<PAGE> 1
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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 JUNE 30, 1999
COMMISSION FILE NUMBER: 1-9245
--------------------
NABORS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
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 July 31, 1999 was 116,594,705.
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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
June 30, 1999 and December 31, 1998.........................................2
Condensed Consolidated Statements of
Income for the Three Months and Six Months
Ended June 30, 1999 and 1998................................................3
Condensed Consolidated Statements of
Changes in Stockholders' Equity for the Six
Months Ended June 30, 1999 and 1998.........................................4
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended June 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 2. Changes in Securities.......................................................19
Item 4. Submission of Matters to a Vote of Security Holders.........................20
Item 5. Other Information...........................................................20
Item 6. Exhibits and Reports on Form 8-K............................................21
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>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 286,215 $ 16,748
Marketable securities 21,208 6,702
Accounts receivable, net 105,688 174,304
Inventory and supplies 24,447 25,740
Prepaid expenses and other current assets 56,851 42,021
------------ ------------
Total current assets 494,409 265,515
Property, plant and equipment, net 1,212,403 1,127,154
Marketable securities 44,880 23,890
Goodwill, net 42,441 8,037
Other long-term assets 58,874 25,646
------------ ------------
Total assets $ 1,853,007 $ 1,450,242
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 138,137 $ 11,329
Short-term borrowings 4,785 74,565
Trade accounts payable 39,249 58,534
Accrued liabilities 97,282 85,262
Income taxes payable 11,237 14,668
------------ ------------
Total current liabilities 290,690 244,358
Long-term obligations 497,697 217,034
Other long-term liabilities 61,531 49,182
Deferred income taxes 6,764 72,199
------------ ------------
Total liabilities 856,682 582,773
------------ ------------
Commitments and contingencies
Stockholders' equity:
Capital stock, par value $.10 per share:
Authorized common shares 200,000;
issued and outstanding 107,664 and 101,382 10,766 10,138
Capital in excess of par value 491,243 394,562
Accumulated other comprehensive income (loss) 5,302 (10,983)
Retained earnings 493,831 478,569
Less treasury stock, at cost, 589 common shares (4,817) (4,817)
------------ ------------
Total stockholders' equity 996,325 867,469
------------ ------------
Total liabilities and stockholders' equity $ 1,853,007 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 129,636 $ 249,259 $ 279,328 $ 536,139
Earnings (losses) from unconsolidated affiliates 303 (331) 3,598 (437)
------------ ------------ ------------ ------------
Total revenues 129,939 248,928 282,926 535,702
------------ ------------ ------------ ------------
Operating expenses:
Direct costs 81,295 160,095 174,595 348,542
General and administrative expenses 15,080 20,034 31,379 40,139
Depreciation and amortization 23,764 20,052 45,186 41,255
------------ ------------ ------------ ------------
Operating expenses 120,139 200,181 251,160 429,936
------------ ------------ ------------ ------------
Operating income 9,800 48,747 31,766 105,766
------------ ------------ ------------ ------------
Other (expense) income:
Interest expense (11,237) (3,999) (16,642) (7,738)
Interest income 3,516 194 4,716 941
Other income, net 3,328 11,775 5,180 21,767
------------ ------------ ------------ ------------
Other (expense) income (4,393) 7,970 (6,746) 14,970
------------ ------------ ------------ ------------
Income before income taxes 5,407 56,717 25,020 120,736
------------ ------------ ------------ ------------
Income taxes:
Current 1,278 9,578 5,062 20,643
Deferred 831 11,407 4,696 24,669
------------ ------------ ------------ ------------
Income taxes 2,109 20,985 9,758 45,312
------------ ------------ ------------ ------------
Net income $ 3,298 $ 35,732 $ 15,262 $ 75,424
------------ ------------ ------------ ------------
Earnings per share:
Basic $ .03 $ .35 $ .15 $ .75
------------ ------------ ------------ ------------
Diluted $ .03 $ .33 $ .14 $ .69
------------ ------------ ------------ ------------
Weighted average number of shares outstanding:
Basic 105,476 100,839 103,139 100,822
------------ ------------ ------------ ------------
Diluted 110,890 113,277 108,553 113,540
------------ ------------ ------------ ------------
</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 75,424 75,424
Translation adjustment (1,411) (1,411)
Unrealized loss on
