e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the transition period from to
Commission file number 1-31339
WEATHERFORD INTERNATIONAL LTD.
(Exact name of Registrant as specified in its Charter)
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Bermuda
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98-0371344 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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515 Post Oak Boulevard |
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Suite 600 |
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Houston, Texas
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77027-3415 |
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(Address of principal executive offices)
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(Zip Code) |
(713) 693-4000
(Registrants telephone number, include area code)
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common shares, as
of the latest practicable date:
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Title of Class |
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Outstanding at October 27, 2006 |
Common Shares, par value $1.00
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339,710,007 |
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
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September 30, |
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December 31, |
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2006 |
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2005 |
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(unaudited) |
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ASSETS |
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Current Assets: |
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Cash and Cash Equivalents |
|
$ |
120,292 |
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$ |
134,245 |
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Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $12,697 and $12,210, Respectively |
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1,522,188 |
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1,259,990 |
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Inventories |
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1,168,952 |
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|
890,121 |
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Other Current Assets |
|
|
456,578 |
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|
354,517 |
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3,268,010 |
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2,638,873 |
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Property, Plant and Equipment, Net of Accumulated
Depreciation of $1,845,478 and $1,593,362, Respectively |
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2,816,868 |
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|
2,367,237 |
|
Goodwill |
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3,033,995 |
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|
2,808,217 |
|
Other Intangible Assets, Net |
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|
632,971 |
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|
621,365 |
|
Other Assets |
|
|
145,180 |
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|
144,612 |
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$ |
9,897,024 |
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$ |
8,580,304 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities: |
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Short-term Borrowings and Current Portion of Long-term Debt |
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$ |
633,038 |
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$ |
954,766 |
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Accounts Payable |
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475,029 |
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476,363 |
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Other Current Liabilities |
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921,000 |
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567,012 |
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|
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2,029,067 |
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1,998,141 |
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Long-term Debt |
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1,571,374 |
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632,071 |
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Deferred Tax Liabilities |
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115,082 |
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88,476 |
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Other Liabilities |
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219,879 |
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194,799 |
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Commitments and Contingencies |
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Shareholders Equity: |
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Common Shares, $1 Par Value, Authorized 1,000,000 Shares,
Issued 361,812 and 358,973 Shares, Respectively |
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361,812 |
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358,973 |
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Capital in Excess of Par Value |
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4,232,006 |
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|
4,164,365 |
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Treasury Shares, Net |
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(638,191 |
) |
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|
(152,111 |
) |
Retained Earnings |
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|
1,827,305 |
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|
1,202,938 |
|
Accumulated Other Comprehensive Income |
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|
178,690 |
|
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|
92,652 |
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|
|
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|
|
|
|
|
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5,961,622 |
|
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5,666,817 |
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|
|
|
|
|
|
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$ |
9,897,024 |
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|
$ |
8,580,304 |
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
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Three Months |
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Nine Months |
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Ended September 30, |
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Ended September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues: |
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Products |
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$ |
634,415 |
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$ |
490,269 |
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$ |
1,805,029 |
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$ |
1,346,265 |
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Services |
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1,062,338 |
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586,547 |
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2,966,311 |
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1,525,552 |
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1,696,753 |
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1,076,816 |
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4,771,340 |
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2,871,817 |
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Costs and Expenses: |
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Cost of Products |
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|
439,132 |
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356,378 |
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1,242,189 |
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|
950,509 |
|
Cost of Services |
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|
639,154 |
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392,284 |
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1,822,010 |
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1,013,997 |
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Research and Development |
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38,241 |
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27,140 |
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|
112,045 |
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|
72,062 |
|
Selling, General and Administrative Attributable to
Segments |
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|
194,410 |
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|
134,316 |
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|
562,807 |
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|
370,644 |
|
Corporate General and Administrative |
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|
24,718 |
|
|
|
19,159 |
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|
|
71,251 |
|
|
|
56,115 |
|
Equity in (Earnings) Losses of Unconsolidated
Affiliates |
|
|
190 |
|
|
|
(2,991 |
) |
|
|
(5,737 |
) |
|
|
(7,114 |
) |
Exit Costs and Restructuring Charges |
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|
¾ |
|
|
|
80,018 |
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|
¾ |
|
|
|
80,018 |
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|
|
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|
|
|
|
|
|
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|
|
|
|
|
|
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|
Operating Income |
|
|
360,908 |
|
|
|
70,512 |
|
|
|
966,775 |
|
|
|
335,586 |
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|
|
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|
|
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Other Income (Expense): |
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|
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|
|
|
|
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|
|
|
|
|
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Debt Redemption Expense |
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|
¾ |
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|
(4,733 |
) |
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¾ |
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|
|
(4,733 |
) |
Interest Expense, Net |
|
|
(27,591 |
) |
|
|
(17,197 |
) |
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|
(70,294 |
) |
|
|
(45,834 |
) |
Other, Net |
|
|
(6,161 |
) |
|
|
10,966 |
|
|
|
(19,651 |
) |
|
|
12,172 |
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|
|
|
|
|
|
|
|
|
|
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|
Income from Continuing Operations Before Income Taxes |
|
|
327,156 |
|
|
|
59,548 |
|
|
|
876,830 |
|
|
|
297,191 |
|
Provision for Income Taxes |
|
|
(92,953 |
) |
|
|
(12,249 |
) |
|
|
(252,463 |
) |
|
|
(74,732 |
) |
|
|
|
|
|
|
|
|
|
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|
Income from Continuing Operations |
|
|
234,203 |
|
|
|
47,299 |
|
|
|
624,367 |
|
|
|
222,459 |
|
Income from Discontinued Operation, Net of Taxes |
|
|
¾ |
|
|
|
587 |
|
|
|
¾ |
|
|
|
1,211 |
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|
|
|
|
|
|
|
|
|
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|
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Net Income |
|
$ |
234,203 |
|
|
$ |
47,886 |
|
|
$ |
624,367 |
|
|
$ |
223,670 |
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|
|
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Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
$ |
0.68 |
|
|
$ |
0.16 |
|
|
$ |
1.79 |
|
|
$ |
0.78 |
|
Income from Discontinued Operation |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
0.68 |
|
|
$ |
0.16 |
|
|
$ |
1.79 |
|
|
$ |
0.79 |
|
|
|
|
|
|
|
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Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
$ |
0.66 |
|
|
$ |
0.15 |
|
|
$ |
1.75 |
|
|
$ |
0.74 |
|
Income from Discontinued Operation |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
0.66 |
|
|
$ |
0.15 |
|
|
$ |
1.75 |
|
|
$ |
0.74 |
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Weighted Average Shares Outstanding: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic |
|
|
345,733 |
|
|
|
300,972 |
|
|
|
347,915 |
|
|
|
284,824 |
|
Diluted |
|
|
354,471 |
|
|
|
311,788 |
|
|
|
356,905 |
|
|
|
311,416 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
624,367 |
|
|
$ |
223,670 |
|
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities: |
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
354,030 |
|
|
|
222,389 |
|
Gain on Sales of Assets, Net |
|
|
(23,040 |
) |
|
|
(460 |
) |
Income from Discontinued Operation |
|
|
¾ |
|
|
|
(1,211 |
) |
Debt Redemption Expense |
|
|
¾ |
|
|
|
4,733 |
|
Non-cash Portion of Exit Costs and Restructuring Charges |
|
|
¾ |
|
|
|
81,651 |
|
Equity in Earnings of Unconsolidated Affiliates |
|
|
(5,737 |
) |
|
|
(13,611 |
) |
Employee Stock-Based Compensation Expense |
|
|
43,017 |
|
|
|
22,826 |
|
Amortization of Original Issue Discount |
|
|
¾ |
|
|
|
11,432 |
|
Deferred Income Tax Benefit |
|
|
(19,283 |
) |
|
|
(13,831 |
) |
Other, Net |
|
|
16,139 |
|
|
|
3,467 |
|
Change in Operating Assets and Liabilities, Net of Effect
of Businesses Acquired |
|
|
(275,408 |
) |
|
|
(235,939 |
) |
|
|
|
|
|
|
|
Net Cash Provided by Continuing Operations |
|
|
714,085 |
|
|
|
305,116 |
|
Net Cash Provided by Discontinued Operation |
|
|
¾ |
|
|
|
2,294 |
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities |
|
|
714,085 |
|
|
|
307,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Acquisitions of Businesses, Net of Cash Acquired |
|
|
(162,192 |
) |
|
|
(963,410 |
) |
Capital Expenditures for Property, Plant and Equipment |
|
|
(720,650 |
) |
|
|
(320,298 |
) |
Acquisition of Intellectual Property |
|
|
(28,469 |
) |
|
|
(9,234 |
) |
Purchase of Equity Investment in Unconsolidated Affiliate |
|
|
¾ |
|
|
|
(16,424 |
) |
Proceeds from Sale of Assets and Businesses, Net |
|
|
22,132 |
|
|
|
9,485 |
|
|
|
|
|
|
|
|
Net Cash Used by Investing Activities |
|
|
(889,179 |
) |
|
|
(1,299,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Borrowings (Repayments) of Short-term Debt, Net |
|
|
(121,716 |
) |
|
|
1,046,775 |
|
Borrowings (Repayments) of Long-term Debt, Net |
|
|
735,920 |
|
|
|
(2,320 |
) |
Redemption of Zero Coupon Convertible Debentures |
|
|
¾ |
|
|
|
(348,816 |
) |
Purchase of Treasury Shares |
|
|
(507,646 |
) |
|
|
¾ |
|
Proceeds from Exercise of Stock Options |
|
|
54,003 |
|
|
|
165,116 |
|
Tax Benefit on Stock Option Exercises |
|
|
194 |
|
|
|
¾ |
|
Other Financing Activities, Net |
|
|
386 |
|
|
|
(2,522 |
) |
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities |
|
|
161,141 |
|
|
|
858,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash and Cash Equivalents |
|
|
(13,953 |
) |
|
|
(134,238 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
134,245 |
|
|
|
317,439 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
120,292 |
|
|
$ |
183,201 |
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest Paid |
|
$ |
43,107 |
|
|
$ |
84,472 |
|
Income Taxes Paid, Net of Refunds |
|
|
111,888 |
|
|
|
59,395 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net Income |
|
$ |
234,203 |
|
|
$ |
47,886 |
|
|
$ |
624,367 |
|
|
$ |
223,670 |
|
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification Adjustment for Deferred
Gain (Loss), Net on Derivative Instruments |
|
|
(1,499 |
) |
|
|
69 |
|
|
|
4,790 |
|
|
|
206 |
|
Foreign Currency Translation Adjustment |
|
|
19,381 |
|
|
|
81,357 |
|
|
|
81,248 |
|
|
|
36,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
252,085 |
|
|
$ |
129,312 |
|
|
$ |
710,405 |
|
|
$ |
260,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
The condensed consolidated financial statements of Weatherford International Ltd. and all
majority-owned subsidiaries (the Company) included herein are unaudited; however, they include
all adjustments of a normal recurring nature which, in the opinion of management, are necessary to
present fairly the Companys Condensed Consolidated Balance Sheet at September 30, 2006, Condensed
Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for
the three and nine months ended September 30, 2006 and 2005, and Condensed Consolidated Statements
of Cash Flows for the nine months ended September 30, 2006 and 2005. Although the Company believes
the disclosures in these financial statements are adequate to make the interim information
presented not misleading, certain information relating to the Companys organization and footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to
Securities and Exchange Commission rules and regulations. These financial statements should be
read in conjunction with the audited consolidated financial statements for the year ended December
31, 2005 and the notes thereto included in the Companys Annual Report on Form 10-K. The results
of operations for the three and nine months ended September 30, 2006 are not necessarily indicative
of the results expected for the full year.
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period and disclosure of contingent liabilities. On an
ongoing basis, the Company evaluates its estimates, including those related to bad debts,
inventories, investments, intangible assets and goodwill, property, plant and equipment, income
taxes, insurance, employment benefits and contingent liabilities. The Company bases its estimates
on historical experience and on various other assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates.
Certain reclassifications have been made to conform prior year financial information to the
current period presentation.
The Company completed the acquisition of the Energy Services Division (Precision Energy
Services) and International Contract Drilling Division (Precision Drilling International) of
Precision Drilling Corporation on August 31, 2005 and began integrating those acquired businesses
into the Companys reporting structure. In connection with the acquisition, the Company realigned
its operating and reporting segments to include Evaluation, Drilling & Intervention Services and
Completion & Production Systems. The Companys remaining segments, Pipeline and Specialty Services
and Precision Drilling International were reported as Other Operations as their operations were not
material individually.
While the Companys intent was to integrate the Precision Drilling International product lines
into Evaluation, Drilling and Intervention Services as of the acquisition date, the reporting
structure that optimized the Companys productivity initiatives was not executed until the second
quarter of 2006, as other integration activities were ongoing. Productivity initiatives the
Company seeks to maximize include but are not limited to (a) customer focus, (b) streamlining
business processes and (c) maximizing product line pull-through including integrated projects. In
addition, it was subsequently determined that the Pipeline and Specialty Services Segment would be
managed and reported under the Completion & Production Systems Division to allow for the
elimination of certain cost redundancies and to benefit from the similarities shared with other
completion and artificial lift product lines.
In connection with these recent changes, the Company realigned its operating segments and
reviewed the presentation of its reporting segments in the second quarter of 2006 (See Note 17).
The three historical reporting segments of Evaluation, Drilling & Intervention Services, Completion
& Production Systems and Other Operations are now presented as: Evaluation, Drilling & Intervention
Services and Completion & Production Systems. The previous components of Other Operations,
Precision Drilling International and Pipeline and Specialty Services, are now reported under
Evaluation, Drilling & Intervention Services and Completion & Production Systems, respectively.
Historical segment data has been restated for all periods to conform to the new presentation (See
Notes 4, 7 and 17).
5
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Critical Accounting Policies
There have been no material changes or developments in the Companys evaluation of accounting
estimates and underlying assumptions or methodologies that the Company believes to be Critical
Accounting Policies and Estimates as disclosed in our Form 10-K, for the year ended December 31,
2005. Although there have been no material changes to the Companys revenue recognition policy
subsequent to December 31, 2005, further clarification of this critical accounting policy, as it
relates to products and services sold in our contract drilling and pipeline services businesses, is
warranted, as these businesses are expected to comprise a higher percentage of total revenues for
2006. In addition, the Company has expanded its disclosure to clarify the nature of the expenses
typically incurred and rebilled to the customer.
Revenue Recognition
Revenue is recognized when all of the following criteria have been met: a) evidence of an
arrangement exists, b) delivery to and acceptance by the customer has occurred, c) the price to the
customer is fixed and determinable and d) collectibility is reasonably assured.
Both contract drilling and pipeline service revenue is contractual by nature and both are
day-rate based contracts. The Company recognizes revenue for these contracts based on the criteria
outlined above which is consistent with our other product offerings.
From time to time, the Company may receive revenues for preparation and mobilization of
equipment and personnel. In connection with new drilling contracts, revenues earned and
incremental costs incurred directly related to preparation and mobilization are deferred and
recognized over the primary contract term of the project using the straight-line method. Costs of
relocating equipment without contracts to more promising market areas are expensed as incurred.
Demobilization fees received are recognized, along with any related expenses, upon completion of
contracts.
The Company incurs rebillable expenses including shipping and handling, third-party inspection
and repairs, and custom and duties. The Company recognizes the revenue associated with these
rebillable expenses as Products Revenues and all related costs as Cost of Products in the
accompanying Condensed Consolidated Statements of Income.
3. Business Combinations
The Company has acquired businesses critical to its long-term growth strategy. Results of
operations for acquisitions are included in the accompanying Condensed Consolidated Statements of
Income from the date of acquisition. The balances included in the Condensed Consolidated Balance
Sheets related to acquisitions are based on preliminary information and are subject to change when
final asset valuations are obtained and the potential for liabilities has been evaluated.
Acquisitions are accounted for using the purchase method of accounting and the purchase price is
allocated to the net assets acquired based upon their estimated fair values at the date of
acquisition. Final valuations of assets and liabilities are obtained and recorded within one year
from the date of the acquisition.
During the first nine months of 2006, the Company effected various acquisitions that were
integrated into the Companys operations for total consideration of approximately $155.7 million.
On August 31, 2005, the Company acquired Precision Energy Services and Precision Drilling
International, former divisions of Precision Drilling Corporation. Precision Energy Services is a
provider of cased hole and open hole wireline services, drilling and evaluation services and
production services. These operations substantially broadened the Companys wireline and
directional capabilities and strengthened the Companys controlled pressure drilling and testing
product lines. Opportunities exist to accelerate the acquired products market penetration in the
Eastern Hemisphere through the Companys established infrastructure. Precision Drilling
International is a land rig contractor owning and operating 48 rigs, with a concentrated presence
in the Eastern Hemisphere and Latin America. The procurement of these assets will allow the
Company to further meet our customers comprehensive service needs.
6
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consideration paid for these businesses was approximately $2,340.7 million consisting of
$942.7 million in cash and 52.0 million Weatherford common shares, $1.00 par value (Common
Shares). The fair value of the shares issued was determined using an average price of $26.89,
which represented the average closing price of the
Companys stock for a short period before and after the agreement date. The purchase price is
subject to a working capital adjustment mechanism, which has not been completed.
The total purchase price was allocated to Precision Energy Services and Precision Drilling
Internationals net tangible and identifiable intangible assets based on their estimated fair
values. The excess of the purchase price over the net assets was recorded as goodwill. The
allocation of the purchase price was based upon the final valuation of net assets which was
completed in the third quarter of 2006.
In association with the acquisition, the Company identified pre-acquisition contingencies
related to duties and taxes associated with the importation of certain equipment assets to foreign
jurisdictions. The Company calculated a range of reasonable estimates of the costs associated with
these duties. As no amount within the range appeared to be a better estimate than any other, the
Company used the amount that is the low end of the range in accordance with Statement of Financial
Accounting Standards (SFAS) No. 5, Accounting for Contingencies, and its interpretations. At
September 30, 2006, the Company has recorded a liability in the amount of $28.0 million for this
matter. If the Company used the high end of the range, the aggregate potential liability would be
approximately $44.0 million higher. It is reasonably possible that the actual amount paid to
settle these items could be materially different from the Companys estimate and could have a
material adverse effect on its consolidated financial statements.
4. Exit Costs, Severance, Restructuring and Asset Impairment Charges
2005 Exit Cost and Restructuring Charges
The Company incurred exit costs and restructuring charges of $97.3 million during the three
and nine months ended September 30, 2005. During the third and fourth quarters of 2005, the
Company underwent both a restructuring related to its acquisition of Precision and reorganization
activities related to its historical businesses, including a change in management, a change in
regional structure and an evaluation of product lines. The Company incurred total exit costs of
$114.2 million, of which $97.3 million was recorded during the quarter ending September 30, 2005 and the
remaining $16.9 million was recorded in the fourth quarter of 2005. The third quarter 2005 charge
included an inventory write-down of $17.3 million which was recorded in Cost of Products and a
remaining amount of $80.0 million which was recorded as Exit Costs and Restructuring Charges in the
related periods Condensed Consolidated Statements of Income.
