentures. The Convertible Preferred Debentures were redeemed at a
price of 102.5% of the principal amount. The Debentures plus accrued interest
were repaid in August 2003 with the proceeds from the sale of our common shares
and cash on hand. In connection with the early extinguishment of the Convertible
Preferred Debentures, we expensed $10.1 million related to the call premium and
$10.9 million to write off the remaining unamortized debt issuance costs.
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 June 30, 2003, the accreted amount of these debentures was
$548.5 million.
30
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
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:
o disrupt oil and gas exploration and production activities;
o negatively impact results of operations;
o restrict the movement and exchange of funds;
o inhibit our ability to collect receivables;
o lead to U.S. government or international sanctions; and
o limit access to markets for periods of time.
INVESTMENT EXPOSURE
We own approximately 45% of Universal Compression Holdings, Inc.'s
outstanding common stock as a result of the merger of our compression services
division with a Universal subsidiary in February 2001. We account for this
ownership interest using the equity method of accounting, which requires us to
record our percentage interest in Universal's results of operations in our
consolidated statement of operations. Accordingly, fluctuations in Universal's
earnings will cause fluctuations in our earnings.
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 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
31
taxing authorities could adversely impact our ability to realize tax benefits
from our reorganization and adversely impact our results.
Our non-U.S. affiliates conduct our operations in a manner intended to
ensure that we do not engage in the conduct of a U.S. trade or business.
However, if the IRS successfully contends that we or any of our non-U.S.
affiliates are engaged in a trade or business in the United States, we or such
non-U.S. affiliate would be required to pay U.S. corporate income tax on income
that is subject to the taxing jurisdiction of the United States, and possibly
the U.S. branch profits tax. Additionally, our U.S. subsidiaries would continue
to be subject to U.S. corporate income tax on their worldwide income, and our
then existing foreign subsidiaries would continue to be subject to U.S.
corporate income tax on their U.S. operations.
CURRENCY EXPOSURE
Approximately 35.7% 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 recorded a $117.8
million adjustment to our equity account for the six months ended June 30, 2003
to reflect the net impact of the strengthening in various foreign currencies,
primarily in Canada and the UK, against the U.S. dollar. 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:
o 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 second 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
worldwide demand will continue at a modest pace throughout 2003.
o Our results are dependent upon our ability to react to the current
market environment. During the latter half of 2002 and in the first six
months of 2003, we implemented a number of programs intended to reduce
our cost structure. Our forward-looking statements assume these
measures will generate the savings expected.
o 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.
o 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 constant effort at the local level
to be successful. Accordingly, there can be no assurance as to the
ultimate success of these integration efforts.
32
o 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 solid tubulars, expandable sand screens and intelligent well
completion. Our forward-looking statements have assumed successful
commercialization of and above-average growth from these new products
and services.
o Nonrealization of expected benefits from our 2002 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.
o 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.
o 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.
o The cyclical nature of or a prolonged downturn in our industry could
affect the carrying value of our goodwill. As of June 30, 2003, we had
approximately $1.6 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.
o 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.
o 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. 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.
33
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 35.7% of our net assets are impacted
by changes in foreign currencies in relation to the U.S. dollar. We recorded a
$117.8 million adjustment to our equity account for the six months ended June
30, 2003 to reflect the net impact of the strengthening in various foreign
currencies, primarily in Canada and the UK, 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 June 30, 2003, the
fair market value of the 6 5/8% Senior Notes was $399.0 million and the fair
value of the 7 1/4% Senior Notes was $223.0 million. The fair value of both
Senior Notes is principally dependent on changes in prevailing interest rates.
As of June 30, 2003, the fair market value of the Convertible Preferred
Debentures was $387.7 million, and the fair marketvalue of the Zero Coupon
convertible Debentures was $579.0 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 $406.8 million at June 30, 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.
34
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual General Meeting of Shareholders was held on May 8,
2003. The shareholders of the Company approved the election of eight directors
to serve until the next annual general meeting of shareholders. The following
sets forth the results of the voting with respect to such matter.
Election of Directors For Withheld
--------------------- --- --------
Philip Burguieres............ 108,284,234 295,448
David J. Butters............. 108,284,114 295,568
Bernard J. Duroc-Danner...... 108,442,356 137,326
Sheldon B. Lubar............. 108,441,814 137,868
William E. Macaulay.......... 108,442,503 137,179
Robert B. Millard............ 108,442,537 137,145
Robert K. Moses, Jr.......... 108,486,984 92,698
Robert A. Rayne.............. 108,485,773 93,909
In addition, the shareholders of the Company approved the appointment of
Ernst & Young LLP for the year ending December 31, 2003, and the authorization
of the Audit Committee of the Board of Directors to set Ernst & Young LLP's
remuneration. The results of the voting with respect to such matter were
107,667,019 shares voted for, 887,663 shares voted against and 25,000 shares
abstained. There were no broker non-votes.
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
filed with this Form 10-Q as exhibits 31.1 and 31.2. 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 exhibits 32.1 and 32.2. Copies of these
certifications are available on the Company's website at www.weatherford.com.
35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
4.1 Credit Agreement dated May 14, 2003, among Weatherford International
Ltd., Weatherford International, Inc., JPMorgan Chase Bank, as
Administrative Agent, BankOne, NA and Wells Fargo Bank, Texas, N.A., as
Co-Syndication Agents, ABN-AMRO Bank, N.V., and The Bank of Nova Scotia,
as Co-Documentation agents, and Wachovia bank, National Association,
Suntrust Bank, Royal Bank of Canada and Deutsche Bank AG New York Branch,
as co-Managing Agents. (incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K (File No.1-31339) filed July 1,
2003).
+10.1 General Amendment of Employee Stock Option Programs of Weatherford
International, Inc. dated May 9, 2003.
+10.2 General Amendment of Director's Stock Option Plans and Agreements dated
May 9, 2003.
+10.3 Weatherford International Ltd. Nonqualified Executive Retirement Plan.
+10.4 Weatherford International, Inc. Foreign Executive Deferred Compensation
Stock Plan.
+10.5 Weatherford International, Inc. Executive Deferred Compensation Stock
Ownership Plan and Related Trust Agreement.
+31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
+31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
+32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
+32.2 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 May 5, 2003, announcing the Company's
new business alignments and earnings for the quarter ended March 31,
2003.
36
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: August 13, 2003
37
INDEX TO EXHIBIT
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
+10.1 General Amendment of Employee Stock Option Programs of Weatherford
International, Inc. dated May 9, 2003.
+10.2 General Amendment of Director's Stock Option Plans and Agreements dated
May 9, 2003.
+10.3 Weatherford International Ltd. Nonqualified Executive Retirement Plan.
+10.4 Weatherford International, Inc. Foreign Executive Deferred Compensation
Stock Plan.
+10.5 Weatherford International, Inc. Executive Deferred Compensation Stock
Ownership Plan and Related Trust Agreement.
+31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
+31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
+32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
+32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------
+ Filed herewith
38