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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to______________
Commission File Number 1-8097
ENSCO International Incorporated
(Exact name of registrant as specified in its charter)
DELAWARE 76-0232579
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 Fountain Place
1445 Ross Avenue, Dallas, Texas 75202-2792
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 922-1500
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 ___
There were 137,082,632 shares of Common Stock, $.10 par value, of the registrant
outstanding as of April 30, 1999.
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<PAGE>
ENSCO INTERNATIONAL INCORPORATED
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
PAGE
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Review Report of Independent Accountants ................. 3
Consolidated Statement of Income
Three Months Ended March 31, 1999 and 1998 ............. 4
Consolidated Balance Sheet
March 31, 1999 and December 31, 1998 ................... 5
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1999 and 1998 ............. 6
Notes to Consolidated Financial Statements ............... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............ 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ........................................ 17
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................... 18
SIGNATURES ......................................................... 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of ENSCO International Incorporated
We have reviewed the accompanying consolidated balance sheet of ENSCO
International Incorporated and its subsidiaries as of March 31, 1999 and the
related consolidated statements of income and of cash flows for the three month
periods ended March 31, 1999 and 1998. This financial information is the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial information for it to be in conformity
with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1998, and the related
consolidated statements of income and of cash flows for the year then ended (not
presented herein), and in our report dated January 25, 1999 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet
information as of December 31, 1998, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
May 7, 1999
3
<PAGE>
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
------ ------
OPERATING REVENUES ..................................... $127.7 $246.4
OPERATING EXPENSES
Operating costs..................................... 67.5 83.7
Depreciation and amortization ...................... 23.6 19.8
General and administrative ......................... 2.9 3.6
------ ------
94.0 107.1
------ ------
OPERATING INCOME ..................................... 33.7 139.3
OTHER INCOME (EXPENSE)
Interest income .................................... 4.1 2.7
Interest expense, net .............................. (5.4) (7.6)
Other, net ......................................... (.1) (.1)
------ ------
(1.4) (5.0)
------ ------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST ....... 32.3 134.3
PROVISION FOR INCOME TAXES
Current income taxes ............................... .3 34.8
Deferred income taxes .............................. 11.0 11.0
------ ------
11.3 45.8
MINORITY INTEREST ..................................... 1.0 1.3
------ ------
NET INCOME ............................................. $ 20.0 $ 87.2
====== ======
EARNINGS PER SHARE
Basic............................................... $ .15 $ .62
Diluted ............................................ .15 .61
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic............................................... 136.3 141.5
Diluted............................................. 136.6 142.9
CASH DIVIDENDS PER COMMON SHARE......................... $ .025 $ .025
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In millions, except for par value)
March 31, December 31,
1999 1998
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................... $ 294.9 $ 330.1
Accounts receivable, net .................... 80.7 118.4
Prepaid expenses and other .................. 22.5 27.8
-------- --------
Total current assets .................... 398.1 476.3
-------- --------
PROPERTY AND EQUIPMENT, AT COST ................ 1,892.9 1,799.2
Less accumulated depreciation ............... 432.0 409.8
-------- -------
Property and equipment, net ............. 1,460.9 1,389.4
-------- -------
OTHER ASSETS, NET .............................. 124.3 127.1
-------- --------
$1,983.3 $1,992.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................. $ 12.8 $ 9.1
Accrued liabilities .......................... 106.9 126.7
Current maturities of long-term debt ......... 4.0 23.6
-------- --------
Total current liabilities ................ 123.7 159.4
-------- --------
LONG-TERM DEBT .................................. 374.5 375.5
DEFERRED INCOME TAXES ........................... 190.9 180.0
OTHER LIABILITIES ............................... 15.2 17.1
MINORITY INTEREST ............................... 16.9 15.8
COMMITMENTS AND CONTINGENCIES ...................
