- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2005 COMMISSION FILE NUMBER: 000-49887 --------------------- NABORS INDUSTRIES LTD. INCORPORATED IN BERMUDA MINTFLOWER PLACE 8 PAR-LA-VILLE ROAD HAMILTON, HM08 BERMUDA (441) 292-1510 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 [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of common shares, par value $.001 per share, outstanding as of October 28, 2005 was 157,476,873. In addition, our subsidiary, Nabors Exchangeco (Canada) Inc., has 179,773 exchangeable shares outstanding as of October 28, 2005 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, 2005 and December 31, 2004........................................... 2 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2005 and 2004.................... 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004........................... 4 Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended September 30, 2005 and 2004....... 5 Notes to Consolidated Financial Statements.................. 7 Report of Independent Registered Public Accounting Firm..... 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................. 36 Item 4. Controls and Procedures..................................... 36 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................... 37 Item 6. Exhibits.................................................... 37 Signatures................................................................... 38 </Table>
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NABORS INDUSTRIES LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) <Table> <Caption> SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ <S> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $ 575,568 $ 384,709 Short-term investments.................................... 856,021 955,304 Accounts receivable, net.................................. 734,982 540,103 Inventory................................................. 42,676 28,653 Deferred income taxes..................................... 40,419 39,599 Other current assets...................................... 118,427 72,068 ---------- ---------- Total current assets................................... 2,368,093 2,020,436 Long-term investments....................................... 208,269 71,034 Property, plant and equipment, net.......................... 3,622,732 3,275,495 Goodwill, net............................................... 342,116 327,225 Other long-term assets...................................... 161,124 168,419 ---------- ---------- Total assets........................................... $6,702,334 $5,862,609 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 819,682 $ 804,550 Trade accounts payable.................................... 270,311 211,600 Accrued liabilities....................................... 187,034 171,234 Income taxes payable...................................... 25,723 11,932 ---------- ---------- Total current liabilities.............................. 1,302,750 1,199,316 Long-term debt.............................................. 1,197,810 1,201,686 Other long-term liabilities................................. 148,089 146,337 Deferred income taxes....................................... 487,533 385,877 ---------- ---------- Total liabilities......................................... 3,136,182 2,933,216 ---------- ---------- Commitments and contingencies (Note 5) Shareholders' equity: Common shares, par value $.001 per share: Authorized common shares 400,000; issued and outstanding 157,728 and 149,861, respectively......... 158 150 Capital in excess of par value............................ 1,584,424 1,358,374 Unearned compensation..................................... (17,346) -- Accumulated other comprehensive income.................... 204,009 148,229 Retained earnings......................................... 1,794,907 1,422,640 ---------- ---------- Total shareholders' equity............................. 3,566,152 2,929,393 ---------- ---------- Total liabilities and shareholders' equity............. $6,702,334 $5,862,609 ---------- ---------- </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, ------------------- ----------------------- 2005 2004 2005 2004 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues and other income: Operating revenues............................ $893,254 $585,652 $2,442,319 $1,709,348 Earnings (losses) from unconsolidated affiliates................................. 91 (292) 7,298 4,683 Investment income............................. 27,178 12,222 54,544 33,106 -------- -------- ---------- ---------- Total revenues and other income............ 920,523 597,582 2,504,161 1,747,137 -------- -------- ---------- ---------- Costs and other deductions: Direct costs.................................. 500,552 378,084 1,429,762 1,137,065 General and administrative expenses........... 65,879 49,548 184,325 140,588 Depreciation and amortization................. 73,673 64,229 212,843 185,560 Depletion..................................... 11,349 9,408 35,045 34,995 Interest expense.............................. 11,195 10,533 33,265 37,779 Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net.............................. 15,684 1,487 23,778 (3,339) -------- -------- ---------- ---------- Total costs and other deductions........... 678,332 513,289 1,919,018 1,532,648 -------- -------- ---------- ---------- Income before income taxes...................... 242,191 84,293 585,143 214,489 -------- -------- ---------- ---------- Income tax expense: Current....................................... 10,153 4,976 24,271 15,572 Deferred...................................... 53,181 3,691 122,796 5,226 -------- -------- ---------- ---------- Total income tax expense................... 63,334 8,667 147,067 20,798 -------- -------- ---------- ---------- Net income...................................... $178,857 $ 75,626 $ 438,076 $ 193,691 -------- -------- ---------- ---------- Earnings per share: Basic......................................... $ 1.14 $ .51 $ 2.82 $ 1.30 Diluted....................................... $ 1.11 $ .48 $ 2.73 $ 1.24 Weighted-average number of common shares outstanding: Basic......................................... 157,209 149,089 155,605 148,646 -------- -------- ---------- ---------- Diluted....................................... 161,850 163,919 160,614 163,584 -------- -------- ---------- ---------- </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, --------------------- 2005 2004 --------- --------- <S> <C> <C> (IN THOUSANDS) Cash flows from operating activities: Net income.................................................. $ 438,076 $ 193,691 Adjustments to net income: Depreciation and amortization............................. 212,843 185,560 Depletion................................................. 35,045 34,995 Deferred income tax expense............................... 122,796 5,226 Deferred financing costs amortization..................... 3,661 3,839 Pension liability amortization............................ 360 643 Discount amortization on long-term debt................... 15,500 15,139 Amortization of loss on cash flow hedges.................. 113 114 Losses on long-lived assets, net.......................... 11,542 1,380 Gains on investments, net................................. (23,452) (11,940) Gains on derivative instruments........................... (708) (1,853) Amortization of unearned compensation..................... 3,354 -- Foreign currency transaction losses (gains)............... 970 (29) Equity in earnings from unconsolidated affiliates, net of dividends.............................................. (4,798) (3,682) Increase (decrease) from changes in: Accounts receivable....................................... (188,619) (74,240) Inventory................................................. (13,043) (420) Other current assets...................................... (39,508) 10,697 Other long-term assets.................................... 4,575 7,049 Trade accounts payable and accrued liabilities............ 68,422 27,007 Income taxes payable...................................... 10,700 (9,082) Other long-term liabilities............................... 7,545 (18,973) --------- --------- Net cash provided by operating activities................... 665,374 365,121 --------- --------- Cash flows from investing activities: Purchases of investments.................................. (454,625) (722,703) Sales and maturities of investments....................... 468,271 705,542 Cash paid for acquisitions of businesses, net............. (46,201) -- Capital expenditures...................................... (577,844) (400,073) Proceeds from sales of assets and insurance claims........ 19,989 3,905 --------- --------- Net cash used for investing activities...................... (590,410) (413,329) --------- --------- Cash flows from financing activities: Increase in cash overdrafts............................... 3,857 6,416 Reduction of long-term debt............................... (424) (301,659) Proceeds from issuance of common shares................... 186,717 52,239 Repurchase of common shares............................... (80,572) -- --------- --------- Net cash provided by (used for) financing activities........ 109,578 (243,004) --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................... 6,317 8,612 --------- --------- Net increase (decrease) in cash and cash equivalents........ 190,859 (282,600) Cash and cash equivalents, beginning of period.............. 384,709 579,737 --------- --------- Cash and cash equivalents, end of period.................... $ 575,568 $ 297,137 --------- --------- </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 UNREALIZED SHARES GAINS MINIMUM UNREALIZED --------------- CAPITAL IN (LOSSES) ON PENSION LOSS ON CUMULATIVE PAR EXCESS OF UNEARNED MARKETABLE LIABILITY CASH FLOW TRANSLATION SHARES VALUE PAR VALUE COMPENSATION SECURITIES ADJUSTMENT HEDGES ADJUSTMENT ------- ----- ---------- ------------ ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> (IN THOUSANDS) Balances, December 31, 2004...................... 149,861 $150 $1,358,374 $ -- $ 271 $(2,419) $(1,143) $151,520 ------- ---- ---------- -------- ------- ------- ------- -------- Comprehensive income (loss): Net income................ Translation adjustment.... 27,457 Unrealized gains on marketable securities, net of income taxes of $995.................... 36,232 Less: reclassification adjustment for gains included in net income, net of income taxes of $367......... (8,249) Pension liability amortization, net of income taxes of $133.... 227 Amortization of loss on cash flow hedges........ 113 ------- ---- ---------- -------- ------- ------- ------- -------- Total comprehensive income (loss)....... -- -- -- -- 27,983 227 113 27,457 ------- ---- ---------- -------- ------- ------- ------- -------- Issuance of common shares for stock options exercised................. 9,011 9 186,708 Nabors Exchangeco shares exchanged................. 38 Repurchase of common shares.................... (1,500) (1) (14,762) Tax effect of stock option deductions................ 33,404 Grants of restricted stock awards.................... 327 21,163 (21,163) Forfeitures of restricted shares.................... (9) (463) 463 Amortization of unearned compensation.............. 3,354 ------- ---- ---------- -------- ------- ------- ------- -------- Subtotal.............. 7,867 8 226,050 (17,346) -- -- -- -- ------- ---- ---------- -------- ------- ------- ------- -------- Balances, September 30, 2005...................... 157,728 $158 $1,584,424 $(17,346) $28,254 $(2,192) $(1,030) $178,977 ------- ---- ---------- -------- ------- ------- ------- -------- <Caption> TOTAL RETAINED SHAREHOLDERS' EARNINGS EQUITY ---------- ------------- <S> <C> <C> (IN THOUSANDS) Balances, December 31, 2004...................... $1,422,640 $2,929,393 ---------- ---------- Comprehensive income (loss): Net income................ 438,076 438,076 Translation adjustment.... 27,457 Unrealized gains on marketable securities, net of income taxes of $995.................... 36,232 Less: reclassification adjustment for gains included in net income, net of income taxes of $367......... (8,249) Pension liability amortization, net of income taxes of $133.... 227 Amortization of loss on cash flow hedges........ 113 ---------- ---------- Total comprehensive income (loss)....... 438,076 493,856 ---------- ---------- Issuance of common shares for stock options exercised................. 186,717 Nabors Exchangeco shares exchanged................. -- Repurchase of common shares.................... (65,809) (80,572) Tax effect of stock option deductions................ 33,404 Grants of restricted stock awards.................... -- Forfeitures of restricted shares.................... -- Amortization of unearned compensation.............. 3,354 ---------- ---------- Subtotal.............. (65,809) 142,903 ---------- ---------- Balances, September 30, 2005...................... $1,794,907 $3,566,152 ---------- ---------- </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 UNREALIZED SHARES GAINS MINIMUM UNREALIZED --------------- CAPITAL IN (LOSSES) ON PENSION LOSS ON CUMULATIVE PAR EXCESS OF MARKETABLE LIABILITY CASH FLOW TRANSLATION RETAINED SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT EARNINGS ------- ----- ---------- ----------- ---------- ---------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> (IN THOUSANDS) Balances, December 31, 2003...................... 