- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 2002
COMMISSION FILE NUMBER: 000-49887
---------------------
NABORS INDUSTRIES LTD.
(Exact name of registrant as specified in its charter)
<Table>
BERMUDA 98-0363970
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2ND FL. INTERNATIONAL TRADING CENTRE
WARRENS
PO BOX 905E
ST. MICHAEL, BARBADOS N/A
(Address of principal executive offices) (Zip Code)
</Table>
(246) 421-9471
(Registrant's telephone number, including area code)
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 [ ]
The number of common shares par value $.001 per share, outstanding as of
October 31, 2002 was 144,738,911. In addition, our subsidiary, Nabors Exchangeco
(Canada) Inc., has 739,198 exchangeable shares outstanding as of October 31,
2002 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.
- --------------------------------------------------------------------------------
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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001........................................... 2
Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2002 and 2001............... 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001........................... 4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2002 and 2001....... 5
Notes to Consolidated Financial Statements.................. 7
Report of Independent Accountants........................... 28
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 38
Item 4. Controls and Procedures..................................... 39
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 40
Item 5. Other Information........................................... 40
Item 6. Exhibits and Reports on Form 8-K............................ 43
Signatures........................................................... 44
Certifications....................................................... 45
</Table>
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 668,687 $ 198,443
Marketable securities..................................... 353,013 343,169
Accounts receivable, net.................................. 275,622 361,086
Inventory and supplies.................................... 16,673 18,515
Deferred income taxes..................................... 27,456 28,145
Prepaid expenses and other current assets................. 95,512 81,588
---------- ----------
Total current assets................................... 1,436,963 1,030,946
Marketable securities....................................... 309,567 377,025
Property, plant and equipment, net.......................... 2,744,913 2,433,247
Goodwill, net............................................... 301,401 199,048
Other long-term assets...................................... 115,442 111,649
---------- ----------
Total assets........................................... $4,908,286 $4,151,915
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 489,595 $ 2,510
Trade accounts payable.................................... 93,564 131,821
Accrued liabilities....................................... 146,690 168,022
Income taxes payable...................................... 26,412 27,777
---------- ----------
Total current liabilities.............................. 756,261 330,130
Long-term debt.............................................. 1,599,026 1,567,616
Other long-term liabilities................................. 100,266 110,902
Deferred income taxes....................................... 314,304 285,401
---------- ----------
Total liabilities......................................... 2,769,857 2,294,049
---------- ----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common shares par value $.001 and $.10, respectively, per
share:
Authorized common shares 400,000; issued 144,418 and
147,711, respectively................................. 144 14,771
Capital in excess of par value............................ 1,246,423 1,091,536
Accumulated other comprehensive income (loss)............. (8,887) 3,260
Retained earnings......................................... 900,749 1,001,079
Less treasury stock, at cost, 0 and 6,822 common shares... -- (252,780)
---------- ----------
Total stockholders' equity............................. 2,138,429 1,857,866
---------- ----------
Total liabilities and stockholders' equity............. $4,908,286 $4,151,915
========== ==========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
2
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues and other income:
Operating revenues............................ $346,995 $613,958 $1,068,954 $1,746,362
Earnings from unconsolidated affiliates....... 8,083 8,459 29,479 28,702
Interest income............................... 8,145 13,636 25,538 42,572
Other income (expense), net................... (994) 5,400 2,152 17,724
-------- -------- ---------- ----------
Total revenues and other income............ 362,229 641,453 1,126,123 1,835,360
-------- -------- ---------- ----------
Costs and other deductions:
Direct costs.................................. 233,890 368,271 721,513 1,074,627
General and administrative expenses........... 36,968 34,248 102,458 101,148
Depreciation and amortization................. 52,084 54,413 143,749 148,889
Interest expense.............................. 17,772 15,395 46,805 42,372
-------- -------- ---------- ----------
Total costs and other deductions........... 340,714 472,327 1,014,525 1,367,036
-------- -------- ---------- ----------
Income before income taxes...................... 21,515 169,126 111,598 468,324
-------- -------- ---------- ----------
Income tax expense (benefit):
Current....................................... 1,774 27,503 8,731 53,826
Deferred...................................... (7,181) 33,382 8,583 119,104
-------- -------- ---------- ----------
Total income tax expense (benefit)......... (5,407) 60,885 17,314 172,930
-------- -------- ---------- ----------
Net income...................................... $ 26,922 $108,241 $ 94,284 $ 295,394
======== ======== ========== ==========
Earnings per share:
Basic......................................... $ .19 $ .75 $ .66 $ 2.03
Diluted....................................... $ .18 $ .68 $ .63 $ 1.82
Weighted average number of common shares
outstanding:
Basic......................................... 145,078 143,610 143,079 145,615
======== ======== ========== ==========
Diluted....................................... 151,158 167,384 149,423 170,318
======== ======== ========== ==========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
3
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
Cash flows from operating activities:
Net income.................................................. $ 94,284 $ 295,394
Adjustments to net income:
Depreciation and amortization............................. 143,749 148,889
Deferred income taxes..................................... 8,583 119,104
Deferred financing costs amortization..................... 3,794 1,610
Discount amortization on zero coupon debentures........... 22,931 23,283
Losses (gains) on disposition of long-term assets......... 1,126 (9,804)
Gains on marketable securities............................ (2,386) (8,119)
Foreign currency transaction gains........................ (1,939) (647)
Loss on early extinguishment of debt...................... 202 --
Equity in earnings from unconsolidated affiliates, net of
dividends.............................................. (19,604) (19,701)
Other..................................................... 502 (266)
Increase (decrease), net of effects from acquisitions, from
changes in:
Accounts receivable....................................... 105,488 (151,845)
Inventory and supplies.................................... 2,988 (1,448)
Prepaid expenses and other current assets................. (14,774) (7,222)
Other long-term assets.................................... 4,708 (6,877)
Trade accounts payable and accrued liabilities............ (47,914) 86,516
Income taxes payable...................................... (6,184) 19,051
Other long-term liabilities............................... (9,865) 21,293
--------- ---------
Net cash provided by operating activities................... 285,689 509,211
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities, available-for-sale.... (88,694) (461,580)
Sales of marketable securities, available-for-sale........ 133,845 28,193
Cash received from dispositions of long-term assets....... 5,571 16,270
Cash paid for acquisitions of businesses, net............. (120,840) --
Capital expenditures...................................... (227,411) (553,036)
--------- ---------
Net cash used for investing activities...................... (297,529) (970,153)
--------- ---------
Cash flows from financing activities:
Increase in restricted cash............................... 791 698
Proceeds from long-term borrowings........................ 495,904 840,338
Reduction of long-term borrowings......................... (21,914) (3,556)
Debt issuance costs....................................... (2,488) (12,879)
Proceeds from issuance of common shares................... 11,050 7,776
Repurchase of common shares............................... (2,487) (247,963)
Payments related to cash flow hedges...................... (1,482) --
--------- ---------
Net cash provided by financing activities................... 479,374 584,414
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 2,710 (480)
--------- ---------
Net increase in cash and cash equivalents................... 470,244 122,992
Cash and cash equivalents, beginning of period.............. 198,443 197,312
--------- ---------
Cash and cash equivalents, end of period.................... $ 668,687 $ 320,304
========= =========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
4
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
----------------------------
COMMON SHARES UNREALIZED
----------------- CAPITAL IN GAINS (LOSSES) CUMULATIVE TOTAL
PAR EXCESS OF ON MARKETABLE TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT EARNINGS STOCK EQUITY
------- ------- ---------- -------------- ----------- -------- --------- -------------
(UNAUDITED)
(IN THOUSANDS)
Balances, December 31,
2000..................... 147,155 $14,715 $1,145,847 $ 15,897 $ (8,803) $643,629 $ (4,817) $1,806,468
------- ------- ---------- -------- -------- -------- --------- ----------
Comprehensive income:
Net income............... 295,394 295,394
Translation adjustment... (4,396) (4,396)
Unrealized losses on
marketable securities,
net of income tax
benefit of $8,167...... (13,906) (13,906)
Less: reclassification
adjustment for gains
included in net income,
net of income taxes of
$1,848................. (3,146) (3,146)
------- ------- ---------- -------- -------- -------- --------- ----------
Total comprehensive
income............ -- -- -- (17,052) (4,396) 295,394 -- 273,946
------- ------- ---------- -------- -------- -------- --------- ----------
Issuance of common shares
for stock options
exercised................ 523 53 7,723 7,776
Tax effect of stock option
deductions............... (62,652) (62,652)
Repurchase of common
shares................... (247,963) (247,963)
------- ------- ---------- -------- -------- -------- --------- ----------
Subtotal............. 523 53 (54,929) -- -- -- (247,963) (302,839)
------- ------- ---------- -------- -------- -------- --------- ----------
Balances, September 30,
2001..................... 147,678 $14,768 $1,090,918 $ (1,155) $(13,199) $939,023 $(252,780) $1,777,575
======= ======= ========== ======== ======== ======== ========= ==========
</Table>
5
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY -- (CONTINUED)
<Table>
<Caption>
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
SHARES VALUE PAR VALUE SECURITIES HEDGES ADJUSTMENT EARNINGS
------- -------- ---------- -------------- ---------- ----------- ----------
(UNAUDITED)
(IN THOUSANDS)
Balances, December 31,
2001................... 147,711 $ 14,771 $1,091,536 $12,410 $ -- $(9,150) $1,001,079
------- -------- ---------- ------- ------- ------- ----------
Comprehensive income:
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..... (1,482)
------- -------- ---------- ------- ------- ------- ----------
Total comprehensive
income........... -- -- -- (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)
Change in par value...... (14,293) 14,293
------- -------- ---------- ------- ------- ------- ----------
Subtotal........... (3,293) (14,627) 154,887 -- -- -- (194,614)
------- -------- ---------- ------- ------- ------- ----------
Balances, September 30,
2002................... 144,418 $ 144 $1,246,423 $ 2,533 $(1,482) $(9,938) $ 900,749
======= ======== ========== ======= ======= ======= ==========
<Caption>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
--------- -------------
(UNAUDITED)
(IN THOUSANDS)
Balances, December 31,
2001................... $(252,780) $1,857,866
--------- ----------
Comprehensive income:
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..... (1,482)
--------- ----------
Total comprehensive
income........... -- 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.................. 252,780 --
Change in par value...... --
--------- ----------
Subtotal........... 252,780 198,426
--------- ----------
Balances, September 30,
2002................... $ -- $2,138,429
========= ==========
</Table>
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 RECENT CORPORATE REORGANIZATION
Effective June 24, 2002, Nabors Industries Ltd., a Bermuda exempted company
(Nabors), became the successor to Nabors Industries, Inc., a Delaware
corporation (Nabors Delaware), following a corporate reorganization. The
reorganization was accomplished through the merger of an indirect, newly formed
Delaware subsidiary owned by Nabors into Nabors Delaware. Nabors Delaware was
the surviving company in the merger and became a wholly-owned, indirect
subsidiary of Nabors. Upon consummation of the merger, all outstanding shares of
Nabors Delaware common stock automatically converted into the right to receive
Nabors common shares, with the result that the shareholders of Nabors Delaware
on the date of the merger became the shareholders of Nabors. Nabors and its
subsidiaries continue to conduct the businesses previously conducted by Nabors
Delaware and its subsidiaries. The reorganization was accounted for as a
reorganization of entities under common control and accordingly, it did not
result in any changes to the consolidated amounts of assets, liabilities and
stockholders' equity.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As used in this Report, "we," "us," "our," and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
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, or U.S. GAAP. Nabors is the successor to Nabors Delaware following the
corporate reorganization described in Note 1. 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 U.S. 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, 2001, as supplemented by our Current Report on
Form 8-K filed on October 10, 2002, which reclassified certain items in our
consolidated statements of income to comply with the transition requirements of
Statement of Financial Accounting Standards (SFAS) No. 145 and Emerging Issues
Task Force (EITF) No. 01-14, as more fully discussed below in "Recent Accounting
Pronouncements." In our management's opinion, the consolidated financial
statements contain all adjustments necessary to present fairly our financial
position as of September 30, 2002, and the results of our operations, for each
of the three-month and nine-month periods ended September 30, 2002 and 2001 and
our cash flows for each of the nine-month periods ended September 30, 2002 and
2001, in accordance with U.S. GAAP. Interim results for the nine months ended
September 30, 2002 may not be indicative of results that will be realized for
the full year ending December 31, 2002.
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 the
consolidated
7
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements of income, and our investment in these entities is carried as a
single amount in the consolidated balance sheets. Investments in net assets of
affiliated entities accounted for using the equity method totaled $55.0 million
and $55.1 million as of September 30, 2002 and December 31, 2001, respectively,
and are included in other long-term assets in the consolidated balance sheets.
RECLASSIFICATIONS
Certain reclassifications have been made to prior periods to conform to the
current period presentation, with no effect on our consolidated financial
position, results of operations or cash flows (See Recent Accounting
Pronouncements).
PROPERTY, PLANT AND EQUIPMENT
Effective October 1, 2001, we changed the depreciable lives of our drilling
and workover rigs from 4,200 to 4,900 active days, our jackup rigs from 4,200 to
8,030 active days and certain other drilling equipment to better reflect the
estimated useful lives of these assets. The effect of this change in accounting
estimate was accounted for on a prospective basis beginning October 1, 2001 and
increased net income by approximately $4.8 million ($.03 per diluted share) for
the current quarter and approximately $15.5 million ($.10 per diluted share) for
the nine months ended September 30, 2002.
DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN CURRENCY RISK
We account for derivative financial instruments in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of FASB Statement No. 133." These statements establish
accounting and reporting standards requiring that derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet at fair value as either assets or liabilities. The
accounting for changes in the fair value of a derivative instrument depends on
the intended use of the derivative and the resulting designation, which is
established at the inception of a derivative. Special accounting for derivatives
qualifying as fair value hedges allows a derivative's gains and losses to offset
related results on the hedged item in the statement of income. For derivative
instruments designated as cash flow hedges, changes in fair value, to the extent
the hedge is effective, are recognized in other comprehensive income until the
hedged item is recognized in earnings. Hedge effectiveness is measured at least
quarterly based on the relative cumulative changes in fair value between the
derivative contract and the hedged item over time. Any change in fair value
resulting from ineffectiveness, as defined by SFAS 133, is recognized
immediately in earnings. Any change in fair value of derivative financial
instruments that are speculative in nature and do not qualify for hedge
accounting treatment is also recognized immediately in earnings.
We have recently begun to utilize derivative financial instruments that are
intended to manage our exposure to interest rate risks. The use of derivative
financial instruments could expose us to credit risk and market risk. Credit
risk is the failure of a counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty would owe us, which can create credit risk for us. When the
fair value of a derivative contract is negative, we would owe the counterparty,
and, therefore, we would not be exposed to credit risk. We attempt to minimize
the credit risk in derivative instruments by entering into transactions with
major financial institutions that have a significant asset base. Market risk is
the adverse effect to the value of a financial instrument that results from
changes in interest rates. We try to manage market risk associated with
interest-rate contracts by establishing and monitoring parameters that limit the
type and degree of market risk that we undertake.
We operate in a number of international areas and are involved in
transactions denominated in currencies other than U.S. dollars, which exposes us
to foreign exchange rate risk. The most significant
8
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exposure arises in connection with our operations in Canada and Saudi Arabia,
which usually are substantially unhedged. In Saudi Arabia, upon renewal of our
contracts, we have been converting Saudi riyal-denominated contracts to U.S.
dollar-denominated contracts in order to reduce our exposure to the Saudi riyal
even though that currency has been pegged to the U.S. dollar at a rate of 3.745
Saudi riyals to 1.00 U.S. dollar since 1986. We cannot guarantee that we will be
able to convert future Saudi riyal-denominated contracts to U.S.
dollar-denominated contracts or that the Saudi riyal exchange rate will continue
in effect as in the past.
At various times, we utilize local currency borrowings (foreign
currency-denominated debt), the payment structure of customer contracts and
foreign exchange contracts to selectively hedge our exposure to exchange rate
fluctuations in connection with monetary assets, liabilities, cash flows and
commitments denominated in certain foreign currencies. A foreign exchange
contract is a foreign currency transaction, defined as an agreement to exchange
different currencies at a given future date and at a specified rate.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 142, "Goodwill and Other Intangible Assets," addresses the
accounting for goodwill and other intangible assets after an acquisition. The
most significant changes made by SFAS 142 are: (1) goodwill and intangible
assets with indefinite lives no longer will be amortized; (2) goodwill and
intangible assets with indefinite lives must be tested for impairment at least
annually; and (3) the amortization period for those intangible assets with
finite lives no longer will be limited to 40 years. The effect of no longer
amortizing goodwill would have increased net income by approximately $1.2
million ($.01 per diluted share) for the prior year quarter and approximately
$3.5 million ($.02 per diluted share) for the nine months ended September 30,
2001.
We adopted SFAS 142 effective January 1, 2002, and during the second
quarter of 2002, we performed our initial goodwill impairment assessment, as
required. As part of that assessment, we determined that our 11 business units
represent our reporting units as defined by SFAS 142. We determined the
aggregate carrying values and fair values of all such reporting units, which
were measured as of the January 1, 2002 adoption date. We calculated the fair
value of each reporting unit based on discounted cash flows and determined there
was no goodwill impairment.
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002, as required. This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. Due to the nature of our business, this new accounting
pronouncement had no impact on our reported results of operations or financial
position.
We adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," effective April
1, 2002. Due to the nature of our business, Financial Accounting Standards Board
(FASB) 44, 64 and Amendment of FASB 13 are not applicable. SFAS 145 eliminates
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and states
that gains and losses from the extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in Accounting Principles
Board (APB) Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." APB 30 defines extraordinary
items as events and transactions that are distinguished by their unusual nature
and by the infrequency of their occurrence. Accordingly, we no longer classify
gains and losses from extinguishment of debt that are usual and frequent as
extraordinary items, and we reclassified to other income all similar debt
extinguishment items that had been reported as extraordinary items in prior
accounting periods. In conjunction with adopting SFAS 145 we reclassified an
extraordinary loss recorded during the first quarter of 2002 totaling $.13
million, net of taxes of $.08 million, to other income with the related income
tax component reclassified to income tax expense.
9
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement will require us to
recognize costs associated with exit or disposal activities when they are
incurred rather than when we commit to an exit or disposal plan. Examples of
costs covered by this guidance include lease termination costs, employee
severance costs that are associated with a restructuring, discontinued
operations, plant closings or other exit or disposal activities. This statement
is effective for fiscal years beginning after December 31, 2002 and will impact
any exit or disposal activities initiated after January 1, 2003. This statement
does not currently impact Nabors.
We adopted EITF No. 01-14, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred," in the second
quarter of 2002. Previously, we recognized reimbursements received as a
reduction to the related direct costs. EITF 01-14 requires that reimbursements
received be included in operating revenues and "out-of-pocket" expenses be
included in direct costs. Accordingly, reimbursements received from our
customers have been reclassified to revenues for all periods presented. The
effect of adopting EITF 01-14 increased operating revenues and direct costs from
previously reported amounts by $20.3 million and $54.1 million for the three and
nine months ended September 30, 2001, respectively.
NOTE 3 ACQUISITIONS
On March 18, 2002, we acquired, for cash, 20.5% of the issued and
outstanding shares of Enserco Energy Service Company, Inc., a Canadian
publicly-held corporation, for Cdn. $15.50 per share for a total price of
Cdn. $83.2 million (U.S. $52.6 million). On April 26, 2002, we completed our
acquisition of Enserco by purchasing their remaining outstanding shares for
Cdn. $15.65 per share, paying cash of Cdn. $100.1 million (U.S. $64.1 million)
and issuing 2,638,526 shares of Nabors Delaware common stock and 910,556
exchangeable shares of Nabors Exchangeco (Canada) Inc., an indirect wholly-owned
Canadian subsidiary of Nabors. The Nabors Exchangeco shares are exchangeable for
Nabors common shares, at each holder's option, on a one-for-one basis and are
listed on the Toronto Stock Exchange. Additionally, these exchangeable shares
have essentially identical rights as Nabors common shares, including but not
limited to voting rights and the right to receive dividends, if any, and will be
automatically exchanged upon the occurrence of certain events. The value of the
Nabors Delaware and Nabors Exchangeco shares issued totaled Cdn. $254.2 million,
or U.S. $162.8 million. Enserco's results of operations were consolidated into
ours commencing on April 26, 2002. In addition, we assumed Enserco debt totaling
Cdn. $33.4 million (U.S. $21.3 million). The Enserco purchase price has been
allocated based on preliminary estimates of the fair market value of assets
acquired and liabilities assumed as of the acquisition date and resulted in
goodwill of approximately U.S. $100 million. The purchase price allocation for
the Enserco acquisition is subject to adjustment as additional information
becomes available and will be finalized by December 31, 2002.
Enserco provided land drilling, well-servicing and workover services in
Canada and operated a fleet of 193 well-servicing rigs and 30 drilling rigs on
the acquisition date. The Enserco acquisition increased our position in Canada
with assets that are relatively new and in excellent condition, allowing us to
provide services to many of our key U.S. customers who have increased their
presence in Canada as it has become even more strategic to the North American
gas supply market.
In June 2002, Nabors acquired the RBF 209 for approximately $21 million.
This 200 foot, mat support, cantilever jackup has been renamed Nabors Rig 659.
This rig has been upgraded at a cost of approximately $4.5 million for work on a
4.5 year contract in Mexico for PEMEX which commenced in September 2002.
On August 12, 2002, Nabors entered into an arrangement agreement to acquire
Ryan Energy Technologies Inc., a corporation incorporated under the laws of
Alberta, Canada. Nabors' acquisition of
10
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Ryan was completed on October 9, 2002, and became effective pursuant to a plan
of arrangement approved by the securityholders of Ryan and the Court of Queen's
Bench of Alberta.
Under the terms of the arrangement each holder of Ryan common shares could
elect to receive for each Ryan common share either cash in the amount of
Cdn. $1.85 or 0.0362 of an exchangeable share of Nabors Exchangeco. Each
registered shareholder electing to receive Nabors Exchangeco shares received
only a whole number of exchangeable shares, and was paid cash in lieu of any
fractional shares. Each exchangeable share has economic and voting rights
effectively equivalent to one Nabors common share and is exchangeable at any
time for one Nabors common share. As a result of the arrangement, all options to
acquire Ryan common shares not previously exercised or surrendered for
termination were terminated and each holder of such options was paid in cash, in
respect of each such option, the greater of: (i) the positive difference, if
any, between Cdn. $1.85 and the exercise price of such option for each Ryan
common share issuable on exercise of such option, and (ii) Cdn. $0.10 per common
share issuable on exercise of such option, subject to required withholdings.
Pursuant to the arrangement, Nabors Exchangeco acquired all of the issued and
outstanding common shares of Ryan in exchange for approximately Cdn. $22.6
million (U.S. $14.2 million) in cash and 380,264 exchangeable shares of Nabors
Exchangeco, of which 219,493 exchangeable shares were immediately exchanged for
common shares of Nabors in accordance with the instructions of the holders of
those shares.
NOTE 4 DERIVATIVE FINANCIAL INSTRUMENTS
On July 25, 2002, we entered into an interest rate hedge transaction with a
third party financial institution to manage and mitigate interest rate risk
exposure relative to a then-contemplated debt financing transaction. Under the
agreement, we agreed to receive (pay) cash from (to) the counterparty based on
the difference between 4.43% and the 10-year Treasury rate on August 23, 2002,
assuming a $100.0 million notional amount with semi-annual interest payments
over a 10-year maturity. In accordance with SFAS 133, as amended, we accounted
for this transaction as a cash flow hedge. During August 2002, we paid
approximately $1.5 million related to the termination of this agreement. In
accordance with SFAS 133, this payment was recorded as a reduction to
accumulated other comprehensive income on our consolidated balance sheet and
will be amortized into earnings as additional interest expense using the
effective interest method over the term of the 5.375% senior notes due 2012
issued by Nabors Delaware as discussed in Note 5 below.
On March 26, 2002, in anticipation of closing the Enserco acquisition
discussed in Note 3, we entered into two foreign exchange contracts with a total
notional value of Cdn. $115.9 million and maturity dates of April 29, 2002.
Additionally, on April 9, 2002, we entered into a third foreign exchange
contract with a notional value of Cdn. $50.0 million maturing April 29, 2002.
The notional amounts of these contracts were used to fund the cash portion of
the Enserco acquisition purchase price. The notional amounts of these contracts
represented the amount of foreign currency purchased at maturity and did not
represent our exposure under these contracts. Although such contracts served as
an economic hedge against our foreign currency risk related to the cash portion
of the acquisition cost, we accounted for these contracts as speculative as
required by SFAS 133 and therefore marked them to market. We recognized a gain
on these foreign exchange contracts of approximately U.S. $1.78 million in our
consolidated statement of income for the nine months ended September 30, 2002.
On October 22, 2002, we entered into an interest rate swap, purchased a
three-month LIBOR range cap, and sold a LIBOR floor in transactions with a third
party financial institution. These transactions are described in detail in Note
13.
11
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 LONG-TERM DEBT
During the nine months ended September 30, 2002, we purchased $.6 million
face value of our 8 5/8% senior subordinated notes due April 2008 in the open
market at a price of 108%. In addition, we purchased $4.7 million face value of
our 6.8% senior unsecured notes due April 2004 in the open market at a price of
104%. Upon settlement of these transactions, we paid $5.7 million and recognized
a pretax loss of approximately $.2 million, resulting from the repurchases of
these notes at prices higher than the amounts recorded on our books.
Additionally, we repaid Cdn. $21.0 million (U.S. $13.2 million) of the debt
assumed in the Enserco acquisition. We also made a $2.5 million scheduled
principal payment relating to certain of our medium-term notes.
On August 22, 2002, Nabors Holdings 1, ULC, one of our indirect,
wholly-owned subsidiaries, issued U.S. $225 million aggregate principal amount
of 4.875% senior notes due 2009 that were fully and unconditionally guaranteed
by Nabors and Nabors Delaware. Concurrently with this offering by Nabors
Holdings, Nabors Delaware issued U.S. $275 million aggregate principal amount of
5.375% senior notes due 2012, which were fully and unconditionally guaranteed by
Nabors. Both issues of senior notes were resold by a placement agent to
qualified institutional buyers under Rule 144A of the Securities Act of 1933, as
amended. Interest on each issue of senior notes is payable August 15 and
February 15 of each year, beginning on February 15, 2003.
Both issues are unsecured and are effectively junior in right of payment to
any of their respective issuers' future secured debt. The senior notes will rank
equally in right of payment with any of their respective issuers' future
unsubordinated debt and will be senior in right of payment to any of such
issuers' subordinated debt. The guarantees of Nabors Delaware and Nabors with
respect to the senior notes issued by Nabors Holdings, and the guarantee of
Nabors with respect to the senior notes issued by Nabors Delaware, will be
similarly unsecured and have a similar ranking to the series of senior notes so
guaranteed.
Subject to certain qualifications and limitations, the indenture governing
the senior notes issued by Nabors Holdings and the indenture governing the
senior notes issued by Nabors Delaware limit the ability of Nabors and its
subsidiaries to incur liens and to enter into sale and lease-back transactions.
In addition, such indentures limit the ability of Nabors, Nabors Delaware and
Nabors Holdings to enter into mergers, consolidations or transfers of all or
substantially all of such entity's assets unless the successor company assumes
the obligations of such entity under the applicable indenture.
