-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AAtneXyWKbXBwt4sfEhjD5lkmqaE7q1z76i2/gALsKnXAn7AKkrvyQri2hPKzHlO EjZ9q2UFLEdIC4LrEUna8Q== 0000950129-99-004956.txt : 19991115 0000950129-99-004956.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950129-99-004956 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOBLE DRILLING CORP CENTRAL INDEX KEY: 0000777201 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 730374541 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11669 FILM NUMBER: 99749473 BUSINESS ADDRESS: STREET 1: 10370 RICHMOND AVE STE 400 CITY: HOUSTON STATE: TX ZIP: 77042 BUSINESS PHONE: 7139743131 MAIL ADDRESS: STREET 1: 10370 RICHMOND AVE STREET 2: STE 400 CITY: HOUSTON STATE: TX ZIP: 77042 10-Q 1 NOBLE DRILLING CORPORATION - DATED 09/30/99 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 September 30, 1999 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) 10370 RICHMOND AVENUE, SUITE 400 77042 HOUSTON, TEXAS (Zip code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 974-3131 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 November 10, 1999: 131,438,719 ================================================================================ 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value amount) (Unaudited)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents .................................... $ 149,434 $ 211,012 Restricted cash .............................................. 3,974 5,871 Accounts receivable (net allowance of $414 and $610) ......... 137,671 148,168 Costs of uncompleted contracts in excess of billings ......... 2,894 907 Inventories .................................................. 4,742 5,133 Prepaid expenses ............................................. 21,152 21,607 Other current assets ......................................... 9,360 45,511 ------------ ------------ Total current assets ........................................... 329,227 438,209 ------------ ------------ PROPERTY AND EQUIPMENT Drilling equipment and facilities ............................ 2,353,415 1,940,919 Other ........................................................ 28,220 27,195 ------------ ------------ 2,381,635 1,968,114 Accumulated depreciation ..................................... (372,423) (318,981) ------------ ------------ 2,009,212 1,649,133 ------------ ------------ INVESTMENTS IN AND ADVANCES TO JOINT VENTURES .................. 29,065 48,270 DEFERRED INCOME TAXES .......................................... 964 964 OTHER ASSETS ................................................... 64,981 42,056 ------------ ------------ $ 2,433,449 $ 2,178,632 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt and current installments of long-term debt ... $ 59,905 $ 148,786 Accounts payable ............................................. 78,921 78,880 Accrued payroll and related costs ............................ 33,274 21,985 Taxes payable ................................................ 46,946 51,495 Interest payable ............................................. 4,995 6,191 Other current liabilities .................................... 25,126 42,152 ------------ ------------ Total current liabilities ...................................... 249,167 349,489 LONG-TERM DEBT ................................................. 747,616 460,842 DEFERRED INCOME TAXES .......................................... 73,342 56,937 OTHER LIABILITIES .............................................. 1,465 891 MINORITY INTEREST .............................................. (2,683) -- ------------ ------------ 1,068,907 868,159 SHAREHOLDERS' EQUITY Common stock- par value $0.10 ................................ 13,444 13,376 Capital in excess of par value ............................... 946,146 943,122 Retained earnings ............................................ 485,985 418,024 Treasury stock, at cost ...................................... (69,675) (61,771) Restricted stock (unearned compensation) ..................... (2,801) -- Accumulated other comprehensive income ....................... (8,557) (2,278) ------------ ------------ 1,364,542 1,310,473 ------------ ------------ COMMITMENTS AND CONTINGENCIES .................................. -- -- ------------ ------------ $ 2,433,449 $ 2,178,632 ============ ============
See accompanying notes to the condensed consolidated financial statements. 2 3 NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1999 1998 ------------ ------------ OPERATING REVENUES Contract drilling services .............................. $ 146,597 $ 145,169 Labor contract drilling services ........................ 7,916 15,238 Turnkey drilling services ............................... 21,095 32,869 Engineering and consulting services ..................... 220 260 Other revenue ........................................... 997 1,513 ------------ ------------ 176,825 195,049 ------------ ------------ OPERATING COSTS AND EXPENSES Contract drilling services .............................. 77,113 67,376 Labor contract drilling services ........................ 6,716 13,234 Turnkey drilling services ............................... 19,626 38,836 Engineering and consulting services ..................... 190 600 Other expense ........................................... 350 1,029 Depreciation and amortization ........................... 24,119 17,813 Selling, general and administrative ..................... 7,637 7,760 Minority interest ....................................... (126) -- ------------ ------------ 135,625 146,648 ------------ ------------ OPERATING INCOME ........................................... 41,200 48,401 OTHER INCOME (EXPENSE) Interest expense ........................................ (10,284) (1,160) Interest income ......................................... 2,338 1,842 Other, net .............................................. 758 (1,910) ------------ ------------ INCOME BEFORE INCOME TAXES ................................. 34,012 47,173 INCOME TAX PROVISION ....................................... (8,842) (14,557) ------------ ------------ NET INCOME ................................................. $ 25,170 $ 32,616 ============ ============ EARNINGS PER SHARE: Basic .................................................... $ 0.19 $ 0.25 Diluted .................................................. $ 0.19 $ 0.25