146,656 $147 $1,270,362 $ 4,969 $(2,815) $(1,294) $ 98,723 $1,120,183 ------- ---- ---------- ------- ------- ------- -------- ---------- Comprehensive income (loss): Net income............... 193,691 Translation adjustment... 19,177 Unrealized losses on marketable securities, net of income tax benefit of $671........ 6,355 Less: reclassification adjustment for gains included in net income, net of income taxes of $813........ (9,426) Pension liability amortization, net of income taxes of $238... 405 Amortization of loss on cash flow hedges....... 114 ------- ---- ---------- ------- ------- ------- -------- ---------- Total comprehensive income (loss)...... -- -- -- (3,071) 405 114 19,177 193,691 ------- ---- ---------- ------- ------- ------- -------- ---------- Issuance of common shares for stock options exercised................ 2,305 2 52,237 Nabors Exchangeco shares exchanged................ 131 Tax effect of stock option deductions............... 18,733 ------- ---- ---------- ------- ------- ------- -------- ---------- Subtotal............. 2,436 2 70,970 -- -- -- -- -- ------- ---- ---------- ------- ------- ------- -------- ---------- Balances, September 30, 2004..................... 149,092 $149 $1,341,332 $ 1,898 $(2,410) $(1,180) $117,900 $1,313,874 ------- ---- ---------- ------- ------- ------- -------- ---------- <Caption> TOTAL SHAREHOLDERS' EQUITY ------------- <S> <C> (IN THOUSANDS) Balances, December 31, 2003...................... $2,490,275 ---------- Comprehensive income (loss): Net income............... 193,691 Translation adjustment... 19,177 Unrealized losses on marketable securities, net of income tax benefit of $671........ 6,355 Less: reclassification adjustment for gains included in net income, net of income taxes of $813........ (9,426) Pension liability amortization, net of income taxes of $238... 405 Amortization of loss on cash flow hedges....... 114 ---------- Total comprehensive income (loss)...... 210,316 ---------- Issuance of common shares for stock options exercised................ 52,239 Nabors Exchangeco shares exchanged................ -- Tax effect of stock option deductions............... 18,733 ---------- Subtotal............. 70,972 ---------- Balances, September 30, 2004..................... $2,771,563 ---------- </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, the Far East and Africa. We are also one of the largest land well-servicing and workover contractors in the United States and Canada. We own approximately 660 land workover and well-servicing rigs in the United States, primarily in the southwestern and western United States, and approximately 215 land workover and well-servicing rigs in Canada. Nabors is a leading provider of offshore platform workover and drilling rigs, and owns 43 platform, 19 jack-up units and three barge rigs in the United States and multiple 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. We also offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in selected domestic and international markets. We time charter a fleet of 28 marine transportation and supply vessels, 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. We have also made selective investments in oil and gas exploration, development and production activities. The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our limited oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments 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. 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). Certain reclassifications have been made to the prior period to conform to the current period presentation, with no effect on our consolidated financial position, results of operations or cash flows. 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, 2004. In our management's opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2005, the results of our operations for the three and nine months ended September 30, 2005 and 2004, and our cash flows for the nine months ended September 30, 2005 and 2004, in accordance with GAAP. Interim results for the three and nine months ended September 30, 2005 may not be indicative of results that will be realized for the full year ending December 31, 2005. Our independent registered public accounting firm has performed a review of, and issued a report on, these consolidated interim financial statements in accordance with standards established by the Public Company Accounting Oversight Board. Pursuant to Rule 436(c) under the 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. 7
PRINCIPLES OF CONSOLIDATION Our consolidated financial statements include the accounts of Nabors, all majority-owned subsidiaries, and all non-majority owned subsidiaries required to be consolidated under Financial Accounting Standards Board (FASB) Interpretation No. 46R, which are not material to our financial position, results of operations or cash flows. All significant intercompany accounts and transactions are eliminated in consolidation. Investments in operating 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 $72.2 million and $67.1 million as of September 30, 2005 and December 31, 2004, respectively, and are included in other long-term assets in our consolidated balance sheets. Similarly, investments in certain funds are accounted for using the equity method of accounting based on our ownership interest in each fund. Our share of the gains and losses of these funds is recorded in investment income in our consolidated statements of income, and our investments in these funds are included in long-term investments in our consolidated balance sheets. CHANGE IN ACCOUNTING PRINCIPLE As of September 30, 2005, we changed our classification of certain available-for-sale marketable debt securities with maturities beyond one year to account for these securities as current assets in our consolidated balance sheets. Such amounts approximated $224.5 million as of September 30, 2005. We believe classifying these marketable debt securities as current assets is preferable based upon the highly liquid nature of these securities and because such securities represent the investment of cash that is available for current operations. These securities were previously classified in our consolidated balance sheets as long-term investments based solely on stated maturity. Amounts presented in our consolidated balance sheet as of December 31, 2004 of $439.5 million have also been reclassified to conform with the current year presentation. This change has no impact to our consolidated statements of 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 and restricted stock awards 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. For restricted stock awards, we record unearned compensation in shareholders' equity equal to the market value of the restricted shares on the date of grant with an offset to capital in excess of par value. Unearned compensation is charged to expense over the vesting period of the restricted stock awards. As the restrictions on the restricted stock awards are removed, which occurs as the restricted stock awards vest, the par value of the shares are reclassified from capital in excess of par value to common shares. For restricted stock awards that are forfeited, any compensation expense recognized in prior periods is reversed during the period of forfeiture. 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 our 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. For stock options, fair value is estimated using an option pricing model such as the Black-Scholes option-pricing model (which we use in our calculations), and compensation cost is amortized over the applicable option vesting period. 8
<Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 2005 2004 2005 2004 -------- ------- -------- -------- <S> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income, as reported..................... $178,857 $75,626 $438,076 $193,691 Add: Stock-based compensation expense, relating to restricted stock awards, included in reported net income, net of related tax effects....................... 1,128 -- 2,275 -- Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects....................... (9,225) (5,890) (31,314) (16,142) -------- ------- -------- -------- Pro forma net income-basic.................. 170,760 69,736 409,037 177,549 Add: Interest expense on assumed conversion of our zero coupon convertible/exchangeable senior debentures/notes, net of tax.............. -- 3,119 -- 9,299 -------- ------- -------- -------- Adjusted pro forma net income-diluted....... $170,760 $72,855 $409,037 $186,848 -------- ------- -------- -------- Earnings per share: Basic-as reported......................... $ 1.14 $ .51 $ 2.82 $ 1.30 Basic-pro forma........................... $ 1.09 $ .47 $ 2.63 $ 1.19 Diluted-as reported....................... $ 1.11 $ .48 $ 2.73 $ 1.24 Diluted-pro forma......................... $ 1.06 $ .44 $ 2.55 $ 1.14 </Table> COMPREHENSIVE INCOME Comprehensive income totaled $241.3 million and $115.0 million for the three months ended September 30, 2005 and 2004, respectively, and $493.9 million and $210.3 million for the nine months ended September 30, 2005 and 2004, respectively. RECENT ACCOUNTING PRONOUNCEMENTS As discussed under Stock-Based Compensation above, we currently account for stock-based compensation as prescribed by APB 25, and because we grant options at prices equal to the market price of our shares on the date of the grant, we do not record compensation expense related to these grants in our consolidated statements of income. On December 16, 2004, the FASB issued a revision to SFAS No. 123, "Share-Based Payment," which will eliminate our ability to account for stock-based compensation using APB 25 and instead would require us to account for stock option awards using a fair-value based method resulting in compensation expense for stock option awards being recorded in our consolidated statements of income. The statement will be effective for stock options granted, modified, or settled in cash in annual periods beginning after June 15, 2005 (2006 for Nabors). Additionally, for stock options granted or modified after December 15, 1994 that have not vested as of the effective date of the statement, compensation cost will be measured and recorded in our consolidated statements of income based on the same estimates of fair value calculated as of the date of grant as currently disclosed within the table required by SFAS No. 148, "Accounting for Stock-Based Compensation -- an Amendment to FAS 123," presented above. The statement may have a material adverse effect on our results of operations during the periods of adoption and annual and interim periods thereafter. The impact that the adoption of this statement in its current form on January 1, 2005 or 2004 would have had on our net income and basic and diluted earnings per share for the three and nine months ended September 30, 2005 and 2004 is presented in the table above. NOTE 3 INCOME TAXES Our effective income tax rate was 26.2% and 25.1% during the three and nine months ended September 30, 2005, respectively, compared to 10.3% and 9.7% during the three and nine months ended September 30, 2004, respectively. The increases in our effective income tax rate resulted from a higher 9
proportion of our taxable income being generated in the U.S. during the three and nine months ended September 30, 2005 compared to the prior year periods. Income generated in the U.S. is generally taxed at a higher rate than in international jurisdictions in which we operate. NOTE 4 COMMON SHARES During the first nine months of 2005, the Compensation Committee of our Board of Directors granted restricted stock awards to certain of our executive officers, other key employees, and independent directors. In conjunction with these grants, we awarded 326,693 restricted shares at an average market price of $57.57 to these individuals. We recorded unearned compensation totaling approximately $21.2 million in shareholders' equity, equal to the market value of the restricted shares on the dates of grant, and will charge the unearned compensation to expense over the vesting period of the restricted stock awards (which ranges from 3 to 4 years). Subsequent to these awards, restricted shares totaling approximately $.5 million have been forfeited, resulting in a reduction to expense amount previously recorded. During the three and nine months ended September 30, 2005, $1.5 million and $3.4 million, respectively, was charged to compensation expense and is included in direct costs and general and administrative expenses in our consolidated statements of income. During the second quarter of 2005, we repurchased and retired 1.5 million of our common shares in the open market for $80.6 million. NOTE 5 COMMITMENTS AND CONTINGENCIES CONTINGENCIES 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, 2005, with our insurance renewal, certain changes have been made to our insurance coverage resulting in additional loss exposure. In addition to the insurance retentions that we are responsible for relating to rig, equipment, property and business interruption risk, we are now responsible for 30% of all losses in excess of those retentions. LITIGATION Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ from our estimates. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position, although they could have a material adverse effect on our results of operations for a particular reporting period. GUARANTEES We enter into various agreements and obligations providing financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers' compensation insurance program and other financial surety instruments such as bonds. We have also guaranteed payment of contingent consideration in conjunction with two separate acquisitions completed during 2002 and the first quarter of 2005, which is based on future operating results of those businesses. 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. 10