marketable securities,
net (6,444) (6,444)
----------------------------------------------------------------------------------------------------
Total comprehensive
income - - - (7,855) 75,424 - 67,569
----------------------------------------------------------------------------------------------------
Issuance of common shares
for stock options exercised 77 7 509 516
Tax benefit on stock option
deductions 11,240 11,240
Return and retirement of
common shares held in
escrow in connection
with the Adcor merger (53) (5) (995) (1,000)
Warrants issued in
connection with acquisition 1,451 1,451
----------------------------------------------------------------------------------------------------
Subtotal 24 2 12,205 - - - 12,207
----------------------------------------------------------------------------------------------------
Balances, June 30, 1998 101,349 $ 10,135 $ 412,325 $(1,185) $ 429,005 $ (3,164) $ 847,116
----------------------------------------------------------------------------------------------------
Balances, December 31, 1998 101,382 $ 10,138 $ 394,562 $(10,983) $ 478,569 $ (4,817) $ 867,469
----------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 15,262 15,262
Translation adjustment 732 732
Unrealized gain on
marketable securities,
net 15,553 15,553
----------------------------------------------------------------------------------------------------
Total comprehensive
income - - - 16,285 15,262 - 31,547
----------------------------------------------------------------------------------------------------
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 121 12 1,171 1,183
Tax benefit on stock option
deductions 21,166 21,166
Return and retirement of
common shares held in
escrow in connection
with the Adcor merger (12) (1) 1 -
Conversion of 5% Notes 6 - 113 113
----------------------------------------------------------------------------------------------------
Subtotal 6,282 628 96,681 - - - 97,309
----------------------------------------------------------------------------------------------------
Balances, June 30, 1999 107,664 $ 10,766 $ 491,243 $ 5,302 $ 493,831 $ (4,817) $ 996,325
----------------------------------------------------------------------------------------------------
</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>
SIX MONTHS ENDED JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 73,951 $ 157,662
------------ ------------
Cash flows from investing activities:
Purchases of marketable securities, available-for-sale (12,544) (1,915)
Cash received from disposition of long-term assets and businesses 12,499 24,844
Cash paid for acquisitions of businesses, net (5,233) (28,208)
Capital expenditures (26,795) (152,527)
Investment in affiliates -- (1,952)
------------ ------------
Net cash used for investing activities (32,073) (159,758)
------------ ------------
Cash flows from financing activities:
Increase in restricted cash (1,430) (15)
Increase (decrease) in long-term borrowings, net 298,041 (4,716)
(Decrease) increase in short-term borrowings, net (68,780) 3,797
Common stock transactions 1,183 516
------------ ------------
Net cash provided by (used for) financing activities 229,014 (418)
------------ ------------
Net increase (decrease) in cash and cash equivalents 270,892 (2,514)
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 $ 286,215 $ 3,109
------------ ------------
</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") 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, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
as of June 30, 1999, and the results of its operations, its changes in
stockholders' equity and its cash flows for the periods ended June 30, 1999 and
1998 in accordance with GAAP. Interim results for the six months ended June 30,
1999 are not necessarily indicative of results which 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 earnings 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 proportional
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 six months ended June 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 $2.7 million, respectively, representing interest expense
associated with the 5% Notes on an after tax basis. 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 six months ended June 30,
1998, 9.5 million shares of common stock assumed to be issued on conversion of
the 5% Notes. The 5% Notes are not assumed to be converted into common stock for
the three months and six months ended June 30, 1999 as the effect on earnings
per share in those periods would be anti-dilutive.
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). On the date of the merger, Bayard owned 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 has a
significant inventory of new component equipment including drill pipe, engines
and high horsepower mud pumps. Bayard also owns and operates 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 7).
