<PAGE> 1
================================================================================
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, 1999
COMMISSION FILE NUMBER: 1-9245
--------------------
NABORS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-0711613
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
515 W. GREENS ROAD, SUITE 1200
HOUSTON, TEXAS 77067
(Address of principal executive offices) (Zip Code)
281-874-0035
(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 shares of Common Stock, par value $.10 per share,
outstanding as of November 1, 1999 was 116,936,933.
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<PAGE> 2
NABORS INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998....................................2
Condensed Consolidated Statements of
Income for the Three Months and Nine Months
Ended September 30, 1999 and 1998...........................................3
Condensed Consolidated Statements of
Changes in Stockholders' Equity for the Nine
Months Ended September 30, 1999 and 1998....................................4
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30,
1999 and 1998...............................................................5
Notes to Condensed Consolidated
Financial Statements........................................................6
Report of Independent Accountants..........................................11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................12
Part II Other Information
Item 1. Legal Proceedings...........................................................19
Item 2. Changes in Securities.......................................................20
Item 5. Other Information...........................................................20
Item 6. Exhibits and Reports on Form 8-K............................................20
Signatures..............................................................................22
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 154,618 $ 16,748
Marketable securities 20,340 6,702
Accounts receivable, net 114,621 174,304
Inventory and supplies 18,107 25,740
Prepaid expenses and other current assets 46,346 42,021
----------- -----------
Total current assets 354,032 265,515
Property, plant and equipment, net 1,207,499 1,127,154
Marketable securities 54,409 23,890
Goodwill, net 43,328 8,037
Other long-term assets 55,748 25,646
----------- -----------
Total assets $ 1,715,016 $ 1,450,242
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 1,877 $ 11,329
Short-term borrowings -- 74,565
Trade accounts payable 45,022 58,534
Accrued liabilities 91,724 85,262
Income taxes payable 12,440 14,668
----------- -----------
Total current liabilities 151,063 244,358
Long-term obligations 325,156 217,034
Other long-term liabilities 44,385 49,182
Deferred income taxes 3,179 72,199
----------- -----------
Total liabilities 523,783 582,773
----------- -----------
Commitments and contingencies
Stockholders' equity:
Capital stock, par value $.10 per share:
Authorized common shares 200,000;
issued 117,525 and 101,382 11,752 10,138
Capital in excess of par value 673,552 394,562
Accumulated other comprehensive income (loss) 12,174 (10,983)
Retained earnings 498,572 478,569
Less treasury stock, at cost, 589 common shares (4,817) (4,817)
----------- -----------
Total stockholders' equity 1,191,233 867,469
----------- -----------
Total liabilities and stockholders' equity $ 1,715,016 $ 1,450,242
----------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 142,355 $ 224,018 $ 421,683 $ 760,157
Earnings (losses) from unconsolidated affiliates 35 197 3,633 (240)
--------- --------- --------- ---------
Total revenues 142,390 224,215 425,316 759,917
--------- --------- --------- ---------
Operating expenses:
Direct costs 93,491 139,259 268,086 487,801
General and administrative expenses 14,989 18,489 46,368 58,628
Depreciation and amortization 23,888 21,362 69,074 62,617
--------- --------- --------- ---------
Operating expenses 132,368 179,110 383,528 609,046
--------- --------- --------- ---------
Operating income 10,022 45,105 41,788 150,871
--------- --------- --------- ---------
Other (expense) income:
Interest expense (6,697) (4,101) (23,339) (11,839)
Interest income 2,600 264 7,316 1,205
Other income, net 1,846 3,015 7,026 24,782
--------- --------- --------- ---------
Other (expense) income (2,251) (822) (8,997) 14,148
--------- --------- --------- ---------
Income before income taxes 7,771 44,283 32,791 165,019
--------- --------- --------- ---------
Income taxes:
Current 1,455 8,594 6,517 29,237
Deferred 1,575 7,151 6,271 31,820
--------- --------- --------- ---------
Income taxes 3,030 15,745 12,788 61,057
--------- --------- --------- ---------
Net income $ 4,741 $ 28,538 $ 20,003 $ 103,962
--------- --------- --------- ---------
Earnings per share:
Basic $ .04 $ .28 $ .19 $ 1.03
--------- --------- --------- ---------
Diluted $ .04 $ .27 $ .17 $ .96
--------- --------- --------- ---------
Weighted average number of shares outstanding:
Basic 114,382 100,788 106,887 100,811
--------- --------- --------- ---------
Diluted 123,099 111,826 115,604 112,969
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
CAPITAL STOCK IN EXCESS OTHER TOTAL
------------------------ OF PAR COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
SHARES PAR VALUE VALUE INCOME (LOSS) EARNINGS STOCK EQUITY
----------- ----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997 101,325 $ 10,133 $ 400,120 $ 6,670 $ 353,581 $ (3,164) $ 767,340
----------- ----------- ----------- ----------- ----------- ----------- -----------
Comprehensive income:
Net income 103,962 103,962
Translation adjustment (3,665) (3,665)
Unrealized loss on marketable
securities, net (12,103) (12,103)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income -- -- -- (15,768) 103,962 -- 88,194
----------- ----------- ----------- ----------- ----------- ----------- -----------
Issuance of common shares for stock
options exercised 88 8 582 590
Reduction of tax benefit on stock
option
deductions (3,889) (3,889)
Return and retirement of common
shares held in escrow in connection
with the Adcor acquisition (53) (5) (995) (1,000)
Warrants issued in connection with the
New Prospect acquisition 1,451 1,451
Conversion of 5% Notes 2 2
Repurchase of common shares (1,653) (1,653)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Subtotal 35 3 (2,849) -- -- (1,653) (4,499)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, September 30, 1998 101,360 $ 10,136 $ 397,271 $ (9,098) $ 457,543 $ (4,817) $ 851,035
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998 101,382 $ 10,138 $ 394,562 $ (10,983) $ 478,569 $ (4,817) $ 867,469
----------- ----------- ----------- ----------- ----------- ----------- -----------
Comprehensive income:
Net income 20,003 20,003
Translation adjustment 586 586
Unrealized gain on marketable
securities, net 22,571 22,571
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income -- -- -- 23,157 20,003 -- 43,160
----------- ----------- ----------- ----------- ----------- ----------- -----------
Issuance of common shares in
connection with the Bayard
acquisition 6,167 617 74,230 74,847
Issuance of common shares for stock
options exercised 480 48 4,873 4,921
Tax benefit on stock option deductions 30,415 30,415
Return and retirement of common
shares held in escrow in connection
with the Adcor acquisition (12) (1) 1 --
Conversion of 5% Notes 9,508 950 169,471 170,421
----------- ----------- ----------- ----------- ----------- ----------- -----------
Subtotal 16,143 1,614 278,990 -- -- -- 280,604
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, September 30, 1999 117,525 $ 11,752 $ 673,552 $ 12,174 $ 498,572 $ (4,817) $ 1,191,233
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 108,394 $ 226,365
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities, available-for-sale (12,544) (1,915)
Sales of marketable securities, available-for-sale 3,089 --
Cash received from disposition of long-term assets and businesses 13,198 37,466
Cash paid for acquisitions of businesses, net (5,233) (28,208)
Capital expenditures (46,252) (228,492)
Distribution from (investment in) affiliates 3,000 (1,952)
--------- ---------
Net cash used for investing activities (44,742) (223,101)
--------- ---------
Cash flows from financing activities:
Increase in restricted cash (1,165) (22)
Long-term borrowings 324,707
Reduction of long-term obligations (178,632) (10,636)
(Decrease) increase in short-term borrowings, net (73,565) 6,571
Common and treasury stock transactions 4,298 (1,063)
--------- ---------
Net cash provided by (used for) financing activities 75,643 (5,150)
--------- ---------
Net increase (decrease) in cash and cash equivalents 139,295 (1,886)
Cash and cash equivalents, beginning of period 16,748 5,623
Cash of affiliates now accounted for under the equity method (1,425) --
--------- ---------
Cash and cash equivalents, end of period $ 154,618 $ 3,737
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The unaudited condensed consolidated financial statements of Nabors
Industries, Inc. (collectively with its subsidiaries, the "Company" or "Nabors")
are prepared in conformity with generally accepted accounting principles
("GAAP"), but do not purport to be a complete presentation inasmuch as all note
disclosures required by GAAP are not included. Reference is made to the
Company's 1998 Annual Report on Form 10-K for additional note disclosures.