Nabors Holdings filed a registration statement with the U.S. Securities and
Exchange Commission on October 11, 2002 pursuant to which it is offering to
exchange its U.S. $225 million aggregate principal amount of 4.875% senior notes
due 2009 for new 4.875% senior notes due 2009 which have been registered under
the Securities Act (the Nabors Holdings Exchange Notes). This registration
statement became effective on October 28, 2002 and the exchange offer is
currently expected to expire on November 29, 2002. The terms of the Nabors
Holdings Exchange Notes, including the terms of the guarantee by Nabors Delaware
and Nabors, are substantially identical to those of the Nabors Holdings senior
notes, except that the transfer restrictions and registration rights relating to
the senior notes issued by Nabors Holdings do not apply to the Nabors Holdings
Exchange Notes.
Similarly, Nabors Delaware filed a registration statement with the U.S.
Securities and Exchange Commission on October 11, 2002 pursuant to which it is
offering to exchange its U.S. $275 million aggregate principal amount of 5.375%
senior notes due 2012 for new 5.375% senior notes due 2012 which have been
registered under the Securities Act (the Nabors Delaware Exchange Notes) in
exchange for the senior notes issued by Nabors Delaware. This registration
statement also became effective on October 28, 2002 and the exchange offer is
also currently expected to expire on November 29, 2002. The terms of the Nabors
Delaware Exchange Notes, including the terms of the guarantee by Nabors, are
substantially
12
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
identical to those of the Nabors Delaware senior notes, except that the transfer
restrictions and registration rights relating to the senior notes issued by
Nabors Delaware do not apply to the Nabors Delaware Exchange Notes.
As a result of the reorganization, discussed in Note 1, we may have failed
to comply with a covenant contained in our $200 million credit facility
agreement and a related $30 million letter of credit facility. At the time of
the potential default, there were no outstanding borrowings on the $200 million
unsecured revolving credit facility and approximately $23 million outstanding on
the related letter of credit facility. Since the $200 million credit facility
was unused and scheduled to mature on September 5, 2002, and because we had
cash, short-term and long-term marketable securities balances as of July 31,
2002 totaling approximately $800 million, we terminated the facility. The bank
provided a waiver on the letter of credit facility and the letter of credit
facility has since expired.
During June 2000, we completed a private placement of zero coupon
convertible senior debentures due 2020. On issuance, the aggregate principal
amount of the debentures at maturity totaled $825 million. The debentures were
issued at a discount with net proceeds to Nabors, after expenses, totaling
approximately $495 million. The debentures can be put back to us on June 20,
2003, June 20, 2008 and June 20, 2013 for a purchase price equal to the issue
price plus accrued original issue discount to the date of repurchase. Based on
the ability of the debenture holders to exercise their put option on June 20,
2003, the outstanding principal amount on the debentures of $486.1 million is
classified in current liabilities in our consolidated balance sheet as of
September 30, 2002.
NOTE 6 COMMON SHARES
In conjunction with our April 2002 acquisition of Enserco, Nabors Delaware
issued 2,638,526 shares of Nabors Delaware common stock and 910,556 exchangeable
shares of Nabors Exchangeco that are now exchangeable for our common shares on a
one-for-one basis (Note 3). The exchangeable shares have been recorded as an
increase in capital in excess of par value. Subsequent to the acquisition,
312,254 exchangeable shares have been exchanged for our common shares, resulting
in 598,302 exchangeable shares outstanding as of September 30, 2002.
As a result of the corporate reorganization (Note 1), the authorized share
capital of Nabors consists of 400 million common shares, par value $.001 per
share, and 25 million preferred shares, par value $.001 per share. Common shares
issued were 144,417,743 at $.001 par value at September 30, 2002 compared to
144,368,390 at $.10 par value immediately preceding the reorganization. The
decrease in par value of common stock from $.10 to $.001 has been recorded as an
increase to capital in excess of par value and a decrease in common shares in
our Consolidated Financial Statements.
In conjunction with the reorganization, 6.8 million shares of treasury
stock outstanding were retired, as Bermuda law does not recognize the concept of
treasury stock. The effect of this retirement reduced common shares by $.7
million, capital in excess of par value by $59.2 million and retained earnings
by $192.9 million.
On July 17, 2002, the Board of Directors of Nabors authorized the
continuation of the share repurchase program that had begun under Nabors
Delaware, and provided that the amount of Nabors common shares authorized for
purchase by Nabors going forward be increased to $400 million. Under the Nabors
Delaware program, Nabors Delaware had acquired an aggregate of approximately
$248.0 million of Nabors Delaware common stock, or 6.2 million shares. During
the current quarter, Nabors also acquired, through a subsidiary, 91,000 of its
common shares in the open market for $27.30 per share for an aggregate price of
$2.5 million. Immediately thereafter these shares were transferred to Nabors.
Pursuant to Bermuda law, any shares, when purchased, will be treated as
cancelled. A repurchase of shares will not have the effect of reducing the
amount of Nabors' authorized share capital. Additionally, the Board
13
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approved the repurchase of up to $400 million of outstanding debt securities of
Nabors and its subsidiaries. These amounts may be increased or decreased at the
discretion of the Board, depending upon market conditions and consideration of
the best interest of shareholder value. Repurchases may be conducted on the open
market, through negotiated transactions, or by other means, from time to time,
depending upon market conditions and other factors.
On July 23, 2002, we entered into a private transaction with a counterparty
in which we sold 1.0 million European-style put options for $2.6 million with a
maturity date of October 23, 2002. Under the arrangement, if the price of our
common shares was less than $26.5698 on the maturity date, the counterparty
could have exercised the put option resulting in, at our option (1) our purchase
of 1.0 million of our common shares at a price of $26.5698 per share or (2) our
payment, in cash or Nabors common shares, of an amount equal to the difference
between $26.5698 and our stock price on October 23, 2002 multiplied by 1.0
million. If the price of our common shares was above $26.5698 on the maturity
date, we anticipated that the counterparty would let the option expire. These
put options expired on October 23, 2002 and we retained the $2.6 million in
proceeds which was recorded as an increase in capital in excess of par value on
our consolidated balance sheet during the current quarter.
NOTE 7 COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
As of September 30, 2002, we had outstanding capital expenditure purchase
commitments of approximately $18.6 million, primarily for rig-related enhancing
and sustaining capital expenditures.
CONTINGENCIES
Self Insurance Accruals. Nabors is self-insured for certain losses
relating to workers' compensation, general liability, property damage and
employee medical benefits. Effective for the period from April 1, 2002 to March
31, 2003, our exposure (that is, our deductible) per occurrence ranges from $1.0
million for workers' compensation to between $2.0 million and $5.0 million for
employer liability, Jones Act and general liability and to $10.0 million for rig
physical damage. As a result, we are self-insured for rigs with replacement
values less than $10.0 million. If a Nabors' rig with a replacement value of
less than $10.0 million was destroyed, we would record a loss equal to its net
book value in the period in which the loss event occurred. In previous years, we
had physical damage insurance for essentially all of our rigs, with a
substantially lower deductible of $.25 million per occurrence. Thus,
historically we have not recorded material losses in our financial statements
related to the destruction of one of our rigs. We have purchased stop-loss
coverage in order to limit our aggregate exposure to certain physical damage
claims for insured rigs (that is, those rigs with replacement values in excess
of $10.0 million). The effect of this coverage is that our maximum physical
damage loss on insured rigs would be $20.0 million plus $1.0 million per
occurrence. There is no assurance that such coverage will adequately protect
Nabors against liability from all potential consequences.
Litigation. In Verdin v. R&B Falcon Drilling USA, Inc., et al., Civil
Action No. G-00-488, in the United States District Court for the Southern
District of Texas, Galveston Division, the class action lawsuit against our
offshore drilling subsidiaries alleging, among other things, conspiracy to
depress wages and benefits paid to our offshore employees, we have reached a
settlement, which was approved by the court on April 22, 2002. The settlement
payment was made in the second quarter of 2002, and the amount paid by Nabors'
subsidiaries was not material to Nabors.
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
14
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 reincorporation in Bermuda. The
AFL-CIO moved to intervene in Civil Action No. 02-1942 and filed a complaint
containing similar allegations. On June 5, 2002, Marilyn Irey, an individual
shareholder of Nabors, filed a complaint in the United States District Court for
the Southern District of Texas (Civil Action No. 02-2108) that is nearly
identical to Steve Rosenberg's complaint. The three shareholders requested that
the Court either enjoin the closing of the shareholder vote on the scheduled
date or the effectuation of the reorganization. In addition, two of the
shareholders (Steve Rosenberg and Marilyn Irey) 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. These two shareholders, on behalf of their purported class, seek
monetary damages for their state law claims. Since the beginning of the
litigation, two of the shareholders (Steve Rosenberg and the AFL-CIO) have
amended their complaints, but have not added any substantive allegations.
On June 13, 2002, the Court granted the AFL-CIO's motion to intervene. On
June 15, 2002, the Court denied a motion for temporary restraining order brought
by two of the shareholders (Steve Rosenberg and the AFL-CIO) in their attempts
to prevent the closing of Nabors' reorganization and its effective
reincorporation in Bermuda. On July 2, 2002, the Court granted an agreed motion
to consolidate Civil Action No. 02-2108 into Civil Action No. 02-1942. Nabors
and its directors have moved to dismiss the lawsuits of all three shareholders,
and that motion is currently pending. Nabors and its directors believe that the
allegations in this lawsuit are without merit, and Nabors and its directors will
defend vigorously the claims brought against them. We are unable, however, to
predict the outcome of this action or the costs to be incurred in connection
with its defense and there can be no assurance that this litigation will be
resolved in our favor.
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 these pending
lawsuits is not expected to have a significant or material adverse effect on our
consolidated financial position, results of operations or cash flows.
NOTE 8 INCOME TAXES
Our effective income tax rate was 16% during the nine months ended
September 30, 2002 compared to 37% for the prior year period. Due primarily to
the corporate reorganization discussed in Note 1, the effective tax rate for the
nine months ended September 30, 2002 was lower than the 25% anticipated rate
accrued in our results during the first two quarters of 2002. The tax benefit
attributable to the corporate reorganization that was recorded during the
quarter ended September 30, 2002 approximated $8.4 million. Nabors currently
expects a 2002 annualized effective tax rate of approximately 14-15%. 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 being considered by the U.S. Congress, and any
responsive action taken by Nabors.
15
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (numerator):
Net income -- basic...................... $ 26,922 $108,241 $ 94,284 $295,394
Add interest expense on assumed
conversion of our zero coupon
convertible senior debentures, net of
tax(1):
$825 million due 2020................. -- 2,021 -- 6,026
$1.381 billion due 2021............... -- 3,332 -- 8,643
-------- -------- -------- --------
Adjusted net income -- diluted........... $ 26,922 $113,594 $ 94,284 $310,063
======== ======== ======== ========
Earnings per share:
Basic.................................... $ .19 $ .75 $ .66 $ 2.03
Diluted.................................. $ .18 $ .68 $ .63 $ 1.82
Shares (denominator):
Weighted average number of shares
outstanding -- basic(2)............... 145,078 143,610 143,079 145,615
Net effect of dilutive stock options and
warrants based on the treasury stock
method................................ 6,080 5,144 6,344 7,340
Assumed conversion of our zero coupon
convertible senior debentures(1):
$825 million due 2020................. -- 8,859 -- 8,859
$1.381 billion due 2021............... -- 9,771 -- 8,504
-------- -------- -------- --------
Weighted average number of shares
outstanding -- diluted................... 151,158 167,384 149,423 170,318
======== ======== ======== ========
</Table>
- ---------------
(1) Diluted earnings per share for the three months and nine months ended
September 30, 2001 reflects the assumed conversion of our $825 million and
$1.381 billion zero coupon convertible senior debentures, as the conversion
in those periods would have been dilutive. Diluted earnings per share for
the three months and nine months ended September 30, 2002 does not reflect
the assumed conversion of our $825 million and $1.381 billion zero coupon
convertible senior debentures, as the conversion in those periods would have
been anti-dilutive.
(2) Includes the weighted average number of common shares of Nabors and the
weighted average number of exchangeable shares of Nabors Exchangeco.
16
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 SUPPLEMENTAL INCOME STATEMENT INFORMATION
Other income (expense), net includes the following:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2002 2001 2002 2001
------ ------- ------- -------
(IN THOUSANDS)
(Losses) gains on marketable securities...... $(550) $ (597) $ 2,386 $ 6,619
(Losses) gains on disposition of long-term
assets and businesses...................... (481) 4,816 (522) 8,774
Foreign currency transaction (losses)
gains...................................... (370) 336 1,936 633
Dividend income.............................. -- 185 38 558
Corporate reorganization expense............. (103) -- (3,461) --
Other........................................ 510 660 1,775 1,140
----- ------ ------- -------
$(994) $5,400 $ 2,152 $17,724
===== ====== ======= =======
</Table>
NOTE 11 SEGMENT INFORMATION
The following table sets forth financial information with respect to our
reportable segments:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
(IN THOUSANDS)
Reportable segments:
Operating revenues and Earnings from
unconsolidated affiliates:
Contract drilling(1)............... $336,088 $586,770 $1,020,693 $1,662,692
Manufacturing and logistics(2)..... 31,751 70,259 111,684 208,777
Other(3)........................... (12,761) (34,612) (33,944) (96,405)
-------- -------- ---------- ----------
Total............................ $355,078 $622,417 $1,098,433 $1,775,064
======== ======== ========== ==========
Income derived from operating
activities:(4)
Contract drilling(1)............... $ 40,877 $155,096 $ 141,582 $ 414,726
Manufacturing and logistics(2)..... 2,087 25,024 18,712 75,725
Other(5)........................... (10,828) (14,635) (29,581) (40,051)
-------- -------- ---------- ----------
Total............................ $ 32,136 $165,485 $ 130,713 $ 450,400
-------- -------- ---------- ----------
Interest expense...................... (17,772) (15,395) (46,805) (42,372)
Interest income....................... 8,145 13,636 25,538 42,572
Other income (expense), net........... (994) 5,400 2,152 17,724
-------- -------- ---------- ----------
Income before income taxes....... $ 21,515 $169,126 $ 111,598 $ 468,324
======== ======== ========== ==========
</Table>
17
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Total assets:
Contract drilling(6)...................................... $3,213,208 $2,872,534
Manufacturing and logistics(7)............................ 308,582 311,629
Other(5).................................................. 1,386,496 967,752
---------- ----------
Total.................................................. $4,908,286 $4,151,915
========== ==========
</Table>
- ---------------
(1) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $7.0 million and $4.7 million for the three-month periods
ended September 30, 2002 and 2001, and $20.6 million and $13.1 million for
the nine-month periods ended September 30, 2002 and 2001, respectively.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.1 million and $3.8 million for the three-month periods
ended September 30, 2002 and 2001, and $8.9 million and $15.6 million for
the nine-month periods ended September 30, 2002 and 2001, respectively.
