<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ____________.
COMMISSION FILE NUMBER 1-7746
-------------------
TRANSOCEAN OFFSHORE INC.
(Exact name of registrant as specified in its charter)
-------------------
DELAWARE 72-0464968
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4 GREENWAY PLAZA
HOUSTON, TEXAS 77046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 871-7500
-------------------
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
---- ----
As of May 1, 1998, 100,307,439 shares of common stock, par value $.01 per
share, of Transocean Offshore Inc. were outstanding.
===============================================================================
<PAGE>
TRANSOCEAN OFFSHORE INC.
INDEX TO FORM 10-Q
QUARTER ENDED MARCH 31, 1998
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997................... 2
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997......................... 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997................... 4
Notes to Condensed Consolidated Financial Statements............ 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings........................................... 17
ITEM 6. Exhibits and Reports on Form 8-K............................ 18
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Transocean Offshore Inc. and
consolidated subsidiaries (the "Company") included herein have been prepared,
without audit, pursuant to the rules and regulations of the 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. These financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1998 1997
------------------- -----------------
(In thousands, except per share data)
<S> <C> <C>
Operating Revenues $258,313 $219,616
- ---------------------------------------------------------------------------------------------
Costs and Expenses
Operating and maintenance 131,648 144,846
Depreciation and amortization 28,078 24,408
General and administrative 7,268 5,779
- ---------------------------------------------------------------------------------------------
166,994 175,033
- ---------------------------------------------------------------------------------------------
Operating Income 91,319 44,583
- ---------------------------------------------------------------------------------------------
Other Income (Expense), Net
Equity in earnings of joint ventures 2,333 2,465
Interest income 868 703
Interest expense, net of amounts capitalized (7,107) (4,802)
Gain on termination of cash flow sharing agreement 21,386 -
Other, net 1,215 (2,200)
- ---------------------------------------------------------------------------------------------
18,695 (3,834)
- ---------------------------------------------------------------------------------------------
Income Before Income Taxes 110,014 40,749
Income Taxes 32,454 13,040
- ---------------------------------------------------------------------------------------------
Net Income $ 77,560 $ 27,709
=============================================================================================
Earnings Per Share
Basic $0.78 $ 0.27
=============================================================================================
Diluted $0.77 $ 0.27
=============================================================================================
Weighted Average Shares Outstanding
Basic 99,673 102,188
- ---------------------------------------------------------------------------------------------
Diluted 100,683 103,610
- ---------------------------------------------------------------------------------------------
Dividends Paid Per Share $0.03 $ 0.03
=============================================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(In thousands, except share data)
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 57,619 $ 54,225
Accounts Receivable 241,168 199,716
Deferred Income Taxes 10,008 4,418
Materials and Supplies 31,543 30,917
Prepayments 8,914 9,389
Other Current Assets 1,284 8,425
- -------------------------------------------------------------------------------------------------------
Total Current Assets 350,536 307,090
- -------------------------------------------------------------------------------------------------------
Property and Equipment 2,226,971 2,113,462
Less Accumulated Depreciation 468,791 445,488
- -------------------------------------------------------------------------------------------------------
Property and Equipment, net 1,758,180 1,667,974
- -------------------------------------------------------------------------------------------------------
Goodwill, net 688,688 693,154
Investments in and Advances to Joint Ventures 44,058 45,869
Other Assets 42,496 41,001
- -------------------------------------------------------------------------------------------------------
Total Assets $2,883,958 $2,755,088
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable $ 45,456 $ 62,997
Accrued Income Taxes 60,052 47,002
Current Portion of Long-Term Debt 4,803 4,812
Other Current Liabilities 62,921 70,381
- -------------------------------------------------------------------------------------------------------
Total Current Liabilities 173,232 185,192
- -------------------------------------------------------------------------------------------------------
Long-Term Debt 776,483 728,282
Deferred Income Taxes 186,653 171,306
Other Long-Term Liabilities 42,345 49,130
- -------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 1,005,481 948,718
- -------------------------------------------------------------------------------------------------------
Preferred Stock, $0.10 par value; 50,000,000 shares authorized,
none issued and outstanding - -
Common Stock, $0.01 par value; 150,000,000 shares authorized,
103,763,040 shares issued and 99,979,040 shares outstanding
at March 31, 1998,and 103,700,638 shares issued and
99,916,638 shares outstanding at December 31, 1997 1,037 1,037