In the opinion of management, the condensed consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of September 30, 1999, and the results of its
operations, its changes in stockholders' equity and its cash flows for the
periods ended September 30, 1999 and 1998 in accordance with GAAP. Interim
results for the nine months ended September 30, 1999 are not necessarily
indicative of results that will be realized for the full year ending December
31, 1999.
Investment in Affiliates
Beginning January 1, 1999, the Company's investments in several 50%
owned joint ventures have been accounted for using the equity method of
accounting, with the Company's share of the net income of these joint ventures
recorded as a component of revenues in the condensed consolidated statements of
income and the Company's investment in these joint ventures carried as a single
amount in the condensed consolidated balance sheets. For periods prior to
January 1, 1999, these investments were accounted for using the proportionate
consolidation method, whereby the Company's pro rata share of the joint
venture's revenues, expenses and financial position were recorded as
corresponding revenues, expenses and financial position of the Company.
The following table summarizes the effect of the change in accounting
method on the Company's condensed consolidated balance sheets as of January 1,
1999:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
-------------
(IN THOUSANDS)
<S> <C>
Current assets $(12,806)
Property, plant and equipment, net (23,684)
Other long-term assets 27,155
--------
Total assets $ (9,335)
--------
Current liabilities $ (7,624)
Long-term obligations (1,711)
--------
Total liabilities $ (9,335)
--------
</TABLE>
Earnings Per Share
Basic earnings per share for all periods presented equals net income
divided by the weighted average number of shares of common stock outstanding
during the period, excluding shares of common stock held in treasury. Diluted
earnings per share for the three months and nine months ended September 30,
1998, reflects the assumed conversion of the aggregate principal amount of the
$172.5 million, 5% Convertible Subordinated Notes due 2006 (the "5% Notes"). As
a result of the assumed conversion in those periods, net income is adjusted to
add back $1.4 million and $4.1 million, respectively, of after tax interest
expense incurred on the 5% Notes. Net income, as adjusted, is divided by the sum
of: (1) the weighted average number of shares of common stock outstanding used
for the basic computation, (2) the net effect of dilutive stock options and
warrants, and (3) for the three months and nine months ended September 30, 1998,
9.5 million shares of common stock assumed to be issued on conversion of the 5%
Notes. Basic and Diluted earnings per share for the three months and nine months
ended September 30, 1999, reflects the weighted average effect of 9.5 million
shares of common stock issued in connection with the conversion of $172.3
million aggregate principal amount of the 5% Notes based upon the actual date of
conversion during the third quarter of 1999 (Note 3).
6
<PAGE> 8
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 ACQUISITIONS
During April 1999, the Company completed its acquisition of Bayard
Drilling Technologies, Inc. ("Bayard") through the merger of Bayard and a
wholly-owned, special purpose subsidiary of the Company. Pursuant to the merger,
each of the approximately 18.3 million shares of Bayard common stock were
exchanged for .3375 shares of the Company's common stock and $.30 per share in
cash (approximately 6.17 million shares and $5.5 million in cash in the
aggregate). The acquisition of Bayard added 87 drilling rigs, 73 of which were
actively marketed. The majority of the rigs are located in the mid-continent
region of the United States and south Texas with the balance of the fleet
located throughout east Texas and Louisiana. In addition, Bayard had a
significant inventory of new component equipment including drill pipe, engines
and high horsepower mud pumps. Bayard also owned and operated a fleet of
oilfield hauling equipment. Approximately $116.0 million of Bayard's debt
remained outstanding as an obligation of Bayard immediately following the
merger, which the Company did not guarantee. Approximately $14.3 million of
Bayard's senior debt was paid off subsequent to the merger pursuant to
contractual requirements and all of the Bayard $100.0 million 11% Senior Notes
due 2005 were acquired by Nabors from the public in connection with a cash
tender offer completed during August 1999 (Note 3).
The acquisition was accounted for using the purchase method of
accounting, and accordingly, Bayard's results of operations have been included
in the condensed consolidated financial statements of the Company commencing on
the effective date of acquisition. The purchase price was allocated based on
preliminary estimates of the fair market value of the assets acquired and the
liabilities assumed as of the acquisition date, and is therefore subject to
adjustment as additional information becomes available and is evaluated. The
preliminary purchase price allocation resulted in goodwill of approximately
$36.5 million, which is being amortized on a straight-line basis over 30 years.
The following unaudited pro forma summary of financial information
presents the Company's consolidated results of operations as if the acquisition
of Bayard had occurred at the beginning of the periods presented, after
including the impact of certain adjustments including: (1) the elimination of
nonrecurring merger related costs, (2) reduced depreciation expense reflecting
the reduction in value assigned to property, plant and equipment, (3)
amortization of goodwill, (4) reduced interest expense associated primarily with
the elimination of certain deferred financing costs and (5) the related income
tax effects of these adjustments.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues $ 425,316 $ 436,292 $ 759,917 $ 824,719
--------- --------- --------- ---------
Net income before extraordinary
items $ 20,003 $ 14,446 $ 103,962 $ 108,026
--------- --------- --------- ---------
Net income $ 20,003 $ 14,446 $ 103,962 $ 107,688
--------- --------- --------- ---------
Net income before extraordinary
items per diluted share $ .17 $ .12 $ .96 $ .94
--------- --------- --------- ---------
Net income per diluted share $ .17 $ .12 $ .96 $ .94
--------- --------- --------- ---------
Weighted average number of
diluted shares outstanding: 115,604 117,660 112,969 119,136
--------- --------- --------- ---------
</TABLE>
The pro forma financial information presented does not purport to
indicate what the combined results of operations would have been had the merger
occurred at the beginning of the periods presented or the results of operations
that may be obtained in the future. Additionally, the pro forma financial
information presented does not reflect the anticipated cost savings resulting
from the integration of the Company's and Bayard's operations.