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; (i) the elimination of
nonrecurring merger related costs, (ii) reduced depreciation expense reflecting
the reduction in value assigned to property, plant and equipment, (iii)
amortization of goodwill, (iv) reduced interest expense associated primarily
with the elimination of certain deferred financing costs and (v) the related
income tax effects thereon.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---------------------------------- --------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
--------------- ---------------- -------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues $ 282,926 $ 293,902 $ 535,702 $ 579,879
--------------- ------------- ------------ ------------
Net income before extraordinary
items $ 15,262 $ 9,725 $ 75,424 $ 79,893
--------------- ------------- ------------ ------------
Net income $ 15,262 $ 9,725 $ 75,424 $ 79,555
--------------- ------------- ------------ ------------
Net income before extraordinary
items per diluted share $ .14 $ .09 $ .69 $ .69
--------------- ------------- ------------ ------------
Net income per diluted share $ .14 $ .09 $ .69 $ .69
--------------- ------------- ------------ ------------
Weighted average number of
diluted shares outstanding: 108,553 111,637 113,540 119,707
--------------- ------------- ------------ ------------
</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
NOTE 3 SENIOR UNSECURED NOTES
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 were
used to repay certain short-term and long-term borrowings of the Company and to
purchase rigs and related equipment from Bayard, a wholly owned subsidiary of
the Company (Note 2). The proceeds from the equipment sale were subsequently
used by Bayard to repay certain Bayard senior debt. Additionally, a portion of
the proceeds was used in connection with several capital structure changes that
were completed in July and August 1999 and included: (i) the prepayment of the
Company's $40.0 million 9.18% Senior Notes due July 31, 2006, plus a make-whole
premium of approximately $4.5 million and (ii) the cash tender of the Bayard
$100.0 million 11% Senior Notes due 2005 (Note 7). 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, investment in subsidiaries and
possible future business acquisitions.
NOTE 4 CAPITAL STOCK
During the six months ended June 30, 1999, options to acquire 121,492
shares of common stock were exercised at prices ranging from $5.88 to $22.82 per
share.
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 June 1999, 6,287 shares of common stock were issued in
connection with the conversion of $.11 million aggregate principal amount of the
5% Notes. The remainder of the 5% Notes were converted or redeemed during July
1999 (Note 7).
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 5 COMMITMENTS AND CONTINGENCIES
Capital Expenditures
As of June 30, 1999, the Company had capital expenditure purchase
commitments outstanding of approximately $11.4 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.
8
<PAGE> 10
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------- ------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Contract drilling $ 124,100 $ 224,963 $ 267,160 $ 481,320
Manufacturing and logistics (1) 7,662 29,023 19,686 61,542
Other (2) (1,823) (5,058) (3,920) (7,160)
------------- ------------- ------------- --------------
Total revenues $ 129,939 $ 248,928 $ 282,926 $ 535,702
------------- ------------- ------------- --------------
Operating income (loss):
Contract drilling $ 14,494 $ 48,893 $ 35,778 $ 102,582
Manufacturing and logistics (476) 3,579 3,839 10,113
Other (3) (4,218) (3,725) (7,851) (6,929)
------------- ------------- ------------- --------------
Total operating income $ 9,800 $ 48,747 $ 31,766 $ 105,766
Consolidated interest expense (11,237) (3,999) (16,642) (7,738)
Consolidated interest income 3,516 194 4,716 941
Consolidated other income, net 3,328 11,775 5,180 21,767
------------- ------------- ------------- --------------
Consolidated income before income taxes $ 5,407 $ 56,717 $ 25,020 $ 120,736
------------- ------------- ------------- --------------
Total assets:
Contract drilling $ 1,431,466 $ 1,263,773
Manufacturing and logistics (1) 73,951 82,397
Other (3)(4) 347,590 39,226
------------- --------------
Total assets $ 1,853,007 $ 1,385,396
------------- --------------
</TABLE>
(1) The revenue reduction during the three months and six months ended
June 30, 1999 and the reduction in total assets for the six months
ended June 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 June 30, 1999, reflects remaining cash proceeds from the issuance
of the 6.80% Notes.
NOTE 7 SUBSEQUENT EVENTS
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. Consequently, 9.51 million shares of common stock were issued to holders
of $172.34 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 cease to be outstanding.
During July 1999, the Company prepaid $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. Accordingly, these notes were classified as
current as of June 30, 1999 in the Company's condensed consolidated balance
sheets.
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%. The offer was conditioned
upon, among other things, the tender of at least 84% of the outstanding notes
and the receipt of consents necessary to eliminate or modify certain restrictive
covenants in the notes indenture. In connection with the offer, the Company
received tenders for 100% of the outstanding principal amount of the Bayard 11%
Notes. As a
9
<PAGE> 11
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
result of the tender, these notes were purchased by Nabors and no longer
represent outstanding debt of the consolidated Company. Accordingly, these notes
were classified as current as of June 30, 1999 in the Company's condensed
consolidated balance sheets.