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value, 20.0 million
shares authorized and none issued ........ - -
Common stock, $.10 par value, 250.0 million
shares authorized and 155.6 million
shares issued ............................ 15.6 15.6
Additional paid-in capital ................... 846.2 846.1
Retained earnings ............................ 555.0 538.4
Restricted stock (unearned compensation) ..... (7.3) (7.7)
Cumulative translation adjustment ............ (1.1) (1.1)
Treasury stock at cost, 18.5 million shares . (146.3) (146.3)
-------- --------
Total stockholders' equity ............... 1,262.1 1,245.0
-------- --------
$1,983.3 $1,992.8
======== ========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
------ ------
OPERATING ACTIVITIES
Net income ............................................. $ 20.0 $ 87.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 23.6 19.8
Deferred income tax provision .................... 11.0 11.0
Amortization of other assets ..................... 2.8 2.4
Other ............................................ .2 (.2)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ... 37.7 (9.3)
Decrease in prepaid expenses and other ....... 4.4 11.4
Increase in accounts payable ................. 3.6 5.3
Increase (decrease) in accrued liabilities ... (35.1) 21.3
------ ------
Net cash provided by operating activities . 68.2 148.9
------ ------
INVESTING ACTIVITIES
Additions to property and equipment .................... (80.1) (81.0)
Other................................................... .6 .7
------ ------
Net cash used by investing activities ..... (79.5) (80.3)
------ ------
FINANCING ACTIVITIES
Reduction of long-term borrowings ...................... (20.6) (9.1)
Cash dividends ......................................... (3.4) (3.6)
Other .................................................. .1 .4
------ ------
Net cash used by financing activities ..... (23.9) (12.3)
------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......... (35.2) 56.3
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........... 330.1 262.2
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................. $294.9 $318.5
====== ======
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited Financial Statements
The accompanying consolidated financial statements of ENSCO
International Incorporated (the "Company") have been prepared in accordance with
generally accepted accounting principles and pursuant to the rules and
regulations of the Securities and Exchange Commission included in the
instructions to Form 10-Q and Article 10 of Regulation S-X. The financial
information included herein is unaudited but, in the opinion of management,
includes all adjustments (consisting of normal recurring adjustments) which are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented.
The financial data for the three month period ended March 31, 1999
included herein has been subjected to a limited review by PricewaterhouseCoopers
LLP, the registrant's independent accountants. The accompanying review report of
independent accountants is not a report within the meaning of Sections 7 and 11
of the Securities Act of 1933 and the independent accountant's liability under
Section 11 does not extend to it.
Results of operations for the three month period ended March 31, 1999
are not necessarily indicative of results of operations which will be realized
for the year ending December 31, 1999. It is recommended that these statements
be read in conjunction with the Company's consolidated financial statements and
notes thereto for the year ended December 31, 1998 included in the Company's
Annual Report to the Securities and Exchange Commission on Form 10-K.
Note 2 - Earnings Per Share
For the three months ended March 31, 1999 and 1998, there were no
adjustments to net income for purposes of calculating basic and diluted earnings
per share. The following is a reconciliation of the weighted average common
shares used in the basic and diluted earnings per share computations for the
three months ended March 31, 1999 and 1998 (in millions).
1999 1998
---- ----
Weighted average common shares - basic ............. 136.3 141.5
Potentially dilutive common shares
Restricted stock grants ...................... - .4
Stock options ................................ .3 1.0
----- ----
Weighted average common shares - diluted ........... 136.6 142.9
===== =====
Note 3 - Contract Expirations
In January 1999, the Company and Petroleos de Venezuela, S.A. ("PDVSA")
agreed upon the early expiration of the contracts on six of the Company's barge
rigs in Venezuela. The six contracts were originally scheduled to expire from
May to September of 1999. As a result of the early expiration of the contracts,
the Company received lump sum payments totaling $18.4 million, all of which was
recognized as revenue in the first quarter of 1999. The Company experienced
early termination of the contracts of certain other rigs during the first
quarter of 1999, and early termination proceeds of approximately $2.0 million
related to these rigs is also included in revenue for the first quarter of 1999.
Note 4 - Segment Information
The Company's operations are categorized into two operating segments
which are differentiated based on the core services provided by the Company, (1)
contract drilling services and (2) marine transportation services. The Company's
contract drilling segment owns or operates a fleet of 51 offshore drilling rigs,
including 36 jackup rigs, seven barge rigs and eight platform rigs. The
Company's marine transportation segment owns a fleet of 36 oilfield support
vessels. Operating income for each segment includes an allocation of general and
administrative expenses of the Company's corporate office. Depreciation expense
of the Company's corporate office is not allocated to the operating segments.
