<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER: 0-13857
NOBLE DRILLING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 73-0374541
(State of incorporation) (I.R.S. employer identification number)
10370 RICHMOND AVENUE, SUITE 400 77042
HOUSTON, TEXAS (Zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 974-3131
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 [_]
Number of shares of Common Stock outstanding as of May 12, 1998: 131,284,077
================================================================================
<PAGE> 2
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 48,025 $ 49,917
Investment in marketable debt securities ..................................... -- 16,471
Accounts receivable (net allowance of $1,437 and $1,380) ..................... 157,036 135,716
Costs of uncompleted contracts in excess of billings ......................... 10,841 941
Inventories .................................................................. 4,624 4,559
Deferred income taxes ........................................................ 293 391
Prepaid expenses ............................................................. 22,842 21,569
Other current assets ......................................................... 30,610 35,451
----------- -----------
Total current assets ........................................................... 274,271 265,015
----------- -----------
PROPERTY AND EQUIPMENT
Drilling equipment and facilities ............................................ 1,560,088 1,426,537
Other ........................................................................ 30,780 24,287
----------- -----------
1,590,868 1,450,824
Accumulated depreciation ..................................................... (274,705) (256,613)
----------- -----------
1,316,163 1,194,211
----------- -----------
INVESTMENT IN AND NOTES RECEIVABLE FROM AFFILIATES ............................. 20,706 21,097
DEFERRED INCOME TAXES .......................................................... 4,856 5,947
OTHER ASSETS ................................................................... 23,827 19,541
----------- -----------
$ 1,639,823 $ 1,505,811
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current installments of long-term debt ................... $ 68,195 $ 9,698
Accounts payable ............................................................. 85,125 77,366
Accrued payroll and related costs ............................................ 23,489 25,858
Taxes payable ................................................................ 31,554 23,708
Interest payable ............................................................. 2,963 6,088
Other current liabilities .................................................... 20,288 10,172
----------- -----------
Total current liabilities ...................................................... 231,614 152,890
LONG-TERM DEBT ................................................................. 136,442 138,139
DEFERRED INCOME TAXES .......................................................... 70,261 63,946
OTHER LIABILITIES .............................................................. 818 1,782
----------- -----------
439,135 356,757
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, $0.10 par value ................................................ 13,351 13,334
Capital in excess of par value ............................................... 939,942 934,383
Retained earnings ............................................................ 302,221 255,992
Treasury stock, at cost ...................................................... (53,669) (53,544)
Accumulated other comprehensive income ....................................... (1,157) (1,111)
----------- -----------
1,200,688 1,149,054
----------- -----------
COMMITMENTS AND CONTINGENCIES .................................................. -- --
----------- -----------
$ 1,639,823 $ 1,505,811
=========== ===========
</TABLE>
2
<PAGE> 3
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
----------- ------------
<S> <C> <C>
OPERATING REVENUES
Contract drilling services .................................................. $ 147,042 $ 113,379
Labor contract drilling services ............................................ 18,267 9,352
Turnkey drilling services ................................................... 20,002 43,028
Engineering and consulting services ......................................... 684 863
Other revenue ............................................................... 3,041 2,093
--------- ---------
189,036 168,715
--------- ---------
OPERATING COSTS AND EXPENSES
Contract drilling services .................................................. 52,930 54,330
Labor contract drilling services ............................................ 12,200 6,557
Turnkey drilling services ................................................... 18,759 36,713
Engineering and consulting services ......................................... 638 561
Other expense ............................................................... 1,372 1,201
Depreciation and amortization ............................................... 18,747 17,576
Selling, general and administrative ......................................... 18,075 16,312
Minority interest ........................................................... -- 403
--------- ---------
122,721 133,653
--------- ---------
OPERATING INCOME ............................................................... 66,315 35,062
OTHER INCOME (EXPENSE)
Interest expense ............................................................ (1,132) (5,457)
Interest income ............................................................. 1,575 1,887
Other, net .................................................................. (440) 858
--------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE ............................ 66,318 32,350
INCOME TAX PROVISION ........................................................... (20,089) (8,702)
--------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE ............................................. 46,229 23,648
EXTRAORDINARY CHARGE, NET OF TAX ............................................... -- (1,704)
--------- ---------
NET INCOME ..................................................................... $ 46,229 $ 21,944
========= =========
EARNINGS PER SHARE-BASIC:
Income before extraordinary charge ........................................... $ 0.35 $ 0.18
Extraordinary charge ......................................................... -- (0.01)
--------- ---------
Net income per common share .................................................. $ 0.35 $ 0.17
========= =========
EARNINGS PER SHARE-DILUTED:
Income before extraordinary charge ........................................... $ 0.35 $ 0.17
Extraordinary charge ......................................................... -- (0.01)
--------- ---------
Net income per common share .................................................. $ 0.35 $ 0.16
========= =========
</TABLE>
3
<PAGE> 4
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---------- -------------
<S> <C> <C>
NET INCOME ..................................................................... $ 46,229 $ 21,944