See accompanying notes to the condensed consolidated financial statements 3 4 NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1999 1998 ------------ ------------ OPERATING REVENUES Contract drilling services .............................. $ 437,606 $ 450,740 Labor contract drilling services ........................ 28,653 49,772 Turnkey drilling services ............................... 61,170 92,717 Engineering and consulting services ..................... 947 1,466 Other revenue ........................................... 4,040 5,618 ------------ ------------ 532,416 600,313 ------------ ------------ OPERATING COSTS AND EXPENSES Contract drilling services .............................. 233,732 195,607 Labor contract drilling services ........................ 25,142 40,627 Turnkey drilling services ............................... 62,695 96,562 Engineering and consulting services ..................... 845 1,669 Other expense ........................................... 1,596 3,035 Depreciation and amortization ........................... 63,993 53,453 Selling, general and administrative ..................... 23,255 24,339 Minority interest ....................................... (960) -- ------------ ------------ 410,298 415,292 ------------ ------------ OPERATING INCOME ........................................... 122,118 185,021 OTHER INCOME (EXPENSE) Interest expense ........................................ (22,541) (3,402) Interest income ......................................... 7,819 4,919 Other, net .............................................. 71 (104) ------------ ------------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE ........ 107,467 186,434 INCOME TAX PROVISION ....................................... (28,673) (57,185) ------------ ------------ INCOME BEFORE EXTRAORDINARY CHARGE ......................... 78,794 129,249 EXTRAORDINARY CHARGE, NET OF TAX ........................... (10,833) -- ------------ ------------ NET INCOME ................................................. $ 67,961 $ 129,249 ============ ============ EARNINGS PER SHARE-BASIC: Income before extraordinary charge ....................... $ 0.60 $ 0.99 Extraordinary charge ..................................... (0.08) -- ------------ ------------ Net income per common share .............................. $ 0.52 $ 0.99 ============ ============ EARNINGS PER SHARE-DILUTED: Income before extraordinary charge ....................... $ 0.59 $ 0.98 Extraordinary charge ..................................... (0.08) -- ------------ ------------ Net income per common share .............................. $ 0.51 $ 0.98 ============ ============
See accompanying notes to the condensed consolidated financial statements. 4 5 NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1999 1998 ------------ ------------ NET INCOME ..................................................................... $ 25,170 $ 32,616 ------------ ------------ OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Foreign currency translation adjustments ..................................... (373) 256 Unrealized holding losses arising during period .............................. (4,499) -- ------------ ------------ Other comprehensive (loss) income ............................................ (4,872) 256 ------------ ------------ COMPREHENSIVE INCOME ........................................................... $ 20,298 $ 32,872 ============ ============
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1999 1998 ------------ ------------ NET INCOME ..................................................................... $ 67,961 $ 129,249 ------------ ------------ OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Foreign currency translation adjustments .................................... (481) 200 ------------ ------------ Unrealized (losses) gains on securities: Unrealized holding losses arising during period ........................... (5,798) (20) Less: reclassification adjustment for gains realized in net income ........ -- 4 ------------ ------------ Net unrealized losses ..................................................... (5,798) (16) ------------ ------------ Other comprehensive (loss) income ........................................... (6,279) 184 ------------ ------------ COMPREHENSIVE INCOME ........................................................... $ 61,682 $ 129,433 ============ ============
See accompanying notes to the condensed consolidated financial statements. 5 6 NOBLE DRILLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income ..................................................... $ 67,961 $ 129,249 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................. 63,993 53,453 Deferred income tax provision ............................. 16,405 12,358 Gain on sales of property and equipment ................... (774) -- Extraordinary charge, net of tax .......................... 10,833 -- Equity in net income of unconsolidated joint ventures ..... 451 1,806 Other ..................................................... 303 (958) Changes in current assets and liabilities: Accounts receivable ...................................... 9,514 (7,879) Other assets ............................................. 33,902 (6,594) Accounts payable ......................................... (7,041) 14,773 Other liabilities ........................................ (6,414) 39,483 ------------ ------------ Net cash provided by operating activities ................ 189,133 235,691 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ............................. (352,890) (423,790) Proceeds from sale of property and equipment ................... 1,009 1,943 Investment in and notes receivable from affiliates ............. -- (29,925) (Investment in) proceeds from sale of marketable securities .... (8,192) 16,455 ------------ ------------ Net cash used by investing activities .................... (360,073) (435,317) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt ....................... 396,731 144,399 Net (payments) borrowings on revolving credit facility ......... (100,000) 60,000 Payment of long-term debt ...................................... (189,778) (9,013) Issuance of common stock ....................................... 512 1,751 Decrease in restricted cash .................................... 1,897 -- Purchase of shares returned to treasury ........................ -- (4,313) ------------ ------------ Net cash provided by financing activities ................ 109,362 192,824 ------------ ------------ DECREASE IN CASH AND CASH EQUIVALENTS ............................ (61,578) (6,802) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................... 211,012 49,917 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 149,434 $ 43,115 ============ ============
See accompanying notes to the condensed consolidated financial statements. 6 7 NOBLE DRILLING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF ACCOUNTING The accompanying condensed 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 generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. All significant transactions among Noble Drilling and its consolidated subsidiaries have been eliminated. The interim condensed 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 condensed 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 condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 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 an 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 prior year condensed consolidated financial statements to conform to the classifications used in the 1999 condensed 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 income before extraordinary charge for the three and nine month periods ended September 30, 1999 and 1998 (in thousands, except per share amounts):
INCOME BEFORE EXTRAORDINARY BASIC BASIC DILUTED DILUTED CHARGE SHARES EPS SHARES EPS ---------------------------------------------------------- THREE MONTHS ENDED: SEPTEMBER 30, 1999 $ 25,170 131,679 $ 0.19 132,961 $ 0.19 SEPTEMBER 30, 1998 $ 32,616 131,302 $ 0.25 131,736 $ 0.25 NINE MONTHS ENDED: SEPTEMBER 30, 1999 $ 78,794 131,391 $ 0.60 132,391 $ 0.59 SEPTEMBER 30, 1998 $129,249 131,195 $ 0.99 132,234 $ 0.98