Less Common Stock in Treasury, at cost;
3,784,000 shares at March 31, 1998 and December 31, 1997 (144,297) (144,297)
Additional Paid-in Capital 1,518,615 1,509,110
Retained Earnings 329,890 255,328
- -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,705,245 1,621,178
- -------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,883,958 $2,755,088
=======================================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
----------- ----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 77,560 $ 27,709
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 28,078 24,408
Deferred income taxes 9,757 1,298
Equity in earnings of joint ventures (2,333) (2,465)
(Gain) loss on disposal of assets (2,048) 138
Deferred income, net (2,858) 20,000
Deferred expenses, net 1,348 (3,615)
Other, net (4,185) 1,707
Changes in operating assets and liabilities
Accounts receivable (42,972) (17,969)
Accounts payable (15,808) (1,643)
Income taxes receivable/payable, net 21,850 10,334
Other current assets 6,990 (762)
Other current liabilities (7,460) (12,251)
- ------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 67,919 46,889
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (114,833) (82,618)
Proceeds from disposal of assets 601 81
Joint ventures and other investments 4,144 (1,484)
- ------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (110,088) (84,021)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on revolving line of credit 50,600 (22,161)
Proceeds from project financing facility - 107,896
Repayments on term loan facility - (6,750)
Financing costs - (2,543)
Treasury shares purchased - (49,910)
Sale of note receivable - 11,000
Exercise of stock options 654 286
Repayment of notes payable (2,308) -
Dividends paid (2,998) (3,038)
Other, net (385) 4
- ------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 45,563 34,784
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 3,394 (2,348)
- ------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 54,225 24,154
- ------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 57,619 $ 21,806
==========================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
BASIS OF CONSOLIDATION - The accompanying condensed consolidated financial
statements of Transocean Offshore Inc. and its consolidated subsidiaries (the
"Company") have been prepared without audit in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, pursuant to such rules and regulations, these
financial statements do not include all disclosures required by generally
accepted accounting principles for complete financial statements. Operating
results for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. In connection with the preparation of these financial statements,
management was required to make estimates and assumptions that affect the
reported amount of assets, liabilities, revenues, expenses and disclosure of
contingent liabilities. Actual results could differ from such estimates. The
accompanying condensed consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
EARNINGS PER SHARE - In 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share. SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
similar to fully diluted earnings per share which was previously not required to
be reported if the effect of the dilution was less than three percent. Earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
STOCK SPLIT - In August 1997, the Board of Directors declared a two-for-one
stock split to be effected in the form of a 100 percent stock dividend. The
dividend was paid September 19, 1997 to stockholders of record on September 5,
1997. All references in the financial statements to number of shares and per
share amounts have been retroactively restated to reflect the increased number
of shares of common stock issued and outstanding as a result of the dividend.
SUPPLEMENTARY CASH FLOW INFORMATION - Cash payments for interest and income
taxes, net were $8.2 million and $2.0 million, respectively, for the three
months ended March 31, 1998 and $7.9 million and $1.4 million, respectively, for
the three months ended March 31, 1997.
GOODWILL - Goodwill is amortized on a straight-line basis over 40 years (the
period when benefits are expected to be derived). Accumulated amortization as
of March 31, 1998 and December 31, 1997 totaled $29.3 million, and $24.8
million, respectively.
CAPITALIZED INTEREST - Interest costs for the construction and upgrade of
qualifying assets are capitalized. The Company capitalized interest costs on
construction work in progress of $6.6 million and $2.8 million for the three
months ended March 31, 1998 and 1997, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to prior period
amounts to conform with the current period's presentation.
5
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
INTERIM FINANCIAL INFORMATION - 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.
NEW ACCOUNTING PRONOUNCEMENT - In February 1998, the FASB issued SFAS No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits. This
Statement revises employers' disclosures about pension and other postretirement
benefit plans in annual financial statements. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. The Company adopted this
standard in the first quarter of 1998.
NOTE 2 - UPGRADE AND EXPANSION OF DRILLING FLEET
The Company made capital additions of $114.8 million during the first quarter of
1998, primarily relating to its previously announced fleet additions and
upgrades. During 1998 the Company spent $26.6 million on the conversion of the
Transocean Marianas, $22.5 million on the construction of a deepwater drillship
to be named "Discoverer Enterprise", $21.6 million on the construction of a
deepwater drillship to be named "Discoverer Spirit" and $21.5 million on the
construction of a third Discoverer Enterprise-class drillship.