Management believes the likelihood that we would be required to perform or otherwise incur any material 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 2005 2006 2007 THEREAFTER TOTAL (IN THOUSANDS) --------- ------- ---- ---------- -------- <S> <C> <C> <C> <C> <C> Financial standby letters of credit and other financial surety instruments..... $1,146 $86,557 $ 55 $6,808 $ 94,566 Contingent consideration in acquisitions........................... 1,250 1,958 708 2,834 6,750 ------ ------- ---- ------ -------- Total.................................... $2,396 $88,515 $763 $9,642 $101,316 ------ ------- ---- ------ -------- </Table> NOTE 6 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, ------------------ ------------------- 2005 2004 2005 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- ------- -------- -------- <S> <C> <C> <C> <C> Net income (numerator): Net income - basic........................... $178,857 $75,626 $438,076 $193,691 Add interest expense on assumed conversion of our zero coupon convertible/exchangeable senior debentures/notes, net of tax: $1.381 billion due 2021(1).............. -- 3,119 -- 9,299 $700 million due 2023(2)................ -- -- -- -- -------- ------- -------- -------- Adjusted net income - diluted............. $178,857 $78,745 $438,076 $202,990 -------- ------- -------- -------- Earnings per share: Basic..................................... $ 1.14 $ .51 $ 2.82 $ 1.30 Diluted................................... $ 1.11 $ .48 $ 2.73 $ 1.24 Shares (denominator): Weighted-average number of shares outstanding-basic(3)...................... 157,209 149,089 155,605 148,646 Net effect of dilutive stock options, warrants and restricted stock awards based on the treasury stock method.............. 4,641 6,339 5,009 6,447 Assumed conversion of our zero coupon convertible/exchangeable senior debentures/notes: $1.381 billion due 2021(1)................ -- 8,491 -- 8,491 $700 million due 2023(2).................. -- -- -- -- -------- ------- -------- -------- Weighted-average number of shares outstanding-diluted....................... 161,850 163,919 160,614 163,584 -------- ------- -------- -------- </Table> - --------------- (1) Diluted earnings per share for the three and nine months ended September 30, 2005 excludes approximately 8.5 million potentially dilutive shares initially issuable upon the conversion of these debentures. Such shares did not impact our calculation of diluted earnings per share for the three and nine months ended September 30, 2005 as we are required to pay cash up to the principal amount of any debentures converted resulting from the issuance of a supplemental indenture relating to the debentures in October 2004. We would only issue an incremental number of shares upon conversion of these debentures, and such shares would only be included in the calculation of the weighted-average number of shares outstanding in our diluted earnings per share calculation, if the price of our shares exceeded 11
approximately $97. Diluted earnings per share for the three and nine months ended September 30, 2004 reflects the assumed conversion of our $1.381 billion zero coupon convertible senior debentures due 2021, as the conversion in those periods would have been dilutive. (2) Diluted earnings per share for the three and nine months ended September 30, 2005 and 2004 excludes approximately 10.0 million potentially dilutive shares initially issuable upon the exchange of our $700 million zero coupon senior exchangeable notes due 2023. Such shares did not impact our calculation of diluted earnings per share for the three and nine months ended September 30, 2005 as we are required to pay cash up to the principal amount of any notes exchanged as a result of the supplemental indenture issued for these notes during the fourth quarter of 2004. We would only issue an incremental number of shares upon exchange of these notes, and such shares would only be included in the calculation of the weighted-average number of shares outstanding in our diluted earnings per share calculation, if the price of our shares exceeded $70.10. Such shares did not impact our calculation of diluted earnings per share for the three and nine months ended September 30, 2004 as the notes are contingently exchangeable under certain circumstances 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, 2004. Based on the initial exchange price per share, these notes would have been exchangeable for our common shares during those periods if 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 was greater than or equal to $84.12. (3) Includes the following weighted-average number of common shares of Nabors and weighted-average number of exchangeable shares of Nabors Exchangeco (Canada) Inc., an indirect wholly-owned Canadian subsidiary of Nabors, respectively: 157.0 million and .2 million shares for the three months ended September 30, 2005; 148.8 million and .3 million shares for the three months ended September 30, 2004; 155.4 million and .2 million shares for the nine months ended September 30, 2005; and 148.3 million and .3 million shares for the nine months ended September 30, 2004. The exchangeable shares of Nabors Exchangeco 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. For all periods presented, the computation of diluted earnings per share excludes outstanding stock options and warrants with exercise prices greater than the average market price of Nabors' common shares, because the inclusion of such options and warrants would be anti-dilutive. The number of options, warrants and restricted stock awards that were excluded from diluted earnings per share that would potentially dilute earnings per share in the future were 1,125 and 507,211 shares during the three and nine months ended September 30, 2005 and 8,963,148 and 8,479,677 shares during the three and nine months ended September 30, 2004. In any period during which the average market price of Nabors' common shares exceeds the exercise prices of these stock options and warrants, such stock options and warrants will be included in our diluted earnings per share computation using the treasury stock method of accounting. Restricted stock will similarly be included in our diluted earnings per share computation using the treasury stock method of accounting in any period where the amount of restricted stock to be issued in future periods exceeds the number of shares assumed repurchased in those periods. NOTE 7 SUPPLEMENTAL BALANCE SHEET INFORMATION Our cash and cash equivalents, short-term and long-term investments consist of the following: <Table> <Caption> SEPTEMBER 30, DECEMBER 31, 2005 2004 (IN THOUSANDS) ------------------ ----------------- <S> <C> <C> Cash and cash equivalents........................... $ 575,568 $ 384,709 Short-term investments.............................. 856,021 955,304 Long-term investments............................... 208,269 71,034 ---------- ---------- Total............................................... $1,639,858 $1,411,047 ---------- ---------- </Table> 12
As of September 30, 2005, our short-term investments consist entirely of investments in available-for-sale marketable debt and equity securities while our long-term investments consist entirely of investments in non-marketable securities. As of December 31, 2004, our short-term investments included $867.8 million of investments in available-for-sale marketable debt and equity securities. NOTE 8 SEGMENT INFORMATION The following tables set forth certain financial information with respect to our reportable segments: <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ----------------------- 2005 2004 2005 2004 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> (IN THOUSANDS) Operating revenues and Earnings from unconsolidated affiliates: Contract Drilling:(1) U.S. Lower 48 Land Drilling........... $355,172 $202,283 $ 914,862 $ 527,700 U.S. Land Well-servicing.............. 130,265 95,377 355,154 263,018 U.S. Offshore......................... 42,115 33,929 125,312 96,806 Alaska................................ 18,159 16,982 64,882 66,020 Canada................................ 131,348 89,293 381,470 289,964 International......................... 143,355 111,618 402,553 321,790 -------- -------- ---------- ---------- Subtotal Contract Drilling(2)....... 820,414 549,482 2,244,233 1,565,298 Oil and Gas(3)........................... 16,354 14,216 46,871 49,515 Other Operating Segments(4)(5)........... 81,753 41,408 229,398 150,086 Other reconciling items(6)............... (25,176) (19,746) (70,885) (50,868) -------- -------- ---------- ---------- Total............................... $893,345 $585,360 $2,449,617 $1,714,031 -------- -------- ---------- ---------- Adjusted income (loss) derived from operating activities:(7) Contract Drilling: U.S. Lower 48 Land Drilling........... $135,295 $ 30,221 $ 310,567 $ 51,760 U.S. Land Well-servicing.............. 29,297 18,511 75,126 42,638 U.S. Offshore......................... 12,883 4,507 32,392 14,120 Alaska................................ 3,612 2,522 13,743 13,488 Canada................................ 28,106 13,888 75,443 60,011 International......................... 38,630 24,713 100,955 62,057 -------- -------- ---------- ---------- Subtotal Contract Drilling.......... 247,823 94,362 608,226 244,074 Oil and Gas.............................. 3,998 4,018 7,741 9,420 Other Operating Segments................. 7,465 (3,094) 18,997 (5,631) -------- -------- ---------- ---------- Total segment adjusted income derived from operating activities....................... 259,286 95,286 634,964 247,863 Other reconciling items(8)................. (17,394) (11,195) (47,322) (32,040) Interest expense........................... (11,195) (10,533) (33,265) (37,779) Investment income.......................... 27,178 12,222 54,544 33,106 Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net.................... (15,684) (1,487) (23,778) 3,339 -------- -------- ---------- ---------- Income before income taxes................. $242,191 $ 84,293 $ 585,143 $ 214,489 -------- -------- ---------- ---------- </Table> 13
<Table> <Caption> SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ <S> <C> <C> (IN THOUSANDS) Total assets: Contract Drilling: U.S. Lower 48 Land Drilling............................ $1,337,873 $1,119,280 U.S. Land Well-servicing............................... 362,286 274,734 U.S. Offshore.......................................... 375,012 409,687 Alaska................................................. 199,796 204,614 Canada................................................. 1,055,944 945,226 International.......................................... 1,331,106 1,121,749 ---------- ---------- Subtotal Contract Drilling(9)........................ 4,662,017 4,075,290 Oil and Gas............................................... 106,054 93,169 Other Operating Segments(10).............................. 344,239 321,979 Other reconciling items(8)................................ 1,590,024 1,372,171 ---------- ---------- Total assets......................................... $6,702,334 $5,862,609 ---------- ---------- </Table> - --------------- (1) These segments include our drilling, workover and well-servicing operations, on land and offshore. (2) Includes Earnings (losses) from unconsolidated affiliates, accounted for by the equity method, of $(1.1) million and $(.26) million for the three months ended September 30, 2005 and 2004, respectively, and $.7 million and $1.9 million for the nine months ended September 30, 2005 and 2004, respectively. (3) Represents our oil and gas exploration, development and production operations. (4) Includes our marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations. (5) Includes Earnings (losses) from unconsolidated affiliates, accounted for by the equity method, of $1.2 million and $(.03) million for the three months ended September 30, 2005 and 2004, respectively, and $6.6 million and $2.8 million for the nine months ended September 30, 2005 and 2004, respectively. (6) Represents the elimination of inter-segment transactions. (7) Adjusted income (loss) derived from operating activities is computed by: subtracting direct costs, general and administrative expenses, and depreciation and amortization, and depletion 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 (loss) 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. (8) Represents the elimination of inter-segment transactions and unallocated corporate expenses and assets. (9) Includes $36.2 million and $35.2 million of investments in unconsolidated affiliates accounted for by the equity method as of September 30, 2005 and December 31, 2004, respectively. (10) Includes $36.0 million and $31.9 million of investments in unconsolidated affiliates accounted for by the equity method as of September 30, 2005 and December 31, 2004, respectively. NOTE 9 CONDENSED CONSOLIDATING FINANCIAL INFORMATION Nabors has fully and unconditionally guaranteed all of the issued public debt securities of Nabors Industries, Inc. (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. 14
