10-Q 1 a13-13967_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2013

 

Commission File Number: 001-32657

 

NABORS INDUSTRIES LTD.

(Exact name of registrant as specified in its charter)

 

Bermuda

 

98-0363970

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

Crown House

Second Floor

4 Par-la-Ville Road

Hamilton, HM08

Bermuda

(441) 292-1510

(Address of principal executive office)

 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated Filer £

 

 

 

Non-accelerated Filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES o  NO x

 

The number of common shares, par value $.001 per share, outstanding as of July 29, 2013 was 295,048,631.

 

 

 



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

 

Index

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012

3

 

 

 

 

Consolidated Statements of Income (Loss) for the Three and Six Months Ended June 30, 2013 and 2012

4

 

 

 

 

Consolidated Statements of Other Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012

5

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012

6

 

 

 

 

Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2013 and 2012

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

Report of Independent Registered Public Accounting Firm

40

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

41

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

54

 

 

 

Item 1A.

Risk Factors

54

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

Item 3.

Defaults Upon Senior Securities

55

 

 

 

Item 4.

Mine Safety Disclosures

55

 

 

 

Item 5.

Other Information

55

 

 

 

Item 6.

Exhibits

56

 

 

 

Signatures

 

57

 

 

 

Exhibit Index

 

58

 

2



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

December 31,

 

(In thousands, except share amounts)

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

508,128

 

$

524,922

 

Short-term investments

 

99,832

 

253,282

 

Assets held for sale

 

351,263

 

383,857

 

Accounts receivable, net

 

1,342,386

 

1,382,623

 

Inventory

 

235,042

 

251,133

 

Deferred income taxes

 

103,779

 

110,480

 

Other current assets

 

252,402

 

226,560

 

Total current assets

 

2,892,832

 

3,132,857

 

Long-term investments and other receivables

 

3,629

 

4,269

 

Property, plant and equipment, net

 

8,577,586

 

8,712,088

 

Goodwill

 

487,252

 

472,326

 

Investment in unconsolidated affiliates

 

68,444

 

61,690

 

Other long-term assets

 

237,160

 

272,792

 

Total assets

 

$

12,266,903

 

$

12,656,022

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of debt

 

$

11,445

 

$

364

 

Trade accounts payable

 

498,081

 

499,010

 

Accrued liabilities

 

634,835

 

599,380

 

Income taxes payable

 

35,795

 

33,628

 

Total current liabilities

 

1,180,156

 

1,132,382

 

Long-term debt

 

4,071,191

 

4,379,336

 

Other long-term liabilities

 

464,465

 

518,664

 

Deferred income taxes

 

548,618

 

599,335

 

Total liabilities

 

6,264,430

 

6,629,717

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Subsidiary preferred stock (Note 8)

 

69,188

 

69,188

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, par value $0.001 per share:
Authorized common shares 800,000; issued 323,421 and 318,813, respectively

 

323

 

319

 

Capital in excess of par value

 

2,376,245

 

2,337,244

 

Accumulated other comprehensive income

 

299,016

 

431,595

 

Retained earnings

 

4,191,606

 

4,120,398

 

Less: treasury shares, at cost, 28,414 common shares

 

(944,627

)

(944,627

)

Total shareholders’ equity

 

5,922,563

 

5,944,929

 

Noncontrolling interest

 

10,722

 

12,188

 

Total equity

 

5,933,285

 

5,957,117

 

Total liabilities and equity

 

$

12,266,903

 

$

12,656,022

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(In thousands, except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

1,491,586

 

$

1,737,114

 

$

3,070,231

 

$

3,627,540

 

Earnings (losses) from unconsolidated affiliates

 

1,360

 

(134,317

)

4,255

 

(202,986

)

Investment income (loss)

 

14,821

 

5,368

 

94,242

 

25,620

 

Total revenues and other income

 

1,507,767

 

1,608,165

 

3,168,728

 

3,450,174

 

 

 

 

 

 

 

 

 

 

 

Costs and other deductions:

 

 

 

 

 

 

 

 

 

Direct costs

 

999,192

 

1,123,256

 

2,025,234

 

2,308,072

 

General and administrative expenses

 

132,612

 

133,612

 

265,157

 

269,958

 

Depreciation and amortization

 

270,199

 

261,016

 

543,564

 

508,637

 

Interest expense

 

60,271

 

63,459

 

120,279

 

126,113

 

Losses (gains) on sales and disposals of long-lived assets and other expense (income), net

 

9,312

 

160,917

 

69,119

 

159,077

 

Total costs and other deductions

 

1,471,586

 

1,742,260

 

3,023,353

 

3,371,857

 

Income (loss) from continuing operations before income taxes

 

36,181

 

(134,095

)

145,375

 

78,317

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

Current

 

11,381

 

34,698

 

30,210

 

60,704

 

Deferred

 

(5,209

)

(70,890

)

(12,766

)

(27,852

)

Total income tax expense (benefit)

 

6,172

 

(36,192

)

17,444

 

32,852

 

Subsidiary preferred stock dividend

 

750

 

750

 

1,500

 

1,500

 

Income (loss) from continuing operations, net of tax

 

29,259

 

(98,653

)

126,431

 

43,965

 

Income (loss) from discontinued operations, net of tax

 

(28,004

)

24,690

 

(25,958

)

15,895

 

Net income (loss)

 

1,255

 

(73,963

)

100,473

 

59,860

 

Less: Net (income) loss attributable to noncontrolling interest

 

(5,616

)

1,174

 

(5,713

)

1,441

 

Net income (loss) attributable to Nabors

 

$

(4,361

)

$

(72,789

)

$

94,760

 

$

61,301

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

0.08

 

$

(0.34

)

$

0.41

 

$

0.16

 

Basic from discontinued operations

 

(0.09

)

0.09

 

(0.09

)

0.05

 

Total Basic

 

$

(0.01

)

$

(0.25

)

$

0.32

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

0.08

 

$

(0.34

)

$

0.41

 

$

0.16

 

Diluted from discontinued operations

 

(0.09

)

0.09

 

(0.09

)

0.05

 

Total Diluted

 

$

(0.01

)

$

(0.25

)

$

0.32

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

294,747

 

290,311

 

293,217

 

289,550

 

Diluted

 

297,119

 

290,311

 