The exit plan related to the Precision acquisition resulted in exit costs and restructuring
charges of $105.5 million during the third and fourth quarters of 2005. The Company initiated an
integration plan to combine worldwide operations, rationalize product lines, and eliminate certain
products, services and locations. Product line rationalization included wireline, controlled
pressure drilling and testing, and directional product and service offerings. Inventory totaling
$20.7 million was written-down. Asset impairment charges included $20.9 million for fixed assets,
$12.9 million related to information technology and $1.7 million related to investments. Employee
severance and termination benefits totaled $33.0 million. Contract terminations and facility
closures of $7.3 million were also recorded. In connection with the valuation of the Precision
assets, $9.0 million was identified as purchased in process research and development and was
written-off.
The exit plan related to the reorganization activities surrounding the Companys historical
businesses resulted in exit costs and restructuring charges of $8.7 million during the third and
fourth quarters of 2005. The Company incurred severance and termination benefits of $3.6 million
and recorded $2.6 million of facility termination charges related to the rationalization of two
facilities, one located in the United Kingdom and the other in the U.S. The remaining $2.5 million
charge related to the write-off of other assets.
The 2005 integration and reorganization plans are expected to be substantially completed
during the fourth quarter of 2006. No additional costs were recorded during the first nine months
of 2006, and the Company does not anticipate future charges, relating
to these activities. A summary of the exit costs and restructuring
charges by segment is as follows:
7
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, |
|
|
|
|
|
|
|
|
|
|
|
|
Drilling & |
|
|
Completion |
|
|
|
|
|
|
|
|
|
Intervention |
|
|
& Production |
|
|
|
|
|
|
|
|
|
Services |
|
|
Systems |
|
|
Corporate |
|
|
Total |
|
|
|
(In thousands) |
|
Cost of Products |
|
$ |
20,654 |
|
|
$ |
3,842 |
|
|
$ |
¾ |
|
|
$ |
24,496 |
|
Cost of Services |
|
|
25,766 |
|
|
|
1,083 |
|
|
|
¾ |
|
|
|
26,849 |
|
Research and Development |
|
|
9,000 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
9,000 |
|
Selling General & Administrative |
|
|
17,349 |
|
|
|
3,803 |
|
|
|
¾ |
|
|
|
21,152 |
|
Corporate General & Administrative |
|
|
¾ |
|
|
|
¾ |
|
|
|
32,738 |
|
|
|
32,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
72,769 |
|
|
|
8,728 |
|
|
|
32,738 |
|
|
|
114,235 |
|
Cash Payments |
|
|
(20,166 |
) |
|
|
(7,721 |
) |
|
|
(8,187 |
) |
|
|
(36,074 |
) |
Non-cash Utilization |
|
|
(52,410 |
) |
|
|
(722 |
) |
|
|
(12,911 |
) |
|
|
(66,043 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
193 |
|
|
$ |
285 |
|
|
$ |
11,640 |
|
|
$ |
12,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, the remaining accrual was comprised of $12.0 million and $0.1
million in severance benefits and facility closure costs, respectively. The length of time the
Company is obligated to make severance payments varies, with the longest obligation continuing
through 2018. The facility closure costs will be paid out over the term of the respective leases,
with the longest obligation continuing through 2011.
5. Dispositions
In June 2004, the Companys management approved a plan to sell its non-core GSI compression
fabrication business. The sale of this business was finalized in July 2005 for a gain of $0.6
million. The GSI Compression fabrication business was historically included in the Companys
Completion & Production Systems segment. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS
No. 144), the GSI compression fabrication business results of operations and cash flows have been
reflected in the condensed consolidated financial statements and notes as a discontinued operation
for all periods presented.
Interest charges have been allocated to the discontinued operation based on a pro rata
calculation of the net assets of the discontinued business to the Companys consolidated net
assets.
Operating results of the discontinued operation were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
¾ |
|
|
$ |
20,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
$ |
587 |
|
|
$ |
777 |
|
Benefit for Income Taxes |
|
|
¾ |
|
|
|
434 |
|
|
|
|
|
|
|
|
Income from Discontinued Operation, |
|
|
|
|
|
|
|
|
Net of Taxes |
|
$ |
587 |
|
|
$ |
1,211 |
|
|
|
|
|
|
|
|
In 2005, the Company divested its remaining holdings in Universal Compression Holdings, Inc.
(Universal) (See Note 6). The Company also sold certain assets and a business during the nine
months ended September 30,
8
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2006. It was determined the discontinued operations provisions of SFAS
No. 144 did not apply to these transactions as the disposals did not meet the guidelines for
discontinued operations.
6. Universal Compression
In December 2005, the Company sold its remaining shares of Universal common stock. The
Company no longer holds any ownership interest in Universal.
7. Goodwill
Goodwill is evaluated for impairment in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), which requires that such assets be tested for impairment on at
least an annual basis. The Company performs its annual goodwill impairment test as of October 1.
The Companys goodwill impairment test involves a comparison of the fair value of each of the
Companys reporting units, as defined under SFAS No. 142, with its carrying amount. The fair value
is determined using discounted cash flows and other market-related valuation models, including
earnings multiples and comparable asset market values. The Company will continue to test its
goodwill annually as of October 1 unless events occur or circumstances change between annual tests
that would more likely than not reduce the fair value of a reporting unit below its carrying
amount.
The changes in the carrying amount of goodwill for the nine months ended September 30, 2006
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, |
|
|
|
|
|
|
|
|
|
Drilling & |
|
|
Completion |
|
|
|
|
|
|
Intervention |
|
|
& Production |
|
|
|
|
|
|
Services |
|
|
Systems |
|
|
Total |
|
|
|
(In thousands) |
|
As of December 31, 2005 |
|
$ |
1,960,013 |
|
|
$ |
848,204 |
|
|
$ |
2,808,217 |
|
Goodwill acquired during period |
|
|
101,772 |
|
|
|
17,998 |
|
|
|
119,770 |
|
Disposal |
|
|
(1,216 |
) |
|
|
¾ |
|
|
|
(1,216 |
) |
Purchase price and other adjustments |
|
|
75,668 |
|
|
|
396 |
|
|
|
76,064 |
|
Impact of foreign currency translation |
|
|
(1,329 |
) |
|
|
32,489 |
|
|
|
31,160 |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006 |
|
$ |
2,134,908 |
|
|
$ |
899,087 |
|
|
$ |
3,033,995 |
|
|
|
|
|
|
|
|
|
|
|
8. Other Intangible Assets, Net
The components of intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Acquired technology |
|
$ |
315,761 |
|
|
$ |
(21,733 |
) |
|
$ |
294,028 |
|
|
$ |
281,350 |
|
|
$ |
(6,501 |
) |
|
$ |
274,849 |
|
Licenses |
|
|
225,974 |
|
|
|
(56,970 |
) |
|
|
169,004 |
|
|
|
205,232 |
|
|
|
(48,164 |
) |
|
|
157,068 |
|
Patents |
|
|
125,561 |
|
|
|
(40,073 |
) |
|
|
85,488 |
|
|
|
116,590 |
|
|
|
(33,028 |
) |
|
|
83,562 |
|
Customer relationships |
|
|
27,694 |
|
|
|
(2,522 |
) |
|
|
25,172 |
|
|
|
43,000 |
|
|
|
(717 |
) |
|
|
42,283 |
|
Customer contracts |
|
|
21,890 |
|
|
|
(3,231 |
) |
|
|
18,659 |
|
|
|
22,450 |
|
|
|
(961 |
) |
|
|
21,489 |
|
Covenants not to compete |
|
|
24,175 |
|
|
|
(22,572 |
) |
|
|
1,603 |
|
|
|
22,333 |
|
|
|
(19,942 |
) |
|
|
2,391 |
|
Other |
|
|
13,679 |
|
|
|
(7,320 |
) |
|
|
6,359 |
|
|
|
13,277 |
|
|
|
(6,175 |
) |
|
|
7,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible
assets |
|
|
754,734 |
|
|
|
(154,421 |
) |
|
|
600,313 |
|
|
|
704,232 |
|
|
|
(115,488 |
) |
|
|
588,744 |
|
Intangible assets with an
indefinite useful life |
|
|
32,658 |
|
|
|
¾ |
|
|
|
32,658 |
|
|
|
32,621 |
|
|
|
¾ |
|
|
|
32,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
787,392 |
|
|
$ |
(154,421 |
) |
|
$ |
632,971 |
|
|
$ |
736,853 |
|
|
$ |
(115,488 |
) |
|
$ |
621,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The estimated fair value of intangible assets obtained through acquisitions consummated in the
preceding twelve months are based on preliminary information which is subject to change when final
valuations are obtained.
The Company has trademarks which are considered to have indefinite lives as the Company has
the ability and intent to renew indefinitely. These trademarks had a carrying value of $11.4
million as of September 30, 2006 and December 31, 2005.
The Company has intangible assets recorded for unrecognized prior service costs related to its
Supplemental Executive Retirement Plan and several of its international pension plans (see Note
16). These unrecognized costs were $21.3 million as of September 30, 2006 and $21.2 million as of
December 31, 2005 and are included in intangible assets with an indefinite useful life.
Amortization expense was $12.9 million and $37.4 million for the three and nine months ended
September 30, 2006, respectively, and $6.0 million and $17.5 million for the three and nine months
ended September 30, 2005, respectively. Future estimated amortization expense for the carrying
amount of intangible assets as of September 30, 2006 is expected to be as follows (in thousands):
|
|
|
|
|
Remainder of 2006 |
|
$ |
12,039 |
|
2007 |
|
|
48,283 |
|
2008 |
|
|
46,216 |
|
2009 |
|
|
45,288 |
|
2010 |
|
|
44,943 |
|
9. Inventories
Inventories by category are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Raw materials, components and supplies |
|
$ |
320,681 |
|
|
$ |
259,047 |
|
Work in process |
|
|
91,076 |
|
|
|
63,491 |
|
Finished goods |
|
|
757,195 |
|
|
|
567,583 |
|
|
|
|
|
|
|
|
|
|
$ |
1,168,952 |
|
|
$ |
890,121 |
|
|
|
|
|
|
|
|
Work in process and finished goods inventories include the cost of materials, labor and plant
overhead.
10. Short-term Debt
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
364-Day revolving credit facility |
|
$ |
¾ |
|
|
$ |
¾ |
|
Revolving credit facility |
|
|
73,142 |
|
|
|
¾ |
|
Canadian credit facility |
|
|
4,794 |
|
|
|
¾ |
|
Commercial paper program |
|
|
449,495 |
|
|
|
716,927 |
|
Short-term bank loans |
|
|
92,670 |
|
|
|
24,596 |
|
|
|
|
|
|
|
|
Total Short-term Borrowings |
|
|
620,101 |
|
|
|
741,523 |
|
Current Portion of Long-term Debt |
|
|
12,937 |
|
|
|
213,243 |
|
|
|
|
|
|
|
|
Short-term Borrowings and Current Portion of Long-term Debt |
|
$ |
633,038 |
|
|
$ |
954,766 |
|
|
|
|
|
|
|
|
10
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In August 2005, the Company entered into the 364-Day Revolving Credit Facility (364-Day
Facility) with UBS AG, Bank of America, N.A. and Morgan Stanley Senior Funding, Inc. Under this
agreement, the Company was allowed to borrow up to $1.2 billion to fund the redemption of its zero
coupon convertible senior debentures (Zero Coupon Debentures), the acquisition of Precision
Energy Services and Precision Drilling International, and certain refinancings, including repayment
of commercial paper or Common Share repurchases. The 364-Day Facility was terminated on August 10,
2006 in connection with the completion of a debt issuance of $600.0 million by the Company.
In October 2005, the Company initiated a commercial paper program under which it may from time
to time issue short-term unsecured notes. In connection with this program, the Company entered into
agreements with third-party lending institutions under which each of these lending institutions may
act as dealers of this commercial paper. Also in connection with the program, Weatherford International, Inc., one of our wholly-owned
indirect subsidiaries, provided a guarantee of any commercial paper notes that the Company may
issue. The Companys commercial paper issuances are supported by the Revolving Credit Facility (as
defined below). As of September 30, 2006, the Company had $449.5 million of outstanding commercial
paper issuances with maturities ranging from 2 to 16 days. The weighted average interest rate
related to outstanding commercial paper issuances at September 30, 2006 was 5.4%.
On February 17, 2006, the Company completed an offering of $350.0 million senior notes at a
coupon rate of 5.50% (5.50% Senior Notes) with a maturity in February 2016. Net proceeds of
$346.2 million were used to partially repay outstanding borrowings on our commercial paper program.
In association with the transaction, the maximum borrowing allowed under the commercial paper
program was reduced from $1.5 billion to $1.2 billion.
On May 2, 2006, the Company amended and restated the revolving credit agreement with a
syndicate of banks of which JPMorgan Chase Bank is the Administrative Agent (Revolving Credit
Facility). As restated, the Revolving Credit Facility provides a $750.0 million, five-year
multi-currency senior unsecured revolving credit facility. Based on the Companys current debt
ratings, it will pay a commitment fee of 0.08% per year, and borrowings under the facility will
bear interest at variable annual rates based on LIBOR plus 0.27%, plus an additional 0.05% for any
period in which more than half of the total commitment is utilized. The restated credit agreement
superseded the previous $500.0 million facility that was scheduled to mature May 12, 2006. At
September 30, 2006, there were $73.1 million of outstanding borrowings and $18.6 million of letters
of credit issued under the Revolving Credit Facility. The weighted average interest rate on the
outstanding borrowings under this facility was 5.4% at September 30, 2006.
On May 15, 2006, the stated maturity date, the Company repaid in full the outstanding $200.0
million of 7 1/4% Senior Notes plus all accrued interest.
On August 7, 2006, the Company issued $600.0 million of 6.50% senior notes due 2036 (6.50%
Senior Notes) and used the net proceeds of $588.3 million to partially repay outstanding
borrowings on its commercial paper program. In connection with this issuance, the Company elected
to notify the administrative agent under its 364-Day Facility to terminate the commitments under
that agreement. In addition, the size of the Companys commercial paper program was reduced to
correspond to the availability under the Revolving Credit Facility.
The Revolving Credit Facility requires the Company to maintain a debt-to-capitalization ratio
of less than 60% and contains other covenants and representations customary for an investment-grade
commercial credit. The Company was in compliance with these covenants at September 30, 2006. The
Revolving Credit Facility is guaranteed by the Companys wholly-owned indirect subsidiary,
Weatherford International, Inc., subject to certain conditions. The Revolving Credit Facility
does not contain any provisions that make its availability dependent upon the Companys credit
ratings; however, the interest rate is dependent upon the credit rating of its long-term senior
debt.
The Company also maintains a Canadian dollar committed facility to support its operations in
that country. The Canadian facility provides for borrowings or letters of credit under the
facility up to an aggregate of 25.0 million Canadian dollars, or $22.4 million as of September 30,
2006. There were borrowings of $4.8 million and $0.4
11
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
million in outstanding letters of credit
under the Canadian facility at September 30, 2006. The weighted average interest rate on the
outstanding borrowings of this facility was 6.8% at September 30, 2006.
The Company has short-term borrowings with various domestic and international institutions
pursuant to uncommitted facilities. At September 30, 2006, the Company had $92.7 million in
short-term borrowings outstanding under these arrangements with a weighted average interest rate of
5.0%. In addition, the Company had $123.7 million of letters of credit and bid and performance
bonds outstanding under these uncommitted facilities.
In connection with the acquisition of Precision Energy Services and Precision Drilling
International, the Company has indemnified Precision Drilling Corporation for outstanding letters
of credit of $11.7 million.
11. Shareholders Equity
Authorized Shares
On May 9, 2006, the Companys shareholders approved an increase in the authorized share
capital from 510,000,000 to 1,010,000,000. The Company is authorized to issue 1,000,000,000 Common
Shares and 10,000,000 undesignated preference shares, $1.00 par value. As of September 30, 2006,
no preferred shares have been issued.
Share Repurchase Program
In
December 2005, the Companys Board of Directors approved a share repurchase program under which up
to $1 billion of the Companys outstanding Common Shares could be purchased in open market or
privately negotiated transactions. Pursuant to this program, the Company purchased approximately
11.5 million Common Shares during the nine months ended September 30, 2006, at an average price per
share of $44.07.
Warrant
On February 28, 2002, the Company issued Shell Technology Ventures Inc. a warrant to purchase
up to 6.5 million Common Shares at a price of $30.00 per share. Effective July 12, 2006, this
agreement was amended and restated to reflect, among other things, changes in the Companys capital
structure. The warrant remains exercisable until February 28, 2012 and is subject to adjustment
for changes in the Companys capital structure or the issuance of dividends in cash, securities or
property. Upon exercise by the holder, settlement may occur through physical delivery, net share
settlement, net cash settlement or a combination thereof. The net cash settlement option upon
exercise is at the sole discretion of the Company. In addition, the amended and restated warrant
no longer contains a conversion feature, which previously allowed the warrant holder to convert the
warrant into Common Shares. The amendment did not affect the
accounting or classification of the warrant.
12. Derivative Instruments
Interest Rate Swaps
The Company uses interest rate swap agreements to take advantage of available short-term
interest rates. Amounts received upon termination of the swap agreements represent the fair value
of the agreements at the time of termination and are recorded as an adjustment to the carrying
value of the related debt. These amounts are being amortized as a reduction to interest expense
over the remaining term of the debt.
As of September 30, 2006 and December 31, 2005, the Company had unamortized gains of $14.8
million and $18.3 million, respectively, associated with interest rate swap terminations. These
gains have been deferred and recorded as an adjustment to the carrying value of the related debt
and are amortized against interest expense over the remaining term of the debt issuance against
which they were hedged. The Companys interest expense was reduced by $0.5 million and $3.5
million for the three and nine months ended September 30, 2006, respectively, and $1.8 million and
$5.1 million for the three and nine months ended September 30, 2005, respectively. There were no
interest rate swap agreements outstanding as of September 30, 2006.
Cash Flow Hedges
During December 2005, the Company recorded a $4.2 million loss in Other Comprehensive Income
on interest rate derivatives entered into and terminated in 2005; this loss is being amortized to
interest expense over the life of the 5.50% Senior Notes.
12
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In January 2006 the Company entered into interest rate derivative instruments for a notional
amount of $350.0 million to hedge projected exposures to interest rates in anticipation of a future
debt issuance. Those hedges were terminated at the time of issuance of the 5.50% Senior Notes.
The Company received cash proceeds of $6.2 million at termination, and the gain on these hedges is
being amortized to interest expense over the life of the 5.50% Senior Notes.
In July 2006 the Company entered into interest rate derivative instruments for a notional
amount of $500.0 million to hedge projected exposures to interest rates in anticipation of a future
debt issuance. Those hedges were terminated at the time of issuance of the 6.50% Senior Notes.
