Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
COMMISSION FILE NUMBER: 000-49887
---------------------
NABORS INDUSTRIES LTD.
INCORPORATED IN BERMUDA
2(ND) FL. INTERNATIONAL TRADING CENTRE
WARRENS
PO BOX 905E
ST. MICHAEL, BARBADOS
(246) 421-9471
98-0363970
(I.R.S. Employer Identification No.)
---------------------
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 by Rule 12b-2 of the Exchange Act).
Yes X No ___
The number of common shares, par value $.001 per share, outstanding as of
October 31, 2003 was 146,587,862. In addition, our subsidiary, Nabors Exchangeco
(Canada) Inc., has 383,394 exchangeable shares outstanding as of October 31,
2003 that are exchangeable for Nabors common shares on a one-for-one basis, and
have essentially identical rights as Nabors Industries Ltd. common shares,
including but not limited to voting rights and the right to receive dividends,
if any.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002........................................... 2
Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2003 and 2002............... 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002........................... 4
Consolidated Statements of Changes in Shareholders' Equity
for the Nine Months Ended September 30, 2003 and 2002....... 5
Notes to Consolidated Financial Statements.................. 7
Report of Independent Accountants........................... 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 40
Item 4. Controls and Procedures..................................... 41
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 41
Item 5. Other Information........................................... 41
Item 6. Exhibits and Reports on Form 8-K............................ 42
Signatures ............................................................ 43
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 510,529 $ 414,051
Marketable securities..................................... 426,174 457,600
Accounts receivable, net.................................. 348,982 277,735
Inventory and supplies.................................... 25,882 20,524
Deferred income taxes..................................... 34,933 32,846
Prepaid expenses and other current assets................. 165,847 167,152
---------- ----------
Total current assets................................... 1,512,347 1,369,908
Marketable securities....................................... 580,473 459,148
Property, plant and equipment, net.......................... 2,881,531 2,781,050
Goodwill, net............................................... 331,509 306,762
Other long-term assets...................................... 181,459 147,004
---------- ----------
Total assets........................................... $5,487,319 $5,063,872
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 299,973 $ 492,985
Trade accounts payable.................................... 98,197 89,705
Accrued liabilities....................................... 170,357 152,864
Income taxes payable...................................... 13,074 15,900
---------- ----------
Total current liabilities.............................. 581,601 751,454
Long-term debt.............................................. 1,984,749 1,614,656
Other long-term liabilities................................. 115,126 137,253
Deferred income taxes....................................... 407,033 402,054
---------- ----------
Total liabilities...................................... 3,088,509 2,905,417
---------- ----------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common shares, par value $.001 per share:
Authorized common shares 400,000; issued 146,517 and
144,965, respectively................................. 147 145
Capital in excess of par value............................ 1,267,765 1,233,598
Accumulated other comprehensive income (loss)............. 75,586 (3,243)
Retained earnings......................................... 1,055,312 927,955
---------- ----------
Total shareholders' equity............................. 2,398,810 2,158,455
Total liabilities and shareholders' equity............. $5,487,319 $5,063,872
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
2
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2003 2002 2003 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- ---------- ----------
Revenues and other income:
Operating revenues............................ $473,494 $353,146 $1,355,883 $1,086,492
Earnings from unconsolidated affiliates....... 2,485 1,932 9,747 11,941
Interest income............................... 6,442 8,145 21,133 25,538
Other income (expense), net................... 2,279 (994) 2,326 2,152
-------- -------- ---------- ----------
Total revenues and other income............ 484,700 362,229 1,389,089 1,126,123
-------- -------- ---------- ----------
Costs and other deductions:
Direct costs.................................. 323,296 233,890 926,647 721,513
General and administrative expenses........... 41,207 36,968 122,935 102,458
Depreciation and amortization................. 58,530 52,084 169,108 143,749
Interest expense.............................. 15,991 17,772 54,705 46,805
-------- -------- ---------- ----------
Total costs and other deductions........... 439,024 340,714 1,273,395 1,014,525
-------- -------- ---------- ----------
Income before income taxes...................... 45,676 21,515 115,694 111,598
-------- -------- ---------- ----------
Income tax (benefit) expense:
Current....................................... 644 1,774 7,930 8,731
Deferred...................................... (5,249) (7,181) (19,593) 8,583
-------- -------- ---------- ----------
Total income tax (benefit) expense......... (4,605) (5,407) (11,663) 17,314
-------- -------- ---------- ----------
Net income...................................... $ 50,281 $ 26,922 $ 127,357 $ 94,284
-------- -------- ---------- ----------
Earnings per share:
Basic......................................... $ .34 $ .19 $ .87 $ .66
Diluted....................................... $ .33 $ .18 $ .83 $ .63
Weighted average number of common shares
outstanding:
Basic......................................... 146,905 145,078 146,332 143,079
-------- -------- ---------- ----------
Diluted....................................... 153,378 151,158 158,090 149,423
-------- -------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
3
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2003 2002
(IN THOUSANDS) ----------- ---------
Cash flows from operating activities:
Net income.................................................. $ 127,357 $ 94,284
Adjustments to net income:
Depreciation and amortization............................. 169,108 143,749
Deferred income tax (benefit) expense..................... (19,593) 8,583
Deferred financing costs amortization..................... 4,098 3,794
Discount amortization on long-term debt................... 20,530 22,931
Amortization of loss on cash flow hedges.................. 113 --
(Gains) losses on long-term assets, net................... (3,182) 1,126
Gains on marketable securities, net....................... (2,692) (2,386)
Losses on derivative instruments.......................... 1,659 --
Sales of marketable securities, trading................... 4,484 --
Foreign currency transaction gains........................ (387) (1,939)
Loss on early extinguishment of debt...................... 908 202
Equity in earnings from unconsolidated affiliates, net of
dividends.............................................. (608) (2,066)
Increase (decrease), net of effects from acquisitions, from
changes in:
Accounts receivable....................................... (43,423) 105,488
Inventory and supplies.................................... (4,639) 2,988
Prepaid expenses and other current assets................. (4,646) (14,774)
Other long-term assets.................................... (28,444) (12,830)
Trade accounts payable and accrued liabilities............ 5,655 (47,412)
Income taxes payable...................................... (2,116) (6,184)
Other long-term liabilities............................... (8,902) (9,865)
----------- ---------
Net cash provided by operating activities................... 215,280 285,689
----------- ---------
Cash flows from investing activities:
Purchases of marketable securities, available-for-sale.... (1,031,192) (427,924)
Sales of marketable securities, available-for-sale........ 938,129 473,075
Cash paid for acquisitions of businesses, net............. -- (120,840)
Capital expenditures...................................... (210,654) (227,411)
Proceeds from sales of assets and insurance claims........ 11,453 5,571
----------- ---------
Net cash used for investing activities...................... (292,264) (297,529)
----------- ---------
Cash flows from financing activities:
Decrease in cash overdrafts............................... (1,904) --
Decrease in restricted cash............................... 2,015 791
Proceeds from long-term debt.............................. 700,000 495,904
Reduction of long-term debt............................... (543,691) (21,914)
Debt issuance costs....................................... (11,512) (2,488)
Proceeds from issuance of common shares................... 24,144 11,050
Repurchase of common shares............................... -- (2,487)
Payments related to cash flow hedges...................... -- (1,482)
----------- ---------
Net cash provided by financing activities................... 169,052 479,374
----------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 4,410 2,710
----------- ---------
Net increase in cash and cash equivalents................... 96,478 470,244
Cash and cash equivalents, beginning of period.............. 414,051 198,443
----------- ---------
Cash and cash equivalents, end of period.................... $ 510,529 $ 668,687
----------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
4
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
COMMON ------------------------------------------------------
SHARES UNREALIZED MINIMUM UNREALIZED
--------------- CAPITAL IN GAINS (LOSSES) PENSION LOSS ON CUMULATIVE
PAR EXCESS OF ON MARKETABLE LIABILITY CASH FLOW TRANSLATION RETAINED
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT EARNINGS
(IN THOUSANDS) ------- ----- ---------- -------------- ---------- ---------- ----------- ----------
Balances, December 31,
2002................... 144,965 $145 $1,233,598 $5,646 $(2,205) $(1,444) $(5,240) $ 927,955
------- ---- ---------- ------ ------- ------- ------- ----------
Comprehensive income
(loss):
Net income............. 127,357
Translation
adjustment........... 79,982
Unrealized losses on
marketable
securities, net of
income tax benefit of
$904................. (1,541)
Less:
reclassification
adjustment for
gains included in
net income, net of
income taxes of
$161............... 275
Amortization of loss on
cash flow hedges, net
of income taxes of
$66.................. 113
------- ---- ---------- ------ ------- ------- ------- ----------
Total comprehensive
income (loss).... -- -- -- (1,266) -- 113 79,982 127,357
------- ---- ---------- ------ ------- ------- ------- ----------
Issuance of common shares
for stock options
exercised.............. 1,134 2 18,142
Issuance of common shares
in connection with the
New Prospect warrants
exercised.............. 200 6,000
Issuance of common shares
in connection with the
Enserco warrants
exercised.............. 66
Nabors Exchangeco shares
exchanged.............. 152
Tax effect of stock
option deductions...... 10,025
------- ---- ---------- ------ ------- ------- ------- ----------
Subtotal........... 1,552 2 34,167 -- -- -- -- --
------- ---- ---------- ------ ------- ------- ------- ----------
Balances, September 30,
2003................... 146,517 $147 $1,267,765 $4,380 $(2,205) $(1,331) $74,742 $1,055,312
------- ---- ---------- ------ ------- ------- ------- ----------
TOTAL
SHAREHOLDERS'
EQUITY
(IN THOUSANDS) -------------
Balances, December 31,
2002................... $2,158,455
----------
Comprehensive income
(loss):
Net income............. 127,357
Translation
adjustment........... 79,982
Unrealized losses on
marketable
securities, net of
income tax benefit of
$904................. (1,541)
Less:
reclassification
adjustment for
gains included in
net income, net of
income taxes of
$161............... 275
Amortization of loss on
cash flow hedges, net
of income taxes of
$66.................. 113
----------
Total comprehensive
income (loss).... 206,186
----------
Issuance of common shares
for stock options
exercised.............. 18,144
Issuance of common shares
in connection with the
New Prospect warrants
exercised.............. 6,000
Issuance of common shares
in connection with the
Enserco warrants
exercised.............. --
Nabors Exchangeco shares
exchanged.............. --
Tax effect of stock
option deductions...... 10,025
----------
Subtotal........... 34,169
----------
Balances, September 30,
2003................... $2,398,810
----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (CONTINUED)
(UNAUDITED)
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
-----------------------------------------
COMMON SHARES UNREALIZED UNREALIZED
------------------- CAPITAL IN GAINS (LOSSES) LOSSES ON CUMULATIVE
PAR EXCESS OF ON MARKETABLE CASH FLOW TRANSLATION RETAINED TREASURY
SHARES VALUE PAR VALUE SECURITIES HEDGES ADJUSTMENT EARNINGS STOCK
(IN THOUSANDS) ------- --------- ---------- -------------- ---------- ----------- ---------- ---------
Balances, December 31,
2001................. 147,711 $14,771 $1,091,536 $12,410 $ -- $(9,150) $1,001,079 $(252,780)
------- ------- ---------- ------- ------- ------- ---------- ---------
Comprehensive income
(loss):
Net income........... 94,284
Translation
adjustment......... (788)
Unrealized losses on
marketable
securities, net of
income tax benefit
of $4,614.......... (7,856)
Less:
reclassification
adjustment for
gains included in
net income, net
of income taxes
of $1,187........ (2,021)
Unrealized losses on
cash flow hedges,
net of income tax
benefit of $870.... (1,482)
------- ------- ---------- ------- ------- ------- ---------- ---------
Total comprehensive
income
(loss)......... -- -- -- (9,877) (1,482) (788) 94,284 --
------- ------- ---------- ------- ------- ------- ---------- ---------
Issuance of common
shares for stock
options exercised.... 651 63 8,411
Issuance of common
shares in connection
with the Bayard
warrants exercised... 18 2 (2)
Issuance of common
shares in connection
with Enserco
acquisition.......... 2,639 264 162,497
Nabors Exchangeco
shares exchanged..... 312 19 (19)
Tax effect of stock
option deductions.... 27,102
Repurchase of common
shares............... (91) (799) (1,688)
Put option on common
shares............... 2,576
Retirement of treasury
stock................ (6,822) (682) (59,172) (192,926) 252,780
Change in par value.... (14,293) 14,293
------- ------- ---------- ------- ------- ------- ---------- ---------
Subtotal......... (3,293) (14,627) 154,887 -- -- -- (194,614) 252,780
------- ------- ---------- ------- ------- ------- ---------- ---------
Balances, September 30,
2002................. 144,418 $ 144 $1,246,423 $ 2,533 $(1,482) $(9,938) $ 900,749 $ --
------- ------- ---------- ------- ------- ------- ---------- ---------
TOTAL
SHAREHOLDERS'
EQUITY
(IN THOUSANDS) -------------
Balances, December 31,
2001................. $1,857,866
----------
Comprehensive income
(loss):
Net income........... 94,284
Translation
adjustment......... (788)
Unrealized losses on
marketable
securities, net of
income tax benefit
of $4,614.......... (7,856)
Less:
reclassification
adjustment for
gains included in
net income, net
of income taxes
of $1,187........ (2,021)
Unrealized losses on
cash flow hedges,
net of income tax
benefit of $870.... (1,482)
----------
Total comprehensive
income
(loss)......... 82,137
----------
Issuance of common
shares for stock
options exercised.... 8,474
Issuance of common
shares in connection
with the Bayard
warrants exercised... --
Issuance of common
shares in connection
with Enserco
acquisition.......... 162,761
Nabors Exchangeco
shares exchanged..... --
Tax effect of stock
option deductions.... 27,102
Repurchase of common
shares............... (2,487)
Put option on common
shares............... 2,576
Retirement of treasury
stock................ --
Change in par value.... --
----------
Subtotal......... 198,426
----------
Balances, September 30,
2002................. $2,138,429
----------
The accompanying notes are an integral part of these consolidated financial
statements.