-------- --------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments .................................... (30) (599)
-------- --------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ................... (20) 2
Less: reclassification adjustment for gains realized in net income ........ 4 --
-------- --------
Net unrealized gains (losses) ............................................. (16) 2
-------- --------
Other comprehensive loss .................................................... (46) (597)
-------- --------
COMPREHENSIVE INCOME ........................................................... $ 46,183 $ 21,347
======== ========
</TABLE>
4
<PAGE> 5
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 46,229 $ 21,944
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................................. 18,747 17,576
Deferred income tax provision ............................................. 7,504 5,832
Extraordinary charge, net of tax .......................................... -- 1,704
Other ..................................................................... 410 1,078
Changes in current assets and liabilities:
Accounts receivable ...................................................... (23,309) (20,639)
Other assets ............................................................. (7,775) 5,202
Accounts payable ......................................................... 7,762 5,088
Other liabilities ........................................................ 14,780 (1,559)
--------- ---------
Net cash provided by operating activities ................................ 64,348 36,226
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ............................................. (140,231) (50,658)
Proceeds from sale of property and equipment ................................... 132 --
Investment in and notes receivable from affiliates ............................. -- (4,320)
Proceeds from sale of marketable debt securities ............................... 16,450 1,928
--------- ---------
Net cash used by investing activities .................................... (123,649) (53,050)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on revolving credit facility .................................... 60,000 --
Payment of long-term debt ...................................................... (3,205) (36,601)
Issuance of common stock ....................................................... 620 959
--------- ---------
Net cash used by financing activities .................................... 57,415 (35,642)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .......................................... (6) (171)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ............................................ (1,892) (52,637)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 49,917 149,632
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 48,025 $ 96,995
========= =========
</TABLE>
5
<PAGE> 6
FORM 10-Q
NOTE 1 - BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements of Noble
Drilling Corporation ("Noble Drilling" or, together with its consolidated
subsidiaries, unless the context requires otherwise, the "Company"), have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all disclosures required by
generally accepted accounting principles for complete financial statements. All
significant transactions among Noble Drilling and its consolidated subsidiaries
have been eliminated. The condensed consolidated financial statements have not
been audited. However, in the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
condensed consolidated financial statements have been included. Results of
operations for interim periods are not necessarily indicative of the results of
operations that may be expected for the entire year. These interim condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made in prior year condensed
consolidated financial statements to conform to the classifications used in the
1998 condensed consolidated financial statements. These reclassifications have
no impact on net income.
NOTE 2 - EARNINGS PER SHARE
The Company has adopted SFAS No. 128, Earnings Per Share ("SFAS 128"),
which established new guidelines for computing and presenting earnings per
share. All prior period earnings per share data have been restated to conform to
the provisions of SFAS 128. Net income per common share has been computed on the
basis of the weighted average number of common shares and, where dilutive,
common share equivalents outstanding during the indicated periods.
The following table reconciles the basic and diluted earnings per share
computations for income before extraordinary charge for the three month periods
ended March 31, 1998 and 1997 (In thousands, except per share amounts):
<TABLE>
<CAPTION>
INCOME BEFORE
EXTRAORDINARY BASIC BASIC DILUTED DILUTED
CHARGE SHARES EPS SHARES EPS
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $ 46,229 131,050 $ 0.35 132,541 $ 0.35
1997 $ 23,648 132,153 $ 0.18 133,748 $ 0.17
</TABLE>
Included in diluted shares are common stock equivalents relating to
outstanding stock options of 1,491,000 and 1,595,000 for the three month periods
ended March 31, 1998 and 1997, respectively.
NOTE 3 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 established standards for reporting
and displaying comprehensive income and its components. Components of
comprehensive income are net income and all changes in equity during a period
except those resulting from transactions with owners. SFAS 130 requires
enterprises to display comprehensive income and its components in its financial
statement, to classify items of comprehensive income by their nature in the
financial statements and display the accumulated balance of other comprehensive
income in shareholders' equity separately from retained earnings and additional
paid-in capital. Comparative financial statements provided for earlier periods
have been reclassified to reflect the application of SFAS 130.
6
<PAGE> 7
FORM 10-Q
The following table sets forth the components of accumulated other
comprehensive income at March 31, 1998 (In thousands):
<TABLE>
<CAPTION>
UNREALIZED GAINS ACCUMULATED
FOREIGN (LOSSES) OTHER
CURRENCY ON COMPREHENSIVE
ITEMS SECURITIES INCOME
------------ -------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997 ..................... $(1,127) $ 16 $(1,111)
Current-period change ............................ (30) (16) (46)
------- ---- -------
Balance at March 31, 1998 ........................ $(1,157) $ -- $(1,157)
======= ==== =======
</TABLE>
NOTE 4 - CREDIT FACILITIES
The Company has an unsecured revolving credit facility in the amount of
$200,000,000 (the "Credit Agreement") through August 14, 2002. As of March 31,
1998, the Company had an outstanding balance of $60,000,000 under the Credit
Agreement and $3,402,000 had been used to support outstanding letters of credit.
At March 31, 1998, the Company had an additional line of credit totaling
$5,000,000, of which $2,397,000 had been used to support outstanding letters of
credit. Additionally, at March 31, 1998, $18,568,000 of outstanding letters of
credit had been supported through a combination of unsecured letter of credit
facilities and surety bonds. The weighted average interest rate on borrowings
under the Credit Agreement was 6.09 percent at March 31, 1998.