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. On August 9, 1999 the Securities and
Exchange Commission declared Nabors' Registration Statement with respect to the
Pool transaction effective. A proxy statement/prospectus was mailed to Pool's
shareholders on August 11, 1999 and Pool will hold a special meeting of
shareholders to consider approval of the Pool merger agreement on September 28,
1999. Completion of the transaction remains subject to various closing
conditions, including approval by Pool's shareholders, 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. Subject to satisfaction of these and
other closing conditions set forth in the merger agreement, Nabors expects the
transaction to close on October 1, 1999. However, there can be no assurance that
these conditions will be met within the time periods provided in the merger
agreement or that the transaction will be consummated.
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 sheet of Nabors
Industries, Inc. and Subsidiaries as of June 30, 1999 and the related condensed
consolidated statements of income for the three months and six months ended June
30, 1999 and 1998 and changes in stockholders' equity and cash flows for the six
month periods ended June 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 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
July 22, 1999
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 1998
Company revenues for the second quarter of fiscal 1999 (the "Current
Quarter") totaled $129.9 million, representing a decrease of $119.0 million, or
48%, as compared to the prior year period. Current Quarter operating income and
net income totaled $9.8 million and $3.3 million ($.03 per diluted share),
respectively, representing a decrease of 80% and 91% compared to the prior year
period. Revenues for the first six months of fiscal 1999 (the "Current Period")
totaled $282.9 million, representing a decrease of $252.8 million, or 47%, as
compared to the prior year period. Operating income and net income for the
Current Period totaled $31.8 million and $15.3 million ($.14 per diluted share),
respectively, representing a decrease of 70% and 80% compared to the prior year
period.
The significant and sustained decline in crude oil prices that began
during the fourth quarter of 1997 resulted in a reduction in the demand for
drilling and workover services in all of the Company's areas of operation when
compared to 1998 levels. The decline in oil prices stemmed from reduced demand
growth rates brought about by the Asian recession and three consecutively warmer
than normal winters in North America. Additionally, the supply of crude oil
increased as a result of increased production quotas by the Organization of
Petroleum Exporting Countries (OPEC) and renewed production by Iraq. The
resulting excess supply of crude oil caused significant declines in crude oil
prices throughout 1998. Natural gas prices were also negatively impacted as
warmer than normal winters in North America during 1997, 1998 and 1999 reduced
demand. The sustained reductions in oil and gas prices led to sharp declines in
the demand for drilling and workover services on a worldwide basis, as oil and
gas companies significantly reduced capital spending for exploration,
development and production activities. These factors resulted in a reduction in
the Company's rig utilization and rig dayrates as compared to the prior year
periods.
Recently, oil production cuts by OPEC and increasing worldwide demand
resulting in part from the Asian recovery, have strengthened crude oil prices
which averaged $17.66 per barrel during the Current Quarter and reached as high
as $19.29 per barrel by quarter end. North American natural gas prices also
improved as a result of steady demand coupled with reduced supply resulting from
depletion and reduced drilling activity during 1998 and 1999. The total US
active land rig count, which touched a more than fifty-year low of 380 working
rigs during April 1999, had improved to 479 working rigs by July 31, 1999. The
Company has experienced increased rig utilization in the US Lower 48 and
offshore platform workover operations during July 1999 and there are indications
that there will be further improvements in these areas throughout the remainder
of 1999. However, oil companies appear to be taking a "wait and see" approach in
determining if current commodity prices are sustainable prior to increasing
capital spending budgets. Accordingly, the near-term outlook for significant
improvements in drilling activity and profitability remains uncertain. However,
if the current commodity price environment continues, all of the Company's
businesses should experience an upturn throughout fiscal 2000 and beyond, but
only modest improvements can be expected for the remainder of fiscal 1999.
