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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 October 31, 2003
-------------- -------------------------------
Common Shares, par value $1.00 131,300,088
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- ----------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and Cash Equivalents......................................... $ 68,854 $ 48,837
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $15,441 and $18,088, Respectively................. 536,840 485,178
Inventories....................................................... 627,344 547,744
Other Current Assets.............................................. 196,396 177,480
-------------- ----------------
1,429,434 1,259,239
-------------- ----------------
Property, Plant and Equipment, Net................................... 1,236,959 1,126,162
Goodwill, Net........................................................ 1,570,513 1,497,302
Other Intangible Assets, Net......................................... 294,160 259,733
Equity Investments in Unconsolidated Affiliates...................... 297,283 285,901
Deferred Tax Assets.................................................. 62,909 18,288
Other Assets......................................................... 39,224 48,364
-------------- ----------------
$ 4,930,482 $ 4,494,989
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-Term Borrowings and Current Portion of Long-Term Debt....... $ 474,391 $ 364,272
Accounts Payable.................................................. 211,220 186,326
Other Current Liabilities......................................... 360,976 326,879
-------------- ----------------
1,046,587 877,477
-------------- ----------------
Long-Term Debt....................................................... 566,978 570,991
Zero Coupon Convertible Senior Debentures............................ 552,636 540,416
5% Convertible Subordinated Preferred Equivalent Debentures.......... -- 402,500
Deferred Tax Liabilities............................................. 42,292 34,399
Other Liabilities.................................................... 115,727 94,710
Commitments and Contingencies
Shareholders' Equity:
Common Shares, $1 Par Value, Authorized 500,000 Shares,
Issued 141,393 and 130,799 Shares, Respectively............... 141,393 130,799
Capital in Excess of Par Value.................................... 2,391,732 1,987,702
Treasury Shares, Net.............................................. (254,891) (258,125)
Retained Earnings................................................. 358,491 262,020
Accumulated Other Comprehensive Loss.............................. (30,463) (147,900)
-------------- ----------------
2,606,262 1,974,496
-------------- ----------------
$ 4,930,482 $ 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 OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Revenues:
Products.......................................... $ 330,871 $ 276,522 $ 916,552 $ 847,501
Services and Rentals.............................. 329,609 308,408 950,969 899,544
------------ ------------ ----------- -----------
660,480 584,930 1,867,521 1,747,045
Costs and Expenses:
Cost of Products.................................. 230,890 192,979 658,178 594,414
Cost of Services and Rentals...................... 236,467 233,838 657,686 623,170
Research and Development.......................... 19,993 19,624 62,588 55,147
Selling, General and Administrative Attributable
to Segments................................... 89,793 78,894 266,503 233,474
Corporate General and Administrative.............. 10,071 9,772 29,565 33,858
Equity in (Earnings) Losses of Unconsolidated
Affiliates, Net of Impairment Charge.......... (5,639) 211,611 (10,503) 198,416
------------ ------------ ----------- -----------
Operating Income (Loss)................................ 78,905 (161,788) 203,504 8,566
------------ ------------ ----------- -----------
Other Income (Expense):
Interest Expense, Net............................. (17,205) (20,404) (58,945) (61,401)
Debt Redemption Expense........................... (20,911) -- (20,911) --
Other, Net........................................ 3,285 (917) 6,316 (2,891)
------------ ------------ ----------- -----------
Income (Loss) Before Income Taxes...................... 44,074 (183,109) 129,964 (55,726)
(Provision) Benefit for Income Taxes................... (10,032) 61,467 (33,493) 18,155
------------ ------------ ----------- -----------
Net Income (Loss)...................................... $ 34,042 $ (121,642) $ 96,471 $ (37,571)
============ ============ =========== ===========
Earnings (Loss) Per Share:
Basic............................................. $ 0.26 $ (1.01) $ 0.77 $ (0.31)
Diluted........................................... $ 0.25 $ (1.01) $ 0.74 $ (0.31)
Weighted Average Shares Outstanding:
Basic............................................. 131,596 120,193 124,751 119,796
Diluted........................................... 136,542 120,193 130,274 119,796
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)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------
2003 2002
-------------- --------------
Cash Flows from Operating Activities:
Net Income (Loss)................................................. $ 96,471 $ (37,571)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization................................. 172,663 158,318
Non-Cash Portion of Restructuring and Asset Impairment
Charge.................................................... -- 15,050
Gain on Sales of Assets....................................... (2,576) (2,297)
Equity in (Earnings) Losses of Unconsolidated Affiliates, Net
of Impairment Charge...................................... (10,503) 198,416
Amortization of Original Issue Discount....................... 12,220 11,862
Debt Redemption Expense....................................... 20,911 --
Deferred Income Tax Benefit................................... (26,996) (74,627)
Other, Net.................................................... 915 4,657
Change in Operating Assets and Liabilities, Net of Effect
of Businesses Acquired.................................... (79,489) (92,773)
-------------- --------------
Net Cash Provided by Operating Activities................. 183,616 181,035
-------------- --------------
Cash Flows from Investing Activities:
Acquisitions of Businesses, Net of Cash Acquired.................. (48,882) (83,229)
Capital Expenditures for Property, Plant and Equipment............ (226,561) (196,031)
Purchase of Equity Investment in Unconsolidated Affiliate......... (4,019) --
Acquisition of License............................................ -- (65,000)
Proceeds from Sales of Assets..................................... 7,761 12,598
-------------- --------------
Net Cash Used by Investing Activities..................... (271,701) (331,662)
-------------- --------------
Cash Flows from Financing Activities:
Borrowings on Short-Term Debt, Net................................ 114,376 159,169
Redemption of Convertible Preferred Debentures.................... (412,563) --
Repayments of Long-Term Debt, Net................................. (9,870) (7,884)
Proceeds from Issuance of Common Shares........................... 400,000 --
Proceeds from (Repayments on) Asset Securitization................ 4,955 (55,055)
Proceeds from Exercise of Stock Options........................... 13,465 25,553
Purchases of Treasury Shares, Net................................. (2,109) (1,994)
Other Financing Activities, Net................................... (152) (909)
-------------- --------------
Net Cash Provided by Financing Activities................. 108,102 118,880
-------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents................. 20,017 (31,747)
Cash and Cash Equivalents at Beginning of Period..................... 48,837 88,832
-------------- --------------
Cash and Cash Equivalents at End of Period........................... $ 68,854 $ 57,085
============== ==============
Supplemental Cash Flow Information:
Interest Paid..................................................... $ 45,196 $ 45,648
Income Taxes Paid, Net of Refunds................................. 41,259 37,067
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 (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Net Income (Loss)...................................... $ 34,042 $ (121,642) $ 96,471 $ (37,571)
Other Comprehensive Income (Loss):
Deferred Loss on Derivative Instruments........... (3,654) -- (3,654) --
Foreign Currency Translation Adjustment........... 3,252 (10,215) 121,091 1,070
------------ ------------ ----------- -----------
Comprehensive Income (Loss)............................ $ 33,640 $ (131,857) $ 213,908 $ (36,501)
============ ============ =========== ===========
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 September 30, 2003, Condensed
Consolidated Statements of Operations and Condensed Consolidated Statements of
Comprehensive Income (Loss) for the three and nine months ended September 30,
2003 and 2002, and Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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 nine month periods ended September 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
information reflects the new operating structure (See Notes 2, 3 and 14).
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 Operations:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2002
------------- -------------
(in thousands)
Cost of Products................................... $ 13,209 $ 39,296
Cost of Services and Rentals....................... (4,608) (12,849)
Selling, General and Administrative Attributable
to Segments...................................... (8,601) (26,447)
5
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. SEVERANCE, RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
2003 Severance and Restructuring Charge
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.
Severance and severance related costs are summarized by segment and by
classification on the accompanying Condensed Consolidated Statements of
Operations in the following table and described in greater detail below:
DRILLING PRODUCTION
SERVICES (1) SYSTEMS (1) TOTAL
------------ ----------- -------
(in thousands)
Cost of Products ...................... $ 2,398 $ 1,905 $ 4,303
Cost of Services and Rentals .......... 973 -- 973
Research and Development .............. 51 425 476
Selling, General and Administrative
Attributable to Segments ............ 548 1,410 1,958
------------ ----------- -------
Total ................................. 3,970 3,740 7,710
Utilized during 2003 ................ (3,380) (3,506) (6,886)
------------ ----------- -------
Balance as of September 30, 2003 ...... $ 590 $ 234 $ 824
============ =========== =======
(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 September 30, 2003, 489 employees had been
terminated, and the remaining terminations are expected to be completed
prior to the end of 2003.