6
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS
Nabors is the largest land drilling contractor in the world, with almost
600 land drilling rigs. We conduct oil, gas and geothermal land drilling
operations in the U.S. Lower 48 states, Alaska, Canada, South and Central
America, the Middle East and Africa. Nabors also is one of the largest land
well-servicing and workover contractors in the United States and Canada. We own
approximately 750 land workover and well-servicing rigs in the United States,
primarily in the southwestern and western United States, and approximately 200
land workover and well-servicing rigs in Canada. Nabors is a leading provider of
offshore platform workover and drilling rigs, and owns 42 platform, 16 jack-up
and three barge rigs in the Gulf of Mexico and international markets. These rigs
provide well-servicing, workover and drilling services. We have a 50% ownership
interest in a joint venture in Saudi Arabia, which owns 17 rigs.
To further supplement and complement our primary business, we offer a wide
range of ancillary well-site services, including oilfield management,
engineering, transportation, construction, maintenance, well logging,
directional drilling, rig instrumentation, data collection and other support
services, in selected domestic and international markets. Our land
transportation and hauling fleet includes approximately 240 rig and oilfield
equipment hauling tractor-trailers and a number of cranes, loaders and
light-duty vehicles. We maintain approximately 290 fluid hauling trucks,
approximately 700 fluid storage tanks, eight saltwater disposal wells and other
auxiliary equipment used in domestic drilling, workover and well-servicing
operations. In addition, we own a fleet of 30 marine transportation and supply
vessels, primarily in the Gulf of Mexico, which provide transportation of
drilling materials, supplies and crews for offshore operations. We manufacture
and lease or sell top drives for a broad range of drilling applications,
directional drilling systems, rig instrumentation and data collection equipment
and rig reporting software.
The majority of our business is conducted through our Contract Drilling
segment, which includes our drilling, workover and well-servicing operations, on
land and offshore. Our subsidiaries engaged in marine transportation and supply
services, top drive manufacturing, directional drilling, rig instrumentation and
software, and construction and logistics operations are classified as
Manufacturing, Logistics and Other for segment reporting purposes.
As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
Nabors became the publicly traded parent company of the Nabors group of
companies, effective June 24, 2002, pursuant to the corporate reorganization
described in our Annual Report on Form 10-K for the year ended December 31,
2002.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The unaudited consolidated financial statements of Nabors are prepared in
conformity with accounting principles generally accepted in the United States of
America (GAAP). Pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission, certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with GAAP have
been omitted. Therefore, these financial statements should be read along with
our Annual Report on Form 10-K for the year ended December 31, 2002. In our
management's opinion, the consolidated financial statements contain all
adjustments necessary to present fairly our financial position as of September
30, 2003, the results of our operations for each of the three-month and
nine-month periods ended September 30, 2003 and 2002, and our cash flows for the
nine months ended September 30, 2003 and 2002, in accordance with GAAP. Interim
results for the three and nine months ended September 30, 2003 may not be
indicative of results that will be realized for the full year ending December
31, 2003.
7
Our independent accountants have performed a review of, and issued a report
on, these consolidated interim financial statements in accordance with standards
established by the American Institute of Certified Public Accountants. Pursuant
to Rule 436(c) under the U.S. Securities Act of 1933, this report should not be
considered a part of any registration statement prepared or certified within the
meanings of Sections 7 and 11 of the Securities Act.
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Nabors and
all majority-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Investments in entities where we have the ability to exert significant
influence, but where we do not control their operating and financial policies,
are accounted for using the equity method. Our share of the net income of these
entities is recorded as Earnings from unconsolidated affiliates in our
consolidated statements of income, and our investment in these entities is
carried as a single amount in our consolidated balance sheets. Investments in
net assets of unconsolidated affiliates accounted for using the equity method
totaled $57.3 million and $58.6 million as of September 30, 2003 and December
31, 2002, respectively, and are included in other long-term assets in our
consolidated balance sheets.
RECLASSIFICATIONS
During the fourth quarter of 2002, we revised the classification of
revenues for certain rigs that we own that are leased to our joint venture in
Saudi Arabia, in which we have a 50% ownership interest. We now report 100% of
these revenues as Operating revenues. Previously, we had reported 50% of these
lease revenues as Earnings from unconsolidated affiliates and 50% as Operating
revenues. The effect of this change in classification resulted in an increase in
Operating revenues and offsetting decrease in Earnings from unconsolidated
affiliates of $6.2 million and $17.5 million for the three and nine months ended
September 30, 2002, respectively. These reclassifications had no impact on total
revenues and other income, or net income.
STOCK-BASED COMPENSATION
We account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation expense for stock options
is measured as the excess, if any, of the quoted market price of Nabors common
shares at the date of grant over the amount an employee must pay to acquire the
common shares. We grant options at prices equal to the market price of our
shares on the date of grant and therefore do not record compensation expense
related to these grants. Statement of Financial Accounting Standards (SFAS) No.
148, "Accounting for Stock-Based Compensation -- an Amendment to FAS 123,"
requires companies that continue to account for stock-based compensation in
accordance with APB 25 to disclose certain information using a tabular
presentation. The table presented below illustrates the effect on net income and
earnings per share as if we had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to our stock-based
employee compensation. Under the provisions of SFAS 123, compensation cost for
stock-based compensation is determined based on fair values as of the dates of
grant estimated using an option pricing model such as the Black-Scholes
option-pricing model, and compensation cost is amortized over the applicable
option vesting period.
8
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2003 2002 2003 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- -------
Net income, as reported............................... $50,281 $26,922 $127,357 $94,284
Deduct: Total stock-based employee compensation
expense determined under the fair value method for
all awards, net of related tax effects.............. (3,755) (4,955) (10,338) (28,568)
------- ------- -------- -------
Pro forma net income.................................. $46,526 $21,967 $117,019 $65,716
------- ------- -------- -------
Earnings per share:
Basic-as reported................................... $ .34 $ .19 $ .87 $ .66
Basic-pro forma..................................... $ .32 $ .15 $ .80 $ .46
Diluted-as reported................................. $ .33 $ .18 $ .83 $ .63
Diluted-pro forma................................... $ .30 $ .15 $ .76 $ .44
The pro forma amounts above were estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions for grants
during the three and nine months ended September 30, 2003 and 2002,
respectively: risk-free interest rates of 2.22% and 3.79%; volatility of 47.58%
and 48.19%; dividend yield of 0.0% for both periods; and expected life of 3.5
years for both periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements, Including Guarantees of Indebtedness of Others." FIN 45 requires
that upon issuance of certain types of guarantees, a guarantor recognize and
account for the fair value of the guarantee as a liability. FIN 45 contains
exclusions to this requirement, including the exclusion of a parent's guarantee
of its subsidiaries' debt to third parties. The initial recognition and
measurement provisions of FIN 45 have been applied on a prospective basis for
guarantees issued or modified after December 31, 2002. During the nine months
ended September 30, 2003, we issued new standby letters of credit which serve as
guarantees under the provisions of FIN 45. The application of the recognition
and measurement provisions of FIN 45 to these guarantees was insignificant. The
disclosure requirements of FIN 45 are effective for financial statements of both
interim and annual periods ending after December 15, 2002 and are included in
Note 6.
In January 2003 the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of variable interest entities (VIEs) by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the risks or rewards associated
with the VIE. The consolidation requirements of FIN 46 applied immediately to
VIEs created after January 31, 2003. For VIEs created at an earlier date, the
consolidation requirements apply for the first interim or annual period ending
after December 15, 2003. On July 1, 2003, we adopted, earlier than required, the
provisions of FIN 46 related to VIEs created on or before January 31, 2003. The
adoption of FIN 46 did not have a material impact on our consolidated financial
position, results of operations or cash flows.
In May 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting 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 149 is effective in relation to certain issues for fiscal
quarters that began prior to June 15, 2003 and for certain contracts entered
into after June 30, 2003. The adoption of SFAS 149 had no impact on our
9
financial position, results of operations or cash flows as of and for the three
and nine months ended September 30, 2003.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS 150 is effective for such financial instruments, except for
those that apply to mandatorily redeemable noncontrolling interests, entered
into or modified after May 31, 2003, and otherwise was effective for such
financial instruments, except for those that apply to mandatorily redeemable
noncontrolling interests, at the beginning of the current quarter. The adoption
of SFAS 150 had no initial impact on our financial position, results of
operations or cash flows as of and for the three and nine months ended September
30, 2003.
NOTE 3 LONG-TERM DEBT
On June 10, 2003, Nabors Industries, Inc. (Nabors Delaware), our
wholly-owned subsidiary, completed a private placement of $700 million aggregate
principal amount of zero coupon senior exchangeable notes due 2023 that are
fully and unconditionally guaranteed by us. The notes were reoffered by the
initial purchaser of the notes to qualified institutional buyers under Rule 144A
of the Securities Act of 1933, as amended, and outside the United States in
accordance with Regulation S under the Securities Act. Nabors and Nabors
Delaware filed a registration statement on Form S-3 pursuant to the Securities
Act with respect to the notes on August 8, 2003. The notes do not bear interest,
do not accrete and have a zero yield to maturity, unless Nabors Delaware becomes
obligated to pay contingent interest as defined in the note indenture and
described below.
The notes are exchangeable at the option of the holders into 14.2653 common
shares of Nabors per $1,000 principal amount of notes (subject to adjustment for
certain events) if any of the following circumstances occur: (1) if in any
calendar quarter beginning after the quarter ending September 30, 2003, the
closing sale price per share of Nabors' common shares for at least 20 trading
days during the period of 30 consecutive trading days ending on the last trading
day of the previous calendar quarter is greater than or equal to 120%, or with
respect to all calendar quarters beginning on or after July 1, 2008, 110%, of
the applicable exchange price per share of the Nabors' common shares on such
last trading day (the initial exchange price per share is $70.10 and is subject
to adjustment for certain events detailed in the note indenture; 120% of this
initial price per share is $84.12 and 110% of this initial price per share is
$77.11), (2) subject to certain exceptions, during the five business day period
after any ten consecutive trading day period in which the trading price per
$1,000 principal amount of notes for each day of such ten trading day period was
less than 95% of the product of the closing sale price of Nabors' common shares
and the exchange rate of such note, (3) if Nabors Delaware calls the notes for
redemption, or (4) upon the occurrence of specified corporate transactions
described in the note indenture.
The notes are unsecured and are effectively junior in right of payment to
any of Nabors Delaware's future secured debt. The notes will rank equally with
any of Nabors Delaware's other existing and future unsecured and unsubordinated
debt and will be senior in right of payment to any of Nabors Delaware's
subordinated debt. The guarantee of Nabors will be similarly unsecured and have
a similar ranking to the notes so guaranteed. Holders of the notes have the
right to require Nabors Delaware to repurchase the notes at a purchase price
equal to 100% of the principal amount of the notes plus contingent interest and
additional amounts, if any, on June 15, 2008, June 15, 2013 and June 15, 2018 or
upon a fundamental change as described in the note indenture. If Nabors Delaware
is required to repurchase the notes, Nabors Delaware will have the right to
deliver, in lieu of cash, our common shares or a combination of cash and common
shares. If Nabors Delaware elects to pay all or a portion of the purchase price
in our common shares, the number of common shares we will issue will be equal to
the purchase price divided by the market price of our common shares. For these
purposes, the market price means the average of the sale prices of our common
shares for the five trading day period ending on the third business day prior to
the applicable purchase date.
10
Nabors Delaware will be obligated to pay contingent interest during any
six-month period from June 15 to December 14 or from December 15 to June 14
commencing on or after June 15, 2008 for which the average trading price of the
notes for each day of the applicable five trading day reference period equals or
exceeds 120% of the principal amount of the notes as of the day immediately
preceding the first day of the applicable six-month interest period. The amount
of contingent interest payable per note in respect to any six-month period will
equal 0.185% of the principal amount of a note. The five day trading reference
period means the five trading days ending on the second trading day immediately
preceding the relevant six-month interest period.
We used a portion of the net proceeds from the issuance of the notes to
redeem the remaining outstanding principal amount of Nabors Delaware's $825
million zero coupon convertible senior debentures due 2020 on June 20, 2003 and
our associated guarantees. The redemption price was $655.50 per $1,000 principal
amount of the debentures for an aggregate redemption price paid of approximately
$494.9 million. The redemption of the debentures did not result in any gain or
loss as the debentures were redeemed at prices equal to their carrying value on
June 20, 2003. The remainder of the proceeds of the notes were invested in cash
and marketable securities.
On April 1, 2003, we redeemed our 8.625% senior subordinated notes due
April 2008 and all associated guarantees at a redemption price of $1,043.13 per
$1,000 principal amount of the notes together with accrued and unpaid interest
to the date of redemption. The aggregate redemption price was $45.2 million and
resulted in the recognition of a pretax loss of approximately $.9 million,
resulting from the redemption of the notes at prices higher than their carrying
value on April 1, 2003. This loss was recorded in other income in our
consolidated statements of income in the second quarter of 2003.
NOTE 4 DERIVATIVE FINANCIAL INSTRUMENTS
On October 21, 2002, we entered into an interest rate swap transaction with
a third-party financial institution to hedge our exposure to changes in the fair
value of $200 million of our fixed rate 5.375% senior notes due 2012, which has
been designated as a fair value hedge under SFAS 133. Additionally, on October
21, 2002, we purchased a LIBOR range cap and sold a LIBOR floor, in the form of
a cashless collar, with the same third-party financial institution with the
intention of mitigating and managing our exposure to changes in the three-month
U.S. dollar LIBOR rate. This transaction does not qualify for hedge accounting
treatment under SFAS 133 and any change in the cumulative fair value of this
transaction will be reflected as a gain or loss in our consolidated statements
of income.
During the three and nine months ended September 30, 2003, we recorded
interest savings related to our interest rate swap agreement accounted for as a
fair value hedge of $1.7 million and $5.0 million, respectively, which served to
reduce interest expense. The fair value of our interest rate swap agreement is
recorded as a derivative asset, included in other long-term assets, and totaled
approximately $8.4 million, $15.8 million and $8.5 million as of September 30,
2003, June 30, 2003 and December 31, 2002, respectively. The carrying value of
our 5.375% senior notes due 2012 has been increased by the same amount.
