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FORM 6-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer Pursuant to Rule 13a-16 or 15f-16 of the
Securities and Exchange Act of 1934
For the month of March, 1999
SANTA FE INTERNATIONAL CORPORATION
(Translation of Registrant's name into English)
Two Lincoln Centre, Suite 1100, 5420 LBJ Freeway, Dallas, Texas 75240-2648
(Address of principal executive offices)
[Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.]
Form 20-F [X] Form 40-F [ ]
[Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934]
Yes [ ] No [X]
[If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with rule 12g3-2(b): 82 - ________.]
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO FORM 6-K
QUARTER ENDED MARCH 31, 1999
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Page No.
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COVER PAGE 1
DOCUMENT TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations and Retained Earnings for the Three
Months ended March 31, 1999 and 1998 3
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998
4
Consolidated Statements of Cash Flows for the Three Months ended March 31,
1999 and 1998 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION 15
SIGNATURES 16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(U.S. dollars, in thousands, except share and per share data)
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
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1999 1998
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Operating revenues $ 185,516 $ 196,281
Operating costs 93,513 99,712
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Operating margin 92,003 96,569
Other operating costs and expenses:
Depreciation and amortization 17,658 12,992
General and administrative 5,189 5,636
Gain on sale of assets (200) (162)
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Operating income 69,356 78,103
Other income (expense):
Investment income 1,431 1,316
Other, net (1,114) (2,695)
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Income before provision for taxes on income 69,673 76,724
Provision for taxes on income (Note 4) 11,217 8,965
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Net income 58,456 67,759
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Retained earnings as of the beginning of the period 558,260 286,001
Dividends declared ($0.0325 per share per quarter) (3,729) (3,721)
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Retained earnings as of the end of the period $ 612,987 $ 350,039
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Income per Ordinary Share:
Basic and Diluted $ 0.51 $ 0.59
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Weighted average ordinary and ordinary equivalent
shares used in Ordinary Share computations:
Basic 114,728,491 114,500,000
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Effect of dilutive securities - employee stock options 361,875 156,000
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Diluted 115,090,366 114,656,000
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</TABLE>
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars, in thousands, except share data)
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MARCH 31, 1999 DECEMBER 31, 1998
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ASSETS
Current assets:
Cash and cash equivalents $ 94,658 $ 124,314
Marketable securities 51,853 --
Accounts receivable 155,020 161,728
Inventories 51,170 51,481
Prepaid expenses and other current assets 12,596 14,913
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Total current assets 365,297 352,436
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Property and equipment, at cost 2,068,503 2,030,756
Less accumulated depreciation and amortization (998,589) (981,555)
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Property and equipment, net 1,069,914 1,049,201
Other noncurrent assets 52,389 52,099
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Total assets $ 1,487,600 $ 1,453,736
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,202 $ 74,603
Accrued liabilities 107,044 107,057
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Total current liabilities 158,246 181,660
Other noncurrent liabilities 44,827 44,852
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Total liabilities 203,073 226,512
Commitments and contingencies (Note 3)
Shareholders' equity:
Ordinary shares par value $.01; 600,000,000 shares authorized,
114,967,498 and 114,762,469 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively 1,150 1,148
Additional paid-in capital 670,390 667,816
Retained earnings 612,987 558,260
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Total shareholders' equity 1,284,527 1,227,224
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Total liabilities and shareholders' equity $ 1,487,600 $ 1,453,736
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</TABLE>
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars, in thousands)
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THREE MONTHS ENDED MARCH 31,
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1999 1998
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Operating activities:
Net income $ 58,456 $ 67,759
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 17,658 12,992
Gain on sale of assets (200) (162)
Accretion of interest income and gains on sales (365) (95)
of marketable securities
Deferred income tax provision (benefit) (43) (28)
Changes in operating assets and liabilities:
Accounts receivable 6,708 (23,896)
Inventories 311 1,374
Prepaid expenses and other current assets 268 (703)
Accounts payable (23,401) (21,985)
Accrued liabilities 456 5,648
Other, net 1,574 5,845
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Net cash provided by operating activities 61,422 46,749
Investing activities:
Capital expenditures (38,264) (66,125)
Advance payments for drilling rigs -- (18,532)
Proceeds from sales of property and equipment 296 175
Maturities of marketable securities -- 3,000
Purchases of marketable securities (51,488) --
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Net cash used for investing activities (89,456) (81,482)
Financing activities:
Dividends paid (3,721) (3,721)
Issuance of shares under the Employee Share Purchase Plan 2,099 --
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Net cash used for financing activities (1,622) (3,721)
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Net change in cash and cash equivalents (29,656) (38,454)
Cash and cash equivalents at beginning of period 124,314 68,453
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Cash and cash equivalents at end of period $ 94,658 $ 29,999
========= =========
Supplemental disclosures of cash flows information:
Income taxes paid $ 3,985 $ 6,421
========= =========
</TABLE>
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SANTA FE INTERNATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Santa Fe International Corporation (the "Company"), a Cayman Islands
corporation, is a majority-owned subsidiary of SFIC Holdings (Cayman), Inc.