2002 Restructuring and Asset Impairment Charge
During the third quarter of 2002, the Company recorded $15.4 million, $10.0
million net of taxes, in restructuring and asset impairment charges relating to
a rationalization of its business. Components of the charge include $8.6
million of severance and related costs, $11.5 million of asset impairment
charges and a $4.7 million reversal of an unutilized prior period charge.
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 Operations.
6
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The charge related to the 2002 plan is summarized by segment and by
classification on the accompanying Condensed Consolidated Statements of
Operations in the following table and described in greater detail below:
DRILLING PRODUCTION
SERVICES (1) (2) SYSTEMS (1) (2) CORPORATE(1)(2)(3) Total
---------------- --------------- ------------------ --------
(in thousands)
Cost of Products ...................... $ 2,800 $ 10,751 $ -- $ 13,551
Cost of Services and Rentals .......... 1,985 -- -- 1,985
Corporate General and Administrative... -- -- (99) (99)
---------------- --------------- ---------------- --------
Total.................................. 4,785 10,751 (99) 15,437
Utilized during 2002 ............. (3,418) (7,289) 99 (10,608)
Reversal of 2002 restructuring
charge ....................... -- (3,148) -- (3,148)
Utilized during 2003 ............. (1,367) (124) -- (1,491)
---------------- --------------- ---------------- --------
Balance as of September 30, 2003 ...... $ -- $ 190 $ -- $ 190
================ =============== ================ ========
(1) In accordance with the Company's announced plan to terminate employees
company-wide, it recorded $8.6 million of severance and related costs
for 849 specifically identified employees.
(2) The asset impairment charges of $11.5 million primarily relate to the
write-down of equipment and facilities as a result of the decline in market
conditions. The remaining assets have a carrying amount of $4.8 million as
of September 30, 2003 and are classified in Property, Plant and Equipment,
Net on the accompanying Condensed Consolidated Balance Sheets.
(3) In 2000, the Company recorded a 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. The $4.7
million of estimated transaction costs were reversed and offset $4.6 million
of corporate severance and asset impairment charges recorded in the third
quarter of 2002.
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 performs its annual goodwill
impairment test as of October 1. 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. 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 nine months ended
September 30, 2003 are as follows:
DRILLING PRODUCTION
SERVICES SYSTEMS TOTAL
-------- ---------- -----------
(in thousands)
As of January 1, 2003.......................... $808,729 $ 688,573 $ 1,497,302
Goodwill acquired during period............. 9,363 11,635 20,998
Impact of foreign currency translation...... 18,615 33,598 52,213
-------- ---------- -----------
As of September 30, 2003....................... $836,707 $ 733,806 $ 1,570,513
======== ========== ===========
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,
unrecognized prior service costs related to its pension plan 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:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------------------------- ----------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
---------- ------------ ---------- ---------- ------------ ----------
(in thousands)
Patents........ $ 91,669 $ (18,025) $ 73,644 $ 74,250 $ (12,342) $ 61,908
Licenses....... 195,169 (21,410) 173,759 184,042 (13,181) 170,861
Covenants not
to compete.. 20,665 (12,757) 7,908 19,077 (9,432) 9,645
Other.......... 13,017 (2,692) 10,325 11,078 (1,759) 9,319
---------- ------------ ---------- ---------- ------------ ----------
$ 320,520 $ (54,884) $ 265,636 $ 288,447 $ (36,714) $ 251,733
========== ============ ========== ========== ============ ==========
Amortization expense was $5.5 million and $15.2 million for the three and
nine months ended September 30, 2003, respectively, and $4.8 million and $11.1
million for the three and nine months ended September 30, 2002, respectively.
Estimated amortization expense for the carrying amount of intangible assets as
of September 30, 2003 is expected to be $5.7 million for the remainder of 2003,
$21.9 million for 2004, $20.9 million for 2005, $19.6 million for 2006 and $17.5
million for 2007.
The Company recorded an intangible asset of $20.5 million for unrecognized
prior service costs related to its supplemental executive retirement plan as of
September 30, 2003 (See Note 13). These unrecognized costs are classified in
Other Intangible Assets, Net on the accompanying Condensed Consolidated Balance
Sheets.
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 September 30, 2003 and December 31, 2002.
5. INVENTORIES
Inventories by category are as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(in thousands)
Raw materials, components and supplies........ $ 171,619 $ 156,294
Work in process............................... 68,212 50,874
Finished goods................................ 387,513 340,576
------------- ------------
$ 627,344 $ 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 sell up
to $75.0 million of receivables 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 $0.9 million for the
three and nine months ended September 30, 2003, respectively, and $0.5 million
and $1.8 million for the three and nine months ended September 30, 2002,
respectively, and are included in Other Expense on the accompanying Condensed
Consolidated Statements of Operations. For receivables securitized as of
September 30, 2003 and December 31, 2002, the Company received $73.9 million and
$68.9
8
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
million, respectively, for purchased interests and had retained interests in
receivables sold of $71.8 million and $59.9 million, respectively.
7. SHORT-TERM DEBT
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
(in thousands)
2003 Revolving credit facility................................. $ 435,000 $ --
2001 Multi-currency revolving credit facility.................. -- 124,880
1998 Revolving credit facility................................. -- 150,000
Short-term bank loans.......................................... 29,667 75,304
------------ ------------
Total short-term borrowings.................................... 464,667 350,184
Current portion of long-term debt.............................. 9,724 14,088
------------ ------------
Short-Term Borrowings and Current Portion of Long-Term Debt.... $ 474,391 $ 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 September 30, 2003. As of September 30,
2003, the Company had $33.3 million available under this agreement due to $31.7
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. These
credit facilities were terminated in May 2003 and borrowings under these
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 September 30, 2003, the
Company had $29.7 million in unsecured short-term borrowings outstanding under
these arrangements with interest rates ranging from 1.80% to 5.23%.
8. INTEREST RATE DERIVATIVES
During the third quarter of 2003, the Company entered into interest rate
swap agreements to reduce the Company's exposure to changes in the fair value of
$150.0 million of its $200.0 million 7 1/4% Senior Notes and to take advantage
of interest rates available in the current economic environment. Under these
agreements, on May 15 and November 15 of each year until maturity, the Company
will receive interest from the counterparties at the fixed rate of 7 1/4% and
will pay to the counterparties a floating rate based on 6-month LIBOR. The
hedges are considered perfectly effective against changes in the fair value of
the debt due to changes in the benchmark interest rate over its term. In
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"), the shortcut method applies and there is no need to
periodically reassess the effectiveness of the hedge during the term of the
swaps. The swap agreements are recorded at fair market value and classified in
Other Assets with the offset to Long-Term Debt on the accompanying Condensed
Consolidated Balance Sheets. The aggregate fair market value of the swaps was an
asset of $2.6 million as of September 30, 2003.
During September 2003, the Company entered into cash flow hedges to secure
the underlying interest rate in anticipation of its $250.0 million senior note
issuance (See Note 17). As of September 30, 2003, the value of these agreements
was a liability of $3.7 million. The related deferred loss is reported in
Accumulated Other Comprehensive Loss on the accompanying Condensed Consolidated
Balance Sheets and in Deferred Loss on Derivative Instruments on the
accompanying Condensed Consolidated Statements of Comprehensive Income (Loss).
9
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
9. EQUITY OFFERING
On July 3, 2003, the Company completed a public offering of ten million
common shares, $1.00 par value ("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.
On August 3, 2003, the Company redeemed all of its outstanding 5%
Convertible Subordinated Preferred Equivalent Debentures due 2027 (the
"Convertible Preferred Debentures") for $412.6 million, or 102.5% of the
principal amount. The Convertible Preferred Debentures plus accrued interest
were repaid with the proceeds of the sale of Common Shares and cash on hand. In
connection with the redemption, the Company expensed $10.1 million related to
the call premium and $10.8 million relating to the remaining unamortized debt
issuance costs. These expenses have been classified in Debt Redemption Expense
on the accompanying Condensed Consolidated Statement of Operations.
10. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share for all periods presented equals net income
(loss) divided by the weighted average number of Common Shares outstanding
during the period. Diluted earnings per share is computed by dividing net income
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. The effect of warrants, stock options, and restricted
stock plans is not included in the computations for periods in which a loss
occurs, because to do so would be anti-dilutive. The assumed conversion of 9.1
million Common Shares related to the Zero Coupon Convertible Senior Debentures
due 2020 (the "Zero Coupon Debentures") and 7.5 million Common Shares related to
the Convertible Preferred Debentures are excluded from diluted earnings per
share for all periods presented because they are anti-dilutive.