NOTE 3 - DEBT
Debt is comprised of the following:
March 31, December 31,
1998 1997
-------- ---------
(In thousands)
Revolving Credit Facility $257,000 $206,400
Project Financing Agreement 196,210 196,210
8.00% Debentures, net of discount 199,222 199,216
7.45% Notes 100,000 100,000
6.90% Notes Payable 27,692 30,000
Other 1,162 1,268
- --------------------------------------------------------------
Total Debt 781,286 733,094
Less Current Maturities 4,803 4,812
- --------------------------------------------------------------
Total Long-Term Debt $776,483 $728,282
==============================================================
6
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - TERMINATION OF CASH FLOW SHARING AGREEMENT
The Company and Global Marine Inc. ("Global Marine") were parties to an
agreement pursuant to which the Company participated in the cash flow from three
jackup drilling rigs owned and operated by Global Marine and Global Marine
participated in the cash flow from one of the Company's jackup drilling rigs,
the Transocean Nordic. During April 1997, Global Marine initiated arbitration
proceedings against the Company in the United Kingdom with respect to various
disputed matters under the agreement, including the distribution of cash flow
from the rigs and whether the Company's acquisition of Transocean ASA may have
given rise to a right of first refusal on the part of Global Marine to purchase
the Transocean Nordic. In March 1998, the Company reached an agreement with
Global Marine that terminated the cash flow sharing agreement, effective
February 1, 1998, with certain continuing rights if any of the rigs are sold
within three years, and settled all disputed matters. Under the terms of this
agreement, the Company received $29.8 million in cash in settlement of
outstanding accounts receivable and to terminate the cash flow sharing
agreement, resulting in an after tax gain of $13.9 million, or $0.14 per share,
diluted.
NOTE 5 - EARNINGS PER SHARE
The reconciliation of the numerator and denominator used for the computation of
basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1998 1997
----------------- ------------------
(In thousands, except per share data)
<S> <C> <C>
Net Income for basic and diluted earnings per share $ 77,560 $ 27,709
=================================================================================================
Weighted-average shares for basic earnings per share 99,673 102,188
Effect of dilutive securities
Employee stock options and unvested stock grant 1,010 1,422
- -------------------------------------------------------------------------------------------------
Adjusted weighted-average shares and assumed conversions
for diluted earnings per share 100,683 103,610
=================================================================================================
Basic earnings per share $ 0.78 $ 0.27
=================================================================================================
Diluted earnings per share $ 0.77 $ 0.27
=================================================================================================
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in connection with the information
contained in the Company's consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
OVERVIEW
Transocean Offshore Inc. is a leading international provider of deepwater and
harsh-environment contract drilling services for oil and gas wells. The Company
currently owns, has ownership interests in or operates 30 mobile offshore
drilling rigs (including one unit not yet in service). Transocean's fleet
consists of seven fourth-generation semisubmersibles, fourteen second- and
third-generation semisubmersibles, three drillships and six jackup rigs. In
addition, the Company has under construction three new technologically advanced,
ultra-deepwater drillships. The Company contracts these drilling rigs, related
equipment and work crews primarily on a dayrate basis to drill offshore wells.
The Company also provides additional drilling services, including turnkey
drilling, coiled tubing drilling and well engineering and planning.
In September 1997, the Company effected a two-for-one split of its common stock
in the form of a 100 percent stock dividend. All references in this report to
number of shares and per share amounts have been retroactively restated to
reflect the increased number of shares of common stock issued and outstanding as
a result of the dividend.
8
<PAGE>
OPERATING RESULTS
Comparative data relating to the Company's operating revenues and operating
income by segment and geographic area follows. In the table and related
discussion below, the "Mobile Units" segment consists of the results of
operations for drilling rigs contracted to customers on a dayrate basis. The
"Drilling Services" segment includes results of all other drilling services
provided by the Company, including turnkey operations.