7
<PAGE> 8
FORM 10-Q
NOTE 5 - FINANCIAL INSTRUMENTS
The Company operates internationally, resulting in exposure to foreign
currency risk. The Company predominantly denominates its contracts in U.S.
Dollars to mitigate the exposure to fluctuations in foreign currencies. The
Company periodically uses foreign exchange derivative instruments or spot
purchases to hedge its known liabilities in foreign currencies to reduce the
impact of foreign currency gains and losses in its financial results. The
Company does not enter into derivative transactions for speculative purposes.
Gains and losses on foreign exchange derivative instruments, which qualify as
accounting hedges, are deferred and recognized when the underlying foreign
exchange exposure is realized. Gains and losses on foreign exchange derivative
instruments that do not qualify as hedges for accounting purposes are recognized
currently based on the change in the market value of the derivative instrument.
During the three-month period ended March 31, 1998, the Company entered into
various foreign currency exchange contracts. These contracts expire monthly
throughout 1998 and require the Company to exchange U.S. Dollars for Dutch
Guilders and British Pounds Sterling totaling $33,800,000 and $24,700,000,
respectively. There were no material gains or losses recognized during the
three-month period ended March 31, 1998. At March 31, 1998 there were no
material unrealized gains or losses on open foreign exchange derivative hedges.
The Company did not utilize foreign exchange derivative instruments in 1997.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements with several vendors to
purchase equipment or for the construction of equipment for the conversion of
rigs, which agreements generally require non-refundable payments as certain
milestones are met. The amount of such payments totaled $166,572,000 as of March
31, 1998. In the event the Company were to cancel the purchase commitments, the
ultimate amounts refunded would be subject to negotiation.
NOTE 7 - SUBSEQUENT EVENT
The Company is currently reviewing proposals from several financial
institutions to arrange project financing for three of the EVA-4000(TM)
semisubmersible rig conversions. In connection with one of the financing
proposals, on April 7, 1998, the Company entered into an interest rate swap
contract with a notional amount of $145,000,000 to provide protection to the
Company from exposure to interest rate increases during the period from April 7,
1998 to the termination date of the interest rate swap contract, May 20, 1998.
The market value of the swap will be calculated on the termination date and the
differential paid or received under the contract will be recognized over the
term of the financing as an adjustment to the effective yield of the underlying
financial instrument.
8
<PAGE> 9
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy, plans and objectives of
management of the Company for future operations, industry conditions, and
indebtedness covenant compliance, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations include, but are not limited
to, intense competition in the drilling industry, volatility of oil and gas
prices, political and economic conditions in international markets (including
Nigeria and Venezuela), potential for decrease in demand for drilling services
in the U.S. Gulf of Mexico ("U.S. Gulf") where the Company has a concentration
of drilling rigs, risks associated with turnkey drilling contracts, early
termination provisions generally found in the Company's offshore drilling
contracts, operational risks (such as blowouts, fires and loss of production),
insurance coverage limitations, and requirements and potential liability imposed
by governmental regulation of the drilling industry (including environmental
regulation).
OUTLOOK
As used herein, unless otherwise required by the context, "Noble
Drilling" refers to Noble Drilling Corporation and the "Company" refers to Noble
Drilling and its consolidated subsidiaries. The Company's business strategy has
been to expand its international and offshore drilling capabilities through
acquisitions and rig upgrades and modifications, and by redeploying assets in
important geological areas. In recent years, the Company has included within its
strategic objectives a focus on increasing the number of rigs in its fleet
capable of drilling in deeper water depths.
In recent years, the demand and dayrates for offshore drilling rigs
have increased significantly, due in part to technological advances that
expanded the opportunities for offshore exploration and development. The current
level of drilling activity resulted in demand sufficient enough to absorb
virtually all of the rigs that are in working condition and being actively
marketed in the major offshore oil and gas markets throughout the world.
During the first quarter of 1998, the Company experienced dayrate
improvements in most of its areas of operations, primarily as a result of
renewals of long-term contracts signed prior to 1997. As a result of the
worldwide decline in crude oil prices, the current demand for offshore drilling
rigs has softened in several of the regions in which the Company operates.
Market dayrates in some of these regions, particularly the U.S. Gulf, have
decreased from the market levels experienced at the end of 1997. Continued
weakness in commodity prices could cause further reduction in dayrates and may
adversely affect, at least near-term, the operating results of the Company.
As part of its deepwater expansion strategy, the Company expects to
deliver its first EVA-4000(TM) semisubmersible conversion, the Noble Paul
Romano, in the second half of 1998 and its second EVA-4000 (TM) conversion, the
Noble Paul Wolff, late in 1998. Four other semisubmersible conversions are
planned or in progress and are expected to be available for service in 1999 or
early 2000. The Noble Paul Romano, which will be capable of drilling in 6,000
feet of water, has been contracted to Shell Deepwater Development Inc. ("Shell
Deepwater"), an affiliate of Shell Oil Company, for a five year contract in the
U.S. Gulf. The Noble Paul Wolff, which will be capable of drilling in 8,900 feet
of water, has been contracted to Petroleo Brasiliero S.A. ("Petrobras") for six
years in Brazil. The Noble Jim Thompson, which will be capable of drilling in
6,000 feet of water, is under a letter of intent to be contracted to Shell
Deepwater for an initial term of three years, with options to extend by Shell
Deepwater, in the U.S. Gulf. Delivery is anticipated in the first quarter of
1999. The Noble Amos Runner, which will be capable of drilling in 6,600 foot
water depths, has been contracted to a rig sharing consortium of operators for a
five year term in the U.S. Gulf. The rig is expected to be delivered in 1999.