7
<PAGE> 9
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On July 29, 1999, the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, expired with respect to Nabors'
previously announced acquisition of Pool Energy Services Co. ("Pool"). Nabors
has been advised that the Department of Justice has closed its investigation
with respect to the proposed transaction. Pool's shareholders approved the Pool
merger agreement on September 28, 1999. Completion of the transaction remains
subject to various closing conditions, including amendment of Pool's Saudi joint
venture or other arrangement being made so that the operations of Nabors and
Pool in Saudi Arabia are not adversely affected by the transaction and customary
conditions such as the accuracy of the parties' representations and warranties
and compliance with covenants. The October 1, 1999 termination date set forth in
the merger agreement has passed and either party may terminate the agreement.
Nevertheless, the parties are continuing to use their best efforts to close the
transaction as promptly as is practicable. However, there can be no assurance
that the transaction will be consummated.
NOTE 3 LONG-TERM OBLIGATIONS
During July 1999, the Company prepaid the entire $40.0 million
aggregate principal amount of its 9.18% Senior Notes due July 31, 2006, issued
to John Hancock Mutual Life Insurance Company and an affiliate, at par plus a
make-whole premium of approximately $4.5 million. In connection with the
transaction, the Company recognized a pre-tax extraordinary loss of $4.7 million
resulting from the make whole premium paid and the recognition of certain
deferred financing costs.
During July 1999, the Company made a cash tender offer to the holders
of Bayard's $100.0 million 11% Senior Notes due 2005 (the Bayard "11% Notes")
that expired on August 3, 1999. The price offered was $1,110 per $1,000 note
plus interest on such amount from and including July 2, 1999 to but excluding
the date of payment, at a per annum rate of 5.0%. In connection with the offer,
the Company accepted for payment all $100 million in aggregate principal amount
of Notes tendered. In connection with the transaction, the Company recognized a
pre-tax extraordinary gain of $4.7 million resulting from the repayment of the
notes at less than the amount recorded on the Company's books. This gain was
netted against the extraordinary loss described above and included in the
Company's condensed consolidated statements of income as other income.
During June 1999, the Company issued a Notice of Redemption to holders
of the Company's 5% Notes for mandatory redemption on July 15, 1999 at a
redemption price of $1,035 per $1,000 note together with accrued and unpaid
interest from May 15, 1999 to the redemption date. Alternatively, holders of the
5% Notes could elect to convert their notes prior to redemption, whereby each
$1,000 note would be converted into 55.1724 shares of the Company's common
stock. Subsequently, 9.51 million shares of common stock were issued to holders
of $172.3 million aggregate principal amount of the 5% Notes. The remaining $.16
million of the 5% Notes were redeemed in accordance with the Notice of
Redemption. As a result of the conversions and the redemption, the 5% Notes were
cancelled during July 1999 and ceased to be outstanding.
During March 1999, the Company issued $325.0 million of 6.80% Senior
Unsecured Notes due April 15, 2004 (the "6.80% Notes"). Interest on the 6.80%
Notes is payable semi-annually on April 15 and October 15, commencing on October
15, 1999. The 6.80% Notes are redeemable in whole or in part, at the option of
the Company at any time, at a redemption price equal to the greater of (1) 100%
of their principal amount or (2) the sum of the present values of the remaining
scheduled payments of principal and interest discounted to the date of
redemption on a semi-annual basis using the comparable treasury security yield
plus 25 basis points together in either case with accrued and unpaid interest.
Certain restrictions have been imposed on the Company as a result of the
issuance of the 6.80% Notes, including limitations on the incurrence of liens
and certain sale-leaseback transactions.
A portion of the proceeds from the issuance of the 6.80% Notes was used
to repay certain short-term and long-term borrowings of the Company, including
the debt reduction transactions described above, and to purchase rigs and
related equipment from Bayard, a wholly owned subsidiary of the Company (Note
2). Bayard used the proceeds from the equipment sale to repay certain of its
senior debt. The remaining proceeds from the issuance of the 6.80% Notes will be
used for general corporate purposes, including but not limited to, working
capital and possible future business acquisitions.
8
<PAGE> 10
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 CAPITAL STOCK
During the nine months ended September 30, 1999, options to acquire
480,119 shares of common stock were exercised at prices ranging from $5.88 to
$22.82 per share.
During June and July 1999, 9,508,048 shares of common stock were issued
in connection with the conversion of $172.3 million aggregate principal amount
of the 5% Notes (Note 3).
During June 1999, 11,865 shares of common stock that had been held in
escrow in connection with the Company's acquisition of Adcor in January 1997
were returned to the Company and retired.
During April 1999, the Company completed the acquisition of Bayard,
whereby the Company acquired all of the outstanding shares of Bayard common
stock in exchange for 6,167,036 newly issued shares of the Company's common
stock (Note 2).
NOTE 5 COMMITMENTS AND CONTINGENCIES
Capital Expenditures
As of September 30, 1999, the Company had outstanding capital
expenditure purchase commitments of approximately $10.2 million.
Contingencies
The Company is a defendant or otherwise involved in a number of
lawsuits in the ordinary course of its business. In the opinion of management,
the Company's ultimate liability with respect to these pending lawsuits is not
expected to have a significant or material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
9
<PAGE> 11
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 SEGMENT INFORMATION
The following table sets forth financial information with respect to
the Company and its reportable segments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Contract drilling $ 132,043 $ 202,461 $ 399,203 $ 683,781
Manufacturing and logistics (1) 12,625 25,941 32,311 87,483
Other (2) (2,278) (4,187) (6,198) (11,347)
------------ ------------ ------------ ------------
Total revenues $ 142,390 $ 224,215 $ 425,316 $ 759,917
------------ ------------ ------------ ------------
Operating income (loss):
Contract drilling $ 12,156 $ 45,525 $ 47,934 $ 148,107
Manufacturing and logistics 831 3,632 4,670 13,745
Other (3) (2,965) (4,052) (10,816) (10,981)
------------ ------------ ------------ ------------
Total operating income $ 10,022 $ 45,105 $ 41,788 $ 150,871
Interest expense (6,697) (4,101) (23,339) (11,839)
Interest income 2,600 264 7,316 1,205
Other income, net 1,846 3,015 7,026 24,782
------------ ------------ ------------ ------------
Income before income taxes $ 7,771 $ 44,283 $ 32,791 $ 165,019
------------ ------------ ------------ ------------
Total assets:
Contract drilling $ 1,424,826 $ 1,301,280
Manufacturing and logistics (1) 66,361 87,533
Other (3)(4) 223,829 23,137
------------ ------------
Total assets $ 1,715,016 $ 1,411,950
------------ ------------
</TABLE>
(1) The revenue reduction during the three months and nine months ended
September 30, 1999 and the reduction in total assets for the nine months
ended September 30, 1999 reflects the change in accounting for certain 50%
owned joint ventures (Note 1).
(2) Elimination of inter-segment manufacturing and logistics sales.
(3) Includes the elimination of inter-segment transactions and unallocated
corporate expenses and assets.
(4) For September 30, 1999, includes remaining cash proceeds from the issuance
of the 6.80% Notes (Note 3).
10
<PAGE> 12
Report of Independent Accountants
To the Stockholders and Board of Directors
of Nabors Industries, Inc.
