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