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 both consolidated and unconsolidated affiliates using the equity method of accounting. The following condensed consolidating financial information presents: condensed consolidating balance sheets as of September 30, 2005 and December 31, 2004, statements of income for each of the three and nine months ended September 30, 2005 and 2004, and statements of cash flows for each of the nine months ended September 30, 2005 and 2004 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 issued by Nabors Holdings, (c) Nabors Holdings, issuer of the $225 million 4.875% senior notes, (d) the non-guarantor subsidiaries, (e) consolidating adjustments necessary to consolidate Nabors and its subsidiaries and (f) Nabors on a consolidated basis. 15
CONDENSED CONSOLIDATING BALANCE SHEETS <Table> <Caption> SEPTEMBER 30, 2005 -------------------------------------------------------------------------------- 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.......... $ 242 $ 140 $ 11 $ 575,175 $ -- $ 575,568 Short-term investments.......... 31,429 -- -- 824,592 -- 856,021 Accounts receivable, net.................. -- -- -- 734,982 -- 734,982 Inventory............... -- -- -- 42,676 -- 42,676 Deferred income taxes... -- -- -- 40,419 -- 40,419 Other current assets.... 163 1,344 376 116,544 -- 118,427 ---------- ---------- -------- ---------- ----------- ---------- Total current assets............. 31,834 1,484 387 2,334,388 -- 2,368,093 Long-term investments..... -- -- -- 208,269 -- 208,269 Property, plant and equipment, net.......... -- -- -- 3,622,732 -- 3,622,732 Goodwill, net............. -- -- -- 342,116 -- 342,116 Intercompany receivables............. 523,861 801,739 -- 522 (1,326,122) -- Investments in affiliates.............. 3,010,752 2,408,804 266,777 1,458,763 (7,072,910) 72,186 Other long-term assets.... -- 11,633 877 76,428 -- 88,938 ---------- ---------- -------- ---------- ----------- ---------- Total assets......... $3,566,447 $3,223,660 $268,041 $8,043,218 $(8,399,032) $6,702,334 ---------- ---------- -------- ---------- ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long- term debt............ $ -- $ 819,682 $ -- $ -- $ -- $ 819,682 Trade accounts payable.............. 223 23 -- 270,065 -- 270,311 Accrued liabilities..... 72 3,015 1,408 182,539 -- 187,034 Income taxes payable.... -- -- 778 24,945 -- 25,723 ---------- ---------- -------- ---------- ----------- ---------- Total current liabilities........ 295 822,720 2,186 477,549 -- 1,302,750 Long-term debt............ -- 973,846 223,964 -- -- 1,197,810 Other long-term liabilities............. -- -- -- 148,089 -- 148,089 Deferred income taxes..... -- 34,264 -- 453,269 -- 487,533 Intercompany payable...... -- -- 2,855 1,323,267 (1,326,122) -- ---------- ---------- -------- ---------- ----------- ---------- Total liabilities.... 295 1,830,830 229,005 2,402,174 (1,326,122) 3,136,182 ---------- ---------- -------- ---------- ----------- ---------- Shareholders' equity...... 3,566,152 1,392,830 39,036 5,641,044 (7,072,910) 3,566,152 ---------- ---------- -------- ---------- ----------- ---------- Total liabilities and shareholders' equity............. $3,566,447 $3,223,660 $268,041 $8,043,218 $(8,399,032) $6,702,334 ---------- ---------- -------- ---------- ----------- ---------- </Table> 16
<Table> <Caption> DECEMBER 31, 2004 -------------------------------------------------------------------------------- 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.......... $ 67,584 $ -- $ 18 $ 317,107 $ -- $ 384,709 Short-term investments.......... 809,773 -- -- 145,531 -- 955,304 Accounts receivable, net.................. -- -- -- 540,103 -- 540,103 Inventory............... -- -- -- 28,653 -- 28,653 Deferred income taxes... -- -- -- 39,599 -- 39,599 Other current assets.... 3,952 4,031 376 63,709 -- 72,068 ---------- ---------- -------- ---------- ----------- ---------- Total current assets............. 881,309 4,031 394 1,134,702 -- 2,020,436 Long-term investments..... -- -- -- 71,034 -- 71,034 Property, plant and equipment, net.......... -- -- -- 3,275,495 -- 3,275,495 Goodwill, net............. -- -- -- 327,225 -- 327,225 Intercompany receivables............. 488,101 806,293 -- 522 (1,294,916) -- Investments in affiliates.............. 1,561,205 2,138,674 254,974 1,181,818 (5,069,582) 67,089 Other long-term assets.... -- 19,080 1,009 81,241 -- 101,330 ---------- ---------- -------- ---------- ----------- ---------- Total assets......... $2,930,615 $2,968,078 $256,377 $6,072,037 $(6,364,498) $5,862,609 ---------- ---------- -------- ---------- ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long- term debt............ $ -- $ 804,550 $ -- $ -- $ -- $ 804,550 Trade accounts payable.............. -- 23 -- 211,577 -- 211,600 Accrued liabilities..... 524 6,354 4,152 160,204 -- 171,234 Income taxes payable.... 672 -- -- 11,260 -- 11,932 ---------- ---------- -------- ---------- ----------- ---------- Total current liabilities........ 1,196 810,927 4,152 383,041 -- 1,199,316 Long-term debt............ -- 977,922 223,764 -- -- 1,201,686 Other long-term liabilities............. -- -- -- 146,337 -- 146,337 Deferred income taxes..... 26 56,952 -- 328,899 -- 385,877 Intercompany payable...... -- -- 2,522 1,292,394 (1,294,916) -- ---------- ---------- -------- ---------- ----------- ---------- Total liabilities.... 1,222 1,845,801 230,438 2,150,671 (1,294,916) 2,933,216 ---------- ---------- -------- ---------- ----------- ---------- Shareholders' equity...... 2,929,393 1,122,277 25,939 3,921,366 (5,069,582) 2,929,393 ---------- ---------- -------- ---------- ----------- ---------- Total liabilities and shareholders' equity............. $2,930,615 $2,968,078 $256,377 $6,072,037 $(6,364,498) $5,862,609 ---------- ---------- -------- ---------- ----------- ---------- </Table> 17
CONDENSED CONSOLIDATING STATEMENTS OF INCOME <Table> <Caption> THREE MONTHS ENDED SEPTEMBER 30, 2005 -------------------------------------------------------------------------------- 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........... $ -- $ -- $ -- $ 893,254 $ -- $893,254 Earnings from unconsolidated affiliates................ -- -- -- 91 -- 91 Earnings from consolidated affiliates................ 173,114 95,535 3,683 101,980 (374,312) -- Investment income............ 6,430 -- 7 20,741 -- 27,178 Intercompany interest income.................... 1,008 18,587 -- -- (19,595) -- -------- -------- ------ ---------- --------- -------- Total revenues and other income.................. 180,552 114,122 3,690 1,016,066 (393,907) 920,523 -------- -------- ------ ---------- --------- -------- Costs and other deductions: Direct costs................. -- -- -- 500,552 -- 500,552 General and administrative expenses.................. 1,666 216 3 64,075 (81) 65,879 Depreciation and amortization.............. -- 150 -- 73,523 -- 73,673 Depletion.................... -- -- -- 11,349 -- 11,349 Interest expense............. -- 9,470 2,860 (1,135) -- 11,195 Intercompany interest expense................... -- -- -- 19,595 (19,595) -- Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net....................... -- (865) -- 16,468 81 15,684 -------- -------- ------ ---------- --------- -------- Total costs and other deductions.............. 1,666 8,971 2,863 684,427 (19,595) 678,332 -------- -------- ------ ---------- --------- -------- Income before income taxes..... 178,886 105,151 827 331,639 (374,312) 242,191 -------- -------- ------ ---------- --------- -------- Income tax expense............. 29 3,558 281 59,466 -- 63,334 -------- -------- ------ ---------- --------- -------- Net income..................... $178,857 $101,593 $ 546 $ 272,173 $(374,312) $178,857 -------- -------- ------ ---------- --------- -------- </Table> 18
<Table> <Caption> THREE MONTHS ENDED SEPTEMBER 30, 2004 -------------------------------------------------------------------------------- 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........... $ -- $ -- $ -- $585,652 $ -- $585,652 Earnings (losses) from unconsolidated affiliates................ -- -- -- (292) -- (292) Earnings from consolidated affiliates................ 44,989 41,015 3,675 43,315 (132,994) -- Investment income............ 7,139 33 -- 5,050 -- 12,222 Intercompany interest income.................... 27,115 18,381 -- -- (45,496) -- ------- ------- ------ -------- --------- -------- Total revenues and other income.................. 79,243 59,429 3,675 633,725 (178,490) 597,582 ------- ------- ------ -------- --------- -------- Costs and other deductions: Direct costs................. -- -- -- 378,084 -- 378,084 General and administrative expenses.................. 1,863 4 -- 48,525 (844) 49,548 Depreciation and amortization.............. -- 150 -- 64,079 -- 64,229 Depletion.................... -- -- -- 9,408 -- 9,408 Interest expense............. -- 8,330 2,890 (687) -- 10,533 Intercompany interest expense................... -- -- -- 45,496 (45,496) -- Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net....................... (202) 1,256 -- (411) 844 1,487 ------- ------- ------ -------- --------- -------- Total costs and other deductions.............. 1,661 9,740 2,890 544,494 (45,496) 513,289 ------- ------- ------ -------- --------- -------- Income before income taxes..... 77,582 49,689 785 89,231 (132,994) 84,293 ------- ------- ------ -------- --------- -------- Income tax expense............. 1,956 3,209 275 3,227 -- 8,667 ------- ------- ------ -------- --------- -------- Net income..................... $75,626 $46,480 $ 510 $ 86,004 $(132,994) $ 75,626 ------- ------- ------ -------- --------- -------- </Table> 19
<Table> <Caption> NINE MONTHS ENDED SEPTEMBER 30, 2005 -------------------------------------------------------------------------------- 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.......... $ -- $ -- $ -- $2,442,319 $ -- $2,442,319 Earnings from unconsolidated affiliates............... -- -- -- 7,298 -- 7,298 Earnings from consolidated affiliates............... 428,864 241,314 11,803 259,366 (941,347) -- Investment income........... 12,013 -- 7 42,524 -- 54,544 Intercompany interest income................... 2,992 55,788 -- -- (58,780) -- -------- -------- ------- ---------- ----------- ---------- Total revenues and other income................. 443,869 297,102 11,810 2,751,507 (1,000,127) 2,504,161 -------- -------- ------- ---------- ----------- ---------- Costs and other deductions: Direct costs................ -- -- -- 1,429,762 -- 1,429,762 General and administrative expenses................. 5,385 1,316 6 178,495 (877) 184,325 Depreciation and amortization............. -- 450 -- 212,393 -- 212,843 Depletion................... -- -- -- 35,045 -- 35,045 Interest expense............ -- 27,498 8,580 (2,813) -- 33,265 Intercompany interest expense.................. -- -- -- 58,780 (58,780) -- Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net...................... 344 (708) -- 23,265 877 23,778 -------- -------- ------- ---------- ----------- ---------- Total costs and other deductions............. 5,729 28,556 8,586 1,934,927 (58,780) 1,919,018 -------- -------- ------- ---------- ----------- ---------- Income before income taxes.... 438,140 268,546 3,224 816,580 (941,347) 585,143 -------- -------- ------- ---------- ----------- ---------- Income tax expense............ 64 10,076 1,096 135,831 -- 147,067 -------- -------- ------- ---------- ----------- ---------- Net income.................... $438,076 $258,470 $ 2,128 $ 680,749 $ (941,347) $ 438,076 -------- -------- ------- ---------- ----------- ---------- </Table> 20
<Table> <Caption> NINE MONTHS ENDED SEPTEMBER 30, 2004 -------------------------------------------------------------------------------- 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.......... $ -- $ -- $ -- $1,709,348 $ -- $1,709,348 Earnings from unconsolidated affiliates............... -- -- -- 4,683 -- 4,683 Earnings from consolidated affiliates............... 105,683 106,716 14,474 110,906 (337,779) -- Investment income........... 16,877 -- -- 16,229 -- 33,106 Intercompany interest income................... 80,856 53,101 -- 522 (134,479) -- -------- -------- ------- ---------- --------- ---------- Total revenues and other income................. 203,416 159,817 14,474 1,841,688 (472,258) 1,747,137 -------- -------- ------- ---------- --------- ---------- Costs and other deductions: Direct costs................ -- -- -- 1,137,065 -- 1,137,065 General and administrative expenses................. 4,309 83 16 138,414 (2,234) 140,588 Depreciation and amortization............. -- 300 -- 185,260 -- 185,560 Depletion................... -- -- -- 34,995 -- 34,995 Interest expense............ -- 30,453 8,610 (1,284) -- 37,779 Intercompany interest expense.................. -- 522 -- 133,957 (134,479) -- Losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net...................... (202) (1,831) -- (3,540) 2,234 (3,339) -------- -------- ------- ---------- --------- ---------- Total costs and other deductions............. 4,107 29,527 8,626 1,624,867 (134,479) 1,532,648 -------- -------- ------- ---------- --------- ---------- Income before income taxes.... 199,309 130,290 5,848 216,821 (337,779) 214,489 -------- -------- ------- ---------- --------- ---------- Income tax expense............ 5,618 8,711 2,047 4,422 -- 20,798 -------- -------- ------- ---------- --------- ---------- Net income.................... $193,691 $121,579 $ 3,801 $ 212,399 $(337,779) $ 193,691 -------- -------- ------- ---------- --------- ---------- </Table> 21