7
<PAGE>
Segment information for the three months ended March 31, 1999 and 1998 is as
follows (in millions):
INDUSTRY SEGMENT
Contract Marine
Drilling Transportation Corporate Total
-------- -------------- --------- -------
1999
----
Revenues ................. $ 117.5 $ 10.2 $ -- $ 127.7
Operating income (loss) .. 34.0 .1 (.4) 33.7
1998
----
Revenues ................. $ 220.8 $ 25.6 $ -- $ 246.4
Operating income (loss) .. 125.7 13.9 (.3) 139.3
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Environment
ENSCO International Incorporated is one of the leading international
providers of offshore drilling services and marine transportation services to
the oil and gas industry. The Company's operations are conducted in the
geographic regions of North America, Europe, Asia Pacific and South America.
Demand for the Company's services is significantly affected by
worldwide expenditures for oil and gas drilling. Expenditures for oil and gas
drilling activity fluctuate based upon many factors including world economic
conditions, the legislative environment in the U.S. and other major countries,
production levels and other activities of OPEC and other oil and gas producers
and the impact that these and other events have on the current and expected
future pricing of oil and natural gas.
Concern over excess oil supplies and the resulting curtailment or
deferral of exploration and development spending by oil companies continues to
adversely impact industry conditions. Demand for drilling rigs and marine
vessels remains depressed, and day rates and utilization continued to decrease
during the first quarter of 1999. By several measures, current industry
conditions are the worst that have been experienced since the mid-1980s.
During the first quarter of 1999 oil prices increased from their low at
the end of 1998, and recently oil prices have exceeded $18.00 per barrel. The
increase in oil prices is due primarily to anticipated cutbacks in oil
production by OPEC which were agreed to in March 1999. Whether or not the recent
increase in oil prices will be sustained is not determinable at the present
time. Although the recent increase in oil prices improves the likelihood of oil
companies increasing their exploration and development spending, the timing of
any exploration and development spending increase and the impact on the
Company's operations and financial results are uncertain. The Company currently
expects that day rates and utilization will continue to deteriorate in the near
term, especially in international markets. If current conditions persist
throughout 1999, the Company anticipates that it will incur a net loss for the
year ending December 31, 1999.
Results of Operations
The Company's results for the first quarter of 1999 continued the
negative trend that began in the second quarter of 1998. The Company has
continued to experience decreases in day rates and utilization as well as more
recently the early termination of drilling contracts. During the first quarter
of 1999, the Company received $20.4 million as a result of the early termination
of various drilling contracts. The termination of these contracts accelerated
the receipt of revenue which otherwise would have been realized over the course
of 1999.
The following analysis highlights the Company's operating results for
the three months ended March 31, 1999 and 1998 (in millions):
1999 1998
------ ------
Operating Results
-----------------
Revenues ...................................... $127.7 $246.4
Operating expenses, including G&A ............. 70.4 87.3
Depreciation and amortization ................. 23.6 19.8
------ ------
Operating income .............................. 33.7 139.3
Other expense, net ............................ 1.4 5.0
Provision for income taxes .................... 11.3 45.8
Minority interest ............................. 1.0 1.3
------ ------
Net income .................................... $ 20.0 $ 87.2
====== ======
9
<PAGE>
1999 1998
------ ------
Revenues
--------
Contract drilling
Jackup rigs:
North America ......................... $ 35.1 $109.9
Europe ................................ 33.3 57.8
Asia Pacific .......................... 14.8 22.6
------ ------
Total jackup rigs ................. 83.2 190.3
Barge rigs - South America ................ 20.5 23.0
Platform rigs ............................. 13.8 7.5
------ ------
Total contract drilling ........... 117.5 220.8
------ ------
Marine transportation
AHTS (1) .................................. 4.8 5.3
Supply .................................... 4.9 17.2
Mini-supply ............................... .5 3.1
------ ------
Total marine transportation ....... 10.2 25.6
------ ------
Total ......................... $127.7 $246.4
====== ======
Operating Margin(2)
-------------------
Contract drilling
Jackup rigs:
North America ......................... $ 9.6 $ 77.2
Europe ................................ 20.7 42.9
Asia Pacific .......................... 5.4 12.4
------ ------
Total jackup rigs .................. 35.7 132.5
Barge rigs - South America ................ 15.6 11.9
Platform rigs ............................. 7.3 3.0
------ ------
Total contract drilling ............ 58.6 147.4
------ ------
Marine transportation
AHTS (1) .................................. 1.9 3.1
Supply .................................... (.1) 10.5
Mini-supply ............................... (.2) 1.7
------ ------
Total marine transportation ........ 1.6 15.3
------ ------
Total ......................... $ 60.2 $162.7
======= ======
(1) Anchor handling tug supply vessels.