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
OPERATING REVENUES (a) (In thousands)
Mobile Units
U.S. Gulf of Mexico $ 69,492 $ 39,106
North Sea and Europe 110,479 84,592
Other Western Hemisphere 25,924 6,935
Other Eastern Hemisphere 15,240 17,787
- ----------------------------------------------------
221,135 148,420
- ----------------------------------------------------
Drilling Services 37,178 71,196
- ----------------------------------------------------
Total Revenues $258,313 $219,616
====================================================
OPERATING INCOME (LOSS) (b)
Mobile Units
U.S. Gulf of Mexico $ 41,097 $ 23,609
North Sea and Europe 37,368 12,865
Other Western Hemisphere 16,086 2,728
Other Eastern Hemisphere 5,661 9,683
Other (1,730) (3,413)
- ----------------------------------------------------
98,482 45,472
- ----------------------------------------------------
Drilling Services 420 5,062
Corporate Expenses (7,583) (5,951)
- ----------------------------------------------------
Operating Income $ 91,319 $ 44,583
====================================================
(a) Intersegment eliminations are not material.
(b) Amounts shown are after applicable depreciation and amortization.
9
<PAGE>
QUARTER ENDED MARCH 31, 1998, COMPARED TO QUARTER ENDED MARCH 31, 1997
Net income for the three months ended March 31, 1998 was $77.6 million or $0.77
per share, diluted, compared to $27.7 million or $0.27 per share, diluted, for
the first quarter of 1997, an increase of $49.9 million or $0.50 per share,
diluted. The increase in 1998 resulted primarily from increased dayrates over
the prior year period, as well as a one-time $21.4 million pre-tax gain ($13.9
million after tax or $0.14 per share, diluted) on the termination of a cash flow
sharing agreement with Global Marine Inc. ("Global Marine").
Revenues were $258.3 million for the three months ended March 31, 1998, compared
to $219.6 million for the prior year quarter, an increase of $38.7 million or 18
percent. Operating income was $91.3 million in 1998 compared to $44.6 million
in the first quarter of 1997, an increase of $46.7 million or 105 percent.
Revenues and operating income from Mobile Units increased significantly in the
first quarter of 1998 compared to the prior year quarter. Rig utilization
increased to 98% in 1998 from 93% in the first quarter of 1997, reflecting
reduced downtime for rig repairs and upgrades. The average dayrate for the
Company's semisubmersible drilling rigs and drillships was approximately
$112,800 in 1998, compared to approximately $86,900 in the first quarter of
1997, an increase of 30 percent. The Company's jackup drilling rigs experienced
a similar percentage increase in average dayrates.
In the U.S. Gulf of Mexico, the increases in revenues and operating income
resulted from higher dayrates earned during the current quarter, as well as from
the results of two additional rigs working in the region. Both rigs were in the
shipyard in the first quarter for 1997 undergoing upgrades. In the North Sea
and Europe, increases resulted from higher dayrates and lower downtime for
repairs and marine surveys. Operating results in Other Western Hemisphere
benefited from the addition of the results of one drilling rig that had operated
in Other Eastern Hemisphere in 1997 and one rig that had operated in an
unconsolidated joint venture in the prior year. Both rigs also experienced
significant dayrate increases over the prior period. The rigs in Other Eastern
Hemisphere experienced significant dayrate increases, which was offset by the
relocation of one rig to Other Western Hemisphere in 1998.
Revenues and operating income from Drilling Services decreased in the first
three months of 1998 compared to the first quarter of 1997. This decrease
primarily reflects the May 1997 divestiture of certain non-core activities and
assets originally acquired in the 1996 combination with Transocean ASA.
Corporate expenses increased $1.6 million, from $6.0 million in the first
quarter of 1997 to $7.6 million in the current quarter. The corporate
organization continued to grow to accommodate the increased activities of the
Company. The previously announced fleet expansion projects require increased
engineering and coordination efforts, as well as expanded recruiting and
training activities for drilling crews. The Company also continues to upgrade
and expand its communication and data processing systems to more effectively
manage its geographically diversified operations.
10
<PAGE>
Other income increased to $18.7 million in the first quarter of 1998 compared to
other expense of $3.8 million in the prior year. In March 1998, the Company
recognized a $21.4 million pre-tax gain on the termination of a cash flow
sharing agreement with Global Marine (see Part II. Item 1. Legal Proceedings).
Interest expense increased due to higher average debt balances in 1998 over the
first quarter of 1997 resulting from the upgrade and expansion of the Company's
drilling fleet.