The fair value of our range cap and floor transaction is recorded as a
derivative liability, included in other long-term liabilities, and totaled
approximately $5.0 million, $7.5 million and $3.8 million as of September 30,
2003, June 30, 2003 and December 31, 2002, respectively. We recorded a gain of
approximately $2.1 million and a loss of approximately $1.6 million for the
three and nine months ended September 30, 2003, respectively, related to this
derivative instrument; such amounts are included in other income (expense) in
our consolidated statements of income. Such gains and losses resulted primarily
from the change in cumulative fair value of this derivative instrument from June
30, 2003 and December 31, 2002, respectively, which resulted in a gain of
approximately $2.5 million during the current quarter and a loss of
approximately $1.2 million during the nine months ended September 30, 2003.
Additionally, as a result of the three-month U.S. dollar LIBOR rate being below
our 2.665% floor on August 15, 2003 (such rate was 1.13%), we are obligated to
pay, on November 15, 2003, approximately $.8 million to the counterparty. This
payment is due for the three-month period from August 15 to November 15, 2003.
We
11
have recorded approximately $.4 million of this obligation as an expense in
other income (expense) in the current quarter and will record the remaining
amount of approximately $.4 million in the fourth quarter of 2003.
Nabors Delaware's $700 million zero coupon senior exchangeable notes due
2023 include a contingent interest provision, discussed in Note 3 above, which
qualifies as an embedded derivative under SFAS 133. This embedded derivative is
required to be separated from the notes and valued at its fair value at the
inception of the note indenture. Any subsequent change in fair value of this
embedded derivative will be recorded in our statements of income. The fair value
of the contingent interest provision at inception of the note indenture was
nominal. In addition, there was no significant change in the fair value of this
embedded derivative through September 30, 2003, resulting in no impact on our
statements of income for the three and nine months ended September 30, 2003.
NOTE 5 INCOME TAXES
Our effective income (benefit) tax rate was (10%) during the three and nine
months ended September 30, 2003 compared to (25%) and 16% for the three and nine
months ended September 30, 2002, respectively. The tax benefit position for the
2003 periods and the third quarter of 2002 resulted primarily from tax savings
realized as a result of our corporate reorganization effective June 24, 2002. It
is possible that the tax savings recorded as a result of the corporate
reorganization may not be realized, depending on the final disposition of
various legislative proposals introduced in the U.S. Congress, and any
responsive action taken by Nabors.
NOTE 6 COMMITMENTS AND CONTINGENCIES
LITIGATION
On May 23, 2002, Steve Rosenberg, an individual shareholder of Nabors,
filed a complaint against Nabors and its directors in the United States District
Court for the Southern District of Texas (Civil Action No. 02-1942), alleging
that Nabors' May 10, 2002 proxy statement/prospectus contained certain material
misstatements and omissions in violation of federal securities laws and state
law. Nabors' May 10, 2002 proxy statement/prospectus was sent to shareholders in
connection with the special meeting to consider and vote on Nabors' proposed
reorganization and effective reorganization in Bermuda. Rosenberg requested that
the Court either enjoin the closing of the shareholder vote on the scheduled
date or the effectuation of the reorganization. In addition, Rosenberg purported
to bring a class action on behalf of all shareholders, alleging that Nabors and
its directors violated their state law fiduciary duties by making these alleged
misstatements and omissions.
On March 18, 2003, the Court granted our motion and dismissed all claims
with prejudice. On April 14, 2003, Rosenberg filed an appeal of the United
States District Court's decision to the United States Fifth Circuit Court of
Appeals. The parties entered into settlement negotiations and in July 2003
reached a confidential settlement of all disputes between the parties. This
settlement had no material effect on our consolidated financial position,
results of operations or cash flows.
Nabors and its subsidiaries are defendants or otherwise involved in a
number of other lawsuits in the ordinary course of their business. In the
opinion of management, our ultimate liability with respect to pending lawsuits
is not expected to have a significant or material adverse effect on our
consolidated financial position, results of operations or cash flows.
GUARANTEES
We enter into various agreements providing financial or performance
assurance to third parties. Certain of these agreements act as guarantees,
including standby letters of credit issued on behalf of insurance carriers in
conjunction with our workers' compensation insurance program and guarantees of
residual value in certain of our operating lease agreements. We have also
guaranteed payment of contingent consideration in conjunction with an
acquisition in 2002, which is based on future operating
12
results of that business. In addition, we have provided indemnifications to
certain third parties which serve as guarantees. These guarantees include
indemnification provided by Nabors to our stock transfer agent and our insurance
carriers. We are not able to estimate the potential future maximum payments that
might be due under our indemnification guarantees.
Management believes that the likelihood that we would be required to
perform or otherwise incur any significant losses associated with any of these
guarantees is remote. The following table summarizes the total maximum amount of
financial and performance guarantees issued by Nabors:
MAXIMUM AMOUNT
---------------------------------------------------
REMAINDER
OF 2003 2004 2005 THEREAFTER TOTAL
(IN THOUSANDS) --------- ------- ------ ---------- -------
Financial standby letters of credit.......... $953 $35,586 $ -- $ -- $36,539
Guarantee of residual value in lease
agreements................................. -- 347 701 65 1,113
Contingent consideration in acquisition...... -- 1,111 1,111 278 2,500
---- ------- ------ ---- -------
Total...................................... $953 $37,044 $1,812 $343 $40,152
---- ------- ------ ---- -------
NOTE 7 EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- --------
Net income (numerator):
Net income - basic............................... $ 50,281 $ 26,922 $127,357 $ 94,284
Add interest expense on assumed conversion of our
zero coupon convertible senior debentures, net
of tax:
$825 million due 2020 (1)................... -- -- 3,639 --
$1.381 billion due 2021 (2)................. -- -- -- --
-------- -------- -------- --------
Adjusted net income - diluted................. $ 50,281 $ 26,922 $130,996 $ 94,284
-------- -------- -------- --------
Earnings per share:
Basic......................................... $ .34 $ .19 $ .87 $ .66
Diluted....................................... $ .33 $ .18 $ .83 $ .63
Shares (denominator):
Weighted average number of shares outstanding-
basic (3)..................................... 146,905 145,078 146,332 143,079
Net effect of dilutive stock options and warrants
based on the treasury stock method............ 6,473 6,080 6,680 6,344
Assumed conversion of our zero coupon
convertible/exchangeable senior
debentures/notes:
$825 million due 2020 (1)................... -- -- 5,078 --
$1.381 billion due 2021 (2)................. -- -- -- --
$700 million due 2023 (4)................... -- -- -- --
-------- -------- -------- --------
Weighted average number of shares
outstanding-diluted.............................. 153,378 151,158 158,090 149,423
-------- -------- -------- --------
- ---------------
(1) Diluted earnings per share for the nine months ended September 30, 2003
reflects the assumed conversion of our $825 million zero coupon convertible
senior debentures due 2020, as the conversion in that period would have been
dilutive. We redeemed for cash the remaining outstanding principal
13
amount of our $825 million zero coupon convertible senior debentures due
2020 on June 20, 2003 and therefore these debentures did not impact the
calculation of diluted earnings per share for the three months ended
September 30, 2003. For the three and nine months ended September 30, 2002,
the weighted average number of shares outstanding-diluted excludes 8.1
million potentially dilutive shares issuable upon the conversion of our $825
million zero coupon convertible senior debentures due 2020 because the
inclusion of such shares would have been anti-dilutive, given the level of
net income for those periods. Net income for the three and nine months ended
September 30, 2002 also excludes the related add-back of interest expense,
net of tax, of $1.9 million and $5.7 million, respectively, for these
debentures. These shares would have been dilutive and therefore included in
the calculation of the weighted average number of shares outstanding-diluted
had diluted earnings per share been at or above $.23 and $.70 for the three
and nine months ended September 30, 2002, respectively.
(2) For the three and nine months ended September 30, 2003 and 2002, the
weighted average number of shares outstanding-diluted excludes 8.5 million
potentially dilutive shares issuable upon the conversion of our $1.381
billion zero coupon convertible senior debentures due 2021 because the
inclusion of such shares would have been anti-dilutive, given the level of
net income for those periods. Net income for the three months ended
September 30, 2003 and 2002 excludes the related add-back of interest
expense of $3.0 million and net income for the nine months ended September
30, 2003 and 2002 excludes the related add-back of interest expense of $9.1
million and $8.8 million, respectively, for these debentures. These shares
would have been dilutive and therefore included in the calculation of the
weighted average number of shares outstanding-diluted had diluted earnings
per share been at or above $.36 and $.35 for the three months ended
September 30, 2003 and 2002, respectively, and at or above $1.07 and $1.04
for the nine months ended September 30, 2003 and 2002, respectively.
(3) Includes the following weighted average number of common shares of Nabors
and weighted average number of exchangeable shares of Nabors Exchangeco
(Canada) Inc., respectively: 146.5 million and .4 million shares for the
three months ended September 30, 2003; 144.4 million and .7 million shares
for the three months ended September 30, 2002; 145.8 million and .5 million
shares for the nine months ended September 30, 2003; and 142.7 million and
.4 million shares for the nine months ended September 30, 2002. The
exchangeable shares of Nabors Exchangeco (Canada) Inc. are exchangeable for
Nabors common shares on a one-for-one basis, and have essentially identical
rights as Nabors Industries Ltd. common shares, including but not limited to
voting rights and the right to receive dividends, if any.
(4) Diluted earnings per share for the three and nine months ended September 30,
2003 excludes approximately 10.0 million potentially dilutive shares
initially issuable upon the exchange of our $700 million zero coupon
exchangeable senior notes due 2023. Such shares are contingently
exchangeable under certain circumstances discussed in Note 3 and would only
be included in the calculation of the weighted average number of shares
outstanding-diluted if any of those criteria were met. Such criteria were
not met during the three and nine months ended September 30, 2003. These
notes were issued in June 2003 and therefore did not impact the calculation
of diluted earnings per share for the three and nine months ended September
30, 2002.
14
NOTE 8 SUPPLEMENTAL INCOME STATEMENT INFORMATION
Other income (expense) includes the following:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- ---------------
2003 2002 2003 2002
(IN THOUSANDS) ------ ----- ------ ------
Gains (losses) on marketable securities, net............... $ 65 $(564) $2,692 $2,386
(Losses) gains on long-term assets, net.................... (95) (481) 3,182 (522)
Foreign currency transaction gains (losses)................ 36 (368) 387 1,939
Corporate reorganization expense........................... -- (103) -- (3,461)
Gains (losses) on derivative instruments................... 2,042 -- (1,659) --
Loss on early extinguishment of debt....................... -- -- (908) (202)
Other...................................................... 231 522 (1,368) 2,012
------ ----- ------ ------
Total.................................................... $2,279 $(994) $2,326 $2,152
------ ----- ------ ------
NOTE 9 SEGMENT INFORMATION
The following table sets forth financial information with respect to our
segments:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2003 2002 2003 2002
(IN THOUSANDS) -------- -------- ---------- ----------
Operating revenues and Earnings from
unconsolidated affiliates:
Contract Drilling (1)......................... $438,014 $336,088 $1,251,693 $1,020,695
Manufacturing, Logistics and Other (2)........ 48,635 33,692 150,396 115,288
Other (3)..................................... (10,670) (14,702) (36,459) (37,550)
-------- -------- ---------- ----------
Total......................................... $475,979 $355,078 $1,365,630 $1,098,433
-------- -------- ---------- ----------
Adjusted income derived from operating
activities: (4)
Contract Drilling (1)......................... $ 62,459 $ 38,927 $ 171,204 $ 137,027
Manufacturing, Logistics and Other (2)........ (790) 4,028 4,397 22,317
Other (5)..................................... (8,723) (10,819) (28,661) (28,631)
-------- -------- ---------- ----------
Total......................................... $ 52,946 $ 32,136 $ 146,940 $ 130,713
Interest expense................................ (15,991) (17,772) (54,705) (46,805)
Interest income................................. 6,442 8,145 21,133 25,538
Other income (expense), net..................... 2,279 (994) 2,326 2,152
-------- -------- ---------- ----------
Income before income taxes.................... $ 45,676 $ 21,515 $ 115,694 $ 111,598
-------- -------- ---------- ----------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Total assets:
Contract Drilling (6)..................................... $3,528,329 $3,266,292
Manufacturing, Logistics and Other (7).................... 335,597 343,365
Other (5)................................................. 1,623,393 1,454,215
---------- ----------
Total..................................................... $5,487,319 $5,063,872
---------- ----------
15
- ---------------
(1) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.0 million and $.9 million for the three months ended
September 30, 2003 and 2002, respectively, and $2.7 million and $3.0 million
for the nine months ended September 30, 2003 and 2002, respectively.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.5 million and $1.0 million for the three months ended
September 30, 2003 and 2002, respectively, and $7.0 million and $8.9 million
for the nine months ended September 30, 2003 and 2002, respectively.
(3) Represents the elimination of inter-segment transactions.
(4) Adjusted income derived from operating activities is computed by subtracting
direct costs, general and administrative expenses, and depreciation and
amortization expense from Operating revenues and then adding Earnings from
unconsolidated affiliates. Such amounts should not be used as a substitute
to those amounts reported under GAAP. However, management evaluates the
performance of our business units and the consolidated company based on
several criteria, including adjusted income derived from operating
activities, because it believes that this financial measure is an accurate
reflection of the ongoing profitability of our company. A reconciliation of
this non-GAAP measure to income before income taxes, which is a GAAP
measure, is provided within the table above.
(5) Represents the elimination of inter-segment transactions and unallocated
corporate expenses and assets.
(6) Includes $26.1 million and $25.3 million of investments in unconsolidated
affiliates, accounted for by the equity method, as of September 30, 2003 and
December 31, 2002, respectively.
(7) Includes $31.2 million and $33.3 million of investments in unconsolidated
affiliates, accounted for by the equity method, as of September 30, 2003 and
December 31, 2002, respectively.
NOTE 10 CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Nabors has fully and unconditionally guaranteed all of the issued public
debt securities of Nabors Delaware, and Nabors and Nabors Delaware have fully
and unconditionally guaranteed the $225 million 4.875% senior notes due 2009
issued by Nabors Holdings 1, ULC, our indirect subsidiary.
The following condensed consolidating financial information is included so
that separate financial statements of Nabors Delaware and Nabors Holdings are
not required to be filed with the U.S. Securities and Exchange Commission. The
condensed consolidating financial statements present investments in
unconsolidated affiliates using the equity method of accounting.