Included in diluted shares are common stock equivalents relating to outstanding stock options of 1,282,000 shares and 434,000 shares for the three month periods ended September 30, 1999 and 1998, respectively, and 1,000,000 shares and 1,039,000 shares for the nine month periods ended September 30, 1999 and 1998, respectively. NOTE 3 - MARKETABLE EQUITY SECURITIES Our investments in marketable equity securities are classified as available for sale and stated at fair market value under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, any unrealized gains and losses, net of taxes, are included in "Accumulated other comprehensive income" in the accompanying Condensed Consolidated Balance Sheets. As of September 30, 1999, the fair market value of available for sale equity securities totaled $4,931,000, with gross unrealized losses of $5,798,000. Available for sale equity securities are included in "Other assets" in the accompanying Condensed Consolidated Balance Sheets. 7 8 NOTE 4 - INVESTMENTS IN AND ADVANCES TO JOINT VENTURES Effective January 1, 1999, we acquired a majority interest in Arktik Drilling Limited, Inc. ("Arktik") and a 100 percent interest in the bareboat charter of the Noble Kolskaya, in exchange for a variable rate note to Kvaerner Maritime A.S. ("Kvaerner") in the aggregate principal amount of $17,500,000 (the "Kvaerner Debt"). (See Note 6). Arktik's principal asset is the drillship, the Noble Muravlenko. As a result of these acquisitions, the results of operations of Arktik and the Noble Kolskaya are included in our Consolidated Statements of Operations from January 1, 1999, and at that date, the respective assets and liabilities were recorded at their estimated fair values. Prior to January 1, 1999, the investments were accounted for under the equity method. The results of operations of Arktik and the Noble Kolskaya prior to January 1, 1999 were not material to our consolidated amounts; therefore, pro forma financial information is not presented. NOTE 5 - CREDIT FACILITIES We have an unsecured revolving credit facility in the amount of $200,000,000 (the "Credit Agreement"), including a letter of credit facility totaling $40,000,000 through August 14, 2002. As of September 30, 1999, we had no outstanding borrowings under the Credit Agreement and $3,677,000 had been used to support outstanding letters of credit. As of September 30, 1999, $196,323,000 remained available under the Credit Agreement. Additionally, at September 30, 1999, we had $21,192,000 of surety bonds and unsecured letter of credit facilities. NOTE 6 - LONG-TERM DEBT On March 16, 1999, we issued $150,000,000 principal amount of our 6.95% Senior Notes due 2009 (the "2009 Notes") and $250,000,000 principal amount of our 7.50% Senior Notes due 2019 (the "2019 Notes" and, together with the 2009 Notes, the "Notes"). Interest on the Notes is payable on March 15 and September 15 of each year beginning September 15, 1999. The Notes are redeemable, as a whole or from time to time in part, at our option on any date prior to maturity at prices equal to 100 percent of the outstanding principal amount of the Notes redeemed plus accrued interest to the redemption date plus a make-whole premium, if any is required to be paid. The Notes are senior unsecured obligations and the indenture governing the Notes contains covenants that, among other things, limit our ability to create certain liens, engage in certain sale and lease-back transactions and merge, consolidate and sell assets, except under certain conditions. In March 1999, we used approximately $143,000,000 of the net proceeds from the issuance of the Notes to purchase and retire $125,000,000 principal amount of our 9 1/8% Senior Notes due 2006, which resulted in an extraordinary charge of $10,833,000, net of taxes of $5,833,000, in the first quarter of 1999. The extraordinary charge represented the difference between the acquisition price and the net carrying value of the retired notes, including unamortized debt issuance costs. In connection with the acquisitions regarding Arktik and the Noble Kolskaya (see Note 4), we incurred the Kvaerner Debt. Additionally, we recorded Arktik's outstanding bank indebtedness in the amount of $24,000,000 (the "Arktik Debt") and Arktik's indebtedness to a minority equity owner in Arktik in the amount of $7,900,000 (the "Shareholder Debt"). The Arktik Debt and the Shareholder Debt are non-recourse except to Arktik. The Arktik Debt is secured by a preferred mortgage on Arktik's drillship, the Noble Muravlenko. The Shareholder Debt is also secured by a mortgage on the Noble Muravlenko. The Kvaerner Debt bears interest at a rate equal to the LIBOR rate plus 1.25 percent. Principal and interest is payable on each April 1 and October 1 through maturity on October 1, 2003. We may prepay all or any portion of the balance, plus accrued interest, at any time after December 31, 1999. The interest rate as of September 30, 1999 was 6.31 percent per annum. The Arktik Debt bears interest at a rate equal to the LIBOR rate plus 1.0 percent. Principal and interest is payable by Arktik on each June 1 and December 1 through maturity on June 1, 2003. Scheduled principal payments are $4,000,000 for the years 1999 through 2002 and $8,000,000 in 2003. The interest rate as of September 30, 1999 was 6.19 percent per annum. The Shareholder Debt bears interest at 12.0 percent per annum. Interest is payable on each April 1 and October 1. The principal balance of the debt is to be repaid by Arktik over a three year period, beginning in 2009. 8 9 NOTE 7 - COMMITMENTS AND CONTINGENCIES We have entered into agreements with vendors to purchase or construct equipment for the conversion of rigs. These agreements generally require non-refundable payments as certain milestones are met. The cumulative amount of such payments totaled $186,947,000 as of September 30, 1999. As of September 30, 1999, we also had $30,567,000 of purchase commitments related to rig conversion projects. In the event we were to cancel the purchase commitments, the ultimate amounts refunded to us would be subject to negotiation with vendors. NOTE 8 - SEGMENT AND RELATED INFORMATION We adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, in 1998, which changes the way we report information about our operating segments. We provide diversified services to the oil and gas industry. Our reportable segments consist of the primary services we provide. These services include offshore contract drilling, turnkey drilling and labor contract drilling services. Although each of these services is generally influenced by the same economic factors, they each represent 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, Africa, Brazil, the Middle East and Mexico, whereas our domestic contract drilling is conducted in the U.S. Gulf of Mexico. Our turnkey drilling operations consist of our coordination of all equipment, materials, services and management to drill a well to a specified depth for a fixed price. Our turnkey drilling operations are conducted primarily in the U.S. Gulf of Mexico. Under our labor contracts, we provide the personnel necessary to manage and perform drilling operations from drilling platforms owned by the operator. Our labor contract drilling services are conducted in the U.K. North Sea and off the east coast of Canada. 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 nine months ended September 30, 1999 and 1998 is shown in the following table (in thousands). The "Other" column consists of results of other insignificant operations and corporate related items.