Income tax expense increased by $19.4 million due primarily to higher pre-tax
earnings in the first quarter of 1998 over the same period in 1997. The
Company's effective tax rate was lower in the first quarter of 1998 compared to
the same period in 1997 due to an increase in the permanent reinvestment of
earnings of certain foreign subsidiaries.
MARKET OUTLOOK
High utilization and increasing dayrates for rigs in the deepwater and harsh-
environment markets continued into the first part of 1998. This reflects the
continued demand for such equipment and limited supply of drilling rigs with
these capabilities. The continued interest in the deepwater and harsh-
environment markets is due in part to technological advances such as 3D seismic
and subsea completions that improve the economics of offshore exploration and
development. Because of the relatively high levels of investment required,
deepwater and harsh-environment exploration and production efforts represent a
longer-term commitment by customers, who typically contract drilling equipment
for such efforts under multi-year agreements.
Historically, the contract drilling market has been highly competitive and
cyclical. As a result, the Company cannot predict the extent to which current
market conditions will continue. During the latter part of 1997 and early part
of 1998, oil prices declined substantially before partially recovering. While
short-term fluctuations in oil prices do not significantly impact the Company's
rig dayrates and utilization due to the longer-term nature of contracts in the
deepwater and harsh-environment markets, an extended period of relatively low
oil prices could reduce demand for the Company's contract drilling services.
Also during 1998, the government of the United Kingdom has discussed increasing
the level of taxation on oil and gas activities in the U.K. sector of the North
Sea. At this time, the Company cannot predict the likelihood of any such tax
increase or what impact any such increase, if enacted, might have on demand for
the Company's services in this sector.
As a result of the improved market conditions, a number of drilling contractors
have commenced upgrading existing rigs or constructing new rigs that will be
capable of competing with the Company's deepwater and harsh-environment rigs.
Although most of these rigs are being built pursuant to long-term contract
commitments, there can be no assurance that, upon the expiration of such
contracts and the contracts for the Company's rigs, the then-current market
conditions will be favorable and that current high utilization rates and
dayrates will continue.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Cash flows provided by operations were $67.9 million for the three months ended
March 31, 1998, compared to $46.9 million for the three months ended March 31,
1997, an increase of $21.0 million. The increase in cash provided by operations
was due primarily to higher net income in the 1998 quarter over the 1997
quarter, partially offset by a decrease due to changes in working capital
components in 1998 and deferred income received from a customer included in
1997.
Cash flows used in investing activities in the first quarter of 1998 were $110.1
million, compared to $84.0 million in the first quarter of 1997. The increase
resulted primarily from the increase in capital expenditures related to the
Transocean Marianas, the Discoverer Enterprise and the two recently announced
Discoverer Enterprise-class drillships.
Cash flows provided by financing activities were $45.6 million in the first
three months of 1998, compared to $34.8 million in the first three months of
1997. During 1998, the Company increased its net borrowings under its revolving
line of credit. In the first quarter of 1997, the Company received proceeds
from the sale of a note and increased its borrowings through the project
financing facility. These proceeds were partially offset by the repurchase of
Company common stock and net repayment on its revolving line of credit.
CAPITAL EXPENDITURES
The Company's investments in its existing fleet and previously announced fleet
additions continue to require significant capital expenditures. Capital
expenditures totaled $114.8 million during the first quarter of 1998 and are
expected to be approximately $395 million during the remainder of the year,
including amounts that will be spent on the construction of two recently
announced Discoverer Enterprise-class drillships. During 1998, $26.6 million
and $22.5 million was spent on the Transocean Marianas conversion and Discoverer
Enterprise construction, respectively, and the Company expects to spend
approximately $55 million and $130 million, respectively, to complete these
projects during the remainder of the year. Additionally, the Company spent
$43.1 million during 1998 on the construction of the two additional Discoverer
Enterprise-class drillships. The Company expects to spend approximately $100
million during the remainder of 1998 and approximately $492 million during 1999
and 2000 in the construction of these drillships.
As with any major construction project that takes place over an extended period
of time, actual costs and the timing of such expenditures may vary from initial
estimates based on finalization of the design and actual terms of awarded
contracts. The Company intends to fund the cash requirements relating to these
capital commitments through available cash balances, borrowings under the Credit
Agreement referred to below and other commercial bank or capital market
financings, including potential public offerings under the Company's shelf
registration statement (discussed below) and, in the case of the Discoverer
Enterprise, financing under the Project Financing Agreement referred to below.