The following condensed consolidating financial information presents:
condensed consolidating balance sheets as of September 30, 2003 and December 31,
2002, statements of income for the three and nine months ended September 30,
2003 and 2002, and statements of cash flows for the nine months ended September
30, 2003 and 2002 of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer
of public debt securities guaranteed by Nabors and guarantor of the $225 million
4.875% senior notes due 2009 issued by Nabors Holdings, (c) Nabors Holdings,
issuer of the $225 million 4.875% senior notes due 2009, (d) the non-guarantor
subsidiaries, (e) consolidating adjustments necessary to consolidate Nabors and
its subsidiaries and (f) Nabors on a consolidated basis.
16
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents... $ 120,841 $ 1 $ 17 $ 389,670 $ -- $ 510,529
Marketable securities....... 27,072 -- -- 399,102 -- 426,174
Accounts receivable, net.... -- -- -- 348,982 -- 348,982
Inventory and supplies...... -- -- -- 25,882 -- 25,882
Prepaid expenses and other
current assets............ 823 1,514 -- 198,443 -- 200,780
---------- ---------- -------- ---------- ----------- ----------
Total current assets...... 148,736 1,515 17 1,362,079 -- 1,512,347
Marketable securities......... 45,998 -- -- 534,475 -- 580,473
Property, plant and equipment,
net......................... -- -- -- 2,881,531 -- 2,881,531
Goodwill, net................. -- -- -- 331,509 -- 331,509
Intercompany receivables...... 2,078,224 2,186,468 199 -- (4,264,891) --
Investments in affiliates..... 130,169 1,995,634 233,980 2,130,027 (4,432,524) 57,286
Other long-term assets........ -- 25,838 1,218 97,117 -- 124,173
---------- ---------- -------- ---------- ----------- ----------
Total assets.............. $2,403,127 $4,209,455 $235,414 $7,336,738 $(8,697,415) $5,487,319
---------- ---------- -------- ---------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-
term debt................. $ -- $ 295,260 $ -- $ 4,713 $ -- $ 299,973
Trade accounts payable...... 277 38 8 97,874 -- 98,197
Accrued liabilities......... 696 12,486 1,359 155,816 -- 170,357
Income taxes payable........ 1,216 (190) (77) 12,125 -- 13,074
---------- ---------- -------- ---------- ----------- ----------
Total current
liabilities............. 2,189 307,594 1,290 270,528 -- 581,601
Long-term debt................ -- 1,761,316 223,433 -- -- 1,984,749
Other long-term liabilities... -- 5,030 -- 110,096 -- 115,126
Deferred income taxes......... 79 60,921 48 345,985 -- 407,033
Intercompany payable.......... 2,049 -- -- 4,262,842 (4,264,891) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities......... 4,317 2,134,861 224,771 4,989,451 (4,264,891) 3,088,509
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity.......... 2,398,810 2,074,594 10,643 2,347,287 (4,432,524) 2,398,810
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity.... $2,403,127 $4,209,455 $235,414 $7,336,738 $(8,697,415) $5,487,319
---------- ---------- -------- ---------- ----------- ----------
17
DECEMBER 31, 2002
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents... $ 40,127 $ 38 $ 207 $ 373,679 $ -- $ 414,051
Marketable securities....... 5,721 -- 21 451,858 -- 457,600
Accounts receivable, net.... -- -- -- 277,735 -- 277,735
Inventory and supplies...... -- -- -- 20,524 -- 20,524
Prepaid expenses and other
current assets............ -- 2,607 -- 197,391 -- 199,998
---------- ---------- -------- ---------- ----------- ----------
Total current assets...... 45,848 2,645 228 1,321,187 -- 1,369,908
Marketable securities......... 19,378 -- -- 439,770 -- 459,148
Property, plant and equipment,
net......................... -- -- -- 2,781,050 -- 2,781,050
Goodwill, net................. -- -- -- 306,762 -- 306,762
Intercompany receivables...... 2,009,672 2,158,524 140 -- (4,168,336) --
Investments in affiliates..... 84,887 1,773,633 221,484 2,092,224 (4,113,589) 58,639
Other long-term assets........ -- 20,150 1,220 66,995 -- 88,365
---------- ---------- -------- ---------- ----------- ----------
Total assets.............. $2,159,785 $3,954,952 $223,072 $7,007,988 $(8,281,925) $5,063,872
---------- ---------- -------- ---------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-
term debt................. $ -- $ 489,126 $ -- $ 3,859 $ -- $ 492,985
Trade accounts payable...... 4 23 -- 89,678 -- 89,705
Accrued liabilities......... 217 10,168 3,930 138,549 -- 152,864
Income taxes payable........ 892 (189) -- 15,197 -- 15,900
---------- ---------- -------- ---------- ----------- ----------
Total current
liabilities............. 1,113 499,128 3,930 247,283 -- 751,454
Long-term debt................ -- 1,343,686 223,234 47,736 -- 1,614,656
Other long-term liabilities... -- 3,763 -- 133,490 -- 137,253
Deferred income taxes......... 152 72,258 (1,560) 331,204 -- 402,054
Intercompany payable.......... 65 -- -- 4,168,271 (4,168,336) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities......... 1,330 1,918,835 225,604 4,927,984 (4,168,336) 2,905,417
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity.......... 2,158,455 2,036,117 (2,532) 2,080,004 (4,113,589) 2,158,455
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity.... $2,159,785 $3,954,952 $223,072 $7,007,988 $(8,281,925) $5,063,872
---------- ---------- -------- ---------- ----------- ----------
18
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Revenues and other income:
Operating revenues........... $ -- $ -- $ -- $473,494 $ -- $473,494
Earnings from unconsolidated
affiliates................. -- -- -- 2,485 -- 2,485
Earnings from consolidated
affiliates................. 2,836 32,386 2,846 31,977 (70,045) --
Interest income.............. 550 5 -- 5,887 -- 6,442
Intercompany interest
income..................... 50,789 15,096 -- -- (65,885) --
Other income, net............ 2 2,041 -- 236 -- 2,279
------- ------- ------ -------- --------- --------
Total revenues and other
income................... 54,177 49,528 2,846 514,079 (135,930) 484,700
------- ------- ------ -------- --------- --------
Costs and other deductions:
Direct costs................. -- -- -- 323,296 -- 323,296
General and administrative
expenses................... 868 37 3 40,299 -- 41,207
Depreciation and
amortization............... -- -- -- 58,530 -- 58,530
Interest expense............. -- 13,220 2,860 (89) -- 15,991
Intercompany interest
expense.................... -- -- -- 65,885 (65,885) --
------- ------- ------ -------- --------- --------
Total costs and other
deductions............... 868 13,257 2,863 487,921 (65,885) 439,024
------- ------- ------ -------- --------- --------
Income (loss) before income
taxes........................ 53,309 36,271 (17) 26,158 (70,045) 45,676
------- ------- ------ -------- --------- --------
Income tax expense (benefit)... 3,028 1,437 (6) (9,064) -- (4,605)
------- ------- ------ -------- --------- --------
Net income (loss).............. $50,281 $34,834 $ (11) $ 35,222 $ (70,045) $ 50,281
------- ------- ------ -------- --------- --------
19
THREE MONTHS ENDED SEPTEMBER 30, 2002
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Revenues and other income:
Operating revenues........... $ -- $ -- $ -- $353,146 $ -- $353,146
Earnings from unconsolidated
affiliates................. -- -- -- 1,932 -- 1,932
Earnings (losses) from
consolidated affiliates.... (21,504) 29,034 -- 26,732 (34,262) --
Interest income.............. 5 -- -- 8,140 -- 8,145
Intercompany interest
income..................... 49,000 13,486 -- -- (62,486) --
Other income (expense),
net........................ -- (103) -- (891) -- (994)
-------- ------- ------- -------- -------- --------
Total revenues and other
income................... 27,501 42,417 -- 389,059 (96,748) 362,229
-------- ------- ------- -------- -------- --------
Costs and other deductions:
Direct costs................. -- -- -- 233,890 -- 233,890
General and administrative
expenses................... 90 129 -- 36,749 -- 36,968
Depreciation and
amortization............... -- -- -- 52,084 -- 52,084
Interest expense............. -- 15,695 1,233 844 -- 17,772
Intercompany interest
expense.................... -- -- -- 62,486 (62,486) --
-------- ------- ------- -------- -------- --------
Total costs and other
deductions............... 90 15,824 1,233 386,053 (62,486) 340,714
-------- ------- ------- -------- -------- --------
Income (loss) before income
taxes........................ 27,411 26,593 (1,233) 3,006 (34,262) 21,515
-------- ------- ------- -------- -------- --------
Income tax expense (benefit)... 489 (903) (469) (4,524) -- (5,407)
-------- ------- ------- -------- -------- --------
Net income (loss).............. $ 26,922 $27,496 $ (764) $ 7,530 $(34,262) $ 26,922
-------- ------- ------- -------- -------- --------
20
NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Revenues and other income:
Operating revenues........... $ -- $ -- $ -- $1,355,883 $ -- $1,355,883
Earnings from unconsolidated
affiliates................. -- -- -- 9,747 -- 9,747
Earnings (losses) from
consolidated affiliates.... (11,101) 85,475 12,496 73,172 (160,042) --
Interest income.............. 1,052 22 11 20,048 -- 21,133
Intercompany interest
income..................... 156,826 43,548 -- -- (200,374) --
Other income (expense),
net........................ (3,553) (1,660) 15 7,524 -- 2,326
-------- -------- ------- ---------- --------- ----------
Total revenues and other
income................... 143,224 127,385 12,522 1,466,374 (360,416) 1,389,089
-------- -------- ------- ---------- --------- ----------
Costs and other deductions:
Direct costs................. -- -- -- 926,647 -- 926,647
General and administrative
expenses................... 2,608 (116) 20 120,423 -- 122,935
Depreciation and
amortization............... -- -- -- 169,108 -- 169,108
Interest expense............. -- 45,571 8,588 546 -- 54,705
Intercompany interest
expense.................... -- -- -- 200,374 (200,374) --
-------- -------- ------- ---------- --------- ----------
Total costs and other
deductions............... 2,608 45,455 8,608 1,417,098 (200,374) 1,273,395
-------- -------- ------- ---------- --------- ----------
Income before income taxes..... 140,616 81,930 3,914 49,276 (160,042) 115,694
-------- -------- ------- ---------- --------- ----------
Income tax expense (benefit)... 13,259 (1,312) 1,488 (25,098) -- (11,663)
-------- -------- ------- ---------- --------- ----------
Net income..................... $127,357 $ 83,242 $ 2,426 $ 74,374 $(160,042) $ 127,357
-------- -------- ------- ---------- --------- ----------
21
NINE MONTHS ENDED SEPTEMBER 30, 2002
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Revenues and other income:
Operating revenues........... $ -- $ -- $ -- $1,086,492 $ -- $1,086,492
Earnings from unconsolidated
affiliates................. -- -- -- 11,941 -- 11,941
Earnings from consolidated
affiliates................. 42,609 98,006 -- 94,115 (234,730) --
Interest income.............. 5 15 -- 25,518 -- 25,538
Intercompany interest
income..................... 52,261 40,950 -- -- (93,211) --
Other income (expense),
net........................ -- (1,883) -- 4,035 -- 2,152
------- -------- ------- ---------- --------- ----------
Total revenues and other
income................... 94,875 137,088 -- 1,222,101 (327,941) 1,126,123
------- -------- ------- ---------- --------- ----------
Costs and other deductions:
Direct costs................. -- -- -- 721,513 -- 721,513
General and administrative
expenses................... 102 397 -- 101,959 -- 102,458
Depreciation and
amortization............... -- -- -- 143,749 -- 143,749
Interest expense............. -- 43,649 1,233 1,923 -- 46,805
Intercompany interest
expense.................... -- -- -- 93,211 (93,211) --
------- -------- ------- ---------- --------- ----------
Total costs and other
deductions............... 102 44,046 1,233 1,062,355 (93,211) 1,014,525
------- -------- ------- ---------- --------- ----------
Income (loss) before income
taxes........................ 94,773 93,042 (1,233) 159,746 (234,730) 111,598
------- -------- ------- ---------- --------- ----------
Income tax expense (benefit)... 489 (1,837) (469) 19,131 -- 17,314
------- -------- ------- ---------- --------- ----------
Net income (loss).............. $94,284 $ 94,879 $ (764) $ 140,615 $(234,730) $ 94,284
------- -------- ------- ---------- --------- ----------
22
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Net cash provided by (used
for) operating activities... $104,446 $ 640,050 $(10,786) $ 289,923 $(808,353) $ 215,280
-------- --------- -------- --------- --------- -----------
Cash flows from investing
activities:
Purchases of marketable
securities,
available-for-sale........ (94,685) -- -- (936,507) -- (1,031,192)
Sales of marketable
securities,
available-for-sale........ 46,809 -- -- 891,320 -- 938,129
Cash paid for investments in
consolidated affiliates... -- (700,255) -- -- 700,255 --
Capital expenditures........ -- -- -- (210,654) -- (210,654)
Proceeds from sales of
assets and insurance
claims.................... -- -- -- 11,453 -- 11,453
-------- --------- -------- --------- --------- -----------
Net cash used for investing
activities.................. (47,876) (700,255) -- (244,388) 700,255 (292,264)
-------- --------- -------- --------- --------- -----------
Cash flows from financing
activities:
Decrease in cash
overdrafts................ -- -- -- (1,904) -- (1,904)
Decrease in restricted
cash...................... -- -- -- 2,015 -- 2,015
Proceeds from long-term
debt...................... -- 700,000 -- -- -- 700,000
Reduction of long-term
debt...................... -- (494,903) -- (48,788) -- (543,691)
Debt issuance costs......... -- (11,353) (159) -- -- (11,512)
Proceeds from issuance of
common shares............. 24,144 -- -- -- -- 24,144
Proceeds from parent
contributions............. -- -- 10,755 689,500 (700,255) --
Cash dividends paid......... -- (133,576) -- (674,777) 808,353 --
-------- --------- -------- --------- --------- -----------
Net cash provided by (used
for) financing activities... 24,144 60,168 10,596 (33,954) 108,098 169,052
-------- --------- -------- --------- --------- -----------
Effect of exchange rate
changes on cash and cash
equivalents................. -- -- -- 4,410 -- 4,410
-------- --------- -------- --------- --------- -----------
Net increase (decrease) in
cash and cash equivalents... 80,714 (37) (190) 15,991 -- 96,478
Cash and cash equivalents,
beginning of period......... 40,127 38 207 373,679 -- 414,051
-------- --------- -------- --------- --------- -----------
Cash and cash equivalents, end
of period................... $120,841 $ 1 $ 17 $ 389,670 $ -- $ 510,529
-------- --------- -------- --------- --------- -----------
23
NINE MONTHS ENDED SEPTEMBER 30, 2002
---------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- --------- ------------ ------------- ------------
Net cash (used for) provided
by operating activities.... $ (8,270) $(264,166) $(222,890) $ 781,015 $ -- $ 285,689
Cash flows from investing
activities:
Purchases of marketable
securities,
available-for-sale....... -- -- -- (427,924) -- (427,924)
Sales of marketable
securities,
available-for-sale....... -- -- -- 473,075 -- 473,075
Cash paid for acquisitions
of businesses, net....... -- -- -- (120,840) -- (120,840)
Capital expenditures....... -- -- -- (227,411) -- (227,411)
Proceeds from sales of
assets and insurance
claims................... -- -- -- 5,571 -- 5,571
-------- --------- --------- --------- --------- ---------
Net cash used for investing
activities................. -- -- -- (297,529) -- (297,529)
-------- --------- --------- --------- --------- ---------
Cash flows from financing
activities:
Decrease in restricted
cash..................... -- -- -- 791 -- 791
Proceeds from long-term
debt..................... -- 272,765 223,139 -- -- 495,904
Reduction of long-term
debt..................... -- (5,049) -- (16,865) -- (21,914)
Debt issuance costs........ -- (1,384) -- (1,104) -- (2,488)
Proceeds from issuance of
common shares............ 11,050 -- -- -- -- 11,050
Repurchase of common
shares................... (2,487) -- -- -- -- (2,487)
Payments related to cash
flow hedges.............. -- (1,482) -- -- -- (1,482)
-------- --------- --------- --------- --------- ---------
Net cash provided by (used
for) financing
activities................. 8,563 264,850 223,139 (17,178) -- 479,374
-------- --------- --------- --------- --------- ---------
Effect of exchange rate
changes on cash and cash
equivalents................ -- -- -- 2,710 -- 2,710
-------- --------- --------- --------- --------- ---------
Net increase in cash and cash
equivalents................ 293 684 249 469,018 -- 470,244
Cash and cash equivalents,
beginning of period........ -- 2,201 -- 196,242 -- 198,443
-------- --------- --------- --------- --------- ---------
Cash and cash equivalents,
end of period.............. $ 293 $ 2,885 $ 249 $ 665,260 $ -- $ 668,687
-------- --------- --------- --------- --------- ---------
24
NOTE 11 SUBSEQUENT EVENT
On October 8, 2003, we entered into two separate agreements with
wholly-owned subsidiaries of El Paso Corporation under which a subsidiary of
Nabors will contribute 20% of an estimated $500 million total cost to develop
approximately 125 wells in exchange for a 20% net profits interest in such wells
(cash proceeds available from production after royalties and operating costs
have been paid). The wells included in these agreements include a combination of
proved undeveloped, probable and possible reserves located primarily in South
Texas, North Louisiana and Offshore Gulf of Mexico. Once cash proceeds totaling
117.5% of our total investment have been received from the wells subject to the
applicable agreement, our net profits interest in those wells will convert to an
overriding royalty interest of 0.4% in the wells for the remainder of the wells'
productive lives. Under the terms of each of the agreements, either party may
terminate the agreement upon 30 day's notice.