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS <Table> <Caption> NINE MONTHS ENDED SEPTEMBER 30, 2005 -------------------------------------------------------------------------------- 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................. $ 134,753 $ 61,358 $(10,975) $ 541,456 $ (61,218) $ 665,374 --------- -------- -------- --------- --------- --------- Cash flows from investing activities: Purchases of investments... (117,623) -- -- (337,002) -- (454,625) Sales and maturities of investments............. 73,112 -- -- 395,159 -- 468,271 Cash paid for investments in consolidated affiliates.............. (85,386) (10,968) -- (10,968) 107,322 -- Cash paid for acquisitions of businesses, net...... -- -- -- (46,201) -- (46,201) Capital expenditures....... -- -- -- (577,844) -- (577,844) Proceeds from sales of assets and insurance claims.................. -- -- -- 19,989 -- 19,989 --------- -------- -------- --------- --------- --------- Net cash used for investing activities................. (129,897) (10,968) -- (556,867) 107,322 (590,410) --------- -------- -------- --------- --------- --------- Cash flows from financing activities: Increase in cash overdrafts.............. -- -- -- 3,857 -- 3,857 Reduction of long-term borrowings.............. -- -- -- (424) -- (424) Proceeds from issuance of parent common shares.... 8,374 -- -- 178,343 -- 186,717 Repurchase of common shares.................. (80,572) -- -- -- -- (80,572) Proceeds from parent contributions........... -- -- 10,968 96,354 (107,322) -- Cash dividends paid........ -- (50,250) -- (10,968) 61,218 -- --------- -------- -------- --------- --------- --------- Net cash (used for) provided by financing activities.... (72,198) (50,250) 10,968 267,162 (46,104) 109,578 --------- -------- -------- --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents................ -- -- -- 6,317 -- 6,317 --------- -------- -------- --------- --------- --------- Net (decrease) increase in cash and cash equivalents................ (67,342) 140 (7) 258,068 -- 190,859 Cash and cash equivalents, beginning of period........ 67,584 -- 18 317,107 -- 384,709 --------- -------- -------- --------- --------- --------- Cash and cash equivalents, end of period.............. $ 242 $ 140 $ 11 $ 575,175 $ -- $ 575,568 --------- -------- -------- --------- --------- --------- </Table> 22
<Table> <Caption> NINE MONTHS ENDED SEPTEMBER 30, 2004 -------------------------------------------------------------------------------- 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... $(115,208) $ 304,467 $(10,967) $ 398,291 $(211,462) $ 365,121 --------- --------- -------- --------- --------- --------- Cash flows from investing activities: Purchases of investments............ (587,374) -- -- (135,329) -- (722,703) Sales and maturities of investments............ 633,434 -- -- 72,108 -- 705,542 Cash paid for investments in consolidated affiliates............. (218,012) (60,000) -- (170,968) 448,980 -- Capital expenditures...... -- -- -- (400,073) -- (400,073) Proceeds from sales of assets and insurance claims................. -- -- -- 3,905 -- 3,905 --------- --------- -------- --------- --------- --------- Net cash used for investing activities................ (171,952) (60,000) -- (630,357) 448,980 (413,329) --------- --------- -------- --------- --------- --------- Cash flows from financing activities: Increase in cash overdrafts............. -- -- -- 6,416 -- 6,416 Reduction of long-term debt................... -- (297,525) -- (4,134) -- (301,659) Proceeds from issuance of parent common shares... 3,592 -- -- 48,647 -- 52,239 Retirement of intercompany loan................... 1,325 -- -- (1,325) -- -- Proceeds from parent contributions.......... -- 160,000 10,968 278,012 (448,980) -- Cash dividends paid....... -- (106,943) -- (104,519) 211,462 -- --------- --------- -------- --------- --------- --------- Net cash provided by (used for) financing activities................ 4,917 (244,468) 10,968 223,097 (237,518) (243,004) --------- --------- -------- --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents............... -- -- -- 8,612 -- 8,612 --------- --------- -------- --------- --------- --------- Net (decrease) increase in cash and cash equivalents............... (282,243) (1) 1 (357) -- (282,600) Cash and cash equivalents, beginning of period....... 403,693 1 17 176,026 -- 579,737 --------- --------- -------- --------- --------- --------- Cash and cash equivalents, end of period............. $ 121,450 $ -- $ 18 $ 175,669 $ -- $ 297,137 --------- --------- -------- --------- --------- --------- </Table> 23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2005, and the related consolidated statements of income for each of the three-month and nine-month periods ended September 30, 2005 and 2004, and the consolidated statements of cash flows and of changes in shareholders' equity for each of the nine-month periods ended September 30, 2005 and 2004. This interim financial information is the responsibility of the Company's management. We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board, 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 information for it to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, of cash flows, and of changes in shareholders' equity for the year then ended, management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 and the effectiveness of the Company's internal control over financial reporting as of December 31, 2004; and in our report dated March 7, 2005, we expressed unqualified opinions thereon. The consolidated financial statements and management's assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2004, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. As discussed in Note 2 to the interim financial statements, the Company changed its balance sheet classification of certain of its investment securities. /s/ PRICEWATERHOUSECOOPERS LLP Houston, Texas November 2, 2005 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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. 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 changes in tax laws; - 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 position, 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, 2004 filed with the U.S. Securities and Exchange Commission under Part 1, Item I, "Business -- Risk Factors." Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "we," "us," "our" and "Nabors" means Nabors Industries Ltd. and, where the context requires, includes our subsidiaries. RESULTS OF OPERATIONS A discussion of our results of operations for the three and nine months ended September 30, 2005 and 2004 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, 2004. 25
The following table sets forth certain information with respect to our reportable segments and rig activity: <Table> <Caption> THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- ------------------------------------------- INCREASE INCREASE 2005 2004 (DECREASE) 2005 2004 (DECREASE) -------- -------- ----------------- ---------- ---------- ----------------- (IN THOUSANDS, EXCEPT PERCENTAGES AND RIG ACTIVITY) <S> <C> <C> <C> <C> <C> <C> <C> <C> Reportable segments: Operating revenues and Earnings from unconsolidated affiliates: Contract Drilling:(1) U.S. Lower 48 Land Drilling............. $355,172 $202,283 $152,889 76% $ 914,862 $ 527,700 $387,162 73% U.S. Land Well-servicing....... 130,265 95,377 34,888 37% 355,154 263,018 92,136 35% U.S. Offshore.......... 42,115 33,929 8,186 24% 125,312 96,806 28,506 29% Alaska................. 18,159 16,982 1,177 7% 64,882 66,020 (1,138) (2)% Canada................. 131,348 89,293 42,055 47% 381,470 289,964 91,506 32% International.......... 143,355 111,618 31,737 28% 402,553 321,790 80,763 25% -------- -------- -------- ---------- ---------- -------- Subtotal Contract Drilling(2)........ 820,414 549,482 270,932 49% 2,244,233 1,565,298 678,935 43% Oil and Gas(3)........... 16,354 14,216 2,138 15% 46,871 49,515 (2,644) (5)% Other Operating Segments(4)(5)......... 81,753 41,408 40,345 97% 229,398 150,086 79,312 53% Other reconciling items(6)............... (25,176) (19,746) (5,430) (27)% (70,885) (50,868) (20,017) (39)% -------- -------- -------- ---------- ---------- -------- Total.................. $893,345 $585,360 $307,985 53% $2,449,617 $1,714,031 $735,586 43% -------- -------- -------- ---------- ---------- -------- Adjusted income (loss) derived from operating activities:(7) Contract Drilling: U.S. Lower 48 Land Drilling............. $135,295 $ 30,221 $105,074 N/M(8) $ 310,567 $ 51,760 $258,807 N/M(8) U.S. Land Well-servicing 29,297 18,511 10,786 58% 75,126 42,638 32,488 76% U.S. Offshore.......... 12,883 4,507 8,376 186% 32,392 14,120 18,272 129% Alaska................. 3,612 2,522 1,090 43% 13,743 13,488 255 2% Canada................. 28,106 13,888 14,218 102% 75,443 60,011 15,432 26% International.......... 38,630 24,713 13,917 56% 100,955 62,057 38,898 63% -------- -------- -------- ---------- ---------- -------- Subtotal Contract Drilling........... 247,823 94,362 153,461 163% 608,226 244,074 364,152 149% Oil and Gas.............. 3,998 4,018 (20) 0% 7,741 9,420 (1,679) (18)% Other Operating Segments............... 7,465 (3,094) 10,559 N/M(8) 18,997 (5,631) 24,628 N/M(8) Other reconciling items(9)............... (17,394) (11,195) (6,199) (55)% (47,322) (32,040) (15,282) (48)% -------- -------- -------- ---------- ---------- -------- Total.................. 241,892 84,091 157,801 188% 587,642 215,823 371,819 172% Interest expense........... (11,195) (10,533) (662) (6)% (33,265) (37,779) 4,514 12% Investment income.......... 27,178 12,222 14,956 122% 54,544 33,106 21,438 65% Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net...................... (15,684) (1,487) (14,197) N/M(8) (23,778) 3,339 (27,117) N/M(8) -------- -------- -------- ---------- ---------- -------- Income before income taxes.................... $242,191 $ 84,293 $157,898 187% $ 585,143 $ 214,489 $370,654 173% -------- -------- -------- ---------- ---------- -------- Rig activity: Rig years:(10) U.S. Lower 48 Land Drilling............... 244.2 207.9 36.3 17% 232.0 192.2 39.8 21% U.S. Offshore............ 15.7 14.0 1.7 12% 16.2 14.4 1.8 13% Alaska................... 6.5 6.4 .1 2% 6.7 6.9 (.2) (3)% Canada................... 54.7 41.9 12.8 31% 49.0 43.6 5.4 12% International(11)........ 84.8 66.3 18.5 28% 81.1 65.6 15.5 24% -------- -------- -------- ---------- ---------- -------- Total rig years........ 405.9 336.5 69.4 21% 385.0 322.7 62.3 19% -------- -------- -------- ---------- ---------- -------- Rig hours:(12) U.S. Land Well-servicing......... 313,677 289,312 24,365 8% 919,006 851,810 67,196 8% Canada Well-servicing.... 89,329 86,676 2,653 3% 263,962 272,145 (8,183) (3)% -------- -------- -------- ---------- ---------- -------- Total rig hours........ 403,006 375,988 27,018 7% 1,182,968 1,123,955 59,013 5% -------- -------- -------- ---------- ---------- -------- </Table> 26
- --------------- (1) These segments include our drilling, workover and well-servicing operations, on land and offshore. (2) Includes Earnings (losses) from unconsolidated affiliates, accounted for by the equity method, of $(1.1) million and $(.26) million for the three months ended September 30, 2005 and 2004, respectively, and $.7 million and $1.9 million for the nine months ended September 30, 2005 and 2004, respectively. (3) Represents our oil and gas exploration, development and production operations. (4) Includes our marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations. (5) Includes Earnings (losses) from unconsolidated affiliates, accounted for by the equity method, of $1.2 million and $(.03) million for the three months ended September 30, 2005 and 2004, respectively, and $6.6 million and $2.8 million for the nine months ended September 30, 2005 and 2004, respectively. (6) Represents the elimination of inter-segment transactions. (7) Adjusted income (loss) derived from operating activities is computed by: subtracting direct costs, general and administrative expenses, and depreciation and amortization, and depletion expense from Operating revenues and then adding Earnings from unconsolidated affiliates. Such amounts should not be used as a substitute to those amounts reported under accounting principles generally accepted in the United States of America (GAAP). However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income (loss) 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. (8) The percentage is so large that it is not meaningful. (9) Represents the elimination of inter-segment transactions and unallocated corporate expenses. (10) Excludes well-servicing rigs, which are measured in rig hours. Rig years represents a measure of the number of equivalent rigs operating during a given period. For example, one rig operating 182.5 days during a 365-day period represents 0.5 rig years. (11) International rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 4.0 years during the three months ended September 30, 2005 and 2004 and 3.9 years and 4.0 years during the nine months ended September 30, 2005 and 2004, respectively. (12) Rig hours represents the number of hours that our well-servicing rig fleet operated during the period. 27