The following reconciles basic and diluted weighted average shares
outstanding:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
(in thousands)
Basic weighted average shares outstanding.............. 131,596 120,193 124,751 119,796
Dilutive effect of warrants and stock option and
restricted stock plans............................. 4,946 -- 5,523 --
------- ------- ------- -------
Diluted weighted average shares outstanding............ 136,542 120,193 130,274 119,796
======= ======= ======= =======
11. SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes investing activities relating to acquisitions
integrated into the Company's operations for the periods shown:
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
2003 2002
-------- ----------
(in thousands)
Fair value of assets, net of cash acquired........................... $ 38,959 $ 50,940
Goodwill............................................................. 20,998 57,949
Total liabilities.................................................... (11,075) (25,660)
-------- ----------
Cash consideration, net of cash acquired............................. $ 48,882 $ 83,229
======== ==========
10
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
12. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure
("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123") to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. As permitted under SFAS No. 123, the Company uses the
intrinsic value method of accounting established by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, to account for its
stock-based compensation programs. Accordingly, no compensation expense is
recognized when the exercise price of an employee stock option is equal to the
Common Share market price on the grant date.
The following illustrates the pro forma effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands, except per share amounts)
Net Income (Loss)
As reported ................................... $ 34,042 $ (121,642) $ 96,471 $ (37,571)
Pro forma compensation expense, determined
under the fair value method for all awards,
net of income tax benefit ................. (5,977) (10,737) (25,756) (33,029)
----------- ----------- ----------- -----------
Pro forma ..................................... $ 28,065 $ (132,379) $ 70,715 $ (70,600)
=========== =========== =========== ===========
Basic earnings (loss) per share:
As reported ................................... $ 0.26 $ (1.01) $ 0.77 $ (0.31)
Pro forma ..................................... 0.21 (1.10) 0.57 (0.59)
Diluted earnings (loss) per share:
As reported ................................... 0.25 (1.01) 0.74 (0.31)
Pro forma ..................................... 0.21 (1.10) 0.54 (0.59)
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 option's vesting period.
13. RETIREMENT PLAN
Effective August 2003, the Company adopted a supplemental executive
retirement plan for certain executives of the Company. The plan is an unfunded
defined benefit plan. In accordance with SFAS No. 87, Employers' Accounting for
Pensions, the Company recorded $20.5 million for an additional minimum pension
liability in Other Liabilities and an intangible asset related to unrecognized
prior service costs in Other Intangible Assets, Net as of September 30, 2003.
The expense related to this plan totaled $0.5 million for the three and nine
months ending September 30, 2003.
14. 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 into two separate segments 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,
11
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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.
Financial information by industry segment for each of the three and
nine months ended September 30, 2003 and 2002 is summarized below. The
accounting policies of the segments are the same as those of the Company.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
(in thousands)
Revenues from unaffiliated customers:
Drilling Services ................ $ 383,359 $ 347,536 $ 1,091,079 $ 1,025,839
Production Systems ............... 277,121 237,394 776,442 721,206
--------- ---------- ----------- -----------
$ 660,480 $ 584,930 $ 1,867,521 $ 1,747,045
========= ========== =========== ===========
Depreciation and amortization:
Drilling Services ................ $ 43,815 $ 42,947 $ 130,722 $ 124,105
Production Systems ............... 14,249 11,259 39,807 32,173
Corporate ........................ 487 772 2,134 2,040
--------- ---------- ----------- -----------
$ 58,551 $ 54,978 $ 172,663 $ 158,318
========= ========== =========== ===========
Operating income (loss):
Drilling Services ................ $ 65,956 $ 52,729 $ 171,035 $ 178,723
Production Systems ............... 17,381 6,866 51,531 62,117
Corporate (a) .................... (4,432) (221,383) (19,062) (232,274)
--------- ---------- ----------- -----------
$ 78,905 $ (161,788) $ 203,504 $ 8,566
========= ========== =========== ===========
(a) Includes equity in earnings (losses) of unconsolidated affiliates. During
2002, the Company recorded an impairment charge of $217.1 million, $146.2
million net of taxes, for its investment in Universal Compression
Holdings, Inc.
As of September 30, 2003, total assets were $2,523.1 million for
Drilling Services, $1,841.4 million for Production Systems, and $566.0 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)
15. 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, which were redeemed in August 2003.
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
SEPTEMBER 30, 2003
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
----------- ----------- ------------ ------------ -------------
ASSETS
Current Assets:
Cash and Cash Equivalents ..................... $ 23 $ 67,627 $ 1,204 $ -- $ 68,854
Intercompany Receivables ...................... 290,723 103,988 12 (394,723) --
Other Current Assets .......................... 6,277 1,354,303 11,743 (11,743) 1,360,580
----------- ----------- ----------- ----------- ------------
297,023 1,525,918 12,959 (406,466) 1,429,434
----------- ----------- ----------- ----------- ------------
Equity Investments in Unconsolidated
Affiliates .................................... 282,612 14,671 -- -- 297,283
Intercompany Investments in Affiliates .......... 700,359 -- 2,801,933 (3,502,292) --
Shares Held in Parent ........................... -- 254,891 -- (254,891) --
Intercompany Notes Receivable ................... 2,045,019 204,240 -- (2,249,259) --
Other Assets .................................... 1,027 3,202,438 45,570 (45,270) 3,203,765
----------- ----------- ----------- ----------- ------------
$ 3,326,040 $ 5,202,158 $ 2,860,462 $(6,458,178) $ 4,930,482
=========== =========== =========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-Term Borrowings and Current Portion
of Long-Term Debt ........................... $ 435,000 $ 39,391 $ -- $ -- $ 474,391
Accounts Payable and Other Current
Liabilities ................................. 4,806 623,574 829 (57,013) 572,196
Intercompany Payables ......................... 6,731 290,723 97,269 (394,723) --
----------- ----------- ----------- ----------- ------------
446,537 953,688 98,098 (451,736) 1,046,587
----------- ----------- ----------- ----------- ------------
Long-Term Debt .................................. -- 1,119,614 -- -- 1,119,614
Intercompany Notes Payable ...................... 204,240 645,019 1,400,000 (2,249,259) --
Other Long-Term Liabilities ..................... -- 158,019 -- -- 158,019
Shareholders' Equity ............................ 2,675,263 2,325,818 1,362,364 (3,757,183) 2,606,262
----------- ----------- ----------- ----------- ------------
$ 3,326,040 $ 5,202,158 $ 2,860,462 $(6,458,178) $ 4,930,482
=========== =========== =========== =========== ============
13
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
---------- ---------- ------------ ------------ -------------
Revenues ............................................ $ -- $ 660,480 $ -- $ -- $ 660,480
Costs and Expenses .................................. -- (587,178) (36) -- (587,214)
Equity in Earnings of Unconsolidated Affiliates ..... 4,625 1,014 -- -- 5,639
--------- --------- --------- --------- ---------
Operating Income (Loss) ............................. 4,625 74,316 (36) -- 78,905
--------- --------- --------- --------- ---------
Other Income (Expense):
Interest Expense, Net ............................. (1,772) (15,433) -- -- (17,205)
Intercompany Income (Expense), Net ................ 31,687 219 33,392 (65,298) --
Debt Redemption Expense ........................... -- (20,911) -- -- (20,911)
Other, Net ........................................ 947 2,320 18 -- 3,285
--------- --------- --------- --------- ---------
Income (Loss) Before Income Taxes ................... 35,487 40,511 33,374 (65,298) 44,074
(Provision) Benefit for Income Taxes ................ (2,208) (18,990) 11,166 -- (10,032)
--------- --------- --------- --------- ---------
Net Income (Loss) ................................... $ 33,279 $ 21,521 $ 44,540 $ (65,298) $ 34,042
========= ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
---------- ---------- ------------ ------------ -----------
Revenues .......................................... $ -- $ 584,930 $ -- $ -- $ 584,930
Costs and Expenses ................................ -- (535,107) -- -- (535,107)
Equity in Earnings (Losses) of Unconsolidated
Affiliates, Net of Impairment Charge ............ (27,078) 1,927 -- (186,460) (211,611)
--------- --------- --------- --------- ---------
Operating Income (Loss) ........................... (27,078) 51,750 -- (186,460) (161,788)
--------- --------- --------- --------- ---------
Other Income (Expense):
Interest Expense, Net ........................... -- (20,404) -- -- (20,404)
Intercompany Income (Expense), Net .............. 20,944 11,081 (32,025) -- --
Other, Net ...................................... -- (917) -- -- (917)
--------- --------- --------- --------- ---------
Income (Loss) Before Income Taxes ................. (6,134) 41,510 (32,025) (186,460) (183,109)
(Provision) Benefit for Income Taxes .............. (1,376) 51,719 11,124 -- 61,467
--------- --------- --------- --------- ---------