295,644

 

292,185

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Nabors

 

$

(4,361

)

$

(72,789

)

$

94,760

 

$

61,301

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Translation adjustment attributable to Nabors

 

(29,304

)

(19,659

)

(52,569

)

(2,393

)

Unrealized gains/(losses) on marketable securities

 

(5,137

)

(5,008

)

5,002

 

7,215

 

Less: reclassification adjustment for (gains)/losses included in net income (loss) (Note 11)

 

(12,183

)

(19

)

(88,157

)

(12,484

)

Unrealized gains/(losses) on marketable securities

 

(17,320

)

(5,027

)

(83,155

)

(5,269

)

Pension liability amortization

 

281

 

260

 

562

 

520

 

Unrealized gains/(losses) on cash flow hedges

 

153

 

191

 

306

 

382

 

Other comprehensive income (loss), before tax

 

(46,190

)

(24,235

)

(134,856

)

(6,760

)

Income tax expense (benefit) related to items of other comprehensive income (loss)

 

(2,063

)

140

 

(2,277

)

(3,584

)

Other comprehensive income (loss), net of tax

 

(44,127

)

(24,375

)

(132,579

)

(3,176

)

Comprehensive income (loss) attributable to Nabors

 

(48,488

)

(97,164

)

(37,819

)

58,125

 

Net income (loss) attributable to noncontrolling interest

 

5,616

 

(1,174

)

5,713

 

(1,441

)

Translation adjustment attributable to noncontrolling interest

 

613

 

(216

)

(801

)

27

 

Comprehensive income (loss) attributable to noncontrolling interest

 

6,229

 

(1,390

)

4,912

 

(1,414

)

Comprehensive income (loss)

 

$

(42,259

)

$

(98,554

)

$

(32,907

)

$

56,711

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss) attributable to Nabors

 

$

94,760

 

$

61,301

 

Adjustments to net income (loss):

 

 

 

 

 

Depreciation and amortization

 

543,637

 

508,748

 

Depletion and other oil and gas expenses

 

14,182

 

151

 

Deferred income tax expense (benefit)

 

(20,720

)

(15,404

)

Impairments and other charges

 

34,983

 

159,950

 

Losses (gains) on investments, net

 

(91,140

)

(21,400

)

Share-based compensation

 

38,824

 

8,784

 

Foreign currency transaction losses (gains), net

 

7,311

 

2,285

 

Gain on sale of oil and gas operations

 

 

(48,486

)

Equity in (earnings) losses of unconsolidated affiliates, net of dividends

 

(3,891

)

202,985

 

Other

 

15,422

 

12,586

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

Accounts receivable

 

22,556

 

(33,981

)

Inventory

 

13,893

 

6,636

 

Other current assets

 

(3,402

)

(26,906

)

Other long-term assets

 

25,820

 

6,693

 

Trade accounts payable and accrued liabilities

 

38,216

 

(94,423

)

Income taxes payable

 

(28,834

)

(33,147

)

Other long-term liabilities

 

(36,209

)

15,565

 

Net cash provided by operating activities

 

665,408

 

711,937

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investments

 

 

(795

)

Sales and maturities of investments

 

163,161

 

25,517

 

Proceeds from sales of unconsolidated affiliates

 

10,000

 

 

Investment in unconsolidated affiliate

 

(3,927

)

 

Cash paid for acquisition of businesses, net

 

(37,516

)

 

Capital expenditures

 

(500,368

)

(967,861

)

Proceeds from sales of assets and insurance claims

 

29,731

 

116,923

 

Other

 

(3,142

)

 

Net cash used for investing activities

 

(342,061

)

(826,216

)

Cash flows from financing activities:

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

(8,686

)

(2,060

)

Dividends to shareholders

 

(23,552

)

 

Proceeds from debt

 

11,569

 

 

Debt issuance costs

 

(87

)

 

Proceeds from revolving credit facility

 

 

200,000

 

Proceeds from (payments for) commercial paper, net

 

295,000

 

 

Proceeds from (payments for) issuance of common shares

 

3,200

 

(5,066

)

Reduction in long-term debt

 

(17,853

)

(1,235

)

Reduction in revolving credit facility

 

(590,000

)

(150,000

)

Purchase of restricted stock

 

(3,023

)

(2,071

)

Tax (expense) benefit related to share-based awards

 

 

(36

)

Net cash (used for) provided by financing activities

 

(333,432

)

39,532

 

Effect of exchange rate changes on cash and cash equivalents

 

(6,709

)

(3,430

)

Net increase (decrease) in cash and cash equivalents

 

(16,794

)

(78,177

)

Cash and cash equivalents, beginning of period

 

524,922

 

398,575

 

Cash and cash equivalents, end of period

 

$

508,128

 

$

320,398

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

in Excess

 

Other

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Par

 

of Par

 

Comprehensive

 

Retained

 

Treasury

 

controlling

 

Total

 

(In thousands)

 

Shares

 

Value

 

Value

 

Income

 

Earnings

 

Shares

 

Interest

 

Equity

 

As of December 31, 2011

 

317,042

 

$

317

 

$

2,287,743

 

$

321,264

 

$

3,956,364

 

$

(977,873

)

$

13,402

 

$

5,601,217

 

Net income (loss)

 

 

 

 

 

 

 

 

 

61,301

 

 

 

(1,441

)

59,860

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

(3,176

)

 

 

 

 

27

 

(3,149

)

Issuance of common shares for stock options exercised, net of surrender of unexercised stock options

 

999

 

1

 

(5,067

)

 

 

 

 

 

 

 

 

(5,066

)

Capital contribution from forgiveness of liability, net of tax

 

 

 

 

 

62,734

 

 

 

 

 

 

 

 

 

62,734

 

Issuance of treasury shares, net of tax benefit

 

 

 

 

 

(25,496

)

 

 

 

 

33,246

 

 

 

7,750

 

Share-based compensation

 

678

 

1

 

8,783

 

 

 

 

 

 

 

 

 

8,784

 

Other

 

 

 

 

 

(2,107

)

 

 

 

 

 

 

(1,121

)

(3,228

)

As of June 30, 2012

 

318,719

 

$

319

 

$

2,326,590

 

$

318,088

 

$

4,017,665

 

$

(944,627

)

$

10,867

 

$

5,728,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2012

 