12
<PAGE>
ACQUISITIONS
The Company regularly reviews possible acquisitions of businesses and drilling
units, and may from time to time in the future make significant capital
commitments for such purposes. Any such acquisition could involve the payment
by the Company of a substantial amount of cash and the issuance of a substantial
number of shares of common stock. The Company would expect to fund the cash
portion of any such acquisition through cash balances on hand, the incurrence of
additional debt, sales of assets or common stock, or a combination thereof.
TERMINATION OF CASH FLOW SHARING AGREEMENT
In March 1998, the Company reached an agreement with Global Marine that
terminated the cash flow sharing agreement, effective February 1, 1998, with
certain continuing rights if any of the rigs are sold within three years, and
settled all disputed matters (see Part II. Item 1. Legal Proceedings). Under
the terms of this agreement, the Company received $29.8 million in cash in
settlement of outstanding accounts receivable balances and to terminate the cash
flow sharing agreement, resulting in an after tax gain of approximately $13.9
million, or $0.14 per share, diluted. The net proceeds were used to repay debt.
AUTHORIZED STOCK REPURCHASE
In May 1997, the Company's Board of Directors authorized the repurchase of up to
$200 million worth of shares of its common stock from time to time on the open
market or in privately negotiated transactions. After purchases made during
1997, approximately $105 million remains available under this authority. The
Board of Directors regularly reviews the possibility of repurchasing common
stock in light of prevailing stock prices and the financial position of the
Company.
DEBT
CREDIT AGREEMENT - In connection with the 1996 combination with Transocean ASA,
the Company entered into a secured credit agreement dated as of July 30, 1996
with a group of banks led by ABN AMRO Bank, N.V. (the "Credit Agreement"). The
Credit Agreement, as subsequently amended, provides for borrowing by the Company
under a six-year revolving credit facility in the amount of $540 million (the
"Revolving Credit Facility"). Loans under the Credit Agreement bear interest,
at the option of the Company, at a base rate or LIBOR plus a margin (0.25
percent at March 31, 1998) that varies depending on the Company's funded debt to
total capital ratio or its public senior unsecured debt rating. The Credit
Agreement requires compliance with various restrictive covenants, including an
interest coverage ratio, which could limit the Company's ability to pay
dividends in the future. The Credit Agreement has a maturity date of July 2002.
As of March 31, 1998, $257.0 million in borrowings were outstanding under the
Credit Agreement.
13
<PAGE>
PROJECT FINANCING AGREEMENT - In connection with the on-going construction of
the Discoverer Enterprise and the now completed upgrade of the Transocean
Amirante, the Company's wholly owned subsidiary, Transocean Enterprise Inc.,
obtained a bank financing agreement effective December 27, 1996 from a group of
banks led by ABN AMRO Bank, N.V. (the "Project Financing Agreement").
Approximately $340 million is available for drawdowns during the construction
period and is available in two tranches. The first tranche of $66 million is to
be repaid upon completion of construction and acceptance of the two vessels (no
later than December 31, 1998) by Amoco Exploration and Production Company
("Amoco"), which is contracting the rigs for a period of five years following
completion. It bears an interest rate of LIBOR plus 0.35 percent. The Company
expects to lend Transocean Enterprise Inc. the necessary funds to repay the $66
million utilizing funds borrowed under the Revolving Credit Facility. The
second tranche of $274.5 million (of which $130.2 million in borrowings were
outstanding as of March 31, 1998) bears an interest rate of LIBOR plus 0.85
percent during the construction period and is convertible to term financing upon
completion of construction and acceptance of the two vessels by Amoco (no later
than December 31, 1998). The term financing would mature over a period of five
years. The term financing would also be divided into two tranches, the relative
amounts and terms of which would depend on various factors. As of March 31,
1998, $196.2 million in borrowings were outstanding under the Project Financing
Agreement.
LETTERS OF CREDIT
The Company had letters of credit outstanding at March 31, 1998 totaling $36.3
million, including $28.9 million relating to a legal dispute with Kvaerner
Installasjon a.s (see Part II. Item 1. Legal Proceedings). The remaining $7.4
million guarantees various insurance and contract bidding activities.