("Holdings"), which in turn is a wholly-owned subsidiary of Kuwait Petroleum
Corporation ("KPC"). KPC is wholly-owned by the Government of Kuwait. In a
series of transactions during the four years ended December 31, 1996, Holdings
and its subsidiaries were reorganized in a manner which resulted in the Company
owning all of the drilling assets and the direct and indirect subsidiaries of
Holdings and KPC engaged in providing contract drilling and drilling related
services (the "Reorganization"). The actions taken in connection with the
Reorganization have been accounted for as a reorganization of entities under
common control in a manner similar to a pooling of interests.
Holders of Ordinary Shares are entitled to participate in the payment
of dividends in proportion to their holdings. Under Cayman Island law, the
Company may pay dividends or make other distributions to its shareholders, in
such amounts as the Board of Directors deems appropriate from the profits of the
Company or out of the Company's share premium account (equivalent to additional
paid-in capital) if the Company thereafter has the ability to pay its debts as
they come due. Cash dividends, if any, will be declared and paid in U.S.
dollars. At March 31, 1999, the Company had declared dividends that had not been
paid amounting to $3,729,000.
The accompanying consolidated financial statements are presented in
U.S. dollars and in accordance with U.S. generally accepted accounting
principles.
The condensed consolidated financial statements included herein have
been prepared without audit, pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. Certain information and notes normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
The financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods. Such adjustments are considered to be of a normal recurring
nature unless otherwise identified. Results of operations for the three month
period ended March 31, 1999 are not necessarily indicative of the results of
operations that will be realized for the year ending December 31, 1999. These
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report on Form
20-F for the year ended December 31, 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents and Marketable Securities
Cash equivalents consist of highly liquid short-term investments that
are readily convertible into cash and which at the date of purchase were so near
their maturity that they expose the Company to an insignificant risk from
changes in interest rates. Cash equivalents are carried at cost plus accrued
interest, which approximates fair value. The interest method is used to account
for any premium or discount on cash equivalents. The Company's policy is to
place its temporary cash investments with high credit quality financial
institutions and by policy limit the amount of credit exposure to any one
financial institution.
The Company's marketable securities are classified as
available-for-sale securities. Unrealized holding gains and losses on
available-for-sale securities are included as a component of other comprehensive
income in shareholders' equity, net of the tax effect. The fair values for
marketable securities are based on quoted market prices. The amortized cost of
debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in investment
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income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The Company does not believe that it is exposed to any significant risks
on its investments.
At March 31, 1999, marketable securities consisted primarily of
Eurodollar debt securities and commercial paper. Cost approximates market value.
Income Per Ordinary Share
The basic and diluted income per Ordinary Share data for the three
months ended March 31, 1999 and 1998, respectively, is calculated based on the
weighted average shares outstanding for the periods.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which established
standards for reporting and display of comprehensive income and its components.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. For the three months ended March 31, 1999 and 1998, the
Company realized no such transactions other than those reported as net income.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in various
lawsuits, claims and related matters. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
In September 1997, the Company entered into a contract for the
construction of the Galaxy III, a heavy duty harsh environment jackup drilling
rig. The cost of the rig, excluding initial mobilization, is expected to be
approximately $176 million. The rig is expected to be delivered by the shipyard
during the third quarter of 1999 and mobilized to its initial work location on
approximately December 1, 1999. The Company has entered into a three year
drilling contract with a customer to operate the rig in the U.K.
sector of the North Sea.