318,813

 

$

319

 

$

2,337,244

 

$

431,595

 

$

4,120,398

 

$

(944,627

)

$

12,188

 

$

5,957,117

 

Net income (loss)

 

 

 

 

 

 

 

 

 

94,760

 

 

 

5,713

 

100,473

 

Dividends to shareholders ($.04/share)

 

 

 

 

 

 

 

 

 

(23,552

)

 

 

 

 

(23,552

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

(132,579

)

 

 

 

 

(801

)

(133,380

)

Issuance of common shares for stock options exercised, net of surrender of unexercised stock options

 

343

 

 

3,200

 

 

 

 

 

 

 

 

 

3,200

 

Deconsolidation of non- controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,899

)

(2,899

)

Share-based compensation

 

4,265

 

4

 

38,824

 

 

 

 

 

 

 

 

 

38,828

 

Other

 

 

 

 

 

(3,023

)

 

 

 

 

 

 

(3,479

)

(6,502

)

As of June 30, 2013

 

323,421

 

$

323

 

$

2,376,245

 

$

299,016

 

$

4,191,606

 

$

(944,627

)

$

10,722

 

$

5,933,285

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Nature of Operations

 

Nabors has grown from a land drilling business centered in the U.S. Lower 48 states, Canada and Alaska to a global business aimed at optimizing the entire well life cycle, with operations on land and offshore in most of the major oil and gas markets in the world. The majority of our business is conducted through two business lines:

 

Drilling & Rig Services

 

This business line is comprised of our global drilling rig operations and drilling-related services, consisting of equipment manufacturing, instrumentation optimization software and directional drilling services.

 

Completion & Production Services

 

This business line is comprised of our operations involved in the completion, life-of-well maintenance and eventual plugging and abandonment of a well.  These services include stimulation, coiled-tubing, cementing, wireline, workover, well-servicing and fluids management.

 

As a global provider of services for oil and natural gas wells, on land and offshore, Nabors’ fleet of rigs and equipment includes:

 

·                  473 actively marketed land drilling rigs for oil and gas land drilling operations in the U.S. Lower 48 states, Alaska, Canada and over 20 other countries throughout the world.

 

·                  442 actively marketed rigs for land well-servicing and workover services in the United States and approximately 102 rigs for land well-servicing and workover services in Canada.

 

·                  36 platform, 5 jackup and 4 barge rigs actively marketed in the United States, including the Gulf of Mexico, and multiple international markets.

 

·                  Approximately 800,000 hydraulic horsepower for hydraulic fracturing, cementing, nitrogen and acid pressure pumping services in key basins throughout the United States and Canada.

 

In addition to the foregoing:

 

·                  We offer a wide range of ancillary well-site services, including engineering, transportation and disposal, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in select U.S. and international markets.

 

·                  We manufacture and lease or sell top drives for a broad range of drilling applications, directional drilling systems, rig instrumentation and data collection equipment, pipeline handling equipment and rig reporting software.

 

·                  We have a 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets 5 rigs in addition to the rigs we lease to the joint venture.

 

Unless the context requires otherwise, references in this report to “we,” “us,” “our,” “the Company,” or “Nabors” mean Nabors Industries Ltd., together with our subsidiaries where the context requires, including Nabors Industries, Inc., a Delaware corporation (“Nabors Delaware”), our wholly owned subsidiary.

 

Note 2 Summary of Significant Accounting Policies

 

Interim Financial Information

 

The unaudited consolidated financial statements of Nabors are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain reclassifications have been made to the prior period to conform to the current-period presentation, with no effect on our consolidated financial position, results of operations or cash flows.  Pursuant to the rules and

 

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regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted.  Therefore, these financial statements should be read along with our annual report on Form 10-K for the year ended December 31, 2012 (“2012 Annual Report”).  In management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of June 30, 2013, as well as the results of our operations and other comprehensive income for the three and six months ended June 30, 2013 and 2012, and our cash flows and changes in equity for the six months ended June 30, 2013 and 2012, in accordance with GAAP.  Interim results for the six months ended June 30, 2013 may not be indicative of results that will be realized for the full year ending December 31, 2013.

 

Our independent registered public accounting firm has reviewed and issued a report on these consolidated interim financial statements in accordance with standards established by the Public Company Accounting Oversight Board.  Pursuant to Rule 436(c) under the Securities Act of 1933, as amended (the “Securities Act”), this report should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of such Act.

 

Principles of Consolidation

 

Our consolidated financial statements include the accounts of Nabors, as well as all majority-owned and nonmajority-owned subsidiaries required to be consolidated under GAAP.  All significant intercompany accounts and transactions are eliminated in consolidation.

 

Investments in operating entities where we have the ability to exert significant influence, but where we do not control operating and financial policies, are accounted for using the equity method.  Our share of the net income (loss) of these entities is recorded as earnings (losses) from unconsolidated affiliates in our consolidated statements of income (loss).  The investments in these entities are included in investment in unconsolidated affiliates in our consolidated balance sheets.

 

Inventory

 

Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method and includes the cost of materials, labor and manufacturing overhead.  Inventory included the following:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Raw materials

 

$

139,413

 

$

148,822

 

Work-in-progress

 

34,572

 

45,733

 

Finished goods

 

61,057

 

56,578

 

 

 

$

235,042

 

$

251,133

 

 

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Goodwill

 

The carrying amount and changes in recorded goodwill for our business lines as of and for the six months ended June 30, 2013 were as follows:

 

 

 

 

 

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

Balance at

 

Purchase

 

Disposals

 

Cumulative

 

Balance at

 

 

 

December 31,

 

Price

 

and

 

Translation

 

June 30,

 

 

 

2012

 

Adjustments

 

Impairments

 

Adjustment

 

2013

 

 

 

(In thousands)

 

Drilling & Rig Services:

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

50,149

 

$

 

$

 

$

 

$

50,149

 

Rig Services

 

32,113

 

15,828

(1)

 

(902

)

47,039

 

Subtotal Drilling & Rig Services

 

82,262

 

15,828

 

 

(902

)

97,188

 

Completion & Production Services

 

390,064

 

 

 

 

390,064

 

Total

 

$

472,326

 

$

15,828

 

$

 

$

(902

)

$

487,252

 

 


(1)         Represents the goodwill recorded in connection with our acquisition of Navigate Energy Services, Inc. (“NES”). See Note 11 - Supplemental Information for additional discussion.