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 JUNE 30, SIX MONTHS ENDED JUNE 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 $ 124,100 $ 224,963 $ (100,863) (45%) $267,160 $ 481,320 $ (214,160) (44%)
Manufacturing and
logistics 7,662 29,023 (21,361) (74%) 19,686 61,542 (41,856) (68%)
Other (1) (1,823) (5,058) 3,235 64% (3,920) (7,160) 3,240 45%
--------- --------- ---------- -------- -------- ----------
Total revenues $ 129,939 $ 248,928 $ (118,989) (48%) $282,926 $535,702 $ (252,776) (47%)
--------- --------- ---------- -------- -------- ----------
Operating income (loss):
Contract drilling $ 14,494 $ 48,893 $ (34,399) (70%) $ 35,778 $102,582 $ (66,804) (65%)
Manufacturing and
logistics (476) 3,579 (4,055) (113%) 3,839 10,113 (6,274) (62%)
Other (2) (4,218) (3,725) (493) (13%) (7,851) (6,929) (922) (13%)
--------- --------- ---------- -------- -------- ----------
Total operating income $ 9,800 $ 48,747 $ (38,947) (80%) $ 31,766 $105,766 $ (74,000) (70%)
--------- --------- ---------- -------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
INCREASE INCREASE
1999 1998 (DECREASE) 1999 1998 (DECREASE)
--------- --------- ----------------- --------- --------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rig activity:
Rig years (3) 121.0 210.1 (89.1) (42%) 127.4 228.1 (100.7) (44%)
Rig utilization 24% 50% (26%) (52%) 28% 54% (26%) (48%)
Industry data:
Average West Texas
intermediate crude
oil spot price
($/bbl) (4) $17.66 $14.60 $3.06 21% $15.45 $15.26 $0.19 1%
Average US natural gas
spot price
($/mcf) (4) $2.14 $2.12 $0.02 1% $1.94 $2.11 ($0.17) (8%)
Average US land rig
count (5) 405 732 (327) (45%) 418 782 (364) (47%)
Average International
land rig
count (5) 405 527 (122) (23%) 411 535 (124) (23%)
</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 0.5 rig years.
(4) Source: Bloomberg
(5) Source: Baker Hughes
Contract drilling. Contract drilling revenues totaled $124.1 million
during the Current Quarter and $267.2 million during the Current Period,
representing a decrease of 45% and 44%, respectively, compared with the prior
year periods. Equivalent rig years decreased to 121.0 years during the Current
Quarter and 127.4 years during the Current Period compared to an average of
210.1 and 228.1 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
a result of lower demand for drilling and workover services caused by lower
crude oil and natural gas prices.
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 during the Current Period as a result of the prevailing market
conditions. This reduction in drilling 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.
13
<PAGE> 15
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. The Canadian operation rig fleet
increased as compared to the prior year periods as a result of the purchase of
seven rigs from Can-Tex Drilling and Exploration Ltd. during the second quarter
of 1998.
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, silicon-controlled rectifier 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 purchase 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 as a result of
reductions in drilling activity and dayrates in Saudi Arabia. South American
revenues were down from the prior year periods as a result of lower drilling
activity in Venezuela and Colombia. These decreases 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 a significant decline in 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 relatively unchanged
as compared to the prior year period. Internationally, platform workover
revenues increased during the Current Quarter and Current Period as a result of
the redeployment 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 $7.7 million during the Current Quarter and $19.7 million during the
Current Period, representing a decrease of 74% and 68%, 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. Beginning January 1,
1999, these joint ventures have been accounted for using the equity method of
accounting, with the Company's equity in the earnings 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 proportional consolidation method whereby the Company's pro rata share of
revenues and expenses were recorded as corresponding revenues and expenses of
the Company. This change in accounting method resulted in a decrease in revenues
for the Current Quarter and Current Period. Additionally, revenues for Peak
Oilfield Services, the Company's Alaskan construction and logistics joint
venture, were lower during the Current Quarter and Current Period as a result of
reduced activity. Canrig revenues were lower during the Current Quarter and
Current Period as a result of decreased top drive sales associated with the
current depressed market conditions. This decrease was somewhat mitigated,
however, by the introduction of a top drive rental fleet throughout 1998.
Revenues for Epoch, the Company's drilling operation software and
instrumentation provider, were also 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Direct costs 62.7% 64.2% 62.5% 65.0%
----------- ---------- ---------- ----------
Gross margin 37.3% 35.8% 37.5% 35.0%
General and administrative expenses 11.7% 8.0% 11.2% 7.5%
Depreciation and amortization 18.3% 8.1% 16.2% 7.7%
----------- ---------- ---------- ----------
Operating income 7.3% 19.7% 10.1% 19.8%
Other (expense) income (3.4%) 3.2% (2.4%) 2.8%
----------- ---------- ---------- ----------
Income before income taxes 3.9% 22.9% 7.7% 22.6%
Income taxes 1.6% 8.4% 3.5% 8.5%
----------- ---------- ---------- ----------
Net income 2.3% 14.5% 4.2% 14.1%
----------- ---------- ---------- ----------
</TABLE>
The increase in the gross margin percentage during the Current Quarter
and Current Period is the result of an increased percentage of the Company's
revenues being generated by the Company's more profitable areas of operation.