SHELF REGISTRATION
In April 1997, the Company filed with the Securities and Exchange Commission
(the "SEC") a $750 million shelf registration statement on Form S-3 for the
proposed offering from time to time of debt securities, preferred stock, common
stock and warrants to purchase preferred stock or debt securities. The
registration statement was declared effective by the SEC on April 11, 1997. In
April 1997, the Company completed the public offering and sale of $300 million
aggregate principal amount of senior, unsecured debt securities under this
registration statement.
DERIVATIVE INSTRUMENTS
The Company enters into a variety of derivative financial instruments in
connection with the management of its exposure to fluctuations in foreign
exchange rates and interest rates. The Company does not enter into derivative
transactions for speculative purposes; however, for accounting purposes certain
transactions may not meet the criteria for hedge accounting.
14
<PAGE>
Gains and losses on foreign exchange derivative instruments, which qualify as
accounting hedges, are deferred and recognized when the underlying foreign
exchange exposure is realized. Gains and losses on foreign exchange derivative
instruments, which do not qualify as hedges for accounting purposes, are
recognized currently based on the change in market value of the derivative
instruments. At March 31, 1998, the Company did not have any foreign exchange
derivative instruments not qualifying as hedges. The Company recognized a net
pre-tax loss of $1.9 million on such instruments for the three months ended
March 31, 1997.
The Company uses interest rate swap agreements to effectively convert a portion
of its floating rate debt to a fixed rate basis, reducing the impact of interest
rate changes on future income. Interest rate swaps are designated as a hedge of
underlying future interest payments. The interest rate differential to be
received or paid on the swaps is recognized over the lives of the swaps as an
adjustment to interest expense. At March 31, 1998, the net unrealized loss on
open interest rate swaps was $3.9 million.
SOURCES OF LIQUIDITY
The Company believes that its cash and cash equivalents, cash generated from
operations, borrowings available under its Credit Agreement, Project Financing
Agreement and access to other financing sources will be adequate to meet its
anticipated short-term and long-term liquidity requirements, including scheduled
debt repayments and capital expenditures for new rig construction, upgrade and
conversion projects.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. This Statement revises employers'
disclosures about pension and other postretirement benefit plans in annual
financial statements. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997. The Company adopted this standard in the first quarter
of 1998.
15
<PAGE>
YEAR 2000 ISSUE
The Company uses a variety of computer information systems. It is possible that
certain of these systems will not be able to process dates beginning in the year
2000, as many such systems are based on storing two digits to identify a
particular year rather than a full four digits and are not designed to take into
account the start of a new century. The Company has performed a survey of all
of its business, financial and engineering information systems and identified
and commenced replacement of software and hardware systems determined not to be
compliant. The Company expects to complete this process during the first half
of 1999. A plan has been developed to survey all rig equipment that uses
program logic chips, identify those chips that are year 2000 compliant and
replace or upgrade those that are not. This plan is in the process of being
implemented and the Company expects full implementation by the second quarter of
1999; however, the Company is unable at this point in the implementation process
to predict the timing, extent or estimated cost of any replacement or upgrades
that may be required. There can be no assurance that the Company will
successfully be able to identify and remedy all potential year 2000 problems in
the operations area in advance of their occurrence. Any such problems, if they
arise, could cause downtime on the Company's offshore drilling units leading to
a loss of revenues, and depending upon the extent of the problems, could have a
material adverse effect upon the operations or financial results of the Company.