 

Note 3 Cash and Cash Equivalents and Short-term Investments

 

Our cash and cash equivalents and short-term investments consisted of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

508,128

 

$

524,922

 

Short-term investments:

 

 

 

 

 

Trading equity securities

 

$

 

$

52,705

 

Available-for-sale equity securities

 

78,662

 

174,610

 

Available-for-sale debt securities

 

21,170

 

25,967

 

Total short-term investments

 

$

99,832

 

$

253,282

 

 

We sold our trading equity securities during the first quarter of 2013.

 

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Certain information related to our cash and cash equivalents and short-term investments follows:

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Fair Value

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair Value

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

508,128

 

$

 

$

 

$

524,922

 

$

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading equity securities

 

 

 

 

52,705

 

46,981

 

 

Available-for-sale equity securities

 

78,662

 

50,115

 

 

174,610

 

137,282

 

(1,030

)

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper and CDs

 

 

 

 

206

 

 

 

Corporate debt securities

 

19,685

 

4,432

 

 

23,399

 

1,870

 

 

Mortgage-backed debt securities

 

216

 

13

 

 

244

 

15

 

 

Mortgage-CMO debt securities

 

209

 

4

 

(3

)

523

 

10

 

(3

)

Asset-backed debt securities

 

1,060

 

 

(88

)

1,595

 

28

 

(192

)

Total available-for-sale debt securities

 

21,170

 

4,449

 

(91

)

25,967

 

1,923

 

(195

)

Total available-for-sale securities

 

99,832

 

54,564

 

(91

)

200,577

 

139,205

 

(1,225

)

Total short-term investments

 

99,832

 

54,564

 

(91

)

253,282

 

186,186

 

(1,225

)

Total cash, cash equivalents and short-term investments

 

$

607,960

 

$

54,564

 

$

(91

)

$

778,204

 

$

186,186

 

$

(1,225

)

 

Certain information related to the gross unrealized losses of our cash and cash equivalents and short-term investments follows:

 

 

 

As of June 30, 2013

 

 

 

Less Than 12 Months

 

More Than 12 Months

 

 

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

 

 

(In thousands)

 

Available-for-sale equity securities

 

$

 

$

 

$

 

$

 

Available-for-sale debt securities: (1)

 

 

 

 

 

 

 

 

 

Mortgage-CMO debt securities

 

21

 

(2

)

108

 

(1

)

Asset-backed debt securities

 

554

 

(1

)

506

 

(87

)

Total available-for-sale debt securities

 

575

 

(3

)

614

 

(88

)

Total

 

$

575

 

$

(3

)

$

614

 

$

(88

)

 


(1)         Our unrealized losses on available-for-sale debt securities held for more than one year are comprised of various types of securities.  Each of these securities has a rating ranging from “A” to “AAA” from Standard & Poor’s and ranging from “A2” to “Aaa” from Moody’s Investors Service and is considered to be of high credit quality.  In each case, we do not intend to sell these investments, and it is less likely than not that we will be required to sell them to satisfy our own cash flow and working capital requirements.  We believe that we will be able to collect all amounts due according to the contractual terms of each investment and, therefore, do not consider the decline in value of these investments to be other-than-temporary at June 30, 2013.

 

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The estimated fair values of our corporate, mortgage-backed, mortgage-CMO and asset-backed debt securities at June 30, 2013, classified by time to contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to repay obligations without prepayment penalties and we may elect to sell the securities prior to the contractual maturity date.

 

 

 

Estimated

 

 

 

Fair Value

 

 

 

June 30, 2013

 

 

 

(In thousands)

 

Debt securities:

 

 

 

Due in one year or less

 

$

 

Due after one year through five years

 

15,413

 

Due in more than five years

 

5,757

 

Total debt securities

 

$

21,170

 

 

Certain information regarding our debt and equity securities is presented below:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

Available-for-sale

 

 

 

 

 

 

 

 

 

Proceeds from sales and maturities

 

$

20,352

 

$

796

 

$

106,953

 

$

19,233

 

Realized gains (losses), net

 

$

12,183

 

$

19

 

$

88,157

 

$

12,484

 

 

Note 4 Fair Value Measurements

 

The following table sets forth, by level within the fair-value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of June 30, 2013.  Our debt securities could transfer into or out of a Level 1 or 2 measure depending on the availability of independent and current pricing at the end of each quarter.  During the three months ended June 30, 2013, there were no transfers of our financial assets between Level 1 and Level 2 measures.  Our financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

Fair Value as of June 30, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities from energy industry

 

$

77,800

 

$

862

 

$

 

$

78,662

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

19,685

 

 

19,685

 

Mortgage-backed debt securities

 

 

216

 

 

216

 

Mortgage-CMO debt securities

 

 

209

 

 

209

 

Asset-backed debt securities

 

1,060

 

 

 

1,060

 

Total short-term investments

 

$

78,860

 

$

20,972

 

$

 

$

99,832

 

 

Nonrecurring Fair Value Measurements

 

Fair value measurements were applied with respect to our nonfinancial assets and liabilities measured on a nonrecurring basis, which would consist of measurements primarily to assets held-for-sale, goodwill, intangible assets and other long-lived assets, assets acquired and liabilities assumed in a business combination, asset retirement obligations and our contractual pipeline commitment.

 

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Table of Contents

 

Fair Value of Financial Instruments

 

The fair value of our financial instruments has been estimated in accordance with GAAP. The fair value of our debt, revolving credit facility and subsidiary preferred stock is estimated based on quoted market prices or prices quoted from third-party financial institutions and other observable inputs, all of which represent Level 2 fair value measurements. The carrying and fair values of these liabilities were as follows:

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

 

 

(In thousands)

 

6.15% senior notes due February 2018

 

$

969,318

 

$

1,082,328

 

$

968,708

 

$

1,164,813

 

9.25% senior notes due January 2019

 

1,111,000

 

1,383,806

 

1,125,000

 

1,492,819

 

5.00% senior notes due September 2020

 

697,795

 

717,535

 

697,648

 

770,707

 

4.625% senior notes due September 2021

 

698,027

 

696,367

 

697,907

 

755,517

 

Subsidiary preferred stock

 

69,188

 

70,500

 

69,188

 

68,625

 

Revolving credit facility

 

300,000

 

300,000

 

890,000

 

890,000

 

Commercial paper

 

295,000

 

295,000

 

 

 

Other

 

11,496

 

11,496

 

437

 

437

 

 

 

$

4,151,824

 

$

4,557,032

 

$

4,448,888

 

$

5,142,918

 

 

The fair values of our cash equivalents, trade receivables and trade payables approximate their carrying values due to the short-term nature of these instruments.