(2) Defined as revenues less operating expenses, exclusive of depreciation and
general and administrative expenses.
10
<PAGE>
The following is an analysis of certain operating information of the
Company for the three months ended March 31, 1999 and 1998:
1999 1998
-------- --------
Contract Drilling
-----------------
Rig utilization:
Jackup rigs:
North America .................... 87% 99%
Europe ........................... 86% 100%
Asia Pacific ..................... 57% 71%
-------- --------
Total jackup rigs ............ 81% 94%
Barge rigs - South America ........... 17% 100%
Platform rigs ........................ 74% 86%
-------- --------
Total ........................ 72% 94%
======== ========
Average day rates:
Jackup rigs:
North America .................... $ 20,258 $ 56,174
Europe ........................... 61,009 100,326
Asia Pacific ..................... 40,836 48,477
-------- --------
Total jackup rigs ............ 30,351 63,120
Barge rigs - South America ........... 17,163 25,246
Platform rigs ........................ 23,853 23,098
-------- --------
Total ........................ $ 29,054 $ 52,288
======== ========
Marine Transportation
---------------------
Fleet utilization:
AHTS* ............................... 70% 73%
Supply ............................... 73% 90%
Mini-supply .......................... 31% 96%
-------- --------
Total ............................ 63% 89%
======== ========
Average day rates:
AHTS* ............................... $ 15,123 $ 16,232
Supply ............................... 3,289 8,908
Mini-supply .......................... 2,315 4,455
-------- --------
Total ............................ $ 5,005 $ 8,676
======== ========
* Anchor handling tug supply vessels.
Discussions relative to each of the Company's operating segments and
significant changes in operating results for the three months ended March 31,
1999 as compared with the prior year same period results are set forth below.
11
<PAGE>
Contract Drilling
The following is an analysis of the Company's offshore drilling rigs at
March 31, 1999 and 1998:
1999 1998
---- ----
Jackup rigs:
North America ......................... 22 22
Europe ................................ 7 7
Asia Pacific .......................... 7 7
---- ----
Total jackup rigs ................. 36 36
Barge rigs - South America(1) ............. 7 10
Platform rigs(2) .......................... 8 8
---- ----
Total ......................... 51 54
==== ====
(1) The Company sold four barge rigs in October 1998. One newly
constructed barge rig was mobilized to Venezuela in March
1999 and commenced drilling operations in early April. The
Company has two additional barge rigs under construction
that will be mobilized to Venezuela during the second
quarter of 1999, and are scheduled to begin drilling
operations in May and July.
(2) In April 1999, the Company completed the operating contract
for a platform rig that was located off the coast of China.
The platform rig was not owned by the Company, but operated
under a management contract. The Company's seven remaining
platform rigs are all located in the Gulf of Mexico.
First quarter 1999 revenues for the Company's drilling segment compared
to the first quarter of 1998 decreased by $103.3 million, or 47%, and operating
margin decreased by $88.8 million, or 60%. These decreases are due primarily to
lower average day rates, which decreased 44% from the prior year period, and
lower utilization for drilling rigs, which decreased to 72% in the first quarter
of 1999 from 94% in the prior year first quarter. Operating expenses for the
contract drilling segment decreased by $14.5 million, or 20%, from the prior
year due primarily to cost cutting initiatives and, to a lesser extent,
decreased utilization.
North America Jackup Rigs
Revenues for the first quarter of 1999 for the North America jackup
rigs decreased by $74.8 million, or 68%, and operating margin decreased by $67.6
million, or 88%, as compared to the prior year first quarter. The decrease in
revenues and operating margin is due primarily to a 64% decrease in average day
rates and to a decrease in utilization, to 87% in the current year quarter as
compared to 99% in the prior year quarter. The Company continues to market all
of its jackup rigs in the Gulf of Mexico and currently has no plans to stack any
of the rigs as a result of the lower industry utilization in the Gulf of Mexico.
Operating expenses decreased by $7.2 million, or 22%, as compared to the prior
year quarter, due primarily to cost saving measures and lower utilization.