Net Income (Loss) ................................. $ (7,510) $ 93,229 $ (20,901) $(186,460) $(121,642)
========= ========= ========= ========= =========
15
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
----------- ------------ ------------ ------------ -------------
Revenues ............................................. $ -- $ 1,867,521 $ -- $ -- $ 1,867,521
Costs and Expenses ................................... -- (1,674,423) (97) -- (1,674,520)
Equity in Earnings of Unconsolidated Affiliates ...... 6,629 3,874 -- -- 10,503
----------- ----------- ----------- ----------- -----------
Operating Income ..................................... 6,629 196,972 (97) -- 203,504
----------- ----------- ----------- ----------- -----------
Other Income (Expense):
Interest Expense, Net .............................. (2,850) (56,095) -- -- (58,945)
Intercompany Income (Expense), Net ................. 85,499 10,307 (30,508) (65,298) --
Debt Redemption Expense ............................ -- (20,911) -- -- (20,911)
Other, Net ......................................... 927 5,371 18 -- 6,316
----------- ----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes .................... 90,205 135,644 (30,587) (65,298) 129,964
(Provision) Benefit for Income Taxes ................. (6,122) (60,902) 33,531 -- (33,493)
----------- ----------- ----------- ----------- -----------
Net Income (Loss) .................................... $ 84,083 $ 74,742 $ 2,944 $ (65,298) $ 96,471
=========== =========== =========== =========== ===========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------ ------------ ------------- ------------ -------------
Revenues ............................................. $ -- $ 1,747,045 $ -- $ -- $ 1,747,045
Costs and Expenses ................................... -- (1,540,063) -- -- (1,540,063)
Equity in Earnings (Losses) of Unconsolidated
Affiliates, Net of Impairment Charge ............... (26,873) 14,917 -- (186,460) (198,416)
Loss on Sale to Parent ............................... -- (186,460) -- 186,460 --
----------- ----------- ----------- ---------- -----------
Operating Income (Loss) .............................. (26,873) 35,439 -- -- 8,566
----------- ----------- ----------- ---------- -----------
Other Income (Expense):
Interest Expense, Net .............................. -- (61,401) -- -- (61,401)
Intercompany Income (Expense), Net ................. 22,131 11,305 (33,436) -- --
Other, Net ......................................... -- (2,891) -- -- (2,891)
----------- ----------- ----------- ---------- -----------
Loss Before Income Taxes ............................. (4,742) (17,548) (33,436) -- (55,726)
(Provision) Benefit for Income Taxes ................. (1,892) 8,401 11,646 -- 18,155
----------- ----------- ----------- ---------- -----------
Net Income (Loss) .................................... $ (6,634) $ (9,147) $ (21,790) $ -- $ (37,571)
=========== =========== =========== ========== ===========
16
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------ ------------ ------------ ------------ -------------
Cash Flows from Operating Activities:
Net Income (Loss).............................. $ 84,083 $ 74,742 $ 2,944 $ (65,298) $ 96,471
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Equity in Earnings of Unconsolidated
Affiliates................................... (6,629) (3,874) -- -- (10,503)
Charges from Parent or Subsidiary.............. (85,499) (10,307) 30,508 65,298 --
Deferred Income Tax Provision (Benefit)........ (161) 6,697 (33,532) -- (26,996)
Other.......................................... 3,683 120,929 32 -- 124,644
------------ ------------ ------------ ------------ ------------
Net Cash Provided (Used) by Operating
Activities................................... (4,523) 188,187 (48) -- 183,616
------------ ------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Acquisition of Businesses, Net of Cash
Acquired..................................... -- (48,882) -- -- (48,882)
Capital Expenditures for Property, Plant and
Equipment.................................... -- (226,561) -- -- (226,561)
Proceeds from Sales of Assets.................. -- 7,761 -- -- 7,761
Other.......................................... -- (4,019) -- -- (4,019)
------------ ------------ ------------ ------------ ------------
Net Cash Used by Investing Activities.......... -- (271,701) -- -- (271,701)
------------ ------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Borrowings (Repayments) on Short-Term
Debt, Net.................................... 435,000 (320,624) -- -- 114,376
Redemption of Debentures....................... -- (412,563) -- -- (412,563)
Repayments of Long-Term Debt, Net.............. -- (9,870) -- -- (9,870)
Process from Issuance of Shares................ 400,000 -- -- -- 400,000
Proceeds from Asset Securitization............. -- 4,955 -- -- 4,955
Borrowings (Repayments) Between
Subsidiaries................................. (830,454) 829,214 1,240 -- --
Proceeds from Exercise of Stock Options........ -- 13,465 -- -- 13,465
Purchases of Treasury Shares, Net.............. -- (2,109) -- -- (2,109)
Other.......................................... -- (152) -- -- (152)
------------ ------------ ------------ ------------ ------------
Net Cash Provided by Financing Activities...... 4,546 102,316 1,240 -- 108,102
------------ ------------ ------------ ------------ ------------
Net Increase in Cash and Cash
Equivalents.................................... 23 18,802 1,192 -- 20,017
Cash and Cash Equivalents at Beginning of
Period......................................... -- 48,825 12 -- 48,837
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents at End of Period........ $ 23 $ 67,627 $ 1,204 $ -- $ 68,854
============ ============ ============ ============ ============
17
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------ ------------ ------------ ------------ -------------
Cash Flows from Operating Activities:
Net Loss ...................................... $ (6,634) $ (9,147) $ (21,790) $ -- $ (37,571)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Equity in (Earnings) Losses of Unconsolidated
Affiliates, Net of Impairment Charges ....... 26,873 (14,917) -- 186,460 198,416
Non-Cash Portion of Restructuring and Asset
Impairment Charges .......................... -- 15,050 -- -- 15,050
Loss on Sale to Parent ........................ -- 186,460 -- (186,460) --
Deferred Income Tax Benefit ................... -- (74,627) -- -- (74,627)
Charges from Parent or Subsidiary ............. (22,131) (11,305) 33,436 -- --
Other ......................................... 1,892 89,521 (11,646) -- 79,767
------------ ------------ ------------ ------------ ------------
Net Cash Provided by Operating Activities ..... -- 181,035 -- -- 181,035
------------ ------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Acquisition of Businesses, Net of Cash
Acquired .................................... -- (83,229) -- -- (83,229)
Capital Expenditures for Property, Plant and
Equipment ................................... -- (196,031) -- -- (196,031)
Acquisition of License ........................ -- (65,000) -- -- (65,000)
Proceeds from Sales of Assets ................. -- 12,598 -- -- 12,598
Capital Contribution to Subsidiary ............ (12) (12) -- 24 --
------------ ------------ ------------ ------------ ------------
Net Cash Provided (Used) by Investing
Activities .................................. (12) (331,674) -- 24 (331,662)
------------ ------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Borrowings on Short-Term Debt, Net ............ -- 159,169 -- -- 159,169
Repayments of Long-Term Debt, Net ............. -- (7,884) -- -- (7,884)
Repayment on Asset Securitization ............. -- (55,055) -- -- (55,055)
Proceeds from Exercise of Stock Options ....... 1,607 23,946 -- -- 25,553
Funds Received on Behalf of Parent ............ (1,607) 1,607 -- -- --
Purchases of Treasury Shares, Net ............. -- (1,994) -- -- (1,994)
Proceeds from Capital Contribution ............ 12 -- 12 (24) --
Other ......................................... -- (909) -- -- (909)
------------ ------------ ------------ ------------ ------------
Net Cash Provided (Used) by Financing
Activities .................................. 12 118,880 12 (24) 118,880
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents ................................... -- (31,759) 12 -- (31,747)
Cash and Cash Equivalents at Beginning of
Period ........................................ -- 88,832 -- -- 88,832
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents at End of Period ....... $ -- $ 57,073 $ 12 $ -- $ 57,085
============ ============ ============ ============ ============
18
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
16. 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"). 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 adoption of
EITF No. 00-21 did not have a material effect on the Company's consolidated
financial statements.
In January 2003, FASB Interpretation No. 46, Consolidation of Variable
Interest Entities ("FIN No. 46") was issued. FIN No. 46 requires a company to
consolidate a variable interest entity if it is designated as the primary
beneficiary of that entity. A variable interest entity is generally defined as
an entity whose equity is insufficient to absorb the expected losses or whose
owners lack the risk and rewards of ownership. FIN No. 46 is currently effective
for all variable interest entities created or modified after January 31, 2003
and is effective for all other variable interest entities beginning December 31,
2003. The Interpretation requires certain disclosures for all variable
interest entities. 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"). 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. 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 adoption of SFAS No. 149 did not have a
material effect on the Company's 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"). 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
adoption of SFAS No. 150 did not have a material effect on the Company's
consolidated financial statements.