The Noble Max Smith, which will be capable of drilling in 6,000 feet of water,
is under a letter of intent to be contracted for work in the U.S. Gulf by two
operators, Amerada Hess Corporation and Union Pacific Resources Corporation. The
initial term of the drilling contract will be for five years with options to the
operators to extend. The rig is expected to be delivered in the third quarter of
1999.
9
<PAGE> 10
FORM 10-Q
The Noble Roger Eason and the Noble Muravlenko are undergoing the final
stages of their water depth upgrades and are scheduled to be available in the
second quarter of 1998. Upon completion of the upgrades, the rigs will begin
operations under a five year contract with Petrobras in the latter part of the
second quarter of 1998.
The Company anticipates a decrease in the total number of turnkey well
completions in 1998 as compared to 1997. For the year ended December 31, 1997,
there were 35 turnkey well completions. Profitability under a turnkey contract
is dependent upon keeping expenses within the estimates used by the Company in
determining the contract price.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
GENERAL
Net income for the first quarter of 1998 (the "Current Quarter") was
$46,229,000, or $0.35 per share, on operating revenues of $189,036,000,
compared to net income of $21,944,000, or $0.16 per share, on operating revenues
of $168,715,000 for the first quarter of 1997 (the "Comparable Quarter"). The
increases in revenues and net income were principally the result of higher
domestic and international average dayrates and contributions from the Noble
Bill Jennings, Noble Leonard Jones, Noble Lewis Dugger, Noble Joe Alford and
Noble Lester Pettus, which were reactivated subsequent to the Comparable
Quarter. The improved revenue from dayrate increases and reactivated rigs was
partially offset by the sale of the Company's mat-supported jackup fleet in the
second quarter of 1997. Results for the Comparable Quarter also included an
extraordinary charge of $1,704,000, net of tax of $918,000, or $0.01 per share,
related to the Company's purchase of $29,555,000 principal amount of its 9 1/4%
Senior Notes Due 2003 (the "9 1/4% Senior Notes").
RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES
The following table sets forth the average rig utilization rates,
operating days and average dayrates for the Company's rig fleet for the three
months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
AVERAGE RIG
UTILIZATION RATES (1) OPERATING DAYS AVERAGE DAYRATES
-------------------------- --------------------------- ---------------------------
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31,
-------------------------- --------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
------------ ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
International........... 90% 92% 2,258 2,341 $ 46,699 $ 33,089
Domestic................ 99% 99% 792 1,223 $ 52,520 $ 29,369
</TABLE>
- ------------------
(1) Information reflects the policy of the Company to report utilization rates
based on the number of actively marketed rigs owned in the fleet.
10
<PAGE> 11
FORM 10-Q
INTERNATIONAL OPERATIONS
The following table sets forth the operating revenues and gross margin
for the Company's international operations for the three months ended March 31,
1998 and 1997:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
----------------------------- ------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services.............. $ 105,446 $ 77,461 $ 62,913 $ 39,399
Labor contract drilling services........ 18,267 9,352 6,067 2,795
Turnkey drilling services............... 3,390 14,346 (1,509) 5,780
Engineering and consulting services..... 684 824 46 302
Other revenue........................... 1,932 1,537 787 1,312
------------ ------------ ------------ ------------
Total.......................... $ 129,719 $ 103,520 $ 68,304 $ 49,588
============ ============ ============ ============
</TABLE>
OPERATING REVENUES. International contract drilling services revenues
increased $27,985,000 in the Current Quarter as compared to the Comparable
Quarter due in part to revenues generated from the Noble Lewis Dugger and the
Noble Sam Noble, which were in the shipyard for the majority of the Comparable
Quarter before moving to Mexico for long-term contracts. These rigs contributed
approximately $9,000,000 of the increased revenues. In addition, revenues from
the Company's operations in the North Sea, India and the Middle East were
significantly higher due to contract renewals at higher average dayrates. Labor
contract drilling services revenues increased $8,915,000 in the Current Quarter
due primarily to revenues generated from the Hibernia Project in Canada as well
as from higher average dayrates on the North Sea platforms. International
turnkey drilling services revenues decreased $10,956,000 in the Current Quarter
as compared to the Comparable Quarter. There were three well completions in the
Comparable Quarter as compared to no completions in the Current Quarter. At
March 31, 1998, there was one international turnkey well in progress offshore
Mexico.