(3) Includes the elimination of inter-segment manufacturing and logistics sales.
(4) 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 accounting principles generally accepted in
the United States of America. However, management does evaluate the
performance of its business units and the consolidated company based on
income derived from operating activities because it believes that this
financial measure is an accurate reflection of the ongoing profitability of
our company.
(5) Includes the elimination of inter-segment transactions and unallocated
corporate expenses, assets and capital expenditures.
(6) Includes $23.7 million and $22.3 million of investments in unconsolidated
affiliates, accounted for by the equity method, at September 30, 2002 and
December 31, 2001, respectively.
(7) Includes $31.3 million and $32.8 million of investments in unconsolidated
affiliates, accounted for by the equity method, at September 30, 2002 and
December 31, 2001, respectively.
NOTE 12 CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In connection with the corporate reorganization on June 24, 2002 as
discussed in Note 1, Nabors fully and unconditionally guaranteed all of the
issued public debt securities of Nabors Delaware at the effective time of the
merger. As discussed in Note 5, Nabors also fully and unconditionally guaranteed
the senior notes issued by Nabors Delaware, and Nabors and Nabors Delaware fully
and unconditionally guaranteed the senior notes issued by Nabors Holdings in
August 2002.
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 Nabors' and Nabors
Delaware's investments in their subsidiaries using the equity method of
accounting. Nabors and Nabors Holdings were formed on December 11, 2001 and
December 28, 2001, respectively, and as such are not presented for the three and
nine months ended September 30, 2001.
The following condensed consolidating financial information presents:
condensed consolidating balance sheets as of September 30, 2002 and December 31,
2001 and the related statements of income for the three and nine months ended
September 30, 2002 and 2001 and statements of cash flows for the nine months
ended September 30, 2002 and 2001 of (a) Nabors, Parent-Guarantor after June 24,
2002 and
18
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-Parent/Non-Guarantor prior to June 24, 2002, (b) Nabors Delaware, issuer of
existing debt and the 5.375% senior notes due 2012 and guarantor of the 4.875%
senior notes due 2009 issued by Nabors Holdings, (c) Nabors Holdings, issuer of
the 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.
CONDENSED CONSOLIDATING BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, 2002
------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents............ $ 293 $ 2,885 $ 228 $ 665,281 $ -- $ 668,687
Marketable securities.... -- -- -- 353,013 -- 353,013
Accounts receivable,
net.................... -- -- -- 275,622 -- 275,622
Inventory and supplies... -- -- -- 16,673 -- 16,673
Prepaid expenses and
other current assets... 209 25 -- 122,734 -- 122,968
---------- ---------- -------- ---------- ----------- ----------
Total current assets... 502 2,910 228 1,433,323 -- 1,436,963
Marketable securities...... -- -- -- 309,567 -- 309,567
Property, plant and
equipment, net........... -- -- -- 2,744,913 -- 2,744,913
Goodwill, net.............. -- -- -- 301,401 -- 301,401
Intercompany receivables... 2,035,957 2,233,392 349 -- (4,269,698) --
Investments in
affiliates............... 102,759 1,764,123 221,484 2,217,657 (4,251,036) 54,987
Other long-term assets..... -- 11,156 1,074 48,225 -- 60,455
---------- ---------- -------- ---------- ----------- ----------
Total assets........... $2,139,218 $4,011,581 $223,135 $7,055,086 $(8,520,734) $4,908,286
========== ========== ======== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term debt......... $ -- $ 486,097 $ -- $ 3,498 $ -- $ 489,595
Trade accounts payable... 23 23 -- 93,518 -- 93,564
Accrued liabilities...... 12 9,222 1,188 136,268 -- 146,690
Income taxes payable..... -- (189) -- 26,601 -- 26,412
---------- ---------- -------- ---------- ----------- ----------
Total current
liabilities......... 35 495,153 1,188 259,885 -- 756,261
Long-term debt............. -- 1,328,871 223,168 46,987 -- 1,599,026
Other long-term
liabilities.............. -- -- -- 100,266 -- 100,266
Deferred income taxes...... 489 48,789 (469) 265,495 -- 314,304
Intercompany payables...... 265 -- -- 4,269,433 (4,269,698) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities...... 789 1,872,813 223,887 4,942,066 (4,269,698) 2,769,857
---------- ---------- -------- ---------- ----------- ----------
Stockholders' equity....... 2,138,429 2,138,768 (752) 2,113,020 (4,251,036) 2,138,429
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
stockholders'
equity.............. $2,139,218 $4,011,581 $223,135 $7,055,086 $(8,520,734) $4,908,286
========== ========== ======== ========== =========== ==========
</Table>
19
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, 2001
------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents........ $-- $ 2,201 $-- $ 196,242 $ -- $ 198,443
Marketable
securities......... -- -- -- 343,169 -- 343,169
Accounts receivable,
net................ -- -- -- 361,086 -- 361,086
Inventory and
supplies........... -- -- -- 18,515 -- 18,515
Prepaid expenses and
other current
assets............. -- 417 -- 109,316 -- 109,733
--- ---------- --- ---------- ----------- ----------
Total current
assets........... -- 2,618 -- 1,028,328 -- 1,030,946
Marketable securities... -- -- -- 377,025 -- 377,025
Property, plant and
equipment, net........ -- -- -- 2,433,247 -- 2,433,247
Goodwill, net........... -- -- -- 199,048 -- 199,048
Intercompany
receivables........... -- 1,931,893 12 -- (1,931,905) --
Investments in
affiliates............ 13 1,467,127 -- 55,141 (1,467,140) 55,141
Other long-term
assets................ -- 13,574 -- 42,934 -- 56,508
--- ---------- --- ---------- ----------- ----------
Total assets....... $13 $3,415,212 $12 $4,135,723 $(3,399,045) $4,151,915
=== ========== === ========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of
long-term debt..... $-- $ -- $-- $ 2,510 $ -- $ 2,510
Trade accounts
payable............ -- 23 -- 131,798 -- 131,821
Accrued liabilities... -- 4,372 -- 163,650 -- 168,022
Income taxes
payable............ -- (189) -- 27,966 -- 27,777
--- ---------- --- ---------- ----------- ----------
Total current
liabilities...... -- 4,206 -- 325,924 -- 330,130
Long-term debt.......... -- 1,523,915 -- 43,701 -- 1,567,616
Other long-term
liabilities........... -- -- -- 110,902 -- 110,902
Deferred income taxes... -- 29,225 -- 256,176 -- 285,401
Intercompany payables... 1 -- -- 1,931,904 (1,931,905) --
--- ---------- --- ---------- ----------- ----------
Total
liabilities...... 1 1,557,346 -- 2,668,607 (1,931,905) 2,294,049
--- ---------- --- ---------- ----------- ----------
Stockholders' equity.... 12 1,857,866 12 1,467,116 (1,467,140) 1,857,866
--- ---------- --- ---------- ----------- ----------
Total liabilities
and stockholders'
equity........... $13 $3,415,212 $12 $4,135,723 $(3,399,045) $4,151,915
=== ========== === ========== =========== ==========
</Table>
20
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- --------
(IN THOUSANDS)
Revenues and other income:
Operating revenues............ $ -- $ -- $ -- $346,995 $ -- $346,995
Earnings from unconsolidated
affiliates................. -- -- -- 8,083 -- 8,083
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 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...................... $ 26,922 $27,496 $ (764) $ 7,530 $(34,262) $ 26,922
======== ======= ======= ======== ======== ========
</Table>
21
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------------------------------
OTHER
NABORS SUBSIDIARIES
DELAWARE (NON- CONSOLIDATING
(ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
-------- ------------ ------------- --------
(IN THOUSANDS)
Revenues and other income:
Operating revenues............................ $ -- $613,958 $ -- $613,958
Earnings from unconsolidated affiliates....... -- 8,459 -- 8,459
Earnings from consolidated affiliates......... 104,615 -- (104,615) --
Interest income............................... 12 13,624 -- 13,636
Intercompany interest income.................. 20,828 -- (20,828) --
Other income, net............................. -- 5,400 -- 5,400
-------- -------- --------- --------
Total revenues and other income............ 125,455 641,441 (125,443) 641,453
-------- -------- --------- --------
Costs and other deductions:
Direct costs.................................. -- 368,271 -- 368,271
General and administrative expenses........... 133 34,115 -- 34,248
Depreciation and amortization................. -- 54,413 -- 54,413
Interest expense.............................. 14,952 443 -- 15,395
Intercompany interest expense................. -- 20,828 (20,828) --
-------- -------- --------- --------
Total costs and other deductions........... 15,085 478,070 (20,828) 472,327
-------- -------- --------- --------
Income before income taxes...................... 110,370 163,371 (104,615) 169,126
-------- -------- --------- --------
Income tax expense.............................. 2,129 58,756 -- 60,885
-------- -------- --------- --------
Net income...................................... $108,241 $104,615 $(104,615) $108,241
======== ======== ========= ========
</Table>
22
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ----------
(IN THOUSANDS)
Revenues and other income:
Operating revenues.......... $ -- $ -- $ -- $1,068,954 $ -- $1,068,954
Earnings from unconsolidated
affiliates............... -- -- -- 29,479 -- 29,479
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 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.................... $94,284 $ 94,879 $ (764) $ 140,615 $(234,730) $ 94,284
======= ======== ======= ========== ========= ==========
</Table>
23
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001
----------------------------------------------------
OTHER
NABORS SUBSIDIARIES
DELAWARE (NON- CONSOLIDATING
(ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
-------- ------------ ------------- ----------
(IN THOUSANDS)
Revenues and other income:
Operating revenues.......................... $ -- $1,746,362 $ -- $1,746,362
Earnings from unconsolidated affiliates..... -- 28,702 -- 28,702
Earnings from consolidated affiliates....... 283,555 -- (283,555) --
Interest income............................. 45 42,527 -- 42,572
Intercompany interest income................ 60,772 -- (60,772) --
Other income (expense), net................. (969) 18,693 -- 17,724
-------- ---------- --------- ----------
Total revenues and other income.......... 343,403 1,836,284 (344,327) 1,835,360
-------- ---------- --------- ----------
Costs and other deductions:
Direct costs................................ -- 1,074,627 -- 1,074,627
General and administrative expenses......... 324 100,824 -- 101,148
Depreciation and amortization............... -- 148,889 -- 148,889
Interest expense............................ 40,733 1,639 -- 42,372
Intercompany interest expense............... -- 60,772 (60,772) --
-------- ---------- --------- ----------
Total costs and other deductions......... 41,057 1,386,751 (60,772) 1,367,036
-------- ---------- --------- ----------
Income before income taxes.................... 302,346 449,533 (283,555) 468,324
-------- ---------- --------- ----------
Income tax expense............................ 6,952 165,978 -- 172,930
-------- ---------- --------- ----------
Net income.................................... $295,394 $ 283,555 $(283,555) $ 295,394
======== ========== ========= ==========
</Table>
24
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING
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..... -- -- -- (88,694) -- (88,694)
Sales of marketable
securities,
available-for-sale..... -- -- -- 133,845 -- 133,845
Cash received from
disposition of
long-term assets....... -- -- -- 5,571 -- 5,571
Cash paid for acquisitions
of businesses, net..... -- -- -- (120,840) -- (120,840)
Capital expenditures...... -- -- -- (227,411) -- (227,411)
------- --------- --------- --------- ----- ---------
Net cash used for investing
activities................ -- -- -- (297,529) -- (297,529)
------- --------- --------- --------- ----- ---------
Cash flows from financing
activities:
Increase in restricted
cash................... -- -- -- 791 -- 791
Proceeds from long-term
borrowings............. -- 272,765 223,139 -- -- 495,904
Reduction of long-term
borrowings............. -- (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
======= ========= ========= ========= ===== =========
</Table>
25
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001
----------------------------------------------------
OTHER
NABORS SUBSIDIARIES
DELAWARE (NON- CONSOLIDATING
(ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
--------- ------------ ------------- ---------
(IN THOUSANDS)
Net cash (used for) provided by operating
activities................................. $(587,201) $1,096,412 $ -- $ 509,211
--------- ---------- ----- ---------
Cash flows from investing activities:
Purchases of marketable securities,
available-for-sale...................... -- (461,580) -- (461,580)
Sales of marketable securities,
available-for-sale...................... -- 28,193 -- 28,193
Cash received from disposition of long-term
assets.................................. -- 16,270 -- 16,270
Capital expenditures....................... -- (553,036) -- (553,036)
--------- ---------- ----- ---------
Net cash used for investing activities....... -- (970,153) -- (970,153)
--------- ---------- ----- ---------
Cash flows from financing activities:
Increase in restricted cash................ -- 698 -- 698
Proceeds from long-term borrowings......... 840,338 -- -- 840,338
Reduction of long-term borrowings.......... -- (3,556) -- (3,556)
Debt issuance costs........................ (12,879) -- -- (12,879)
Proceeds from issuance of common shares.... 7,776 -- -- 7,776
Repurchase of common shares................ (247,963) -- -- (247,963)
--------- ---------- ----- ---------
Net cash provided by (used for) financing
activities................................. 587,272 (2,858) -- 584,414
--------- ---------- ----- ---------
Effect of exchange rate changes on cash and
cash equivalents........................... -- (480) -- (480)
--------- ---------- ----- ---------
Net increase in cash and cash equivalents.... 71 122,921 -- 122,992
Cash and cash equivalents, beginning of
period..................................... 2,118 195,194 -- 197,312
--------- ---------- ----- ---------
Cash and cash equivalents, end of period..... $ 2,189 $ 318,115 $ -- $ 320,304
========= ========== ===== =========
</Table>
NOTE 13 SUBSEQUENT EVENTS
DERIVATIVE TRANSACTIONS
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 a portion of our fixed rate 5.375% senior notes due 2012 issued by
Nabors Delaware. The purpose of this transaction was to convert a portion of
future interest due on the senior notes to a lower variable rate in an attempt
to realize savings on our future interest payments. We have designated this swap
agreement as a fair value hedge under SFAS 133, as amended. The swap agreement
has a notional amount of $200 million and matures in August 2012 to match the
maturity of the senior notes. Under the agreement, we pay on a quarterly basis a
floating rate based on a three-month U.S. dollar LIBOR rate, plus a spread, and
receive a fixed rate of interest of 5.375%.