 

As of June 30, 2013, our short-term investments were carried at fair market value and classified as available-for-sale.  As of December 31, 2012, our short-term investments were carried at fair market value and included $200.6 million and $52.7 million in securities classified as available-for-sale and trading, respectively.

 

Note 5 Share-Based Compensation

 

Our share-based employee and director compensation plans are more fully described in Note 8 — Share-Based Compensation in our 2012 Annual Report. Total share-based compensation expense, which includes stock options and restricted stock, totaled $6.0 million and $4.3 million for the three months ended June 30, 2013 and 2012, respectively, and $38.8 million and $8.8 million for the six months ended June 30, 2013 and 2012, respectively. Total share-based compensation expense for the six months ended June 30, 2013 included a one-time stock grant valued at $27.0 million, which vested immediately, in connection with the termination of the 2009 employment agreement with Anthony Petrello, our Chairman, President and Chief Executive Officer. This share-based compensation expense has been recognized in other (losses) gains on sales and disposals of long-lived assets and other expense (income), net in our consolidated statement of income (loss).  See Note 9 — Commitments and Contingencies for additional discussion. All other share-based compensation expense is included in direct costs and general and administrative expenses in our consolidated statements of income (loss). Share-based compensation expense has been allocated to our various operating segments.  See Note 13 — Segment Information.

 

During the six months ended June 30, 2013 and 2012, we awarded 4,688,514 and 923,131 shares of restricted stock, respectively, vesting over periods of up to four years, to our employees and directors.  Some of the restricted stock awards made during the six months ended June 30, 2013 contain provisions relating to market conditions or performance measures, which may affect the grant date or vesting of such awards. All of these awards had an aggregate value at their grant date of $76.2 million and $19.2 million, respectively.  The fair value of restricted stock that vested during the six months ended June 30, 2013 and 2012 was $36.3 million and $9.3 million, respectively.

 

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During the six months ended June 30, 2013 and 2012, we awarded options vesting over periods up to four years to purchase 44,375 and 634,974 of our common shares, respectively, to our employees and directors.  The fair value of stock options granted during the six months ended June 30, 2013 and 2012 was calculated using the Black-Scholes option pricing model and the following weighted-average assumptions:

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

Weighted average fair value of options granted

 

$

6.25

 

$

9.52

 

Weighted average risk free interest rate

 

0.64

%

0.63

%

Dividend yield

 

0.78

%

0.00

%

Volatility (1)

 

51.01

%

55.91

%

Expected life

 

4.0 years

 

4.0 years

 

 


(1)                                                         Expected volatilities are based on implied volatilities from publicly traded options to purchase Nabors’ common shares, historical volatility of Nabors’ common shares and other factors.

 

The total intrinsic value of stock options exercised during the six months ended June 30, 2013 and 2012 was $2.4 million and $5.1 million, respectively.  Additionally, the intrinsic value of stock options surrendered during the six months ended June 30, 2012 was $17.9 million.  The total fair value of stock options that vested during the six months ended June 30, 2013 and 2012 was $3.9 million and $7.6 million, respectively.

 

Note 6 Debt

 

Debt consisted of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

6.15% senior notes due February 2018

 

$

969,318

 

$

968,708

 

9.25% senior notes due January 2019

 

1,111,000

 

1,125,000

 

5.00% senior notes due September 2020

 

697,795

 

697,648

 

4.625% senior notes due September 2021

 

698,027

 

697,907

 

Revolving credit facility

 

300,000

 

890,000

 

Commercial paper

 

295,000

 

 

Other

 

11,496

 

437

 

 

 

$

4,082,636

 

$

4,379,700

 

Less: current portion of debt

 

11,445

 

364

 

 

 

$

4,071,191

 

$

4,379,336

 

 

Commercial Paper Program

 

During April 2013, Nabors Delaware established a commercial paper program. This program allows the issuance from time to time of up to an aggregate amount of $1.5 billion in commercial paper with a maturity of no more than 397 days. Our commercial paper borrowings are classified as long-term debt because the borrowings are fully supported by availability under our revolving credit facility; that facility matures in November 2017, which is more than one year from now.  As of June 30, 2013, we had issued $295.0 million in commercial paper, using the proceeds to reduce borrowings on our revolving credit facility.  The weighted average interest rate on borrowings at June 30, 2013 was 0.4%.

 

Revolving Credit Facility

 

At June 30, 2013, we had $1.2 billion of remaining availability from a total of $1.5 billion under our existing revolving credit facility. The weighted average interest rate on borrowings at June 30, 2013 was 1.54%.  The revolving credit facility contains various covenants and restrictive provisions that limit our ability to incur additional indebtedness, make investments or loans and create liens and require us to maintain a net funded indebtedness to total capitalization ratio, as defined in each agreement. We were in compliance

 

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with all covenants under the agreement at June 30, 2013 and December 31, 2012. If we should fail to perform our obligations under the covenants, the revolving credit commitment could be terminated, and any outstanding borrowings under the facility could be declared immediately due and payable.

 

Note 7 Common Shares

 

During the six months ended June 30, 2013, our employees exercised vested options to acquire .3 million of our common shares, resulting in proceeds of $3.2 million. During the six months ended June 30, 2012, our employees exercised vested options and surrendered unexercised vested stock options to acquire 1.0 million of our common shares. We received $15.9 million relating to exercised options. We used approximately $21.0 million to repurchase surrendered unexercised vested options and to satisfy related tax withholding obligations pursuant to stock option share settlements and exercises by some employees. For the six months ended June 30, 2013 and 2012, we withheld .2 million and .1 million, respectively, of our common shares with a fair value of $3.0 million and $2.1 million, respectively, to satisfy tax withholding obligations in connection with the vesting of all stock awards.