GROSS MARGIN. International contract drilling services gross margin
increased $23,514,000 in the Current Quarter as compared to the Comparable
Quarter. This was primarily due to higher dayrates received on certain contract
renewals in all of the Company's international areas of operations. The dayrate
increases were offset partially by the sale of the Company's mat-supported
jackup in West Africa in the second quarter of 1997 and downtime experienced on
the Noble Carl Norberg, which was demobilized out of Venezuela in the Current
Quarter. Labor contract drilling services gross margin increased $3,272,000 in
the Current Quarter as compared to the Comparable Quarter as a result of the
contribution of the Hibernia Project in Canada and higher average dayrates
experienced on the North Sea platform contracts. International turnkey
drilling services gross margin decreased due to zero completions in the Current
Quarter as compared to three completions in the Comparable Quarter. The
negative results from international turnkey drilling services are attributable
to unexpected drilling delays experienced on a turnkey well in progress
offshore Mexico. At March 31, 1998, the Company had fully accrued for the
estimated loss on this well.
11
<PAGE> 12
FORM 10-Q
DOMESTIC OPERATIONS
The following table sets forth the operating revenues and gross margin
for the Company's domestic operations for the three months ended March 31, 1998
and 1997:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
----------------------------- ------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services.............. $ 41,596 $ 35,918 $ 31,199 $ 19,650
Turnkey drilling services............... 16,612 28,682 2,752 535
Engineering and consulting services..... - 39 - -
Other revenue........................... 1,109 556 882 (420)
----------- ----------- ----------- -----------
Total.......................... $ 59,317 $ 65,195 $ 34,833 $ 19,765
=========== =========== =========== ===========
</TABLE>
OPERATING REVENUES. Domestic contract drilling services revenues
increased $5,678,000 in the Current Quarter as compared to the Comparable
Quarter due primarily to higher average dayrates and the revenues generated
from the recently reactivated rigs, the Noble Bill Jennings, Noble Leonard
Jones, Noble Joe Alford and Noble Lester Pettus. These increases were partially
offset by the decrease in revenues resulting from the sale of the Company's
mat-supported jackup fleet in the second quarter of 1997. Additionally,
domestic contract drilling services revenues decreased as a result of the Noble
Paul Wolff, Noble Jim Thompson and Noble Amos Runner being taken out of
service in 1997 for conversion to EVA-4000(TM) semisubmersibles. Domestic
turnkey drilling services revenues were $12,070,000 lower in the Current
Quarter as compared to the Comparable Quarter due to fewer well completions in
the Current Quarter. There were two domestic turnkey well completions in the
Current Quarter, as compared to six completions in the Comparable Quarter.
GROSS MARGIN. Domestic contract drilling services gross margin
increased $11,549,000 in the Current Quarter as compared to the Comparable
Quarter due primarily to higher average domestic dayrates. Domestic turnkey
drilling services gross margin increased $2,217,000 in the Current Quarter as
compared to the Comparable Quarter as a result of losses experienced on two
turnkey wells in the Comparable Quarter. Both of the domestic turnkey well
completions in the Current Quarter were profitable.
OTHER OPERATING ITEMS
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $1,171,000 in the Current Quarter as compared to the
Comparable Quarter due primarily to depreciation expense related to the upgrade
costs on three recently reactivated rigs, the Noble Bill Jennings, Noble
Lewis Dugger and Noble Leonard Jones.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,763,000 in the Current Quarter as compared
to the Comparable Quarter due primarily to higher personnel costs incurred to
support overall growth of the Company and increased recruiting and training
activity.
INTEREST EXPENSE. Interest expense decreased $4,325,000 in the Current
Quarter as compared to the Comparable Quarter due primarily to the Company's
repurchase of its 9 1/4% Senior Notes in the second quarter of 1997 and the
capitalization of $2.4 million of interest expense on upgrade projects in the
Current Quarter.
INTEREST INCOME. Interest income decreased $312,000 in the Current
Quarter as compared to the Comparable Quarter due to lower average cash balances
in the Current Quarter.
INCOME TAX PROVISION. Income tax expense increased $11,387,000 in the
Current Quarter as compared to the Comparable Quarter due primarily to higher
pre-tax earnings.
12
<PAGE> 13
FORM 10-Q
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company had working capital of $42,657,000 and $112,125,000 as of
March 31, 1998, and December 31, 1997, respectively. Long-term debt as a
percentage of long-term debt plus shareholders' equity was 10 percent at March
31, 1998 compared to 11 percent at December 31, 1997.
At March 31, 1998, the Company had cash and cash equivalents of
$48,025,000 and had $139,201,000 of funds available under various lines of
credit. The Company expects to generate positive cash flow from operations for
the remainder of 1998, assuming no material decrease in demand for contract
drilling and turnkey services. The Company will continue to have cash
requirements for debt principal and interest payments. For the remainder of
1998, required debt principal and interest payments for currently outstanding
debt are estimated to be approximately $12,800,000. The Company expects to fund
these obligations out of cash and short-term investments as well as cash
expected to be provided by operations.