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 Operating revenues and Earnings from unconsolidated affiliates for the three months ended September 30, 2005 totaled $893.3 million, representing an increase of $308.0 million, or 53%, compared to the prior year quarter. Adjusted income derived from operating activities and net income for the three months ended September 30, 2005 totaled $241.9 million and $178.9 million ($1.11 per diluted share), respectively, representing increases of 188% and 137% compared to the prior year quarter. Operating revenues and Earnings from unconsolidated affiliates for the nine months ended September 30, 2005 totaled $2.4 billion, representing an increase of $735.6 million, or 43%, compared to the prior year period. Adjusted income derived from operating activities and net income for the nine months ended September 30, 2005 totaled $587.6 million and $438.1 million ($2.73 per diluted share), respectively, representing increases of 172% and 126% compared to the prior year period. The increase in our operating results during the three and nine months ended September 30, 2005 resulted from higher revenues realized by essentially all of our operating segments. Revenues increased as a result of higher average dayrates and activity levels during the three and nine months ended September 30, 2005 compared to the prior year periods. This increase in average dayrates and activity reflects an increase in demand for our services in these markets during the three and nine months ended September 30, 2005, which resulted from continuing higher price levels for natural gas and oil during 2004 and the first three quarters of 2005. Our operating results for the fourth quarter of 2005 are expected to increase from levels realized during the third quarter of 2005 as a result of improved conditions in Canada, where operations typically improve in the fourth quarter as a result of seasonality, and a continued improvement in results for our U.S. Lower 48 Land Drilling operations resulting from continued higher average dayrates and activity levels. 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. Land Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg) averaged $7.41 per million cubic feet (mcf) during the period from October 1, 2004 through September 30, 2005, up from a $5.58 per mcf average during the period from October 1, 2003 through September 30, 2004. West Texas intermediate spot oil prices (per Bloomberg) averaged $53.69 per barrel during the period from October 1, 2004 through September 30, 2005, up from a $37.24 per barrel average during the period from October 1, 2003 through September 30, 2004. Contract Drilling. Our Contract Drilling operating segments contain one or more of the following operations: drilling, workover and well-servicing, on land and offshore. Operating revenues and Earnings from unconsolidated affiliates for our Contract Drilling operating segments totaled $820.4 million and adjusted income derived from operating activities totaled $247.8 million during the three months ended September 30, 2005, representing increases of 49% and 163%, respectively, compared to the prior year quarter. Operating revenues and Earnings from unconsolidated affiliates for our Contract Drilling operating segments totaled $2.2 billion and adjusted income derived from operating activities totaled $608.2 million during the nine months ended September 30, 2005, representing increases of 43% and 149%, respectively, compared to the prior year period. Rig years (excluding well-servicing rigs) increased to 405.9 years and 385.0 years during the three and nine months ended September 30, 2005, respectively, from 336.5 years and 322.7 years during the three and nine months ended September 30, 2004, respectively, as a result of increased capital spending by our customers, which resulted from the improvement in commodity prices discussed above. U.S. Lower 48 Land Drilling Operating revenues totaled $355.2 million and $914.9 million during the three and nine months ended September 30, 2005, respectively, representing increases of 76% and 73%, respectively, compared to the prior year periods. Adjusted income derived from operating activities totaled $135.3 million during the three months ended September 30, 2005 compared to $30.2 million during the prior year quarter, and totaled $310.6 million during the nine months ended September 30, 2005 compared to $51.8 million during the prior year period. The increase in operating results during the three and nine months ended September 30, 2005 primarily resulted from higher average dayrates and an increase in drilling activity driven by higher natural gas prices, which is reflected in the increase in rig years to 244.2 years and 232.0 years 28
during the three and nine months ended September 30, 2005, respectively, compared to 207.9 years and 192.2 years during the three and nine months ended September 30, 2004, respectively. Average dayrates and activity levels improved during the current year periods as a result of an increase in demand for drilling services in the U.S. Lower 48 market, which resulted from continuing higher price levels for natural gas during 2004 and the first three quarters of 2005. U.S. Land Well-servicing Operating revenues and adjusted income derived from operating activities totaled $130.3 million and $29.3 million, respectively, during the three months ended September 30, 2005, representing increases of 37% and 58%, respectively, compared to the prior year quarter. Operating revenues and adjusted income derived from operating activities totaled $355.2 million and $75.1 million, respectively, during the nine months ended September 30, 2005, representing increases of 35% and 76%, respectively, compared to the prior year period. These increases primarily resulted from an increase in average dayrates compared to the prior year periods and from higher well-servicing hours, which totaled 313,677 hours and 919,006 hours during the three and nine months ended September 30, 2005, respectively, compared to 289,312 hours and 851,810 hours during the three and nine months ended September 30, 2004, respectively. These increases in average dayrates and activity resulted from higher customer demand for our services in a number of markets in which we operate, which was driven by a sustained level of higher oil prices. U.S. Offshore Operating revenues and adjusted income derived from operating activities totaled $42.1 million and $12.9 million, respectively, during the three months ended September 30, 2005, representing increases of 24% and 186%, respectively, compared to the prior year quarter. Operating revenues and adjusted income derived from operating activities totaled $125.3 million and $32.4 million, respectively, during the nine months ended September 30, 2005, representing increases of 29% and 129%, respectively, compared to the prior year period. These increases primarily resulted from an increase in average dayrates and utilization for our jack-up rigs, both of which resulted from an improvement in demand for our drilling services in this market driven by increased natural gas prices compared to the prior year period. Additionally, for the nine months ended September 30, 2005, the addition of two new platform rigs for deepwater development projects, which commenced operations late in the second quarter of 2004, positively impacted our results. Rig years for our U.S. Offshore operations totaled 15.7 years and 16.2 years during the three and nine months ended September 30, 2005, respectively, compared to 14.0 years and 14.4 years during the three and nine months ended September 30, 2004, respectively. Additionally, our U.S. Offshore unit's operating results for the three and nine months ended September 30, 2005 were increased by $1.5 million of net business interruption insurance proceeds related to one of our Super Sundowner rigs that was significantly damaged during Hurricane Katrina in August 2005. Also, for the nine months ended September 30, 2005, Operating revenues were increased by an additional $2.2 million of net business interruption insurance proceeds recorded in the second quarter of 2005 related to one of our MODS deepwater platform rigs significantly damaged during Hurricane Ivan in September 2004. We also recorded impairment charges to certain other rigs damaged during Hurricanes Katrina and Rita during the third quarter of 2005 (see our discussion of gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net under Other Financial Information below for further discussion of these charges). Alaskan Operating revenues and adjusted income derived from operating activities totaled $18.2 million and $3.6 million, respectively, during the three months ended September 30, 2005, representing increases of 7% and 43%, respectively, compared to the prior year quarter. These increases primarily resulted from revenues associated with a water injection project during the three months ended September 30, 2005 and an increase in rentals of full size camps compared to the prior year quarter. Rig years for our Alaskan operations remained substantially unchanged during the three months ended September 30, 2005 compared to the prior year quarter, totaling 6.5 years and 6.4 years for the three months ended September 30, 2005 and 2004, respectively. Operating revenues and adjusted income derived from operating activities totaled $64.9 million and $13.7 million, respectively, during the nine months ended September 30, 2005, representing only insignificant changes from the prior year periods as Operating revenues decreased by 2% and adjusted income derived from operating activities increased by 2% compared to the prior year period. Rig years declined slightly to 6.7 years during the nine months ended September 30, 2005 from 6.9 years during the prior year period. 29
Canadian Operating revenues and adjusted income derived from operating activities totaled $131.3 million and $28.1 million, respectively, during the three months ended September 30, 2005, representing increases of 47% and 102%, respectively, compared to the prior year quarter. Operating revenues and adjusted income derived from operating activities totaled $381.5 million and $75.4 million, respectively, during the nine months ended September 30, 2005, representing increases of 32% and 26%, respectively, compared to the prior year period. These increases primarily resulted from an increase in average dayrates for our Canadian drilling and well-servicing operations and from an overall increase in drilling activity compared to the prior year periods. Average dayrates and drilling activity levels improved as a result of increased demand for our services in this market, which was driven by increased commodity prices compared to the prior year periods. The increase in drilling activity is reflected in the increase in rig years to 54.7 years and 49.0 years during the three and nine months ended September 30, 2005, respectively, from 41.9 years and 43.6 years during the three and nine months ended September 30, 2004, respectively. International Operating revenues and Earnings from unconsolidated affiliates and adjusted income derived from operating activities totaled $143.4 million and $38.6 million, respectively, during the three months ended September 30, 2005, representing increases of 28% and 56%, respectively, compared to the prior year quarter. Operating revenues and Earnings from unconsolidated affiliates and adjusted income derived from operating activities totaled $402.6 million and $101.0 million, respectively, during the nine months ended September 30, 2005, representing increases of 25% and 63%, respectively, compared to the prior year period. The improved results during the three and nine months ended September 30, 2005 primarily resulted from an increase in operations in South and Central America (primarily in Mexico, Colombia, Venezuela and Ecuador) and in the Middle East (primarily in Saudi Arabia, the United Arab Emirates and Qatar) resulting from improved demand for our services in these markets compared to the prior year period. International rig years increased to 84.8 years and 81.1 years during the three and nine months ended September 30, 2005, respectively, from 66.3 years and 65.6 years during the three and nine months ended September 30, 2004, respectively. Oil and Gas. This operating segment represents our oil and gas exploration, development and production operations. Oil and Gas Operating revenues and adjusted income derived from operating activities totaled $16.4 million and $4.0 million, respectively, during the three months ended September 30, 2005 representing an increase of 15% and an insignificant decrease, respectively, compared to the prior year quarter. Oil and Gas Operating revenues and adjusted income derived from operating activities totaled $46.9 million and $7.7 million, respectively, during the nine months ended September 30, 2005 representing decreases of 5% and 18%, respectively, compared to the prior year period. Oil and Gas segment results were positively impacted during the three and nine months ended September 30, 2005 by higher commodity prices compared to the prior year periods and increased production resulting from new investments in oil and gas properties, and were negatively impacted by the expected decline in production under our contracts executed with El Paso Corporation in the fourth quarter of 2003. Other Operating Segments. These operations include our marine transportation and supply services, drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations. Operating revenues and Earnings from unconsolidated affiliates for our Other Operating Segments totaled $81.8 million and $229.4 million, respectively, during the three and nine months ended September 30, 2005, representing increases of 97% and 53%, respectively, compared to the prior year periods. Adjusted income derived from operating activities totaled $7.5 million and $19.0 million during the three and nine months ended September 30, 2005, respectively, compared to adjusted losses derived from operating activities totaling $3.1 million and $5.6 million during the three and nine months ended September 30, 2004, respectively. These increases primarily resulted from (i) increased sales of top drives driven by the strengthening of the oil and gas drilling market compared to the prior year periods, (ii) increased demand for directional drilling, rig instrumentation and data collection services, primarily driven by an overall increase in drilling activity in the Canadian market compared to the prior year periods, and (iii) increased margins for our marine transportation and supply services driven by higher average dayrates compared to the prior year periods. 30