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Nabors Industries Ltd.:
We have reviewed the accompanying consolidated balance sheet of Nabors
Industries Ltd. and its subsidiaries as of September 30, 2003, and the related
consolidated statements of income for each of the three-month and nine-month
periods ended September 30, 2003 and 2002 and the consolidated statements of
cash flows and of changes in shareholders' equity for the nine-month periods
ended September 30, 2003 and 2002. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002, and the related consolidated statements of income, of cash
flows, and of changes in shareholders' equity for the year then ended (not
presented herein), and in our report dated January 29, 2003, except for Note 21,
as to which the date is March 18, 2003, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the accompanying
consolidated balance sheet information as of December 31, 2002, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
October 29, 2003
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NATURE OF OPERATIONS
Nabors is the largest land drilling contractor in the world, with almost
600 land drilling rigs. We conduct oil, gas and geothermal land drilling
operations in the U.S. Lower 48 states, Alaska, Canada, South and Central
America, the Middle East and Africa. Nabors also is one of the largest land
well-servicing and workover contractors in the United States and Canada. We own
approximately 750 land workover and well-servicing rigs in the United States,
primarily in the southwestern and western United States, and approximately 200
land workover and well-servicing rigs in Canada. Nabors is a leading provider of
offshore platform workover and drilling rigs, and owns 42 platform, 16 jack-up
and three barge rigs in the Gulf of Mexico and international markets. These rigs
provide well-servicing, workover and drilling services. We have a 50% ownership
interest in a joint venture in Saudi Arabia, which owns 17 rigs.
To further supplement and complement our primary business, we offer a wide
range of ancillary well-site services, including oilfield management,
engineering, transportation, construction, maintenance, well logging,
directional drilling, rig instrumentation, data collection and other support
services, in selected domestic and international markets. Our land
transportation and hauling fleet includes approximately 240 rig and oilfield
equipment hauling tractor-trailers and a number of cranes, loaders and
light-duty vehicles. We maintain approximately 290 fluid hauling trucks,
approximately 700 fluid storage tanks, eight saltwater disposal wells and other
auxiliary equipment used in domestic drilling, workover and well-servicing
operations. In addition, we own a fleet of 30 marine transportation and supply
vessels, primarily in the Gulf of Mexico, which provide transportation of
drilling materials, supplies and crews for offshore operations. We manufacture
and lease or sell top drives for a broad range of drilling applications,
directional drilling systems, rig instrumentation and data collection equipment
and rig reporting software.
The majority of our business is conducted through our Contract Drilling
segment, which includes our drilling, workover and well-servicing operations, on
land and offshore. Our subsidiaries engaged in marine transportation and supply
services, top drive manufacturing, directional drilling, rig instrumentation and
software, and construction and logistics operations are classified as
Manufacturing, Logistics and Other for segment reporting purposes. A discussion
of our results of operations for the three and nine months ended September 30,
2003 and 2002 is included below. This discussion should be read in conjunction
with our accompanying consolidated financial statements and notes thereto and
our Annual Report on Form 10-K for the year ended December 31, 2002.
As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
Nabors became the publicly traded parent company of the Nabors group of
companies, effective June 24, 2002, pursuant to the corporate reorganization
described in our Annual Report on Form 10-K for the year ended December 31,
2002.
FORWARD-LOOKING STATEMENTS
We often discuss expectations regarding our future markets, demand for our
products and services, and our performance in our annual and quarterly reports,
press releases, and other written and oral statements. Statements that relate to
matters that are not historical facts are "forward-looking statements" within
the meaning of the safe harbor provisions of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These "forward-looking statements" are based on an analysis of currently
available competitive, financial and economic data and our operating plans. They
are inherently uncertain and investors should recognize that events and actual
results could turn out to be significantly different from our expectations. By
way of illustration, when used in this document, words such as "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "should,"
"could," "may," "predict" and similar expressions are intended to identify
forward-looking statements.
27
You should consider the following key factors when evaluating these
forward-looking statements:
- fluctuations in worldwide prices of and demand for natural gas and oil;
- fluctuations in levels of natural gas and oil exploration and development
activities;
- fluctuations in the demand for our services;
- the existence of competitors, technological changes and developments in
the oilfield services industry;
- the existence of operating risks inherent in the oilfield services
industry;
- the existence of regulatory and legislative uncertainties;
- the possibility of political instability, war or acts of terrorism in any
of the countries in which we do business; and
- general economic conditions.
Our businesses depend, to a large degree, on the level of spending by oil
and gas companies for exploration, development and production activities.
Therefore, a sustained increase or decrease in the price of natural gas or oil,
which could have a material impact on exploration, development and production
activities, could also materially affect our financial condition, results of
operations and cash flows.
The above description of risks and uncertainties is by no means
all-inclusive, but is designed to highlight what we believe are important
factors to consider. For a more detailed description of risk factors, please
refer to our Annual Report on Form 10-K for the year ended December 31, 2002
filed with the Securities and Exchange Commission under Item I, Part VI, "Risk
Factors."
28
RESULTS OF OPERATIONS
The following table sets forth certain information with respect to our
segments and rig activity:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ ----------------------------------------
INCREASE INCREASE
2003 2002 (DECREASE) 2003 2002 (DECREASE)
(IN THOUSANDS, EXCEPT PERCENTAGES -------- -------- -------------- ---------- ---------- --------------
AND RIG ACTIVITY)
Segments:
Operating revenues and Earnings
from unconsolidated affiliates:
Contract Drilling: (1)
U.S. Lower 48 Land
Drilling................... $135,409 $ 92,298 $ 43,111 47% $ 343,702 $ 298,479 $ 45,223 15%
U.S. Land Well-servicing..... 78,773 74,168 4,605 6% 236,937 224,121 12,816 6%
U.S. Offshore................ 25,928 24,446 1,482 6% 72,322 75,876 (3,554) (5%)
Alaska....................... 20,187 26,359 (6,172) (23%) 86,601 97,300 (10,699) (11%)
Canada....................... 71,489 41,387 30,102 73% 222,113 90,339 131,774 146%
International................ 106,228 77,430 28,798 37% 290,018 234,580 55,438 24%
-------- -------- -------- ---------- ---------- --------
Subtotal Contract Drilling
(2)........................ 438,014 336,088 101,926 30% 1,251,693 1,020,695 230,998 23%
Manufacturing, Logistics and
Other (3) (4)................ 48,635 33,692 14,943 44% 150,396 115,288 35,108 30%
Other (5)...................... (10,670) (14,702) 4,032 27% (36,459) (37,550) 1,091 3%
-------- -------- -------- ---------- ---------- --------
Total........................ $475,979 $355,078 $120,901 34% $1,365,630 $1,098,433 $267,197 24%
-------- -------- -------- ---------- ---------- --------
Adjusted cash flow derived from
operating activities: (6)
Contract Drilling:
U.S. Lower 48 Land
Drilling................... $ 28,867 $ 21,359 $ 7,508 35% $ 66,363 $ 73,168 $ (6,805) (9%)
U.S. Land Well-servicing..... 18,644 14,320 4,324 30% 52,600 45,046 7,554 17%
U.S. Offshore................ 5,599 3,891 1,708 44% 11,814 7,002 4,812 69%
Alaska....................... 8,659 11,371 (2,712) (24%) 40,235 35,232 5,003 14%
Canada....................... 18,054 9,067 8,987 99% 56,760 24,210 32,550 134%
International................ 36,046 27,206 8,840 32% 97,538 84,798 12,740 15%
-------- -------- -------- ---------- ---------- --------
Subtotal Contract Drilling... 115,869 87,214 28,655 33% 325,310 269,456 55,854 21%
Manufacturing, Logistics and
Other........................ 4,624 8,282 (3,658) (44%) 20,374 34,991 (14,617) (42%)
Other (7)...................... (9,017) (11,276) 2,259 20% (29,636) (29,985) 349 1%
-------- -------- -------- ---------- ---------- --------
Total........................ 111,476 84,220 27,256 32% 316,048 274,462 41,586 15%
Depreciation and amortization...... (58,530) (52,084) (6,446) (12%) (169,108) (143,749) (25,359) (18%)
-------- -------- -------- ---------- ---------- --------
Adjusted income derived from
operating activities (8)......... 52,946 32,136 20,810 65% 146,940 130,713 16,227 12%
Interest expense................... (15,991) (17,772) 1,781 10% (54,705) (46,805) (7,900) (17%)
Interest income.................... 6,442 8,145 (1,703) (21%) 21,133 25,538 (4,405) (17%)
Other income (expense), net........ 2,279 (994) 3,273 329% 2,326 2,152 174 8%
-------- -------- -------- ---------- ---------- --------
Income before income taxes......... $ 45,676 $ 21,515 $ 24,161 112% $ 115,694 $ 111,598 $ 4,096 4%
-------- -------- -------- ---------- ---------- --------
Net cash provided by operating
activities from the consolidated
statements of cash flows (6)..... $ 94,509 $ 91,004 $ 3,505 4% $ 215,280 $ 285,689 $(70,409) (25%)
-------- -------- -------- ---------- ---------- --------
Rig activity:
Rig years: (9)
U.S. Lower 48 Land Drilling...... 157.4 103.2 54.2 53% 134.6 105.5 29.1 28%
U.S. Offshore.................... 14.1 14.5 (.4) (3%) 14.2 14.6 (.4) (3%)
Alaska........................... 6.3 8.8 (2.5) (28%) 8.0 9.9 (1.9) (19%)
Canada........................... 39.1 23.4 15.7 67% 40.4 20.6 19.8 96%
International (10)............... 63.3 54.6 8.7 16% 60.1 53.5 6.6 12%
-------- -------- -------- ---------- ---------- --------
Total rig years.............. 280.2 204.5 75.7 37% 257.3 204.1 53.2 26%
-------- -------- -------- ---------- ---------- --------
Rig hours: (11)
U.S. Land Well-servicing......... 275,610 259,688 15,922 6% 830,933 764,293 66,640 9%
Canada Well-servicing (12)....... 90,233 62,553 27,680 44% 229,393 93,081 136,312 146%
-------- -------- -------- ---------- ---------- --------
Total rig hours.............. 365,843 322,241 43,602 14% 1,060,326 857,374 202,952 24%
-------- -------- -------- ---------- ---------- --------
- ---------------
(1) This segment includes our drilling, workover and well-servicing operations,
on land and offshore.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.0 million and $.9 million for the three months ended
September 30, 2003 and 2002, respectively, and $2.7 million and $3.0
million for the nine months ended September 30, 2003 and 2002,
respectively.
29
(3) Includes our marine transportation and supply services, top drive
manufacturing, directional drilling, rig instrumentation and software, and
construction and logistics operations.
(4) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.5 million and $1.0 million for the three months ended
September 30, 2003 and 2002, respectively, and $7.0 million and $8.9
million for the nine months ended September 30, 2003 and 2002,
respectively.