Although average dayrates for the Current Quarter and Current Period are lower
than the prior year periods for many of the Company's operating areas, a lower
percentage of the Company's revenues were derived from the US Lower 48
operation. Contracts in the US Lower 48 generally earn a lower gross margin
percentage than Alaska, international and offshore contracts. 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 Quarter and
Current Period as the Company's equity in the earnings 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 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 reflect the newly acquired
Bayard $100.0 million 11% Senior Notes due 2005 (the "Bayard 11% Notes")
beginning in April 1999. Interest expense for the remainder of 1999 will be
lower as a result of several capital structure changes 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 unrealized holding gains recognized on investments in marketable equity
securities and a gain on a physical damage insurance claim. 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 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 37.0% and 37.5% for the prior
year quarter and six month period, respectively.
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 rating as provided by Moody's Investor Service and Standard &
Poor's is "A3" and "BBB+", respectively.
15
<PAGE> 17
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. 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 were
used to repay certain short-term and long-term borrowings of the Company and to
purchase rigs and related equipment from Bayard Drilling Technologies, Inc.
("Bayard"), a wholly-owned subsidiary of the Company (Note 2). The proceeds from
the equipment sale were subsequently used by Bayard to repay certain Bayard
senior debt. Additionally, a portion of the proceeds was used in connection with
several capital structure changes that were completed during July and August
1999 (as described below) and included: (i) the prepayment of the Company's
$40.0 million 9.18% Senior Notes due July 31, 2006, at par plus a make-whole
premium of approximately $4.5 million and (ii) the cash tender of the Bayard
$100.0 million 11% Senior Notes due 2005, as discussed below. 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, investment in
subsidiaries and possible future business acquisitions.
During June 1999, the Company filed a universal 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.
During June 1999, the Company issued a Notice of Redemption to holders
of the Company's $172.5 million 5% Convertible Subordinated Notes due 2006 (the
"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. Consequently, 9.51
million shares of common stock were issued to holders of $172.34 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 cease to be outstanding.
During July 1999, the Company prepaid $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 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%. The offer was conditioned
upon, among other things, the tender of at least 84% of the outstanding notes
and the receipt of consents necessary to eliminate or modify certain restrictive
covenants in the notes indenture. In connection with the offer, the Company
received tenders for 100% of the outstanding principal amount of the Bayard 11%
Notes. As a result of the tender, these notes were purchased by Nabors and no
longer represent outstanding debt of the consolidated Company.
The Company had working capital of $203.7 million as of June 30, 1999,
representing a $182.6 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 significantly 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
increased as a result of the reclassification to current of the 9.18% Notes,
which were prepaid in July 1999, and the acquired Bayard 11% Notes which were
purchased from the public by Nabors during August in connection with a cash
tender offer and no longer represent outstanding debt of the consolidated
Company. 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. As a result of the
16
<PAGE> 18
issuance of the 6.80% Notes and the debt acquired in connection with the Bayard
acquisition, the Company's ratio of funded debt to funded debt plus
stockholders' equity, commonly referred to as the debt to capital ratio, was
0.39:1 as of June 30, 1999 as compared to 0.26:1 as of December 31, 1998.
Following the completion of the conversion and redemption of the Company's 5%
Notes in July 1999, the prepayment of the Company's 9.18% Notes in July 1999,
and the completion of the cash tender offer for the Bayard 11% Notes, the
Company's debt to capital ratio should approximate 0.23:1.
Net cash provided by operating activities totaled $74.0 million during
the Current Period, compared to $158.0 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.
Net cash used for investing activities totaled $32.1 million during the
Current Period compared to $159.8 million during the prior year period. Cash was
used primarily for capital expenditures, acquisitions of business 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 from
the disposition of long-term assets and business.
Financing activities provided cash totaling $229.0 million during the
Current Period, but used cash of $.4 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. During the prior year period, cash
was used to reduce long-term borrowings and cash was provided by increased
short-term borrowings.
The Company's cash and cash equivalents and investments in short-term
marketable securities totaled $307.4 million as of June 30, 1999. The Company
currently has credit facility arrangements with various banks with total
availability of $253.2 million. As of June 30, 1999, remaining availability,
after borrowings on the facilities and outstanding letters of credit, totaled
approximately $234.5 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 $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.