NOTE 4 - INCOME TAXES
The Company is not subject to income taxes in the Cayman Islands. All
of the Company's income before provision for taxes on income and the related
provision for taxes on income relates to operations in jurisdictions other than
the Cayman Islands. The relationship between income before provision for taxes
on income and the provision for taxes on income varies from period to period
because each jurisdiction in which the Company operates has its own system of
taxation (not only with respect to the nominal rate, but also with respect to
the allowability of deductions, credits and other benefits) and because the
amounts earned in, and subject to tax by, each jurisdiction varies from period
to period. The provisions for taxes on income for the three month periods ended
March 31, 1999 and 1998 were recognized based upon the expected annualized
relationship.
NOTE 5 - SEGMENT INFORMATION
At December 31, 1998, the Company adopted Statement of Financial
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". At that time, the Company identified seven reportable
segments, defined as different equipment classifications, or by contract terms
in the case of drilling related services, as follows: heavy duty harsh
environment jackup rigs, semisubmersible rigs, 300 to 350 foot cantilever jackup
rigs, 200 to 250 foot jackup rigs, other marine rigs, land rigs and drilling
related services. Historically, the Company's platform rig and inland lake barge
were combined and reported as "other marine rigs". During the fourth quarter of
1998, the Company's inland lake barge was retired from service, and, effective
January 1, 1999, the Company has reclassified the remaining platform rig to its
drilling related services segment.
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The Company evaluates performance and allocates resources based upon
the operating margin (operating revenues less operating expenses) generated by
the segment. For further details of operating margin by segment, see Item 2. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations. There are no intersegment sales and transfers due to the nature of
the business of the segments. The following table sets forth operating revenue
and segment income for each of the reportable segments and reconciles total
segment income to consolidated income before provision for taxes on income.
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THREE MONTHS ENDED MARCH 31,
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1999 1998
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(in thousands)
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OPERATING REVENUES
Heavy duty harsh environment jackup rigs $ 45,262 $ 33,306
Semisubmersible rigs 28,917 24,527
300-350 foot cantilever jackup rigs 34,067 37,899
200-250 foot jackup rigs 20,794 39,333
Other marine rigs -- 3,927
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Total marine rigs 129,040 138,992
Land rigs 34,801 38,010
Drilling related services 21,373 18,975
Other 302 304
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Total operating revenues $ 185,516 $ 196,281
========= =========
SEGMENT INCOME
Heavy duty harsh environment jackup rigs $ 26,281 $ 20,042
Semisubmersible rigs 16,684 11,183
300-350 foot cantilever jackup rigs 18,150 21,500
200-250 foot jackup rigs 6,257 22,041
Other marine rigs -- 839
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Total marine rigs 67,372 75,605
Land rigs 5,480 8,974
Drilling related services 5,498 1,629
Other (3,805) (2,469)
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Total segment income 74,545 83,739
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Unallocated amount:
General and administrative 5,189 5,636
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Operating income 69,356 78,103
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Other income (expense) 317 (1,379)
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INCOME BEFORE PROVISION FOR TAXES ON INCOME $ 69,673 $ 76,724
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements regarding future performance and results and the other
statements that are not historical facts contained in this report are
forward-looking statements. Statements made in this document that state the
Company's or management's intentions, hopes, plans, estimates, beliefs,
expectations, anticipations or predictions of the future and words of similar
import are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. Such
statements involve risks and uncertainties including, but not limited to, the
risks involved in dealing with other parties, including the risk that other
parties' commitments to the Company and its subsidiaries could be breached,
changes in the markets for oil and natural gas and for offshore drilling rigs
and the risks of doing business in changing markets, changes in the dates the
Company's rigs undergoing conversion to drilling operations will commence
drilling, and changing costs and other factors discussed herein and in the
Company's other Securities and Exchange Commission filings. Should one or more
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
The contract drilling industry is and historically has been highly
volatile, competitive and cyclical, with periods of high demand and rig
utilization resulting in high rig dayrates followed by periods of low demand,
excess rig supply and depressed rig dayrates. The contract drilling business is
influenced by many factors beyond the control of the Company, including the
current and anticipated prices of oil and natural gas.
Beginning in 1998 and continuing into 1999, the industry witnessed a
substantial decline in oil prices with resulting adverse impact upon rig
utilization and rig dayrates. During industry down cycles, drilling companies
compete aggressively for contracts at depressed rates and often are compelled to
accept contract terms which are less favorable than those which normally
prevail, especially in areas such as liability and indemnity provisions, rate
structure, termination and term extension options. Low rig utilization in weak
markets causes drilling companies to lay-up or "stack" idle rigs, which often
results in termination of employment of all or part of the associated rig crews.