Europe Jackup Rigs
First quarter revenues for the Europe jackup rigs decreased by $24.5
million, or 42%, and operating margin decreased by $22.2 million, or 52%, as
compared to the prior year quarter. The decrease in revenues is due primarily to
a 39% decrease in average day rates and a decrease in utilization, to 86% in the
current year quarter from 100% in the prior year quarter. During the first
quarter of 1999, three of the Europe jackup rigs that were originally under
contract through 1999 were released from their contracts early. One of these
rigs returned to work under another contract in the first quarter, and the other
two rigs have been stacked. A fourth rig experienced idle time in the first
quarter after completing a contract and returned to work in the second quarter.
Operating expenses for the Europe jackup rigs decreased by $2.3 million, or 15%,
from the prior year quarter due primarily to cost reductions and lower
utilization.
Asia Pacific Jackup Rigs
First quarter revenues for the Asia Pacific jackup rigs decreased by
$7.8 million, or 35%, and operating margin decreased by $7.0 million, or 56%, as
12
<PAGE>
compared to the prior year quarter. The decrease in revenues and operating
margin is due primarily to a decrease in utilization, to 57% in the current
quarter from 71% in the prior year quarter, and a 16% decrease in average day
rates. Three of the Asia Pacific jackup rigs were stacked for all of the first
quarter whereas only two rigs were idle in the prior year quarter. Operating
expenses decreased approximately $800,000, or 8%, from the prior year quarter
due primarily to cost saving measures and lower utilization.
South America Barge Rigs
First quarter revenues for the South America barge rigs decreased by
$2.5 million, or 11%, and operating expenses decreased by $6.2 million, or 56%,
as compared to the prior year quarter. The decrease in revenues and operating
expenses is primarily due to the sale of four barge rigs in October 1998, and a
decrease in utilization to 17% in the current quarter from 100% in the prior
year quarter for the remaining six barge rigs, which experienced early contract
terminations in January 1999. The decreases in revenue resulting from the sale
of four barge rigs and decreased utilization on the remaining six barge rigs was
partially offset by lump sum early contract termination payments totaling $18.4
million. First quarter operating margin for the South America barge rigs
increased by $3.7 million, or 31%, as compared to the prior year quarter, as the
favorable impact of the early contract termination payments exceeded the decease
in margins resulting from the sale of four barge rigs and the decreased
utilization on the remaining six barge rigs discussed above. During the first
quarter of 1999, the Company completed and delivered the first of three new
barge rigs being constructed to perform five-year term contracts. The remaining
two barge rigs are scheduled for delivery in the second quarter of 1999.
Platform Rigs
First quarter revenues for the platform rigs increased by $6.3 million,
or 84%, and operating margin increased by $4.3 million, or 143%, as compared to
the prior year quarter. The increase in revenues is due to a lump sum contract
cancellation payment received in the first quarter of 1999, and to higher
drilling day rates earned by certain rigs in the current year quarter compared
to lower standby day rates earned in the prior year quarter. In 1998, certain
rigs received standby rates while undergoing enhancement modifications in the
shipyard. In the first quarter of 1999, operating expenses for the platform rigs
increased by $2.0 million, or 44%, due primarily to the higher cost associated
with drilling operations compared to the lower cost incurred by several rigs
while in the shipyard during the first quarter of 1998.
Marine Transportation
The following is an analysis of the Company's marine transportation vessels
as of March 31, 1999 and 1998:
1999 1998
---- ----
AHTS(1)(2)(3) ................... 5 5
Supply(3) ....................... 23 24
Mini Supply ..................... 8 8
---- ----
Total(4) ............ 36 37
==== ====
(1) Anchor handling tug supply vessels.
(2) In September 1998, one of the Company's large AHTS vessels
sank while supporting drilling operations for a customer in
the Gulf of Mexico. The vessel was fully insured and the
Company recognized a gain on the loss of the vessel during
the third quarter of 1998.
(3) During the fourth quarter of 1998, the Company added
towing capabilities to one of its larger supply vessels and
reclassified the vessel as an AHTS vessel effective January
1, 1999.
(4) All of the Company's marine transportation vessels are
located in the Gulf of Mexico.