Capital expenditures totaled $140,231,000 and $50,658,000 for the
Current Quarter and Comparable Quarter, respectively. Capital expenditures for
the remainder of 1998 are expected to aggregate approximately $379,800,000, of
which the majority are discretionary and relate to upgrades of equipment. This
amount includes approximately $168,300,000 for the conversions of the Noble Paul
Romano, Noble Paul Wolff, Noble Jim Thompson, Noble Amos Runner and Noble Max
Smith to EVA-4000(TM) semisubmersible units. Additionally, the Company expects
to spend approximately $150,000,000 to upgrade the equipment and water depths on
the Noble Homer Ferrington (formerly the Noble Shelf 4). The conversion of these
rigs will be completed in late 1998 and 1999. The total cost of these six
semisubmersible conversions is expected to be approximately $800,000,000. These
capital expenditures will be funded from operating cash flows, existing cash
balances, available credit facility and lines of credit and proceeds to be
received from planned project financings. The Company is currently reviewing
proposals from several financial institutions to arrange project financing for
three EVA-4000(TM) semisubmersible rig conversions. Once finalized, the proceeds
received from such project financings are expected to approximate $400,000,000,
and will be used to fund the cost of three EVA-4000(TM) semisubmersible
conversions.
Given the strong demand for drilling rigs and related services,
increasingly heavy backlogs for equipment and services required to complete the
conversions could constrain the Company's ability to complete the conversions on
a timely basis. The Company has entered into agreements with several vendors to
purchase equipment or for the construction of equipment for the conversion of
rigs, which agreements generally require non-refundable payments as certain
milestones are met. The amount of such payments totaled $166,572,000 as of March
31, 1998. In the event the Company were to cancel the purchase commitments, the
ultimate amounts refunded would be subject to negotiation. Certain projects
currently being considered by the Company could require, if they materialize,
capital expenditures or other cash requirements not included in the above
estimate. In addition, the Company will continue to evaluate acquisitions of
drilling units from time to time. Factors that could cause actual capital
expenditures to exceed materially the planned capital expenditures include
delays and cost overruns in shipyards, shortages of equipment, latent damage or
deterioration to hull, equipment and machinery in excess of engineering
estimates and assumptions, and changes in design criteria or specifications
during repair or construction.
In May 1997, the Company's Board of Directors authorized the repurchase
of up to 10,000,000 shares of the Company's common stock, or approximately
eight percent of its then outstanding common stock. As of March 31, 1998, the
Company had repurchased 2,186,000 shares of common stock at a total cost of
$52,181,000. Additional purchases, if any, would be made from time to time on
the open market or in private transactions at prices determined by the Company.
CREDIT FACILITIES AND LONG-TERM DEBT
The Company has an unsecured revolving credit facility in the amount
of $200,000,000 (the "Credit Agreement") through August 14, 2002. As of
March 31, 1998, the Company had an outstanding balance of $60,000,000 under the
13
<PAGE> 14
FORM 10-Q
Credit Agreement and $3,402,000 had been used to support outstanding letters of
credit. At March 31, 1998, the Company had an additional line of credit totaling
$5,000,000 of which $2,397,000 had been used to support outstanding letters of
credit. Additionally, at March 31, 1998, $18,568,000 of outstanding letters of
credit had been supported through a combination of unsecured letter of credit
facilities and surety bonds. The weighted average interest rate on borrowings
under the Credit Agreement was 6.09 percent at March 31, 1998. As of May 12,
1998, the Company had an outstanding balance of $100,000,000 under the Credit
Agreement.
The Company believes that its cash and cash equivalents, cash generated
from operations, borrowings under its lines of credit and access to other
financing sources will be adequate to meet its anticipated short-term and
long-term liquidity requirements, including scheduled debt repayments.
FINANCIAL INSTRUMENTS
The Company occasionally uses financial instruments to hedge against
its exposure to changes in foreign currencies and interest rates. Management
believes that the Company's hedging activities do not expose the Company to any
material interest rate risk, foreign currency exchange rate risk, commodity
price risk or any other market rate or price risk. Although these hedging
arrangements expose the Company to credit risk, the Company monitors the credit
worthiness of its counterparties, which generally are major institutions, and
believes that losses from nonperformance are unlikely to occur.
The fair value of the Company's long-term debt at March 31, 1998 was
$150,628,000 based on the quoted market prices for similar issues or on the
current rates offered to the Company for debt of similar remaining maturities.
FOREIGN CURRENCY RISK
The Company operates internationally, resulting in exposure to foreign
currency risk. The Company predominantly denominates its contracts in U.S.
Dollars to mitigate the exposure to fluctuations in foreign currencies. The
Company periodically uses foreign exchange derivative instruments or spot
purchases to hedge its known liabilities in foreign currencies to reduce the
impact of foreign currency gains and losses in its financial results. The
Company does not enter into derivative transactions for speculative purposes.
Gains and losses on foreign exchange derivative instruments, which qualify as
accounting hedges, are deferred and recognized when the underlying foreign
exchange exposure is realized. Gains and losses on foreign exchange derivative
instruments that do not qualify as hedges for accounting purposes are
recognized currently based on the change in the market value of the derivative
instrument. During the Current Quarter, the Company entered into various
foreign currency exchange contracts. These contracts expire monthly throughout
1998 and require the Company to exchange U.S. Dollars for Dutch Guilders and
British Pounds Sterling totaling $33,800,000 and $24,700,000, respectively.
There were no material gains or losses recognized during the Current Quarter.
At March 31, 1998 there were no material unrealized gains or losses on open
foreign exchange derivative hedges. The Company did not utilize foreign
exchange derivative instruments in 1997.