The Company paid a cash settlement of $1.5 million at termination, and the loss on these hedges is
being amortized to interest expense over the life of the 6.50% Senior Notes.
Other Derivative Instruments
As of September 30, 2006, the Company had several foreign currency forward contracts and one
option contract with notional amounts aggregating $200.2 million, which were entered into to
hedge exposure to currency fluctuations in various foreign currencies, including the euro, the Australian dollar, the Norwegian kroner, the Brazilian reais, the Mexican
peso and the pound sterling. In addition, after the closing of the acquisition of Precision Energy
Services and Precision Drilling International, the Company entered into a series of cross-currency
swaps with notional amounts at execution totaling $588.9 million. These derivative instruments
were not designated as hedges and the changes in fair value of the contracts are recorded each
period in current earnings. During the three and nine months ended September 30, 2006, net cash
proceeds of $0.6 million and $2.4 million, respectively, were received from the cross-currency
swaps, which were the net settlement of quarterly interest rate payments on the two currencies
swapped. These quarterly net interest rate settlements are based on the variable interest rates of
both the Canadian dollar and the U.S. dollar. On March 31, 2006, cross currency swaps with an
original notional value of $140.4 million were terminated and the Company paid a net settlement in
April 2006 of $3.5 million. On September 11, 2006, a cross currency swap with an original notional
value of $84.2 million was terminated and the Company paid a net settlement of $6.3 million. At
September 30, 2006, the fair value of the remaining cross-currency swaps was $336.3 million.
13. Earnings Per Share
Basic earnings per share for all periods presented equals net income divided by the weighted
average number of Common Shares outstanding during the period. Diluted earnings per share is
computed by dividing net income, as adjusted for the assumed conversion of dilutive debentures, by
the weighted average number of Common Shares outstanding during the period as adjusted for the
dilutive effect of the Companys stock option and restricted share plans, warrant and the
incremental shares for the assumed conversion of dilutive debentures.
The effect of the assumed conversion of dilutive debentures is not
included in the computation of earnings per share for the three months
ended September 30, 2005 because to do so would be anti-dilutive.
The diluted earnings per share calculation for the three and nine months ended September 30,
2006 excludes 57 thousand and 24 thousand stock options that were anti-dilutive, respectively.
However, for the three and nine months ended September 30, 2005, there were no anti-dilutive stock
options, therefore, the effect of all stock options were included in the diluted earnings per share
calculation for those periods. Net income for the diluted earnings per share calculation for the
nine months ended September 30, 2005 is adjusted to add back $7.9 million of amortization of
original issue discount, net of taxes, relating to the Companys Zero Coupon Debentures due 2020.
13
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following reconciles basic and diluted weighted average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Basic weighted average shares outstanding |
|
|
345,733 |
|
|
|
300,972 |
|
|
|
347,915 |
|
|
|
284,824 |
|
Dilutive effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant |
|
|
2,251 |
|
|
|
1,856 |
|
|
|
2,307 |
|
|
|
1,498 |
|
Stock option and restricted share plans |
|
|
6,487 |
|
|
|
8,960 |
|
|
|
6,683 |
|
|
|
9,080 |
|
Convertible debentures |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
16,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,471 |
|
|
|
311,788 |
|
|
|
356,905 |
|
|
|
311,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Supplemental Cash Flow Information
The following summarizes investing activities relating to acquisitions integrated into the
Companys operations for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Fair value of assets, net of cash acquired |
|
$ |
87,178 |
|
|
$ |
1,602,791 |
|
Goodwill |
|
|
119,770 |
|
|
|
1,146,557 |
|
Consideration paid related to prior year acquisitions |
|
|
6,539 |
|
|
|
2,497 |
|
Common shares issued |
|
|
¾ |
|
|
|
(1,398,020 |
) |
Total liabilities |
|
|
(51,295 |
) |
|
|
(390,415 |
) |
|
|
|
|
|
|
|
Cash consideration, net of cash acquired |
|
$ |
162,192 |
|
|
$ |
963,410 |
|
|
|
|
|
|
|
|
15. Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004)
Share-Based Payment (SFAS No. 123R). SFAS No. 123R addresses the accounting for all share-based
payment awards, including shares issued under employee stock purchase plans, stock options,
restricted stock and stock appreciation rights. Under the new standard, companies are no longer
able to account for share-based compensation transactions using the intrinsic value method in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Under the intrinsic method, no compensation expense is recognized when the exercise
price of an employee stock option is equal to the Common Share market price on the grant date and
all other factors of the grant are fixed. Under SFAS No. 123R, companies must account for
share-based compensation transactions using a fair-value method and recognize the expense in the
consolidated statement of income. Effective, January 1, 2006, the Company adopted SFAS No. 123R
using the modified-prospective transition method. Under this method, compensation cost is
recognized for all awards granted, modified or settled after the adoption date as well as for any
awards that were granted prior to the adoption date for which the requisite service has not yet
been rendered.
Previously on January 1, 2003, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), to expense the fair value of employee stock-based compensation for
awards granted, modified or settled subsequent to December 31, 2002. The Company selected the
prospective method of adoption, and under this method, the fair value of employee stock-based
compensation granted or modified subsequent to adoption is measured at the grant date based on the
fair value of the award and is recognized as an expense over the service period, which is usually
the vesting period. Accordingly, the adoption of SFAS No.
14
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
123Rs fair value method does not have
an impact on the Companys reported results of operations for the nine months ended September 30,
2006 as all of the grants issued prior to the adoption of SFAS No. 123 were fully
vested in the prior year and the grants issued subsequent to January 1, 2003 are currently
being expensed at their estimated fair value.
SFAS No. 123R requires the cash flows resulting from the tax benefits resulting from tax
deductions in excess of compensation cost recognized for share based awards to be classified as
financing cash flows. Had the Company not adopted SFAS No. 123R, the excess tax benefits would
have been classified as an operating cash inflow.
A description of the Companys share-based payment plans are presented below.
Incentive Plan
In May 2006, shareholders voted to approve the Weatherford International Ltd. 2006 Omnibus
Incentive Plan (Omnibus Plan) previously adopted by the Board of Directors in February 2006. The
Omnibus Plan provides for awards of options, SARs, restricted shares, restricted share units,
performance share awards, performance unit awards, other share-based awards and cash-based awards
to any employee or non-employee director of the Company or any of its affiliates. No further
options, restricted shares or restricted share units will be granted under the other existing
equity plans of the Company and any future issuances of stock based awards will be made from the
Omnibus Plan. The provisions of each award will vary based on the type of award granted and will
be specified by the Compensation Committee of the Board of Directors. Those awards, such as
options and SARs, that are based on a specific contractual term will be granted with a term not to
exceed ten years. The terms of the issuances to date under the Omnibus Plan are consistent with
awards previously granted. Under the Omnibus Plan, there are 10.0 million Common Shares available
for grant. As of September 30, 2006, approximately 9.8 million shares were available for grant
under the plan. To date, only options, restricted shares and restricted share units have been
granted under the Omnibus Plan.
The options granted under the Omnibus Plan are granted with an exercise price equal to or
greater than the fair market value of the Common Shares at the time the option is granted. The
Company values and recognizes the options and restricted shares similar to the awards previously
granted under the Companys other share-based payment plans.
Stock Option Plans
The Company has a number of stock option plans pursuant to which directors, officers and key
employees have been granted options to purchase Common Shares at the fair market value on the date
of grant.
The Company has in effect a 1991 Employee Stock Option Plan (1991 ESO Plan), a 1992 Employee
Stock Option Plan (1992 ESO Plan) and a 1998 Employee Stock Option Plan (1998 ESO Plan).
Stock options generally vest after one to four years following the date of grant and expire after
ten to fourteen years from the date of grant. Subsequent to the approval of the Companys Omnibus
Plan in May 2006, future grants under these plans have been suspended.
Restricted Share Plan
The Restricted Share Plan provides for the granting of restricted share awards (RSA) or
restricted share units (RSU), the vesting of which is subject to conditions and limitations
established at the time of the grant. Upon the grant of an RSA, the participant has the rights of
a shareholder, including but not limited to the right to vote such shares and the right to receive
any dividends paid on such shares. Recipients of RSU awards will not have the rights of a
shareholder of the Company until such date as the Common Shares are issued or transferred to the
recipient. Key employees, directors and persons providing material services to the Company may be
eligible for participation in the Restricted Share Plan. Subsequent to the approval of the
Companys Omnibus Plan in May 2006, future RSA and RSU grants under this plan have been suspended.
RSAs and RSUs vest based on continued employment, and vesting generally occurs over a two to
four-year period, with an equal amount of the restricted shares vesting on each anniversary of the
grant date. A portion of the
15
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2005 and 2006 grants vest over a four-year period, with 50% of the
shares vesting after two years and the remaining portion vesting in the fourth year.
The fair value of RSAs and RSUs is determined based on the closing price of the Companys
shares on the grant date. The total fair value is amortized to expense on a straight-line basis
over the vesting period.
The following illustrates the pro forma effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to all outstanding and
unvested awards as of September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
|
|
(In thousands, except per share |
|
|
|
amounts) |
|
Net Income: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
47,886 |
|
|
$ |
223,670 |
|
Employee stock-based compensation expense included in
reported net income, net of income tax benefit |
|
|
6,095 |
|
|
|
14,837 |
|
Pro forma compensation expense, determined
under fair value methods for all awards,
net of income tax benefit |
|
|
(9,363 |
) |
|
|
(25,605 |
) |
|
|
|
|
|
|
|
Pro forma |
|
$ |
44,618 |
|
|
$ |
212,902 |
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.16 |
|
|
$ |
0.79 |
|
Pro forma |
|
|
0.15 |
|
|
|
0.75 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.15 |
|
|
$ |
0.74 |
|
Pro forma |
|
|
0.14 |
|
|
|
0.71 |
|
The Company recognized $14.6 million and $43.0 million in employee stock-based compensation
expense during the three and nine months ended September 30, 2006, respectively, and $9.4 million
and $22.8 million for the three and nine months ended September 30, 2005, respectively. The
related income tax benefit recognized for the three and nine months ended September 30, 2006, was
$5.1 million and $15.1 million, respectively, and $3.3 million and $8.0 million for the three and
nine months ended September 30, 2005, respectively. The Company capitalized $0.2 million and $2.5
million of stock-based compensation during the three and nine months ended September 30, 2006,
respectively.
The Company uses the Black-Scholes option pricing model to determine the fair value of each
option award on the date of grant. The estimated fair value of the option is amortized to expense
on a straight-line basis over the vesting period. The specific assumptions used in determining the
fair values for option grants during the three and nine months ended September 30, 2006 are
discussed in more detail below and are noted in the following table. There were no options granted
during the first nine months of 2005.
The Company calculates the expected volatility by measuring the volatility of the historical
stock price for a period equal to the expected life of the option and ending at the time the option
was granted. The risk-free interest rate is determined based upon the interest rate on a U.S.
Treasury Bill with a term equal to the expected life of the option at the time the option was
granted. In estimating the expected lives of the stock options, the Company has relied primarily
on actual experience with previous stock option grants. The expected life is less than the term of
the option as option holders, in our experience, exercise or forfeit the options during the term of
the option.
16
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2006 |
Expected volatility |
|
|
37.54 |
% |
|
|
37.62 |
% |
Expected dividends |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected term (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
Risk-free rate |
|
|
5.10 |
% |
|
|
4.99 |
% |
A summary of option activity under the stock option plans as of September 30, 2006, and
changes during the nine month period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Remaining |
|
Intrinsic |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Value |
Options |
|
Shares |
|
Price |
|
Term |
|
(in thousands) |
Outstanding at January 1, 2006 |
|
|
13,940,334 |
|
|
$ |
13.72 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
59,000 |
|
|
|
49.59 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(4,137,562 |
) |
|
|
12.98 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(18,000 |
) |
|
|
19.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
9,843,772 |
|
|
|
14.24 |
|
|
|
8.15 |
|
|
$ |
270,922 |
|
|
Vested or Expected to Vest at
September 30, 2006 |
|
|
9,843,772 |
|
|
|
14.24 |
|
|
|
8.15 |
|
|
|
270,922 |
|
|
Exercisable at September 30, 2006 |
|
|
8,883,906 |
|
|
|
13.36 |
|
|
|
7.91 |
|
|
|
251,912 |
|
The weighted-average grant date fair value of options granted during the nine months ended
September 30, 2006 was $20.42. There were no options granted during the first nine months of 2005.
The intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005
was $142.6 million and $242.5 million, respectively. As of September 30, 2006, there was $3.1
million of total unrecognized compensation cost related to the Companys unvested stock options and
that cost is expected to be recognized over a weighted-average period
of 0.8 years.
A summary of the status of the Companys non-vested RSAs and RSUs issued under its Restricted
Share Plan and Omnibus Plan as of September 30, 2006 and changes during the nine month period then
ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
Grant Date |
|
|
RSA |
|
Fair Value |
|
RSU |
|
Fair Value |
Non-Vested at January 1, 2006 |
|
|
4,206,900 |
|
|
$ |
30.47 |
|
|
|
2,680,240 |
|
|
$ |
33.99 |
|
Granted |
|
|
83,000 |
|
|
|
43.93 |
|
|
|
146,300 |
|
|
|
45.18 |
|
Vested |
|
|
(637,390 |
) |
|
|
23.77 |
|
|
|
(269,602 |
) |
|
|
26.06 |
|
Forfeited |
|
|
(163,730 |
) |
|
|
32.98 |
|
|
|
(177,113 |
) |
|
|
33.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at September 30, 2006 |
|
|
3,488,780 |
|
|
|
33.33 |
|
|
|
2,379,825 |
|
|
|
35.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The weighted-average grant date fair value of RSAs and RSUs granted during the nine months
ended September 30, 2006 and 2005 was $44.73 and $24.97, respectively. The total fair
value of RSAs and RSUs vested during the nine months ended
September 30, 2006 and 2005 was $38.5
million and $14.9 million, respectively. As of September 30, 2006, there was $93.5 million and
$68.7 million of total unrecognized compensation cost related to non-vested RSAs and RSUs
respectively, which is expected to be recognized over a weighted-average period of 2.9 years.
16. Retirement and Employee Benefit Plans
The Company has defined benefit pension and other post-retirement benefit plans covering
certain U.S. and international employees. Plan benefits are generally based on factors such as
age, compensation levels and years of service. The components of net periodic benefit cost for the
three and nine months ended September 30, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
United |
|
|
|
|
|
|
United |
|
|
|
|
|
|
States |
|
|
International |
|
|
States |
|
|
International |
|
|
|
(In thousands) |
|
Service cost |
|
$ |
610 |
|
|
$ |
2,408 |
|
|
$ |
633 |
|
|
$ |
1,974 |
|
Interest cost |
|
|
1,002 |
|
|
|
1,659 |
|
|
|
872 |
|
|
|
1,200 |
|
Expected return on plan assets |
|
|
(144 |
) |
|
|
(1,551 |
) |
|
|
(186 |
) |
|
|
(926 |
) |
Amortization of transition obligation |
|
|
¾ |
|
|
|
(1 |
) |
|
|
¾ |
|
|
|
¾ |
|
Amortization of prior service cost |
|
|
572 |
|
|
|
(27 |
) |
|
|
657 |
|
|
|
80 |
|
Amortization of loss |
|
|
474 |
|
|
|
127 |
|
|
|
327 |
|
|
|
9 |
|
Settlements |
|
|
¾ |
|
|
|
¾ |
|
|
|
11,120 |
|
|
|
¾ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
2,514 |
|
|
$ |
2,615 |
|
|
$ |
13,423 |
|
|
$ |
2,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
United |
|
|
|
|
|
|
United |
|
|
|
|
|
|
States |
|
|
International |
|
|
States |
|
|
International |
|
|
|
(In thousands) |
|
Service cost |
|
$ |
1,828 |
|
|
$ |
6,992 |
|
|
$ |
1,899 |
|
|
$ |
5,984 |
|
Interest cost |
|
|
3,034 |
|
|
|
4,868 |
|
|
|
2,633 |
|
|
|
3,511 |
|
Expected return on plan assets |
|
|
(474 |
) |
|
|
(4,578 |
) |
|
|
(601 |
) |
|
|
(2,703 |
) |
Amortization of transition obligation |
|
|
¾ |
|
|
|
(3 |
) |
|
|
¾ |
|
|
|
(2 |
) |
Amortization of prior service cost |
|
|
1,717 |
|
|
|
(78 |
) |
|
|
1,971 |
|
|
|
246 |
|
Amortization of loss |
|
|
1,417 |
|
|
|
367 |
|
|
|
945 |
|
|
|
30 |
|
Settlements |
|
|
2,770 |
|
|
|
¾ |
|
|
|
11,120 |
|
|
|
¾ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
10,292 |
|
|
$ |
7,568 |
|
|
$ |
17,967 |
|
|
$ |
7,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company previously disclosed in its financial statements for the year ended December 31,
2005, that it expected to contribute $0.4 million in the U.S. and $6.9 million internationally to
its pension and other postretirement benefit plans during 2006. As of September 30, 2006,
approximately $0.3 million of contributions have been made in the U.S. and $4.8 million of
contributions have been made internationally. Currently, the Company anticipates total
contributions in the U.S. and internationally to approximate the original estimates previously
disclosed.
17. Segment Information
Reporting Segments
The Company is a diversified international energy service and manufacturing company that
provides a variety of services and equipment to the exploration, production and transmission
sectors of the oil and natural gas industry.
18
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company operates in virtually every oil and
natural gas exploration and production region in the world. The Company divides its business into
two separate segments as defined by the chief operating decision maker: Evaluation, Drilling &
Intervention Services and Completion & Production Systems.
In connection with the Companys continued integration plan relating to the acquisition of
divisions of Precision Drilling Corporation and the recent operational realignment of its Pipeline
and Specialty Services businesses, the Company undertook a review of its presentation of segment
information in the second quarter of 2006 (See Note 1). In addition to its former businesses,
Evaluation, Drilling & Intervention Services now includes the operations of Precision Drilling
International and Completion & Production Services includes the operations of Pipeline and
Specialty Services. The following describes our reporting segments:
The Companys Evaluation, Drilling & Intervention Services segment provides a wide range of
oilfield products and services, including drilling services and equipment, cased hole and open hole
wireline services, well installation services and cementing products and equipment, controlled
pressure drilling and testing, fishing and intervention services, liner systems, expandable solid
tubular systems and contract drilling rigs.
The Companys Completion & Production Systems segment designs, manufactures, sells and
services a complete line of artificial lift equipment, including progressing cavity pumps,
reciprocating rod lift systems, gas lift systems and electrical submersible pumps as well as
provides fracturing technologies, production optimization services and automation and monitoring of
wellhead production. This segment also provides pipeline specialty services and certain completion
products and systems including cased hole systems, flow control systems, sand screens, expandable
sand screen systems and intelligent completion technologies. Completion & Production Systems also
provides screens for industrial applications.
