10-Q 1 h89694e10-q.txt NOBLE DRILLING CORPORATION - 6/30/01 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ] 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: 0-13857 NOBLE DRILLING CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE 73-0374541 (State of incorporation) (I.R.S. employer identification number) 13135 SOUTH DAIRY ASHFORD, SUITE 800 77478 SUGAR LAND, TEXAS (Zip code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 276-6100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Number of shares of Common Stock outstanding as of August 6, 2001: 131,988,520 2 FORM 10-Q PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents ................... $ 218,600 $ 173,235 Restricted cash ............................. 7,190 3,889 Accounts receivable ......................... 192,766 175,394 Inventories ................................. 3,619 3,870 Prepaid expenses ............................ 10,122 13,241 Other current assets ........................ 20,337 9,503 ----------- ----------- Total current assets ............................ 452,634 379,132 ----------- ----------- PROPERTY AND EQUIPMENT Drilling equipment and facilities ........... 2,612,117 2,567,079 Other ....................................... 31,764 31,372 ----------- ----------- 2,643,881 2,598,451 Accumulated depreciation .................... (559,302) (503,322) ----------- ----------- 2,084,579 2,095,129 ----------- ----------- INVESTMENT IN AND ADVANCES TO JOINT VENTURES..... 60,413 44,991 OTHER ASSETS .................................... 88,434 76,279 ----------- ----------- $ 2,686,060 $ 2,595,531 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt ........ $ 49,364 $ 49,351 Accounts payable ............................ 47,459 56,394 Accrued payroll and related costs ........... 41,653 39,582 Taxes payable ............................... 38,008 36,420 Interest payable ............................ 11,437 10,409 Other current liabilities ................... 14,730 13,272 ----------- ----------- Total current liabilities ....................... 202,651 205,428 LONG-TERM DEBT .................................. 623,788 650,291 DEFERRED INCOME TAXES ........................... 174,040 149,084 OTHER LIABILITIES ............................... 17,021 17,746 COMMITMENTS AND CONTINGENCIES ................... -- -- MINORITY INTEREST ............................... (4,617) (3,737) ----------- ----------- 1,012,883 1,018,812 ----------- ----------- SHAREHOLDERS' EQUITY Common stock-par value $0.10 per share ...... 13,814 13,744 Capital in excess of par value .............. 1,039,000 1,019,615 Retained earnings ........................... 790,513 668,047 Treasury stock, at cost ..................... (152,097) (104,894) Restricted stock (unearned compensation) .... (13,971) (15,670) Accumulated other comprehensive loss ........ (4,082) (4,123) ----------- ----------- 1,673,177 1,576,719 ----------- ----------- $ 2,686,060 $ 2,595,531 =========== ===========
See accompanying notes to the consolidated financial statements. 2 3 FORM 10-Q NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED JUNE 30, ----------------------------- 2001 2000 --------- --------- OPERATING REVENUES Contract drilling services ........ $ 233,344 $ 190,416 Labor contract drilling services .. 7,977 7,628 Turnkey drilling services ......... -- 30,343 Engineering, consulting and other . 5,325 2,337 --------- --------- 246,646 230,724 --------- --------- OPERATING COSTS AND EXPENSES Contract drilling services ........ 103,437 95,930 Labor contract drilling services .. 6,558 6,358 Turnkey drilling services ......... -- 23,778 Engineering, consulting and other . 3,807 1,847 Depreciation and amortization ..... 29,116 27,865 Selling, general and administrative 6,330 5,594 --------- --------- 149,248 161,372 --------- --------- OPERATING INCOME .................... 97,398 69,352 OTHER INCOME (EXPENSE) Interest expense .................. (12,401) (13,761) Other, net ........................ 4,268 4,660 --------- --------- INCOME BEFORE INCOME TAXES .......... 89,265 60,251 INCOME TAX PROVISION ................ (21,262) (16,870) --------- --------- NET INCOME .......................... $ 68,003 $ 43,381 ========= ========= EARNINGS PER SHARE: Basic ............................. $ 0.51 $ 0.32 Diluted ........................... $ 0.50 $ 0.32
See accompanying notes to the consolidated financial statements. 3 4 FORM 10-Q NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited)
SIX MONTHS ENDED JUNE 30, ---------------------------------- 2001 2000 ------------ ------------- OPERATING REVENUES Contract drilling services ........ $ 443,771 $ 353,494 Labor contract drilling services .. 15,458 15,591 Turnkey drilling services ......... -- 43,382 Engineering, consulting and other . 9,808 3,076 --------- --------- 469,037 415,543 --------- --------- OPERATING COSTS AND EXPENSES Contract drilling services ........ 199,619 179,123 Labor contract drilling services .. 12,637 12,084 Turnkey drilling services ......... -- 39,784 Engineering, consulting and other . 6,663 2,129 Depreciation and amortization ..... 57,055 54,229 Selling, general and administrative 12,855 11,971 --------- --------- 288,829 299,320 --------- --------- OPERATING INCOME .................... 180,208 116,223 OTHER INCOME (EXPENSE) Interest expense .................. (24,956) (27,260) Other, net ........................ 7,118 6,709 --------- --------- INCOME BEFORE INCOME TAXES .......... 162,370 95,672 INCOME TAX PROVISION ................ (39,904) (26,788) --------- --------- NET INCOME .......................... $ 122,466 $ 68,884 ========= ========= EARNINGS PER SHARE: Basic ............................. $ 0.92 $ 0.52 Diluted ........................... $ 0.90 $ 0.51
See accompanying notes to the consolidated financial statements. 4 5 FORM 10-Q NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