INTEREST RATE RISK
The Company is currently reviewing proposals from several financial
institutions to arrange project financing for three of the EVA-4000(TM)
semisubmersible rig conversions. In connection with one of the financing
proposals, on April 7, 1998, the Company entered into an interest rate swap
contract with a notional amount of $145,000,000 to provide protection to the
Company from exposure to interest rate increases during the period from April 7,
1998 to the termination date of the interest rate swap contract, May 20, 1998.
The market value of the swap will be calculated on the termination date and the
differential paid or received under the contract will be recognized over the
term of the financing as an adjustment to the effective yield of the underlying
financial instrument.
YEAR 2000
In 1996, the Company began implementation of a major computer software
conversion for its management and accounting information systems. The new
system is generally considered to be year 2000 compliant; however, the Company
uses other systems which have not yet been reviewed adequately to determine
whether or not they will function properly in the year 2000. The Company has
commenced a project to assess all remaining systems for year 2000 compliance.
The Company expects its year 2000 assessment to be completed on a timely basis
and plans to review the compliance efforts of the entities it does business
with. The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability to
modify proprietary software and unanticipated problems identified in the
ongoing compliance review. The Company has limited or no control over the
actions of proprietary software vendors and other entities with which it
interacts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information on foreign currency risk and interest rate risk, see
"Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Instruments."
14
<PAGE> 15
FORM 10-Q
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of Noble Drilling was held in
Houston, Texas, at 10:00 a.m., local time, on April 23, 1998.
(b) Proxies were solicited by the Board of Directors of Noble
Drilling pursuant to Regulation 14A under the Securities
Exchange Act of 1934. There was no solicitation in opposition to
the Board of Directors' nominees as listed in the proxy
statement and all of such nominees were duly elected.
(c) Out of a total of 131,342,070 shares of Noble Drilling common
stock outstanding and entitled to vote, 111,574,689 shares were
present in person or by proxy, representing approximately 85
percent of outstanding shares. The first matter voted on by the
stockholders, as fully described in the proxy statement for the
annual meeting, was the re-election of Michael A. Cawley, Tommy
C. Craighead and James C. Fishel to serve three-year terms on
the Board of Directors of Noble Drilling. The results of voting
were as follows:
<TABLE>
<CAPTION>
Nominee Number of Shares Number of Shares WITHHOLDING
for Re-election Voting FOR Re-election AUTHORITY
as Director as Director to Vote for Re-election as
Director
-------------------------- ---------------------- ----------------------------
<S> <C> <C> <C>
Michael A. Cawley 110,421,985 1,152,704
Tommy C. Craighead 110,424,827 1,149,862
James L. Fishel 110,409,689 1,165,000
</TABLE>
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The information required by this Item 6(a) is set forth in the
Index to Exhibits accompanying this quarterly report and is
incorporated herein by reference.
(b) No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1998.
15
<PAGE> 16
FORM 10-Q
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.
NOBLE DRILLING CORPORATION
DATE: May 14, 1998 /s/ JAMES C. DAY
-----------------------------------------
JAMES C. DAY, Chairman, President and
Chief Executive Officer
DATE: May 14, 1998 /s/ BYRON L. WELLIVER
-----------------------------------------
BYRON L. WELLIVER,
Senior Vice President-Finance,
Treasurer and Controller
(Principal Financial and Accounting
Officer)
16
<PAGE> 17
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10 Noble Drilling Corporation Short-Term Incentive Plan
(revised April 1998)
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10
NOBLE DRILLING CORPORATION
SHORT TERM INCENTIVE PLAN
Revised: April 1998*
PURPOSE
The success of Noble Drilling Corporation ("Noble Drilling") and its
subsidiaries (collectively, unless the context otherwise requires, the
"Company") is a result of the collective efforts of all employees. Each position
within the Company has the ability to make a positive contribution to key
factors in increasing shareholder value. Those factors can be quantified and
measured through achieving EVA(R)1 targets
In order to focus each employee's attention on available opportunities
to increase revenues, control costs and seek out profitable ventures, the
Company maintains a bonus program that rewards employees for successful
achievement of specific goals. The objective of the program is to more closely
link incentive awards to the creation of wealth and promote a culture of
performance and ownership. To be successful, an incentive plan must align
employee interests with those of owners and motivate and influence behavior.
PARTICIPATION AND ELIGIBILITY
The bonus plan covers all full-time employees in salary classifications
18 and higher who have completed one year of service at the close of the bonus
plan year, which will be a calendar year. The bonus earned by employees with
less than two full years of service will be adjusted based upon the number of
full months employed compared to twenty-four months. Additionally, no bonus
payments will be made for a partial year of service. Eligibility will be
determined from the employee roster at close of the bonus plan year and
employees must be actively employed with the Company on the day which bonus
payments are made to receive a bonus payment.
*Established 1977
- --------
1 EVA(R) is a registered trademark of Stern Stewart & Co.
1
<PAGE> 2
TARGET BONUS
The target bonus amount shall be determined on an aggregate basis for
each operating hemisphere and area. The target bonus shall be the base salary at
year-end of eligible employees multiplied times the appropriate percentage
factor assigned to the salary classification.