Financial information by industry segment for each of the three and nine months ended
September 30, 2006 and 2005 is summarized below. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies. Inter-segment sales are
not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Revenues from unaffiliated customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, Drilling & Intervention Services |
|
$ |
1,100,059 |
|
|
$ |
627,690 |
|
|
$ |
3,071,829 |
|
|
$ |
1,608,693 |
|
Completion & Production Systems |
|
|
596,694 |
|
|
|
449,126 |
|
|
|
1,699,511 |
|
|
|
1,263,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,696,753 |
|
|
$ |
1,076,816 |
|
|
$ |
4,771,340 |
|
|
$ |
2,871,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, Drilling & Intervention Services |
|
$ |
97,105 |
|
|
$ |
59,734 |
|
|
$ |
279,267 |
|
|
$ |
156,692 |
|
Completion & Production Systems |
|
|
25,807 |
|
|
|
21,667 |
|
|
|
72,684 |
|
|
|
64,017 |
|
Corporate |
|
|
596 |
|
|
|
549 |
|
|
|
2,079 |
|
|
|
1,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
123,508 |
|
|
$ |
81,950 |
|
|
$ |
354,030 |
|
|
$ |
222,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, Drilling & Intervention
Services (a) |
|
$ |
267,942 |
|
|
$ |
111,430 |
|
|
$ |
735,087 |
|
|
$ |
322,133 |
|
Completion & Production Systems |
|
|
117,874 |
|
|
|
55,268 |
|
|
|
297,202 |
|
|
|
142,472 |
|
Exit Costs and Restructuring Charges |
|
|
¾ |
|
|
|
(80,018 |
) |
|
|
¾ |
|
|
|
(80,018 |
) |
Corporate (b) |
|
|
(24,908 |
) |
|
|
(16,168 |
) |
|
|
(65,514 |
) |
|
|
(49,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
360,908 |
|
|
$ |
70,512 |
|
|
$ |
966,775 |
|
|
$ |
335,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes a write down of $17.3 million of inventory in connection with our exit and
restructuring plan for the three and nine months ended September 30, 2005. |
|
(b) |
|
Includes equity in earnings (losses) of unconsolidated affiliates that are integral to the Companys
operations. |
19
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of September 30, 2006, total assets were $6,750.7 million for Evaluation, Drilling &
Intervention Services, $2,822.8 million for Completion & Production Systems and $323.5 million for
Corporate. Total assets as of December 31, 2005, were $5,750.5 million for Evaluation, Drilling &
Intervention Services, $2,407.1 million for Completion & Production Systems and $422.7 million for
Corporate.
18. Condensed Consolidating Financial Statements
As of September 30, 2006, the 6 5/8% Senior Notes of Weatherford International, Inc. (the
Issuer) were guaranteed by Weatherford International Ltd. (the Parent). As of December 31,
2005, the 6 5/8% Senior Notes and the 7 1/4% Senior Notes of the Issuer were guaranteed by the
Parent. The 7 1/4% Senior Notes were paid in full in May 2006. The following obligations of the
Parent were guaranteed by the Issuer as of September 30, 2006 and December 31, 2005: (i) the
Revolving Credit Facility, (ii) the 4.95% Senior Notes, and (iiii) issuances of notes under the
commercial paper program. As of September 30, 2006, the 5.50% Senior Notes and 6.50% Senior Notes
are guaranteed by the Issuer. As of December 31, 2005, the 364-Day Facility was guaranteed by the
Issuer.
As a result of these guarantee arrangements, the Company is required to present the following
condensed consolidating financial information. The accompanying guarantor financial information is
presented on the equity method of accounting for all periods presented. Under this method,
investments in subsidiaries are recorded at cost
and adjusted for the Companys share in the subsidiaries cumulative results of operations,
capital contributions and distributions and other changes in equity. Elimination entries relate
primarily to the elimination of investments in subsidiaries and associated intercompany balances
and transactions. Certain prior year amounts have been reclassified, including investments in
consolidated subsidiaries, to conform to the current presentation.
20
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidating Balance Sheet
September 30, 2006
(unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidation |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
111 |
|
|
$ |
47 |
|
|
$ |
120,134 |
|
|
$ |
¾ |
|
|
$ |
120,292 |
|
Other Current Assets |
|
|
225 |
|
|
|
3,894 |
|
|
|
3,143,599 |
|
|
|
¾ |
|
|
|
3,147,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336 |
|
|
|
3,941 |
|
|
|
3,263,733 |
|
|
|
¾ |
|
|
|
3,268,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Investments in Affiliates |
|
|
9,575,484 |
|
|
|
3,156,066 |
|
|
|
12,923,147 |
|
|
|
(25,654,697 |
) |
|
|
¾ |
|
Shares Held in Parent |
|
|
¾ |
|
|
|
130,545 |
|
|
|
507,646 |
|
|
|
(638,191 |
) |
|
|
¾ |
|
Intercompany Receivables, Net |
|
|
284,677 |
|
|
|
1,439,126 |
|
|
|
¾ |
|
|
|
(1,723,803 |
) |
|
|
¾ |
|
Other Assets |
|
|
53,907 |
|
|
|
9,845 |
|
|
|
6,565,262 |
|
|
|
¾ |
|
|
|
6,629,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,914,404 |
|
|
$ |
4,739,523 |
|
|
$ |
23,259,788 |
|
|
$ |
(28,016,691 |
) |
|
$ |
9,897,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Borrowings and Current Portion
of Long-term Debt |
|
$ |
450,220 |
|
|
$ |
55,425 |
|
|
$ |
127,393 |
|
|
$ |
¾ |
|
|
$ |
633,038 |
|
Accounts Payable and Other Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
16,594 |
|
|
|
9,966 |
|
|
|
1,369,469 |
|
|
|
¾ |
|
|
|
1,396,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466,814 |
|
|
|
65,391 |
|
|
|
1,496,862 |
|
|
|
¾ |
|
|
|
2,029,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
1,199,109 |
|
|
|
355,644 |
|
|
|
16,621 |
|
|
|
¾ |
|
|
|
1,571,374 |
|
Intercompany Payables, Net |
|
|
¾ |
|
|
|
¾ |
|
|
|
1,723,803 |
|
|
|
(1,723,803 |
) |
|
|
¾ |
|
Other Long-term Liabilities |
|
|
49,999 |
|
|
|
64,312 |
|
|
|
220,650 |
|
|
|
¾ |
|
|
|
334,961 |
|
Shareholders Equity |
|
|
8,198,482 |
|
|
|
4,254,176 |
|
|
|
19,801,852 |
|
|
|
(26,292,888 |
) |
|
|
5,961,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,914,404 |
|
|
$ |
4,739,523 |
|
|
$ |
23,259,788 |
|
|
$ |
(28,016,691 |
) |
|
$ |
9,897,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidating Balance Sheet
December 31, 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidation |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
124 |
|
|
$ |
3,172 |
|
|
$ |
130,949 |
|
|
$ |
¾ |
|
|
$ |
134,245 |
|
Other Current Assets |
|
|
952 |
|
|
|
1,179 |
|
|
|
2,502,497 |
|
|
|
¾ |
|
|
|
2,504,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076 |
|
|
|
4,351 |
|
|
|
2,633,446 |
|
|
|
¾ |
|
|
|
2,638,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Investments in Affiliates |
|
|
8,029,938 |
|
|
|
2,602,236 |
|
|
|
12,368,520 |
|
|
|
(23,000,694 |
) |
|
|
¾ |
|
Shares Held in Parent |
|
|
¾ |
|
|
|
152,111 |
|
|
|
¾ |
|
|
|
(152,111 |
) |
|
|
¾ |
|
Intercompany Receivables, Net |
|
|
180,959 |
|
|
|
1,741,011 |
|
|
|
¾ |
|
|
|
(1,921,970 |
) |
|
|
¾ |
|
Other Assets |
|
|
43,493 |
|
|
|
10,366 |
|
|
|
5,887,572 |
|
|
|
¾ |
|
|
|
5,941,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,255,466 |
|
|
$ |
4,510,075 |
|
|
$ |
20,889,538 |
|
|
$ |
(25,074,775 |
) |
|
$ |
8,580,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Borrowings and Current Portion
of Long-term Debt |
|
$ |
717,628 |
|
|
$ |
206,118 |
|
|
$ |
31,020 |
|
|
$ |
¾ |
|
|
$ |
954,766 |
|
Accounts Payable and Other Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
4,002 |
|
|
|
7,770 |
|
|
|
1,031,603 |
|
|
|
¾ |
|
|
|
1,043,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721,630 |
|
|
|
213,888 |
|
|
|
1,062,623 |
|
|
|
¾ |
|
|
|
1,998,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
255,329 |
|
|
|
357,449 |
|
|
|
19,293 |
|
|
|
¾ |
|
|
|
632,071 |
|
Intercompany Payables, Net |
|
|
¾ |
|
|
|
¾ |
|
|
|
1,921,970 |
|
|
|
(1,921,970 |
) |
|
|
¾ |
|
Other Long-term Liabilities |
|
|
46,792 |
|
|
|
80,231 |
|
|
|
156,252 |
|
|
|
¾ |
|
|
|
283,275 |
|
Shareholders Equity |
|
|
7,231,715 |
|
|
|
3,858,507 |
|
|
|
17,729,400 |
|
|
|
(23,152,805 |
) |
|
|
5,666,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,255,466 |
|
|
$ |
4,510,075 |
|
|
$ |
20,889,538 |
|
|
$ |
(25,074,775 |
) |
|
$ |
8,580,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidating Statements of Income
Three Months Ended September 30, 2006
(unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidation |
|
Revenues |
|
$ |
¾ |
|
|
$ |
¾ |
|
|
$ |
1,696,753 |
|
|
$ |
¾ |
|
|
$ |
1,696,753 |
|
Costs and Expenses |
|
|
(2,525 |
) |
|
|
(243 |
) |
|
|
(1,332,887 |
) |
|
|
¾ |
|
|
|
(1,335,655 |
) |
Equity in Losses of Unconsolidated Affiliates |
|
|
¾ |
|
|
|
¾ |
|
|
|
(190 |
) |
|
|
¾ |
|
|
|
(190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
|
(2,525 |
) |
|
|
(243 |
) |
|
|
363,676 |
|
|
|
¾ |
|
|
|
360,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, Net |
|
|
(21,770 |
) |
|
|
(5,665 |
) |
|
|
(156 |
) |
|
|
¾ |
|
|
|
(27,591 |
) |
Intercompany Charges, Net |
|
|
(10,419 |
) |
|
|
108,275 |
|
|
|
(97,856 |
) |
|
|
¾ |
|
|
|
¾ |
|
Equity in Subsidiary Income |
|
|
273,678 |
|
|
|
208,552 |
|
|
|
¾ |
|
|
|
(482,230 |
) |
|
|
¾ |
|
Other, Net |
|
|
(4,761 |
) |
|
|
(209 |
) |
|
|
(1,191 |
) |
|
|
¾ |
|
|
|
(6,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations Before Income Taxes |
|
|
234,203 |
|
|
|
310,710 |
|
|
|
264,473 |
|
|
|
(482,230 |
) |
|
|
327,156 |
|
Provision for Income Taxes |
|
|
¾ |
|
|
|
(37,032 |
) |
|
|
(55,921 |
) |
|
|
¾ |
|
|
|
(92,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations |
|
|
234,203 |
|
|
|
273,678 |
|
|
|
208,552 |
|
|
|
(482,230 |
) |
|
|
234,203 |
|
Income from Discontinued Operation, Net of
Taxes |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
234,203 |
|
|
$ |
273,678 |
|
|
$ |
208,552 |
|
|
$ |
(482,230 |
) |
|
$ |
234,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
Three Months Ended September 30, 2005
(unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidation |
|
Revenues |
|
$ |
¾ |
|
|
$ |
¾ |
|
|
$ |
1,076,816 |
|
|
$ |
¾ |
|
|
$ |
1,076,816 |
|
Costs and Expenses |
|
|
(6,753 |
) |
|
|
(275 |
) |
|
|
(1,002,267 |
) |
|
|
¾ |
|
|
|
(1,009,295 |
) |
Equity in Earnings of Unconsolidated Affiliates |
|
|
¾ |
|
|
|
¾ |
|
|
|
2,991 |
|
|
|
¾ |
|
|
|
2,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
|
(6,753 |
) |
|
|
(275 |
) |
|
|
77,540 |
|
|
|
¾ |
|
|
|
70,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Redemption Expense |
|
|
¾ |
|
|
|
(4,733 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
(4,733 |
) |
Interest Expense, Net |
|
|
(6,870 |
) |
|
|
(10,238 |
) |
|
|
(89 |
) |
|
|
¾ |
|
|
|
(17,197 |
) |
Intercompany Charges, Net |
|
|
(8,524 |
) |
|
|
26,759 |
|
|
|
(18,235 |
) |
|
|
¾ |
|
|
|
¾ |
|
Equity in Subsidiary Income |
|
|
65,107 |
|
|
|
57,255 |
|
|
|
¾ |
|
|
|
(122,362 |
) |
|
|
¾ |
|
Other, Net |
|
|
4,934 |
|
|
|
17 |
|
|
|
6,015 |
|
|
|
¾ |
|
|
|
10,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations Before Income Taxes |
|
|
47,894 |
|
|
|
68,785 |
|
|
|
65,231 |
|
|
|
(122,362 |
) |
|
|
59,548 |
|
Provision for Income Taxes |
|
|
(8 |
) |
|
|
(3,678 |
) |
|
|
(8,563 |
) |
|
|
¾ |
|
|
|
(12,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations |
|
|
47,886 |
|
|
|
65,107 |
|
|
|
56,668 |
|
|
|
(122,362 |
) |
|
|
47,299 |
|
Income from Discontinued Operation, Net of
Taxes |
|
|
¾ |
|
|
|
¾ |
|
|
|
587 |
|
|
|
¾ |
|
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
47,886 |
|
|
$ |
65,107 |
|
|
$ |
57,255 |
|
|
$ |
(122,362 |
) |
|
$ |
47,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidating Statements of Income
Nine Months Ended September 30, 2006
(unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidation |
|
Revenues |
|
$ |
¾ |
|
|
$ |
¾ |
|
|
$ |
4,771,340 |
|
|
$ |
¾ |
|
|
$ |
4,771,340 |
|
Costs and Expenses |
|
|
(11,302 |
) |
|
|
(819 |
) |
|
|
(3,798,181 |
) |
|
|
¾ |
|
|
|
(3,810,302 |
) |
Equity in Earnings of Unconsolidated Affiliates |
|
|
¾ |
|
|
|
¾ |
|
|
|
5,737 |
|
|
|
¾ |
|
|
|
5,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
|
(11,302 |
) |
|
|
(819 |
) |
|
|
978,896 |
|
|
|
¾ |
|
|
|
966,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income (Expense), Net |
|
|
(50,485 |
) |
|
|
(20,297 |
) |
|
|
488 |
|
|
|
¾ |
|
|
|
(70,294 |
) |
Intercompany Charges, Net |
|
|
(17,324 |
) |
|
|
74,128 |
|
|
|
(56,804 |
) |
|
|
¾ |
|
|
|
¾ |
|
Equity in Subsidiary Income |
|
|
704,052 |
|
|
|
671,167 |
|
|
|
¾ |
|
|
|
(1,375,219 |
) |
|
|
¾ |
|
Other, Net |
|
|
(574 |
) |
|
|
(463 |
) |
|
|
(18,614 |
) |
|
|
¾ |
|
|
|
(19,651 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations Before Income Taxes |
|
|
624,367 |
|
|
|
723,716 |
|
|
|
903,966 |
|
|
|
(1,375,219 |
) |
|
|
876,830 |
|
Provision for Income Taxes |
|
|
¾ |
|
|
|
(19,664 |
) |
|
|
(232,799 |
) |
|
|
¾ |
|
|
|
(252,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations |
|
|
624,367 |
|
|
|
704,052 |
|
|
|
671,167 |
|
|
|
(1,375,219 |
) |
|
|
624,367 |
|
Income from Discontinued Operation, Net of
Taxes |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
624,367 |
|
|
$ |
704,052 |
|
|
$ |
671,167 |
|
|
$ |
(1,375,219 |
) |
|
$ |
624,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
Nine Months Ended September 30, 2005
(unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidation |
|
Revenues |
|
$ |
¾ |
|
|
$ |
¾ |
|
|
$ |
2,871,817 |
|
|
$ |
¾ |
|
|
$ |
2,871,817 |
|
Costs and Expenses |
|
|
(11,897 |
) |
|
|
(616 |
) |
|
|
(2,530,832 |
) |
|
|
¾ |
|
|
|
(2,543,345 |
) |
Equity in Earnings of Unconsolidated Affiliates |
|
|
¾ |
|
|
|
¾ |
|
|
|
7,114 |
|
|
|
¾ |
|
|
|
7,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
|
(11,897 |
) |
|
|
(616 |
) |
|
|
348,099 |
|
|
|
¾ |
|
|
|
335,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Redemption Expense |
|
|
¾ |
|
|
|
(4,733 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
(4,733 |
) |
Interest Expense, Net |
|
|
(9,757 |
) |
|
|
(35,664 |
) |
|
|
(413 |
) |
|
|
¾ |
|
|
|
(45,834 |
) |
Intercompany Charges, Net |
|
|
(19,368 |
) |
|
|
78,875 |
|
|
|
(59,507 |
) |
|
|
¾ |
|
|
|
¾ |
|
Equity in Subsidiary Income |
|
|
259,130 |
|
|
|
234,259 |
|
|
|
¾ |
|
|
|
(493,389 |
) |
|
|
¾ |
|
Other, Net |
|
|
4,978 |
|
|
|
(155 |
) |
|
|
7,349 |
|
|
|
¾ |
|
|
|
12,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations Before Income Taxes |
|
|
223,086 |
|
|
|
271,966 |
|
|
|
295,528 |
|
|
|
(493,389 |
) |
|
|
297,191 |
|
(Provision) Benefit for Income Taxes |
|
|
584 |
|
|
|
(12,836 |
) |
|
|
(62,480 |
) |
|
|
¾ |
|
|
|
(74,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations |
|
|
223,670 |
|
|
|
259,130 |
|
|
|
233,048 |
|
|
|
(493,389 |
) |
|
|
222,459 |
|
Income from Discontinued Operation, Net of
Taxes |
|
|
¾ |
|
|
|
¾ |
|
|
|
1,211 |
|
|
|
¾ |
|
|
|
1,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
223,670 |
|
|
$ |
259,130 |
|
|
$ |
234,259 |
|
|
$ |
(493,389 |
) |
|
$ |
223,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2006
(unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidation |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
624,367 |
|
|
$ |
704,052 |
|
|
$ |
671,167 |
|
|
$ |
(1,375,219 |
) |
|
$ |
624,367 |
|
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided (Used) by Operating
Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Earnings of Unconsolidated
Affiliates |
|
|
¾ |
|
|
|
¾ |
|
|
|
(5,737 |
) |
|
|
¾ |
|
|
|
(5,737 |
) |
Equity in Earnings of Affiliates |
|
|
(704,052 |
) |
|
|
(671,167 |
) |
|
|
¾ |
|
|
|
1,375,219 |
|
|
|
¾ |
|
Charges from Parent or Subsidiary |
|
|
17,324 |
|
|
|
(74,128 |
) |
|
|
56,804 |
|
|
|
¾ |
|
|
|
¾ |
|
Deferred Income Tax Provision (Benefit) |
|
|
¾ |
|
|
|
19,630 |
|
|
|
(38,913 |
) |
|
|
¾ |
|
|
|
(19,283 |
) |
Other, Net |
|
|
141,055 |
|
|
|
(188,305 |
) |
|
|
161,988 |
|
|
|
¾ |
|
|
|
114,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Continuing
Operations |
|
|
78,694 |
|
|
|
(209,918 |
) |
|
|
845,309 |
|
|
|
¾ |
|
|
|
714,085 |
|
Net Cash Used by Discontinued Operation |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Operating
Activities |
|
|
78,694 |
|
|
|
(209,918 |
) |
|
|
845,309 |
|
|
|
¾ |
|
|
|
714,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Businesses, Net of Cash
Acquired |
|
|
¾ |
|
|
|
¾ |
|
|
|
(162,192 |
) |
|
|
¾ |
|
|
|
(162,192 |
) |
Capital Expenditures for Property, Plant and
Equipment |
|
|
¾ |
|
|
|
¾ |
|
|
|
(720,650 |
) |
|
|
¾ |
|
|
|
(720,650 |
) |
Acquisition of Intellectual Property |
|
|
¾ |
|
|
|
¾ |
|
|
|
(28,469 |
) |
|
|
¾ |
|
|
|
(28,469 |
) |
Capital Contribution to Subsidiary |
|
|
(651,748 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
651,748 |
|
|
|
¾ |
|
Proceeds from Sale of Assets and Business,
Net |
|
|
¾ |
|
|
|
¾ |
|
|
|
22,132 |
|
|
|
¾ |
|
|
|
22,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Investing Activities |
|
|
(651,748 |
) |
|
|
¾ |
|
|
|
(889,179 |
) |
|
|
651,748 |
|
|
|
(889,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
(Repayments) of Short-term Debt, Net |
|
|
(267,407 |
) |
|
|
51,136 |
|
|
|
94,555 |
|
|
|
¾ |
|
|
|
(121,716 |
) |
Borrowings (Repayments ) of Long-term Debt,
Net |
|
|
944,216 |
|
|
|
(200,865 |
) |
|
|
(7,431 |
) |
|
|
¾ |
|
|
|
735,920 |
|
Borrowings (Repayments) Between
Subsidiaries, Net |
|
|
(103,717 |
) |
|
|
301,888 |
|
|
|
(198,171 |
) |
|
|
¾ |
|
|
|
¾ |
|
Proceeds from Exercise of Stock Options |
|
|
¾ |
|
|
|
54,003 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
54,003 |
|
Purchase of Treasury Shares |
|
|
¾ |
|
|
|
¾ |
|
|
|
(507,646 |
) |
|
|
¾ |
|
|
|
(507,646 |
) |
Proceeds from Capital Contribution |
|
|
¾ |
|
|
|
¾ |
|
|
|
651,748 |
|
|
|
(651,748 |
) |
|
|
¾ |
|
Other, Net |
|
|
(51 |
) |
|
|
631 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Financing