Current drilling industry conditions have resulted in a significant
decline in demand for drilling rigs which, in turn, has resulted in an increase
in the number of idle rigs. As a result, the Company has realized a substantial
decline in rig utilization and lower overall average rig dayrates for the first
quarter of 1999 compared to the fourth quarter of 1998, leading to decreased
operating revenues and net income.
The Company presently has a number of rigs idle and expects to continue
to experience overall lower fleet utilization and declining dayrates throughout
the remainder of 1999. The Company has taken certain actions, such as reducing
personnel employment as rigs become idle, deferring certain non-essential
operating expenses, reducing land based support personnel, deferring
compensation actions and applying other similar cost reduction measures. The
Company will continue to evaluate rig employment conditions and make further
adjustments as appropriate. In recent weeks, the price of crude oil has
increased by approximately 65% from lows reached during the first quarter of
1999. Although it is too early to evaluate the potential impact of this oil
price increase on results of operations, both as to amount and timing, the
Company believes that higher oil prices may result in increased demand for rigs.
The following table presents data relating to the Company's operating
revenues, operating costs, operating margin, operating income, utilization and
average dayrates by segment.
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
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1999 1998
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(in thousands except as indicated)
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OPERATING REVENUES
Heavy duty harsh environment jackup rigs $ 45,262 $ 33,306
Semisubmersible rigs 28,917 24,527
300-350 foot cantilever jackup rigs 34,067 37,899
200-250 foot jackup rigs 20,794 39,333
Other marine rigs (2) -- 3,927
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Total marine rigs 129,040 138,992
Land rigs 34,801 38,010
Drilling related services (2) 21,373 18,975
Other 302 304
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Total operating revenues 185,516 196,281
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OPERATING COSTS (1)
Heavy duty harsh environment jackup rigs 14,437 10,478
Semisubmersible rigs 10,715 12,205
300-350 foot cantilever jackup rigs 13,238 14,073
200-250 foot jackup rigs 12,243 15,264
Other marine rigs (2) -- 3,037
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Total marine rigs 50,633 55,057
Land rigs 23,606 25,060
Drilling related services (2) 15,633 17,268
Other 3,641 2,327
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Total operating costs 93,513 99,712
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OPERATING MARGIN 92,003 96,569
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Depreciation and amortization 17,658 12,992
General and administrative 5,189 5,636
Loss (gain) on sale of assets (200) (162)
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OPERATING INCOME $ 69,356 $ 78,103
========= =========
OPERATING INCOME AS A PERCENTAGE OF REVENUES 37.4% 39.8%
========= =========
RIG FLEET UTILIZATION (IN PERCENTAGES)
Heavy duty harsh environment jackup rigs 100.0% 93.1%
Semisubmersible rigs 100.0% 100.0%
300-350 foot cantilever jackup rigs 89.7% 97.4%
200-250 foot jackup rigs 54.2% 100.0%
Other marine rigs (2) -- 100.0%
Total marine rigs 80.2% 98.1%
Land rigs 73.0% 91.7%
AVERAGE DAYRATES (IN WHOLE DOLLARS)
Heavy duty harsh environment jackup rigs $ 100,582 $ 99,421
Semisubmersible rigs 107,100 90,841
300-350 foot cantilever jackup rigs 52,735 54,064
200-250 foot jackup rigs 47,367 48,559
Other marine rigs (2) -- 21,817
Total marine rigs 71,490 60,537
Land rigs 16,596 16,285
</TABLE>
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(1) EXCLUSIVE OF DEPRECIATION WHICH IS PRESENTED SEPARATELY BELOW.
(2) DURING THE FOURTH QUARTER OF 1998, THE COMPANY'S INLAND LAKE BARGE WAS
RETIRED FROM SERVICE, AND ITS REMAINING MARINE PLATFORM RIG HAS BEEN
RECLASSIFIED AS A COMPONENT OF DRILLING RELATED SERVICES EFFECTIVE
JANUARY 1, 1999.