THREE MONTHS ENDED JUNE 30, ---------------------------- 2001 2000 ---------- ---------- NET INCOME ................................................ $ 68,003 $ 43,381 -------- -------- OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Foreign currency translation adjustments .............. 1,779 129 Unrealized holding losses arising during period ....... (594) (588) -------- -------- Other comprehensive income (loss) ..................... 1,185 (459) -------- -------- COMPREHENSIVE INCOME ...................................... $ 69,188 $ 42,922 ======== ========
SIX MONTHS ENDED JUNE 30, ---------------------------- 2001 2000 ---------- ---------- NET INCOME ................................................ $ 122,466 $ 68,884 --------- -------- OTHER COMPREHENSIVE INCOME, NET OF TAX: Foreign currency translation adjustments .............. 1,945 74 Unrealized holding (losses) gains arising during period (1,904) 672 --------- -------- Other comprehensive income ............................ 41 746 --------- -------- COMPREHENSIVE INCOME ...................................... $ 122,507 $ 69,630 ========= ========
See accompanying notes to the consolidated financial statements. 5 6 FORM 10-Q NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30, ----------------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ..................................................................... $ 122,466 $ 68,884 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................................. 57,055 54,229 Deferred income tax provision ............................................. 26,302 61,283 Deferred repair and maintenance amortization .............................. 10,335 8,950 Gain on sales of property and equipment ................................... (716) (1,288) Equity in loss of joint ventures .......................................... 2,474 427 Compensation expense from stock-based plans ............................... 1,946 773 Other ..................................................................... 2,162 428 Changes in current assets and liabilities, net of acquired working capital: Accounts receivable .................................................... (17,372) (46,001) Other current assets ................................................... (8,578) 2,431 Accounts payable ....................................................... (15,546) (12,413) Other current liabilities .............................................. 7,192 1,506 --------- --------- Net cash provided by operating activities ............................ 187,720 139,209 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ........................................................... (46,268) (77,359) Proceeds from sales of property and equipment .................................. 716 1,900 Investment in and advances to joint ventures ................................... (17,896) (39,300) Deferred repair and maintenance expenditures ................................... (18,086) (9,186) Investment in marketable debt securities ....................................... -- (19,253) Acquisition of Maurer Engineering Incorporated ................................. (6,090) -- --------- --------- Net cash used for investing activities ............................... (87,624) (143,198) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of long-term debt ...................................................... (26,490) (30,307) Proceeds from issuance of common stock, net .................................... 12,930 27,991 Purchase of shares returned to treasury ........................................ (37,870) -- (Increase) decrease in restricted cash ......................................... (3,301) 127 --------- --------- Net cash used for financing activities ............................... (54,731) (2,189) --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................. 45,365 (6,178) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 173,235 132,827 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 218,600 $ 126,649 ========= =========
See accompanying notes to the consolidated financial statements. 6 7 FORM 10-Q NOBLE DRILLING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF ACCOUNTING The accompanying consolidated financial statements of Noble Drilling Corporation ("Noble Drilling" or, together with its consolidated subsidiaries, unless the context requires otherwise, the "Company", "we", "our" and words of similar import) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. All significant transactions among Noble Drilling and its consolidated subsidiaries have been eliminated. The interim consolidated financial statements have not been audited. However, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial statements have been included. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for the entire year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2000. Noble Drilling (Paul Romano) Inc. was formed on April 3, 1998 for the purpose of owning the Noble Paul Romano and financing its conversion to a Noble EVA-4000(TM) semisubmersible. Noble Drilling (Paul Romano) Inc. is an indirect, wholly-owned subsidiary of Noble Drilling and is operated in a fashion that is intended to ensure that its assets and liabilities are distinct and separate from those of the Company and its affiliates and that the creditors of Noble Drilling (Paul Romano) Inc. would be entitled to satisfy their claims from the assets of Noble Drilling (Paul Romano) Inc. prior to any distribution to the Company or its affiliates. Certain reclassifications have been made in the prior year consolidated financial statements to conform to the classifications used in the 2001 consolidated financial statements. These reclassifications have no impact on net income. NOTE 2 - EARNINGS PER SHARE The following table reconciles the basic and diluted earnings per share computations for the three and six month periods ended June 30, 2001 and 2000 (in thousands, except per share amounts):
NET BASIC BASIC DILUTED DILUTED THREE MONTHS ENDED: INCOME SHARES EPS SHARES EPS ------------------ ----------- ----------- ----------- ----------- ---------- JUNE 30, 2001............................... $ 68,003 133,865 $ 0.51 135,457 $ 0.50 JUNE 30, 2000............................... $ 43,381 133,601 $ 0.32 135,616 $ 0.32