We have reviewed the accompanying condensed consolidated balance sheets of
Nabors Industries, Inc. and Subsidiaries as of September 30, 1999 and the
related condensed consolidated statements of income for the three months and
nine months ended September 30, 1999 and 1998 and changes in stockholders'
equity and cash flows for the nine month periods ended September 30, 1999 and
1998. 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 generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1998, and the related
consolidated statements of income, changes in stockholders' equity and of cash
flows for the year then ended (not presented herein), and in our report dated
February 2, 1999 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1998 is
fairly stated in all material respects in relationship to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
October 20, 1999
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Company revenues for the third quarter of fiscal 1999 (the "Current
Quarter") totaled $142.4 million, representing a decrease of $81.8 million, or
36%, as compared to the prior year period. Current Quarter operating income and
net income totaled $10.0 million and $4.7 million ($.04 per diluted share),
respectively, representing decreases of 78% and 83% compared to the prior year
period. Revenues for the first nine months of fiscal 1999 (the "Current Period")
totaled $425.3 million, representing a decrease of $334.6 million, or 44%, as
compared to the prior year period. Operating income and net income for the
Current Period totaled $41.8 million and $20.0 million ($.17 per diluted share),
respectively, representing decreases of 72% and 81% compared to the prior year
period.
The significant reduction in Current Quarter and Current Period
results is a reflection of the reduced capital spending by our customers for
drilling and workover services following the decline in crude oil prices that
began during the fourth quarter of 1997 and reversed beginning in March of 1999.
The reduced capital spending by our customers resulted in a reduction in the
Company's rig utilization and rig dayrates as compared to the prior year
periods. These lower activity levels in our various business units bottomed in
the second and third quarters of 1999 and are generally beginning to increase in
response to the higher average oil prices during these two quarters. The outlook
is also improving as higher capital spending plans are gradually materializing,
initially among our North American customers, with recent bid awards confirming
increased spending plans in our international markets.
The recent increases in North American activity is illustrated by the
increases in the total US active land rig count. This count declined throughout
1998 reaching a more than fifty-year low of 380 working rigs during April 1999.
Since then it has improved to 634 working rigs by October 29, 1999 (Based on
information published by Baker Hughes). This improvement was driven almost
exclusively by rigs drilling for natural gas. This increase has benefited Nabors
directly, and as a result, after six consecutive quarters of declining operating
income, the Current Quarter's results appear to mark the beginning of a
sustainable upturn in our business that should progressively improve. During the
Current Quarter, the Company experienced an improvement in its US Lower 48 and
Gulf of Mexico offshore platform workover operations as compared to the second
quarter of 1999; however, activity levels in these areas remain lower than
during the 1998 comparable period. Largely offsetting these improvements over
the second quarter of 1999 were lower rig counts in the Company's higher margin
international land and offshore platform drilling operations as a number of
long-term contracts expired, causing results in these units to also be
significantly lower than 1998 levels.
Looking forward, the Company anticipates consistently improving
operating results in the US Lower 48 as well as increased seasonal levels of
activity in Canada resulting from the high natural gas related demand for deep
drilling, silicon-controlled rectifier (SCR) rigs with top drives in the
Canadian foothills. The Alaskan drilling operation stabilized during the Current
Quarter and is expected to improve beginning in 2000. Additionally, utilization
of the Company's international land and offshore platform drilling rigs are
expected to show improvements beginning late in the fourth quarter of 1999. In
summary, if the current commodity price environment continues, modest
improvements are expected for the remainder of 1999 and increasingly significant
improvements are expected throughout fiscal 2000.
12
<PAGE> 14
The following tables set forth certain financial information with
respect to the Company's operating segments, the Company's rig activity and
certain industry data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
INCREASE INCREASE
1999 1998 (DECREASE) 1999 1998 (DECREASE)
---------- ---------- ------------------ ---------- ---------- -------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract drilling $ 132,043 $ 202,461 $ (70,418) (35%) $ 399,203 $ 683,781 $ (284,578) (42%)
Manufacturing and logistics 12,625 25,941 (13,316) (51%) 32,311 87,483 (55,172) (63%)
Other(1) (2,278) (4,187) 1,909 46% (6,198) (11,347) 5,149 45%
---------- ---------- ---------- ---------- ---------- ----------
Total revenues $ 142,390 $ 224,215 $ (81,825) (36%) $ 425,316 $ 759,917 $ (334,601) (44%)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss):
Contract drilling $ 12,156 $ 45,525 $ (33,369) (73%) $ 47,934 $ 148,107 $ (100,173) (68%)
Manufacturing and logistics 831 3,632 (2,801) (77%) 4,670 13,745 (9,075) (66%)
Other(2) (2,965) (4,052) 1,087 27% (10,816) (10,981) 165 2%
---------- ---------- ---------- ---------- ---------- ----------
Total operating income $ 10,022 $ 45,105 $ (35,083) (78%) $ 41,788 $ 150,871 $ (109,083) (72%)
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
INCREASE INCREASE
1999 1998 (DECREASE) 1999 1998 (DECREASE)
-------- -------- ------------------ -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rig activity:
Rig years (3) 144.1 185.7 (41.6) (22%) 133.0 213.8 (80.8) (38%)
Rig utilization 29% 43% (14%) (33%) 28% 51% (23%) (45%)
Industry data:
Average West Texas
intermediate crude
oil spot price ($/bbl)(4) $ 21.72 $ 14.17 $ 7.55 53% $ 17.58 $ 14.88 $ 2.70 18%
Average US natural gas
spot price ($/mcf)(4) $ 2.45 $ 1.92 $ .53 28% $ 2.11 $ 2.05 $ .06 3%
Average US land rig
count(5) 516 657 (141) (21%) 452 740 (288) (39%)
Average International
land rig count(5) 398 487 (89) (18%) 407 519 (112) (22%)
</TABLE>
(1) Elimination of inter-segment manufacturing and logistics sales.
(2) Includes the elimination of inter-segment transactions and unallocated
corporate expenses.
(3) 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 .5 rig years.
(4) Source: Bloomberg
(5) Source: Baker Hughes
Contract drilling. Contract drilling revenues totaled $132.0 million
during the Current Quarter and $399.2 million during the Current Period,
representing decreases of 35% and 42%, respectively, compared with the prior
year periods. Equivalent rig years decreased to 144.1 years during the Current
Quarter and 133.0 years during the Current Period compared to averages of 185.7
and 213.8 years during the comparable prior year periods. Substantially all of
the Company's contract drilling operations experienced declines in drilling
activity and dayrates during the Current Quarter and Current Period as compared
to the prior year periods. These declines resulted from the reduced demand for
drilling and workover services caused by reduced customer spending resulting
from lower crude oil and natural gas prices throughout 1998 and the first
quarter of 1999.
Alaskan revenues were lower during the Current Quarter and Current
Period as a result of lower equivalent rig years and lower average dayrates as
compared to the prior year periods. A number of rig contracts in Alaska were not
renewed as expected during the Current Period as a result of the prevailing
market conditions. This reduction in drilling
13
<PAGE> 15
activity was partially offset by the contribution of two newly constructed 1,000
horsepower re-drilling and re-completion drilling rigs, 7ES and 9ES, which
commenced five-year contracts during the fourth quarter of 1998.