Activities |
|
|
573,041 |
|
|
|
206,793 |
|
|
|
33,055 |
|
|
|
(651,748 |
) |
|
|
161,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash and Cash
Equivalents |
|
|
(13 |
) |
|
|
(3,125 |
) |
|
|
(10,815 |
) |
|
|
¾ |
|
|
|
(13,953 |
) |
Cash and Cash Equivalents at Beginning of
Period |
|
|
124 |
|
|
|
3,172 |
|
|
|
130,949 |
|
|
|
¾ |
|
|
|
134,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
111 |
|
|
$ |
47 |
|
|
$ |
120,134 |
|
|
$ |
¾ |
|
|
$ |
120,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2005
(unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Parent |
|
Issuer |
|
Subsidiaries |
|
Eliminations |
|
Consolidation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
223,670 |
|
|
$ |
259,130 |
|
|
$ |
234,259 |
|
|
$ |
(493,389 |
) |
|
$ |
223,670 |
|
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided (Used) by Operating
Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Earnings of Unconsolidated
Affiliates |
|
|
(6,497 |
) |
|
|
¾ |
|
|
|
(7,114 |
) |
|
|
¾ |
|
|
|
(13,611 |
) |
Equity in Earnings of Affiliates |
|
|
(259,130 |
) |
|
|
(234,259 |
) |
|
|
¾ |
|
|
|
493,389 |
|
|
|
¾ |
|
Charges from Parent or Subsidiary |
|
|
19,368 |
|
|
|
(78,875 |
) |
|
|
59,507 |
|
|
|
¾ |
|
|
|
¾ |
|
Deferred Income Tax Provision (Benefit) |
|
|
¾ |
|
|
|
13,447 |
|
|
|
(27,278 |
) |
|
|
¾ |
|
|
|
(13,831 |
) |
Other, Net |
|
|
(633,637 |
) |
|
|
(625,594 |
) |
|
|
1,368,119 |
|
|
|
¾ |
|
|
|
108,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Continuing
Operations |
|
|
(656,226 |
) |
|
|
(666,151 |
) |
|
|
1,627,493 |
|
|
|
¾ |
|
|
|
305,116 |
|
Net Cash Provided by Discontinued
Operation |
|
|
¾ |
|
|
|
¾ |
|
|
|
2,294 |
|
|
|
¾ |
|
|
|
2,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Operating
Activities |
|
|
(656,226 |
) |
|
|
(666,151 |
) |
|
|
1,629,787 |
|
|
|
¾ |
|
|
|
307,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Businesses, Net of Cash
Acquired |
|
|
¾ |
|
|
|
¾ |
|
|
|
(963,410 |
) |
|
|
¾ |
|
|
|
(963,410 |
) |
Capital Expenditures for Property, Plant and
Equipment |
|
|
¾ |
|
|
|
¾ |
|
|
|
(320,298 |
) |
|
|
¾ |
|
|
|
(320,298 |
) |
Acquisition of Intellectual Property |
|
|
¾ |
|
|
|
¾ |
|
|
|
(9,234 |
) |
|
|
¾ |
|
|
|
(9,234 |
) |
Proceeds from Sale of Assets and Businesses,
Net |
|
|
¾ |
|
|
|
¾ |
|
|
|
9,485 |
|
|
|
¾ |
|
|
|
9,485 |
|
Other, Net |
|
|
¾ |
|
|
|
¾ |
|
|
|
(16,424 |
) |
|
|
¾ |
|
|
|
(16,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Investing Activities |
|
|
¾ |
|
|
|
¾ |
|
|
|
(1,299,881 |
) |
|
|
¾ |
|
|
|
(1,299,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings of Short-term Debt, Net |
|
|
932,050 |
|
|
|
5,700 |
|
|
|
109,025 |
|
|
|
¾ |
|
|
|
1,046,775 |
|
Borrowings (Repayments) of Long-term Debt,
Net |
|
|
¾ |
|
|
|
1,759 |
|
|
|
(4,079 |
) |
|
|
¾ |
|
|
|
(2,320 |
) |
Redemption of Zero Convertible Debentures |
|
|
¾ |
|
|
|
(348,816 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
(348,816 |
) |
Borrowings (Repayments) Between
Subsidiaries, Net |
|
|
(414,717 |
) |
|
|
809,858 |
|
|
|
(395,141 |
) |
|
|
¾ |
|
|
|
¾ |
|
Proceeds from Exercise of Stock Options |
|
|
¾ |
|
|
|
165,116 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
165,116 |
|
Other, Net |
|
|
¾ |
|
|
|
(2,394 |
) |
|
|
(128 |
) |
|
|
¾ |
|
|
|
(2,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Financing
Activities |
|
|
517,333 |
|
|
|
631,223 |
|
|
|
(290,323 |
) |
|
|
¾ |
|
|
|
858,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash
Equivalents |
|
|
(138,893 |
) |
|
|
(34,928 |
) |
|
|
39,583 |
|
|
|
¾ |
|
|
|
(134,238 |
) |
Cash and Cash Equivalents at Beginning of
Period |
|
|
138,979 |
|
|
|
74,053 |
|
|
|
104,407 |
|
|
|
¾ |
|
|
|
317,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
86 |
|
|
$ |
39,125 |
|
|
$ |
143,990 |
|
|
$ |
¾ |
|
|
$ |
183,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
19. New Accounting Pronouncements
In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106,
and 132(R) (SFAS No. 158). Among other items, SFAS No. 158 requires recognition of the
overfunded or underfunded status of an entitys defined benefit postretirement plan as an asset or
liability in the financial statements, requires the measurement of defined benefit postretirement
plan assets and obligations as of the end of the employers fiscal year, and requires recognition
of the funded status of defined benefit postretirement plans in other comprehensive income. SFAS
No. 158 is effective for fiscal years ending after December 15, 2006, and early application is
encouraged. At December 31, 2005, the required adjustment to the Companys balance sheet would
have been a net reduction to assets of approximately $8 million, an increase in liabilities of
approximately $17 million, and reduction to accumulated other comprehensive income of approximately
$25 million. However, as valuations are updated for the year ending December 31, 2006, amounts
will vary, possibly by material amounts.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No.
157), which defines fair value, establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting
pronouncements that require or permit fair value measurements. The new guidance is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. We are currently evaluating the potential impact, if any, of the
adoption of SFAS No. 157 on our consolidated financial position, results of operations and cash
flows.
In September 2006, the Staff of the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB No. 108). SAB No. 108 provides guidance
on the consideration of the effects of prior year misstatements in quantifying current year
misstatements for the purpose of determining whether the current years financial statements are
materially misstated. SAB No. 108 is effective for fiscal years ending after November 15, 2006. We
will adopt SAB No. 108 as of December 31, 2006. We do not expect the adoption of SAB No. 108 to
have a material impact on our consolidated financial position, results of operations and cash
flows.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 prescribes a
recognition threshold and measurement attribute for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. In addition, it provides guidance
on the measurement, derecognition, classification and disclosure of tax positions, as well as the
accounting for related interest and penalties. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Company is assessing FIN No. 48 and has not determined the impact that
the adoption of FIN No. 48 will have on its results of operations.
20. Subsequent Event
On October 27, 2006, the Company announced that Lisa W. Rodriguez, Senior Vice President and
Chief Financial Officer, left the Company, that Andrew P. Becnel became the Chief Financial Officer
and Senior Vice President, and that Jessica Abarca became the Vice President Accounting and Chief
Accounting Officer.
27
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |
We begin Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) with an executive level overview. This overview provides a general description of our
company today, a discussion of industry market trends, insight into managements perspective of the
opportunities and challenges we face and our outlook for the remainder of 2006 and into 2007.
Next, we analyze the results of our operations for the three and nine months ended September 30,
2006 and 2005, including the trends in our overall business and our operating segments. Then we
review our cash flows and liquidity, capital resources and contractual obligations. We close with
a discussion of new accounting pronouncements and an update, when applicable, to our critical
accounting judgments and estimates.
Overview
General
The following discussion should be read in conjunction with our financial statements included
with this report and our financial statements and related Managements Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31, 2005 included in our
Annual Report on Form 10-K. Our discussion includes various forward-looking statements about our
markets, the demand for our products and services and our future results. These statements are
based on certain assumptions we consider reasonable. For information about these assumptions, you
should refer to the section below entitled Forward-Looking Statements.
We provide equipment and services used for drilling, completion and production of oil and
natural gas wells throughout the world. We conduct operations in approximately 100 countries and
have service and sales locations in nearly all of the oil and natural gas producing regions in the
world. Our offerings include drilling and evaluation services, including directional drilling,
measurement while drilling and logging while drilling, well installation services, fishing and
intervention services, drilling equipment including land rigs, completion systems, production
optimization and all forms of artificial lift. We operate under two segments: Evaluation, Drilling
& Intervention Services and Completion & Production Systems.
Industry Trends
Changes in the current price and expected future prices of oil and natural gas influence the
level of energy industry spending. Changes in expenditures result in an increased or decreased
demand for our products and services. Rig count is an indicator of the level of spending for the
exploration for and production of oil and natural gas reserves.
The following chart sets forth certain statistics that reflect historical market conditions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry Hub |
|
North American Rig |
|
International Rig |
|
|
WTI Oil (1) |
|
Gas (2) |
|
Count (3) |
|
Count (3) |
September 30, 2006
|
|
$ |
62.91 |
|
|
$ |
5.620 |
|
|
|
2,185 |
|
|
|
949 |
|
December 31, 2005 |
|
|
61.04 |
|
|
|
11.225 |
|
|
|
2,046 |
|
|
|
948 |
|
September 30, 2005 |
|
|
66.24 |
|
|
|
13.921 |
|
|
|
1,949 |
|
|
|
907 |
|
|
|
|
(1) |
|
Price per barrel as of September 30 and December 31 Source: Applied Reasoning, Inc. |
|
(2) |
|
Price per MM/BTU as of September 30 and December 31 Source: Oil World |
|
(3) |
|
Average rig count for the applicable month Source: Baker Hughes Rig Count |
Although oil and natural gas prices have continued to fluctuate over the last several years,
the average annual price of oil and natural gas has continued to increase. Oil prices ranged from
a high of $77.03 per barrel in July of 2006 to a low of $17.97 per barrel in January of 2002.
Natural gas prices ranged from a high of $15.42 per MM/BTU in December of 2005 to a low of $1.91
per MM/BTU in January of 2002. Factors influencing oil and natural gas prices during this period
include persistent low inventories, strong economic growth in both the U.S. and China, the lack of
excess capacity within the Organization of Petroleum Exporting Countries (OPEC), weather and
geopolitical uncertainty, including the uncertainty of Iraqi oil production.
28
Historically, the majority of worldwide drilling activity has been concentrated in North
America. From mid-1999 through mid-2001, North American rig count improved steadily, peaking in
the first quarter of 2001 at a quarterly average of 1,636 rigs. During the latter part of 2001,
the rig count started to decline, and the decline continued through mid-2002. Since mid-2002, the
North American rig count has improved to a third quarter 2006 rig count average of 2,210 rigs.
Traditionally, the international rig count has not been as volatile as the North American rig
count. The international market experienced a 9% improvement in the 2005 average annual rig count
as compared to the previous year and an 18% improvement as compared to 2003. During 2006,
international rig count has remained relatively consistent with 2005 levels.
Drilling and completion spending has continued to increase in both North America and the
international markets. According to Spears and Associates, 2005 drilling and completion spending
increased 36% in North America and 17% in the international market over 2004 levels. In addition,
according to Spears and Associates, North America and international drilling and completion
spending through the first nine months of 2006 has increased
approximately 48% and 19%,
respectively, over the same period a year ago and in 2007, is anticipated to increase 16% over 2006
levels for both of these markets.
Opportunities and Challenges
The nature of our industry offers many opportunities and challenges. We have created a
long-term strategy aimed at growing our business, servicing our customers, and most importantly,
creating value for our shareholders. The success of our long-term strategy will be determined by
our ability to withstand the cyclicality of the energy industry, respond to industry demands, apply
capital discipline, and successfully maximize the benefits from our acquisitions.
The cyclicality of the energy industry impacts the demand for our products and services.
Certain of our products and services, such as our drilling and evaluation services, well
installation services and well completion services, depend on the level of exploration and
development activity and the completion phase of the well life cycle. Other products and services,
such as our production optimization and artificial lift systems, are dependent on production
activity. Decline rates, a measure of the fall in production from a well over time, are
accelerating. The market for oilfield services will grow year on year relative to the decline
rates and the implicit rate of demand growth. We are aggressively, but methodically, expanding our
workforce, manufacturing capacity and equipment to meet the demands of the industry.
In the third quarter of 2005, we acquired Precision Energy Services and Precision Drilling
International. This acquisition significantly strengthened and expanded our service offering.
Opportunities exist to accelerate the market penetration of the acquired products in the Eastern
Hemisphere and in Latin America by utilizing our established infrastructure and to increase pull
through sales with our expanded portfolio of technologies. The magnitude we will benefit from this
acquisition will be dependent upon our success in our continuing integration of these businesses.
Industry Outlook
In general, we believe the outlook for our businesses is favorable. As decline rates are
accelerating and reservoir productivity complexities are increasing, our clients are having
difficulty securing desired rates of production growth. Assuming the demand for hydrocarbons does
not weaken, these phenomena provide us with a robust outlook.
In particular, the international markets are experiencing a multi-year expansion, with the
Eastern Hemisphere standing out as the strongest market.
Near term, the climate will dictate activity in North America. Should this years winter be
mild, we would expect a pull-back in North American activity during the first half of 2007. Absent
a warm winter, North American activity is expected to remain near or at current high levels, as
Canada continues to recover from its seasonal spring decline. High natural gas storage levels
could impact near-term activity; however we believe an activity decline would be short lived, if it
were to occur. Furthermore, curtailments could be at least partially offset by increases in
oil-based projects.
The acceleration of decline rates and the increasing complexity of the reservoirs also
increase our customers requirements for technologies that improve productivity.
29
Weatherford Outlook
Geographic Markets. Excluding seasonal trends, rig activity in both Canada and the U.S.
should remain relatively flat. We expect volume increases in Latin America with improvements
stemming from Brazil and Argentina. The North Sea is expected to show modest growth throughout
2006 and 2007. Excluding the North Sea, we expect substantial growth in the Eastern Hemisphere to
initially originate from the Caspian Region, the Middle East and North Africa. Later, we expect
the growth to spread to sub-Sahara Africa and pockets of Asia Pacific.
Pricing. The overall pricing outlook is positive. Pricing trends are occurring concurrently
with raw material and labor cost inflation. We expect pricing to remain positive for the remainder
of 2006 and throughout 2007 net of cost increases. Price improvements are being realized on a
contract-by-contract basis and are occurring in different classes of products and service lines
depending upon the region.
Business Segments. Overall, we expect our operating segments to outpace market activity. In
our Evaluation Drilling & Intervention Division, our directional, controlled pressure drilling and
testing and wireline products and services, which were enhanced with the tools and technology
acquired from Precision Drilling Corporation, are expected to have the highest growth rates. We
expect strong growth from our drilling services in Asia Pacific, Latin America, Middle East and
North Africa. Our acquired directional and wireline technology are expected to grow
internationally, in particular in the Middle East and North Africa region, as we utilize our
Eastern Hemisphere infrastructure to accelerate their market penetration. Furthermore, we expect
our well construction product line to gain deepwater market share in both the U.S. and
international markets. In our Completion & Production Systems Division, we anticipate our
production optimization product lines and completion systems to have strong top line growth, and
our new ESP product line is initially expected to grow in the Middle East, Latin America and the
U.S. We also expect steady growth from our stimulation services throughout the remainder of 2006
and into 2007.
