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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 September 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-12797
CLIFFS DRILLING COMPANY
(Exact name of registrant as specified in its charter)
Delaware 76-0248934
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Threadneedle, Houston, Texas 77079
(Address of principal executive offices)(Zip code)
(281) 496-5000
(Registrant's telephone number, including area code)
1200 Smith Street, Suite 300
Houston, Texas 77002
(Former address)
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 1 _X_ No 2 ___
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Forward-Looking Statements and Assumptions
This Quarterly Report on Form 10-Q may contain or incorporate
by reference certain forward-looking statements, including by way of
illustration and not of limitation, statements relating to liquidity,
revenues, expenses, margins and contract rates and terms. The Company
strongly encourages readers to note that some or all of the assumptions,
upon which such forward-looking statements are based, are beyond the
Company's ability to control or estimate precisely, and may in some cases
be subject to rapid and material changes. Such assumptions include the
contract status of the Company's drilling units, general market
conditions prevailing in the contract drilling industry (including daily
rates and utilization) and various other trends affecting the contract
drilling industry, including world oil and gas prices, the exploration
and development programs of the Company's customers, the actions of the
Company's competitors and economic conditions generally.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Company or Group of Companies for Which Report is Filed:
Cliffs Drilling Company
The financial statements for the three and nine month periods ended
September 30, 1999 and 1998, include, in the opinion of the Company, all
adjustments (which only consist of normal recurring adjustments)
necessary to present fairly the financial position and results of
operations for such periods. The financial data for the three and nine
month periods ended September 30, 1999 included herein have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Results of operations for the three and nine
month periods ended September 30, 1999 are not necessarily indicative
of results of operations which will be realized for the year ending
December 31, 1999. The financial statements should be read in conjunction
with the Company's Form 10-K for the year ended December 31, 1998.
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
September 30, December 31,
1999 1998
--------- ---------
(unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 79,300 $ 36,276
Accounts receivable:
Trade, net 37,914 35,670
Other 4,137 6,984
Materials and supplies inventory 9,501 10,335
Drilling contracts in progress 15,838 29,483
Other current assets 5,790 4,861
--------- ---------
Total current assets 152,480 123,609
--------- ---------
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED INVESTEES 5,486 2,580
--------- ---------
PROPERTY AND EQUIPMENT:
Drilling 511,417 504,189
Other 4,044 4,550
--------- ---------
Total property and equipment 515,461 508,739
Accumulated depreciation, depletion and
amortization since December 1, 1998 (29,011) (2,898)
--------- ---------
Net property and equipment 486,450 505,841
--------- ---------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 73,634 70,579
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 6,412 4,139
--------- ---------
DUE FROM PARENT - 10,508
--------- ---------
TOTAL ASSETS $ 724,462 $ 717,256
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, trade $ 23,825 $ 29,840
Accrued liabilities 24,773 23,101
--------- ---------
Total current liabilities 48,598 52,941
LONG-TERM OBLIGATIONS 202,104 202,935
DEFERRED INCOME TAXES 59,230 55,094
OTHER NONCURRENT LIABILITIES 1,163 1,797
PAYABLE TO PARENT 3,044 -
--------- ---------
Total liabilities 314,139 312,767
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value - -
Capital in excess of par value 405,069 405,069
Retained earnings (deficit) since
December 1, 1998 5,254 (580)
--------- ---------
Total stockholder's equity 410,323 404,489
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 724,462 $ 717,256
========= =========
The accompanying notes are an integral part of the interim consolidated
financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Post - Pre - Post - Pre -
Acquisition Acquisition Acquisition Acquisition
----------- ----------- ----------- -----------
REVENUES $ 62,039 $ 94,497 $ 225,391 $ 269,239
-------- -------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 48,251 55,650 166,688 158,761
Depreciation, depletion and
amortization 9,229 7,505 27,827 21,246
General and administrative 4,476 4,176 8,469 8,694
-------- -------- --------- ---------
Total costs and expenses 61,956 67,331 202,984 188,701
-------- -------- --------- ---------
OPERATING INCOME 83 27,166 22,407 80,538
-------- -------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 1,294 447 2,432 1,496
Interest expense (5,176) (5,224) (15,613) (15,192)
Income (loss) from equity
investments (283) 9 (62) 291
Other, net (139) 28 (189) (371)
-------- -------- --------- ---------
Total other income (expense) (4,304) (4,740) (13,432) (13,776)
-------- -------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (4,221) 22,426 8,975 66,762
INCOME TAX EXPENSE (BENEFIT) (1,478) 7,849 3,141 23,367
-------- -------- --------- ---------
NET INCOME (LOSS) $ (2,743) $ 14,577 $ 5,834 $ 43,395
======== ======== ========= =========
NET INCOME PER COMMON SHARE:
Basic N/A $ 0.92 N/A $ 2.73
======== ======== ========= =========
Diluted N/A $ 0.91 N/A $ 2.71
======== ======== ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic N/A 15,913 N/A 15,868
======== ======== ========= =========
Diluted N/A 16,001 N/A 16,030
======== ======== ========= =========
The accompanying notes are an integral part of the interim consolidated
financial statements.