 

During the three months ended June 30, 2013, cash dividends of $0.04 per share were declared for shareholders of record on June 7, 2013. Dividends of $23.6 million have been paid during the six months ended June 30, 2013 (including dividends declared in February 2013 and paid in March 2013) and charged to retained earnings in our consolidated statement of changes in equity.

 

Note 8 Subsidiary Preferred Stock

 

As of June 30, 2013, dividends on outstanding shares of preferred stock had been declared and paid in full with respect to each quarter since their issuance.

 

Note 9 Commitments and Contingencies

 

Commitments

 

Employment Contracts

 

During the first quarter of 2013, the Compensation Committee authorized a new employment agreement for Mr. Petrello effective January 1, 2013 that significantly restructured his compensation arrangements. The new employment agreement provides for an initial term of five years, with automatic one-year extensions at the end of each term, subject to a 90-day notice of termination provided within the agreement.

 

·                  The new employment agreement provides for an annual cash bonus targeted at base salary, with a cap of twice that amount, based on the achievement of certain financial and operational performance metrics and defined performance criteria.

 

·                  The new employment agreement provides for long-term equity incentive awards.  Mr. Petrello may receive restricted stock that may or may not vest depending upon the Company’s performance relative to a Performance Peer Group (as defined) over a three-year period (“TSR Shares”). The agreement provides that the target number of TSR Shares that will vest is valued at 150% of base salary, with a maximum number of TSR Shares valued at twice that amount.

 

·                  The employment agreement provides for long-term equity incentive awards in the form of restricted stock based upon the achievement of specific financial or operational objectives (“Performance Shares”).  Once earned, Performance Shares are then subject to three-year vesting requirements.  Performance Shares are targeted at 200% of base salary, with a maximum award of twice that amount, and are also subject to a minimum threshold before any amount can be earned.

 

·                  In the event of Mr. Petrello’s Termination Without Cause (including in the event of a change of control), or his death or disability, either he or his estate would be entitled to receive, within 30 days thereafter, 2.99 times the average of his base salary and annual cash bonus during the three fiscal years preceding the termination.

 

We do not have insurance to cover, and we have not recorded an expense or accrued a liability relating to any potential termination obligation.

 

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Contingencies

 

Income Tax Contingencies

 

We are subject to income taxes in the United States and numerous other jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly audited by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than what is reflected in income tax provisions and accruals. An audit or litigation could materially affect our financial position, income tax provision, net income, or cash flows in the period or periods challenged.

 

It is possible that future changes to tax laws (including tax treaties) could impact our ability to realize the tax savings recorded to date, as well as future tax savings resulting from our 2002 corporate reorganization.  See Note 13 — Income Taxes to our 2012 Annual Report for additional discussion.

 

In 2006, Nabors Drilling International Limited, one of our wholly owned Bermuda subsidiaries (“NDIL”), received a Notice of Assessment from Mexico’s federal tax authorities in connection with the audit of NDIL’s Mexico branch for 2003. The notice proposed to deny depreciation expense deductions relating to drilling rigs operating in Mexico in 2003.  The notice also proposed to deny a deduction for payments made to an affiliated company for the procurement of labor services in Mexico. NDIL’s Mexico branch took similar deductions for depreciation and labor expenses from 2004 to 2008.  In 2009, the government proposed similar assessments against the Mexico branch of another wholly owned Bermuda subsidiary, Nabors Drilling International II Ltd. (“NDIL II”) for 2006.  We anticipate that a similar assessment will eventually be proposed against NDIL through 2008 and against NDIL II for 2007 to 2010.  Although Nabors and its tax advisors previously concluded that the deductions were appropriate for each of the years, a reserve has been recorded in accordance with GAAP.  During 2013, we reached a negotiated settlement for NDIL’s 2003, 2005 and 2006 tax years (the statute of limitations had previously expired on the 2004 tax year) and NDIL II’s 2006 tax year. Accordingly, the corresponding reserves were reduced by approximately $20 million during the first quarter of 2013. After this settlement, the remaining amounts assessed or expected to be assessed in the aggregate, range from $30 million to $35 million, for which reserves are recorded in accordance with GAAP. If we ultimately do not prevail, we would be required to recognize additional tax for any amount in excess of the current reserve.

 

Self-Insurance

 

We estimate the level of our liability related to self-insured claims, and record reserves for these amounts in our consolidated financial statements. Our estimates are based on the facts and circumstances specific to existing claims and our past experience with similar claims. These loss estimates and accruals recorded in our financial statements for claims have historically been reasonable in light of the actual amount of claims paid and are actuarially supported.  Although we believe our insurance coverage and reserve estimates are reasonable, a significant accident or other event that is not fully covered by insurance or contractual indemnity could occur and could materially affect our financial position and results of operations for a particular period.

 

We self-insure for certain losses relating to workers’ compensation, employers’ liability, general liability, automobile liability and property damage. Some workers’ compensation claims, employers’ liability and marine employers’ liability claims are subject to a $2.0 million per-occurrence deductible.  Some automobile liability claims are subject to a $1.0 million deductible.  General liability claims are subject to a $5.0 million per-occurrence deductible.

 

Litigation

 

Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ from our estimates. For matters where an unfavorable outcome is reasonably possible and significant, we disclose the nature of the matter and a range of potential exposure, unless an estimate cannot be made at the time of disclosure. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period.

 

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In 2009, the Court of Ouargla entered a judgment of approximately $18.2 million (at current exchange rates) against us relating to alleged customs infractions in Algeria.  We believe we did not receive proper notice of the judicial proceedings, and that the amount of the judgment was excessive in any case.  We asserted the lack of legally required notice as a basis for challenging the judgment on appeal to the Algeria Supreme Court.  In May 2012, that court reversed the lower court and remanded the case to the Ouargla Court of Appeals for treatment consistent with the Supreme Court’s ruling. In January 2013, the Ouargla Court of Appeals reinstated the judgment.  We have again lodged an appeal to the Algeria Supreme Court, asserting the same challenges as before. Based upon our understanding of applicable law and precedent, we continue to believe that we will prevail. The Hassi Messaoud customs office recently initiated efforts to collect the judgment prior to the Supreme Court’s decision in the case, as permitted by Algerian law.  We intend to post security to suspend those efforts and have recorded a reserve in the anticipation of that security.  If we are ultimately required to pay a fine or judgment related to this matter, the resulting loss could be up to $13.6 million in excess of amounts accrued.