(5) Represents the elimination of inter-segment transactions.
(6) Adjusted cash flow derived from operating activities is computed by
subtracting direct costs and general and administrative expenses from
Operating revenues and then adding Earnings from unconsolidated affiliates.
Such amounts should not be used as a substitute to those amounts reported
under accounting principles generally accepted in the United States of
America (GAAP). However, management evaluates the performance of our
business units based on several criteria, including adjusted cash flows
derived from operating activities, because it believes that this financial
measure is an accurate reflection of the ongoing performance of our
business units. The following is a reconciliation of net cash provided by
operating activities from our consolidated statements of cash flows, which
is a GAAP measure, to this non-GAAP measure:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2003 2002 2003 2002
(IN THOUSANDS) -------- ------- -------- --------
Net cash provided by operating activities from
the consolidated statements of cash flows.... $ 94,509 $91,004 $215,280 $285,689
Interest expense............................... 15,991 17,772 54,705 46,805
Interest income................................ (6,442) (8,145) (21,133) (25,538)
Other (income) expense, net.................... (2,279) 994 (2,326) (2,152)
Current income tax expense..................... 644 1,774 7,930 8,731
Deferred financing costs amortization.......... (1,378) (1,598) (4,098) (3,794)
Discount amortization on long-term debt........ (4,961) (7,661) (20,530) (22,931)
Amortization of loss on cash flow hedges....... (42) -- (113) --
Gains (losses) on long-term assets, net........ (95) (298) 3,182 (1,126)
Gains (losses) on marketable securities, net... 65 (564) 2,692 2,386
Gains (losses) on derivative instruments....... 2,042 -- (1,659) --
Sales of marketable securities, trading........ -- -- (4,484) --
Foreign currency transaction gains (losses).... 36 (368) 387 1,939
Loss on early extinguishment of debt........... -- -- (908) (202)
Equity in (losses) earnings of unconsolidated
affiliates, net of dividends................. (1,154) (58) 608 2,066
Decrease (increase), net of effects from
acquisitions, from changes in balance sheet
accounts..................................... 14,540 (8,632) 86,515 (17,411)
-------- ------- -------- --------
Adjusted cash flow derived from operating
activities................................... $111,476 $84,220 $316,048 $274,462
-------- ------- -------- --------
(7) Represents the elimination of inter-segment transactions and unallocated
corporate expenses.
(8) Adjusted income derived from operating activities is computed by
subtracting direct costs, general and administrative expenses, and
depreciation and amortization expense from Operating revenues and then
adding Earnings from unconsolidated affiliates. Such amounts should not be
used as a substitute to those amounts reported under GAAP. However,
management evaluates the performance of our business units and the
consolidated company based on several criteria, including adjusted income
derived from operating activities, because it believes that this financial
measure is an accurate reflection of the ongoing profitability of our
company. A reconciliation of this non-GAAP measure to income before income
taxes, which is a GAAP measure, is provided within the table set forth
immediately following the heading "Results of Operations" above.
(9) Excludes well-servicing rigs, which are measured in rig hours. Includes our
equivalent percentage ownership of rigs owned by unconsolidated affiliates.
Rig years represents a measure of the number
30
of equivalent rigs operating during a given period. For example, one rig
operating 182.5 days during a 365-day period represents 0.5 rig years.
(10) International rig years include our equivalent percentage ownership of rigs
owned by unconsolidated affiliates which totaled 3.7 years and 3.9 years
during the three and nine months ended September 30, 2003 and 2002,
respectively.
(11) Rig hours represents the aggregate number of hours that our well-servicing
rig fleet operated during the period.
(12) The Canada well-servicing operation was acquired during April 2002 as part
of our acquisition of Enserco Energy Service Company Inc.
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating revenues and Earnings from unconsolidated affiliates for the
three months ended September 30, 2003 totaled $476.0 million, representing an
increase of $120.9 million, or 34%, as compared to the prior year quarter.
Adjusted income derived from operating activities and net income for the three
months ended September 30, 2003 totaled $52.9 million and $50.3 million ($.33
per diluted share), respectively, representing increases of 65% and 87% compared
to the prior year quarter. Operating revenues and Earnings from unconsolidated
affiliates for the nine months ended September 30, 2003 totaled $1.37 billion,
representing an increase of $267.2 million, or 24%, as compared to the prior
year period. Adjusted income derived from operating activities and net income
for the nine months ended September 30, 2003 totaled $146.9 million and $127.4
million ($.83 per diluted share), respectively, representing increases of 12%
and 35% compared to the prior year period.
The increase in our Operating revenues and Earnings from unconsolidated
affiliates during the three and nine months ended September 30, 2003 primarily
resulted from higher revenues realized by our International, U.S. Lower 48 Land
Drilling and Canadian operations. International revenues improved primarily as a
result of new contracts for our operation in Mexico. The improved revenues for
our U.S. Lower 48 Land Drilling operations resulted from higher activity levels
driven by a gradual increase in demand for drilling services in that market
during 2003. The improved revenues from our Canadian operations resulted from an
increase in the level of activity for our land drilling and well-servicing
operations compared to the prior year periods driven by increased demand for our
services in that market during 2003 and our acquisition of Enserco Energy
Service Company Inc. in April 2002. The Enserco acquisition increased the number
of drilling rigs owned and operated by Nabors in Canada by 30 drilling rigs
while also adding over 200 well-servicing rigs. The increase in demand for our
services in the U.S. Lower 48 and Canadian markets resulted from higher average
price levels for natural gas in the current year periods compared to the prior
year periods.
The increase in adjusted income derived from operating activities during
the three and nine months ended September 30, 2003 primarily resulted from the
increase in revenues discussed above. However, the overall increase in adjusted
income derived from operating activities for the nine months ended September 30,
2003 was partially offset by lower average dayrates in our U.S. Lower 48 Land
Drilling operations experienced during this period as a result of the weakness
in this market over the period beginning in the second quarter of 2001 and
extending through the end of 2002.
Natural gas prices are the primary driver of our U.S. Lower 48 Land
Drilling, Canadian and U.S. Offshore (Gulf of Mexico) operations while oil
prices are the primary driver of our Alaskan, International and U.S.
Well-servicing operations. Natural gas and oil prices began increasing in the
latter part of the first quarter of 2002, and averaged $4.88 per million cubic
feet (mcf) and $30.21 per barrel, respectively, during the current year quarter,
compared to $3.19 per mcf and $28.30 per barrel for the prior year quarter.
Natural gas and oil prices averaged $5.62 per mcf and $31.03 per barrel,
respectively, during the nine months ended September 30, 2003, compared to $3.05
per mcf and $25.46 per barrel for the prior year period.
31
Our operating results for the fourth quarter of 2003 and for 2004 are
expected to increase from levels realized during the current quarter primarily
as a result of the expected continuance of improved drilling activity for our
U.S. Lower 48 Land Drilling operations and expected improvements in activity
levels for our Canadian land drilling operations. Canadian drilling activity is
subject to substantial levels of seasonality, as activity levels typically peak
in the first quarter, decline substantially in the second quarter, and then
generally increase over the last half of the year. As a result of our recent
acquisitions in Canada, this seasonality has a more significant impact on our
overall results as our Canadian operations represent a larger portion of our
overall operations. We also expect a continuing recovery in our U.S. Offshore
(Gulf of Mexico) operations, which began during the second quarter of 2003 and
continued during the current quarter. We expect results from our International
operations for the fourth quarter of 2003 and for 2004 to remain flat because of
the unexpected cessation of a couple of long-running contracts in the current
quarter, fewer successes in new contract awards than forecasted and lower
expectations of the level of ongoing contribution from our platform rigs
offshore in Mexico. Our U.S. Land Well-servicing operations are expected to
maintain a steady to slightly upward trend for the fourth quarter of 2003 and
for 2004. Additionally, we expect results from our operations in Alaska to
remain flat for the last quarter of 2003 and to be reduced overall during 2004
compared to 2003.
On October 8, 2003, we entered into two separate agreements with
wholly-owned subsidiaries of El Paso Corporation under which a subsidiary of
Nabors will contribute 20% of an estimated $500 million total cost to develop
approximately 125 wells in exchange for a 20% net profits interest in such wells
(cash proceeds available from production after royalties and operating costs
have been paid). The wells included in these agreements include a combination of
proved undeveloped, probable and possible reserves located primarily in South
Texas, North Louisiana and Offshore Gulf of Mexico. Once cash proceeds totaling
117.5% of our total investment have been received from the wells subject to the
applicable agreement, our net profits interest in those wells will convert to an
overriding royalty interest of 0.4% in the wells for the remainder of the wells'
productive lives. Under the terms of each of the agreements, either party may
terminate the agreement upon 30 day's notice.
Contract Drilling. The business units that comprise this segment contain
one or more of the following operations: drilling, workover and well-servicing,
on land and offshore. For the three months ended September 30, 2003, Operating
revenues and Earnings from unconsolidated affiliates for the contract drilling
segment totaled $438.0 million and adjusted cash flow derived from operating
activities totaled $115.9 million, representing increases of 30% and 33%,
respectively, compared to the prior year quarter. Rig years (excluding
well-servicing rigs) increased to 280.2 years during the three months ended
September 30, 2003 from 204.5 years during the prior year quarter. For the nine
months ended September 30, 2003, Operating revenues and Earnings from
unconsolidated affiliates for the contract drilling segment totaled $1.25
billion and adjusted cash flow derived from operating activities totaled $325.3
million, representing increases of 23% and 21%, respectively, compared to the
prior year period. Rig years (excluding well-servicing rigs) increased to 257.3
years during the nine months ended September 30, 2003 from 204.1 years during
the prior year period.
U.S. Lower 48 Land Drilling Operating revenues and adjusted cash flow
derived from operating activities totaled $135.4 million and $28.9 million,
respectively, during the current quarter, representing increases of 47% and 35%,
respectively, compared to the prior year quarter. These increases resulted
primarily from the increase in drilling activity that began in the first quarter
of 2003, which is reflected in the increase in rig years to 157.4 years for the
current quarter compared to 103.2 years during the prior year quarter. Average
dayrates for the three months ended September 30, 2003 were consistent with the
prior year quarter while rising labor costs had a negative impact on adjusted
cash flows derived from operating activities. Operating revenues and adjusted
cash flow derived from operating activities totaled $343.7 million and $66.4
million, respectively, for the nine months ended September 30, 2003,
representing an increase of 15% and a decrease of 9%, respectively, compared to
the prior year period. The increase in Operating revenues for the nine months
ended September 30, 2003 resulted from the increase in drilling activity
discussed above, which is reflected in the increase in rig years to 134.6 years
for the nine months ended September 30, 2003 compared to 105.5 years during the
prior year period, and which was partially
32
offset by lower average dayrates for the nine months ended September 30, 2003
compared to the prior year period. The decrease in adjusted cash flow derived
from operating activities for the nine months ended September 30, 2003 resulted
from lower average dayrates combined with rising labor costs, which were only
partially offset by the increase in rig years compared to the prior year period.
U.S. Land Well-servicing Operating revenues and adjusted cash flow derived
from operating activities totaled $78.8 million and $18.6 million, respectively,
during the current quarter, representing increases of 6% and 30%, respectively,
compared to the prior year quarter, and totaled $236.9 million and $52.6
million, respectively, during the nine months ended September 30, 2003,
representing increases of 6% and 17%, respectively, compared to the prior year
period. The improved results for the three and nine months ended September 30,
2003 resulted from an increase in well-servicing activity driven by increased
capital spending by our customers during the first nine months of 2003 and a
marginal increase in average dayrates compared to the prior year periods. The
higher capital spending resulted from the improvement in commodity prices which
began in 2002 and was sustained during the first nine months of 2003. U.S. Land
Well-servicing hours increased to 275,610 hours during the current quarter from
259,688 hours during the prior year quarter and increased to 830,933 hours
during the nine months ended September 30, 2003 from 764,293 hours during the
prior year period.
U.S. Offshore Operating revenues and adjusted cash flow derived from
operating activities totaled $25.9 million and $5.6 million, respectively,
during the current quarter, representing increases of 6% and 44%, respectively,
compared to the prior year quarter. These increases resulted primarily from
higher average dayrates, which were only partially offset by lower rig years
compared to the prior year quarter. Rig years for our U.S. Offshore operations
totaled 14.1 years for the current quarter compared to 14.5 years during the
prior year quarter. U.S. Offshore Operating revenues and adjusted cash flow
derived from operating activities totaled $72.3 million and $11.8 million,
respectively, for the nine months ended September 30, 2003, representing a
decrease of 5% and an increase of 69%, respectively, compared to the prior year
period. The decrease in Operating revenues for the nine months ended September
30, 2003 resulted primarily from lower rig years compared to the prior year
period. Rig years for our U.S. Offshore operations totaled 14.2 years for the
nine months ended September 30, 2003 compared to 14.6 years during the prior
year period. The increase in adjusted cash flow derived from operating
activities for the nine months ended September 30, 2003 resulted primarily from
increased working days for our 1,000 horsepower workover rigs that currently
generate higher daily cash margins than the remainder of our rigs, which was
only partially offset by lower rig years in the current year period. Adjusted
cash flow derived from operating activities for the three and nine months ended
September 30, 2003 was also positively impacted by lower costs due to increased
monitoring of costs on working rigs and reductions in fixed overhead and costs
for non-working rigs.
Alaskan Operating revenues and adjusted cash flow derived from operating
activities totaled $20.2 million and $8.7 million, respectively, during the
current quarter, representing decreases of 23% and 24%, respectively, compared
to the prior year quarter. These decreases resulted from lower drilling activity
and lower average dayrates in the current quarter compared to the prior year
quarter. In addition, the recording of an incremental $2.6 million in Operating
revenues in the third quarter of 2002, representing business interruption
insurance proceeds related to damage incurred on one of our land drilling rigs
in Alaska in 2001, contributed to the current quarter decrease in Operating
revenues and adjusted cash flow derived from operating activities compared to
the prior year quarter. The decrease in drilling activity is reflected in the
decrease in rig years to 6.3 years in the current quarter from 8.8 years in the
prior year quarter. Alaskan Operating revenues and adjusted cash flow derived
from operating activities totaled $86.6 million and $40.2 million, respectively,
during the nine months ended September 30, 2003, representing a decrease of 11%
and an increase of 14%, respectively, compared to the prior year period. The
decrease in Operating revenues resulted from lower drilling activity reflected
in the decrease in rig years to 8.0 years for the nine months ended September
30, 2003 from 9.9 years in the prior year period. This reduced activity level
was partially offset by an incremental $5.7 million of Operating revenues,
representing business interruption insurance proceeds recorded in the first
quarter of 2003 related to the damage incurred on one of our land drilling rigs
in Alaska in 2001, which exceeded the $2.6 million in
33
business interruption insurance proceeds recorded in the third quarter of 2002
related to another damaged rig discussed above. The increase in adjusted cash
flow derived from operating activities resulted from the business interruption
insurance proceeds received in the current year period.