INTERNATIONAL DOMESTIC LABOR THREE MONTHS ENDED: CONTRACT CONTRACT CONTRACT TURNKEY - ------------------- DRILLING DRILLING DRILLING DRILLING SEPTEMBER 30, 1999: SERVICES SERVICES SERVICES SERVICES OTHER TOTAL - ------------------- ------------ ---------- ---------- ---------- ---------- ---------- Revenues from external customers ......... $ 100,294 $ 46,593 $ 8,730 $ 21,095 $ 113 $ 176,825 Intersegment revenues .................... -- -- -- -- -- -- Segment profit (loss) .................... 16,767 6,668 1,826 760 (850) 25,171 Total assets at September 30, 1999 (1) ... 1,156,761 1,056,504 26,227 8,266 185,691 2,433,449 SEPTEMBER 30, 1998: - ------------------- Revenues from external customers ......... $ 122,040 $ 23,672 $ 16,477 $ 32,868 $ (8) $ 195,049 Intersegment revenues .................... -- (51) -- -- -- (51) Segment profit (loss) (2) ................ 38,600 3,237 207 (4,414) (5,018) 32,612
- --------------- (1) Total assets - Other at September 30, 1999 includes cash and cash equivalents of $127,348,000. (2) Segment loss - Other for the three months ended September 30, 1998 includes tax expense of $7,971,000 for intercompany domestic rig leases to international areas, revenues from which are included in U.S. taxable income. 9 10
INTERNATIONAL DOMESTIC LABOR NINE MONTHS ENDED: CONTRACT CONTRACT CONTRACT TURNKEY - ------------------- DRILLING DRILLING DRILLING DRILLING SEPTEMBER 30, 1999: SERVICES SERVICES SERVICES SERVICES OTHER TOTAL - ------------------- ------------- -------- -------- -------- -------- -------- Revenues from external customers ... $345,019 $ 93,668 $ 32,237 $ 61,170 $ 322 $532,416 Intersegment revenues .............. -- 1,305 -- -- -- 1,305 Segment profit (loss) .............. 77,462 2,453 4,445 (2,468) (3,125) 78,767 SEPTEMBER 30, 1998: - ------------------- Revenues from external customers ... $346,522 $105,771 $ 54,477 $ 93,543 $ -- $600,313 Intersegment revenues .............. 873 2,242 -- 135 -- 3,250 Segment profit (loss) .............. 100,017 35,013 6,147 (4,026) (7,906) 129,245
The following table is a reconciliation of reportable segment profit or loss to our consolidated totals for the three and nine months ended September 30, 1999 and 1998 (in thousands).
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1999 1998 ----------- ------------ Total profit for reportable segments ....................... $ 25,171 $ 32,612 Elimination of intersegment (profits) losses ............... (1) 4 ---------- ---------- Total consolidated net income ..................... $ 25,170 $ 32,616 ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1999 1998 ----------- ----------- Total profit for reportable segments ....................... $ 78,767 $ 129,245 Elimination of intersegment losses ......................... 27 4 Extraordinary charge, net of tax ........................... (10,833) -- ---------- ---------- Total consolidated net income ..................... $ 67,961 $ 129,249 ========== ==========
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 and Section 21E of the Securities Exchange Act of 1934. 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 our 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 be certain 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, risks associated with our turnkey drilling operations, intense competition in the drilling industry, heavy demand for the equipment and services that we need in order to finish our major shipyard refurbishment and conversion projects on schedule and on budget, political and economic conditions in international markets where we operate, adverse weather (such as hurricanes) and seas, operational risks (such as blowouts, fires and loss of production), limitations on our insurance coverage, and requirements and potential liability imposed by governmental regulation of the drilling industry (including environmental regulation). As used herein, unless otherwise required by the context, the term "Noble Drilling" refers to Noble Drilling Corporation and the terms "we" "our" and similar words refer to Noble Drilling and its 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. 10 11 THE COMPANY We are a leading provider of diversified services for the oil and gas industry. Contract drilling services are performed with our fleet of 47 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 fleet of 32 jackup rigs includes 19 premium units that operate in water depths of 300 feet and greater, four of which operate in water depths of 360 feet and greater. In addition, our fleet includes three submersible drilling units. Ten 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, Africa, Brazil, the Middle East and Mexico. We also provide labor contract drilling services, turnkey drilling services and engineering and production management 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. Since January 1999, oil prices have increased significantly as a result of OPEC productions cuts, decreased oil supply due to low levels of drilling and the beginnings of Asian economic recovery which has contributed to rising global oil demand projections. Natural gas prices in the U. S. have also increased in anticipation of tighter supplies. Current drilling activity in many international markets continues to remain weak, although the Gulf of Mexico jackup market is showing positive signs of improvement in the form of improved utilization, particularly for the higher-end equipment, and higher dayrates. The strengthening demand for jackups in the U. S. Gulf of Mexico could be adversely impacted by jackups mobilized back to the Gulf of Mexico from weak international markets. Oil companies continue to work through the effects of industry consolidation, which have inhibited capital spending on exploration and development this year. Further consolidation among our customer base would be expected to dampen drilling activity levels near-term. 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. A principal component of our deepwater strategy is our EVA-4000(TM) semisubmersible conversion program. The EVA-4000(TM) is our proprietary design by which we convert our three-column submersible drilling rigs into ultra-deepwater semisubmersibles at a lower cost and on an accelerated delivery schedule, we believe, versus a new construction project. Four of our five EVA-4000(TM) semisubmersibles have been delivered under long-term contracts. The Noble Paul Romano, Noble Paul Wolff, Noble Jim Thompson and Noble Amos Runner were activated in December 1998, May 1999, June 1999 and August 1999, respectively. The fifth EVA-4000(TM), the Noble Max Smith, is scheduled for delivery in December 1999. In addition, the Noble Homer Ferrington is being upgraded and is scheduled for delivery in the first quarter of 2000. The Noble Paul Romano, which is capable of drilling in 6,000 feet of water, is contracted to Shell Deepwater Development Inc. ("Shell Deepwater"), an affiliate of Shell Oil Company, for use in the U.S. Gulf of Mexico under a five year contract scheduled to expire in December 2003. The Noble Paul Wolff, a dynamically positioned unit capable of drilling in 8,900 feet of water, is contracted to Petroleo Brasiliero S.A. ("Petrobras") for use offshore Brazil under a six year contract scheduled to expire in May 2005. The Noble Jim Thompson, which is capable of drilling in 6,000 feet of water, is contracted to Shell Deepwater for use in the U.S. Gulf of Mexico for an initial term of three years scheduled to expire in July 2002, with options to extend by Shell Deepwater. The Noble Amos Runner, which is capable of drilling in 6,600 feet of water, is under contract to a rig-sharing consortium of operators for use in the U.S. Gulf of Mexico under a five year contract scheduled to expire in August 2004. 