On October 21, 2002, we also purchased a three-month LIBOR range cap and
sold a LIBOR floor in transactions with the same third party financial
institution. These transactions are intended to mitigate and manage our exposure
to changes in the three-month U.S. dollar LIBOR rate and do not qualify for
hedge accounting treatment under SFAS 133, as amended. Any change in the
cumulative fair value of the range cap and the floor will be reflected as a gain
or loss in our consolidated statement of income. The range cap and the floor are
effective August 15, 2003 and expire on August 15, 2012. The range cap will be
triggered
26
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
when the three-month U.S. dollar LIBOR rate is at or above 4.50%, and below
6.50%, such that the counterparty will pay us any difference between the actual
LIBOR rate and the 4.50% strike rate on a notional amount of $200 million. No
payment will be due to us if the three-month U.S. dollar LIBOR rate is at or
above 6.50%. The floor is triggered when the three-month U.S. dollar LIBOR rate
is at or below 2.665% such that we will pay the counterparty any difference
between the actual LIBOR rate and the 2.665% floor rate on a notional amount of
$200 million.
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Nabors Industries Ltd.:
We have reviewed the accompanying consolidated balance sheet of Nabors
Industries Ltd. and its subsidiaries as of September 30, 2002, and the related
consolidated statements of income for each of the three-month and nine-month
periods ended September 30, 2002 and 2001 and the consolidated statements of
cash flows and of changes in stockholders' equity for the nine-month periods
ended September 30, 2002 and 2001. These 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 to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, 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, 2001, and the related consolidated statements of income, of cash
flows and of changes in stockholders' equity for the year then ended (not
presented herein), and in our report dated January 23, 2002, except for Note 16,
as to which the date is March 18, 2002, Notes 1, 2, 7, 12 and 15, as to which
the date is August 20, 2002, and Note 17, as to which the date is October 10,
2002, we expressed an unqualified opinion on those consolidated financial
statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
October 23, 2002
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT CORPORATE REORGANIZATION
Effective June 24, 2002, Nabors Industries Ltd., a Bermuda exempted company
(Nabors), became the successor to Nabors Industries, Inc., a Delaware
corporation (Nabors Delaware), following a corporate reorganization. The
reorganization was accomplished through the merger of an indirect, newly formed
Delaware subsidiary owned by Nabors, into Nabors Delaware. Nabors Delaware was
the surviving company in the merger and became a wholly-owned, indirect
subsidiary of Nabors. Upon consummation of the merger, all outstanding shares of
Nabors Delaware common stock automatically converted into the right to receive
Nabors common shares with the result that the shareholders of Nabors Delaware on
the date of the merger became the shareholders of Nabors. Nabors and its
subsidiaries continue to conduct the businesses previously conducted by Nabors
Delaware and its subsidiaries. The reorganization was accounted for as a
reorganization of entities under common control and accordingly, it did not
result in any changes to the consolidated amounts of assets, liabilities and
stockholders' equity.
The authorized share capital of Nabors consists of 400 million common
shares, par value $.001 per share and 25 million preferred shares, par value
$.001 per share. Common shares issued were 144,417,743 at $.001 par value at
September 30, 2002 compared to 144,368,390 at $.10 par value immediately
preceding the reorganization. The decrease in par value of common stock from
$.10 to $.001 has been recorded as an increase to capital in excess of par value
and a decrease in common shares in our Consolidated Financial Statements. In
conjunction with the reorganization, 6.8 million shares of treasury stock
outstanding were retired, as Bermuda law does not recognize the concept of
treasury stock. The effect of this retirement reduced common shares by $.7
million, capital in excess of par value by $59.2 million and retained earnings
by $192.9 million.
The Board of Nabors Delaware approved the reincorporation transaction
because international activities are an important part of our current business
and they believe that international operations will continue to grow in the
future. Expansion of our international business is an important part of our
current business strategy and significant growth opportunities exist in the
international marketplace. We believe that reorganizing as a Bermuda company
will allow us to implement our business strategy more effectively. In addition,
we believe that the reorganization should increase our access to international
capital markets and acquisition opportunities, increase our attractiveness to
non-U.S. investors, improve global cash management, improve our global tax
position and result in a more favorable corporate structure for expansion of our
current business.
Several members of the United States Congress have introduced legislation
that, if enacted, would have the effect of eliminating the tax benefits of the
reorganization. In particular, on June 18, 2002, the Senate Finance Committee
approved legislation introduced by Senator Charles Grassley, the Ranking
Minority Member of the Senate Finance Committee, along with Senator Max Baucus,
the Chairman of the Senate Finance Committee, (S. 2119) that, for United States
federal tax purposes, would treat a foreign corporation, such as Nabors, that
undertakes a corporate expatriation transaction, such as the reorganization, as
a domestic corporation and, thus, such foreign corporation would be subject to
United States federal income tax. S. 2119 is proposed to be effective for
corporate expatriation transactions completed after March 20, 2002. In addition,
on July 11, 2002, Representative Bill Thomas, Chairman of the House Committee on
Ways and Means, introduced legislation (H.R. 5095) that is substantially similar
to S. 2119 with respect to its treatment of corporations that undertake a
corporate expatriation transaction such as the reorganization, except that (i)
it is proposed to apply to transactions completed after March 20, 2002 and
before March 21, 2005 and (ii) it would not permit shareholders to qualify for
tax-free treatment with respect to a corporate expatriation transaction such as
the reorganization. If any of the proposed legislation, including S. 2119 or
H.R. 5095, were enacted with their proposed effective dates, the tax savings
would not be realized from the reorganization.
In addition, there has been significant negative publicity and criticism of
corporate inversion transactions from public pension funds and other investors
since the time we completed the reorganization.
29
In light of such events and if and when any such legislation is enacted, we
will consider the effects of such legislation and will evaluate all strategic
alternatives that may be necessary or prudent in response to such legislation.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Operating revenues and Earnings from unconsolidated affiliates for the
third quarter of fiscal year 2002 totaled $355.1 million, representing a
decrease of $267.3 million, or 43%, as compared to the prior year period.
Current quarter income derived from operating activities and net income totaled
$32.1 million and $26.9 million ($.18 per diluted share), respectively,
representing decreases of 81% and 75% compared to the prior year period.
Operating revenues and Earnings from unconsolidated affiliates for the first
nine months of fiscal year 2002 totaled $1,098.4 million, representing a
decrease of $676.6 million, or 38%, as compared to the prior year period. Income
derived from operating activities and net income totaled $130.7 million and
$94.3 million ($.63 per diluted share), respectively, for the first nine months
of fiscal year 2002 representing decreases of 71% and 68%, respectively,
compared to the prior year period. 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.
The decrease in our operating results during the current three-month and
nine-month periods as compared to the prior year periods is primarily due to the
continuing weak environment in several of our key North American markets,
resulting in reduced rig utilization and average margins. Our customers continue
to exercise caution regarding any substantial increases in near-term capital
spending.
While third quarter average commodity prices were slightly higher than the
prior year quarter, they were substantially lower during the nine month period
ended September 30, 2002 as compared to the prior year period, resulting in
lower aggregate cash flow for producers. The Henry Hub natural gas spot price
(per Bloomberg) averaged $3.05 per million cubic feet (mcf) during the first
nine months of 2002, down significantly from the $4.47 per mcf average during
the prior year period. West Texas intermediate spot oil prices (per Bloomberg)
averaged $25.46 per barrel during the first nine months of 2002, down from
$27.79 per barrel during the prior year period.
The corresponding decline in our rig activity resulted in declining overall
profitability for Nabors. These lower activity levels were experienced by all of
our North American business units through the second quarter of 2002, with the
sharpest decline coming from our U.S. Lower 48 land drilling business. The
decrease in North American land and offshore drilling activity is illustrated by
the drilling industry's lower total active land and offshore rig count. The
average U.S. land, Canadian land and U.S. offshore rig counts during the nine
months ended September 30, 2002 were lower by 32%, 29% and 30%, respectively,
than the corresponding prior year period. Also contributing to the overall
decline in our operating results was a decline in activity for our U.S. land
well-servicing and workover business driven primarily by lower rig utilization
due to the overall weak market, and the more recent loss of some higher margin
workover rigs and an offshore platform operation compounded by the incurrence of
deferred maintenance costs.
Natural gas prices are the primary driver of our U.S. land, Canadian and
U.S. Gulf Coast operations while crude oil prices are the primary driver of our
Alaskan, international and well servicing operations. Natural gas and oil prices
began increasing in the latter part of the second quarter of 2002, averaging
$3.19 per mcf and $28.30 per bbl, respectively, during the current year quarter,
as compared to $2.77 per mcf and $26.73 per bbl for the prior year period. These
increases, however, have not yet resulted in a corresponding strengthening of
our key North American markets. Major oil companies and large independents, our
primary customer base, appear to be reluctant to increase spending until the new
budget year. These concerns seem to be diminishing with time, and the continued
fall in natural gas production levels resulting from lower drilling activity is
increasing the likelihood of higher sustaining average prices over the
intermediate-term.
30
Looking forward, we expect that, in the fourth quarter of 2002,
improvements in our international, Canadian and U.S. Gulf Coast businesses will
be offset by lower results in our Alaskan and U.S. Lower 48 land drilling and
well-serving businesses. Our markets outside of the United States have a
favorable near-term outlook, particularly in our international offshore markets
where we anticipate a number of further rig deployments and continued strong bid
prospects. In Canada, we expect higher activity in the fourth quarter of 2002
and continued improvement through the first half of 2003. In the U.S. Gulf of
Mexico, we expect a continued improvement in the fourth quarter of 2002 and even
more substantial improvement in the first half of 2003. We expect improvement in
our remaining business units beginning in 2003.
The following tables set forth certain information with respect to our
reportable segments, rig, vessel and well-servicing activity, and certain
industry data:
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- -----------------------------------------
INCREASE INCREASE
2002 2001 (DECREASE) 2002 2001 (DECREASE)
-------- -------- --------------- ---------- ---------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Reportable segments:
Operating revenues and
Earnings from
unconsolidated
affiliates:
Contract drilling(1)..... $336,088 $586,770 $(250,682) (43)% $1,020,693 $1,662,692 $(641,999) (39)%
Manufacturing and
logistics(2)........... 31,751 70,259 (38,508) (55)% 111,684 208,777 (97,093) (47)%
Other(3)................. (12,761) (34,612) 21,851 63 % (33,944) (96,405) 62,461 65 %
-------- -------- --------- ---------- ---------- ---------
Total.................. $355,078 $622,417 $(267,339) (43)% $1,098,433 $1,775,064 $(676,631) (38)%
======== ======== ========= ========== ========== =========
Income derived from
operating activities(4):
Contract drilling(1)..... $ 40,877 $155,096 $(114,219) (74)% $ 141,582 $ 414,726 $(273,144) (66)%
Manufacturing and
logistics(2)........... 2,087 25,024 (22,937) (92)% 18,712 75,725 (57,013) (75)%
Other(5)................. (10,828) (14,635) 3,807 26 % (29,581) (40,051) 10,470 26 %
-------- -------- --------- ---------- ---------- ---------
Total.................. $ 32,136 $165,485 $(133,349) (81)% $ 130,713 $ 450,400 $(319,687) (71)%
======== ======== ========= ========== ========== =========
</Table>
- ---------------
(1) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $7.0 million and $4.7 million for the three-month periods
ended September 30, 2002 and 2001, and $20.6 million and $13.1 million for
the nine-month periods ended September 30, 2002 and 2001, respectively.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.1 million and $3.8 million for the three-month periods
ended September 30, 2002 and 2001, and $8.9 million and $15.6 million for
the nine-month periods ended September 30, 2002 and 2001, respectively.
(3) Includes the elimination of inter-segment manufacturing and logistics sales.
(4) 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 accounting principles generally accepted in
the United States of America. However, management does evaluate the
performance of its business units and the consolidated company based on
income derived from operating activities because it believes that this
financial measure is an accurate reflection of the ongoing profitability of
our company.
(5) Includes the elimination of inter-segment transactions and unallocated
corporate expenses.