For the first quarter 1999, revenues for the Company's marine
transportation segment decreased by $15.4 million, or 60%, and operating margin
13
<PAGE>
decreased by $13.7 million, or 90%, as compared to the prior year quarter. The
decrease in revenues is due to a decrease in utilization, to 63% in the current
quarter from 89% in the prior year quarter, and a 42% decrease in average day
rates. The Company currently has seven of its vessels cold stacked. Operating
expenses decreased by $1.7 million, or 17%, due primarily to lower utilization
and cost reductions.
Depreciation and Amortization
Depreciation and amortization expense for the first quarter of 1999
increased by $3.8 million, or 19%, as compared to the prior year quarter. The
increase is due primarily to enhancement projects that were completed subsequent
to the first quarter of 1998, offset in part by the sale of four barge rigs in
October 1998.
General and Administrative
General and administrative expense for the first quarter of 1999
decreased by $700,000, or 19%, as compared to the prior year quarter. The
decrease is due primarily to a reduction in performance-based compensation and
cost saving measures.
Other Income (Expense)
Other income (expense) for the three months ended March 31, 1999 and
1998 was as follows (in millions):
1999 1998
---- ----
Interest income ........... $ 4.1 $ 2.7
Interest expense, net ..... (5.4) (7.6)
Other, net ................ (.1) (.1)
----- -----
$(1.4) $(5.0)
===== =====
Interest income increased in the first quarter of 1999 as compared to
the prior year quarter due primarily to higher average invested cash balances.
Interest expense decreased as compared to the prior year quarter due to lower
average debt balances and a $2.0 million increase in capitalized interest
resulting from the new construction projects.
Provision for Income Taxes
The Company's provision for income taxes decreased by $34.5 million for
the three months ended March 31, 1999 as compared to the prior year period, due
to the decreased profitability of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow and Capital Expenditures
The Company's cash flow from operations and capital expenditures for
the three months ended March 31, 1999 and 1998 are as follows (in millions):
1999 1998
------ ------
Cash flow from operations .. $ 68.2 $148.9
====== ======
Capital expenditures
Enhancements ........... $ 10.1 $ 43.5
Construction ........... 66.2 27.8
Sustaining ............. 3.8 9.7
------ ------
$ 80.1 $ 81.0
====== ======
Cash flow from operations decreased by $80.7 million for the first
quarter of 1999 as compared to the prior year quarter. The decrease in cash flow
from operations is due primarily to reduced operating results and reduced cash
flow from working capital changes.
Management anticipates that capital expenditures for the full year 1999
will be approximately $275 million, including $210 million for new construction
projects, $30 million for enhancements and $35 million for ongoing operations.
14
<PAGE>
Financing and Capital Resources
The Company's long-term debt, total capital and debt to capital ratios at
March 31, 1999 and December 31, 1998 are summarized below (in millions, except
percentages):
March 31, December 31,
1999 1998
--------- ------------
Long-term debt .................. $ 374.5 $ 375.5
Total capital ................... 1,636.6 1,620.5
Long-term debt to total capital . 22.9% 23.2%
During the first quarter of 1999 the Company repaid $19.6 million of
term loans outstanding at December 31, 1998. These loans were secured by four
Venezuela barge rigs and were required to be paid as a result of the early
termination of the drilling contracts of the four rigs. In order to assure the
Company has adequate liquidity and resources for growth, the Company is
currently in the process of arranging approximately $200 million of long-term
debt consisting of 15 year notes that will be guaranteed by the United States
Maritime Administration for the construction of the Company's new build
semisubmersible rig. The funds will not be fully drawn until the new rig is
completed in mid 2000.
The Company's liquidity position at March 31, 1999 and December 31, 1998 is
summarized in the table below (in millions, except ratios):
March 31, December 31,
1999 1998
--------- ------------
Cash and cash equivalents ....... $ 294.9 $ 330.1
Working capital ................. 274.4 316.9
Current ratio ................... 3.2 3.0
MARKET RISK
The Company occasionally uses derivative financial instruments to hedge
against its exposure to changes in foreign currencies. The Company does not use
derivative financial instruments for trading purposes. The Company predominantly
structures its drilling rig contracts in U.S. dollars to mitigate its exposure
to fluctuations in foreign currencies. The Company will, however, from time to
time, hedge its known liabilities or projected payments in foreign currencies to
reduce the impact of foreign currency gains and losses in its financial results.