17. SUBSEQUENT EVENTS
On October 7, 2003, the Company completed a public offering of $250.0
million of 4.95% Senior Notes due 2013 ("4.95% Senior Notes"). The notes are
fully and unconditionally guaranteed by Weatherford International, Inc. The
interest on the notes is payable semi-annually on April 15 and October 15,
beginning April 15, 2004. Net proceeds from the offering were $247.9 million
and were used to repay short-term borrowings.
In connection with the issuance of the 4.95% Senior Notes, the Company
settled its cash flow hedges for $3.3 million. The hedging agreements resulted
in a deferred loss which is scheduled to be amortized into interest expense over
the life of the debt.
In October 2003, a subsidiary of the Company converted one of its
uncommitted short-term credit facilities to a committed credit facility maturing
in April 2004. The credit facility has a borrowing capacity of approximately
$36.8 million, bears interest at LIBOR plus 0.7% and is guaranteed by the
Company.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following is a discussion of our markets, financial condition and
results of operations for the three and nine months ended September 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 below 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)
---------- ---------- -------------- -------------
September 30, 2003 ..................... $ 29.20 $ 4.830 1,441 792
December 31, 2002 ...................... 31.20 4.789 1,204 753
September 30, 2002 ..................... 30.45 4.138 1,110 727
(1) Price per barrel as of September 30 and December 31 - Source: Applied
Reasoning, Inc.
(2) Price per MM/BTU as of September 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 the first half of 2003,
the U.S. rig count steadily improved. Since July 2003, the U.S. rig count has
averaged 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 558 rigs, the highest it has been since the first quarter of 2001.
Post breakup, activity has increased, and rig count remains strong with an
average monthly rig count for October 2003 of 399 rigs. 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 $4.67
per mcf. We expect activity in the United States to remain at the current level
for the remainder of 2003 and increase slightly in 2004. Furthermore, we believe
the Canadian market will strengthen throughout the remainder of 2003 and the
first quarter of 2004.
International rig activity continues to strengthen. We anticipate continued
improvements in the eastern hemisphere, excluding the North Sea, and Latin
American markets during the remainder of 2003 and 2004. More specifically, we
expect these improvements to be concentrated in the Middle East, Russia and
selected areas of Latin America. North Sea activity is expected to experience a
seasonal decline during the fourth quarter and then improve in 2004.
In general, we expect the markets and our business strategies to affect our
results as follows:
NORTH AMERICA. Although there were steady improvements in the U.S. land
markets during the first half of 2003, activity levels have remained relatively
flat in recent months. During the first half of 2003, the activity in the Gulf
of Mexico did not improve as significantly as the U.S. land activity and is
expected to remain at current levels. Any improvements would first impact our
drilling services and then our production and completion products and services.
We anticipate volume to be modest and we expect pricing to remain constant in
the near future. Canada had a very strong performance in the third quarter of
2003 and activity 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 third quarter were approximately 57% North American, with 29% in
the U.S. and 28% in Canada. Improvements in North America will also impact our
Drilling Services Division, which derives approximately 44% of its revenues from
this region.
INTERNATIONAL. Overall, we expect international activity to continue to
improve modestly over the remainder of 2003 and in 2004. The largest expected
increases in 2004 over 2003 are in the Europe/CIS and Middle East/North Africa
regions. We believe the activity in the UK should begin to see improvements in
2004. 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.
We expect our technology products to fuel much of the prospective
performance in our international markets as we expect continued growth from
these products in the current year and beyond. During 2003, we achieved
milestones in both our expandable and fiber optic technology products, including
the installation of our 200th Expandable Sand Screen (ESS). This success is
evidence of increasing customer acceptance of the new technology.
During 2003, we commercialized our first expandable solids for well
remediation and completed our first international application. We successfully
installed the world's first three-phase fiber optic downhole flow meter and have
installed over fifty optical sensing systems around the world. 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.
21
Our results depend upon a number of factors, many of which are beyond our
control. For a discussion of these factors, 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, we expect fourth quarter results to approximate third quarter
results. The level of market improvements for our businesses for 2004 will be
heavily dependent on the strength of the North American markets, our gains in
market share outside North America and the acceptance of our new technologies.
The strength of 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. We expect the annual
savings from these terminations will be approximately $20 million beginning in
the fourth quarter of 2003.
Severance and severance related costs are summarized by segment and by
classification on the Condensed Consolidated Statements of Operations in the
following table and described in greater detail below:
22
DRILLING PRODUCTION
SERVICES (1) SYSTEMS (1) TOTAL
------------ ----------- ------------
(in thousands)
Cost of Products ....................... $ 2,398 $ 1,905 $ 4,303
Cost of Services and Rentals ........... 973 -- 973
Research and Development ............... 51 425 476
Selling, General and Administrative
Attributable to Segments ............ 548 1,410 1,958
------------ ----------- ------------
Total .................................. 3,970 3,740 7,710
Utilized during 2003 ................ (3,380) (3,506) (6,886)
------------ ----------- ------------
Balance as of September 30, 2003 ....... $ 590 $ 234 $ 824
============ =========== ============
(1) In accordance with our announced plan to terminate employees company-wide,
we recorded severance costs for 515 specifically identified employees. As
of September 30, 2003, 489 employees had been terminated, and the remaining
terminations are expected to be completed prior to the end of 2003.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
The following charts contain selected financial data comparing our results
for the three months ended September 30, 2003 and September 30, 2002:
COMPARATIVE FINANCIAL DATA
THREE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------
2003 2002
-------------- -----------------
(in thousands, except percentages and
per share data)
Revenues............................................................. $ 660,480 $ 584,930
Gross Profit %....................................................... 29.2% 27.0% (b)
Research and Development............................................. $ 19,993 $ 19,624
Selling, General and Administrative Attributable to Segments......... 89,793 78,894
Corporate General and Administrative................................. 10,071 9,772 (b)
Operating Income (Loss).............................................. 78,905 (161,788) (b)
Net Income (Loss).................................................... 34,042 (a) (121,642) (b)
Net Income (Loss) per Diluted Share.................................. 0.25 (1.01)
Depreciation and Amortization........................................ 58,551 54,978
(a) Includes $20.9 million, or $13.6 million after tax, related to the call
premium and write-off of unamortized debt issuance costs from the redemption
of our Convertible Preferred Debentures.
(b) Includes $217.1 million related to a write-down in our investment in
Universal and $15.4 million for a restructuring and asset impairment charge
related to a rationalization of our business in light of industry
conditions. The net after tax impact of these charges was $156.2 million.
23
SALES BY GEOGRAPHIC REGION
THREE MONTHS
ENDED SEPTEMBER 30,
-------------------
2003 2002
---- ----
REGION:
U.S............................................................ 33% 33%
Canada......................................................... 16 14
Latin America.................................................. 10 9
Europe and West Africa......................................... 20 21
Middle East and North Africa................................... 13 12
Asia Pacific................................................... 8 11
--- ---
Total..................................................... 100% 100%
=== ===
A discussion of our consolidated results for the three months ended
September 30, 2003 as compared to the three months ended September 30, 2002
follows:
- Third quarter 2003 consolidated revenues increased $75.6 million, or
12.9%, over the third quarter of 2002. North American revenues improved
$50.6 million, or 18.3%, due to higher activity levels in both Canada
and the U.S. and a $10.3 million contribution from acquisitions. The
international increase in revenue of 8.1% primarily relates to
increases in Latin America of 35.1%, as compared to a rig count
improvement of 24.0%, and increases in Middle East and North Africa
revenues of 17.4%. The Middle East and North Africa benefited from a
significant product related contract. These international increases
were partially offset by a $13.2 million, or 21.0%, decline in our Asia
Pacific region.
- Our gross profit as a percentage of revenues increased from 27.0% in
the third quarter of 2002 to 29.2% in the third quarter of 2003,
primarily as a result of the $15.5 million severance and asset
impairment charge recorded to cost of sales in the third quarter of
2002. This increase was partially offset by lower margins in the third
quarter of 2003 due to pricing pressure in the U.S. and product mix.
- Selling, general and administrative expenses attributable to segments
increased $10.9 million in the current quarter compared to the same
quarter of the prior year but as a percentage of revenue was
essentially flat.
- Equity in earnings for the third quarter of 2003 was flat with the
third quarter of 2002, excluding the impact of the $217.1 million
write-down in our investment in Universal.