Canadian revenues were lower during the Current Quarter and Current
Period as a result of lower equivalent rig years and dayrates associated with
the reduced demand for drilling services.
US Lower 48 revenues decreased significantly during the Current Quarter
and Current Period as a result of reduced demand for drilling services. The
decline in active rigs has been more prevalent for the Company's shallower
mechanical rig fleet, however, all rig categories have been adversely impacted.
Dayrates for all classes of rigs have also decreased compared to the prior year
periods. The impact of reduced activity levels and lower dayrates on US Lower 48
margins was somewhat mitigated as an increased percentage of the Company's
working rigs were deep drilling SCR rigs, which typically command higher
dayrates than shallower mechanical rigs. US Lower 48 revenues for the Current
Quarter and Current Period reflect the addition of 87 rigs (73 of which are
actively marketed) in connection with the acquisition of Bayard Drilling
Technologies, Inc. ("Bayard") during April 1999.
International operation revenues decreased during the Current Quarter
and Current Period primarily as a result of reduced drilling activity in the
Middle East and South America. Middle Eastern revenues declined primarily as a
result of reductions in drilling activity and dayrates in Saudi Arabia.
Additionally, the Ocean Master VIII, a jack-up drilling rig that operated in the
Persian Gulf during 1998, has not operated during 1999, which further negatively
impacted Middle Eastern revenues as compared to the prior year periods. South
American revenues were down from the prior year periods as a result of lower
drilling activity in Venezuela and Colombia. These decreases in South America
were partially offset by the contribution of four rigs that commenced operations
in Bolivia during the second half of 1998.
Offshore revenues decreased during the Current Quarter and Current
Period as a result of lower workover activity in the Gulf of Mexico as compared
to the prior year periods. The Company's platform workover rigs and jack-up
workover rigs experienced fewer operating days and lower dayrates as a result of
the decrease in demand. Revenues for the Company's platform drilling rigs
operating in the Gulf of Mexico were also lower as compared to the prior year
periods due to lower equivalent rig years. Internationally, platform workover
revenues increased during the Current Quarter and Current Period as a result of
the deployment of three Super Sundowner(R) rigs, which began operations offshore
Mexico during the fourth quarter of 1998.
Manufacturing and logistics. Manufacturing and logistics revenues
totaled $12.6 million during the Current Quarter and $32.3 million during the
Current Period, representing decreases of 51% and 63%, respectively, compared
with the prior year periods. These decreases were primarily attributable to a
change in the method of accounting for the Company's investments in several 50%
owned joint ventures, primarily Peak Oilfield Services Company, the Company's
Alaskan construction and logistics joint venture. Beginning January 1, 1999,
these joint ventures have been accounted for using the equity method of
accounting, with the Company's equity in the net income of the joint ventures
recorded as a component of revenues in the condensed consolidated statements of
income. During the prior year period, these investments were accounted for using
the proportionate consolidation method whereby the Company's pro rata share of
revenues and expenses were recorded as corresponding revenues and expenses of
the Company. Additionally, revenues for Peak Oilfield Services were lower during
the Current Quarter and Current Period as a result of reduced activity. Canrig
revenues were higher during the Current Quarter and relatively unchanged during
the Current Period as a result of top drive sales that took place during the
Current Quarter. Additionally, the top drive rental fleet introduced throughout
1998 contributed to increased revenues during the Current Quarter and Current
Period. Revenues for Epoch, the Company's drilling operation software and
instrumentation provider, were lower during the Current Quarter and Current
Period as a result of decreased industry activity.
14
<PAGE> 16
The following table sets forth selected consolidated financial
information of the Company expressed as a percentage of total operating revenues
excluding earnings (losses) from unconsolidated affiliates:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Direct costs 65.7% 62.2% 63.6% 64.2%
------ ------ ------ ------
Gross margin 34.3% 37.8% 36.4% 35.8%
General and administrative expenses 10.5% 8.3% 11.0% 7.7%
Depreciation and amortization 16.8% 9.5% 16.4% 8.2%
------ ------ ------ ------
Operating income 7.0% 20.0% 9.0% 19.9%
Other (expense) income (1.6%) (0.3%) (2.1%) 1.8%
------ ------ ------ ------
Income before income taxes 5.4% 19.7% 6.9% 21.7%
Income taxes 2.1% 7.0% 3.0% 8.0%
------ ------ ------ ------
Net income 3.3% 12.7% 3.9% 13.7%
------ ------ ------ ------
</TABLE>
Generally, the Company's gross margin percentage may be affected by
changes in the proportion of revenues derived in its various areas of operation,
as contracts in the US Lower 48 typically earn a lower gross margin percentage
than Alaska, international and offshore contracts. The decrease in the gross
margin percentage during the Current Quarter was the result of the Current
Quarter increase in the percentage of the Company's revenues derived in the US
Lower 48. Additionally, average dayrates in many of the Company's operating
areas were lower during the Current Quarter and Current Period as compared to
the prior year periods. During the Current Period, a greater percentage of the
Company's revenues were generated by the Company's more profitable areas of
operation, which increased the gross margin percentage as compared to the prior
year period. Additionally, the change in the method of accounting for the
Company's investments in several joint ventures increased the gross margin
percentage for the Current Period as the Company's equity in the net income of
the joint ventures is now recorded as revenue. General and administrative
expenses as a percentage of revenues increased during the Current Quarter and
Current Period due to the decline in the Company's revenues, as these expenses
were spread over a smaller revenue base. The Company has effected significant
reductions in overhead costs in light of the current market environment, and as
a result, general and administrative expenses have decreased in terms of
absolute dollars during the Current Quarter and Current Period. Depreciation
expense as a percentage of revenues increased during the Current Quarter and
Current Period as a result of the decrease in revenues for the Current Quarter
and Current Period, as well as significant capital expenditures and a number of
acquisitions completed during 1998 and 1999.
Interest expense increased during the Current Quarter and Current
Period primarily as a result of the March 1999 issuance of the $325.0 million
6.80% Senior Unsecured Notes due April 15, 2004 (the "6.80% Notes").
Additionally, interest expense for the Current Quarter and Current Period
includes interest on the acquired Bayard $100.0 million 11% Senior Notes due
2005 (the "Bayard 11% Notes") beginning in April 1999 and continuing through the
beginning of August 1999, when the Bayard 11% Notes were purchased from the
public by the Company in connection with a tender offer. Interest expense for
the Current Quarter and Current Period was somewhat reduced, however, as a
result of several debt reduction transactions that were completed during July
and August 1999 (see further discussion under "Liquidity and Capital
Resources"). Interest income increased during the Current Quarter and Current
Period as a result of interest income earned on the remaining proceeds from the
6.80% Notes.
Other income decreased during the Current Quarter and Current Period.
During the Current Quarter and Current Period, other income consisted primarily
of realized and unrealized holding gains recognized on investments in marketable
equity securities and gains on physical damage insurance claims. During the
prior year, gains were recognized on the January 1998 sale of J.W. Gibson, the
Company's land workover and well servicing operation, and on physical damage
insurance claims.