FORWARD-LOOKING INFORMATION
The statements included in this quarterly report regarding future financial
performance and results of operations and other statements that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Statements to the effect that the Company or management "anticipates,"
"believes," "estimates," "expects," "predicts," or "projects" a particular
result or course of events, or that such result or course of events "should"
occur, and similar expressions, are also intended to identify forward-looking
statements. Such statements are subject to numerous risks, uncertainties and
assumptions, including but not limited to uncertainties relating to industry and
market conditions, prices of crude oil and natural gas, foreign exchange and
currency fluctuations, political instability in foreign jurisdictions, scheduled
completion of construction projects, the labor market for skilled personnel in
the offshore drilling industry, the outcome of upcoming labor negotiations with
unions representing certain Norwegian offshore workers, and other factors
discussed in this quarterly report and in the Company's other filings with the
Securities Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those indicated.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and Global Marine were parties to an agreement pursuant to which the
Company participated in the cash flow from three jackup drilling rigs owned and
operated by Global Marine and Global Marine participated in the cash flow from
one of the Company's jackup drilling rigs, the Transocean Nordic. During April
1997, Global Marine initiated arbitration proceedings against the Company in the
United Kingdom with respect to various disputed matters under the agreement,
including the distribution of cash flow from the rigs and whether the Company's
acquisition of Transocean ASA may have given rise to a right of first refusal on
the part of Global Marine to purchase the Transocean Nordic. In March 1998, the
Company reached a settlement with Global Marine resolving the disputed matters
under the cash flow sharing agreement and terminating such agreement as of
February 1, 1998. Pursuant to the settlement, the parties will have certain
continuing rights to receive payments if any of the rigs covered by the former
agreement are sold within three years. The Company received $29.8 million in
cash from Global Marine, resulting in an after tax gain of $13.9 million, or
$0.14 per share, diluted. The net cash proceeds were used to repay debt.
During 1997, Kvaerner Installasjon a.s ("Kvaerner") in Norway performed
modification and refurbishment work on one of the Company's fourth-generation
semisubmersible drilling rigs, the Transocean Leader. Disputes have arisen with
respect to the work performed and the amount owed with respect to such work.
The amount in dispute is approximately $40 million. The Company has posted a
letter of credit for approximately $30 million pending the resolution of the
dispute by agreement between the parties or by final judgment under the
Norwegian judicial process. The parties are continuing to discuss the matter,
and the Company is unable to predict at this time the ultimate outcome of such
discussions or any resulting judicial process; however, the Company believes
Kvaerner's claims are without merit and that the outcome of the dispute will
have no material adverse effect on the Company's operations or financial
position.
In 1990 and 1991, two of the Company's subsidiaries were served with assessments
totaling approximately $11 million from the municipality of Rio de Janeiro,
Brazil to collect a municipal tax on services ("ISS"). The Company believes
that neither subsidiary is liable for the taxes and has contested the
assessments in the Brazilian administrative and court systems. The proceedings
with respect to the 1991 assessment, which was for approximately $9 million,
have reached the first level Brazilian state court, which rejected the Company's
arguments. The Company has appealed that decision to the second level court.
The legal and administrative decisions as to the 1990 assessments are still
pending. If the Company's defenses are ultimately unsuccessful, the Company
believes that the Brazilian government-controlled oil company, Petrobras, has a
contractual obligation to reimburse the Company for ISS payments required to be
paid by them. The Company believes the outcome of these assessments will have
no material adverse affect on the Company's operations or financial position.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed in connection with this Report:
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ending March 31,
1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on May 12, 1998.
TRANSOCEAN OFFSHORE INC.
By: /s/ Robert L. Long
--------------------------------
Robert L. Long
Senior Vice President
(Principal Financial Officer)
By: /s/ Barbara S. Koucouthakis
--------------------------------
Barbara S. Koucouthakis
Vice President and Controller
(Principal Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 57,619 21,806
<SECURITIES> 0 0
<RECEIVABLES> 241,168 175,542
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 350,536 257,385
<PP&E> 2,226,971 1,832,246
<DEPRECIATION> 468,791 399,047
<TOTAL-ASSETS> 2,883,958 2,518,143
<CURRENT-LIABILITIES> 173,232 232,024
<BONDS> 776,483 468,809
0 0
0 0
<COMMON> 1,037 1,030
<OTHER-SE> 1,704,208 1,601,885
<TOTAL-LIABILITY-AND-EQUITY> 2,883,958 2,518,143
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<TOTAL-REVENUES> 258,313 219,616
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<TOTAL-COSTS> 166,994 175,033
<OTHER-EXPENSES> 0 0
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<INTEREST-EXPENSE> 7,107 4,802
<INCOME-PRETAX> 110,014 40,749
<INCOME-TAX> 32,454 13,040
<INCOME-CONTINUING> 77,560 27,709
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 77,560 27,709
<EPS-PRIMARY> 0.78 0.27
<EPS-DILUTED> 0.77 0.27
<FN>
<F1>1997 has been restated to reflect the adoption of SFAS No. 128, Earnings Per
Share, and a two-for-one stock split paid in September 1997.
</FN>
</TABLE>