31
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- ------------------------------------------
2002 2001 DECREASE 2002 2001 DECREASE
------- ------- --------------- --------- --------- ----------------
Rig activity(1):
Rig years(2)............. 204.5 346.0 (141.5) (41)% 204.1 348.2 (144.1) (41)%
Rig utilization.......... 39% 60% (21)% (35)% 40% 60% (20)% (33)%
Vessel activity:
Vessel years(3).......... 19.0 25.3 (6.3) (25)% 18.1 25.7 (7.6) (30)%
Vessel utilization....... 56% 74% (18)% (24)% 54% 64% (10)% (16)%
Well-servicing activity:
Well-servicing
hours(4)............... 471,000 488,000 (17,000) (4)% 1,317,000 1,467,000 (150,000) (10)%
Well-servicing
utilization............ 54% 67% (13)% (19)% 54% 70% (16)% (23)%
</Table>
- ---------------
(1) Excludes labor contracts and well-servicing rigs. Includes our percentage
ownership of rigs from unconsolidated affiliates.
(2) Rig years represents a measure of the number 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.
(3) Vessel years represents a measure of the number of equivalent vessels
operating during a given period. For example, one vessel operating 182.5
days during a 365-day period represents 0.5 vessel years.
(4) Well-servicing hours represents the total number of hours that our U.S. and
Canadian well-servicing rig fleet operated during the period.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
INCREASE
2002 2001 (DECREASE) 2002 2001 DECREASE
------ ------ ----------- ------ ------ ------------
Industry data:
Commodity prices(1):
Average Henry Hub natural gas spot
price ($/mcf).................... $ 3.19 $ 2.77 $0.42 15% $ 3.05 $ 4.47 $(1.42) (32)%
Average West Texas intermediate
crude oil spot price
($/barrel)....................... $28.30 $26.73 $1.57 6% $25.46 $27.79 $(2.33) (8)%
Rig count data(2):
Average U.S. land rig count........ 722 1,069 (347) (33)% 695 1,022 (327) (32)%
Average International land rig
count............................ 495 536 (41) (8)% 500 526 (26) (5)%
Average Canadian land rig count.... 243 315 (72) (23)% 253 358 (105) (29)%
Average U.S. offshore rig count.... 112 149 (37) (25)% 113 161 (48) (30)%
</Table>
- ---------------
(1) Source: Bloomberg
(2) Source: Baker Hughes
Contract drilling. This segment includes our drilling, workover and
well-servicing operations, on land and offshore. Third quarter 2002 Operating
revenues and Earnings from unconsolidated affiliates for the contract drilling
segment totaled $336.1 million and income derived from operating activities
totaled $40.9 million, representing decreases of 43% and 74%, respectively,
compared to the prior year quarter. Rig years (excluding labor contracts and
land well-servicing rigs) decreased to 204.5 years during the third quarter of
2002 from 346.0 years during the prior year quarter. Rig years represents a
measure of the number 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. For the nine months ended September 30, 2002, contract drilling Operating
revenues and Earnings from unconsolidated affiliates totaled $1,020.7 million
and income derived from operating activities totaled $141.6 million,
representing decreases of 39% and 66%, respectively, compared to the prior year
period. Rig years decreased to 204.1 years from 348.2 years during the prior
year period.
32
Alaskan drilling revenues decreased during the current quarter and
year-to-date period due to lower rig years, partially offset by higher average
dayrates. Rig years in Alaska decreased to 8.8 years during the current quarter
from 11.0 years in the prior year quarter and decreased slightly to 9.9 years
during the nine months ended September 30, 2002 from 10.7 years during the prior
year period.
U.S. Lower 48 drilling revenues decreased dramatically during the current
quarter and year-to-date period as a result of decreased demand for drilling
services. The protracted weakness of the North American natural gas market has
resulted in significant declines in both rig years and dayrates. Declines in
operating results for the current quarter and year-to-date period were partially
offset by the collection of a significant amount of slow and partially reserved
receivables in the current quarter. U.S. Lower 48 rig years decreased to 103.2
years during the current quarter from 230.6 years during the prior year quarter
and decreased to 105.5 years during the first nine months of 2002 from 231.4
years during the prior year period.
U.S. land well-servicing operations decreased during the current quarter
and year-to-date period due to decreased activity primarily resulting from lower
oil prices prior to the current quarter and, to a lesser extent, lower natural
gas prices over the same period and a loss of a higher margin offshore platform
operation. U.S. land well-servicing hours decreased to 409,000 hours during the
current quarter from 488,000 hours during the prior year quarter and decreased
to 1,224,000 hours during the nine months ended September 30, 2002 from
1,467,000 hours during the prior year period.
U.S. Offshore revenues decreased during the current quarter and
year-to-date period due to lower average dayrates and decreased drilling
activity resulting from lower natural gas and oil prices during much of the
first nine months of 2002 compared to the prior year period. Offshore rig years
decreased to 14.5 years during the current quarter from 28.8 years during the
prior year quarter and decreased to 14.6 years during the nine months ended
September 30, 2002 from 31.4 years during the prior year period. In early
October 2002, we sustained a total loss of Nabors Rig D105 due to storm damage
from Hurricane Lili. The damage to this rig is covered by our insurance and
subject to our deductible (see discussion under "Critical Accounting Policies"
below). We currently do not anticipate recording a loss for financial statement
purposes with respect to this rig.
Canadian revenues increased during the current quarter and year-to-date
period due to the increase in well-servicing revenues resulting from the
acquisition of Enserco in April 2002, offset in part by lower drilling revenues.
Drilling revenues decreased due to lower average dayrates which, during the
current quarter, were partially offset by higher levels of drilling activity.
Rig years in Canada increased to 23.4 years during the current quarter from 17.9
years during the prior year quarter and remained stable at 20.6 years for the
nine months ended September 30, 2002 as compared to the prior year period.
Canadian well-servicing hours totaled 62,000 and 93,000 hours for the three
months ended September 30, 2002 and for the period from April 26, 2002 through
September 30, 2002, respectively.
International revenues increased slightly during the current quarter and
year-to-date period due to higher average dayrates which were partially offset
by lower rig years. International rig years decreased to 54.6 years during the
current quarter from 57.7 years during the prior year quarter and decreased
slightly to 53.5 years during the first nine months of 2002 from 54.1 years
during the prior year period. Rig years include our percentage ownership of rigs
from unconsolidated affiliates which totaled 3.8 and 3.5 during the three months
ended September 30, 2002 and 2001, respectively, and 3.6 and 3.2 during the nine
months ended September 30, 2002 and 2001, respectively.
Manufacturing and logistics. This segment includes our supply vessel, top
drive manufacturing, rig instrumentation and software, and construction and
transportation operations. Manufacturing and logistics Operating revenues and
Earnings from unconsolidated affiliates were $31.8 million during the current
quarter, representing a decrease of 55% compared with the prior year quarter.
Income derived from operating activities for this segment decreased to $2.1
million compared to $25.0 million, representing a decrease of 92% compared to
the prior year quarter. For the nine months ended September 30, 2002,
manufacturing and logistics Operating revenues and Earnings from unconsolidated
affiliates totaled $111.7 million and income derived from operating activities
totaled $18.7 million, representing decreases of
33
47% and 75%, respectively. Decreases in this segment resulted primarily from
decreased top drive sales for our manufacturing operation, decreased rig move
activity for our transportation operation and lower equivalent vessel years for
our supply vessel operation. Supply vessel years decreased to 19.0 years during
the current quarter from 25.3 years during the prior year quarter and decreased
to 18.1 years during the nine months ended September 30, 2002 from 25.7 years
during the prior year period. Vessel years represents a measure of the number of
equivalent vessels operating during a given period. For example, one vessel
operating 182.5 days during a 365-day period represents 0.5 vessel years.
Other Financial Information. Our gross margin percentage decreased to 33%
in the current quarter from 40% in the prior year period and decreased to 33% in
the first nine months of 2002 from 39% in the prior year period. This percentage
is calculated by dividing gross margin by operating revenues. Gross margin is
calculated by subtracting direct costs from operating revenues. The decrease in
our gross margin percentage during the three and nine months ended September 30,
2002 is primarily due to a decline in rig activity as well as lower average
dayrates in our U.S. Lower 48 drilling and U.S. Offshore operations.
General and administrative expenses increased by $2.7 million, or 8%, in
the current quarter and by $1.3 million, or 1%, in the first nine months of 2002
compared to the prior year periods due to increases related to our recent
Canadian acquisitions partially offset by decreased rig activity. As a
percentage of operating revenues, general and administrative expenses increased
during the current quarter (10.7% vs. 5.6%) and year-to-date period (9.6% vs.
5.8%), compared to the prior year periods, as these expenses were spread over a
lower revenue base.
Depreciation and amortization expense decreased by $2.3 million, or 4%, in
the current quarter and by $5.1 million or 3%, in the first nine months of 2002
compared to the prior year periods. Effective October 1, 2001, we changed the
depreciable lives of our drilling and workover rigs from 4,200 to 4,900 active
days, our jackup rigs from 4,200 to 8,030 active days and certain other drilling
equipment to better reflect the estimated useful lives of these assets. The
effect of this change in accounting estimate was accounted for on a prospective
basis beginning October 1, 2001 and decreased depreciation expense by
approximately $7.0 million for the current quarter and approximately $22.6
million for the nine months ended September 30, 2002. Also represented in the
decrease in depreciation and amortization expense was the adoption, on January
1, 2002, of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," which resulted in us no longer
amortizing goodwill. The effect of this change would have decreased amortization
expense by approximately $1.8 million for the prior year quarter and
approximately $5.2 million for the nine months ended September 30, 2001.
Depreciation expense also decreased due to lower rig utilization. Partially
offsetting these items was an increase to depreciation expense during the
current year periods related to capital expenditures for projects that went into
service subsequent to September 30, 2001.
Interest expense increased year-to-date due to higher average outstanding
debt balances and higher amortization of deferred financing costs compared to
the prior year period. Interest income decreased during the current quarter and
year-to-date period due to a significant decrease in interest rates earned on
our investments resulting from the overall lower interest rate environment, in
addition to a lower average balance invested as compared to the prior year
period.
Other income decreased during the first nine months of 2002 primarily due
to lower gains on marketable securities, losses incurred on dispositions of
long-term assets compared to gains incurred on such transactions in the prior
year period and reorganization charges incurred during the current year relating
to the corporate reorganization. These unfavorable variances were partially
offset by a gain realized from the foreign exchange contracts relating to the
Enserco acquisition and miscellaneous other items.
Our effective income tax rate was 16% during the nine months ended
September 30, 2002 compared to 37% for the prior year period. Due primarily to
the corporate reorganization discussed above, the effective tax rate for the
nine months ended September 30, 2002 was lower than the 25% anticipated rate
accrued in our results during the first two quarters of 2002. The tax benefit
attributable to the corporate reorganization that was recorded during the
quarter ended September 30, 2002 approximated $8.4 million. Nabors currently
expects a 2002 annualized effective tax rate of approximately 14-15%. It is
possible that
34
the tax savings recorded as a result of the corporate reorganization may not be
realized, depending on the final disposition of various legislative proposals
being considered by the U.S. Congress, and any responsive action taken by
Nabors.
Excluding the $8.4 million ($.06 per diluted share) in tax savings related
to the reorganization, our effective tax rate for the nine months ended
September 30, 2002 was 23%. This effective tax rate was lower than the rate
previously anticipated due to an increase in international earnings (excluding
Canada), which are generally taxed at lower rates, as a percentage of our
overall earnings.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had cash and cash equivalents and investments
in marketable securities totaling $1,331.3 million and working capital of $680.7
million. In addition, we generate significant cash from operating activities
over the course of a twelve-month period. Our ability to raise money in the
public markets is enhanced by our senior unsecured debt ratings as provided by
Moody's Investor Service and Standard & Poor's which are currently "A3" and
"A-", respectively.
Our funded debt to capital ratio was 0.49:1 as of September 30, 2002,
compared to 0.46:1 as of December 31, 2001. Our net funded debt to capital ratio
was 0.26:1 as of September 30, 2002 and December 31, 2001. 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
stockholders' equity. The net funded debt to capital ratio considers cash and
cash equivalents, short-term marketable securities and long-term marketable
securities as an additional offset 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 6.9:1 as of September
30, 2002, compared to 13.3:1 as of December 31, 2001. The interest coverage
ratio is computed by calculating the sum of earnings before interest expense,
income taxes, and depreciation and amortization expense (EBITDA) and then
dividing by interest expense. This ratio is a method for calculating the amount
of cash flows available to cover interest expense.
Net cash provided by operating activities totaled $285.7 million during the
nine months ended September 30, 2002, compared to net cash provided by operating
activities totaling $509.2 million during the prior year period. This decrease
is primarily due to the decrease in our net income. This was partially offset
during the current period by cash provided from the change in our working
capital accounts as compared to the prior year where our working capital
accounts resulted in a use of cash. During the nine-month period ended September
30, 2002 and 2001, net income was increased for non-cash items such as
depreciation expense and deferred taxes and was reduced for Earnings from
unconsolidated affiliates.
Net cash used for investing activities totaled $297.5 million during the
current nine-month period, compared to $970.2 million used during the prior year
period. During the current period, we used cash primarily for capital
expenditures, purchases of marketable securities and the acquisition of Enserco.
On March 18, 2002, we acquired, for cash, 20.5% of the issued and outstanding
shares of Enserco, a Canadian publicly-held corporation, for Cdn. $15.50 per
share for a total price of Cdn. $83.2 million (U.S. $52.6 million). On April 26,
2002, we completed our acquisition of Enserco by purchasing their remaining
outstanding shares for Cdn. $15.65 per share by paying cash of Cdn. $100.1
million (U.S. $64.1 million) and by issuing 2,638,526 shares of Nabors Delaware
common stock and 910,556 exchangeable shares of Nabors Exchangeco (Canada) Inc.,
an indirect wholly-owned Canadian subsidiary of Nabors, that are exchangeable
for our common shares on a one-for-one basis and are listed on the Toronto Stock
Exchange. In addition, we assumed Enserco debt totaling Cdn. $33.4 million (U.S.
$21.3 million). Cash was provided during the current period from the sale of
marketable securities. During the prior year period, cash was primarily used for
capital expenditures and purchases of marketable securities.