Canadian Operating revenues and adjusted cash flow derived from operating
activities totaled $71.5 million and $18.1 million, respectively, for the three
months ended September 30, 2003, representing increases of 73% and 99%,
respectively, compared to the prior year quarter, and totaled $222.1 million and
$56.8 million, respectively, during the nine months ended September 30, 2003,
representing increases of 146% and 134%, respectively, compared to the prior
year period. As discussed above, these increases reflect an increase in drilling
and well-servicing revenues, which resulted from an overall increase in Canadian
drilling and well-servicing activity. The increases for the nine months ended
September 30, 2003 also relate to an increase in drilling and well-servicing
revenues resulting from our acquisition of Enserco in April 2002. Rig years in
Canada increased to 39.1 years during the current quarter from 23.4 years during
the prior year quarter, and increased to 40.4 years during the nine months ended
September 30, 2003 from 20.6 years during the prior year period. Canadian
Well-servicing hours totaled 90,233 hours for the three months ended September
30, 2003 compared to 62,553 hours for the three months ended September 30, 2002
and totaled 229,393 hours for the nine months ended September 30, 2003 compared
to 93,081 hours for the nine months ended September 30, 2002.
International Operating revenues and Earnings from unconsolidated
affiliates and adjusted cash flow derived from operating activities totaled
$106.2 and $36.0 million, respectively, during the current quarter, representing
increases of 37% and 32%, respectively, compared to the prior year quarter, and
totaled $290.0 million and $97.5 million, respectively, during the nine months
ended September 30, 2003, representing increases of 24% and 15%, respectively,
compared to the prior year period. The improved results for the three and nine
months ended September 30, 2003 primarily resulted from new contracts for our
operation in Mexico. International rig years increased to 63.3 years during the
current quarter from 54.6 years during the prior year quarter and increased to
60.1 years during the nine months ended September 30, 2003 from 53.5 years
during the prior year period.
Manufacturing, Logistics and Other. These operations include our marine
transportation and supply services, drilling technology and top drive
manufacturing, directional drilling, rig instrumentation and software, and
construction and transportation operations. Manufacturing, Logistics and Other
Operating revenues and Earnings from unconsolidated affiliates during the three
and nine months ended September 30, 2003 totaled $48.6 million and $150.4
million, respectively, representing increases of 44% and 30% compared with the
prior year periods. These increases primarily resulted from the acquisition of
Ryan Energy Technologies, Inc. during the fourth quarter of 2002. Manufacturing,
Logistics and Other adjusted cash flow derived from operating activities for the
three and nine months ended September 30, 2003 totaled $4.6 million and $20.4
million, respectively, representing decreases of 44% and 42%, respectively,
compared to the prior year periods. While Ryan's results have been additive to
our revenues, adjusted cash flow derived from operating activities from this new
business was minimal for the three and nine months ended September 30, 2003. In
addition, decreased results for our marine transportation and our top drive
manufacturing operations resulted in lower profitability for Manufacturing,
Logistics and Other as compared to the prior year periods. Adjusted cash flow
derived from operating activities declined for our marine transportation
operations primarily as a result of lower average dayrates in the current year
periods and declined for our top drive manufacturing operations primarily as a
result of fewer top drive sales in the current year periods compared to the
prior year periods.
Other Financial Information. General and administrative expenses increased
by $4.2 million, or 11%, in the current quarter and by $20.5 million, or 20%, in
the first nine months of 2003 compared to the prior year periods resulting from
increases related to our Canadian acquisitions in 2002 and increased
International activity. As a percentage of operating revenues, general and
administrative expenses decreased (8.7% vs. 10.5%) during the current quarter
compared to the prior year quarter and decreased slightly (9.1% vs. 9.4%) for
the nine months ended September 30, 2003 compared to the prior year period.
34
Depreciation and amortization expense increased by $6.4 million, or 12%, in
the current quarter and by $25.4 million, or 18%, in the first nine months of
2003 compared to the prior year periods. Depreciation and amortization expense
increased as a result of an increase in average rig years for our U.S. Lower 48
Land Drilling, Canadian land drilling and International operations, a full
period of depreciation for the nine months ended September 30, 2003 on assets
acquired in our acquisition of Enserco in April 2002, and full periods of
depreciation for the three and nine months ended September 30, 2003 on assets
acquired in our acquisition of Ryan in October 2002, as well as other capital
expenditures during the fourth quarter of 2002 and the first nine months of
2003.
Interest expense decreased by $1.8 million, or 10%, in the current quarter
compared to the prior year quarter resulting from the issuance of Nabors
Delaware's $700 million zero coupon senior exchangeable notes in June 2003. Such
notes will not accrue interest unless Nabors Delaware becomes obligated to pay
contingent interest. The proceeds from this debt issuance were used to redeem
Nabors Delaware's $825 million zero coupon convertible senior debentures that
had an effective interest rate of 2.5% and our 8.625% senior subordinated notes.
The decrease resulting from issuance of these non-interest-bearing notes was
partially offset by the August 2002 issuance of our $225 million aggregate
principal amount of 4.875% senior notes and $275 million aggregate principal
amount of 5.375% senior notes. Interest expense increased by $7.9 million, or
17% for the nine months ended September 30, 2003 compared to the prior year
period resulting from the August 2002 issuances of senior notes discussed above,
which were only partially offset by savings realized in the second and third
quarter of 2003 related to the redemptions discussed above.
Interest income decreased by $1.7 million, or 21%, in the current quarter
and by $4.4 million, or 17%, in the first nine months of 2003 compared to the
prior year periods, reflecting lower average yields on investments resulting
from the overall declining interest rate environment partially offset by higher
average cash and marketable securities balances.
Other income increased by $3.3 million in the current quarter and by $.2
million in the first nine months of 2003 compared to the prior year periods.
Other income for the three months ended September 30, 2003 includes
mark-to-market gains recorded on our range cap and floor derivative instrument
of approximately $2.5 million, partially offset by the accrual of approximately
$.4 million of a total of approximately $.8 million in cash due on this
derivative instrument on November 15, 2003 (see discussion under Item 3.
Quantitative and Qualitative Disclosures About Market Risk below). Other income
for the nine months ended September 30, 2003 includes net gains on marketable
securities of approximately $2.7 million and net gains on long-term assets of
approximately $3.2 million, partially offset by mark-to-market losses recorded
on our range cap and floor derivative instrument of approximately $1.2 million,
the accrual of $.4 million due on the derivative instrument discussed above, and
a loss of approximately $.9 million resulting from the redemption of our 8.625%
senior subordinated notes due April 2008 at prices higher than their carrying
value on April 1, 2003. Other income for the three months ended September 30,
2002 includes net losses on marketable securities of approximately $.6 million
and net losses on long-term assets of approximately $.5 million. Other income
for the nine months ended September 30, 2002 includes net gains on marketable
securities of approximately $2.4 million and foreign currency transaction gains
of approximately $1.9 million, partially offset by the recognition of
approximately $3.5 million in corporate reorganization expense.
Our effective income (benefit) tax rate was (10%) during the three and nine
months ended September 30, 2003 compared to (25%) and 16% for the three and nine
months ended September 30, 2002, respectively. The tax benefit position for the
2003 periods and the third quarter of 2002 resulted primarily from tax savings
realized as a result of our corporate reorganization effective June 24, 2002. It
is possible that the tax savings recorded as a result of the corporate
reorganization may not be realized, depending on the final disposition of
various legislative proposals introduced in the U.S. Congress, and any
responsive action taken by Nabors.
35
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Operating Activities. Net cash provided by operating activities totaled
$215.3 million during the nine months ended September 30, 2003, compared to net
cash provided by operating activities totaling $285.7 million during the prior
year period. During the nine months ended September 30, 2003, net income was
increased for non-cash items such as depreciation and amortization, and was
reduced for changes in our working capital and other balance sheet accounts.
During the prior year period, net income was increased for non-cash items such
as depreciation and amortization and for changes in our working capital
accounts, and was reduced for Earnings from unconsolidated affiliates.
Investing Activities. Net cash used for investing activities totaled
$292.3 million during the nine months ended September 30, 2003, compared to
$297.5 million used for investing activities during the prior year period.
During the current year period, cash was used for purchases, net of sales, of
marketable securities and capital expenditures. During the prior year period,
cash was used for capital expenditures, the acquisition of 20.5% of the issued
and outstanding shares of Enserco and was provided by sales, net of purchases,
of marketable securities.
Financing Activities. Financing activities provided cash totaling $169.1
million during the nine months ended September 30, 2003 compared to cash
provided by financing activities of $479.4 million during the prior year period.
During the current year period, cash was provided by approximately $688.5
million in net proceeds from the issuance of the $700 million zero coupon senior
exchangeable notes due 2023 by Nabors Delaware on June 10, 2003 and was used for
the reduction of long-term debt of $543.7 million. Cash was also provided during
the current year period by our receipt of proceeds from the exercise of options
to acquire 1,134,000 of our common shares. During the prior year period, cash
was provided by the proceeds of $495.9 million from the issuance of senior notes
by our subsidiaries in August 2002 and by our receipt of proceeds from the
exercise of options to acquire 651,000 shares of our common shares, and was used
for the reduction of long-term debt.
On June 10, 2003, Nabors Delaware completed a private placement of $700
million aggregate principal amount of zero coupon senior exchangeable notes due
2023 that are fully and unconditionally guaranteed by us. The notes were
reoffered by the initial purchaser of the notes to qualified institutional
buyers under Rule 144A of the Securities Act of 1933, as amended, and outside
the United States in accordance with Regulation S under the Securities Act.
Nabors and Nabors Delaware filed a registration statement on Form S-3 pursuant
to the Securities Act with respect to the notes on August 8, 2003. The notes do
not bear interest, do not accrete and have a zero yield to maturity, unless
Nabors Delaware becomes obligated to pay contingent interest as defined in the
note indenture. Cash provided by issuance of the notes, net of issuance costs,
totaled $688.5 million.
We used a portion of the net proceeds from the issuance of the notes to
redeem the remaining outstanding principal amount of Nabors Delaware's $825
million zero coupon convertible senior debentures due 2020 on June 20, 2003. The
redemption price was $655.50 per $1,000 principal amount of the debentures for
an aggregate redemption price paid of approximately $494.9 million. The
remainder of the proceeds of the notes were invested in cash and marketable
securities and will be used for general corporate purposes, possibly including
the redemption of a portion of the outstanding amount of our 6.8% senior notes
due April 15, 2004 and for acquisitions.
On April 1, 2003, we redeemed our 8.625% senior subordinated notes due
April 2008 and all associated guarantees at a redemption price of $1,043.13 per
$1,000 principal amount of the notes together with accrued and unpaid interest
to the date of redemption for an aggregate redemption price of $45.2 million.
FUTURE CASH REQUIREMENTS
As of September 30, 2003, we had long-term debt, including current
maturities, of $2.3 billion and cash and cash equivalents and investments in
marketable securities of $1.5 billion.
36
Our 6.8% senior notes are due April 15, 2004 for an aggregate principal
amount of $295.3 million. This amount is classified in current liabilities in
our consolidated balance sheet as of September 30, 2003.
As of September 30, 2003, we had outstanding capital expenditure purchase
commitments of approximately $20.5 million, primarily for rig-related enhancing
and sustaining capital expenditures. We have historically completed a number of
acquisitions and will continue to evaluate opportunities to acquire assets or
businesses to enhance our operations. Several of our previous acquisitions were
funded through issuances of our common shares. Future acquisitions may be paid
for using existing cash or issuance of debt or Nabors shares. Such capital
expenditures and acquisitions will depend on our view of market conditions and
other factors.
As discussed above, on October 8, 2003, we entered into two separate
agreements with wholly-owned subsidiaries of El Paso Corporation under which a
subsidiary of Nabors will contribute 20% of an estimated $500 million total cost
to develop approximately 125 wells in exchange for a 20% net profits interest in
such wells (cash proceeds available from production after royalties and
operating costs have been paid). The contributions due from Nabors to develop
these wells will be paid out over a period beginning in October 2003 through
June 30, 2005, the expiration date for development of the wells pursuant to the
agreements.
Our 2002 Annual Report on Form 10-K includes our contractual cash
obligations table as of December 31, 2002. As a result of the issuance of Nabors
Delaware's $700 million zero coupon senior exchangeable notes due 2023 on June
10, 2003 and the redemption of certain existing debt in the second quarter of
2003, we are presenting the following table in this Report which summarizes our
remaining contractual cash obligations related to long-term debt as of September
30, 2003:
PAYMENT DUE BY PERIOD
-------------------------------------------------------------------
REMAINDER
TOTAL OF 2003 2004-2005 2006-2007 THEREAFTER
(IN THOUSANDS) ---------- --------- --------- --------- ----------
Principal.................... $2,322,075 $ -- $295,275 $826,800(1) $1,200,000
Interest..................... 206,502 11,457 57,357 51,501 86,187
---------- ------- -------- -------- ----------
Total........................ $2,528,577 $11,457 $352,632 $878,301 $1,286,187
---------- ------- -------- -------- ----------
- ---------------
(1) Represents our $1.381 billion zero coupon convertible senior debentures
which can be put to us on February 5, 2006.
No other significant changes have occurred to the contractual cash
obligations information disclosed in our 2002 Annual Report on Form 10-K.
GUARANTEES
We enter into various agreements providing financial or performance
assurance to third parties. Certain of these agreements act as guarantees,
including standby letters of credit issued on behalf of insurance carriers in
conjunction with our workers' compensation insurance program and guarantees of
residual value in certain of our operating lease agreements. We have also
guaranteed payment of contingent consideration in conjunction with an
acquisition in 2002, which is based on future operating results of that
business. In addition, we have provided indemnifications to certain third
parties which serve as guarantees. These guarantees include indemnification
provided by Nabors to our stock transfer agent and our insurance carriers. We
are not able to estimate the potential future maximum payments that might be due
under our indemnification guarantees.