In regard to the EVA related goal, the Plan pays a Target Bonus for
achieving the EVA target. The Target Bonus provides a link between pay and
performance, acting as a competitive labor market benchmark. Salary
classifications and target bonus factors are as follows:
<TABLE>
<CAPTION>
Salary Classification(2) Target Factor
--------------------- -------------
<S> <C>
18N through 19N 10%
20N through 23N(3) 15%
24N through 25N 25%
26N through 27N 30%
28N through 32N 35%
30C through 32C 45%
33C through 36C 55%
37C 75%
</TABLE>
GOALS
At the end of each year, the total bonus pool will be determined by the
Board of Directors, considering target bonus levels, the Board's assessment of
overall company results, and attainment of specific, predetermined corporate,
hemisphere or area goals. Goals in the following categories will be recommended
each year by the Chief Executive Officer of Noble Drilling Corporation and
approved by the Board of Directors for the Corporation and for each hemisphere
and operating area. The percentage weighting assigned to each goal shall be as
follows subject to annual review by the Board of Directors.
<TABLE>
<CAPTION>
Corporate Goals Assigned Weight
--------------- ---------------
<S> <C> <C>
1. Total shareholder return 50%
2. Achieve EVA targets 50%
</TABLE>
- --------
(2) The salary classification system will be revised prior to year end 1998.
(3) Rig Managers in all divisions, except the U.K. platform operation, will be
in a 10% bonus category. Platform Superintendents and Rig Managers in the
U.K. will be in a special 5% bonus category.
2
<PAGE> 3
<TABLE>
<CAPTION>
Hemisphere Goal Calculation
<S> <C> <C>
1. Total shareholder return 50%
2. Achieve EVA targets 50%
</TABLE>
<TABLE>
<CAPTION>
Area Goals Assigned Weight
---------- ---------------
<S> <C> <C>
(Gulf Coast Marine, India, Qatar, Venezuela,
Nigeria, North Sea and Brazil)
1. Achieve EVA targets 30%
2. Budgeted capital expenditures 30%
3 Safety results 20%
4 Rig maintenance 20%
</TABLE>
<TABLE>
<CAPTION>
Hibernia and Triton Goals Assigned Weight
------------------------- ---------------
<S> <C> <C>
1. Achieve EVA targets 80%
2. Safety results 20%
</TABLE>
The goal weighting percentage will be used in measuring overall
performance, considering measurement of actual results measured against the goal
for each factor. The adjustment to the goal weighting will be based upon the
following schedule.
<TABLE>
<CAPTION>
Goal Achievement Range Adjustment Factor
---------------------- -----------------
<S> <C>
Greater than 135% 2.00
126--135% 1.75
116--125% 1.50
106--115% 1.25
96--105% 1.00
86-- 95% .75
76-- 85% .50
Less than 75% .00
</TABLE>
BONUS ALLOCATION
All employees in salary classifications 18N through 37C shall receive a
bonus (assuming a bonus is payable) as calculated using the target bonus times
the applicable multiplier. The remaining bonus pool shall be allocated to
eligible employees within the hemispheres, areas or departments based upon
merit. Hemisphere Managing Directors, Area Managers and department heads shall
submit the allocated bonus listing to the Chief Executive Officer of Noble
Drilling for
3
<PAGE> 4
review and approval. All bonus calculations, allocations and recommendations are
subject to review and approval by the Compensation Committee of the Board of
Directors. The Committee and the Chief Executive Officer have the ability to
adjust individual bonus calculations as deemed to be appropriate for any reason.
GOAL FLEXIBILITY
It is intended that the total bonus pool will reflect the best judgment
of the Board of Directors in determining overall Company performance for the
year. In determining overall Company performance, the Board will consider the
Company's performance in relation to the pre-determined goals and market
conditions. It is expected that the Company will prepare budgets and forecasts
in October or November of the plan year. If such budgets have substantially
changed due to subsequent events, then the Chief Executive Officer of Noble
Drilling Corporation shall, at his discretion, submit revised goals to the Board
of Director of Noble Drilling for its approval. Revisions(s) to the goals can be
considered.
4
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 48,025 96,995
<SECURITIES> 0 19,903
<RECEIVABLES> 158,473 122,357
<ALLOWANCES> 1,437 583
<INVENTORY> 4,624 4,812
<CURRENT-ASSETS> 274,271 413,603
<PP&E> 1,590,868 1,128,317
<DEPRECIATION> 274,705 200,706
<TOTAL-ASSETS> 1,639,823 1,365,182
<CURRENT-LIABILITIES> 231,614 149,515
<BONDS> 136,442 209,445
0 0
0 0
<COMMON> 13,351 13,248
<OTHER-SE> 1,187,337 935,537
<TOTAL-LIABILITY-AND-EQUITY> 1,639,823 1,365,182
<SALES> 0 0
<TOTAL-REVENUES> 189,036 168,715
<CGS> 0 0
<TOTAL-COSTS> 85,899 99,362
<OTHER-EXPENSES> 36,822 34,291
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,132 5,457
<INCOME-PRETAX> 66,318 32,350
<INCOME-TAX> 20,089 8,702
<INCOME-CONTINUING> 0 23,648
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (1,704)
<CHANGES> 0 0
<NET-INCOME> 46,229 21,944
<EPS-PRIMARY> 0.35 0.17
<EPS-DILUTED> 0.35 0.16
</TABLE>