Overall, the level of market improvements for our businesses for the remainder of 2006 will
continue to depend heavily on our ability to gain market share outside North America, primarily in
the Eastern Hemisphere, recruit and retain personnel and secure further acceptance of our new
technologies. The continued strength of the industry is uncertain and will be highly dependent on
many external factors, such as world economic and political conditions, member country quota
compliance within OPEC and weather conditions. The extreme volatility of our markets makes
predictions regarding future results difficult.
Results of Operations
In connection with our continued integration plan relating to the acquisition of divisions of
Precision Drilling Corporation and the recent operational realignment of our Pipeline and Specialty
Services businesses, we undertook a review of our presentation of segment information in the second
quarter of 2006. In addition to their former businesses, Evaluation, Drilling & Intervention
Services now includes the operations of Precision Drilling International and Completion &
Production Services includes the operations of Pipeline and Specialty Services.
The following charts contain selected financial data comparing our consolidated and segment
results from operations for the three and nine months ended September 30, 2006 and 2005. On August
31, 2005, we completed the acquisition of Precision Energy Services and Precision Drilling
International, divisions of Precision Drilling Corporation. The results of operations from the
acquired businesses are included in our results of operations from the date of acquisition;
therefore, the three and nine months ended September 30, 2005 periods include one month of activity
from these acquired businesses. We are unable to provide certain information regarding our current
period results excluding the impact of acquisitions due to the integration of these acquisitions
into our operations.
30
Comparative Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except percentages and per share data) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, Drilling & Intervention Services |
|
$ |
1,100,059 |
|
|
$ |
627,690 |
|
|
$ |
3,071,829 |
|
|
$ |
1,608,693 |
|
Completion & Production Systems |
|
|
596,694 |
|
|
|
449,126 |
|
|
|
1,699,511 |
|
|
|
1,263,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,696,753 |
|
|
|
1,076,816 |
|
|
|
4,771,340 |
|
|
|
2,871,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit %: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, Drilling & Intervention Services (a) |
|
|
38.3 |
% |
|
|
31.5 |
% |
|
|
37.6 |
% |
|
|
34.3 |
% |
Completion & Production Systems |
|
|
33.1 |
|
|
|
29.0 |
|
|
|
32.5 |
|
|
|
28.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.5 |
|
|
|
30.5 |
|
|
|
35.8 |
|
|
|
31.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, Drilling & Intervention Services |
|
$ |
25,036 |
|
|
$ |
14,624 |
|
|
$ |
70,063 |
|
|
$ |
35,297 |
|
Completion & Production Systems |
|
|
13,205 |
|
|
|
12,516 |
|
|
|
41,982 |
|
|
|
36,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,241 |
|
|
|
27,140 |
|
|
|
112,045 |
|
|
|
72,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Attributable to
Segments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, Drilling & Intervention Services |
|
|
127,992 |
|
|
|
71,645 |
|
|
|
349,526 |
|
|
|
193,736 |
|
Completion & Production Systems |
|
|
66,418 |
|
|
|
62,671 |
|
|
|
213,281 |
|
|
|
176,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,410 |
|
|
|
134,316 |
|
|
|
562,807 |
|
|
|
370,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate General and Administrative |
|
|
24,718 |
|
|
|
19,159 |
|
|
|
71,251 |
|
|
|
56,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Earnings (Losses) of Unconsolidated Affiliates |
|
|
(190 |
) |
|
|
2,991 |
|
|
|
5,737 |
|
|
|
7,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit Costs and Restructuring Charges |
|
|
|
|
|
|
80,018 |
|
|
|
|
|
|
|
80,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, Drilling & Intervention Services |
|
|
267,942 |
|
|
|
111,430 |
|
|
|
735,087 |
|
|
|
322,133 |
|
Completion & Production Systems |
|
|
117,874 |
|
|
|
55,268 |
|
|
|
297,202 |
|
|
|
142,472 |
|
Exit Costs and Restructuring Charges |
|
|
|
|
|
|
(80,018 |
) |
|
|
|
|
|
|
(80,018 |
) |
Corporate (b) |
|
|
(24,908 |
) |
|
|
(16,168 |
) |
|
|
(65,514 |
) |
|
|
(49,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360,908 |
|
|
|
70,512 |
|
|
|
966,775 |
|
|
|
335,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Redemption Expense |
|
|
|
|
|
|
(4,733 |
) |
|
|
|
|
|
|
(4,733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, Net |
|
|
(27,591 |
) |
|
|
(17,197 |
) |
|
|
(70,294 |
) |
|
|
(45,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, Net |
|
|
(6,161 |
) |
|
|
10,966 |
|
|
|
(19,651 |
) |
|
|
12,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate |
|
|
28.4 |
% |
|
|
20.6 |
% |
|
|
28.8 |
% |
|
|
25.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations per Diluted Share |
|
$ |
0.66 |
|
|
$ |
0.15 |
|
|
$ |
1.75 |
|
|
$ |
0.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Diluted Share |
|
|
0.66 |
|
|
|
0.15 |
|
|
|
1.75 |
|
|
|
0.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
123,508 |
|
|
|
81,950 |
|
|
|
354,030 |
|
|
|
222,389 |
|
|
|
|
(a) |
|
Includes a write down of $17.3 million of inventory in connection with our exit and
restructuring plan for the three and nine months ended September 30, 2005. |
|
(b) |
|
Includes equity in earnings (losses) of unconsolidated affiliates which are integral to our
operations. |
31
Consolidated Revenues by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
U.S. |
|
|
39 |
% |
|
|
38 |
% |
|
|
38 |
% |
|
|
38 |
% |
Canada |
|
|
17 |
|
|
|
18 |
|
|
|
19 |
|
|
|
17 |
|
Latin America |
|
|
10 |
|
|
|
10 |
|
|
|
11 |
|
|
|
9 |
|
Europe, CIS and West Africa |
|
|
13 |
|
|
|
15 |
|
|
|
13 |
|
|
|
16 |
|
Middle East and North Africa |
|
|
14 |
|
|
|
11 |
|
|
|
13 |
|
|
|
12 |
|
Asia Pacific |
|
|
7 |
|
|
|
8 |
|
|
|
6 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Results
Revenues
Consolidated revenues increased $619.9 million, or 57.6%, in the third quarter of 2006 as
compared to the third quarter of 2005. The acquisition of Precision Energy Services and Precision
Drilling International completed in the third quarter of 2005 contributed approximately $280
million of the increase. The remaining increase resulted primarily from organic growth as our
businesses continued to benefit from increasing market activity, share gains and pricing
initiatives. North America generated revenue growth of 59.1%, and included revenue increases of
60.6% and 55.9% in the U.S. and Canada, respectively. Excluding revenues from acquisitions, North
American revenues increased approximately $190 million, or 35%. This regions increase outpaced
the 14.1% increase in the average North American rig count. The increase in activity and price
increases in the U.S. and Canadian markets were the key contributors to revenue growth during the
third quarter of 2006. Internationally, revenues increased $265.4 million, 55.6%, or approximately
$150 million, 34%, excluding acquisitions, as compared to a 3.4% increase in the average
international rig count. Our international revenue growth, excluding acquisitions, was generated
by increases of approximately 57%, 30% and 24% in the Middle East and North Africa region, Europe,
CIS and West Africa region, and Latin America region, respectively. These revenue increases were
generated primarily by increased volume and increased pricing which is obtained through long-term
contracts.
Consolidated revenues for the first nine months of 2006 increased $1,899.5 million, or 66.1%,
over the first nine months of 2005. Excluding the impact of our acquisitions, North American
revenues increased approximately $560 million, or 37%, and included increases of 41% and 27% in the
U.S. and Canada, respectively. This regions increase outpaced
the 19.1% increase in the average
North American rig count. International revenues for the first nine months of 2006 increased
approximately $320 million, or 26%, excluding acquisitions, as
compared to the 1.8% increase in the
average international rig count. Our international revenue growth, excluding acquisitions, was
generated by increases of approximately 33%, 24% and 24% in our Middle East and North Africa
region, Europe, CIS and West Africa region, and Latin America region, respectively.
Gross Profit
Our gross profit as a percentage of revenues increased from 30.5% in the third quarter of 2005
to 36.5% in the third quarter of 2006 and increased to 35.8% during the nine months ended September
30, 2006 as compared to 31.6% during the nine months ended September 30, 2005. This increase was
primarily the result of the positive impact of higher base revenues to cover fixed costs, with
additional contributions from stronger North American and international pricing. In addition, the
three and nine months ended September 30, 2005 included $17.3 million of inventory write downs
associated with our integration/reorganization plan.
Research and Development
Research and development expenses increased $11.1 million, or 40.9%, and $40.0 million, or
55.5%, during the three and nine months ended September 30, 2006, respectively, as compared to the
same periods of the prior year. Our late 2005 acquisition of Precision generated approximately $10
million and $30 million of this increase for the three and nine months ended September 30, 2006,
respectively, with the remaining increase due primarily to our commitment in developing and
commercializing new technologies as well as investing in our core product offerings.
32
Research and development expense as a percentage of revenue has remained relatively consistent
during the three and nine months ended September 30, 2006 as compared to the same periods in the
prior year.
Corporate General and Administrative
Corporate
general and administrative expenses increased $5.6 million, or
29.0%, and $15.1 million,
or 27.0%, during the three and nine months ended September 30, 2006, respectively, as compared to
the same periods of the prior year. This increase is due primarily to increased costs associated
with higher employee compensation expense and professional service fees. Corporate general and
administrative expenses as a percentage of consolidated revenues were approximately 18% lower for
the three months ended September 30, 2006 as compared to the same period of the prior year and
improved approximately 24% during the nine months ended September 30, 2006 as compared to the same
period of the prior year.
Exit Cost and Restructuring Charges
We incurred exit costs and restructuring charges of $97.3 million during the three and nine
months ended September 30, 2005. During the third and fourth quarters of 2005, we underwent both a
restructuring related to our acquisition of Precision and reorganization activities related to its
historical businesses, including a change in management, a change in regional structure and an
evaluation of product lines. Total exit costs incurred related to this exit and reorganization
were $114.2 million, of which $97.3 million was recorded during the quarter ending September 30,
2005 and the remaining $16.9 million was recorded in the fourth quarter of 2005. The third quarter
2005 charge included an inventory write-down of $17.3 million which was recorded in Cost of
Products and a remaining amount of $80.0 million which was recorded as Exit Costs and Restructuring
Charges in the related periods Condensed Consolidated Statements of Income.
The exit plan related to the Precision acquisition resulted in exit costs and restructuring
charges of $105.5 million during the third and fourth quarters
of 2005. We initiated an integration plan to combine worldwide operations,
rationalize product lines, and eliminate certain products, services and locations. Product line
rationalization included wireline, controlled pressure drilling and testing, and directional
product and service offerings. Inventory totaling $20.7 million was written-down. Asset
impairment charges included $20.9 million for fixed assets, $12.9 million related to information
technology and $1.7 million related to investments. Employee severance and termination benefits
totaled $33.0 million. Contract terminations and facility closures of $7.3 million were also
recorded. In connection with the valuation of the Precision assets, $9.0 million was identified as
purchased in process research and development and was written-off.
The exit plan related to the reorganization activities surrounding our historical businesses
resulted in exit costs and restructuring charges of $8.7 million during the third and fourth quarters
of 2005. We incurred severance and
termination benefits of $3.6 million and recorded $2.6 million of facility termination charges
related to the rationalization of two facilities, one located in the United Kingdom and the other
in the U.S. The remaining $2.5 million charge related to the write-off of other assets.
The 2005 integration and reorganization plans are expected to be substantially completed
during the fourth quarter of 2006. No additional costs were recorded during the first nine months
of 2006, and we do not anticipate future charges, relating to these
activities. A summary of the exit costs and restructuring charges by
segment is as follows:
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluation, |
|
|
|
|
|
|
|
|
|
|
|
|
Drilling & |
|
|
Completion & |
|
|
|
|
|
|
|
|
|
Intervention |
|
|
Production |
|
|
|
|
|
|
|
|
|
Services |
|
|
Systems |
|
|
Corporate |
|
|
Total |
|
|
|
(In thousands) |
|
Cost of Products |
|
$ |
20,654 |
|
|
$ |
3,842 |
|
|
$ |
¾ |
|
|
$ |
24,496 |
|
Cost of Services |
|
|
25,766 |
|
|
|
1,083 |
|
|
|
¾ |
|
|
|
26,849 |
|
Research and Development |
|
|
9,000 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
9,000 |
|
Selling General & Administrative |
|
|
17,349 |
|
|
|
3,803 |
|
|
|
¾ |
|
|
|
21,152 |
|
Corporate General & Administrative |
|
|
¾ |
|
|
|
¾ |
|
|
|
32,738 |
|
|
|
32,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
72,769 |
|
|
|
8,728 |
|
|
|
32,738 |
|
|
|
114,235 |
|
Cash Payments |
|
|
(20,166 |
) |
|
|
(7,721 |
) |
|
|
(8,187 |
) |
|
|
(36,074 |
) |
Non-cash Utilization |
|
|
(52,410 |
) |
|
|
(722 |
) |
|
|
(12,911 |
) |
|
|
(66,043 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
193 |
|
|
$ |
285 |
|
|
$ |
11,640 |
|
|
$ |
12,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, the remaining accrual was comprised of $12.0 million and $0.1
million in severance benefits and facility closure costs, respectively. The length of time we are
obligated to make severance payments varies, with the longest obligation continuing through 2018.
The facility closure costs will be paid out over the term of the respective leases, with the
longest obligation continuing through 2011.
Interest Expense, Net
Interest expense, net increased $10.4 million, or 60.4%, and $24.5 million, or 53.4% during
the three and nine months ended September 30, 2006, respectively. Interest expense increased due
primarily to the incremental borrowings used to fund the cash portion of our acquisition in the
third quarter of 2005 and our acquisition of shares under our share repurchase program. This
increase was offset by the settlement of our Zero Coupon Convertible Senior Debentures and the
reduction of our outstanding debt balance with the proceeds received from the sale of our remaining
investment in Universal Compression, which occurred in the third and fourth quarter of 2005, respectively.
Other, Net
Other income (expense) decreased $17.1 million and $31.8 million during the three and nine
months ended September 30, 2006, respectively, as compared to the same periods in the prior year
primarily due to unfavorable changes in foreign exchange rates experienced during the current year.
In addition, the three and nine month periods ended September 30, 2005 included equity in earnings
of $3.9 million and $6.5 million, respectively, from our
investment in Universal Compression. Our remaining interest in Universal Compression was sold in December of 2005.
Income Taxes
Our effective income tax rates for the three months ended September 30, 2006 and 2005 were
28.4% and 20.6%, respectively, and were 28.8% and 25.1% during the nine months ended September 30,
2006 and 2005, respectively. The increase in our effective tax rates during the three and nine
months ended September 30, 2006 were primarily related to $102.0 million, $70.3 million net of tax,
of exit and restructuring charges and debt redemption expense incurred in the three and nine months
ended September 30, 2005 and settlement of certain foreign tax audits on favorable terms during the
same periods of last year.
Segment Results
Evaluation, Drilling & Intervention Services
Evaluation, Drilling & Intervention Services revenues increased $472.4 million, or 75.3%, in
the third quarter of 2006 as compared to the third quarter of 2005. All of our product lines
generated substantial growth. Our third quarter 2005 acquisition of Precision Energy Services
provided significant top-line growth in our controlled pressure drilling and testing systems, cased
and open hole wireline and directional drilling product line offerings. Geographically, the North
American revenue increase of $239.3 million, or 79.0%, included approximately $160 million of
revenues from acquisitions. The increase of approximately 31% before acquisitions was due to
volume growth above the 14.1% increase in the average North American rig count and price increases
implemented during
34
the first half of 2006. International revenues improved $233.1 million, or 71.8%, in the
third quarter of 2006 as compared to the third quarter of 2005. The most significant organic
international growth was in the Middle East and North Africa region, Europe, CIS and West Africa
region, and the Asia Pacific region, where revenues increased approximately 54%, 39% and 31%,
respectively. Our international revenue growth, excluding acquisitions, increased approximately
$110 million, or 41%, as compared to a 3.4% increase in the average international rig count. This
increase reflects our continued investment in the Eastern Hemisphere and new, technologically
advanced product offerings.
Evaluation, Drilling & Intervention Services revenues increased $1,463.1 million, or 91.0%, in
the first nine months of 2006 as compared to the first nine months of 2005. All of our product
lines generated substantial growth. Geographically, the North American revenue increase of $782.8
million, or 103.9%, included approximately $580 million of revenues from acquisitions. The
increase of approximately 30% before acquisitions was due to volume
growth above the 19.1% increase
in the average North American rig count and price increases implemented during the first half of
2006. International revenues improved $680.4 million, or 79.6%, during the first nine months of
2006 as compared to the first nine months of 2005. The most significant organic international
growth was in the Asia Pacific region, Middle East and North Africa region, and Europe CIS and West
Africa region where revenues increased approximately 35%, 33% and 29%, respectively. Our
international revenue growth, excluding acquisitions, of approximately $240 million, or 30%, was
significantly above the 1.8% increase in the average international rig count. This increase
reflects our continued investment in the Eastern hemisphere and new, technologically advanced
product offerings.
Gross profit as a percentage of revenues increased to 38.3% in the third quarter of 2006 from
31.5% in the third quarter of 2005. Gross profit as a percentage of revenues increased to 37.6%
during the first nine months of 2006 from 34.3% during the first nine months of 2005. This
increase was primarily volume driven, with additional benefits realized from the North American and
international pricing increases. In addition, the three and nine months ended September 30, 2005
included $17.3 million of inventory write downs associated with our integration/reorganization
plan.
Research and development expenses increased $10.4 million, or 71.2%, and $34.8 million, or
98.5%, during the three and nine months ended September 30, 2006, respectively, as compared to the
same periods of the prior year. Our late 2005 acquisition of Precision generated approximately $10
million and $30 million of this increase for the three and nine months ended September 30, 2006,
respectively, with the remaining increase due primarily to our commitment in developing and
commercializing new technologies as well as investing in our core product offerings.
Selling, general and administrative expenses increased $56.3 million, or 78.6%, and $155.8
million, or 80.4%, during the three and nine months ended September 30, 2006, respectively, as
compared to the same periods of the prior year. Selling, general and administrative expenses as a
percentage of revenues were relatively flat for the three months ended September 30, 2006 as
compared to the same period of the prior year and improved approximately one percent during the
nine months ended September 30, 2006 as compared to the same period of the prior year. This
year-over-year improvement was primarily as a result of higher revenues during the current year to
absorb the divisions fixed cost base.
Completion & Production Systems
Revenues in our Completion & Production Systems segment increased $147.6 million, or 32.9%, in
the third quarter of 2006 as compared to the same quarter of the prior year. This increase was
driven primarily by higher demand for our artificial lift and chemicals and stimulation product
lines. On a geographic basis, our North American revenues increased $115.2 million, or 38.8%, in
the third quarter of 2006 as compared to the third quarter of 2005 and included increases of 54.0%
and 14.2% in the U.S. and Canada, respectively. Improvements in the region, beyond the increases
in activity, were primarily due to North American pricing increases and changes in product mix.