37
Management believes that the likelihood that we would be required to
perform or otherwise incur any significant losses associated with any of these
guarantees is remote. The following table summarizes the total maximum amount of
financial and performance guarantees issued by Nabors:
MAXIMUM AMOUNT
---------------------------------------------------
REMAINDER
OF 2003 2004 2005 THEREAFTER TOTAL
(IN THOUSANDS) --------- ------- ------ ---------- -------
Financial standby letters of Credit.......... $953 $35,586 $ -- $ -- $36,539
Guarantee of residual value in lease
agreements................................. -- 347 701 65 1,113
Contingent consideration in Acquisition...... -- 1,111 1,111 278 2,500
---- ------- ------ ---- -------
Total........................................ $953 $37,044 $1,812 $343 $40,152
---- ------- ------ ---- -------
FINANCIAL CONDITION AND SOURCES OF LIQUIDITY
As of September 30, 2003, we had cash and cash equivalents and investments
in marketable securities of $1.5 billion and working capital of $930.7 million.
This compares to cash and cash equivalents and investments in marketable
securities of $1.3 billion and working capital of $618.5 million as of December
31, 2002.
The increase in cash and cash equivalents and investments in marketable
securities relates primarily to the issuance of the zero coupon senior
exchangeable notes due 2023 by Nabors Delaware during the second quarter of
2003, which resulted in net proceeds of $688.5 million, partially offset by
reductions in long-term debt of $543.7 million during the current period. Cash
and cash equivalents and investments in marketable securities were also
increased during the nine months ended September 30, 2003 by cash provided by
operating activities totaling $215.3 million and decreased by capital
expenditures of $210.7 million during the period. The increase in working
capital relates primarily to the redemption of Nabors Delaware's $825 million
zero coupon convertible senior debentures due 2020 on June 20, 2003 for an
aggregate redemption price paid of approximately $494.9 million, which was
classified in current liabilities as of December 31, 2002, only partially offset
by the reclassification of $295.3 million principal amount of our 6.8% senior
notes due April 15, 2004 to current liabilities as of September 30, 2003.
Our funded debt to capital ratio was 0.49:1 as of September 30, 2003 and
December 31, 2002. Our net funded debt to capital ratio was 0.24:1 as of
September 30, 2003 and 0.26:1 as of December 31, 2002. The funded debt to
capital ratio is calculated by dividing funded debt by funded debt plus capital.
Funded debt is defined as the sum of (1) short-term borrowings, (2) current
portion of long-term debt and (3) long-term debt. Capital is defined as
shareholders' equity. The net funded debt to capital ratio nets cash and cash
equivalents and marketable securities against funded debt. This ratio is
calculated by dividing net funded debt by net funded debt plus capital. Both of
these ratios are a method for calculating the amount of leverage a company has
in relation to its capital. Our interest coverage ratio was 5.9:1 as of
September 30, 2003, compared to 6.0:1 as of December 31, 2002. The interest
coverage ratio is computed by calculating the sum of income before income taxes,
interest expense, and depreciation and amortization expense and then dividing by
interest expense. This ratio is a method for calculating the amount of cash
flows available to cover interest expense.
We have three letter of credit facilities and a Canadian line of credit
facility with various banks as of September 30, 2003. Availability and
borrowings under our credit facilities as of September 30, 2003 are as follows:
(IN THOUSANDS)
Credit available............................................ $86,069
Letters of credit outstanding............................... (54,641)
-------
Remaining availability...................................... $31,428
-------
38
We have a shelf registration statement on file with the Securities and
Exchange Commission to allow us to offer, from time to time, up to $700 million
in debt securities, guarantees of debt securities, preferred shares, depository
shares, common shares, share purchase contracts, share purchase units and
warrants. We currently have not issued any securities registered under this
registration statement.
Our current cash and cash equivalents, investments in marketable securities
and projected cash flow generated from current operations are expected to more
than adequately finance our sustaining capital expenditures and our debt service
requirements for the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements, Including Guarantees of Indebtedness of Others." FIN 45 requires
that upon issuance of certain types of guarantees, a guarantor recognize and
account for the fair value of the guarantee as a liability. FIN 45 contains
exclusions to this requirement, including the exclusion of a parent's guarantee
of its subsidiaries' debt to third parties. The initial recognition and
measurement provisions of FIN 45 have been applied on a prospective basis for
guarantees issued or modified after December 31, 2002. During the nine months
ended September 30, 2003, we issued new standby letters of credit which serve as
guarantees under the provisions of FIN 45. The application of the recognition
and measurement provisions of FIN 45 to these guarantees was insignificant. The
disclosure requirements of FIN 45 are effective for financial statements of both
interim and annual periods ending after December 15, 2002 and are included in
Note 6 to our accompanying consolidated financial statements.
In January 2003 the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of variable interest entities (VIEs) by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the risks or rewards associated
with the VIE. The consolidation requirements of FIN 46 applied immediately to
VIEs created after January 31, 2003. For VIEs created at an earlier date, the
consolidation requirements apply for the first interim or annual period ending
after December 15, 2003. On July 1, 2003, we adopted, earlier than required, the
provisions of FIN 46 related to VIEs created on or before January 31, 2003. The
adoption of FIN 46 did not have a material impact on our consolidated financial
position, results of operations or cash flows.
In May 2003 the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies financial accounting and
reporting 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 149 is
effective in relation to certain issues for fiscal quarters that began prior to
June 15, 2003 and for certain contracts entered into after June 30, 2003. The
adoption of SFAS 149 had no impact on our financial position, results of
operations or cash flows as of and for the three and nine months ended September
30, 2003.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS 150 is effective for such financial instruments, except for
those that apply to mandatorily redeemable noncontrolling interests, entered
into or modified after May 31, 2003, and otherwise was effective for such
financial instruments, except for those that apply to mandatorily redeemable
noncontrolling interests, at the beginning of the current quarter. The adoption
of SFAS 150 had no initial impact on our financial position, results of
operations or cash flows as of and for the three and nine months ended September
30, 2003.
39
CRITICAL ACCOUNTING POLICIES
We disclosed our critical accounting policies in our 2002 Annual Report on
Form 10-K. No significant changes have occurred to those policies with the
exception of the following:
Self Insurance Accruals. We are self-insured for certain losses relating
to workers' compensation, employers' liability, general liability, automobile
liability and property damage. Effective April 1, 2003, with our insurance
renewal, certain changes have been made to our insurance coverage. Effective for
the period from April 1, 2003 to March 31, 2004, our exposure (that is, our
deductible) per occurrence is $1.0 million for workers' compensation, $2.0
million for employers' liability and marine employers' liability (Jones Act) and
$5.0 million for general liability losses. Our self-insurance for automobile
liability loss is $0.5 million per occurrence. We maintain actuarially supported
accruals in our consolidated balance sheets to cover the self-insurance
retentions.
We are self-insured for certain other losses relating to rig, equipment,
property, business interruption and political, war and terrorism risks.
Effective April 1, 2003, our per occurrence self-insurance retentions are $10.0
million for rig physical damage and business interruption for 29 specific
high-value rigs. The remainder of the fleet is subject to a $5.0 million
self-insurance retention. However, our rigs, equipment and property in Canada
and Saudi Arabia are subject to $1.0 million self-insurance retentions. As a
result, with the exception of Canada and Saudi Arabia, we are self-insured for
29 higher value rigs up to $10.0 million and for the remainder of our rigs up to
$5.0 million.
Political violence (war and terrorism) insurance is procured for our
operations in Mexico, the Caribbean, South America, Africa, the Middle East and
Asia. Political violence losses are subject to $0.25 million per occurrence
deductibles, except for Colombia which is subject to deductibles of $10.0
million and $1.0 million for political risk and terrorism, respectively. There
is no assurance that such coverage will adequately protect Nabors against
liability from all potential consequences.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may be exposed to market risk through changes in interest rates and
foreign currency risk due to our operations in international markets as
discussed in our 2002 Annual Report on Form 10-K.
On October 21, 2002, we entered into an interest rate swap transaction with
a third-party financial institution to hedge our exposure to changes in the fair
value of $200 million of our fixed rate 5.375% senior notes due 2012, which has
been designated as a fair value hedge under SFAS 133. Additionally, on October
21, 2002, we purchased a LIBOR range cap and sold a LIBOR floor, in the form of
a cashless collar, with the same third-party financial institution with the
intention of mitigating and managing our exposure to changes in the three-month
U.S. dollar LIBOR rate. This transaction does not qualify for hedge accounting
treatment under SFAS 133 and any change in the cumulative fair value of this
transaction will be reflected as a gain or loss in our consolidated statements
of income.
During the three and nine months ended September 30, 2003, we recorded
interest savings related to our interest rate swap agreement accounted for as a
fair value hedge of $1.7 million and $5.0 million, respectively, which served to
reduce interest expense. The fair value of our interest rate swap agreement is
recorded as a derivative asset, included in other long-term assets, and totaled
approximately $8.4 million, $15.8 million and $8.5 million as of September 30,
2003, June 30, 2003 and December 31, 2002, respectively. The carrying value of
our 5.375% senior notes due 2012 has been increased by the same amount.
The fair value of our range cap and floor transaction is recorded as a
derivative liability, included in other long-term liabilities, and totaled
approximately $5.0 million, $7.5 million and $3.8 million as of September 30,
2003, June 30, 2003 and December 31, 2002, respectively. We recorded a gain of
approximately $2.1 million and a loss of approximately $1.6 million for the
three and nine months ended September 30, 2003, respectively, related to this
derivative instrument; such amounts are included in other income (expense) in
our consolidated statements of income. Such gains and losses resulted primarily
from the change in cumulative fair value of this derivative instrument from June
30, 2003 and December 31,
40
2002, respectively, which resulted in a gain of approximately $2.5 million
during the current quarter and a loss of approximately $1.2 million during the
nine months ended September 30, 2003. Additionally, as a result of the
three-month U.S. dollar LIBOR rate being below our 2.665% floor on August 15,
2003 (such rate was 1.13%), we are obligated to pay, on November 15, 2003,
approximately $.8 million to the counterparty. This payment is due for the
three-month period from August 15 to November 15, 2003. We have recorded
approximately $.4 million of this obligation as an expense in other income
(expense) in the current quarter and will record the remaining amount of
approximately $.4 million in the fourth quarter of 2003.
Nabors Delaware's $700 million zero coupon senior exchangeable notes due
2023 include a contingent interest provision, discussed in Note 3 to our
accompanying consolidated financial statements, which qualifies as an embedded
derivative under SFAS 133. This embedded derivative is required to be separated
from the notes and valued at its fair value at inception of the note agreement.
Any subsequent change in fair value of this embedded derivative will be recorded
in our statements of income. The fair value of the contingent interest provision
at inception of the note indenture was nominal. In addition, there was no
significant change in the fair value of this embedded derivative through
September 30, 2003, resulting in no impact on our statements of income for the
three and nine months ended September 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. We maintain a set of disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) that are designed to ensure that information required to be disclosed in
our reports filed under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms. We have investments in certain unconsolidated
affiliates that we do not control or manage. As we do not control or manage
these entities, our disclosure controls and procedures with respect to such
entities are necessarily more limited than those we maintain with respect to our
consolidated entities.
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act
under the supervision and with the participation of management, including our
Chairman and Chief Executive Officer, and Vice President and Chief Financial
Officer, as of the end of the period covered by this report. Based on that
evaluation, our Chairman and Chief Executive Officer, and Vice President and
Chief Financial Officer concluded that, as of the end of such period, our
disclosure controls and procedures are effective.
(b) Internal Control Over Financial Reporting. There have not been any
changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nabors and its subsidiaries are defendants or otherwise involved in a
number of lawsuits in the ordinary course of their business. In the opinion of
management, our ultimate liability with respect to pending lawsuits is not
expected to have a significant or material adverse effect on our consolidated
financial position, results of operations or cash flows.
ITEM 5. OTHER INFORMATION
RELATED PARTY -- SPLIT-DOLLAR LIFE INSURANCE AGREEMENTS
Pursuant to their employment agreements, Nabors and its Chairman and Chief
Executive Officer, President and Chief Operating Officer, former Vice Chairman
and certain other key employees entered
41
into split-dollar life insurance agreements pursuant to which we pay a portion
of the premiums under life insurance policies with respect to these individuals
and, in certain instances, members of their families. Under these agreements, we
are reimbursed for such premiums upon the occurrence of specified events,
including the death of an insured individual. Any recovery of premiums paid by
Nabors could potentially be limited to the cash surrender value of these
policies under certain circumstances. As such, the values of these policies are
recorded at their respective cash surrender values in our consolidated balance
sheets. We have made premium payments to date totaling $12.8 million related to
these policies. The cash surrender value of these policies of approximately
$10.8 million is included in other long-term assets in our consolidated balance
sheet as of September 30, 2003.
Under the Sarbanes-Oxley Act of 2002, the future payment of premiums by
Nabors under these agreements may be deemed to be prohibited loans by us to
these individuals. We have paid no premiums related to these agreements since
the adoption of the Sarbanes-Oxley Act, and have postponed premium payments
related to these agreements pending clarification of the Act's application to
these insurance agreements. We will monitor developments and intend to take
appropriate action to ensure that these agreements do not violate applicable
law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15 Awareness Letter of Independent Accountants.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Vice President and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
- Report on Form 8-K filed with the U.S. Securities and Exchange
Commission on August 8, 2003 to present the required reconciliations of
"non-GAAP" financial measures to the most comparable GAAP financial
measures in accordance with Regulation G for all quarterly and annual
periods presented within Current Reports on Form 8-K filed subsequent to
Nabors' last fiscal year ended but prior to the effective date of the
Regulations on March 28, 2003.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NABORS INDUSTRIES LTD.
/s/ Anthony G. Petrello
--------------------------------------
Anthony G. Petrello
President and Chief Operating Officer
/s/ Bruce P. Koch
--------------------------------------
Bruce P. Koch
Vice President and Chief Financial
Officer
Dated: November 7, 2003
43
INDEX TO EXHIBITS
15 Awareness Letter of Independent Accountants.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Vice President and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
44