- Our effective tax rates for the third quarter of 2003 and 2002 were
22.8% and 33.6%, respectively. Excluding the charge related to the
early extinguishment of debentures and related taxes, our third quarter
2003 effective rate was 26.7% compared to an effective tax rate of
30.0% for the third quarter of 2002, excluding the impact of the
write-down in our investment in Universal and the restructuring and
asset impairment charge and related taxes. The decline reflects the
continued 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 third quarter of 2003 and 2002:
THREE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
2003 2002
---------- ---------------
(in thousands)
Revenues............................................ $ 383,359 $ 347,536
Gross Profit %...................................... 32.4% 30.4% (a)
Research and Development............................ $ 10,225 $ 8,753
Selling, General and Administrative................. 47,924 44,070
Operating Income.................................... 65,956 52,729 (a)
(a) Includes $4.8 million of charges related to severance and asset
impairment.
A discussion of the results of our Drilling Services Division for the third
quarter of 2003 compared to the third quarter of 2002 follows:
24
- Our North American revenues for the third quarter of 2003 improved
$27.2 million, or 19.5%, as compared to the same period of the prior
year due to higher activity levels as evidenced by a comparable 20.0%
increase in the quarterly average North American rig count.
- International revenues for this division increased $8.6 million, or
4.1%, in the third quarter of 2003 compared to the third quarter of
2002. Our Latin America and Middle East and North Africa regions showed
strong improvements with increased revenues of 30.5% and 10.4%,
respectively, which were partially offset by a 5.8% decline in Europe
and West Africa caused in part by lower activity in Nigeria due to
political unrest.
- Gross profit as a percentage of revenues increased from 30.4% in the
third quarter of 2002 to 32.4% in the third quarter of 2003 primarily
due to a change in product mix and the $4.8 million severance and asset
impairment charge recorded in the third quarter of 2002.
- Research and development expenses for the third quarter of 2003
increased 16.8% as compared to the third quarter of 2002 due to this
division's continued focus on its expandable solids technology.
- Third quarter 2003 selling, general and administrative expenses
remained flat as a percentage of revenues as compared to the third
quarter of 2002.
PRODUCTION SYSTEMS
The following chart sets forth data regarding the results of our Production
Systems Division for the third quarter of 2003 and 2002:
THREE MONTHS
ENDED SEPTEMBER 30,
----------------------------
2003 2002
---------- ---------------
(in thousands)
Revenues............................................ $ 277,121 $ 237,394
Gross Profit %...................................... 24.9% 22.1% (a)
Research and Development............................ $ 9,768 $ 10,871
Selling, General and Administrative................. 41,869 34,824
Operating Income.................................... 17,381 6,866 (a)
(a) Includes $10.8 million of charges related to severance and asset
impairment.
A discussion of the results of our Production Systems Division for the
third quarter of 2003 compared to the third quarter of 2002 follows:
- Our Production Systems Division's revenues for the third quarter of
2003 increased $39.7 million, or 16.7%, over the third quarter of 2002.
In the third quarter of 2003, gains of 17.2%, 40.5% and 53.8% were made
in the North America, Latin America and Europe and West Africa regions,
respectively, and were partially offset by a 37.0% decline in revenues
in the Asia Pacific region.
- Gross profit as a percentage of revenues increased from 22.1% in the
third quarter of 2002 to 24.9% in the third quarter of 2003 due to
$10.8 million of severance and asset impairment charges recorded in the
third quarter of 2002. This increase in the gross profit percentage was
partially offset by lower absorption in locations where manufacturing
facilities are in the process of being closed and product mix.
- Research and development expenses during the third quarter of 2003
decreased 10.1% as compared to the third quarter of 2002 primarily due
to the successful completion of various projects.
- Selling, general and administrative expenses as a percentage of
revenues increased from 14.7% in the third quarter of 2002 to 15.1% in
the same period in 2003. This increase is primarily due to an increase
of $1.0 million of intangible asset amortization during the third
quarter of 2003 as compared to the same quarter of the prior year.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2002
The following charts contain selected financial data comparing our results
for the nine months ended September 30, 2003 and September 30, 2002:
25
COMPARATIVE FINANCIAL DATA
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------
2003 2002
------------------- -----------------
(in thousands, except percentages and
per share data)
Revenues............................................................. $ 1,867,521 $ 1,747,045
Gross Profit %....................................................... 29.5% (a) 30.3% (c)
Research and Development............................................. $ 62,588 (a) $ 55,147
Selling, General and Administrative Attributable to Segments......... 266,503 (a) 233,474
Corporate General and Administrative................................. 29,565 33,858 (c)
Operating Income..................................................... 203,504 (a) 8,566 (c)
Net Income (Loss).................................................... 96,471 (a)(b) (37,571) (c)
Net Income (Loss) per Diluted Share.................................. 0.74 (0.31)
Depreciation and Amortization........................................ 172,663 158,318
(a) Includes $7.7 million of severance and severance related costs of which
$5.3 million was recorded in Cost of Products and Cost of Services and
Rentals, $0.5 million in Research and Development and $1.9 million in
Selling, General and Administrative.
(b) Includes $20.9 million, or $13.6 million after tax, related to the call
premium and write-off of unamortized debt issuance costs from the
redemption of our Convertible Preferred Debentures.
(c) Includes $217.1 million related to a write-down in our investment in
Universal and $15.4 million for a restructuring and asset impairment charge
related to a rationalization of our business in light of industry
conditions. The net after tax impact of these charges was $156.2 million.
SALES BY GEOGRAPHIC REGION
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2003 2002
---- ----
REGION:
U.S. ................................................................ 34% 33%
Canada .............................................................. 17 14
Latin America ....................................................... 9 9
Europe and West Africa .............................................. 19 19
Middle East and North Africa ........................................ 12 12
Asia Pacific ........................................................ 9 13
--- ---
Total .......................................................... 100% 100%
=== ===
A discussion of our consolidated results for the nine months ended
September 30, 2003 compared to the nine months ended September 30, 2002 follows:
- Consolidated revenues for the first nine months of 2003, excluding our
incremental revenues from 2002 acquisitions, increased 5.2% over the
same period of 2002. On the same basis, revenues in North America
increased $90.9 million, or 11.0%, while international revenues
remained flat. Increases in revenue of 16.1% in Latin America and 3.8%
in the Middle East and North Africa were offset by a 19.3% decline in
our Asia Pacific region.
- Gross profit as a percentage of revenues decreased from 30.3% for the
first nine months of 2002 to 29.5% in the first half of 2003. The
decline is primarily attributable to pricing pressures in the U.S.
market and a shift in our product mix.
- Research and development expenses increased 13.5% primarily due to
costs incurred to further develop our technology-related product lines.
- Selling, general and administrative expenses attributable to segments
increased as a percentage of revenues from 13.4% for the first nine
months of 2002 to 14.3% in the same period this year due primarily to
severance and related expenses recorded in the second quarter of 2003
and higher intangible asset amortization of $4.1 million.
26
- Excluding the third quarter 2002 write-down of our investment in
Universal, our equity in earnings in unconsolidated affiliates for the
first nine months of 2003 was $8.1 million lower than the comparable
period last year. The decrease is primarily related to a $4.4 million
debt extinguishment charge taken by Universal in the quarter ended June
30, 2003 and to lower activity levels experienced by a Middle East
entity in which we have an equity investment.
- Our effective tax rates for the nine months ended September 30, 2003
and 2002, respectively, were 25.8% and 32.6%. Excluding the debt
redemption and severance and severance related charges and related
taxes, our effective tax rate for the first nine months of 2003 was
26.3% compared to an effective tax rate of 32.9% for the same period of
2003, excluding the impact of the write-down in our investment in
Universal and the restructuring and asset impairment charge and related
taxes. This decrease relates to the continued 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 nine months ended September 30, 2003 and 2002:
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------------
2003 2002
---------------- -----------------
(in thousands, except percentages)
Revenues...................................................... $ 1,091,079 $ 1,025,839
Gross Profit %................................................ 32.1% (a) 32.4% (b)
Research and Development...................................... $ 31,216 $ 23,781
Selling, General and Administrative........................... 147,605 (a) 130,154
Operating Income.............................................. 171,035 (a) 178,723 (b)
(a) Includes $4.0 million of severance and severance related costs of which
$3.4 million was recorded in Cost of Products and Cost of Services and
Rentals, $0.1 in Research and Development and $0.5 million in Selling,
General and Administrative.
(b) Includes $4.8 million of charges related to severance and asset impairment.
A discussion of the results of our Drilling Services Division for the nine
months ended September 30, 2003 compared to the nine months ended September 30,
2002 follows:
- Our North American revenues for the first nine months of 2003 increased
13.4% as compared to the same period last year. An increase in the
nine-month average North American rig count of 26.0% contributed to the
increase in revenues in this region. Despite the decline in the UK
North Sea region, our international revenues remained flat in the first
nine months of 2003 as compared to the same period of the prior year.
- Gross profit as a percentage of revenues declined from 32.4% in the
first nine months of 2002 to 32.1% in the same period of 2003. 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.