As of June 30, 1999, the Company had capital expenditure purchase
commitments outstanding of approximately $11.4 million.
During January 1999, the Company executed a definitive merger agreement
with Pool Energy Services Co. ("Pool"), pursuant to which each of the
approximately 18.9 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 19.4 million shares). As of March 31, 1999, Pool had
approximately $188.5 million of long-term debt that will remain an obligation of
Pool after the acquisition. The merger, which is subject to the approval of
Pool's shareholders' and other closing conditions, will be accounted for under
the purchase method of accounting and is expected to close on October 1, 1999.
Projected capital expenditures for 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 has initiated a Y2K compliance
program to ensure that all of the critical Systems and processes that are under
its direct control remain functional. The Company has organized a task force of
key employees and engaged an outside consultant to assist in the management of
its Y2K compliance program. The Company's Y2K compliance program focuses 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 are being
prioritized and all critical Systems are being assessed for Y2K compliance as
part of the second phase of the program. In the third phase, Systems have been
or will be remediated or replaced as necessary and contingency plans will be
developed if deemed appropriate. The fourth phase involves testing all critical
systems to ensure Y2K compliance. The Company has substantially completed the
inventory and assessment phases of the program and is moving forward with the
remediation and testing phases as necessary. A full time Y2K coordinator has
been appointed to oversee the Company's Y2K efforts. 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 have 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 rig's critical Systems and has substantially completed assessing these
Systems for Y2K compliance. The Company's mechanical rigs appear to be Y2K
compliant. Currently, the Company is not in a position to reasonably predict the
likely worst case Y2K scenario for its SCR drilling rigs, but expects to be able
to do so following the completion of its drilling rig assessment on or about
September 30, 1999.
Nabors Products - Two of the Company's subsidiaries manufacture and
sell software, instrumentation and top drive systems to affiliates and third
parties. Manufacturers may have added exposure to third parties that can be
mitigated, in part, by early notification and remediation. 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 in its top drives and has contacted the
manufacturers of the chips. The manufacturers all have certified that the chips
are Y2K compliant. In operating the top drives, no dates are entered and no
calculations are made utilizing dates. The Company is attempting to determine
whether any test can be used to validate the manufacturers' certifications.
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 is directly contacting key suppliers and
customers and is reviewing 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
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.
Contingency Plans - If during the course of the Company's assessment of
its critical Systems, it is determined that the risk of Y2K disruptions is
significant, contingency plans will be developed as appropriate. Such plans
might include the use of alternative service providers or product suppliers.
Currently, the Company does not have any contingency plans in place based on
current Y2K readiness assessments.
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:
o fluctuations in worldwide prices of oil and natural gas and
demand for oil and natural gas;
o fluctuations in levels of oil and gas exploration and development
activities;
o fluctuations in the demand for contract drilling services;
o the existence of competitors, technological changes and
developments in the industry;
o the existence of operating risks inherent in the contract
drilling industry;
o the existence of regulatory uncertainties;
o the possibility of political instability in any of the countries
in which Nabors does business; and
o 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 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, $163,000 was redeemed, and the remainder was
converted into 9,508,158 shares of Nabors common stock.
19
<PAGE> 21
In connection with the redemption, Nabors entered into a standby
underwriting arrangement with Warburg Dillon Read LLC that provided, under
certain circumstances, for Warburg Dillon Read to purchase 50% of the shares of
Nabors' common stock that would have been delivered upon conversion of the 5%
notes, in part to finance any required redemption payment. Due to the
overwhelming number of 5% notes converted, no shares were sold to Warburg Dillon
Read pursuant to this arrangement.
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 has accepted for payment all $100
million in aggregate principal amount of Notes tendered. Bayard intends to
satisfy and discharge its obligations under the Indenture with respect to the
Notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1999 Annual Meeting of Shareholders held on June 8, 1999,
88,486,714 shares were present in person or by proxy, constituting 82.7% of the
outstanding common stock of Nabors entitled to vote. The sole matter voted upon
at the Annual Meeting was as follows:
Election of Directors: Three Class II directors were elected to the
Board of Directors of Nabors to serve for a three-year term, until 2002:
<TABLE>
<S> <C>
Anthony G. Petrello
-------------------
Votes cast in favor: 87,957,003
Votes withheld: 529,711
Myron M. Sheinfeld
------------------
Votes cast in favor: 87,932,145
Votes withheld: 554,569
Martin J. Whitman
-----------------
Votes cast in favor: 87,921,045
Votes withheld: 565,669
</TABLE>
Class III Directors, Eugene M. Isenberg and Jack Wexler, continued in office
with terms expiring in 2000. Class I Directors, Richard A. Stratton and Hans W.