 

In March 2011, the Court of Ouargla entered a judgment of approximately $35.8 million (at current exchange rates) against us relating to alleged violations of Algeria’s foreign currency exchange controls, which require that goods and services provided locally be invoiced and paid in local currency. The case relates to certain foreign currency payments made to us by CEPSA, a Spanish operator, for wells drilled in 2006. Approximately $7.5 million of the total contract amount was paid offshore in foreign currency, and approximately $3.2 million was paid in local currency. The judgment includes fines and penalties of approximately four times the amount at issue. We have appealed the ruling based on our understanding that the law in question applies only to resident entities incorporated under Algerian law. An intermediate court of appeals has upheld the lower court’s ruling, and we have appealed the matter to the Algeria Supreme Court.  While our payments were consistent with our historical operations in the country, and, we believe, those of other multinational corporations there, as well as interpretations of the law by the Central Bank of Algeria, the ultimate resolution of this matter could result in a loss of up to $27.8 million in excess of amounts accrued.

 

On September 21, 2011, we received an informal inquiry from the SEC related to perquisites and personal benefits received by the officers and directors of Nabors, including their use of non-commercial aircraft.  Our Audit Committee and Board of Directors were apprised of this inquiry and we cooperated with the SEC.  On June 6, 2013, the staff of the SEC informed us that it had concluded its inquiry and determined not to recommend any enforcement action to the Commission.

 

On March 9, 2012, Nabors Global Holdings II Limited (“NGH2L”) signed a contract with ERG Resources, LLC (“ERG”) relating to the sale of all of the Class A shares of NGH2L’s wholly owned subsidiary, Ramshorn International Limited, an oil and gas exploration company.  When ERG failed to meet its closing obligations, NGH2L terminated the transaction on March 19, 2012 and, as contemplated in the agreement, retained ERG’s $3 million escrow deposit. ERG filed suit the following day in the 61st Judicial District Court of Harris County, Texas, in a case styled ERG Resources, LLC v. Nabors Global Holdings II Limited, Ramshorn International Limited, and Parex Resources, Inc.; Cause No. 2012-16446, seeking injunctive relief to halt any sale of the shares to a third party, specifically naming as defendant Parex Resources, Inc. (“Parex”).  The lawsuit also seeks monetary damages of up to $100 million based on an alleged breach of contract by NGH2L and alleged tortious interference with contractual relations by Parex. Nabors successfully defeated ERG’s effort to obtain a temporary restraining order from the Texas court on March 20, 2012.  Nabors completed the sale of Ramshorn’s Class A shares to a Parex affiliate on April 12, 2012, which mooted ERG’s application for a temporary injunction that was scheduled for hearing by the Texas court on April 13, 2012.  ERG retains its causes of action for monetary damages, but Nabors believes the claims are foreclosed by the terms of the agreement and are without factual or legal merit.  Although we are vigorously defending the lawsuit, its ultimate outcome cannot be determined at this time.

 

Off-Balance Sheet Arrangements (Including Guarantees)

 

We are a party to some transactions, agreements or other contractual arrangements defined as “off-balance sheet arrangements” that could have a material future effect on our financial position, results of operations, liquidity and capital resources.  The most significant of these off-balance sheet arrangements involve agreements and obligations under which we provide financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers’ compensation insurance program and other financial surety instruments such as bonds. In addition, we have provided indemnifications, which serve as guarantees, to some third parties. These guarantees include indemnification provided by Nabors to our share transfer agent and our insurance carriers. We are not able to estimate the potential future maximum payments that might be due under our indemnification guarantees.

 

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Management believes the likelihood that we would be required to perform or otherwise incur any material losses associated with any of these guarantees is remote. The following table summarizes the total maximum amount of financial guarantees issued by Nabors:

 

 

 

Maximum Amount

 

 

 

Remainder
of 2013

 

2014

 

2015

 

Thereafter

 

Total

 

 

 

(In thousands)

 

Financial standby letters of credit and other financial surety instruments

 

$

16,513

 

18,402

 

 

 

$

34,915

 

 

Note 10 Earnings (Losses) Per Share

 

A reconciliation of the numerators and denominators of the basic and diluted earnings (losses) per share computations is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (numerator):

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of tax

 

$

29,259

 

$

(98,653

)

$

126,431

 

$

43,965

 

Less: net (income) loss attributable to noncontrolling interest

 

(5,616

)

1,174

 

(5,713

)

1,441

 

Less: earnings allocated to unvested shareholders

 

74

 

 

(740

)

 

Adjusted income (loss) from continuing operations - basic and diluted

 

$

23,717

 

$

(97,479

)

$

119,978

 

$

45,406

 

Income (loss) from discontinued operations, net of tax

 

$

(28,004

)

$

24,690

 

$

(25,958

)

$

15,895

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

0.08

 

$

(0.34

)

$

0.41

 

$

0.16

 

Basic from discontinued operations

 

(0.09

)

0.09

 

(0.09

)

0.05

 

Total Basic

 

$

(0.01

)

$

(0.25

)

$

0.32

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

0.08

 

$

(0.34

)

$

0.41

 

$

0.16

 

Diluted from discontinued operations

 

(0.09

)

0.09

 

(0.09

)

0.05

 

Total Diluted

 

$

(0.01

)

$

(0.25

)

$

0.32

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

Shares (denominator):

 

 

 

 

 

 

 

 

 

Weighted-average number of shares outstanding - basic

 

294,747

 

290,311

 

293,217

 

289,550

 

Net effect of dilutive stock options, warrants and restricted stock awards based on the if-converted method

 

2,372

 

 

2,427

 

2,635

 

Weighted-average number of shares outstanding - diluted

 

297,119

 

290,311

 

295,644

 

292,185

 

 

For all periods presented, the computation of diluted earnings (losses) per share excludes outstanding stock options and warrants with exercise prices greater than the average market price of our common shares, because their inclusion would be anti-dilutive and because they are not considered participating securities. The average number of options and warrants that were excluded from diluted earnings (losses) per share that would potentially dilute earnings per share were 11,578,175 and 17,635,173 shares during the three months ended June 30, 2013 and 2012, respectively, and 12,015,219 and 13,395,935 shares during the six months ended June 30, 2013 and 2012, respectively.  In any period during which the average market price of our common shares exceeds the exercise prices of these stock options and warrants, such stock options and warrants will be included in our diluted earnings (losses) per share computation using the if-converted method of accounting. Restricted stock is included in our basic and diluted earnings (losses) per share computation using the two-class method of accounting in all periods because such stock is considered participating securities.