- Research and development expenses increased $7.4 million in the first
nine 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.
- Selling, general and administrative expenses as a percentage of
revenues increased from 12.7% in the first nine months of 2002 to 13.5%
in the first nine months of 2003. The increase is primarily related to
severance and related expenses recorded in the second quarter of 2003
associated with our initiative to permanently reduce our cost structure
and an increase in 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 nine months ended September 30, 2003 and 2002:
27
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------
2003 2002
-------------- ---------------
(in thousands)
Revenues........................................................ $ 776,442 $ 721,206
Gross Profit %.................................................. 26.0% (a) 27.3% (b)
Research and Development........................................ $ 31,372 (a) $ 31,366
Selling, General and Administrative............................. 118,898 (a) 103,320
Operating Income................................................ 51,531 (a) 62,117 (b)
(a) Includes $3.7 million of severance and severance related costs of which
$1.9 million was recorded in Cost of Products, $0.4 million in Research and
Development and $1.4 million in Selling, General and Administrative.
(b) Includes $10.8 million of charges related to severance and asset
impairment.
A discussion of the results of our Production Systems Division for the nine
months ended September 30, 2003 compared to the nine months ended September 30,
2002 follows:
- Our North American revenues increased 16.0%, or 8.6% excluding
incremental revenues associated with our 2002 acquisitions. Our
international revenues decreased 2.5% as compared to the first nine
months of 2002 primarily due to decreased activity in the Asia Pacific
and Middle East and North Africa regions.
- Gross profit as a percent of revenues decreased from 27.3% in the first
nine months of 2002 to 26.0% in the first nine months of 2003 due
primarily to a shift in our product mix.
- Selling, general and administrative expenses increased as a percentage
of revenues from 14.3% in the first nine months of 2002 to 15.3% in the
same period this year primarily due to $1.4 million of severance
expenses recorded during the second quarter of 2003 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 business. Components of the charge include $8.6 million
of severance and related costs, $11.5 million of asset impairment charge and a
$4.7 million reversal of an unutilized prior period charge.
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
Operations. The charge related to the 2002 plan is summarized by segment in the
following table and described in greater detail below:
DRILLING PRODUCTION
SERVICES(1)(2) SYSTEMS(1)(2) CORPORATE(1)(2)(3) TOTAL
-------------- ------------- ------------------ ---------
(in thousands)
Cost of Products.......................... $ 2,800 $ 10,751 $ -- $ 13,551
Cost of Services and Rentals.............. 1,985 -- -- 1,985
Corporate General and Administrative...... -- -- (99) (99)
---------- ---------- -------- ---------
Total..................................... 4,785 10,751 (99) 15,437
Utilized during 2002................. (3,418) (7,289) 99 (10,608)
Reversal of 2002 restructuring
charge........................... -- (3,148) -- (3,148)
Utilized during 2003................. (1,367) (124) -- (1,491)
---------- ---------- -------- ---------
Balance as of September 30, 2003.......... $ -- $ 190 $ -- $ 190
========== ========== ======== =========
28
(1) In accordance with our announced plan to terminate employees company-wide,
we recorded $8.6 million of severance and related costs for 849 specifically
identified employees.
(2) The asset impairment charges of $11.5 million primarily relate to the
write-down of equipment and facilities as a result of the decline in market
conditions. The remaining assets have a carrying amount of $4.8 million as
of September 30, 2003 and are classified in Property, Plant and Equipment,
Net on our Condensed Consolidated Balance Sheets.
(3) In 2000, we recorded a 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. The $4.7 million of
estimated transaction costs were reversed and offset $4.6 million of
corporate severance and asset impairment charges recorded in the third
quarter of 2002.
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. The adoption of EITF No. 00-21 did not have a
material effect on our consolidated financial statements.
In January 2003, Financial Accounting Standards Board Interpretation No.
46, Consolidation of Variable Interest Entities was issued. FIN No. 46 requires
a company to consolidate a variable interest entity if it is designated as the
primary beneficiary of that entity. A variable interest entity is generally
defined as an entity whose equity is insufficient to absorb the expected losses
or whose owners lack the risk and rewards of ownership. FIN No. 46 is currently
effective for all variable interest entities created or modified after January
31, 2003 and is effective for all other variable interest entities beginning
December 31, 2003. The Interpretation requires certain disclosures for all
variable interest entities. 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. The adoption of SFAS No.
149 did not 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. The adoption of SFAS No. 150 did not
have a material effect 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. 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.
29
CASH FLOWS
As of September 30, 2003, our cash and cash equivalents were $68.9 million,
a net increase of $20.0 million from December 31, 2002, which was primarily
attributable to the following:
- cash inflows from operating activities of $183.6 million;
- capital expenditures for property, plant and equipment of $226.6
million;
- acquisition of new businesses of approximately $48.9 million in cash,
net of cash acquired;
- proceeds from the sales of assets of $7.8 million;
- borrowings, net of repayments, on long-term debt and short-term
facilities of $104.5 million;
- redemption of Convertible Preferred Debentures of $412.6 million;
- proceeds from issuance of common shares of $400.0 million;
- proceeds from our asset securitization of $5.0 million;
- proceeds from stock option activity of $13.5 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 September 30, 2003, we had $33.3
million available under this agreement. In October 2003, we issued $250.0
million in Senior Notes, and the proceeds were used to reduce amounts
outstanding under the credit facility.
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 September 30, 2003, we had $29.7 million
in unsecured short-term borrowings outstanding under these arrangements with
interest rates ranging from 1.80% to 5.23%.
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 sell up
to $75.0 million of receivables 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 $0.9 million for the three and nine months ended
September 30, 2003, respectively. For receivables securitized as of September
30, 2003, we received $73.9 million for purchased interests and had retained
interests in receivables sold of $71.8 million.
Equity Offering
On July 3, 2003, we completed a public offering of ten million of our
common shares in exchange for approximately $400.0 million in cash proceeds. The
common shares were sold through Lehman Brothers, an investment banking firm of
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 to redeem our outstanding 5% Convertible Preferred Debentures due 2027.
30
CONTRACTUAL OBLIGATIONS
Our contractual obligations at September 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.
Senior Notes and Derivative Instruments
In the third quarter of 2003, we entered into interest rate swap agreements
to reduce the exposure to changes in the fair value on $150.0 million of our
$200.0 million 7 1/4% Senior Notes due May 15, 2006. The objective of the swaps
was to protect the debt against changes in fair value and to take advantage of
the interest rates available. As of September 30, 2003, the aggregate fair
market value of these swap agreements was an asset of $2.6 million.
On October 7, 2003, we completed a public offering of $250.0 million of
4.95% Senior Notes due 2013. The notes are fully and unconditionally guaranteed
by Weatherford International, Inc. Interest on the notes is payable
semi-annually on April 15 and October 15, beginning April 15, 2004. Net proceeds
from the offering were $247.9 million and were used to repay short-term
borrowings.
During September 2003, we entered into cash flow hedges to secure the
underlying interest rate in anticipation of the senior note issuance. In
connection with the October 2003 senior note issuance we settled these cash flow
hedges with a $3.3 million payment to the counterparties. The hedging agreement
resulted in a deferred loss which is scheduled to be amortized into interest
expense over the life of the debt.
Capital Expenditures
Our capital expenditures for property, plant and equipment during the nine
months ended September 30, 2003 were $209.6 million, net of proceeds from tools
lost down hole of $17.0 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 $275.0
million. Our depreciation expense during the three and nine months ended
September 30, 2003 was $53.1 million and $157.5 million, respectively.
Convertible Preferred Debentures
On July 3, 2003, we called the outstanding $402.5 million Convertible
Preferred Debentures. The Convertible Preferred Debentures were redeemed for
$412.6 million, or 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 redemption of the
Convertible Preferred Debentures, we expensed $10.1 million related to the call
premium and $10.8 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 September 30, 2003, the accreted amount of these debentures was
$552.6 million.
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.
31
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
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. Future
terrorist attacks and responses to any such attacks could adversely affect our
business.
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:
- disrupt oil and gas exploration and production activities;
- negatively impact results of operations;
- restrict the movement and exchange of funds;
- inhibit our ability to collect receivables;
- lead to U.S. government or international sanctions; and
- limit access to markets for periods of time.
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
Condensed Consolidated Statements 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 was 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 taxing authorities could adversely
impact our ability to realize tax benefits from our reorganization and adversely
impact our results.
32
If the U.S. Internal Revenue Service or other taxing authorities do not
agree with our assessment of the effects or interpretation of tax laws, treaties
and regulations, we could incur a material amount of U.S. federal income tax as
a result of our June 2002 reorganization as a Bermuda company.