At March 31, 1999, the Company had foreign currency exchange contracts
outstanding to exchange U.S. dollars for Dutch guilders, British pounds sterling
and Singapore dollars totaling $45.0 million. At March 31, 1999, there were no
material unrealized gains or losses on open foreign currency exchange derivative
hedges. Management believes that the Company's hedging activities do not expose
the Company to any material interest rate risk, foreign currency exchange rate
risk, commodity price risk or any other market rate or price risk.
YEAR 2000 UPDATE
The Company has completed its assessment of its critical information
technology (IT) systems and non-IT systems and is working to correct the
deficiencies identified. The Company believes that it is on schedule to
successfully implement the required systems and equipment modifications
necessary to make the Company's critical systems Year 2000 compliant by
mid-1999.
The Company's critical IT systems are comprised primarily of a general
ledger accounting software package and related application modules, a fixed
asset system, payroll system and procurement and purchasing system. The
assessment of the Company's IT systems found that some of the IT systems were
not Year 2000 compliant. Changes to make these systems Year 2000 compliant are
being made in conjunction with the Company's planned upgrade cycle, which should
be completed by mid-1999.
Non-IT systems are comprised primarily of computer controlled equipment
and electronic devices, including equipment with embedded microprocessors which
are used to operate equipment on the Company's drilling rigs and marine vessels.
Additionally, telephone systems and other office based electronic equipment are
considered in the assessment of non-IT systems. With respect to drilling rig and
marine vessel based systems, the Company's assessment indicates that there will
be no disruption in the operations of its drilling rigs and marine vessels as a
result of the Year 2000 problem. The Company conducted testing of its drilling
rig based equipment with manufacture representatives during the fourth quarter
of 1998 which verified the Company's assessment. With respect to other office
based non-IT systems, the Company's assessment found that it will be necessary
to replace or modify some existing equipment, which should be completed by
mid-1999.
15
<PAGE>
The total cost to make all systems and equipment Year 2000 compliant is
currently estimated at $550,000, including software and systems that are being
replaced in the Company's normal upgrade cycle. Approximately $440,000 has been
spent in modifying and upgrading systems and equipment to date. These estimates
do not include internal labor costs for employees who spend part of their time
working on the Company's Year 2000 project.
The Company has initiated or received communication from most
significant suppliers, customers and financial service providers on the Year
2000 issue. This communication has been used to determine the extent to which
the Company is vulnerable to these third parties' failure to remedy their own
Year 2000 issues. Although there is currently no indication that these business
partners will not achieve their Year 2000 compliance plans, there can be no
guarantee that the systems of other companies on which the Company relies will
be timely converted. Additionally, there can be no guarantee that the Company
will not experience Year 2000 problems. If the Company or its business partners
experience Year 2000 compliance problems, material adverse business consequences
could result. The Company believes that the most likely negative effects, if
any, could include delays in payments to the Company from customers or payments
by the Company to suppliers and disruptions in shipments of equipment and
materials required to operate the Company's drilling rigs and marine vessels.
The Company has begun contingency planning for its Year 2000 issues and
is expected to have such plans completed during the third quarter of 1999. The
Company's contingency planning will primarily focus on precautionary measures
related to the shipment of equipment to foreign countries and rig crew changes
on or around January 1, 2000.
OUTLOOK AND FORWARD-LOOKING STATEMENTS
The Company currently expects that day rates and utilization levels for
drilling rigs and marine transportation vessels will continue to deteriorate
during the remainder of 1999 as a result of current industry conditions and
sharply curtailed spending for exploration and development programs by oil
companies. As day rates and utilization continue to decrease, the Company's
financial results will be adversely affected. Due to the short-term nature of
many of the Company's contracts and the unpredictable nature of oil and natural
gas prices, which affect the demand for drilling activity, the extent of such
adverse change cannot be accurately predicted. While recent oil price
improvement has been encouraging, even if these prices persist, significantly
higher day rates will probably not be realized for several quarters. Based on
these factors, the Company anticipates it will incur a net loss for 1999.
However, management remains positive on the long-term outlook for the industry
and for ENSCO.
The decline experienced in the offshore drilling markets has resulted
in the Company stacking certain rigs and vessels. The Company will stack its
rigs and vessels if it does not believe there will be a market for the equipment
in the near-term or if sufficient cash flow cannot be generated to cover cash
operating costs. During the remainder of 1999, the Company expects that its Gulf
of Mexico jackup rigs will experience greater downtime as the majority of these
rigs are on short-term contracts and will be competing against many available
rigs for additional work. Currently, the Company has no plans to stack any of
its North America jackup rigs. In Europe, three of the Company's rigs are
currently idle, including two rigs that were stacked during the first quarter.