11 12 We have entered into a drilling contract with Amerada Hess Corporation for use of the Noble Max Smith in the U. S. Gulf of Mexico for 30 months out of a five-year contract period. We continue to work with Union Pacific Resources Corporation under its letter of intent with us to finalize the terms and conditions of its use of the unit during the balance of the five-year period. Union Pacific has expressed to us its desire to contract the unit for less than the remaining 30 month portion of the five-year period and at a lower dayrate than is provided for in its letter of intent. The unit is scheduled for delivery in December 1999. Inability to contract the unit during the off-times not used by Amerada Hess over the five-year contract term, whether in the spot market or pursuant to a long-term contract, at the dayrate specified in the letter of intent with Union Pacific would adversely affect our future revenues and operating income during the relevant time periods. In the absence of achieving an acceptable outcome, we plan to pursue the performance by Union Pacific Resources Corporation of its commitment under the terms and conditions of its letter of intent. The Noble Homer Ferrington remains subject to the letter agreements dated February 1998 with Mariner Energy, Inc. and Samedan Oil Corporation for a five-year drilling contract and related rig sharing agreement. As previously disclosed, Mariner expressed its view in March 1999 that its letter agreement had expired, and further expressed its intention to work toward a mutually acceptable outcome because Mariner still needs access to such a deepwater rig. As previously disclosed, Samedan has questioned the extent of its obligations under its letter agreement, particularly if Mariner defaults on its commitment under its letter agreement. Samedan has also informed us that it has concerns about the rig's design criteria. We believe these operators have a binding commitment to utilize this unit, and we will continue to work with both operators to attempt to achieve a mutually acceptable outcome. In the absence of such an outcome, we plan to pursue the performance by such parties of their commitments under the terms and conditions of their respective letter agreements. The rig, which will be capable of drilling in 6,000 feet of water, is scheduled for delivery in the first quarter of 2000. If we are unable to finalize the contracts covering the Noble Homer Ferrington, we could experience delays in finding alternate customers. Failure or delay in contracting the unit under terms as favorable to us as those reflected in the existing letter agreements would adversely affect our future revenues and operating income. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 GENERAL Net income for the third quarter of 1999 (the "Current Quarter") was $25,170,000, or $0.19 per diluted share, on operating revenues of $176,825,000, compared to net income for the third quarter of 1998 (the "Comparable Quarter") of $32,616,000, or $0.25 per diluted share, on operating revenues of $195,049,000. RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES The following table sets forth the average rig utilization rates, operating days and average dayrate for our rig fleet for the three months ended September 30, 1999 and 1998:
AVERAGE RIG UTILIZATION RATES (1) OPERATING DAYS AVERAGE DAYRATE -------------------- ------------------- ---------------------- THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------- ---------------------- 1999 1998 1999 1998 1999 1998 ------ ------ ------ ------ ------ ------ International......... 64% 89% 1,728 2,283 $ 58,029 $ 53,243 Domestic.............. 72% 64% 893 571 $ 51,873 $ 41,357
- --------------------- (1) Information reflects our policy to report utilization rates based on the number of actively marketed rigs in our fleet. 12 13 INTERNATIONAL OPERATIONS The following table sets forth the operating revenues and gross margin for our international operations for the three months ended September 30, 1999 and 1998:
REVENUES GROSS MARGIN ---------------------------- --------------------------- THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ----------- ----------- (In thousands) Contract drilling services....................... $ 100,274 $ 121,554 $ 44,221 $ 64,004 Labor contract drilling services................. 7,916 15,238 1,200 2,004 Turnkey drilling services........................ - 23,449 (109) 136 Engineering and consulting services.............. 220 260 30 (340) Other............................................ 614 1,465 436 690 ------------ ------------ ----------- ----------- Total................................... $ 109,024 $ 161,966 $ 45,778 $ 66,494 ============ ============ =========== ===========
OPERATING REVENUES. International contract drilling services revenues decreased $21,280,000 in the Current Quarter as compared to the Comparable Quarter primarily due to lower average rig utilization rates and operating days. The geographic locations affected the most by decreased average rig utilization were Africa, Mexico and the Middle East. The decrease in utilization was partially offset by higher average international dayrates in the Current Quarter resulting from certain contract renewals in the North Sea and the consolidation of the results of operations effective January 1, 1999 of Arktik Drilling Limited, Inc. ("Arktik") and the Noble Kolskaya. See Note 4 to our accompanying Condensed Consolidated Financial Statements. Additionally, the Noble Paul Wolff, an EVA-4000TM semisubmersible, began operating in Brazil for Petrobras in May 1999 at a dayrate that is above our average dayrate. Labor contract drilling services revenues decreased $7,322,000 in the Current Quarter as compared to the Comparable Quarter due to fewer operating days on the North Sea labor contracts as a result of the expiration of certain contracts that were not renewed coupled with reduced drilling and workover activities by our customers. We did not generate any international turnkey drilling services revenues in the Current Quarter compared to $23,449,000 in the Comparable Quarter. There were no international turnkey well completions in the Current Quarter compared to one in Mexico in the Comparable Quarter. GROSS MARGIN. International contract drilling services gross margin decreased $19,783,000 in the Current Quarter as compared to the Comparable Quarter primarily due to lower average rig utilization rates and operating days combined with certain ongoing operating expenses incurred on rigs that were stacked during the Current Quarter. Labor contract drilling services gross margin decreased $804,000 in the Current Quarter as compared to the Comparable Quarter primarily due to fewer operating days on the North Sea labor contracts coupled with reduced drilling and workover activities by our customers. DOMESTIC OPERATIONS The following table sets forth the operating revenues and gross margin for our domestic operations for the three months ended September 30, 1999 and 1998:
REVENUES GROSS MARGIN -------------------------------- -------------------------------- THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (In thousands) Contract drilling services ..................... $ 46,323 $ 23,615 $ 25,263 $ 13,789 Turnkey drilling services ...................... 21,095 9,420 1,578 (6,103) Other .......................................... 383 48 211 (206) ------------ ------------ ------------ ------------ Total ................................. $ 67,801 $ 33,083 $ 27,052 $ 7,480 ============ ============ ============ ============