NET BASIC BASIC DILUTED DILUTED SIX MONTHS ENDED: INCOME SHARES EPS SHARES EPS ---------------- ----------- ----------- ----------- ----------- ---------- JUNE 30, 2001............................... $ 122,466 133,767 $ 0.92 135,502 $ 0.90 JUNE 30, 2000............................... $ 68,884 133,026 $ 0.52 135,134 $ 0.51
Included in diluted shares are common stock equivalents relating to outstanding stock options of 1,592,000 shares and 2,015,000 shares for the three-month periods ended June 30, 2001 and 2000, respectively, and 1,735,000 shares and 2,108,000 shares for the six-month periods ended June 30, 2001 and 2000, respectively. 7 8 FORM 10-Q NOTE 3 - MARKETABLE SECURITIES As of June 30, 2001, we owned marketable equity securities with a fair market value of $12,216,000, of which $7,201,000 is included in a Rabbi Trust for the Noble Drilling Corporation 401(k) Savings Restoration Plan. The marketable securities included in the Rabbi Trust are classified as trading securities and are included in "Other current assets" in the Consolidated Balance Sheet at June 30, 2001 at their fair market value. We recognized a net unrealized holding loss of $153,000 and a net realized gain of $8,000 related to these assets in the three months ended June 30, 2001. The remaining investments, with a fair market value of $5,015,000, are classified as available for sale and are included in "Other assets" in the Consolidated Balance Sheets at their fair market value. Gross unrealized holding losses on these investments at June 30, 2001 were $5,952,000 and are included in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets. At June 30, 2001, we did not own any marketable debt securities. NOTE 4 - INVESTMENTS IN AND ADVANCES TO JOINT VENTURES We loaned our Noble CROSCO Drilling Ltd. ("Noble CROSCO") joint venture $5,200,000 in March 2001 and another $1,800,000 in May 2001 pursuant to a credit agreement. We agreed to lend Noble CROSCO up to $7,000,000 under this credit agreement to finance part of the upgrade costs of the Panon. The upgrade of the Panon was completed in May 2001. In addition, in March 2001 we loaned our Noble Rochford Drilling Ltd. ("Noble Rochford") joint venture $10,000,000 under a supplemental shareholder loan. These funds were used to complete the upgrade of the Noble Julie Robertson. We have a 50 percent equity interest in each of Noble CROSCO and Noble Rochford. We account for these investments using the equity method. NOTE 5 - CREDIT FACILITIES On May 29, 2001, we terminated our bank credit facility totaling $200,000,000. On May 30, 2001, we entered into a new unsecured revolving bank credit facility totaling $200,000,000 (the "Credit Agreement"), including a letter of credit facility totaling $50,000,000, through May 30, 2006. We are required to maintain various affirmative and negative covenants, including two financial covenants relating to interest coverage and debt to capital ratios. The Credit Agreement contains restrictive covenants, including restrictions on incurring additional indebtedness, and restrictions on permitting additional liens, payment of dividends, transactions with affiliates, and mergers or consolidations. As of June 30, 2001, we had no outstanding borrowings under the Credit Agreement and had outstanding letters of credit and third-party corporate guarantees totaling $13,706,000. As of June 30, 2001, $196,594,000 remained available under the Credit Agreement. Additionally, $5,851,000 of bid and performance bonds had been supported by surety bonds. NOTE 6 - SEGMENT AND RELATED INFORMATION We provide diversified services for the oil and gas industry. Our reportable segments consist of the primary services we provide, which include offshore contract drilling and engineering and consulting services. Although both of these segments are generally influenced by the same economic factors, each represents a distinct service to the oil and gas industry. Offshore contract drilling services is then separated into international and domestic contract drilling segments since there are certain economic and political risks associated with each of these geographic markets and our management makes decisions based on these markets accordingly. Our international contract drilling segment conducts contract drilling services in the North Sea, Brazil, West Africa, the Middle East, India and Mexico. For the three and six months ended June 30, 2000, we also operated in Venezuela. Our domestic contract drilling is conducted in the U.S. Gulf of Mexico. Our engineering and consulting segment consists of well site management, project management and technical services performed by our Triton Engineering subsidiary ("Triton"), as well as the design and development of drilling products and drilling related software programs. During the fourth quarter of 2000, we announced that Triton had revised its business model to focus on well site management, project management and technical services. Turnkey drilling, Triton's major revenue source prior to revising its business model, involved Triton's coordination of all equipment, materials, services and management to drill a well to a specified depth, for a fixed price. Because of Triton's revised business model, past results of the engineering and consulting services segment may not be indicative of future results. 8 9 FORM 10-Q All intersegment sales pricing is based on current market conditions. We evaluate the performance of our operating segments based on operating revenues and earnings. Summarized financial information of our reportable segments for the three and six months ended June 30, 2001 and 2000 is shown in the following table (in thousands). The "Other" column includes results of labor contract drilling services, other insignificant operations and corporate related items. Our engineering and consulting services segment included turnkey drilling operations for the three and six-month periods ended June 30, 2000.