The effective tax rate during the Current Quarter and Current Period
was 39.0%, as compared to an effective tax rate of 35.6% and 37.0% for the prior
year quarter and nine month period, respectively.
15
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
Despite the current market conditions, the Company generates
significant cash from operations. The Company also has substantial borrowing
capacity under various credit facility arrangements. Additionally, the Company
has access to public debt and equity capital markets. The Company's senior
unsecured debt ratings as provided by Moody's Investor Service and Standard &
Poor's are "A3" and "A-", respectively.
During July 1999, the Company prepaid the entire $40.0 million
aggregate principal amount of its 9.18% Senior Notes due July 31, 2006, issued
to John Hancock Mutual Life Insurance Company and an affiliate (the "9.18%
Notes"), at par plus a make-whole premium of approximately $4.5 million.
During July 1999, the Company made a cash tender offer to the holders
of the Bayard 11% Notes that expired on August 3, 1999. The price offered was
$1,110 per $1,000 note plus interest on such amount from and including July 2,
1999 to but excluding the date of payment, at a per annum rate of 5.0%. In
connection with the offer, the Company accepted for payment all $100 million in
aggregate principal amount of Notes tendered.
During June 1999, the Company issued a Notice of Redemption to holders
of the Company's 5% Notes for mandatory redemption on July 15, 1999 at a
redemption price of $1,035 per $1,000 note together with accrued and unpaid
interest from May 15, 1999 to the redemption date. Alternatively, holders of the
5% Notes could elect to convert their notes prior to redemption, whereby each
$1,000 note would be converted into 55.1724 shares of the Company's common
stock. Subsequently, 9.51 million shares of common stock were issued to holders
of $172.3 million aggregate principal amount of the 5% Notes. The remaining $.16
million of the 5% Notes were redeemed in accordance with the Notice of
Redemption. As a result of the conversions and the redemption, the 5% Notes were
cancelled during July 1999 and ceased to be outstanding.
During March 1999, the Company issued the 6.80% Notes. Interest on the
6.80% Notes is payable semi-annually on April 15 and October 15, commencing on
October 15, 1999. A portion of the proceeds from the issuance of the 6.80% Notes
was used to repay certain short-term and long-term borrowings of the Company,
including the debt reduction transactions described above, and to purchase rigs
and related equipment from Bayard, a wholly owned subsidiary of the Company
(Note 2). Bayard used the proceeds from the equipment sale to repay certain of
its senior debt. The remaining proceeds from the issuance of the 6.80% Notes
will be used for general corporate purposes, including but not limited to,
working capital and possible future business acquisitions.
During June 1999, the Company filed a shelf registration statement on
Form S-3 with the Securities and Exchange Commission (SEC) to allow the Company
to offer, from time to time, up to $500.0 million in debt securities, preferred
stock, common stock, depository shares or warrants. The SEC declared the
registration statement effective on June 28, 1999. The Company currently has not
issued any securities registered under the registration statement.
The Company had working capital of $203.0 million as of September 30,
1999, representing a $181.8 million increase as compared to December 31, 1998.
The increase in working capital is primarily attributable to the significant
increase in cash and cash equivalents representing the remaining proceeds from
the issuance of the 6.80% Notes. Additionally, proceeds from the 6.80% Notes
were used to reduce short-term borrowings as compared to December 31, 1998. The
balances of accounts receivable and accounts payable have decreased as compared
to December 31, 1998 as a result of the decline in drilling activity.
Additionally, the current portion of long-term obligations decreased primarily
as a result of principal payments on various term notes. Goodwill was recorded
in connection with the acquisition of Bayard and other long-term assets
increased as a result of the change in the method of accounting for the
Company's investments in several joint ventures (Note 1). The Company's
long-term obligations increased primarily as a result of the issuance of the
6.80% Notes, but reflects the pre-payment of the 9.18% Notes and the conversion
and redemption of the 5% Notes. The Company's ratio of funded debt to funded
debt plus stockholders' equity, commonly referred to as the debt to capital
ratio, was 0.22:1 as of September 30, 1999 as compared to 0.26:1 as of December
31, 1998.
Net cash provided by operating activities totaled $108.4 million during
the Current Period, compared to $226.4 million during the prior year period.
During the Current Period and prior year period, net income was increased for
non-cash items such as depreciation and deferred taxes and cash was provided
from changes in the Company's working capital accounts.
16
<PAGE> 18
Net cash used for investing activities totaled $44.7 million during the
Current Period compared to $223.1 million during the prior year period. Cash was
used primarily for capital expenditures, acquisitions of businesses and
purchases of marketable securities during both the Current Period and the prior
year period. During the Current Period and prior year period, cash was provided
by the disposition of long-term assets and businesses.
Financing activities provided cash totaling $75.6 million during the
Current Period, but used cash of $5.2 million during the prior year period.
During the Current Period, cash was provided by the issuance of the 6.80% Notes
and was used to reduce short-term borrowings and other long-term borrowings.
During the prior year period, cash was used primarily to reduce long-term
borrowings.
The Company's cash and cash equivalents and investments in short-term
marketable securities totaled $175.0 million as of September 30, 1999. The
Company currently has credit facility arrangements with various banks with total
availability of $225.4 million. As of September 30, 1999, remaining
availability, after borrowings on the facilities and outstanding letters of
credit, totaled approximately $210.8 million.
During April 1999, the Company completed its acquisition of Bayard
through the merger of Bayard and a wholly-owned, special purpose subsidiary of
the Company. Pursuant to the merger, each of the approximately 18.3 million
shares of Bayard common stock were exchanged for .3375 shares of the Company's
common stock and $.30 per share in cash (approximately 6.17 million shares and
$5.5 million in cash in the aggregate). Approximately $116.0 million of Bayard's
debt remained outstanding as an obligation of Bayard immediately following the
merger, which the Company did not guarantee. Approximately $14.3 million of
Bayard's senior debt was paid off subsequent to the merger pursuant to
contractual requirements and all of the Bayard 11% Notes were acquired by Nabors
from the public in connection with a cash tender offer completed during August
1999.
As of September 30, 1999, the Company had outstanding capital
expenditure purchase commitments of approximately $10.2 million.
During January 1999, the Company executed a definitive merger agreement
with Pool Energy Services Co. ("Pool"), pursuant to which each of the
approximately 19.1 million shares of Pool common stock not owned by the Company
prior to the merger will be exchanged for 1.025 shares of the Company's common
stock (approximately 19.6 million shares). As of June 30, 1999 Pool had
approximately $192.8 million of long-term debt that will remain an obligation of
Pool after the acquisition. On July 29, 1999, the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, expired with
respect to Nabors' previously announced acquisition of Pool Energy Services Co.
("Pool"). Nabors has been advised that the Department of Justice has closed its
investigation with respect to the proposed transaction. Pool's shareholders
approved the Pool merger agreement on September 28, 1999. Completion of the
transaction remains subject to various closing conditions, including amendment
of Pool's Saudi joint venture or other arrangement being made so that the
operations of Nabors and Pool in Saudi Arabia are not adversely affected by the
transaction and customary conditions such as the accuracy of the parties'
representations and warranties and compliance with covenants. The October 1,
1999 termination date set forth in the merger agreement has passed and either
party may terminate the agreement. Nevertheless, the parties are continuing to
use their best efforts to close the transaction as promptly as is practicable.