13 14 OPERATING REVENUES. Domestic contract drilling services revenues increased $22,708,000 in the Current Quarter as compared to the Comparable Quarter due to higher average rig utilization rates, operating days and average dayrate. The higher average dayrate was primarily related to the operations of the Noble Paul Romano, Noble Jim Thompson and Noble Amos Runner EVA-4000(TM) semisubmersibles at dayrates that are above our average dayrate, partially offset by lower average dayrates on our domestic jackup rigs. The Noble Paul Romano, Noble Jim Thompson and Noble Amos Runner began operating in December 1998, June 1999 and August 1999, respectively. Domestic turnkey drilling services revenues increased $11,675,000 in the Current Quarter as compared to the Comparable Quarter due to more well completions in the Current Quarter. There were seven domestic well completions in the Current Quarter compared to one in the Comparable Quarter. GROSS MARGIN. Domestic contract drilling services gross margin increased $11,474,000 in the Current Quarter as compared to the Comparable Quarter due to higher average rig utilization rates, operating days and average dayrate. The higher average dayrate was primarily related to the operations of our EVA-4000(TM) semisubmersibles in the U. S. Gulf of Mexico, partially offset by lower average dayrates on our domestic jackup rigs. Domestic turnkey drilling services gross margin increased $7,681,000 in the Current Quarter as compared to the Comparable Quarter due to additional well completions. OTHER ITEMS DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense increased $6,306,000 in the Current Quarter as compared to the Comparable Quarter due primarily to the activation of four EVA-4000(TM) semisubmersibles since the latter part of 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses were consistent between the Current Quarter and Comparable Quarter, decreasing by $123,000. INTEREST EXPENSE. Interest expense increased $9,124,000 in the Current Quarter as compared to the Comparable Quarter due to higher average debt balances resulting from project financings completed in the latter part of 1998 related to EVA-4000(TM) semisubmersible conversions and our March 1999 issuance of $150,000,000 principal amount of 6.95% Senior Notes due 2009 (the "2009 Notes") and $250,000,000 principal amount of 7.50% Senior Notes due 2019 (the "2019 Notes" and, together with the 2009 Notes, the "Notes"). Additionally, in connection with the acquisition of a majority interest in Arktik and a 100 percent interest in the bareboat charter of the Noble Kolskaya, we incurred debt of $17,500,000 and recorded Arktik's outstanding indebtedness of $31,900,000. See Notes 4 and 6 to our accompanying Condensed Consolidated Financial Statements. Capitalized interest costs related to construction in progress on qualifying upgrade projects were $4,218,000 and $4,892,000 in the Current Quarter and the Comparable Quarter, respectively. INTEREST INCOME. Interest income increased $496,000 in the Current Quarter as compared to the Comparable Quarter due to higher average cash balances resulting from the completion of project financings in the latter part of 1998 and the March 1999 issuance of the Notes. INCOME TAX PROVISION. Income tax expense decreased $5,715,000 in the Current Quarter as compared to the Comparable Quarter due primarily to lower pretax earnings. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 GENERAL Net income for the nine months ended September 30, 1999 (the "Current Period"), excluding non-recurring items, was $78,794,000, or $0.59 per diluted share, on operating revenues of $532,416,000, compared to net income of $129,249,000, or $0.98 per diluted share, on operating revenues of $600,313,000 for the nine months ended September 30, 1998 (the "Comparable Period"). Results of the Current Period included an extraordinary charge of $10,833,000, net of taxes of $5,833,000, related to our purchase and retirement of $125,000,000 principal amount of our 9 1/8% Senior Notes due 2006 (the "9 1/8% Notes") in March 1999. We financed the purchase and retirement of the 9 1/8% Notes with a portion of the net proceeds from the issuance of the Notes. 14 15 RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES The following table sets forth the average rig utilization rates, operating days and average dayrate for our rig fleet for the nine months ended September 30, 1999 and 1998:
AVERAGE RIG UTILIZATION RATES (1) OPERATING DAYS AVERAGE DAYRATE -------------------- ------------------- ------------------- NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------- ------------------- 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- International ................ 76% 89% 5,993 6,825 $ 57,467 $ 50,660 Domestic ..................... 67% 84% 2,290 2,176 $ 40,701 $ 48,247
- ----------- (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 nine months ended September 30, 1999 and 1998:
REVENUES GROSS MARGIN -------------------------------- -------------------------------- NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (In thousands) Contract drilling services ................. $ 344,401 $ 345,755 $ 162,925 $ 183,389 Labor contract drilling services ........... 28,653 49,772 3,511 9,145 Turnkey drilling services .................. -- 26,912 -- (5,131) Engineering and consulting services ........ 947 1,466 102 (203) Other ...................................... 3,255 4,879 2,366 2,270 ------------ ------------ ------------ ------------ Total ............................. $ 377,256 $ 428,784 $ 168,904 $ 189,470 ============ ============ ============ ============
OPERATING REVENUES. International contract drilling services revenues in the Current Period were flat as compared to the Comparable Period with lower average rig utilization rates and operating days being offset by higher average dayrates on certain contract renewals in the North Sea. The geographic locations affected the most by decreased average rig utilization were Africa, Mexico and the Middle East. The lower utilization in these areas was partially offset by the consolidation of the results of operations effective January 1, 1999 of Arktik and the Noble Kolskaya. See Note 4 to our accompanying Condensed Consolidated Financial Statements. Additionally, the Noble Paul Wolff, an EVA-4000(TM) semisubmersible, began operating in Brazil for Petrobras in May 1999 at a dayrate that is higher than our average international dayrate. Labor contract drilling services revenues decreased $21,119,000 in the Current Period as compared to the Comparable Period due to fewer operating days on the North Sea labor contracts as a result of the expiration of certain contracts that were not renewed coupled with reduced drilling and workover activities by our customers. We did not generate any international turnkey drilling services revenues in the Current Period as compared to $26,912,000 generated in the Comparable Period. There were no international turnkey wells completed in the Current Period compared to one in the Comparable Period. 15 16 GROSS MARGIN. International contract drilling services gross margin decreased $20,464,000 in the Current Period as compared to the Comparable Period primarily due to lower average rig utilization rates and operating days combined with ongoing operating expenses incurred on rigs that were stacked during the Current Period. Labor contract drilling services gross margin decreased $5,634,000 in the Current Period as compared to the Comparable Period primarily due to fewer operating days on the North Sea labor contracts coupled with reduced drilling and workover activities by our customers. DOMESTIC OPERATIONS The following table sets forth the operating revenues and gross margin for our domestic operations for the nine months ended September 30, 1999 and 1998:
REVENUES GROSS MARGIN -------------------------------- -------------------------------- NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (In thousands) Contract drilling services ................... $ 93,205 $ 104,985 $ 40,949 $ 71,744 Turnkey drilling services .................... 61,170 65,805 (1,525) 1,286 Other ........................................ 785 739 78 313 ------------ ------------ ------------ ------------ Total ............................... $ 155,160 $ 171,529 $ 39,502 $ 73,343 ============ ============ ============ ============