INTERNATIONAL DOMESTIC THREE MONTHS ENDED: CONTRACT CONTRACT ENGINEERING ------------------- DRILLING DRILLING & CONSULTING JUNE 30, 2001: SERVICES SERVICES SERVICES OTHER TOTAL -------------- -------- -------- -------- ----- ----- Revenues from external customers $ 112,124 $ 122,534 $ 3,108 $ 8,880 $ 246,646 Intersegment revenues .......... -- -- 39 -- 39 Segment profit ................. 26,288 40,942 129 653 68,012 Total assets ................... 1,154,794 1,460,357 9,650 61,259 2,686,060 JUNE 30, 2000: -------------- Revenues from external customers $ 95,068 $ 95,946 $31,762 $ 7,948 $ 230,724 Intersegment revenues .......... -- 191 -- -- 191 Segment profit ................. 9,218 28,156 4,026 1,981 43,381 Total assets ................... 1,163,527 1,320,191 6,044 70,776 2,560,538
INTERNATIONAL DOMESTIC SIX MONTHS ENDED: CONTRACT CONTRACT ENGINEERING ----------------- DRILLING DRILLING & CONSULTING JUNE 30, 2001: SERVICES SERVICES SERVICES OTHER TOTAL -------------- -------- -------- -------- ----- ----- Revenues from external customers $ 207,219 $ 239,143 $ 5,328 $17,347 $ 469,037 Intersegment revenues .......... -- -- 86 -- 86 Segment profit ................. 40,893 80,477 216 902 122,488 JUNE 30, 2000: -------------- Revenues from external customers $ 179,954 $ 174,378 $44,902 $16,309 $ 415,543 Intersegment revenues .......... -- 293 -- -- 293 Segment profit ................. 18,878 46,307 1,899 1,800 68,884
9 10 FORM 10-Q The following table is a reconciliation of reportable segment profit to our consolidated totals for the three and six months ended June 30, 2001 and 2000 (in thousands).
THREE MONTHS ENDED JUNE 30, ----------------------------- 2001 2000 --------- --------- Total profit for reportable segments $ 67,359 $ 41,400 Elimination of intersegment profits (9) -- Other profit ....................... 653 1,981 --------- --------- Total consolidated net income .. $ 68,003 $ 43,381 ========= =========
SIX MONTHS ENDED JUNE 30, ----------------------------- 2001 2000 --------- --------- Total profit for reportable segments $ 121,586 $ 67,084 Elimination of intersegment profits (22) -- Other profit ....................... 902 1,800 --------- --------- Total consolidated net income .. $ 122,466 $ 68,884 ========= =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations", regarding our financial position, business strategy, plans and objectives of management for future operations, industry conditions, and indebtedness covenant compliance, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, volatility in crude oil and natural gas prices, potential deterioration in the demand for our drilling services and resulting declining dayrates, the cancellation by our customers of drilling contracts or letter agreements or letters of intent for drilling contracts or their exercise of early termination provisions generally found in our drilling contracts, intense competition in the drilling industry, political and economic conditions in the United States and in international markets where we operate, cost overruns or delays on shipyard repair, maintenance, conversion or upgrade projects, adverse weather (such as hurricanes) and seas, operational risks (such as blowouts and fires), limitations on our insurance coverage, and requirements and potential liability imposed by governmental regulation of the drilling industry (including environmental regulation). All of the foregoing risks and uncertainties are beyond our ability to control, and in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. When used in this Form 10-Q, the words "believes", "anticipates", "expects", "plans" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. As used herein, unless otherwise required by the context, the term "Noble Drilling" refers to Noble Drilling Corporation and the terms "Company", "we", "our", and words of similar import refer to Noble Drilling and its 10 11 FORM 10-Q consolidated subsidiaries. The use herein of such terms as group, organization, we, us, our and its, or references to specific entities, is not intended to be a precise description of corporate relationships. THE COMPANY We are a leading provider of diversified services for the oil and gas industry. We perform contract drilling services with our fleet of 49 offshore drilling units located in key markets worldwide. Our fleet of floating deepwater units consists of nine semisubmersibles and three dynamically positioned drillships, seven of which are designed to operate in water depths greater than 5,000 feet. Our premium fleet of 34 independent leg, cantilever jackup rigs includes 21 units that operate in water depths of 300 feet and greater, four of which operate in water depths of 360 feet and greater, and 11 units that operate in water depths of 250 feet. In addition, our fleet includes three submersible drilling units. Nine of our drilling units are capable of operating in harsh environments. Over 60 percent of the fleet is currently deployed in international markets, principally including the North Sea, Brazil, West Africa, the Middle East, India and Mexico. We also provide labor contract drilling services, well site and project management services, and engineering services. Demand for drilling services depends on a variety of economic and political factors, including worldwide demand for oil and gas, the ability of the Organization of Petroleum Exporting Countries ("OPEC") to set and maintain production levels