Other Financial Information. General and administrative expenses totaled $65.9 million during the three months ended September 30, 2005, representing an increase of $16.3 million, or 33%, compared to the prior year quarter, and totaled $184.3 million during the nine months ended September 30, 2005, representing an increase of $43.7 million, or 31%, compared to the prior year period. These increases primarily resulted from increased activity for a majority of our operating segments and increased corporate compensation expense. As a percentage of operating revenues, general and administrative expenses decreased during the three months ended September 30, 2005 compared to the prior year quarter (7.4% vs. 8.5%), and decreased during the nine months ended September 30, 2005 compared to the prior year period (7.5% vs. 8.2%), as these expenses were spread over a larger revenue base. Depreciation and amortization expense totaled $73.7 million during the three months ended September 30, 2005, representing an increase of $9.4 million, or 15%, compared to the prior year quarter, and totaled $212.8 million during the nine months ended September 30, 2005, representing an increase of $27.3 million, or 15%, compared to the prior year period. Depreciation and amortization expense increased during the current year periods primarily as a result of depreciation on capital expenditures made during the fourth quarter of 2004 and the first three quarters of 2005, and increases in average rig years for our U.S. Lower 48 Land Drilling, Canadian land drilling and International operations. Depletion expense totaled $11.3 million during the three months ended September 30, 2005, representing an increase of $1.9 million, or 21%, compared to the prior year quarter. Depletion expense for the three months ended September 30, 2005 increased as a result of production increases from new investments in oil and gas properties, partially offset by the decline in production under our agreements with El Paso. Depletion expense was substantially unchanged during the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004, totaling approximately $35.0 million in both periods. Interest expense totaled $11.2 million during the three months ended September 30, 2005, representing an increase of $.7 million, or 6%, compared to the prior year quarter. This increase resulted from lower savings realized from our interest rate swap agreement during the current year quarter as interest rates have increased compared to the prior year quarter (see a discussion on the interest rate swap agreement under Quantitative and Qualitative Disclosures About Market Risk below), and was partially offset by an increase in capitalized interest in the current year quarter resulting from a higher level of capital expenditures compared to the prior year quarter. Interest expense totaled $33.3 million during the nine months ended September 30, 2005, representing a decrease of $4.5 million, or 12%, compared to the prior year period. This decrease primarily resulted from the payment upon maturity of our 6.8% senior notes in April 2004. Investment income totaled $27.2 million during the three months ended September 30, 2005, representing an increase of $15.0 million, or 122%, compared to the prior year quarter, and totaled $54.5 million during the nine months ended September 30, 2005, representing an increase of $21.4 million, or 65%, compared to the prior year period. These increases resulted from (i) increased returns realized on our marketable security portfolios during the three and nine months ended September 30, 2005 compared to the prior year periods resulting from higher interest rates, (ii) a gain realized upon the redemption of certain of our non-marketable securities during the three months ended September 30, 2005, and (iii) higher earnings on our non-marketable securities accounted for under the equity method of accounting recorded during the three and nine months ended September 30, 2005. Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net increased to a loss of $(15.7) million during the three months ended September 30, 2005 from a loss of $(1.5) million during the prior year quarter. The amounts for the three months ended September 30, 2005 include losses on long-lived assets of approximately $7.6 million, which primarily consists of impairment charges recorded as a result of damage sustained in Hurricanes Katrina and Rita of approximately $2.2 million and $5.4 million, respectively. The amounts for the three months ended September 30, 2004 include mark-to-market losses recorded on our range cap and floor derivative instrument of approximately $1.2 million. Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net decreased to a loss of $(23.8) million during the nine months ended September 30, 2005 from a gain of $3.3 million during the prior year period. The amounts for the nine months ended September 30, 2005 include losses on long-lived 31
assets of approximately $10.7 million, which primarily consists of impairment charges recorded as a result of Hurricanes Katrina and Rita during the third quarter of 2005 discussed above. The amounts for the nine months ended September 30, 2004 include mark-to-market gains recorded on our range cap and floor derivative instrument of approximately $1.9 million. We expect to incur additional expenses in future periods associated with incidental expenses related to the restoration of the rigs damaged during Hurricane Katrina and Rita to operating condition, which we will record in gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net in those periods. Our effective income tax rate was 26.2% and 25.1% during the three and nine months ended September 30, 2005, respectively, compared to 10.3% and 9.7% during the three and nine months ended September 30, 2004, respectively. The increases in our effective income tax rate resulted from a higher proportion of our taxable income being generated in the U.S. during the three and nine months ended September 30, 2005, compared to the prior year periods. Income generated in the U.S. is generally taxed at a higher rate than in international jurisdictions in which we operate. In October 2004 the U.S. Congress passed and the President signed into law the American Jobs Creation Act of 2004. The Act did not impact the corporate reorganization completed by Nabors effective June 24, 2002, that made us a foreign entity. It is possible that future changes to tax laws (including tax treaties) could have an impact on our ability to realize the tax savings recorded to date as well as future tax savings as a result of our corporate reorganization, depending on any responsive action taken by Nabors. We expect our effective tax rate during 2005 to be in the 25%-27% range because we expect a higher proportion of our income to be generated in the U.S. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Our cash flows depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Sustained increases or decreases in the price of natural gas or oil could have a material impact on these activities, and could also materially affect our cash flows. Certain sources and uses of cash, such as the level of discretionary capital expenditures, purchases and sales of investments, issuances and repurchases of debt and of our common shares are within our control and are adjusted as necessary based on market conditions. The following is a discussion of our cash flows for the nine months ended September 30, 2005 and 2004. Operating Activities. Net cash provided by operating activities totaled $665.4 million during the nine months ended September 30, 2005, compared to net cash provided by operating activities of $365.1 million during the prior year period. During the nine months ended September 30, 2005 and 2004, net income was increased for non-cash items such as depreciation and amortization, and depletion, and was reduced for changes in our working capital (primarily accounts receivable) and other balance sheet accounts. Investing Activities. Net cash used for investing activities totaled $590.4 million during the nine months ended September 30, 2005, compared to net cash used for investing activities of $413.3 million during the prior year period. During each of the nine months ended September 30, 2005 and 2004, cash was primarily used for capital expenditures. Financing Activities. Net cash provided by financing activities totaled $109.6 million during the nine months ended September 30, 2005, compared to net cash used for financing activities of $243.0 million during the prior year period. During the nine months ended September 30, 2005, cash was provided by our receipt of proceeds totaling $186.7 million from the exercise of options to acquire our common shares by our employees and was used for the repurchase of our common shares in the open market totaling $80.6 million. During the nine months ended September 30, 2004, cash was used for the reduction of long-term debt of $301.7 million (including the payment upon maturity of our 6.8% senior notes in April 2004 totaling $295.3 million) and was provided by our receipt of proceeds totaling $52.2 million from the exercise of options to acquire our common shares by our employees. 32
FUTURE CASH REQUIREMENTS As of September 30, 2005, we had long-term debt, including current maturities, of $2.0 billion and cash and cash equivalents and investments of $1.6 billion. Our $1.381 billion zero coupon convertible senior debentures can be put to us on February 5, 2006, February 5, 2011 and February 5, 2016, for a purchase price equal to the issue price plus accrued original issue discount to the date of repurchase. The amount of the purchase price would total $826.8 million, $936.2 million and $1.1 billion if the debentures were put to us on February 5, 2006, February 5, 2011 or February 5, 2016, respectively. As our $1.381 billion zero coupon convertible senior debentures can be put to us on February 5, 2006, the outstanding principal amount of these debentures of $819.7 million is included in current liabilities in our balance sheet as of September 30, 2005. We cannot redeem the debentures before February 5, 2006, after which time we may redeem all or a portion of the debentures for cash at any time at their accreted value. We treat the redemption price, including accrued original issue discount, on such debentures as a financing activity for purposes of reporting cash flows in our consolidated statements of cash flows. Additionally, each of our $700 million zero coupon senior exchangeable notes and our $1.381 billion zero coupon convertible senior debentures provide that upon an exchange or conversion, as applicable, of these convertible debt instruments, we will be required to pay holders of these debt instruments, in lieu of common shares, cash up to the principal amount of the instruments and, at our option, consideration in the form of either cash or our common shares for any amount above the principal amount of the instruments required to be paid pursuant to the terms of the indentures. If the $1.381 billion debentures were converted, our cash obligation would be an amount equal to the lesser of 8.5 million multiplied by the sale price of our common shares on the trading day immediately prior to the related conversion date or the principal amount of the debentures on the date of conversion. If these debentures had been converted on September 30, 2005, we would have been required to pay cash totaling approximately $619.7 million to the holders of the debentures (based on the closing price for our common shares on September 29, 2005 of $72.98). As this amount is substantially lower than the $826.8 million that the holders of the debentures will receive if they put the debentures to us on the first put date of