International revenues improved $32.4 million, or 21.2%, over the third quarter of 2005 and were
led by revenue growth of 67.3% in the Middle East and North Africa and 17.7% in Latin America.
Revenues in our Completion & Production Systems segment increased $436.4 million, or 34.5%,
during the first nine months of 2006 as compared to the same period of the prior year. This
increase was driven primarily by higher demand for our artificial lift and chemicals and
stimulation product lines. On a geographic basis, our North American revenues increased $358.2
million, or 43.6%, during the first nine months of 2006 as compared to the same period of 2005 and
included increases of 54.0% and 26.2% in the U.S. and Canada, respectively. Improvements in the
region, beyond the increases in activity, were primarily due to North American pricing
35
increases and changes in product mix. International revenues for the first nine months of
2006 improved $78.2 million, or 17.7%, over the same period of 2005 and were led by revenue growth
of 32.4% in the Middle East and North Africa and 23.7% in Latin America.
Our gross profit as a percentage of revenues increased to 33.1% in the third quarter of 2006
from 29.0% in the third quarter of 2005. Gross profit as a percentage of revenues increased to
32.5% during the first nine months of 2006 from 28.2% during the first nine months of 2005. The
percentage increase was due to this divisions higher revenue base and changes in product mix.
Selling, general and administrative expenses increased $3.7 million, or 6.0%, and $36.4
million, or 20.6%, during the three and nine months ended September 30, 2006, respectively, as
compared to the same periods of the prior year. Selling, general and administrative expenses as a
percentage of revenues have improved slightly in both the three and nine month periods ended
September 30, 2006, as compared to the same periods of the prior year, primarily as a result of
higher revenues during the current year to absorb the divisions fixed cost base. In addition, the
three and nine months ended September 30, 2006 include the effect from the divestiture of a portion
of our minority interest in a subsidiary. This transaction represents 14% and 4% of selling,
general and administrative expenses for the three and nine months ended September 30, 2006,
respectively.
Liquidity and Capital Resources
Historical Cash Flows
As of September 30, 2006, our cash and cash equivalents were $120.3 million, a net decrease of
$14.0 million from December 31, 2005, which was primarily attributable to the following:
|
|
|
cash inflows from operating activities of $714.1 million; |
|
|
|
|
capital expenditures for property, plant and equipment of $720.7 million; |
|
|
|
|
acquisition of new businesses of approximately $162.2 million in cash, net of cash acquired; |
|
|
|
|
acquisition of intellectual property of $28.5 million; |
|
|
|
|
net proceeds from the sales of assets of $22.1 million; |
|
|
|
|
borrowings, net of repayments, on long-term debt and short-term facilities of $614.2 million; |
|
|
|
|
proceeds from stock option activity of $54.0 million; and |
|
|
|
|
treasury share purchases of $507.6 million. |
Sources of Liquidity and Borrowings
Our sources of liquidity are reserves of cash, cash generated from operations, and committed
availabilities under bank lines of credit. We also historically have accessed banks for short-term
loans from uncommitted borrowing arrangements and the capital markets with debt, equity and
convertible offerings. We maintain a shelf registration statement covering the future issuance of
various types of securities, including debt, common shares, preferred shares, and warrants.
The following summarizes our short-term committed financing facilities and our usage and
availability of committed facilities as of September 30, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses of Availability |
|
|
Short-term |
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
Letters |
|
|
Committed |
|
Facility |
|
Expiration |
|
Paper |
|
|
|
|
|
of |
|
Committed |
Financing Facilities |
|
Amount |
|
Date |
|
Support |
|
Drawn |
|
Credit |
|
Availability |
Revolving Credit
Facility |
|
$ |
750.0 |
|
|
May 2011
|
|
$ |
449.5 |
|
|
$ |
73.1 |
|
|
$ |
18.6 |
|
|
$ |
208.8 |
|
Canadian Facility |
|
|
22.4 |
|
|
July 2007
|
|
|
|
|
|
|
4.8 |
|
|
|
0.4 |
|
|
|
17.2 |
|
In August 2005, we entered into a 364-Day Revolving Credit Agreement (364-Day Facility).
Under this agreement, we were allowed to borrow up to $1.2 billion to fund the redemption of our
zero coupon convertible senior debentures and the acquisition of Precision Energy Services and
Precision Drilling International, and were allowed to fund certain refinancings, including
commercial paper repayments or common share repurchases. The
36
364-Day Facility was terminated on August 10, 2006 in connection with the completion of our
debt issuance of $600.0 million.
On May 2, 2006, we amended and restated our revolving credit agreement with a syndicate of
banks of which JPMorgan Chase Bank is the Administrative Agent (Revolving Credit Facility). As
restated, the Revolving Credit Facility provides us a $750.0 million, five-year multi-currency
senior unsecured revolving credit facility. Based on our current debt ratings, we will pay a
commitment fee of 0.08% per year, and borrowings under the facility will bear interest at variable
annual rates based on LIBOR plus 0.27%, plus an additional 0.05% for any period in which more than
half of the total commitment is utilized. The restated credit agreement superceded our previous
$500.0 million facility that was scheduled to mature May 12, 2006. The weighted average interest
rate on the outstanding borrowing under this facility was 5.4% at September 30, 2006. The
Revolving Credit Facility provides that, with the consent of the lenders, we can increase the size
of the facility up to $1.5 billion. However, there is no certainty that the lenders will consent
to any requested increase.
The Revolving Credit Facility requires us to maintain a debt-to-capitalization ratio of less
than 60% and contains other covenants and representations customary for investment-grade commercial
credit. We were in compliance with these covenants at September 30, 2006. The Revolving Credit
Facility is guaranteed by our wholly-owned indirect subsidiary, Weatherford International, Inc.,
subject to certain conditions. The committed facility does not contain any provisions that make
its availability dependent upon our credit ratings; however, the interest rate is dependent upon
the credit rating of our long-term senior debt.
We also maintain a Canadian dollar committed facility to support our operations in that
country. The Canadian facility provides for borrowings or letters of credit under the facility up
to an aggregate of 25.0 million Canadian dollars, or $22.4 million as of September 30, 2006. The
weighted average interest rate of the outstanding borrowings of this facility was 6.8% as of
September 30, 2006.
Uncommitted Borrowing Arrangements
We have short-term borrowings with various domestic and international institutions pursuant to
uncommitted facilities. At September 30, 2006, we had $92.7 million in short-term borrowings
outstanding under these arrangements with a weighted average interest rate of 5.0%. In addition, we
had $123.7 million of letters of credit and bid and performance bonds outstanding under these
uncommitted facilities. In connection with the acquisition of Precision Energy Services and
Precision Drilling International, we have indemnified Precision Drilling Corporation for
outstanding letters of credit of $11.7 million.
Commercial Paper
In October 2005, we initiated a commercial paper program under which we may from time to time
issue short-term unsecured notes. In connection with this program, we entered into agreements with
third-party lending institutions under which each of these lending institutions may act as dealers
of this commercial paper. Also in connection with the program, Weatherford International, Inc.,
one of our wholly-owned indirect subsidiaries, provided a guarantee of any commercial paper notes
that we may issue. Our commercial paper issuances are supported by the committed lending
facilities. As of September 30, 2006, we had $449.5 million of outstanding commercial paper
issuances with maturities ranging from 2 to 16 days. The weighted average interest rate related to
outstanding commercial paper issuances at September 30, 2006 was 5.4%.
Debt Offerings
On February 17, 2006, we completed an offering of $350.0 million senior notes at a coupon rate
of 5.50% (5.50% Senior Notes) with a maturity in February 2016. Net proceeds of $346.2 million
were used to partially repay outstanding borrowings on our commercial paper program. In
association with the transaction, the maximum borrowing allowed under the commercial paper program
was reduced from $1.5 billion to $1.2 billion.
On August 7, 2006, we completed an offering of $600.0 million senior notes at a coupon rate of
6.50% (6.50% Senior Notes) with a maturity in August 2036. Net proceeds of $588.3 million were
used to partially repay outstanding borrowings on our commercial paper program. In connection with
the issuance, we elected to notify our administrative agent under our 364-Day Facility to terminate
the commitments under that agreement. In addition,
37
the size of our commercial paper program was reduced to correspond to the availability under
the Revolving Credit Facility.
Cash Requirements
Our cash requirements and contractual obligations at September 30, 2006, and the effect these
obligations are expected to have on our liquidity and cash flow in future periods are as follows:
We project that our capital expenditures for 2006 will be $850 $900 million. We expect to
use these expenditures primarily to support the growth of our business and operations. Capital
expenditures during the nine months ended September 30, 2006 were $671.1 million, net of proceeds
from tools lost down hole of $49.6 million.
In December 2005, our board authorized us to repurchase up to $1.0 billion of our outstanding
common shares. We may from time to time repurchase our common shares depending upon the price of
our common shares, our liquidity and other considerations. During the nine months ended September
30, 2006, we repurchased 11.5 million of our common shares at an aggregate price of $507.6 million.
From time to time we acquire businesses or technologies that increase our range of products
and services, expand our geographic scope or are otherwise strategic to our businesses. During the
nine months ended September 30, 2006, we used approximately $162.2 million in cash, net of cash
acquired, in business acquisitions.
Derivative Instruments
From time to time, we enter into derivative transactions to hedge existing or projected
exposures to changes in interest rates and foreign currency exchange rates. We do not enter into
derivative transactions for speculative or trading purposes.
As of December 2005, we had recorded a $4.2 million loss in other comprehensive income on
interest rate derivatives entered into and terminated in 2005; this loss is being amortized to
interest expense over the life of the 5.50% Senior Notes. In January 2006, we entered into
interest rate derivative instruments for a notional amount of $350.0 million to hedge projected
exposures to interest rates in anticipation of a future debt issuance. Those hedges were
terminated at the time of issuance of the 5.50% Senior Notes. We received cash proceeds of $6.2
million at termination, and the gain on these hedges is being amortized to interest expense over
the life of the 5.50% Senior Notes.
In July 2006 we entered into interest rate derivative instruments for a notional amount of
$500.0 million to hedge projected exposures to interest rates in anticipation of a future debt
issuance. Those hedges were terminated at the time of issuance of the 6.50% Senior Notes. The
Company paid a cash settlement of $1.5 million at termination, and the loss on these hedges is
being amortized to interest expense over the life of the 6.50% Senior Notes.
We use interest rate swap agreements to take advantage of available short-term interest rates.
Amounts received upon termination of the swap agreements represent the fair value of the
agreements at the time of termination and are recorded as an adjustment to the carrying value of
the related debt. These amounts are being amortized as a reduction to interest expense over the
remaining term of the debt.
As of September 30, 2006 and December 31, 2005, we had unamortized gains of $14.8 million and
$18.3 million, respectively associated with interest rate swap terminations. These gains have been
deferred and recorded as an adjustment to the carrying value of the related debt and are amortized
against interest expense over the remaining term of the debt issuance against which they were
hedged. Our interest expense was reduced by $0.5 million and $3.5 million for the three and nine
months ended September 30, 2006, respectively, and $1.8 million and $5.1 million for the three and
nine months ended September 30, 2005, respectively. There were no interest rate swap agreements
outstanding as of September 30, 2006.
As of September 30, 2006, we had entered into several foreign currency forward contracts and
one option contract with notional amounts aggregating $200.2 million to hedge exposure to
currency fluctuations in various foreign currencies, including the euro, the
Australian dollar, the Norwegian kroner, the Brazilian reais, the Mexican peso and the pound
sterling. In addition, after the closing of the acquisition of Precision Energy Services and
Precision Drilling International, we entered into a series of cross-currency swaps with
38
notional
amounts at execution totaling $588.9 million. These derivative instruments were not designated as
hedges
and the changes in fair value of the contracts are recorded each period in current earnings.
During the three and nine months ended September 30, 2006, net cash proceeds of $0.6 million and
$2.4 million, respectively, were received from the cross-currency swaps, which were the net
settlement of quarterly interest rate payments on the two currencies swapped. These quarterly net
interest rate settlements are based on the variable interest rates of both the Canadian dollar and
the U.S. dollar. On March 31, 2006, cross currency swaps with an original notional value of $140.4
million were terminated and we paid a net settlement in April 2006 of $3.5 million. On September
11, 2006, a cross currency swap with an original notional value of $84.2 million was terminated and
the Company paid a net settlement of $6.3 million. At September 30, 2006, the fair value of the
remaining cross-currency swaps was $336.3 million.
Off Balance Sheet Arrangements
Guarantees
The 6 5/8% Senior Notes of Weatherford International, Inc. were guaranteed by Weatherford
International Ltd. as of September 30, 2006. The following obligations of Weatherford
International Ltd. were guaranteed by Weatherford International, Inc. as of September 30, 2006: (i)
the Revolving Credit Facility, (ii) the 4.95% Senior Notes, (iii) the 5.50% Senior Notes (iv) the
6.50% Senior Notes, and (v) issuances of commercial paper.
Letters of Credit
We execute letters of credit in the normal course of business. While these obligations are
not normally called, these obligations could be called by the beneficiaries at any time before the
expiration date should we breach certain contractual or payment obligations. As of September 30,
2006, we had $142.7 million of letters of credit and bid and performance bonds outstanding,
consisting of $123.7 million outstanding under various uncommitted credit facilities and $19.0
million letters of credit outstanding under our committed facilities. In addition, in connection
with the acquisition of Precision Energy Services and Precision Drilling International, we have
indemnified Precision Drilling Corporation for outstanding letters of credit of $11.7 million. If
the beneficiaries called these letters of credit, the called amount would become an on-balance
sheet liability, and our available liquidity would be reduced by the amount called.
Operating Leases
We are committed under various operating lease agreements primarily related to office space
and equipment. Generally, these leases include renewal provisions as well as provisions which
permit the adjustment of rental payments for taxes, insurance and maintenance related to the
property.
New Accounting Pronouncements
See Note 19 to our condensed consolidated financial statements included elsewhere in this
report.
Subsequent Event
On October 27, 2006, we announced that Lisa W. Rodriguez, our Senior Vice President and Chief
Financial Officer, left the company, that Andrew P. Becnel became our Chief Financial Officer and
Senior Vice President, and that Jessica Abarca became our Vice President Accounting and Chief
Accounting Officer.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements. We prepare these financial statements in conformity with
U.S. generally accepted accounting principles. As such, we are required to make certain estimates,
judgments and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the periods
presented. We base our estimates on historical experience, available information and various other
assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate
our estimates; however, actual results may differ from these estimates under different assumptions
or conditions. There have been no material changes or developments in our evaluation of the
accounting estimates and the underlying assumptions or methodologies that we believe to be Critical
Accounting Policies and Estimates as disclosed in our Form 10-K, for the year ended December 31,
2005. Although there have been no material changes to our revenue recognition policy subsequent to
December 31, 2005, we believe further clarification of this critical accounting policy, as it
relates to products and services sold in our contract drilling and pipeline service businesses, is
warranted, as these businesses are expected to comprise a higher percentage of our total revenues
for 2006. In
39
addition, we have expanded our disclosure to clarify the nature of the expenses we typically
incur and rebill to the customer.
Revenue Recognition
Revenue is recognized when all of the following criteria have been met: a) evidence of an
arrangement exists, b) delivery to and acceptance by the customer has occurred, c) the price to the
customer is fixed and determinable and d) collectibility is reasonably assured.
Both our contract drilling and pipeline service revenue is contractual by nature and both are
day-rate based contracts. We recognize the revenue for these contracts based on the criteria
outlined above which is consistent with our other product offerings.
From time to time, we may receive revenues for preparation and mobilization of equipment and
personnel. In connection with new drilling contracts, revenues earned and incremental costs
incurred directly related to preparation and mobilization are deferred and recognized over the
primary contract term of the project using the straight-line method. Costs of relocating equipment
without contracts to more promising market areas are expensed as incurred. Demobilization fees
received are recognized, along with any related expenses, upon completion of contracts.
We incur rebillable expenses including shipping and handling, third-party inspection and
repairs, and custom and duties. We recognize the revenue associated with these rebillable expenses
as Products Revenues and all related costs as Cost of Products in the accompanying Consolidated
Statements of Income.
Exposures
An investment in our common shares involves various risks. When considering an investment in
our Company, you should consider carefully all of the risk factors described in our most recent
Annual Report on Form 10-K under the heading Item 1A. Risk Factors as well as the information
below and other information included and incorporated by reference in this report.
Currency Exposure
Approximately 40.1% of our net assets are located outside the U.S. and are carried on our
books in local currencies. Changes in those currencies in relation to the U.S. dollar result in
translation adjustments, which are reflected as accumulated other comprehensive income in the
shareholders equity section in our Condensed Consolidated Balance Sheets. We recognize
remeasurement and transactional gains and losses on currencies in our Condensed Consolidated
Statements of Income which may adversely impact our results of operations. We enter into foreign
currency forward contracts and other derivative instruments to reduce our exposure to currency
fluctuations.
In certain foreign countries, a component of our cost structure is U.S. dollar denominated,
whereas our revenues are partially local currency based. In those cases, a devaluation of the local
currency would adversely impact our operating margins.
Acquisition Integration Exposure
In August of 2005, we acquired Precision Energy Services and Precision Drilling International.
The Precision divisions purchased are substantial businesses, and integrating those businesses with
our other operations and product lines will take significant focus and effort from our management
and employees. The integration of this or any other acquisition we make may include unexpected
costs and temporarily divert attention from our normal operations. We also cannot be certain that
we will realize anticipated synergies from any acquisition. The Precision acquisition is subject to
a post-closing purchase price adjustment to reflect changes in working capital and related items.
We are negotiating with Precision Drilling Corporation regarding this adjustment, but at this point
we cannot determine how much, if any, we will be required to pay to Precision Drilling Corporation
or Precision Drilling Corporation will be required to pay to us in connection with this adjustment.
This acquisition was not subjected to managements evaluation of internal control over
financial reporting during 2005. Management will undertake their evaluation of internal control
over financial reporting during 2006, and any control weaknesses identified, if any, could have an
adverse affect on our financial condition and results of operations.
In
association with the Precision acquisition, we identified pre-acquisition contingencies related to
duties and taxes associated with the importation of certain equipment assets to foreign
jurisdictions. We calculated a range of reasonable estimates of the costs associated with these
duties. As no amount within the range appeared to be a better estimate than any other, we used the
amount that is the low end of the range in accordance with Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies, and its interpretations. At September 30, 2006, we
have recorded a liability in the amount of $28.0 million for this matter. If we used the high end
of the range, the aggregate potential liability would be approximately $44.0 million higher. It is
reasonably possible that the actual amount paid to settle these items could be materially different
from our estimate and could have a material adverse effect on our consolidated financial
statements.
Forward-Looking Statements
This report, as well as other filings made by us with the Securities and Exchange Commission
(SEC), and our releases issued to the public contain various statements relating to future
results, including certain projections and business trends. We believe these statements constitute
Forward-Looking Statements as defined in the Private Securities Litigation Reform Act of 1995.