However, there can be no assurance that the transaction will be consummated.
Projected capital expenditures for the remainder of 1999 are expected
to reflect substantial reductions in cash spending as a result of current market
conditions. The Company has historically completed a number of acquisitions and
will continue to evaluate opportunities to acquire assets or businesses to
enhance the Company's core operations. Such capital expenditures and
acquisitions are at the discretion of the Company and will depend on
management's view of market conditions and other factors.
The current cash and cash equivalents, short-term investments, credit
facility position, and projected cash flow generated from current operations,
are expected to adequately finance the Company's sustaining capital and debt
service requirements for the next twelve months.
17
<PAGE> 19
OTHER MATTERS
YEAR 2000 ISSUE AND COMPLIANCE PROGRAM
Background - The Year 2000 problem ("Y2K") refers to the fact that a
number of computers, computer programs and other equipment with embedded chips
or processors (referred to collectively as "Systems") in use today, use two
digits rather than four digits to define the applicable year. Any Systems that
are date sensitive may recognize a date of "00" as the year 1900 rather than the
year 2000. This could result in miscalculations or System failures causing
disruptions of operations, as well as potentially exposing the Company to third
party liability.
Y2K Compliance Program - The Company initiated a Y2K compliance program
during July 1998 to ensure that all of the critical Systems and processes that
are under its direct control remain functional. The Company organized a task
force of key employees, including a full-time Y2K coordinator, and engaged an
outside consultant to assist in the management of its Y2K compliance program.
The Company's Y2K compliance program focused on the Company's Systems as well as
the Systems of key third party service providers, product suppliers and
customers. The first phase of the program consisted of inventorying or
identifying all Systems. The identified Systems were prioritized and all
critical Systems were assessed for Y2K compliance as part of the second phase of
the program. In the third phase, Systems were remediated or replaced as
necessary and contingency plans were developed. The fourth phase involves
testing select critical systems to ensure Y2K compliance. The Company has
substantially completed the inventory, assessment, testing and remediation
phases of the program and is finalizing contingency planning. The Company
anticipates the entire program being completed in advance of the year 2000.
Critical Systems - The Systems that are critical to the Company's
operations include both its accounting and administrative Systems and its
operational Systems. Upgrades to a number of the Company's accounting and
administrative Systems in the ordinary course of business had the added benefit
of resolving certain Y2K compliance issues. Accordingly, the Company believes
its critical accounting and administrative Systems, which consist primarily of
computer hardware and software, to be substantially Y2K compliant. The Company's
critical operational Systems consist primarily of Systems in use on the
Company's drilling rigs. The Company has completed an inventory of each drilling
and workover rig's critical Systems and has substantially completed assessing
these Systems for Y2K compliance. Based on this analysis and in reliance on
information provided by various equipment vendors, the Company's rigs appear to
be Y2K compliant.
Nabors Products - Two of the Company's subsidiaries manufacture and
sell software, instrumentation and top drive systems to affiliates and third
parties. Manufacturers such as Canrig and Epoch may have added exposure to third
parties that can be mitigated, in part, by early notification and remediation,
which the Company has completed. Epoch has thoroughly investigated its hardware
and software products for Y2K compliance. With the exception of PERC versions
4.0 and earlier, and DRS for DOS, all are Y2K compliant. Epoch has upgrades
available for both of the non-compliant products that will make them Y2K
compliant and provide additional benefits for customers. Epoch has alerted all
customers who purchased non-compliant products as to the potential problems, and
has offered to sell them the upgrades. Most of the customers have upgraded or
agreed to upgrade. The remaining customers either have determined not to upgrade
or are still assessing their systems. Canrig has identified four embedded chips
which interface with its top drives and has contacted the manufacturers of these
chips. The manufacturers all have certified that the chips are Y2K compliant. In
addition, the Company has validated the manufacturer's certification through
testing. Even so, the Company cannot guarantee that systems supplied by third
party manufacturers will remain functional. Finally, in operating the top
drives, no dates are entered and no calculations are made utilizing dates.
Therefore, the issue of Y2K compliance does not appear applicable to the top
drives as manufactured by the Company.
Key Third Parties - Third parties that are key to the Company's
operations include suppliers that provide capital equipment and other supplies
and services essential to the operation of the Company's drilling rigs or
business, and customers that provide a source of revenue and cash flow to the
Company. Any significant Y2K disruptions of the Company's key suppliers and
customers could adversely impact the Company's financial condition, results of
operations or cash flows. The Company has directly contacted key suppliers and
customers and has reviewed published information of various suppliers to
determine the state of their Y2K readiness. Because the Company must rely on
representations made by key third parties with respect to their state of Y2K
readiness, it cannot guarantee that all of the Systems of key third parties that
are relied upon by the Company will remain functional. The Company has
substantially completed identifying and contacting all key third parties with
respect to their Y2K readiness.
18
<PAGE> 20
Contingency Plans - Contingency plans have been prepared by each
business unit. These plans address the continuation or restoration of critical
business functions should a Y2K disruption occur. The Company expects to
finalize these plans by November 30, 1999.
Costs - To date, the incremental costs incurred by the Company that
relate solely to the Y2K compliance program have not been and are not expected
to be material. These costs are exclusive of upgrades made to the Company's
Systems in the ordinary course of business and consist primarily of fees paid to
an outside consultant and internal employee time. The Company does not
separately track the internal costs incurred for the Y2K project, which consist
primarily of payroll and related costs associated with employee time. Based upon
the Company's current assessments, the costs to complete the Company's Y2K
compliance program will not have a material effect on the Company's financial
condition, results of operations or cash flows. All current and future costs
related to the Company's Y2K compliance program have been and are expected to be
funded with cash generated from the Company's operations.
Risks - There are numerous uncertainties that make the ultimate impact
of Y2K disruptions in the United States or other countries where the Company
operates difficult to predict. While the Company will obtain representations
from key third parties with respect to their Y2K readiness, there will be
certain Systems or processes relied on by the Company that are outside of the
Company's control. The failure by key third parties to correct their Y2K issues
could adversely affect the Company. Additionally, the Company could be
unsuccessful in identifying and remediating or replacing all of its
non-compliant Systems, and as such, the Company's financial condition, results
of operations and cash flows could be materially impacted. While the Company
does not currently anticipate any catastrophic System failures, no assurances
can be made that such failures will not ultimately occur.
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 1934. When used in this document, words
such as "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "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 or implied in the
forward-looking statements. Factors that might cause such a difference include:
- fluctuations in worldwide prices of oil and natural gas and demand
for oil and natural gas;
- fluctuations in levels of oil and gas exploration and development
activities;
- fluctuations in the demand for contract drilling and workover
services;
- the existence of competitors, technological changes and developments
in the industry;
- the existence of operating risks inherent in the contract drilling
industry;
- the existence of regulatory uncertainties;
- the possibility of political instability in any of the countries in
which Nabors does business; and
- year 2000 issues and general economic conditions.