February 5, 2006 or if they sold the debentures in the open market, we do not currently expect the debentures to be converted and any payment to be required prior to February 5, 2006 (when the holders have the option to put the debentures back to us), unless the price for our shares were to exceed approximately $97. Our $700 million zero coupon senior exchangeable notes cannot be exchanged until the price for our shares exceeds approximately $84 or in various other circumstances as described in the note indenture. As of September 30, 2005, we had outstanding purchase commitments of approximately $544 million, primarily for rig-related enhancing, construction and sustaining capital expenditures. Total capital expenditures over the next twelve months, including these outstanding purchase commitments, are currently expected to be approximately $1.3 billion, including currently planned rig-related enhancing, construction and sustaining capital expenditures. This amount could change significantly based on market conditions and new business opportunities. The level of our outstanding purchase commitments and our expected level of capital expenditures over the next twelve months represent a number of capital programs that are currently underway or planned. These programs will result in an expansion in the number of drilling and well-servicing rigs that we own and operate and will consist primarily of land drilling and well-servicing rigs. The increase in capital expenditures is expected across a majority of our operating segments, most significantly within our U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, Canadian, and International operations. Our 2004 Annual Report on Form 10-K includes our contractual cash obligations table as of December 31, 2004. As a result of the increase in our outstanding purchase commitments discussed above, we are presenting the following table in this Report which summarizes our remaining contractual cash obligations related to purchase commitments as of September 30, 2005: <Table> <Caption> PAYMENT DUE BY PERIOD -------------------------------------------------------- TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS THEREAFTER (IN THOUSANDS) -------- -------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> Purchase commitments(1)........... $544,001 $529,606 $14,395 $ -- $ -- </Table> 33
- --------------- (1) Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of the transaction. No other significant changes have occurred to the contractual cash obligations information disclosed in our 2004 Annual Report on Form 10-K. 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. During 2002 our Board of Directors authorized the continuation of a share repurchase program under which we may repurchase our common shares in the open market. Under this program we are authorized to purchase up to $400 million of our common shares. Through September 30, 2005, approximately $83.1 million of our common shares had been repurchased under this program, which includes 1.5 million of our common shares repurchased and retired for $80.6 million during the second quarter of 2005. See our discussion of guarantees issued by Nabors that could have a potential impact on our financial position, results of operations or cash flows in future periods included in Note 5 to our accompanying consolidated financial statements. FINANCIAL CONDITION AND SOURCES OF LIQUIDITY Our primary sources of liquidity are cash and cash equivalents, marketable and non-marketable securities and cash generated from operations. As of September 30, 2005, we had cash and cash equivalents and investments of $1.6 billion (including $208.3 million of long-term investments) and working capital of $1.1 billion. This compares to cash and cash equivalents and investments of $1.4 billion (including $71.0 million of long-term investments) and working capital of $821.1 million as of December 31, 2004. Our funded debt to capital ratio was 0.36:1 as of September 30, 2005 and 0.41:1 as of December 31, 2004. Our net funded debt to capital ratio was 0.10:1 as of September 30, 2005 and 0.17:1 as of December 31, 2004. 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 and non-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. Non-marketable securities consist of investments in overseas funds investing primarily in a variety of public and private U.S. and non-U.S. securities (including asset-backed securities and mortgage-backed securities, global structured asset securitizations, whole loan mortgages, and participations in whole loans and whole loan mortgages). These investments are classified as non-marketable, because they do not have published fair values. Our interest coverage ratio was 24.5:1 as of September 30, 2005, compared to 14.1:1 as of December 31, 2004. The interest coverage ratio is computed by calculating the sum of income before income taxes, interest expense, depreciation and amortization, and depletion 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 with various banks as of September 30, 2005. Availability and borrowings under our credit facilities as of September 30, 2005 are as follows: <Table> <Caption> (IN THOUSANDS) <S> <C> Credit available............................................ $128,531 Letters of credit outstanding............................... (89,852) -------- Remaining availability...................................... $ 38,679 -------- </Table> We have a shelf registration statement on file with the U.S. Securities and Exchange Commission to allow us to offer, from time to time, up to $700 million in debt securities, guarantees of debt securities, 34
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 and non-marketable securities and projected cash flow generated from current operations are expected to more than adequately finance our sustaining capital expenditures, our debt service requirements (including our $1.381 billion zero coupon convertible senior debentures that may be put to us on February 5, 2006), and all other expected cash requirements for the next twelve months. See our discussion of the impact of changes in market conditions on our derivative financial instruments discussed under Item 3. Quantitative and Qualitative Disclosures About Market Risk below. OTHER MATTERS MOVE TO NYSE On October 24, 2005, we announced that we had applied for listing of our common shares on the New York Stock Exchange (NYSE) under the ticker symbol "NBR". Consequently, subject to approval by the NYSE of our listing application, the trading of our common shares will be transferred to the NYSE from the American Stock Exchange (AMEX). We anticipate that trading in our common shares on the NYSE will begin on November 3, 2005, and that the last day of trading of our common shares on the AMEX will be November 2, 2005. Our common shares will continue to be traded on the AMEX under the symbol "NBR" until the transfer to the NYSE is effective. RECENT ACCOUNTING PRONOUNCEMENTS As discussed under Stock-Based Compensation in Note 2 to our accompanying consolidated financial statements, we currently account for stock-based compensation as prescribed by Accounting Principals Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and because we grant options at prices equal to the market price of our shares on the date of the grant, we do not record compensation expense related to these grants in our consolidated statements of income. On December 16, 2004, the FASB issued a revision to Statement of Financial Accounting Standards (SFAS) No. 123, "Share-Based Payment," which will eliminate our ability to account for stock-based compensation using APB 25 and instead would require us to account for stock option awards using a fair-value based method resulting in compensation expense for stock option awards being recorded in our consolidated statements of income. The statement will be effective for stock options granted, modified, or settled in cash in annual periods beginning after June 15, 2005 (2006 for Nabors). Additionally, for stock options granted or modified after December 15, 1994 that have not vested as of the effective date of the statement, compensation cost will be measured and recorded in our consolidated statements of income based on the same estimates of fair value calculated as of the date of grant as currently disclosed within the table required by SFAS No. 148, "Accounting for Stock-Based Compensation - an Amendment to FAS 123," presented in Note 2 to our accompanying consolidated financial statements. The statement may have a material adverse effect on our results of operations during the periods of adoption and annual and interim periods thereafter. The impact that the adoption of this statement in its current form on January 1, 2005 or 2004 would have had on our net income and basic and diluted earnings per share for the three and nine months ended September 30, 2005 and 2004 is presented in the table included in Note 2 to our accompanying consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES We disclosed our critical accounting estimates in our 2004 Annual Report on Form 10-K. No significant changes have occurred to those items. SELF-INSURANCE ACCRUALS Effective April 1, 2005, with our insurance renewal, certain changes have been made to our insurance coverage resulting in additional exposure to obligations from claims that might arise in the ordinary course of 35
business. In addition to the insurance retentions that we are responsible for relating to rig, equipment, property and business interruption risk, we are now responsible for 30% of all losses in excess of those retentions. 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 2004 Annual Report on Form 10-K. Material changes in our exposure to market risk from that disclosed in our 2004 Annual Report on Form 10-K are discussed below. 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 No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 is reflected as a gain or loss in our consolidated statements of income. In June 2004 we unwound $100 million of the $200 million range cap and floor derivative instrument. The fair value of our interest rate swap agreement recorded as a derivative asset and included in other long-term assets totaled approximately $.4 million and $4.6 million as of September 30, 2005 and December 31, 2004, respectively. The carrying value of our 5.375% senior notes has been increased by the same amount as of September 30, 2005 and December 31, 2004. The fair value of our range cap and floor transaction recorded as a derivative asset and included in other long-term assets totaled approximately $1.1 million, $.2 million and $.3 million as of September 30, 2005, June 30, 2005 and December 31, 2004, respectively. We recorded mark-to-market gains, included in losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net of approximately $.9 million and $.7 million during the three and nine months ended September 30, 2005, respectively, resulting from the change in cumulative fair value of this derivative instrument during the three and nine months ended September 30, 2005. ITEM 4. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. We maintain a set of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, as amended, is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. We have investments in certain unconsolidated entities 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 subsidiaries. The Company's management, with the participation of the Company's Chairman and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company's Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective, at the reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective, at the reasonable assurance level, in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chairman and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 36
(b) Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company's 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 most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's 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 business. We estimate the range of our liability related to pending litigation when we believe the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ from our estimates. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position, although they could have a material adverse effect on our results of operations for a particular reporting period. ITEM 6. EXHIBITS <Table> <C> <S> 15 Awareness Letter of Independent Accountants. 18 Preference Letter of Independent Accountants Regarding Change in Accounting Principle. 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, and 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> 37
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. Date: November 2, 2005 /s/ Anthony G. Petrello -------------------------------------- Anthony G. Petrello Deputy Chairman, President and Chief Operating Officer Date: November 2, 2005 /s/ Bruce P. Koch -------------------------------------- Bruce P. Koch Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 38
EXHIBIT INDEX <Table> <Caption> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 15 Awareness Letter of Independent Accountants. 18 Preference Letter of Independent Accountants Regarding Change in Accounting Principle. 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, and 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> 39