 

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Table of Contents

 

Note 11 Supplemental Information

 

Accrued liabilities include the following:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Accrued compensation

 

$

150,867

 

$

158,095

 

Deferred revenue

 

183,383

 

148,165

 

Other taxes payable

 

66,304

 

58,590

 

Workers’ compensation liabilities

 

22,645

 

22,645

 

Interest payable

 

90,285

 

90,878

 

Warranty accrual

 

6,458

 

6,436

 

Litigation reserves

 

33,592

 

26,782

 

Current liability to discontinued operations

 

57,737

 

68,961

 

Professional fees

 

3,147

 

2,989

 

Current deferred tax liability

 

12,005

 

10,721

 

Other accrued liabilities

 

8,412

 

5,118

 

 

 

$

634,835

 

$

599,380

 

 

Investment income (loss) includes the following:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

2,342

 

$

3,594

 

$

3,118

 

$

4,949

 

Gains (losses) on investments, net

 

12,479

 

1,774

(1)

91,124

(2)

20,671

(1)(3)

 

 

$

14,821

 

$

5,368

 

$

94,242

 

$

25,620

 

 


(1)  Includes net unrealized gains of $1.4 million and $7.4 million from our trading securities during the three and six months ended June 30, 2012, respectively.

 

(2)  Includes realized gains of $88.7 million from available-for-sale debt and equity securities and net realized gains of $2.4 million from our trading securities.

 

(3)  Includes $12.5 million realized gain related to debt securities in addition to unrealized gains discussed above.

 

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Table of Contents

 

Losses (gains) on sales and disposals of long-lived assets and other expense (income), net includes the following:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Losses (gains) on sales, disposals and involuntary conversions of long-lived assets

 

$

1,977

 

$

5,962

 

$

5,436

 

$

4,180

 

Provision for retirement of assets

 

 

46,264

(1)

 

46,264

(1)

Intangible asset impairment

 

 

74,960

(2)

 

74,960

(2)

Goodwill impairment

 

 

26,279

(3)

 

26,279

(3)

Termination of employment contract

 

 

 

45,000

(4)

 

Litigation expenses

 

(502

)

4,996

 

5,659

 

5,536

 

Foreign currency transaction losses (gains)

 

2,990

 

2,710

 

7,307

 

2,255

 

Losses (gains) on derivative instruments

 

 

(551

)

 

(1,013

)

Other losses (gains)

 

4,847

 

297

 

5,717

 

616

 

 

 

$

9,312

 

$

160,917

 

$

69,119

 

$

159,077

 

 


(1)         Represents a provision for retirement of long-lived assets totaling $46.3 million in multiple operating segments, which reduced the carrying value of some assets to their salvage value. The retirements in our Canada operations included functionally inoperable rigs and other drilling equipment.  In our Production and Completion operations, the retirements related to rigs and vehicles that would require significant repair to return to work and other non-core assets when we consolidated our pressure pumping and well-servicing operations into one business line.  A prolonged period of lower natural gas and oil prices and its potential impact on our utilization and dayrates could result in the recognition of future impairment charges to additional assets if future cash flow estimates, based upon information then available to management, indicate that the carrying value of those assets may not be recoverable.

 

(2)         Represents impairment of the Superior trade name. The Superior trade name was initially classified as a ten-year intangible asset at the date of acquisition in September 2010. The impairment is a result of the decision to cease using the Superior trade name to reduce confusion in the marketplace and enhance the Nabors brand.

 

(3)         Represents the impairment of goodwill associated with our U.S. Offshore and International reporting units. The impairments were deemed necessary due to the prolonged uncertainty of utilization of some of our rigs as a result of changes in our customers’ plans for future drilling operations in the Gulf of Mexico as well as our international markets. A significantly prolonged period of lower natural gas prices or changes in laws and regulations could continue to adversely affect the demand for and prices of our services, which could result in future goodwill impairment charges for other reporting units due to the potential impact on our estimate of our future operating results.

 

(4)         Represents a one-time stock grant valued at $27 million, which vested immediately and $18 million in cash awarded and paid to Mr. Petrello in connection with the termination of his prior employment agreement. See Note 9 — Commitments and Contingencies for additional discussion.

 

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Table of Contents

 

The changes in accumulated other comprehensive income (loss), by component, include the following:

 

 

 

Gains (losses)
on cash flow
hedges

 

Unrealized
gains (losses)
on available-for-
sale securities

 

Defined benefit
pension plan
items

 

Foreign
currency items

 

Total

 

 

 

(In thousands (a))

 

As of January 1, 2012

 

$

(3,254

)

$

45,179

 

$

(7,378

)

$

286,717

 

$

321,264

 

Other comprehensive income (loss) before reclassifications

 

 

7,215

 

 

(2,393

)

4,822

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

263

 

(8,579

)

318

 

 

(7,998

)

Net other comprehensive income (loss)

 

263

 

(1,364

)

318

 

(2,393

)

(3,176

)

As of June 30, 2012

 

$

(2,991

)

$

43,815

 

$

(7,060

)

$

284,324

 

$

318,088

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 1, 2013

 

$

(2,793

)

$

134,229

 

$

(7,632

)

$

307,791

 

$

431,595

 

Other comprehensive income (loss) before reclassifications

 

 

4,913

 

 

(52,569

)

(47,656

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

187

 

(85,454

)

344

 

 

(84,923

)

Net other comprehensive income (loss)

 

187

 

(80,541

)

344

 

(52,569

)

(132,579

)

As of June 30, 2013

 

$

(2,606

)

$

53,688

 

$

(7,288

)

$

255,222

 

$

299,016

 

 


(a) All amounts are net of tax. Amounts in parentheses indicate debits.

 

The line items that were reclassified from net income include the following:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Line item in consolidated statement of income (loss)

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Investment income (loss)

 

$

12,183

 

$

19

 

$

88,157

 

$

12,484

 

Interest expense

 

153