OPERATING REVENUES. Domestic contract drilling services revenues decreased $11,780,000 in the Current Period as compared to the Comparable Period primarily due to lower average dayrates and average rig utilization rates. The lower average dayrates primarily relate to our domestic jackup rigs and were partially offset by revenues from the Noble Paul Romano, Noble Jim Thompson and Noble Amos Runner which began operating in December 1998, June 1999 and August 1999, respectively, and earn dayrates that are higher than our average domestic rate. Domestic turnkey drilling services revenues were $4,635,000 lower in the Current Period than the Comparable Period due to lower turnkey rates charged to our customers and the completion of turnkey wells that were less complex and thus produced lower average revenues than those wells completed in the Comparable Period. Nineteen domestic turnkey wells were completed in the Current Period as compared to nine in the Comparable Period. GROSS MARGIN. While the operations of the Noble Paul Romano, Noble Jim Thompson and Noble Amos Runner favorably impacted domestic contract drilling services gross margin in the Current Period, gross margin decreased $30,795,000 in the Current Period as compared to the Comparable Period due primarily to lower average dayrates and average rig utilization rates and certain ongoing operating expenses incurred on rigs that were stacked during the Current Period. The negative turnkey drilling services gross margin is attributable to above market dayrates and lower utilization on certain drilling rigs which our turnkey subsidiary had under term contract from a third party during the Current Period. OTHER ITEMS DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense increased $10,540,000 in the Current Period as compared to the Comparable Period due primarily to the activation of four EVA-4000(TM) semisubmersibles since the latter part of 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased $1,084,000 in the Current Period as compared to the Comparable Period primarily due to the implementation of cost reduction initiatives in the Current Period. 16 17 INTEREST EXPENSE. Interest expense increased $19,139,000 in the Current Period as compared to the Comparable Period due to higher average debt balances resulting from project financings completed in the latter part of 1998 related to EVA-4000(TM) semisubmersible conversions and the March 1999 issuance of the Notes. Additionally, in connection with the acquisition of a majority interest in Arktik and a 100 percent interest in the bareboat charter of the Noble Kolskaya, we incurred debt of $17,500,000 and recorded Arktik's outstanding indebtedness of $31,900,000. See Notes 4 and 6 to our accompanying Condensed Consolidated Financial Statements. Capitalized interest costs related to construction in progress on qualifying upgrade projects were $18,659,000 and $10,845,000 in the Current Period and the Comparable Period, respectively. INTEREST INCOME. Interest income increased $2,900,000 in the Current Period as compared to the Comparable Period due to higher average cash balances resulting from the completion of project financings in the latter part of 1998 and the March 1999 issuance of the Notes. INCOME TAX PROVISION. Income tax expense decreased $28,512,000 in the Current Period as compared to the Comparable Period due primarily to lower pretax earnings and a lower proportion of our earnings being U.S. sourced earnings that are taxed at higher effective rates than international earnings. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW At September 30, 1999, we had cash and cash equivalents of $149,434,000 and approximately $196,323,000 of funds available under our line of credit. We had working capital of $80,060,000 and $88,720,000 at September 30, 1999 and December 31, 1998, respectively. Total debt as a percentage of total debt plus shareholders' equity was 37 percent at September 30, 1999 compared to 32 percent at December 31, 1998. Capital expenditures totaled $96,837,000 and $352,890,000 for the Current Quarter and Current Period, respectively. We expect capital expenditures for the remainder of 1999 to aggregate approximately $92,480,000, of which the majority relates to conversions and upgrades of drilling units. Of this amount, approximately $34,000,000 relates to the conversion of the Noble Max Smith and approximately $57,030,000 relates to the upgrade of the Noble Homer Ferrington. We expect the total cost of these two semisubmersible projects to be approximately $334,567,000. Certain projects we are currently considering 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 exceed materially 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 and criteria or specifications during repair or construction. We have entered into agreements with vendors to purchase or construct equipment for the conversion of drilling units. These agreements generally require non-refundable payments as certain milestones are met. The cumulative amount of such payments totaled $186,947,000 through September 30, 1999. As of September 30, 1999, we also had $30,567,000 of purchase commitments related to rig conversion projects. If we cancelled the purchase commitments, the ultimate amounts refunded to us would be subject to negotiation with vendors. CREDIT FACILITIES AND LONG-TERM DEBT As of September 30, 1999, our short-term debt and current installments of long-term debt balance was $59,905,000 as compared to $148,786,000 as of December 31, 1998. As of September 30, 1999, our long-term debt balance was $747,616,000 as compared to $460,842,000 as of December 31, 1998. 17 18 On March 16, 1999, we issued our 2009 Notes and 2019 Notes in the aggregate principal amount of $400,000,000. We used approximately $218,000,000 of the net proceeds from the issuance of the Notes to purchase and retire our 9 1/8% Notes and to repay $75,000,000 outstanding under our Credit Agreement. See Note 6 to our accompanying Condensed Consolidated Financial Statements. As of September 30, 1999, we had no borrowings under the Credit Agreement and $3,677,000 had been used to support outstanding letters of credit. As of September 30, 1999, we had the ability to borrow $196,323,000 under the Credit Agreement. Additionally, at September 30, 1999, we had $21,192,000 of surety bonds and unsecured letter of credit facilities. In connection with our acquisition effective January 1, 1999 of a majority interest in Arktik and a 100 percent interest in the bareboat charter of the Noble Kolskaya, we incurred indebtedness to Kvaerner Maritime A.S. in the aggregate principal amount of $17,500,000. Additionally, we recorded Arktik's outstanding bank indebtedness (the "Arktik Debt") in the amount of $24,000,000 and Arktik's indebtedness to a minority equity owner in Arktik in the amount of $7,900,000. See Note 4 to our accompanying Condensed Consolidated Financial Statements. In connection with the Arktik Debt, we have entered into an interest swap contract with a notional amount of $20,000,000 to minimize our exposure to interest rate increases during the period from December 1, 1999 to June 2, 2003, the termination date of the interest rate swap contract. Under the terms of the swap agreement, on a semi-annual basis we will pay a fixed interest rate of 6.29% per annum plus a 1% margin on the outstanding principal balance. Interest expense recognized on the Arktik Debt will be at the fixed interest rate plus 1% margin. See Note 6 to our accompanying Condensed Consolidated Financial Statements. Required debt principal and interest payments for currently outstanding debt are