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QUARTERS ENDED MARCH 31, 1999 AND 1998
OPERATING REVENUES. Total operating revenues decreased $10.8 million
(5.5%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet increased $12.0 million (35.9%) primarily due to the inception of Galaxy
II operations on November 8, 1998. Operating revenues for the Company's three
semisubmersibles increased $4.4 million (17.9%) due to a 17.9% increase in
average dayrates. Revenues from 300-350 foot cantilever jackups decreased $3.8
million (10.1%) primarily because of decreased utilization of Rig 136 in Egypt
and the Galveston Key in Indonesia, which was partially offset by increased
utilization of the Parameswara in Vietnam ($1.1 million). The remaining decrease
($2.7 million) was due to a 2.5% decrease in average dayrates. Revenues from
200-250 foot jackup rigs decreased $18.5 million (47.1%), mainly due to lower
utilization ($13.5 million) of Rig 105, Rig 124 and Rig 141 in Egypt (191 days),
Rig 127 in Qatar (90 days) and the Key Victoria in Venezuela (90 days) and a
2.5% decrease in average dayrates ($5.0 million). During the fourth quarter of
1998, the inland lake barge Rey del Lago was retired from service and the
Company's remaining platform rig in the North Sea, Rig 82, was reclassified as a
component of drilling related services. Accordingly, no revenues were earned in
the other marine rig category for the quarter ended March 31, 1999 compared to
$3.9 million for the same period of 1998. Revenues from land rigs decreased $3.2
million (8.4%) primarily due to decreased utilization of 589 days ($9.8 million)
and lower average dayrates earned by rigs in Egypt, Oman, Qatar and Venezuela
($2.0 million), partially offset by $8.6 million increased revenue from four new
rigs placed in service in Venezuela. Revenues from drilling related services
increased $2.4 million (12.6%) due to a $2.5 million increase in revenues from
incentive contracts and $0.7 million in revenues from the Company's platform rig
that was transferred from other marine rigs effective January 1, 1999, partially
offset by decreased third party rig operations revenues of $0.8 million.
Incentive drilling revenues increased because of an increase in the number of
contracts containing incentive based provisions, primarily in the North Sea.
Third party operations revenues decreased mainly due to fewer contracts in
Venezuela, partially offset by increased transportation operations in Kuwait and
increased activity in Azerbaijan.
OPERATING COSTS. Total operating costs decreased $6.2 million (6.2%).
Operating expenses from heavy duty harsh environment jackup rigs increased $4.0
million (37.8%) primarily due to inception of Galaxy II operations.
Semisubmersible rig operating costs decreased $1.5 million (12.2%) primarily due
to lower amortization of mobilization costs for Rig 135 and non-recurring costs
associated with conducting extensive Rig 140 repair and maintenance projects and
its subsequent relocation from the Gulf of Mexico to the North Sea. Operating
costs for the 200-250 foot jackup rigs decreased $3.0 million (19.8%) primarily
due to lower utilization of rigs in Egypt, Qatar and Venezuela. The
reclassification of the Company's platform rig to drilling related services led
to a decrease in other marine operating expenses of $3.0 million. Operating
costs associated with land rigs decreased $1.4 million (5.8%), primarily due to
reduced utilization ($5.4 million) and lower personnel costs, repairs and
maintenance and other operating costs ($1.3 million), partially offset by costs
associated with the deployment of four new rigs in Venezuela ($5.3 million).
Operating expenses from drilling related services decreased $1.6 million (9.5%)
primarily due to a $2.4 million decrease in expenses from third party
operations, partially offset by $0.5 million in expense from the Company's
reclassified platform rig and a $0.3 million increase in incentive drilling
expenses, mainly in the North Sea. Other operating expenses increased $1.3
million, primarily due to increased provision for inventory obsolescence.
GENERAL AND ADMINISTRATIVE. General and administrative expense
decreased $0.4 million (7.9%) primarily due to decreased costs associated with
employee benefits.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $4.7 million (35.9%) for the quarter ended March 31, 1999 as compared
with the same period in the prior year. Depreciation of four land rigs that were
in service during the quarter ended March 31, 1999, but not in the prior year
same period, yielded increased expense of $2.0 million. Addition of the new
Galaxy II increased depreciation expense by $1.6 million. The remainder of the
increase was due to depreciation of general capital additions to all other rigs
and equipment.