and pricing, the level of production of non-OPEC countries and the policies of the various governments regarding exploration and development of their oil and gas reserves. Oil and natural gas prices remained strong during the first half of 2001 as a result of OPEC production policies and tight supplies of natural gas in the U.S. Demand for offshore drilling rigs in the U.S. Gulf of Mexico remained strong in the second quarter of 2001, and as a result, rig utilization and dayrates achieved their highest levels since early 1998. We believe the increased demand for domestic rigs was largely attributable to oil and gas prices that began rising in 1999 and until recently have remained at high levels as compared to average prices in recent years. Recent cooler than normal summer weather, weaker than expected industrial demand and stronger than expected supply of natural gas have contributed to a build-up in natural gas inventory storage levels. We believe that a continuation of these events could lead to further downward pressure on natural gas prices and a decrease in the demand for offshore drilling rigs in the U.S. Gulf of Mexico. However, drilling activity in many international markets continued to improve in the second quarter of 2001 in the form of higher utilization rates and dayrates. Oil companies continue to work through the effects of industry consolidation, which has inhibited capital spending on exploration and development. We expect that further consolidation among our customer base would dampen drilling activity levels near-term. We cannot predict the future level of demand for our drilling services or future conditions in the offshore contract drilling industry. In recent years, we have focused on increasing the number of rigs in our fleet capable of deepwater offshore drilling. We have incorporated this focus into our broader, long-standing business strategy to actively expand our international and offshore deepwater capabilities through acquisitions, rig upgrades and modifications and to redeploy assets in important geological areas. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 GENERAL Net income for the second quarter of 2001 (the "Current Quarter") was $68,003,000, or $0.50 per diluted share, on operating revenues of $246,646,000, compared to net income for the second quarter of 2000 (the "Comparable Quarter") of $43,381,000, or $0.32 per diluted share, on operating revenues of $230,724,000. 11 12 FORM 10-Q RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES The following table sets forth the average rig utilization rates, operating days and average dayrates for our rig fleet for the three months ended June 30, 2001 and 2000:
AVERAGE RIG UTILIZATION RATE (1) OPERATING DAYS AVERAGE DAYRATE -------------------- ------------------ ------------------ THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, -------------------- ------------------- ------------------ 2001 2000 2001 2000 2001 2000 ------- ------- ------- ------- ------- ------- International..... 87% 87% 1,993 2,163 $55,722 $43,786 Domestic ......... 98% 88% 1,718 1,429 $71,182 $66,974
(1) Information reflects our policy to report utilization rates based on the number of actively marketed rigs in our fleet. INTERNATIONAL OPERATIONS The following table sets forth the operating revenues and gross margin for our international operations for the three months ended June 30, 2001 and 2000:
REVENUES GROSS MARGIN ------------------------- ----------------------- THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ----------------------- 2001 2000 2001 2000 -------- -------- ------- ------- (In thousands) Contract drilling services ...... $111,054 $ 94,710 $47,851 $31,623 Labor contract drilling services 7,977 7,628 1,419 1,270 Engineering, consulting and other 2,246 869 1,142 338 -------- -------- ------- ------- Total .................. $121,277 $103,207 $50,412 $33,231 ======== ======== ======= =======
OPERATING REVENUES. International contract drilling revenues increased $16,344,000 due to higher average dayrates in West Africa and the North Sea and higher rig utilization in West Africa. This increase was partially offset by the expiration of contracts in Venezuela and the Middle East. Labor contract drilling services revenues increased $349,000 due to escalation clauses on our labor contract for the Hibernia project in Canada, partially offset by the expiration of a North Sea labor contract. International engineering, consulting and other revenues increased $1,377,000 due to an engineering services contract in the North Sea which began during the fourth quarter of 2000. GROSS MARGIN. International contract drilling services gross margin increased $16,228,000 due to higher average dayrates in West Africa and the North Sea and higher rig utilization in West Africa. International labor contract drilling services gross margin increased $149,000 due to escalation clauses on our labor contract for the Hibernia project in Canada. International engineering, consulting and other gross margin increased $804,000 due to reduced minority interest related to the Noble Muravlenko, a drillship operating in Brazil in which we own an 82 percent interest through a joint venture. 12 13 FORM 10-Q DOMESTIC OPERATIONS The following table sets forth the operating revenues and gross margin for our domestic operations for the three months ended June 30, 2001 and 2000:
REVENUES GROSS MARGIN ------------------------- --------------------- THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- --------------------- 2001 2000 2001 2000 -------- -------- ------- ------- (In thousands) Contract drilling services ...... $122,290 $ 95,706 $82,056 $62,863 Turnkey drilling services ....... -- 30,343 -- 6,565 Engineering, consulting and other 3,079 1,468 376 152 -------- -------- ------- ------- Total .................. $125,369 $127,517 $82,432 $69,580 ======== ======== ======= =======
OPERATING REVENUES. Domestic contract drilling services revenues increased $26,584,000 due to higher average dayrates, higher rig utilization rates and increased operating days on our jackup rigs, partially offset by lower average dayrates on our semisubmersible rigs. The higher operating statistics on our domestic jackup rigs reflected improved market conditions in the Gulf of Mexico. There was no turnkey drilling activity in the Current Quarter as our Triton Engineering subsidiary ("Triton") revised its business model during the fourth quarter of 2000 to focus on well site management, project management and technical services. Domestic engineering, consulting and other revenues increased $1,611,000 as a result of Triton's revised business model and additional revenues from our Noble Engineering & Development ("NED") and Maurer Technology ("Maurer") subsidiaries. GROSS MARGIN. Domestic contract drilling services gross margin increased $19,193,000 due to higher average dayrates, higher rig utilization rates and increased operating days on our jackup rigs. There was no turnkey drilling activity in the Current Quarter due to Triton's revised business model. Domestic engineering, consulting and other gross margin increased $224,000 as a result of Triton's revised business model and additional contributions from NED and Maurer. OTHER ITEMS DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense increased $1,251,000 due to various capital upgrades to our rig fleet. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses increased $736,000 due to higher labor costs. INTEREST EXPENSE. Interest expense decreased $1,360,000 due to lower average debt balances in the Current Quarter. INCOME TAX PROVISION. Income tax provision increased $4,392,000 due to higher pretax earnings, partially offset by a lower effective tax rate. The effective tax rate was 24 percent in the Current Quarter compared to 28 percent in the Comparable Quarter. 13 14 FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 GENERAL Net income for the six months ended June 30, 2001 (the "Current Period") was $122,466,000, or $0.90 per diluted share, on operating revenues of $469,037,000, compared to net income for the six months ended June 30, 2000 (the "Comparable Period") of $68,884,000, or $0.51 per diluted share, on operating revenues of $415,543,000. RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES The following table sets forth the average rig utilization rates, operating days and average dayrates for our rig fleet for the six months ended June 30, 2001 and 2000:
AVERAGE RIG UTILIZATION RATE (1) OPERATING DAYS AVERAGE DAYRATE -------------------- ------------------- ------------------- SIX MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, -------------------- ------------------- ------------------- 2001 2000 2001 2000 2001 2000 ---- ---- ----- ----- ------- ------- International ..... 83% 75% 3,866 3,787 $53,080 $47,395 Domestic .......... 98% 86% 3,309 2,669 $72,095 $65,197
(1) Information reflects our policy to report utilization rates based on the number of actively marketed rigs in our fleet. INTERNATIONAL OPERATIONS The following table sets forth the operating revenues and gross margin for our international operations for the six months ended June 30, 2001 and 2000:
REVENUES GROSS MARGIN ------------------------ --------------------- SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ --------------------- 2001 2000 2001 2000 -------- -------- ------- ------- (In thousands) Contract drilling services .......... $205,207 $179,483 $85,115 $63,903 Labor contract drilling services .... 15,458 15,591 2,821 3,507 Engineering, consulting and other ... 4,174 1,482 2,158 740 -------- -------- ------- ------- Total ...................... $224,839 $196,556 $90,094 $68,150 ======== ======== ======= =======
OPERATING REVENUES. International contract drilling revenues increased $25,724,000 due to higher average dayrates and rig utilization in West Africa and the North Sea, partially offset by the expiration of contracts in Venezuela and the Middle East. Labor contract drilling services revenues decreased $133,000 due to the expiration of a North Sea labor contract, partially offset by escalation clauses on our labor contract for the Hibernia project in Canada. International engineering, consulting and other revenues increased $2,692,000 due to an engineering services contract in the North Sea which began during the fourth quarter of 2000. GROSS MARGIN. International contract drilling gross margin increased $21,212,000 due to higher average dayrates and rig utilization in West Africa and the North Sea, partially offset by the expiration of contracts in the Middle East. Labor contract drilling services gross margin decreased $686,000 due to the expiration of a North Sea labor contract, partially offset by escalation clauses on our labor contract for the Hibernia project in Canada. International 14 15 FORM 10-Q engineering, consulting and other revenues increased $1,418,000 due to an engineering services contract in the North Sea which began during the fourth quarter of 2000. DOMESTIC OPERATIONS The following table sets forth the operating revenues and gross margin for our domestic operations for the six months ended June 30, 2001 and 2000:
REVENUES GROSS MARGIN ----------------------- -------------------- SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (In thousands) Contract drilling services ...... $238,564 $174,011 $159,037 $110,468 Turnkey drilling services ....... -- 43,382 -- 3,598 Engineering, consulting and other 5,634 1,594 987 207 -------- -------- -------- -------- Total .................. $244,198 $218,987 $160,024 $114,273 ======== ======== ======== ========
OPERATING REVENUES. Domestic contract drilling services revenues increased $64,553,000 due to higher average dayrates, higher rig utilization rates and increased operating days on our jackup rigs. The higher operating statistics on our domestic jackup rigs reflected improved market conditions in the Gulf of Mexico. There was no turnkey drilling activity in the Current Period as Triton revised its business model during the fourth quarter of 2000 to focus on well site management, project management and technical services. Domestic engineering, consulting and other revenues increased $4,040,000 as a result of Triton's revised business model and additional revenues from NED and Maurer. GROSS MARGIN. Domestic contract drilling services gross margin increased $48,569,000 due to higher average dayrates, higher rig utilization rates and increased operating days on our jackup rigs. There was no turnkey drilling activity in the Current Period due to Triton's revised business model. Domestic engineering, consulting and other gross margin increased $780,000 as a result of Triton's revised business model and contributions from NED and Maurer. OTHER ITEMS DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense increased $2,826,000 due to the activation of the Noble Homer Ferrington semisubmersible in March 2000 and various capital upgrades to our rig fleet. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $884,000 due to higher labor costs. INTEREST EXPENSE. Interest expense decreased $2,304,000 due to lower average debt balances in the Current Period. INCOME TAX PROVISION. Income tax provision increased $13,116,000 due to higher pretax earnings, partially offset by a lower effective tax rate. The effective tax rate was 25 percent in the Current Period compared to 28 percent in the Comparable Period. 15 16 FORM 10-Q LIQUIDITY AND CAPITAL RESOURCES OVERVIEW At June 30, 2001, we had cash and cash equivalents of $218,600,000 and $196,594,000 of funds available under our bank credit facility. We had working capital, including cash, of $249,983,000 and $173,704,000 at June 30, 2001 and December 31, 2000, respectively. Total debt as a percentage of total debt plus shareholders' equity was 29 percent at June 30, 2001 compared to 31 percent at December 31, 2000. We repurchased 1,157,000 shares of Noble Drilling common stock at a total cost of $44,481,000 during the second quarter of 2001. As of August 6, 2001 an additional 925,000 shares have been repurchased at a total cost of $26,307,000 since June 30, 2001. Additional repurchases, if any, may be made on the open market or in private transactions at prices determined by us. The board of directors of Noble Drilling has authorized the repurchase of up to 5,000,000 shares. As of August 6, 2001, 1,504,000 shares were available for future repurchase under such authorization. CAPITAL EXPENDITURES Capital expenditures totaled $26,417,000 and $46,268,000 for the Current Quarter and Current Period, respectively. In addition, Current Quarter and Current Period loans to our joint ventures totaled $2,352,000 and $17,896,000, respectively, and deferred maintenance expenditures totaled $7,296,000 and $18,086,000, respectively. We expect our capital expenditures for the remainder of 2001 will aggregate approximately $150,000,000 and our joint venture fundings and deferred repair and maintenance expenditures for the remainder of 2001 will aggregate approximately $3,000,000 and $35,000,000, respectively. For more information on loans to our joint ventures, see Note 4 to our accompanying consolidated financial statements. Certain projects currently under consideration could require, if they materialize, capital expenditures or other cash requirements not included in the above estimate. In addition, we will continue to evaluate acquisitions of drilling units from time to time. Other factors that could cause actual capital expenditures to materially exceed the planned capital expenditures include delays and cost overruns in shipyards, shortages of equipment, latent damage or deterioration to hull, equipment and machinery in excess of engineering estimates and assumptions, and changes in design criteria or specifications during repair or construction. CREDIT FACILITIES AND LONG-TERM DEBT On May 29, 2001, we terminated our bank credit facility totaling $200,000,000 and we entered into a new unsecured revolving bank credit facility totaling $200,000,000 (the "Credit Agreement") on May 30, 2001. The term of the Credit Agreement extends through May 30, 2006. As of June 30, 2001, we had no borrowings under the Credit Agreement and had outstanding letters of credit and third-party corporate guarantees totaling $13,706,000. Additionally, at June 30, 2001, $5,851,000 of bid and performance bonds had been supported by surety bonds. As of June 30, 2001, we had the ability to borrow $196,594,000 under the Credit Agreement. As of August 6, 2001, we had no borrowings under the Credit Agreement. At June 30, 2001, total long-term debt was $673,152,000, including current maturities of $49,364,000, compared to total long-term debt of $699,642,000, including current maturities of $49,351,000, at December 31, 2000. In July 2001, we purchased and retired $43,305,000 principal amount of our 7.50% Senior Notes due 2019 for $44,362,000. An extraordinary charge of $988,000, net of taxes of $532,000, will be recognized in the third quarter of 2001 related to the purchase and retirement of these notes. We believe that our cash and cash equivalents, cash flows from operating activities, available borrowings under lines of credit, and access to other financing sources will be adequate to meet our anticipated short-term and long-term liquidity requirements, including capital expenditures and scheduled debt repayments. 16 17 FORM 10-Q ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK We are subject to market risk exposure related to changes in interest rates on our Credit Agreement. Interest on our Credit Agreement is at an agreed upon percentage point spread from LIBOR. At June 30, 2001, there were no outstanding borrowings under our Credit Agreement. Therefore, an immediate change of one percent in the interest rate would not cause a material change in interest expense on an annual basis. FOREIGN CURRENCY EXCHANGE RATE RISK We conduct business internationally; however, a substantial majority of the value of our foreign transactions are denominated in U.S. Dollars. With minor exceptions, we structure our drilling contracts in U.S. Dollars to mitigate our exposure to fluctuations in foreign currencies. Other than trade accounts receivable and trade accounts payable, which mostly offset each other, we do not currently have any significant financial instruments that are sensitive to foreign currency rates. 17 18 FORM 10-Q PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 14, 2000, Raymond Verdin filed a lawsuit in the United States District Court for the Southern District of Texas, Galveston Division, on behalf of himself and those similarly situated against the majority of offshore drilling companies in the United States, including Noble Drilling Corporation. Mr. Verdin sought to represent a class of offshore workers who are or have been employed by the defendants and alleged that the defendants conspired to avoid competition in the offshore labor market by agreeing to limit wages and benefits provided to offshore workers. An amended complaint was filed on October 6, 2000 in which a new plaintiff, Thomas Bryant, was substituted as class representative for Mr. Verdin. Mr. Bryant's lawsuit maintains the same allegations as Mr. Verdin's lawsuit and seeks an unspecified amount of treble damages and other relief for himself and an alleged class of offshore workers. Jermey Richardson was later added as another plaintiff and the plaintiffs added several new defendants, including several subsidiaries of Noble Drilling Corporation. None of these individual plaintiffs were ever employed by Noble Drilling Corporation or its subsidiaries. We deny all allegations of liability asserted by plaintiffs in this lawsuit and filed our answer to the plaintiffs' Third Amended Complaint on February 26, 2001. On July 30, 2001, the lawsuit was transferred to the United States District Court for the Southern District of Texas, Houston Division, by order of the Chief U.S. District Judge for such district. Notwithstanding our conviction that this lawsuit is without merit, we recently settled with the plaintiffs to avoid further time consuming and costly litigation. As part of the settlement, the plaintiffs have agreed to dismiss all claims against us, with prejudice, and we have agreed, without admitting any wrongdoing, to pay the plaintiffs an aggregate of $625,000, for which we were fully reserved at June 30, 2001. There are no other material pending legal proceedings to which we are a party or of which our property is the subject. We are involved in certain routine litigation incidental to our business. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The information required by this Item 6(a) is set forth in the Index to Exhibits accompanying this quarterly report and is incorporated herein by reference. (b) Reports on Form 8-K We furnished a Form 8-K on April 25, 2001 which included our press release dated April 25, 2001 as Exhibit 99.1, announcing financial results for the quarter ended March 31, 2001. We furnished a Form 8-K on June 4, 2001 which included our Monthly Fleet Status Report as of June 4, 2001 as Exhibit 99.1. 18 19 FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NOBLE DRILLING CORPORATION DATE: August 13, 2001 By: /s/ ROBERT D. CAMPBELL ------------------------- ROBERT D. CAMPBELL, President DATE: August 13, 2001 By: /s/ MARK A. JACKSON ------------------------- MARK A. JACKSON, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 19 20 FORM 10-Q INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBIT ------ ------- 4 Credit Agreement dated May 30, 2001, among Noble Drilling Corporation, Christiania Bank og Kreditkasse ASA, New York Branch, as Administrative Agent, and the lenders named therein. 20