From time to time, we update the various factors we consider in making our forward-looking
statements and the assumptions we use in those statements. However, we undertake no obligation to
publicly update or revise any forward-looking events or circumstances that may arise after the date
of this report. The following sets forth the various assumptions we use in our forward-looking
statements, as well as risks and uncertainties relating to those statements. Certain of the risks
and uncertainties may cause actual results to be materially different from projected results
contained in forward-looking statements in this report and in our other disclosures. These risks
and uncertainties include, but are not limited to, the following:
40
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A downturn in market conditions could affect projected results. Any material changes in
oil and natural gas supply and demand, oil and natural gas prices, rig count or other
market trends would affect our results and would likely affect the forward-looking
information we provided. The oil and natural gas industry is extremely volatile and
subject to change based on political and economic factors outside our control. During 2004
and 2005, worldwide drilling activity increased; however, if an extended regional and/or
worldwide recession were to occur, it would result in lower demand and lower prices for oil
and natural gas, which would adversely affect drilling and production activity and
therefore would affect our revenues and income. We have assumed increases in worldwide
demand will continue throughout 2006. |
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Availability of a skilled workforce could affect our projected results. Due to the high
activity in the exploration and production and oilfield service industries there is an
increasing shortage of available skilled labor. Our forward-looking statements assume we
will be able to recruit and maintain a sufficient skilled workforce for activity levels. |
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Increases in the prices and availability of our raw materials could affect our results
of operations. We use large amounts of raw materials for manufacturing our products. The
price of these raw materials has a significant impact on our cost of producing products for
sale or producing fixed assets used in our business. We have assumed that the prices of
our raw materials will remain within a manageable range and will be readily available. If
we are unable to attain necessary raw materials or if we are unable to minimize the impact
of increased raw materials costs through our supply chain initiatives or by passing through
these increases to our customers, our margins and results of operations could be adversely
affected. |
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Our long-term growth depends upon technological innovation and commercialization. Our
ability to deliver our long-term growth strategy depends in part on the commercialization
of new technology. A central aspect of our growth strategy is to innovate our products and
services, to obtain technologically advanced products through internal research and
development and/or acquisitions, to protect proprietary technology from unauthorized use
and to expand the markets for new technology through leverage of our worldwide
infrastructure. The key to our success will be our ability to commercialize the technology
that we have acquired and demonstrate the enhanced value our technology brings to our
customers operations. Our major technological advances include, but are not limited to,
those related to directional drilling, controlled pressure drilling and testing systems, expandable solid
tubulars, expandable sand screens and intelligent well completion. Our forward-looking
statements have assumed successful commercialization of, and above-average growth from,
these new products and services. |
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Nonrealization of expected benefits from our 2002 corporate reincorporation could affect
our projected results. We have gained certain business, financial and strategic advantages
as a result of our reincorporation, including improvements to our global tax position and
cash flow. An inability to continue to realize expected benefits of the reincorporation in
the anticipated time frame, or at all, would negatively affect the benefit of our corporate
reincorporation. |
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Nonrealization of expected benefits from our 2005 acquisition of Precision Energy
Services and Precision Drilling International could affect our projected results. We
expect to gain certain business, financial and strategic advantages as a result of this
acquisition, including synergies and operating efficiencies. An inability to realize
expected strategic advantages as a result of the acquisition, would negatively affect the
anticipated benefits of the acquisition. |
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The cyclical nature of or a prolonged downturn in our industry could affect the carrying
value of our goodwill. As of September 30, 2006, we had approximately $3.0 billion of
goodwill. Our estimates of the value of our goodwill could be reduced in the future as a
result of various factors, some of which are beyond our control. Any reduction in the
value of our goodwill may result in an impairment charge and therefore adversely affect our
results. |
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Currency fluctuations could have a material adverse financial impact on our business. A
material change in currency rates in our markets could affect our future results as well as
affect the carrying values of our assets. World currencies have been subject to much
volatility. Our forward-looking statements assume no material impact from future changes
in currencies. |
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Adverse weather conditions in certain regions could aversely affect our operations. In
the summer of 2005, the Gulf of Mexico suffered several significant hurricanes. These
hurricanes and associated hurricane threats reduced the number of days on which we and our
customers could operate, which resulted in lower revenues than we otherwise would have
achieved. Similarly, an unusually warm Canadian winter or unusually rough weather in the
North Sea could reduce our operations and revenues from those areas |
41
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during the relevant period. Our forward-looking statements assume weather patterns in our
primary areas of operations will not deviate significantly from historical patterns. |
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Political disturbances, war, or terrorist attacks and changes in global trade policies
could adversely impact our operations. We have assumed there will be no material political
disturbances or terrorist attacks and there will be no material changes in global trade
policies. Any further military action undertaken by the U.S. or other countries could
adversely affect our results of operations. |
Finally, our future results will depend upon various other risks and uncertainties, including,
but not limited to, those detailed in our other filings with the SEC. For additional information
regarding risks and uncertainties, see our other filings with the SEC under the Securities Exchange
Act of 1934, as amended, and the Securities Act of 1933, as amended, available free of charge at
the SECs website at www.sec.gov. We will generally update our assumptions in our filings
as circumstances require.
Available Information
We make available, free of charge, on our website (www.weatherford.com) our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file or furnish them to the SEC.
42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are currently exposed to market risk from changes in foreign currency and changes in
interest rates. From time to time, we may enter into derivative financial instrument transactions
to manage or reduce our market risk, but we do not enter into derivative transactions for
speculative purposes. A discussion of our market risk exposure in financial instruments follows.
Foreign Currency Exchange Rates
We operate in virtually every oil and natural gas exploration and production region in the
world. In some parts of the world, such as the Middle East and Southeast Asia, the currency of our
primary economic environment is the U.S. dollar. We use this as our functional currency. In other
parts of the world, we conduct our business in currencies other than the U.S. dollar and the
functional currency is the applicable local currency. In those countries in which we operate in
the local currency, the effects of foreign currency fluctuations are largely mitigated because
local expenses of such foreign operations are also generally denominated in the same currency.
Assets and liabilities of which the functional currency is the local currency are translated
using the exchange rates in effect at the balance sheet date, resulting in translation adjustments
that are reflected as Accumulated Other Comprehensive Income in the shareholders equity section on
our Condensed Consolidated Balance Sheets. Approximately 40.1% of our net assets are impacted by
changes in foreign currencies in relation to the U.S. dollar. We recorded a $81.2 million
adjustment to increase our equity account for the nine month period ended September 30, 2006 to
reflect the net impact of the strengthening of various foreign currencies against the U.S. dollar.
As of September 30, 2006, we had entered into several foreign currency forward contracts and
one option contract with notional amounts aggregating $200.2 million to hedge exposure to
currency fluctuations in various foreign currencies, including the euro, the
Australian dollar, the Norwegian kroner, the Brazilian reais, the Mexican peso and the pound
sterling. In addition, after the closing of the acquisition of Precision Energy Services and
Precision Drilling International, we entered into a series of cross-currency swaps with notional
amounts at execution totaling $588.9 million. These derivative instruments were not designated as
hedges and the changes in fair value of the contracts are recorded each period in current earnings.
During the three and nine months ended September 30, 2006, net cash proceeds of $0.6 million and
$2.4 million, respectively, were received from the cross-currency swaps, which were the net
settlement of quarterly interest rate payments on the two currencies swapped. These quarterly net
interest rate settlements are based on the variable interest rates of both the Canadian dollar and
the U.S. dollar. On March 31, 2006, cross currency swaps with an original notional value of $140.4
million were terminated and we paid a net settlement in April 2006 of $3.5 million. On September
11, 2006, a cross currency swap with an original notional of $84.2 million was terminated and the
Company paid a net settlement of $6.3 million. At September 30, 2006, the fair value of the
remaining cross-currency swaps was $336.3 million.
Interest Rates
We are subject to interest rate risk on our long-term fixed interest rate debt and
variable-interest rate borrowings. Variable rate debt, where the interest rate fluctuates
periodically, exposes us to short-term changes in market interest rates. Fixed rate debt, where
the interest rate is fixed over the life of the instrument, exposes us to changes in market
interest rates reflected in the fair value of the debt and to the risk that we may need to
refinance maturing debt with new debt at a higher rate. All other things being equal, the fair
value of our fixed rate debt will increase or decrease as interest rates change.
Our long-term borrowings outstanding at September 30, 2006 subject to interest rate risk
consisted of the following:
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September 30, 2006 |
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December 31, 2005 |
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Carrying |
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Value |
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Value |
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(In millions) |
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6 5/8% Senior Notes due 2011
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$ |
357.2 |
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$ |
360.4 |
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$ |
358.1 |
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$ |
374.0 |
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4.95% Senior Notes due 2013
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255.5 |
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240.1 |
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256.0 |
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244.5 |
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5.50% Senior Notes due 2016
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348.6 |
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343.4 |
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6.50% Senior Notes due 2036
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595.7 |
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613.1 |
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43
We have various other long-term debt instruments of $15.1 million, but believe the impact of
changes in interest rates in the near term will not be material to these instruments. Short-term
borrowings of $620.1 million at September 30, 2006 approximate fair value.
As it relates to our variable rate debt, if market interest rates average 1.0% more in 2006
than the rates as of September 30, 2006, interest expense for the remainder of 2006 would increase
by $1.6 million. This amount was determined by calculating the effect of the hypothetical interest
rate on our variable rate debt. This sensitivity analysis assumes there are no changes in the
amount of our outstanding variable debt from September 30, 2006.
Interest Rate Swaps
We manage our debt portfolio to achieve an overall desired position of fixed and floating
rates and may employ interest rate swaps as a tool to achieve that goal. The major risks from
interest rate derivatives include changes in the interest rates affecting the fair value of such
instruments, potential increases in interest expense due to market increases in floating interest
rates and the creditworthiness of the counterparties in such transactions. The counterparties to
our interest rate swaps are creditworthy multinational commercial banks. We believe that the risk
of counterparty nonperformance is immaterial.
We use interest rate swap agreements to take advantage of available short-term interest rates.
Amounts received upon termination of the swap agreements represent the fair value of the
agreements at the time of termination and are recorded as an adjustment to the carrying value of
the related debt. These amounts are being amortized as a reduction to interest expense over the
remaining term of the debt.
As of September 30, 2006 and December 31, 2005, we had unamortized gains of $14.8 million and
$18.3 million, respectively associated with interest rate swap terminations. These gains have been
deferred and recorded as an adjustment to the carrying value of the related debt and are amortized
against interest expense over the remaining term of the debt issuance against which they were
hedged. Our interest expense was reduced by $0.5 million and $3.5 million for the three and nine
months ended September 30, 2006, respectively, and $1.8 million and $5.1 million for the three and
nine months ended September 30, 2005, respectively. There were no interest rate swap agreements
outstanding as of September 30, 2006.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness, as of the end of the period covered by this Quarterly Report on Form 10-Q, of the
Companys disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under
the Exchange Act). Based upon that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded the Companys disclosure controls and procedures are effective as
of the end of the period covered by this report to timely alert them to material information
relating to the Company (including its consolidated subsidiaries) required to be included in the
Companys Exchange Act filings.
The Companys management, including the Chairman, Chief Executive Officer, and Chief Financial
Officer, identified no change in the Companys internal control over financial reporting that
occurred during the Companys fiscal quarter ended September 30, 2006, that has materially
affected, or is reasonably likely to materially affect, the Companys internal controls over
financial reporting.
44
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
Except as described below, there have been no material changes during the quarter ended
September 30, 2006 to the risk factors set forth in Part I, Item 1A in our Annual Report on Form
10-K for the year ended December 31, 2005 filed with the SEC on March 10, 2006 (Annual Report).
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We have updated the percentage of our net assets located outside the U.S. and carried on
our books in local currencies on page 40 of this report from 40.7% as of December 31, 2005
to 40.1% as of September 30, 2006. |
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We added the following paragraph to the risk factor titled Acquisition Integration Exposure: |
In
association with the Precision acquisition, we identified pre-acquisition contingencies related to
duties and taxes associated with the importation of certain equipment assets to foreign
jurisdictions. We calculated a range of reasonable estimates of the costs associated with these
duties. As no amount within the range appeared to be a better estimate than any other, we used the
amount that is the low end of the range in accordance with Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies, and its interpretations. At September 30, 2006, we
have recorded a liability in the amount of $28.0 million for this matter. If we used the high end
of the range, the aggregate potential liability would be approximately $44.0 million higher. It is
reasonably possible that the actual amount paid to settle these items could be materially different
from our estimate and could have a material adverse effect on our consolidated financial
statements.
ITEM 2. UNREGISTERED SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS
Effective July 12, 2006, we and Shell Technology Ventures Inc. amended and restated a warrant
held by STVI to purchase 6.5 million of our common shares at an exercise price of $30 per share.
The amendments reflect, among other things, changes in our capital and organizational structure
since the original warrant was issued in February 2002. The warrant is exercisable until February
28, 2012 and is subject to adjustment for changes in our capital structure or our issuance of
dividends in cash, securities or property. To the extent that the amendment and restatement of the
warrant constitutes the issuance of a new security, that new security was issued solely in exchange
for the original warrant. There were no cash proceeds from the exchange. That new security was an
exempted security not subject to registration as provided by Section 3(a)(9) of the Securities Act
of 1933.
In December 2005, our Board of Directors approved a share repurchase program under which up to
$1 billion of our outstanding common shares could be purchased. Future purchases of our shares can
be made in the open market or privately negotiated transactions, at the discretion of management
and as market conditions warrant. During the quarter ended September 30, 2006, we purchased our
common shares in the following amounts at the following average prices:
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Number (or |
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of Shares |
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Approximate |
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Purchased as |
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Dollar Value) of |
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Part of |
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Shares that May |
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Publicly |
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Yet Be |
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Total Number |
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Average |
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Announced |
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Purchased |
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of Shares |
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Price Paid |
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Plans or |
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Under the Plans |
Period |
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Purchased |
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per Share |
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Programs |
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or Programs |
July 1-July 31, 2006
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$
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|
$ |
761,347,941 |
|
August 1-August 31, 2006
|
|
|
2,491,300 |
|
|
|
45.28 |
|
|
|
2,491,300 |
|
|
|
648,539,734 |
|
September 1-September 30, 2006
|
|
|
3,849,000 |
|
|
|
40.58 |
|
|
|
3,849,000 |
|
|
|
492,353,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,340,300 |
|
|
|
42.43 |
|
|
|
6,340,300 |
|
|
|
492,353,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, under our restricted share plan, employees may elect to have us withhold common
shares to satisfy minimum statutory federal, state and local tax withholding obligations arising on
the vesting of restricted stock awards and exercise of options. When we withhold these shares, we
are required to remit to the appropriate taxing authorities the market price of the shares
withheld, which could be deemed a purchase of the common shares by us on the date of withholding.
During the quarter ended September 30, 2006, we withheld common shares to satisfy these tax
withholding obligations as follows:
|
|
|
|
|
|
|
|
|
Period |
|
No. of Shares |
|
Average Price |
July 1-July 31, 2006 |
|
|
464 |
|
|
$ |
48.30 |
|
August 1-August 31, 2006 |
|
|
¾ |
|
|
$ |
¾ |
|
September 1-September 30, 2006 |
|
|
32,320 |
|
|
$ |
41.78 |
|
45
ITEM 6. EXHIBITS
(a) Exhibits:
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
4.1
|
|
Officers Certificate, dated August 7, 2006, establishing the
series of 6.50% Senior Notes due 2036 (incorporated by reference
to Exhibit 4.1 to the Registrants Current Report on Form 8-K (File
No. 1-31339) filed August 7, 2006). |
|
|
|
4.2
|
|
Form of $500,000 Global note for 6.50% Senior Notes due 2036
(incorporated by reference to Exhibit 4.2 to the Registrants
Current Report on Form 8-K (File No. 1-31339) filed August 7,
2006). |
|
|
|
4.3
|
|
Form of $100,000 Global note for 6.50% Senior Notes due 2036
(incorporated by reference to Exhibit 4.3 to the Registrants
Current Report on Form 8-K (File No. 1-31339) filed August 7,
2006). |
|
|
|
10.1
|
|
Employment Agreement dated October 27, 2006, between Weatherford International Ltd. and
Andrew P. Becnel (incorporated by reference to Exhibit 10.1 to the Registrants Current Report
on Form 8-K (File No. 1-31339) filed October 27, 2006). |
|
|
|
10.2
|
|
Employment Agreement dated October 27, 2006, between Weatherford International Ltd. and
Jessica Abarca (incorporated by reference to Exhibit 10.2 to the Registrants Current Report
on Form 8-K (File No. 1-31339) filed October 27, 2006). |
|
|
|
10.3
|
|
Indemnification Agreement dated October 27, 2006, between Weatherford International Ltd. and
Jessica Abarca (incorporated by reference to Exhibit 10.3 to the Registrants Current Report
on Form 8-K (File No. 1-31339) filed October 27, 2006). |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Weatherford International Ltd.
|
|
|
By: |
/s/ Bernard J. Duroc-Danner
|
|
|
|
Bernard J. Duroc-Danner |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Andrew P. Becnel
|
|
|
|
Andrew P. Becnel |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
(Principal Financial Officer)
|
|
|
|
|
|
|
/s/ Jessica Abarca
|
|
|
|
Jessica Abarca |
|
|
|
Vice President
Accounting and |
|
|
|
Chief Accounting Officer |
|
|
|
(Principal Accounting Officer)
|
|
|
|
|
Date: October 31, 2006 |
|
47
Index to Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
4.1
|
|
Officers Certificate, dated August 7, 2006, establishing the
series of 6.50% Senior Notes due 2036 (incorporated by reference
to Exhibit 4.1 to the Registrants Current Report on Form 8-K (File
No. 1-31339) filed August 7, 2006). |
|
|
|
4.2
|
|
Form of $500,000 Global note for 6.50% Senior Notes due 2036
(incorporated by reference to Exhibit 4.2 to the Registrants
Current Report on Form 8-K (File No. 1-31339) filed August 7,
2006). |
|
|
|
4.3
|
|
Form of $100,000 Global note for 6.50% Senior Notes due 2036
(incorporated by reference to Exhibit 4.3 to the Registrants
Current Report on Form 8-K (File No. 1-31339) filed August 7,
2006). |
|
|
|
10.1
|
|
Employment Agreement dated October 27, 2006, between Weatherford International Ltd. and
Andrew P. Becnel (incorporated by reference to Exhibit 10.1 to the Registrants Current Report
on Form 8-K (File No. 1-31339) filed October 27, 2006). |
|
|
|
10.2
|
|
Employment Agreement dated October 27, 2006, between Weatherford International Ltd. and
Jessica Abarca (incorporated by reference to Exhibit 10.2 to the Registrants Current Report
on Form 8-K (File No. 1-31339) filed October 27, 2006). |
|
|
|
10.3
|
|
Indemnification Agreement dated October 27, 2006, between Weatherford International Ltd. and
Jessica Abarca (incorporated by reference to Exhibit 10.3 to the Registrants Current Report
on Form 8-K (File No. 1-31339) filed October 27, 2006). |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
48