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OTHER INCOME (EXPENSE), NET. This category increased $1.7 million for
the quarter ended March 31, 1999, mainly due to $1.0 million decreased foreign
exchange losses, primarily incurred in Indonesia during the quarter ended March
31, 1998, and $0.6 million lower provision for contingency reserves. Investment
income increased slightly ($0.1 million), primarily due to higher invested
balances.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income
increased by $2.3 million (25.1%), primarily due to increased earnings from
Galaxy II operations in Canada, Rig 135 in Trinidad and the Compact Driller in
Thailand leading to an increase in the Company's annualized effective tax rate
to 16.1% from 11.7% for the same period in 1998.
NET INCOME. Net income for the quarter ended March 31, 1999 decreased
$9.3 million (13.7%) to $58.5 million as compared to $67.8 million for the same
period in the prior year. This decrease resulted primarily from $10.8 million
decreased operating revenues, increased depreciation and amortization expense of
$4.7 million and $2.3 million increased provision for income taxes, partially
offset by decreased operating expense of $6.2 million, $1.7 million higher other
income (expense), net and decreased general and administrative expense of $0.4
million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $61.4 million and $46.7
million for the quarters ended March 31, 1999 and 1998, respectively. The
increase in cash flows from operations was primarily attributable to decreased
working capital requirements. Investing activities used cash of $89.5 million
and $81.5 million for the quarterly periods ended March 31, 1999 and 1998,
respectively. The increased usage in investing activities of $8.0 million was
primarily due to $54.5 million increased purchases and decreased maturities of
marketable securities, partially offset by decreased capital spending and
advance payments related to construction of drilling rigs of $27.8 million and
$18.5 million, respectively. Capital expenditures totaled $38.3 million and
$66.1 million for the quarters ended March 31, 1999 and 1998, respectively,
principally related to rig expansion, upgrades and modernization. For the three
month periods, capital expenditures on the heavy duty harsh environment jackup
rigs Galaxy II and Galaxy III and new land rigs decreased $14.2 million, $2.7
million and $8.0 million, respectively. Investments in marketable securities for
the quarter ended March 31, 1999 were primarily for Eurodollar debt instruments
and commercial paper with original maturities of more than 90 but less than 365
days. Cash used in financing activities was $1.6 million for the three months
ended March 31, 1999, consisting of $3.7 million in dividends paid, partially
offset by $2.1 million generated by the January 1999 issuance of shares under
the Company's Employee Share Purchase Plan. For the three months ended March 31,
1998, the total cash used in financing activities was $3.7 million, consisting
solely of dividends paid.
The Company had budgeted approximately $167 million for capital
expenditures for the year ending December 31, 1999. Capital spending to meet
contractual obligations for customers and for rig upgrade, modernization and
enhancement projects was budgeted to require approximately $64 million
representing numerous individual transactions spread over the course of the
year. Given current depressed market conditions, it is likely that actual
spending for the year will be somewhat less than budgeted. Progress payments on
the Galaxy III heavy duty harsh environment jackup rig presently under
construction were budgeted to require approximately $60 million with initial
mobilization expected to require an additional $8 million. This estimate remains
valid and the Company believes it has minimal exposure to cost overruns in
completing the Galaxy III construction as the rig is approximately 92% complete
and is currently scheduled for delivery during the third quarter of 1999. The
Company currently has one high specification 3,000 horsepower land rig under
assembly for work in the Middle East that was budgeted to require approximately
$10 million to complete. It is now estimated the cost to complete will be
approximately $8 million and the rig is expected to begin work in June 1999. In
addition, the Company budgeted $25 million intended for use in either
constructing or acquiring a new heavy duty land rig. Based on current
conditions, it is unlikely that market demand will warrant this addition; thus,
it is unlikely these funds will be expended. It is expected that the entire 1999
capital program will be funded from internally generated funds. Future capital
spending, particularly rig fleet additions, is subject to the Company's
prospects for securing appropriate drilling contract opportunities and the
availability of suitable rigs, rig components, construction facilities and
supplies.
From time to time, the Company reviews opportunities for rig
acquisition, construction or upgrade. Once a capital project is undertaken by
the Company, factors outside the Company's control, such as changes in market
demand, may alter the project economics and the Company may be unable to fully
recoup the cost of such expenditures through future drilling contracts. Should
current plans for rig
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acquisition, construction or upgrade not be completed, the Company will not have
those rigs available to compete in its markets.