The Company continues to market the remaining rig. In the Asia Pacific region,
the Company has five rigs currently not under contract. The Company has stacked
three of these rigs and plans to market the remaining two rigs. In South
America, the Company has received delivery of two new barge rigs constructed
against a long-term contract with Chevron. A third new barge rig is expected to
be delivered in the second quarter and commence drilling under contract in the
third quarter of 1999. The Company's six other barge rigs in Venezuela were
idled in January 1999 as a result of early contract terminations by PDVSA. The
Company has stacked four of the barge rigs and plans to market the remaining two
barge rigs, one of which is currently performing a short-term contract. In the
marine transportation segment, there are currently two supply vessels and five
mini-supply vessels stacked. Additional vessels will be considered for stacking
as their drydocking requirements mature during 1999.
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties that could cause
16
<PAGE>
actual results to differ materially from the results discussed in the
forward-looking statements. Generally, forward-looking statements include words
or phrases such as "management anticipates," "the Company believes," "the
Company anticipates" and words and phrases of similar impact, and include but
are not limited to statements regarding future operations and business
environment. The forward-looking statements are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The factors
that could cause actual results to differ materially include, but are not
limited to: (i) industry conditions and competition, (ii) the cyclical nature of
the industry, (iii) worldwide expenditures for oil and gas drilling, (iv)
operational risks and insurance, (v) risks associated with operating in foreign
jurisdictions, (vi) environmental liabilities which may arise in the future
which are not covered by insurance or indemnity, (vii) the impact of current and
future laws and governmental regulation, as well as repeal or modification of
the same, affecting the oil and gas industry and the Company's operations in
particular, and (viii) the risks described from time to time in the Company's
reports to the Securities and Exchange Commission, including the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains and losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. This statement is not expected to
have a material impact on the Company's consolidated financial statements. This
statement is effective for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. ENSCO will adopt this accounting standard as
required by January 1, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required under Item 3. has been incorporated into
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed with this Report
Exhibit No.
-----------
15.1 Letter of Independent Accountants regarding
Awareness of Incorporation by Reference.
27.1 Financial Data Schedule. (Exhibit 27.1 is being
submitted as an exhibit only in the electronic
format of this Quarterly Report on Form 10-Q
submitted to the Securities and Exchange
Commission.)
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSCO INTERNATIONAL INCORPORATED
Date: May 7, 1999 /s/ C. Christopher Gaut
--------------------------------
C. Christopher Gaut
Chief Financial Officer
/s/ H. E. Malone
--------------------------------
H. E. Malone, Corporate Controller
and Chief Accounting Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1999 financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000314808
<NAME> ENSCO INTERNATIONAL INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 294,900
<SECURITIES> 0
<RECEIVABLES> 80,700
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 398,100
<PP&E> 1,892,900
<DEPRECIATION> 432,000
<TOTAL-ASSETS> 1,983,300
<CURRENT-LIABILITIES> 123,700
<BONDS> 374,500
0
0
<COMMON> 15,600
<OTHER-SE> 1,246,500
<TOTAL-LIABILITY-AND-EQUITY> 1,983,300
<SALES> 0
<TOTAL-REVENUES> 127,700
<CGS> 0
<TOTAL-COSTS> 67,500
<OTHER-EXPENSES> 26,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,400
<INCOME-PRETAX> 32,300
<INCOME-TAX> 11,300
<INCOME-CONTINUING> 20,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,000
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
May 7, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that ENSCO International Incorporated has included our report dated
May 7, 1999 (issued pursuant to the provisions of Statement on Auditing Standard
No. 71) in the Company's Registration Statements on Form S-3 (Nos. 33-42965,
33-46500, 33-49590, 33-43756, 33-64642, 333-03575 and 333-37897), and any
existing amendments thereto, and Form S-8 (Nos. 333-58625, 33-14714, 33-32447,
33-35862, 33-40282 and 33-41294). We are also aware of our responsibilities
under the Securities Act of 1933.
Yours very truly,
/s/ PricewaterhouseCoopers LLP