Financing activities provided cash totaling $479.4 million during the
current nine-month period compared to cash provided of $584.4 million during the
prior year period. During the current period, cash
35
was primarily provided by the proceeds of $495.9 million from the issuance of
senior notes by our subsidiaries in August 2002. Cash was used primarily for the
reduction of long-term borrowings. We purchased $.6 million face value of our
8 5/8% senior subordinated notes due April 2008 in the open market at a price of
108% and purchased $4.7 million face value of our 6.8% senior unsecured notes
due April 2004 in the open market at a price of 104%. Upon settlement of these
transactions, we paid $5.7 million and recognized a pretax loss of approximately
$.2 million, resulting from the repurchases of these notes at prices higher than
the amounts recorded on our books. Additionally, we paid off Cdn. $21.0 million
(U.S. $13.2 million) of the debt assumed in the Enserco acquisition. We also
made a $2.5 million scheduled principal payment relating to certain of our
medium-term notes. This was partially offset by cash provided by our receipt of
proceeds from the exercise of options to acquire .6 million shares of our common
stock. During the prior year period, cash was primarily provided by the proceeds
from issuance of our $1.381 billion zero coupon convertible senior debentures
during February 2001, partially offset by cash used to repurchase shares of our
common stock.
As a result of the reorganization discussed above, we may have failed to
comply with a covenant contained in our $200 million credit facility agreement
and a related $30 million letter of credit facility. At the time of the
potential default, there were no outstanding borrowings on the $200 million
unsecured revolving credit facility and approximately $23 million outstanding on
the related letter of credit facility. Since the $200 million credit facility
was unused and scheduled to mature on September 5, 2002, and because we had
cash, short-term and long-term marketable securities balances as of July 31,
2002 totaling approximately $800 million, we terminated the facility. We plan on
replacing this credit facility with a similar facility during 2003. The bank
provided a waiver on the letter of credit facility and the letter of credit
facility has since expired.
As of September 30, 2002, we had outstanding capital expenditure purchase
commitments of approximately $18.6 million, primarily for rig-related enhancing
and sustaining capital expenditures. We have historically completed a number of
acquisitions during down markets 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 stock. Future
acquisitions may be paid for using existing cash, borrowings under lines of
credit or issuance of debt or Nabors stock. Such capital expenditures and
acquisitions are at our discretion and will depend on our view of market
conditions and other factors.
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, including the possible redemption of
our zero coupon convertible senior debentures due 2020 which can be put back to
us on June 20, 2003.
OTHER MATTERS
FORWARD-LOOKING STATEMENTS
The statements in this document that relate to matters that are not
historical facts are "forward-looking statements" within the meaning of Section
27A of the Securities Exchange Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. 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. Future events and actual results may differ
materially from the results set forth in or implied in the forward-looking
statements. Factors that might cause such a difference include:
- 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;
36
- 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 and production activities,
could also materially affect our financial condition, results of operations and
cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 142, "Goodwill and Other Intangible Assets," addresses the
accounting for goodwill and other intangible assets after an acquisition. The
most significant changes made by SFAS 142 are: (1) goodwill and intangible
assets with indefinite lives no longer will be amortized; (2) goodwill and
intangible assets with indefinite lives must be tested for impairment at least
annually; and (3) the amortization period for those intangible assets with
finite lives no longer will be limited to 40 years. The effect of no longer
amortizing goodwill would have increased net income by approximately $1.2
million ($.01 per diluted share) for the prior year quarter and approximately
$3.5 million ($.02 per diluted share) for the nine months ended September 30,
2001.
We adopted SFAS 142 effective January 1, 2002 and during the second quarter
of 2002, we performed our initial goodwill impairment assessment as required. As
part of that assessment, we determined that our 11 business units represent our
reporting units as defined by SFAS 142. We determined the aggregate carrying
values and fair values of all such reporting units, which were measured as of
the January 1, 2002 adoption date. We calculated the fair value of each
reporting unit based on discounted cash flows and determined there was no
goodwill impairment.
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002, as required. This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. Due to the nature of our business, this new accounting
pronouncement had no impact on our reported results of operations or financial
position.
We adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," effective April
1, 2002. Due to the nature of our business, Financial Accounting Standards Board
(FASB) 44, 64 and Amendment of FASB 13 are not applicable. SFAS 145 eliminates
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and states
that gains and losses from the extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in Accounting Principles
Board (APB) Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." APB 30, defines extraordinary
items as events and transactions that are distinguished by their unusual nature
and by the infrequency of their occurrence. Accordingly, we no longer classify
gains and losses from extinguishment of debt that are usual and frequent as
extraordinary items, and we reclassified to other income all similar debt
extinguishment items that had been reported as extraordinary items in prior
accounting periods. In conjunction with adopting SFAS 145 we reclassified an
extraordinary loss recorded during the first quarter of 2002 totaling $.13
million, net of taxes of $.08 million, to other income with the related income
tax component reclassified to income tax expense.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement will require us to
recognize costs associated with exit or disposal
37
activities when they are incurred rather than when we commit to an exit or
disposal plan. Examples of costs covered by this guidance include lease
termination costs, employee severance costs that are associated with a
restructuring, discontinued operations, plant closings or other exit or disposal
activities. This statement is effective for fiscal years beginning after
December 31, 2002 and will impact any exit or disposal activities initiated
after January 1, 2003. This statement does not currently impact Nabors.
We adopted Emerging Issues Task Force (EITF) No. 01-14, "Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred," in the second quarter of 2002. Previously, we recognized
reimbursements received as a reduction to the related direct costs. EITF 01-14
requires that reimbursements received be included in operating revenues and
"out-of-pocket" expenses be included in direct costs. Accordingly,
reimbursements received from our customers have been reclassified to revenues
for all periods presented. The effect of adopting EITF 01-14 increased operating
revenues and direct costs from previously reported amounts by $20.3 million and
$54.1 million for the three and nine months ended September 30, 2001,
respectively.
CRITICAL ACCOUNTING POLICIES
The Company disclosed its critical accounting policies in its 2001 Annual
Report on Form 10-K. No significant changes have occurred to those policies with
the exception of the following:
Self Insurance Accruals. Nabors is self-insured for certain losses
relating to workers' compensation, general liability, property damage and
employee medical benefits. Given the recent tightening in the insurance market,
effective April 1, 2002, with our insurance renewal, our self-insurance levels
have significantly increased. As a result, our exposure to losses relating to
workers' compensation, general liability and property damage has increased
dramatically. Effective for the period from April 1, 2002 to March 31, 2003, our
exposure (that is our deductible) per occurrence ranges from $1.0 million for
workers' compensation to between $2.0 million and $5.0 million for employer
liability, Jones Act and general liability and $10.0 million for rig physical
damage. As a result, we are self-insured for rigs with replacement values less
than $10.0 million. If a Nabors' rig with a net book value of less than $10.0
million was destroyed, we would record a loss equal to its net book value in the
period in which the loss event occurred. In previous years, we had physical
damage insurance for essentially all of our rigs, with a substantially lower
deductible of $.25 million per occurrence. Thus, historically we have not
recorded material losses in our financial statements related to the destruction
of one of our rigs. We have purchased stop-loss coverage in order to limit our
aggregate exposure to certain physical damage claims for insured rigs (that is,
those rigs with replacement values in excess of $10.0 million). The effect of
this coverage is that our maximum physical damage loss on insured rigs would be
$20.0 million plus $1.0 million per occurrence. 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 below.
We have recently begun to utilize derivative financial instruments that are
intended to manage our exposure to interest rate risks. The use of derivative
financial instruments could expose us to credit risk and market risk. Credit
risk is the failure of a counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty would owe us, which can create credit risk for us. When the
fair value of a derivative contract is negative, we would owe the counterparty,
and, therefore, we would not be exposed to credit risk. We attempt to minimize
the credit risk in derivative instruments by entering into transactions with
major financial institutions that have a significant asset base. Market risk is
the adverse effect to the value of a financial instrument that results from
changes in interest rates. We try to manage market risk associated with
interest-rate contracts by establishing and monitoring parameters that limit the
type and degree of market risk that we undertake.
38
On July 25, 2002, we entered into an interest rate hedge transaction with a
third party financial institution to manage and mitigate interest rate risk
exposure relative to a then-contemplated debt financing transaction. Under the
agreement, we agreed to receive (pay) cash from (to) the counterparty based on
the difference between 4.43% and the 10-year Treasury rate on August 23, 2002,
assuming a $100.0 million notional amount with semi-annual interest payments
over a 10-year maturity. In accordance with SFAS 133, as amended, we accounted
for this transaction as a cash flow hedge. In August 2002, we paid approximately
$1.5 million related to the termination of this agreement. In accordance with
SFAS 133, this payment was recorded as a reduction to accumulated other
comprehensive income on our consolidated balance sheet and will be amortized
into earnings as additional interest expense using the effective interest method
over the term of the 5.375% senior notes due 2012 issued by Nabors Delaware.
We operate in a number of international areas and are involved in
transactions denominated in currencies other than U.S. dollars, which exposes us
to foreign exchange rate risk. The most significant exposures arise in
connection with our operations in Canada and Saudi Arabia, which usually are
substantially unhedged. In Saudi Arabia, upon renewal of our contracts, we have
been converting Saudi riyal-denominated contracts to U.S. dollar-denominated
contracts in order to reduce our exposure to the Saudi riyal even though that
currency has been pegged to the U.S. dollar at a rate of 3.745 Saudi riyals to
1.00 U.S. dollar since 1986. We cannot guarantee that we will be able to convert
future Saudi riyal-denominated contracts to U.S. dollar-denominated contracts or
that the Saudi riyal exchange rate will continue in effect as in the past.
At various times, we utilize local currency borrowings (foreign
currency-denominated debt), the payment structure of customer contracts and
foreign exchange contracts to selectively hedge our exposure to exchange rate
fluctuations in connection with monetary assets, liabilities, cash flows and
commitments denominated in certain foreign currencies. A foreign exchange
contract is a foreign currency transaction, defined as an agreement to exchange
different currencies at a given future date and at a specified rate.
On March 26, 2002, in anticipation of closing the Enserco acquisition, we
entered into two foreign exchange contracts with a total notional value of
Cdn. $115.9 million and maturity dates of April 29, 2002. Additionally, on April
9, 2002, we entered into a third foreign exchange contract with a notional value
of Cdn. $50.0 million maturing April 29, 2002. The notional amounts of these
contracts were used to fund the cash portion of the Enserco acquisition purchase
price. The notional amounts of these contracts represented the amount of foreign
currency purchased at maturity and did not represent our exposure on these
contracts. Although such contracts served as an economic hedge against our
foreign currency risk related to the cash portion of the acquisition cost, we
accounted for these contracts as speculative as required by SFAS 133 and
therefore marked them to market. We recognized a gain on these foreign exchange
contracts of approximately U.S. $1.78 million in our statement of income for the
nine months ended September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities
and Exchange Commission's rules and forms. Within the 90 days prior to the date
of this report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chairman and Chief Executive
Officer and Vice President - Finance (our principal financial officer), of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Exchange Act. Based on that
evaluation, our Chairman and Chief Executive Officer and Vice
President - Finance concluded that our disclosure controls and procedures are
effective.
There have not been any significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to our previous evaluation of internal controls.
39
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 2002, a Canadian subsidiary of Nabors was served with a
Statement of Claim filed in the Court of Queen's Bench of Alberta, Canada,
Judicial District of Calgary, by Starchild Energy Systems Limited. Starchild
alleges that, in August and September 1996, during the course of drilling an oil
well in Cardston County, Alberta, the subsidiary caused or allowed hydrocarbons
to enter the soil, causing the soil to become polluted or contaminated.
Starchild makes similar allegations against Winterhawk Group Ltd. and Winterhawk
Petroleum Consulting Services, Ltd. (collectively "Winterhawk"), which Starchild
alleges were responsible for supervising drilling operations and, among other
things, ensuring against hydrocarbon spills. Starchild alleges that the Alberta
Energy and Utilities Board has ordered it to remediate the land, and that
Nabors' subsidiary is required to indemnify Starchild for the cost of
environmental surveys, inspections, testing and reports, preliminary and
permanent remediation. As alternate remedies, Starchild seeks damages for the
loss in value of its interest in the land at issue or damages in the amount of
money paid to Nabors' subsidiary and Winterhawk under their respective
contracts. Starchild seeks damages of Cdn.$2,000,000, interest and attorneys'
fees. Our subsidiary denies that it caused any hydrocarbon contamination, denies
that it is responsible under the contract for the contamination at issue and
denies that it made any misrepresentations. We believe the allegations in this
lawsuit are without merit and our subsidiary will vigorously defend the claims
brought against it. However, we are unable to predict the outcome of this
lawsuit or the costs to be incurred in connection with its defense and there can
be no assurance that this litigation will be resolved in our favor.
For a description of certain other legal proceedings affecting Nabors,
please review Item 3 of Nabors Industries, Inc. Annual Report on Form 10-K for
the year ended December 31, 2001, Part II, Item 1 of Nabors Industries, Inc.
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and Part II,
Item 1 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002,
as amended, which are incorporated in this report by reference.
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, Nabors' ultimate liability with respect to these pending
lawsuits is not expected to have a significant or material adverse effect on
Nabors' consolidated financial position, cash flows or results of operations.
ITEM 5. OTHER INFORMATION
RELATED PARTY -- SPLIT-DOLLAR LIFE INSURANCE AGREEMENTS
Nabors and its Chairman and Chief Executive Officer, President and Chief
Operating Officer, Vice Chairman, and certain other employees have entered 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. Under the recently enacted
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 currently intend to postpone 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.