On March 5, 1999, the Company's Board of Directors declared a regular
quarterly dividend of $0.0325 per Ordinary Share payable on April 15, 1999 to
holders of record at the close of business March 31, 1999. The Company's current
dividend policy contemplates payment of future quarterly dividends of $0.0325
per Ordinary Share.
The Company's principal source of funds has been cash flow from
operations. The Company believes available cash resources and cash flows from
operations will be sufficient to meet its capital requirements during 1998.
The Company currently has a $35 million uncommitted credit facility for
advances and letter of credit with a major bank, none of which was drawn or
subject to standby letters of credit at March 31, 1999.
CURRENCY RISK AND INFLATION
The Company conducts material business operations in foreign currency
environments, including the U.K., Venezuela, Indonesia and Egypt. The Company
generally attempts to minimize its currency exchange risk by seeking
international contracts payable in local currency in amounts equal to the
Company's estimated operating costs payable in local currency and in dollars for
the balance of the contract. Because of this strategy, the Company has minimized
its net asset or liability positions denominated in local currencies and has not
experienced significant gains or losses associated with changes in currency
exchange rates. Accordingly, the Company has not historically entered into
financial hedging arrangements to manage risks relating to fluctuations in
currency exchange rates. However, the Company may enter into such contracts in
the future in the event that the Company assumes significant foreign currency
risks.
Although inflation has not had a significant impact on the Company's
results of operations during the past several years, labor availability and cost
and vendor prices and delivery fluctuate in response to overall drilling
industry conditions.
CREDIT RISKS
The Company's customers consist primarily of major international, state
owned and large independent oil companies and their affiliates. The Company has
not incurred any charges for credit losses during the last five years. There is
no assurance that in the future such charges will not occur. Such charges may
adversely affect the Company's profitability.
IMPACT OF YEAR 2000
The Company has actively been pursuing solutions to the Millennium Date
Change Problem ("Y2K") for approximately two years with initial activities
concentrating on Information Technology ("IT") issues. A Company-wide initiative
was launched in January 1998 with the formation of the Y2K Office responsible
for coordinating the Y2K efforts and reporting directly to the Company's Chief
Executive Officer. A Company policy was issued in April 1998 stating a goal of
`business as usual' and further specifying that the Company intended to be
prepared for Y2K by July 1999 with the responsibility for the preparation
allocated to operating and administrative management. Guidance as to minimum
requirements included development of a `Quality Plan' document that organized
local initiatives complete with milestones and reporting requirements,
definitions of conformity and operational significance and an outline of a basic
program of awareness, inventory, impact analysis, mitigation, implementation and
testing.
A Company-wide awareness campaign was initiated, with all operational
centers visited. At these meetings, Y2K policy and guidance was presented, and
the responsibilities of local management were discussed. Eighteen centers are
now working towards the solutions of their Y2K issues with the support of the
Y2K Office in Dallas, Texas.
Due to the diverse geographic location and nature of the Company
business activities ranging from the operation of drilling rigs through the
procurement and supply of materials, the potential Y2K problems are being
considered in three categories: IT; Field Equipment; and Third Party
Relationships. To these three categories, a common set of analyses is applied in
order to evaluate the potential for the
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disruption of business. Evaluation of operational significance of all
potentially Y2K sensitive functions or components is critical to subsequent
mitigation and remedial action.
IT issues include remediation of corporate supported software including
materials management, accounting and payroll systems and the upgrade of
non-compliant hardware and communication systems. Major software applications
have been modified and are presently in the testing phase. Final deployment of
IT solutions is scheduled to be ongoing with conclusion scheduled for July 1999.
Analysis of hardware (primarily computer) compliance is complete. It is expected
that all hardware will be deployed by July 1999.
As to field equipment issues, a considerable amount of electrical
equipment is used on drilling rigs for control, monitoring and data acquisition.
This equipment contains imbedded microprocessors and is potentially Y2K
sensitive. A comprehensive inventory of all such equipment has been compiled and
assessed as to potential risk and appropriate remedial action. Analysis to date
has shown that many items of equipment are Y2K compliant. Verification of
operation of critical items including independent validation is almost complete.
Much of the known non-compliant equipment has been upgraded or replaced and
testing is expected to be finished by the end of May 1999.