The Company's 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 oil or
natural gas, which could have a material impact on exploration, development and
production activities, also could materially affect the Company's financial
condition, results of operations and cash flows.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In Nabors' Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, Nabors reported regarding material litigation involving an acquired
subsidiary, Bayard Drilling Technologies, Inc. The lawsuit, Yuan v. Bayard
Drilling Technologies, Inc. et al., was filed in February 1998 in the United
States District Court for the Western District of Oklahoma. The Yuan case was
consolidated with two other related cases in July 1998. During the quarter ended
September 30, 1999, the motion to dismiss previously filed by Bayard was granted
in part and denied in part. Control person liability claims asserted against
certain former directors and officers of Bayard (i.e., Carl B. Anderson, III,
Merrill A. Miller, Jr., Sidney L. Tassin, Lew O. Ward, and Mike Mullen), Roy T.
Oliver, Chesapeake Energy Corporation and Energy Spectrum LLC were dismissed.
All of the other claims against all of the defendants remain pending.
19
<PAGE> 21
Nabors and Bayard believe the allegations in the lawsuits referenced
above are without merit and Bayard is defending vigorously the claims brought
against it. Neither Nabors nor Bayard is able, however, to predict the outcome
of these lawsuits or the costs to be incurred in connection with their defense
and there can be no assurance that this litigation will be resolved in Bayard's
favor. An adverse result or prolonged litigation could have a material adverse
effect on the financial position or results of operations of Bayard.
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 the
Nabors' consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES.
On June 30, 1999, Nabors announced the redemption of all of its
outstanding 5% convertible Subordinated Notes due 2006 on July 15, 1999. The 5%
notes were redeemable at $1,035 per $1,000 principal amount plus accrued
interest from May 15, 1999 to the redemption date. In lieu of redemption, each
$1,000 principal amount was convertible into 55.172 shares of Nabors common
stock at a conversion price of $18.125 per share. Of the $172.5 million
principal amount outstanding, $.16 million was redeemed, and the remainder was
converted into 9,508,158 shares of Nabors common stock.
On July 6, 1999, Nabors commenced a tender offer with respect to $100
million aggregate principal amount of Bayard Drilling Technologies' 11% Senior
Notes due 2005. The offer expired in accordance with its terms at 5:00 P.M. New
York City time, on August 3, 1999. Nabors accepted for payment all $100 million
in aggregate principal amount of Notes tendered.
ITEM 5. OTHER INFORMATION
Retirement of debt
On July 15, 1999, Nabors prepaid $40 million aggregate principal amount
of its 9.18% Senior Notes due July 31, 2006, issued to John Hancock Mutual Life
Insurance Company and an affiliate, at par, plus a make-whole premium of
approximately $4.5 million.
Pool Transaction
On July 29, 1999, the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, expired with respect to Nabors'
previously announced acquisition of Pool Energy Services Co. ("Pool"). Nabors
has been advised that the Department of Justice has closed its investigation
with respect to the proposed transaction. Pool's shareholders approved the Pool
merger agreement on September 28, 1999. Completion of the transaction remains
subject to various closing conditions, including amendment of Pool's Saudi joint
venture or other arrangement being made so that the operations of Nabors and
Pool in Saudi Arabia are not adversely affected by the transaction and customary
conditions such as the accuracy of the parties' representations and warranties
and compliance with covenants. The October 1, 1999 termination date set forth in
the merger agreement has passed and either party may terminate the agreement.
Nevertheless, the parties are continuing to use their best efforts to close the
transaction as promptly as is practicable. However, there can be no assurance
that the transaction will be consummated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re: Computation of Per Share Earnings
15.1 Awareness Letter of Independent Accountants
27 Financial Data Schedule
20
<PAGE> 22
(b) Reports on Form 8-K
o Current Report on Form 8-K filed July 1, 1999 announcing the call
for redemption by Nabors Industries of its 5% Convertible
Subordinated Notes due 2006.
o Current Report on Form 8-K filed July 7, 1999 announcing
commencement of a tender offer by Nabors Industries for all of
Bayard Drilling Technologies' 11% Senior Notes due 2005, and with
regard to a standby underwriting arrangement for the 5% Convertible
Subordinated Notes redemption.
21
<PAGE> 23
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, INC.
/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 15, 1999
22
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
11 Statement re: Computation of Per Share Earnings
15.1 Awareness Letter of Independent Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of shares outstanding 114,382 100,788 106,887 100,811
--------- --------- --------- ---------
Net income $ 4,741 $ 28,538 $ 20,003 $ 103,962
--------- --------- --------- ---------
Per share amount $ .04 $ .28 $ .19 $ 1.03
--------- --------- --------- ---------
Diluted:
Weighted average number of shares outstanding 114,382 100,788 106,887 100,811
Net effect of dilutive stock options and warrants-based
on the treasury stock method using
average market price 8,717 1,521 8,717 2,641
Assumed conversion of 5% convertible notes -- 9,517 -- 9,517
--------- --------- --------- ---------
Total 123,099 111,826 115,604 112,969
--------- --------- --------- ---------
Net income $ 4,741 $ 28,538 $ 20,003 $ 103,962
Add 5% convertible note interest, net
of tax effect -- 1,358 -- 4,075
--------- --------- --------- ---------
Total $ 4,741 $ 29,896 $ 20,003 $ 108,037
--------- --------- --------- ---------
Per share amount $ .04 $ .27 $ .17 $ .96
--------- --------- --------- ---------
</TABLE>
<PAGE> 1
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Nabors Industries, Inc. and Subsidiaries Registration
Statements on Form S-8, Form S-4 and Form S-3
We are aware that our report dated October 20, 1999 on our review of the interim
condensed consolidated financial information of Nabors Industries, Inc. and
Subsidiaries for the three months and nine months ended September 30, 1999 and
included in this Form 10-Q is incorporated by reference in the Company's
registration statements on Form S-8 (Registration Numbers 333-87069, 333-86289,
333-76077, 333-11313, 33-87324, 33-87322, 33-47521, 33-45097 and 33-39316), on
Form S-4 (Registration Number 333-84781) and on Form S-3 (Registration Number
333-81137). Pursuant to Rule 436(c) under the Securities Act of 1933, this
report should not be considered a part of the registration statement prepared or
certified by us within the meanings of Section 7 and 11 of the Act.
PricewaterhouseCoopers LLP
Houston, Texas
November 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 154,618
<SECURITIES> 20,340
<RECEIVABLES> 118,382
<ALLOWANCES> 3,761
<INVENTORY> 18,107
<CURRENT-ASSETS> 354,032
<PP&E> 1,656,893
<DEPRECIATION> 449,394
<TOTAL-ASSETS> 1,715,016
<CURRENT-LIABILITIES> 151,063
<BONDS> 325,156
0
0
<COMMON> 11,752
<OTHER-SE> 1,179,481
<TOTAL-LIABILITY-AND-EQUITY> 1,715,016
<SALES> 421,683
<TOTAL-REVENUES> 425,316
<CGS> 268,086
<TOTAL-COSTS> 268,086
<OTHER-EXPENSES> 115,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,339
<INCOME-PRETAX> 32,791
<INCOME-TAX> 12,788
<INCOME-CONTINUING> 20,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,003
<EPS-BASIC> 0.19
<EPS-DILUTED> 0.17
</TABLE>