estimated to be approximately $34,188,000 over the remainder of 1999. We expect to fund these obligations out of existing balances of cash and cash equivalents as well as cash expected to be provided by operations. We anticipate that our existing cash balances and our cash flows generated from operations will be sufficient to meet our required debt principal and interest payments and our expected discretionary capital expenditures, assuming no material decrease in demand for contract drilling and turnkey services. YEAR 2000 We are working to resolve the potential impact of the year 2000 on the ability of our computerized systems to accurately process information that may be date-sensitive. Any of our programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. We are managing our year 2000 compliance issues through a committee (the "Y2K Committee"), which was formed to develop our year 2000 initiatives. As of September 30, 1999, the Y2K Committee had completed its review of critical information technology ("IT") systems, such as computer hardware and software, and non-information technology ("Non-IT") systems, which include computer controlled equipment and electronic devices that are used to operate equipment on our drilling units. Additionally, the review of telephone systems and other office-based electronic equipment systems has been completed. The Y2K Committee has also initiated and/or received communication from most of our customers, suppliers and service providers on year 2000 issues to determine the extent to which we may be exposed to the disruption of business activities in the event these third parties fail to correct their year 2000 system deficiencies. Although there is currently no indication that the various companies on which we primarily rely will not resolve their year 2000 compliance issues, there can be no guarantee that the systems of such companies will be corrected on a timely basis. Additionally, there can be no guarantee that we will not encounter an unexpected year 2000 problem. The Y2K Committee began implementing corrective measures based on the internal and external IT and Non-IT systems reviews. However, if we or the third parties on which we principally rely are unable to finalize corrective measures in a timely manner, a material adverse impact to our results of operations and financial position could result. In the event we or the various companies on which we primarily rely experience year 2000 compliance problems, worst-case consequences could include the interruption of drilling services aboard our drilling units, delays in shipments of materials and supplies required to operate our drilling units, delays in transferring personnel to and from the drilling units, and delays in receiving funds from customers or in making payments to suppliers. 18 19 The year 2000 remediation and testing phases for critical IT systems have been completely reviewed, remediated and tested. We are developing a contingency plan for year 2000 issues to address business interruptions. We expect to have a contingency plan completed by November 30, 1999. As of September 30, 1999, we had incurred costs of approximately $185,000 related to our year 2000 project. The estimated additional costs to complete the project are approximately $65,000. A portion of these costs is not incremental, but rather reflects redeployment of internal resources from other activities. We do not separately track the internal costs incurred for the year 2000 project. Such internal costs principally relate to payroll costs of project personnel. All of the costs of the year 2000 project are being borne out of our operating cash flow and are expensed as incurred. ACCOUNTING PRONOUNCEMENT In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon adoption, all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged items; effects of certain changes in fair value are recorded in Other Comprehensive Income pending recognition in earnings. SFAS 133, as amended by SFAS No.137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.133", is effective for fiscal years beginning after June 15, 2000. The impact of SFAS 133 on our financial statements will depend on a variety of factors, including future interpretive guidance from the FASB, the future level of actual foreign currency transactions, the extent of our hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, we believe adoption will not have a material effect on our results of operations, cash flows or financial position. 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 and certain variable rate indebtedness. Interest on these obligations is at an agreed upon percentage point spread from LIBOR. At September 30, 1999, there were no outstanding borrowings under the Credit Agreement and $15,750,000 of variable rate obligations was outstanding. Based upon this balance, 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, the vast majority of our foreign transactions are denominated in U.S. dollars. With minor exceptions, we structure our drilling contracts in U.S. dollars to mitigate the exposure to fluctuations in foreign currencies. Other than our trade accounts receivable and trade accounts payable, we do not currently have financial instruments that are sensitive to foreign currency rates. PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION In June 1998 the Securities and Exchange Commission amended Rule 14a-4 under the Securities Exchange Act of 1934. The amended rule provides that a proxy may confer discretionary authority to vote on any matter at an annual meeting if the company did not have written notice of the matter to be raised at the annual meeting at least 45 days in advance of the anniversary of the mailing of proxy materials for the prior year's annual meeting. The rule further provides that any advance notice provision in a company's bylaws or articles of incorporation will override the 45-day advance notice provision in the rule. The bylaws of Noble Drilling provide that notice of any stockholder proposal nominating persons for election to the Board of Directors of Noble Drilling must be given to the Secretary of Noble Drilling not later than 90 days prior to the annual meeting; and all other stockholder proposals must be filed with the Secretary not less than 60 nor more than 120 days in advance of the date of the annual meeting. This requirement is separate and apart from the Securities and Exchange Commission's requirements that a stockholder must satisfy in order to have a stockholder proposal included in Noble Drilling's proxy statement and form of proxy. As described in 19 20 Noble Drilling's proxy statement for its 1999 Annual Meeting, specific proposals of stockholders intended to be presented at the 2000 Annual Meeting must be received by the Secretary of Noble Drilling no later than November 19, 1999 in order to be eligible for inclusion in Noble Drilling's proxy materials relating to that meeting. 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) No reports on Form 8-K were filed by us during the quarter ended September 30, 1999. 20 21 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: November 12, 1999 /s/ ROBERT D. CAMPBELL --------------------------------------- ROBERT D. CAMPBELL, President DATE: November 12, 1999 /s/ BYRON L. WELLIVER --------------------------------------- BYRON L. WELLIVER, Senior Vice President-Finance, Treasurer and Controller (Principal Financial and Accounting Officer) 21 22 INDEX TO EXHIBITS
Exhibit Number Exhibit - ------- ------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 SEP-30-1999 149,434 0 138,085 414 4,742 329,227 2,381,635 372,423 2,433,449 249,167 747,616 0 0 13,444 1,351,098 2,433,449 0 532,416 0 324,010 86,288 0 22,541 107,467 28,673 78,794 0 (10,833) 0 67,961 0.52 0.51
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