Schmidt, continued in office with terms expiring in 2001.
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. On August 9, 1999 the Securities and
Exchange Commission declared Nabors' Registration Statement with respect to the
Pool transaction effective. A proxy statement/prospectus was mailed to Pool's
shareholders on August 11, 1999 and Pool will hold a special meeting of
shareholders to consider approval of the Pool merger agreement on September 28,
1999. Completion of the transaction remains subject to various closing
conditions, including approval by Pool's shareholders, 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. Subject to satisfaction of these and
other closing conditions set forth in the merger agreement, Nabors expects the
transaction to close on October 1, 1999. However, there can be no assurance that
these conditions will be met within the time periods provided in the merger
agreement or that the transaction will be consummated.
20
<PAGE> 22
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
(b) Reports on Form 8-K
o Current Report on Form 8-K filed April 22, 1999 with regard to
the acquisition of Bayard Drilling Technologies, Inc.
o Amendment to Current Report on 8-K/A filed June 21, 1999 with
regard to the acquisition of Bayard Drilling Technologies,
Inc. (filing pro forma information and financial statements).
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: August 16, 1999
22
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
-------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of shares outstanding 105,476 100,839 103,139 100,822
-------- -------- -------- --------
Net income $ 3,298 $ 35,732 $ 15,262 $ 75,424
-------- -------- -------- --------
Per share amount $ .03 $ .35 $ .15 $ .75
-------- -------- -------- --------
Diluted:
Weighted average number of shares outstanding 105,476 100,839 103,139 100,822
Net effect of dilutive stock options and warrants-based
on the treasury stock method using
average market price 5,414 2,921 5,414 3,201
Assumed conversion of 5% convertible notes(1) -- 9,517 -- 9,517
--------- -------- -------- --------
Total 110,890 113,277 108,553 113,540
--------- -------- -------- --------
Net income $ 3,298 $ 35,732 $ 15,262 $ 75,424
Add 5% convertible note interest, net
of tax effect(1) -- 1,358 -- 2,706
--------- -------- -------- --------
Total $ 3,298 $ 37,090 $ 15,262 $ 78,130
--------- -------- -------- --------
Per share amount $ .03 $ .33 $ .14 $ .69
--------- -------- -------- --------
</TABLE>
(1) The 5% convertible notes are not assumed to be converted into common stock
for the three months and six months ended June 30, 1999 as the effect on
earnings per share in those periods would be anti-dilutive.
<PAGE> 1
EXHIBIT 15.1
PricewaterhouseCoopers LLP Awareness Letter
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 and Form S-3
We are aware that our report dated July 22, 1999 on our review of the interim
condensed consolidated financial information of Nabors Industries, Inc. and
Subsidiaries for the three months and six months ended June 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 333-76077, 333-57129,
333-11313, 33-87324, 33-87322, 33-47521, 33-45097 and 33-39316) and on Form S-3
(Registration Numbers 333-81137, 333-20501 and 333-25233). 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
August 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 286,215
<SECURITIES> 21,208
<RECEIVABLES> 111,511
<ALLOWANCES> 5,823
<INVENTORY> 24,447
<CURRENT-ASSETS> 494,409
<PP&E> 1,638,794
<DEPRECIATION> 426,391
<TOTAL-ASSETS> 1,853,007
<CURRENT-LIABILITIES> 290,690
<BONDS> 497,697
0
0
<COMMON> 10,766
<OTHER-SE> 985,559
<TOTAL-LIABILITY-AND-EQUITY> 1,853,007
<SALES> 279,328
<TOTAL-REVENUES> 282,926
<CGS> 174,595
<TOTAL-COSTS> 174,595
<OTHER-EXPENSES> 76,565
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,642
<INCOME-PRETAX> 25,020
<INCOME-TAX> 9,758
<INCOME-CONTINUING> 15,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,262
<EPS-BASIC> .15
<EPS-DILUTED> .14
</TABLE>