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, 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 27.8% 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 $121.1
million adjustment to our equity account for the nine months ended September 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. Such
translation adjustments could adversely impact our book value.
We recognize remeasurement and transactional gains and losses on currencies
in our Condensed Consolidated Statements of Operations. 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 these risks and uncertainties may cause actual results to be
materially different from projected results contained in forward-looking
statements in this report and in our other disclosures. These risks and
uncertainties include, but are not limited to, the following:
- A downturn in market conditions could affect projected results. Any
material changes in oil and gas supply and demand, oil and gas prices,
rig count or other market trends would affect our results and would
likely affect the forward-looking information provided by us. The oil
and gas industry is extremely volatile and subject to change based on
political and economic factors outside our control. Through the
beginning of 2002, there was a general decrease in prices for oil and
natural gas, reflecting diminished demand attributable to political and
economic issues. In the latter part of 2002, there was an increase of
prices for oil and natural gas. However, with the exception of Canada,
producers did not increase drilling due to the political and economic
uncertainty. During 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 and 2004.
- Our results are dependent upon our ability to react to the current
market environment. During the latter half of 2002 and in the first
nine 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.
- A material disruption in our manufacturing could adversely affect our
business. Our forward-looking statements assume any manufacturing
consolidation and outsourcing will be completed without material
33
disruptions. If there are disruptions or excess costs associated with
manufacturing changes, our results could be adversely affected.
- Our success is dependent upon the integration of acquisitions. We have
consummated acquisitions of several product lines and businesses. The
success of our acquisitions will be dependent on our ability to
integrate the product lines and businesses with our existing businesses
and eliminate duplicative costs. We incur various duplicative costs
during the integration of the operations of acquired businesses into
our operations. Our forward-looking statements assume the successful
integration of the operations of the acquired businesses; however,
there can be no assurance the expected benefits of these acquisitions
will materialize. Integration of acquisitions is something that cannot
occur in the short-term and requires constant effort at the local level
to be successful. Accordingly, there can be no assurance as to the
ultimate success of these integration efforts.
- Our long-term growth is dependent upon technological innovation and
commercialization. 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.
- Nonrealization of expected benefits from our 2002 corporate
reincorporation could affect our projected results. An inability to
realize expected benefits of the reincorporation within the anticipated
time frame, or at all, would likely affect the financial benefit of our
corporate reincorporation.
- Nonrealization of expected benefits of our recent change in divisional
structure could adversely affect our projected results. We recently
realigned our operational structure from three divisions to two
divisions. Our forward-looking statements assume there will be no
material disruption to our operations and we will realize anticipated
cost savings.
- A decline in the fair value of our investment in Universal that is
other than temporary would adversely affect our projected results. In
the third quarter of 2002, we determined the decline in Universal's
stock price was other than temporary and recorded a write-down in the
carrying value of the investment. In connection with the reduction in
the carrying value, we recognized a tax benefit related to the
difference between the book carrying value and the tax basis of the
investment. We can make no assurances there will not be an additional
decline in value of our investment in Universal and that any such
decline would be temporary. Any decline may result in an additional
write-down in the carrying value of our investment in Universal and
would adversely affect our results.
- The cyclical nature of or a prolonged downturn in our industry could
affect the carrying value of our goodwill. As of September 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, some of which are beyond our control. Any reduction in the
value of our goodwill may result in an impairment charge and therefore
adversely affect our results.
- Currency fluctuations could have a material adverse financial impact on
our business. A material decline in currency rates in our markets could
affect our future results as well as affect the carrying values of our
assets. World currencies have been subject to much volatility. Our
forward-looking statements assume no material impact from future
changes in currencies.
- Political disturbances, war, or terrorist attacks and changes in global
trade policies could adversely impact our operations. We have assumed
there will be no material political disturbances or terrorist attacks
and there will be no material changes in global trade policies. Any
further military action undertaken by the United States or other
countries against Iraq or other countries could adversely affect our
results of operations.
34
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.
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 27.8% of our net assets are impacted
by changes in foreign currencies in relation to the U.S. dollar. We recorded a
$121.1 million adjustment to our equity account for the nine months ended
September 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. 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. 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, the $200.0 million
principal of the 7 1/4% Senior Notes due 2006, the $910.0 million Zero Coupon
Senior Convertible Debentures due 2020, and the $250.0 million principal of the
4.95% Senior Notes due 2013. As of September 30, 2003, the fair market value of
the 6 5/8% Senior Notes was $386.1 million and the fair value of the 7 1/4%
Senior Notes was $223.5 million. The 4.95% Senior Notes were not outstanding as
of September 30, 2003. The fair value of our three Senior Notes is principally
dependent on changes in prevailing interest rates. As of September 30, 2003, the
fair market value of the Zero Coupon Convertible Debentures was $568.7 million.
The fair market value of 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 $55.1425 per share.
We have interest rate swaps which convert fixed rate debt to variable rate
debt. Our interest rate swaps hedge $150.0 million of the 7 1/4% fixed rate
senior notes and are an asset with a fair value of $2.6 million at September 30,
2003. Under these interest rate swap agreements, the counterparties pay a fixed
rate of 7 1/4% interest and we pay a variable interest rate based on published
6-month LIBOR. The payments under these agreements are settled on May 15 and
November 15 of each year until May 2006 and coincide with the interest payment
dates on the hedged debt instrument.
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 $464.7 million at September 30, 2003
approximate fair market value.
35
ITEM 4. CONTROLS AND PROCEDURES
At the end of the period covered by 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-15 (e) and 15d-15 (e) 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 as of the end of the period covered by this report 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 has been no change in our internal controls over financial
reporting that occurred during the three month period ended September 30, 2003
that has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
36
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, the
certifications of Bernard J. Duroc-Danner, Chief Executive Officer of the
Company, and Lisa W. Rodriguez, Chief Financial Officer of the Company, are
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 Exhibit Numbers 32.1 and 32.2. Copies of these
certifications are available on the Company's website at www.weatherford.com.
37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.1 Indenture, dated October 1, 2003, among Weatherford International Ltd.,
Weatherford International, Inc., and Deutsche Bank Trust Company
Americas. (incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K (File No. 1-31339) filed October 2, 2003).
4.2 Form of global note for 4.95% Senior Notes due 2013. (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
(File No. 1-31339) filed October 7, 2003).
4.3 Officers' Certificate dated as of October 7, 2003. (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K
(File No. 1-31339) filed October 7, 2003).
+10.1 Weatherford International Ltd. Restricted Share Plan, including form of
agreement for officers.
+10.2 Employment Agreements dated August 1, 2003, between Weatherford
International Ltd. and each of M. David Colley, E. Lee Colley III,
Bernard J. Duroc-Danner, Stuart E. Ferguson, Burt M. Martin, Keith R.
Morley, Jon R. Nicholson, James N. Parmigiano, Lisa W. Rodriguez and
Gary L. Warren.
+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 14, 2003, announcing that the
Company entered into a three-year unsecured revolving credit facility
agreement.
2. Current Report on Form 8-K dated June 30, 2003, announcing that the
Company entered into a purchase agreement with Lehman Brothers to sell
10,000,000 common shares, plus an over-allotment option to purchase up
to an additional 1,500,000 common shares.
3. Current Report on Form 8-K dated July 3, 2003, announcing the close of
the Company's previously announced sale of 10,000,000 common shares and
the call for redemption of all of the outstanding Weatherford
International, Inc. 5% Convertible Subordinated Preferred Equivalent
Debentures.
4. Current Report on Form 8-K dated July 21, 2003, announcing earnings for
the quarter ended June 30, 2003.
38
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
(Principal Executive Officer)
/s/ Lisa W. Rodriguez
---------------------------------------------
Lisa W. Rodriguez
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
Date: November 5, 2003
39
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.1 Indenture, dated October 1, 2003, among Weatherford International Ltd.,
Weatherford International, Inc., and Deutsche Bank Trust Company
Americas. (incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K (File No. 1-31339) filed October 2, 2003).
4.2 Form of global note for 4.95% Senior Notes due 2013. (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
(File No. 1-31339) filed October 7, 2003).
4.3 Officers' Certificate dated as of October 7, 2003. (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K
(File No. 1-31339) filed October 7, 2003).
+10.1 Weatherford International Ltd. Restricted Share Plan, including form of
agreement for officers.
+10.2 Employment Agreements dated August 1, 2003, between Weatherford
International Ltd. and each of M. David Colley, E. Lee Colley III,
Bernard J. Duroc-Danner, Stuart E. Ferguson, Burt M. Martin, Keith R.
Morley, Jon R. Nicholson, James N. Parmigiano, Lisa W. Rodriguez and
Gary L. Warren.
+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