In the area of third party relationships, the Company's business relies
heavily on the supply of goods and services from outside suppliers and failure
of any provider as a result of Y2K issues could cause serious business
disruption. In order to minimize potential disruption, all suppliers of goods
and services are being surveyed and critical suppliers are being audited to
determine their preparedness for Y2K. This process is now substantially
complete. Where doubt exists, alternative sources are being secured if
available. Contingency plans have been developed to accommodate such failure and
are presently being reviewed.
In the event that Y2K compliance is not timely met in certain areas,
operating and administrative management have developed and are in the process of
testing contingency plans covering a wide range of issues that could adversely
impact business. These include failure of systems that effect safety and the
environment, supply of equipment and materials and provision of utilities,
particularly in third world countries. All major contingency plans are being
reviewed at this time. It must, however, be clearly recognized that contingency
planning will continue to the millennium rollover date as circumstances dictate.
Since full verification of Y2K compliance of field equipment is nearing
completion, the total cost estimate for the Company-wide Y2K initiative has been
revised to $3.5 million, which is a decrease of $1.6 million from the original
projection of $5.1 million. However, additional expenses may be incurred as a
result of unforeseen circumstances. Total costs incurred through March 31, 1999
were $2.0 million, comprised of $1.4 million in expenditures for the calendar
year ended December 31, 1998 and $0.6 million spent during the quarter ended
March 31, 1999. Y2K remediation costs are charged to operations on a current
basis as incurred.
The Company has determined that its insurance does not cover costs
incurred to remedy Y2K related problems. The Company's insurance may provide
reimbursement for physical loss or damage to the Company's insured property that
results from a Y2K related incident.
Company management believes that an effective program is in place to
resolve the Y2K issue in a timely manner. Since it is not possible to anticipate
all eventualities, particularly where third world countries are concerned,
circumstances that impact or interrupt normal business operations could occur.
The resulting cost, potential liability and loss of revenue under such
circumstances is not subject to quantification and has not been included in
estimates as detailed herein.
OTHER
Operational risks and hazards may result in extensive damage to or
total loss of drilling rigs, with associated personal injuries and loss of life,
pollution, well loss, well control expenses and/or wreck removal or other
requirements. Such losses, liabilities or obligations may be uninsured or
underinsured. In the event of a major incident or incidents resulting from
operational risks and hazards, the Company will sustain a loss of revenue by
reason of the rig loss or damage and may be subject to extraordinary expenses in
respect of uninsured or underinsured losses, liabilities or obligations.
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The Company's worldwide operations are subject to numerous
international, U.S., state and local environmental laws and regulations that
relate directly or indirectly to its operations, including certain regulations
controlling the discharge of materials into the environment, requiring removal
and clean-up under certain circumstances, or otherwise relating to the
protection of the environment. Laws and regulations protecting the environment
have become increasingly stringent in recent years and may in certain
circumstances impose a strict liability and render a company liable for
environmental damage without regard to negligence or fault on the part of such
company. Such laws and regulations may expose the Company to liability for the
conduct of or conditions caused by others, or for acts of the Company that were
in compliance with all applicable laws at the time such acts were performed.
The Company operates each of its rigs under a contract either to drill a
specified well or number of wells or for a stated period of time, which
generally is automatically extended to include the period required to complete
the well in progress on the scheduled contract expiration date. Contracts often
are cancelable upon specified notice at the option of the customer, and some,
but not all, contracts provide for the customer to pay a specified early
termination payment in the event of such cancellation. The contracts customarily
provide for either automatic termination or termination at the option of the
customer in the event of total loss of the drilling rig or if drilling
operations are suspended for extended periods by reason of force majeure or
excessive rig downtime for repairs. The contracts also contain provisions
addressing automatic termination or termination at the option of the customer in
certain circumstances and may be dishonored or subject to renegotiation in
depressed market conditions.
The Company's liquidity also may be adversely impacted by reason of
war, political turmoil, revolution, insurrection or similar events which could,
inter alia, result in damage to or loss of the Company's rigs, either physically
or by reason of nationalization, expropriation or deprivation of use, or could
impair the concessionary rights of the Company's customers, thus jeopardizing
the Company's drilling contracts. The Company does not normally insure against
these risks, and such events could result in an actual or constructive loss of
substantial assets and the associated loss of revenues and/or receivables.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 12 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.
Date: May 7, 1999 SANTA FE INTERNATIONAL CORPORATION
By: /s/ D. G. Barber
-----------------------------------
D. G. Barber, Senior Vice President
and Chief Financial Officer
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