ISSUANCE OF SENIOR NOTES
On August 22, 2002, Nabors Holdings 1, ULC, one of our indirect,
wholly-owned subsidiaries, issued U.S. $225 million aggregate principal amount
of 4.875% senior notes due 2009 that were fully and unconditionally guaranteed
by Nabors and Nabors Delaware. Concurrently with this offering by Nabors
Holdings, Nabors Delaware issued U.S. $275 million aggregate principal amount of
5.375% senior notes due 2012, which were fully and unconditionally guaranteed by
Nabors. Both issues of senior notes were
40
resold by a placement agent to qualified institutional buyers under Rule 144A of
the Securities Act of 1933, as amended. Interest on each issue of senior notes
is payable August 15 and February 15 of each year, beginning on February 15,
2003.
Both issues are unsecured and are effectively junior in right of payment to
any of their respective issuers' future secured debt. The senior notes will rank
equally in right of payment with any of their respective issuers' future
unsubordinated debt and will be senior in right of payment to any of such
issuers' subordinated debt. The guarantees of Nabors Delaware and Nabors with
respect to the senior notes issued by Nabors Holdings, and the guarantee of
Nabors with respect to the senior notes issued by Nabors Delaware, will be
similarly unsecured and have a similar ranking to the series of senior notes so
guaranteed.
Subject to certain qualifications and limitations, the indenture governing
the senior notes issued by Nabors Holdings and the indenture governing the
senior notes issued by Nabors Delaware limit the ability of Nabors and its
subsidiaries to incur liens and to enter into sale and lease-back transactions.
In addition, such indentures limit the ability of Nabors, Nabors Delaware and
Nabors Holdings to enter into mergers, consolidations or transfers of all or
substantially all of such entity's assets unless the successor company assumes
the obligations of such entity under the applicable indenture.
Nabors Holdings filed a registration statement with the U.S. Securities and
Exchange Commission on October 11, 2002 pursuant to which it is offering to
exchange its U.S. $225 million aggregate principal amount of 4.875% senior notes
due 2009 for new 4.875% senior notes due 2009 which have been registered under
the Securities Act (the Nabors Holdings Exchange Notes). This registration
statement became effective on October 28, 2002 and the exchange offer is
currently expected to expire on November 29, 2002. The terms of the Nabors
Holdings Exchange Notes, including the terms of the guarantee by Nabors Delaware
and Nabors, are substantially identical to those of the Nabors Holdings senior
notes, except that the transfer restrictions and registration rights relating to
the senior notes issued by Nabors Holdings do not apply to the Nabors Holdings
Exchange Notes.
Similarly, Nabors Delaware filed a registration statement with the U.S.
Securities and Exchange Commission on October 11, 2002 pursuant to which it is
offering to exchange its U.S. $275 million aggregate principal amount of 5.375%
senior notes due 2012 for new 5.375% senior notes due 2012 which have been
registered under the Securities Act (the Nabors Delaware Exchange Notes) in
exchange for the senior notes issued by Nabors Delaware. This registration
statement also became effective on October 28, 2002 and the exchange offer is
also currently expected to expire on November 29, 2002. The terms of the Nabors
Delaware Exchange Notes, including the terms of the guarantee by Nabors, are
substantially identical to those of the Nabors Delaware senior notes, except
that the transfer restrictions and registration rights relating to the senior
notes issued by Nabors Delaware do not apply to the Nabors Delaware Exchange
Notes.
LEGISLATIVE UPDATE WITH REGARD TO REINCORPORATION
Effective June 24, 2002, Nabors Industries Ltd., a Bermuda exempted
company, became the successor to Nabors Industries, Inc., a Delaware
corporation, following a corporate reorganization. The reorganization was
accomplished through the merger of an indirect, newly formed Delaware subsidiary
wholly owned by Nabors, into Nabors Delaware. Nabors Delaware was the surviving
company in the merger and became a wholly-owned, indirect subsidiary of Nabors.
Upon consummation of the merger, all outstanding shares of Nabors Delaware
common stock automatically converted into the right to receive Nabors common
shares so that the shareholders of Nabors Delaware on the date of the merger
became the shareholders of Nabors. Nabors and its subsidiaries continue to
conduct the businesses previously conducted by Nabors Delaware and its
subsidiaries. The reorganization was accounted for as a reorganization of
entities under common control and accordingly, it did not result in any changes
to the consolidated amounts of assets, liabilities and stockholders' equity.
Several members of the United States Congress have introduced legislation
that, if enacted, would have the effect of eliminating the tax benefits of the
reorganization. In particular, on June 18, 2002, the
41
Senate Finance Committee approved legislation introduced by Senator Charles
Grassley, the Ranking Minority Member of the Senate Finance Committee, along
with Senator Max Baucus, the Chairman of the Senate Finance Committee, (S. 2119)
that, for United States federal tax purposes, would treat a foreign corporation,
such as Nabors, that undertakes a corporate expatriation transaction, such as
the reorganization, as a domestic corporation and, thus, such foreign
corporation would be subject to United States federal income tax. S. 2119 is
proposed to be effective for corporate expatriation transactions completed after
March 20, 2002. In addition, on July 11, 2002, Representative Bill Thomas,
Chairman of the House Committee on Ways and Means, introduced legislation (H.R.
5095) that is substantially similar to S. 2119 with respect to its treatment of
corporations that undertake a corporate expatriation transaction such as the
reorganization, except that (i) it is proposed to apply to transactions
completed after March 20, 2002 and before March 21, 2005 and (ii) it would not
permit shareholders to qualify for tax-free treatment with respect to a
corporate expatriation transaction such as the reorganization. If any of the
proposed legislation, including S. 2119 or H.R. 5095, were enacted with their
proposed effective dates, any tax savings would not be realized from the
reorganization.
In addition, there has been significant negative publicity and criticism of
corporate inversion transactions from public pension funds and other investors
since the time we completed the reorganization.
In light of such events and if and when any such legislation is enacted, we
will consider the effects of such legislation and will evaluate all strategic
alternatives that may be necessary or prudent in response to such legislation.
SHARE AND DEBT REPURCHASE PROGRAMS
On July 17, 2002, the Board of Directors of Nabors authorized the
continuation of the share repurchase program that had begun under Nabors
Delaware, and provided that the amount of Nabors common shares authorized for
purchase by Nabors going forward be increased to $400 million. Under the Nabors
Delaware program, Nabors Delaware had acquired an aggregate of approximately
$248.0 million of Nabors Delaware common stock, or 6.2 million shares. During
the current quarter, Nabors also acquired, through a subsidiary, 91,000 of its
common shares in the open market for $27.30 per share for an aggregate price of
$2.5 million. Immediately thereafter these shares were transferred to Nabors.
Pursuant to Bermuda law, any shares, when purchased, will be treated as
cancelled. A repurchase of shares will not have the effect of reducing the
amount of Nabors' authorized share capital. Additionally, the Board approved the
repurchase of up to $400 million of outstanding debt securities of Nabors and
its subsidiaries. These amounts may be increased or decreased at the discretion
of the Board, depending upon market conditions and consideration of the best
interest of shareholder value. Repurchases may be conducted either on the open
market, negotiated transactions, or by other means, from time to time, depending
upon market conditions and other factors.
On July 23, 2002, we entered into a private transaction with a counterparty
in which we sold 1.0 million European-style put options for $2.6 million with a
maturity date of October 23, 2002. Under the arrangement, if the price of our
common shares was less than $26.5698 on the maturity date, the counterparty
could have exercised the put option resulting in, at our option (1) our purchase
of 1.0 million of our common shares at a price of $26.5698 per share or (2) our
payment, in cash or Nabors common shares, of an amount equal to the difference
between $26.5698 and our stock price on October 23, 2002 multiplied by 1.0
million. If the price of our common shares was above $26.5698 on the maturity
date, we anticipated that the counterparty would let the option expire. These
put options expired on October 23, 2002 and we retained the $2.6 million in
proceeds which was recorded as an increase in capital in excess of par value on
our consolidated balance sheet during the current quarter.
42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
4.1 Indenture, dated August 22, 2002, among Nabors Holdings 1,
ULC, Nabors Industries, Inc., Nabors Industries Ltd. and
Bank One, N.A. (incorporated by reference to Exhibit 4.1 to
the Registration Statement on Form S-4 filed with the SEC by
Nabors Holdings 1, ULC, Nabors Industries, Inc. and Nabors
Industries Ltd. (Registration No. 333-100493))
4.2 Registration Rights Agreement, dated August 22, 2002, among
Nabors Holdings 1, ULC, Nabors Industries, Inc., Nabors
Industries Ltd. and Lehman Brothers Inc. (incorporated by
reference to Exhibit 4.2 to the Registration Statement on
Form S-4 filed with the SEC by Nabors Holdings 1, ULC,
Nabors Industries, Inc. and Nabors Industries Ltd.
(Registration No. 333-100493))
4.3 Form of 4.875% Senior Exchange Note due 2009 (included in
Exhibit 4.1)
4.4 Indenture, dated August 22, 2002, among Nabors Industries,
Inc., Nabors Industries Ltd. and Bank One, N.A.
(incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4 filed with the SEC by
Nabors Industries, Inc. and Nabors Industries Ltd.
(Registration No. 333-100492))
4.5 Registration Rights Agreement, dated August 22, 2002, among
Nabors Industries, Inc., Nabors Industries Ltd. and Lehman
Brothers Inc. (incorporated by reference to Exhibit 4.2 to
the Registration Statement on Form S-4 filed with the SEC by
Nabors Industries, Inc. and Nabors Industries Ltd.
(Registration No. 333-100492))
4.6 Form of 5.375% Senior Exchange Note due 2012 (included in
Exhibit 4.4)
10.1 Waiver dated as of September 27, 2002 pursuant to Section
9.[c] and Schedule 9.[c] of the Amended Employment Agreement
among Nabors Industries, Inc., Nabors Industries Ltd., and
Anthony G. Petrello.
15.1 Awareness Letter of Independent Accountants.
99.1 Certification of Chief Executive Officer 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.
</Table>
(b) Reports on Form 8-K
- - Report by Nabors Industries Ltd. on Form 8-K filed with the Securities and
Exchange Commission on July 18, 2002, with respect to Nabors' press release
announcing results for the three months and six months ended June 30, 2002.
- - Report by Nabors Industries Ltd. on Form 8-K filed with the Securities and
Exchange Commission on August 20, 2002, supplementing the Annual Report on
Form 10-K filed by Nabors Delaware as of December 31, 2001 (superceded by the
Report by Nabors Industries Ltd. on Form 8-K filed with the Securities and
Exchange Commission on October 10, 2002).
- - Report by Nabors Industries Ltd. on Form 8-K filed with the Securities and
Exchange Commission on October 1, 2002, with respect to Nabors' press release
announcing that, based on preliminary estimates, it expects revenues and
earnings for the third quarter of 2002 to be lower than consensus.
- - Report by Nabors Industries Ltd. on Form 8-K filed with the Securities and
Exchange Commission on October 10, 2002, supplementing the Annual Report on
Form 10-K filed by Nabors Delaware as of December 31, 2001.
- - Report by Nabors Industries Ltd. on Form 8-K filed with the Securities and
Exchange Commission on October 24, 2002, with respect to Nabors' press release
announcing results for the three months and nine months ended September 30,
2002.
43
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 - Finance
(principal financial and accounting
officer)
Dated: November 14, 2002
44
CERTIFICATIONS
CERTIFICATION BY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Eugene M. Isenberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nabors Industries
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; (b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and (c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluations as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors: (a) all significant deficiencies
in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses in
internal controls; and (b) any fraud, whether material or not material, that
involves management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ EUGENE M. ISENBERG
--------------------------------------
Eugene M. Isenberg
Chief Executive Officer
45
CERTIFICATION BY VICE PRESIDENT - FINANCE
(THE PRINCIPAL FINANCIAL OFFICER)
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce P. Koch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nabors Industries
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; (b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and (c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluations as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors: (a) all significant deficiencies
in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses in
internal controls; and (b) any fraud, whether material or not material, that
involves management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ BRUCE P. KOCH
--------------------------------------
Bruce P. Koch
Vice President - Finance
(principal financial and accounting
officer)
46
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.1 Indenture, dated August 22, 2002, among Nabors Holdings 1,
ULC, Nabors Industries, Inc., Nabors Industries Ltd. and
Bank One, N.A. (incorporated by reference to Exhibit 4.1 to
the Registration Statement on Form S-4 filed with the SEC by
Nabors Holdings 1, ULC, Nabors Industries, Inc. and Nabors
Industries Ltd. (Registration No. 333-100493))
4.2 Registration Rights Agreement, dated August 22, 2002, among
Nabors Holdings 1, ULC, Nabors Industries, Inc., Nabors
Industries Ltd. and Lehman Brothers Inc. (incorporated by
reference to Exhibit 4.2 to the Registration Statement on
Form S-4 filed with the SEC by Nabors Holdings 1, ULC,
Nabors Industries, Inc. and Nabors Industries Ltd.
(Registration No. 333-100493))
4.3 Form of 4.875% Senior Exchange Note due 2009 (included in
Exhibit 4.1)
4.4 Indenture, dated August 22, 2002, among Nabors Industries,
Inc., Nabors Industries Ltd. and Bank One, N.A.
(incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4 filed with the SEC by
Nabors Industries, Inc. and Nabors Industries Ltd.
(Registration No. 333-100492))
4.5 Registration Rights Agreement, dated August 22, 2002, among
Nabors Industries, Inc., Nabors Industries Ltd. and Lehman
Brothers Inc. (incorporated by reference to Exhibit 4.2 to
the Registration Statement on Form S-4 filed with the SEC by
Nabors Industries, Inc. and Nabors Industries Ltd.
(Registration No. 333-100492))
4.6 Form of 5.375% Senior Exchange Note due 2012 (included in
Exhibit 4.4)
10.1 Waiver dated as of September 27, 2002 pursuant to Section
9.[c] and Schedule 9.[c] of the Amended Employment Agreement
among Nabors Industries, Inc., Nabors Industries Ltd., and
Anthony G. Petrello.
15.1 Awareness Letter of Independent Accountants.
99.1 Certification of Chief Executive Officer 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.
</Table>