The merger of RBF Cliffs Acquisition Corp., a wholly-owned subsidiary
of R&B Falcon Corporation, with and into Cliffs Drilling Company was
effective on December 1, 1998 and was accounted for using the purchase
method of accounting. The purchase price adjustments were "pushed down"
and recorded in the consolidated financial statements of Cliffs Drilling
Company, which affects the comparability of the post-acquisition and pre-
acquisition results of operations and cash flows. See Note B.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months
Ended September 30,
-------------------------
1999 1998
----------- -----------
Post - Pre -
Acquisition Acquisition
----------- -----------
OPERATING ACTIVITIES:
Net income $ 5,834 $ 43,395
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 27,827 21,246
Deferred income tax expense 4,136 6,770
Mobilization expense amortization - 770
Gain on disposition of assets (166) (194)
Amortization of debt issue costs 616 680
Amortization of restricted stock - 2,212
Amortization of debt premium (503) (503)
Other (4,437) 797
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable 603 (387)
Materials and supplies inventory 3,593 (3,798)
Drilling contracts in progress 13,645 4,921
Prepaid insurance and other prepaid expenses (929) (2,140)
Investments in and advances to
unconsolidated investees (2,906) (111)
Other assets (2,492) -
Due from/payable to parent 13,552 -
Accounts payable and other accrued expenses (4,977) (2,747)
-------- --------
Net cash provided by operating activities 53,396 70,911
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (10,541) (63,471)
Proceeds from sale of property and equipment 497 1,528
-------- --------
Net cash used in investing activities (10,044) (61,943)
-------- --------
FINANCING ACTIVITIES:
Payments on borrowings (328) -
Proceeds from exercise of stock options - 211
Debt issue costs - (32)
-------- --------
Net cash provided by (used in)
financing activities (328) 179
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 43,024 9,147
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 36,276 28,122
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79,300 $ 37,269
======== ========
The accompanying notes are an integral part of the interim consolidated
financial statements.
The merger of RBF Cliffs Acquisition Corp., a wholly-owned subsidiary of R&B
Falcon Corporation, with and into Cliffs Drilling Company was effective on
December 1, 1998 and was accounted for using the purchase method of
accounting. The purchase price adjustments were "pushed down" and recorded
in the consolidated financial statements of Cliffs Drilling Company, which
affects the comparability of the post-acquisition and pre-acquisition
results of operations and cash flows. See Note B.
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A) SIGNIFICANT ACCOUNTING POLICIES
GOODWILL - Goodwill was recorded as a result of the merger of the
Company and R&B Falcon Corporation in December 1998 (see Note B). Goodwill
has increased $3.0 million since December 31, 1998. Such increase
represents revisions to the estimate in the initial purchase price
allocation offset by $1.4 million of amortization.
OVERHEAD ALLOCATIONS - As of July 1, 1999, R&B Falcon Corporation
provided substantially all of the Company's general and administrative
services including personnel. General and administrative expenses including
payroll costs of R&B Falcon Corporation are allocated to the Company and
other subsidiaries of R&B Falcon Corporation based on revenues. General
and administrative expenses allocated to the Company were $3.9 million for
the three and nine months ended September 30, 1999, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS - In 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be measured at its fair value,
recorded in the balance sheet as either an asset or liability and that
changes in the derivative's fair value be recognized currently in earnings.
SFAS No. 133 is effective for all fiscal quarters for fiscal years
beginning after June 15, 2000 and is not expected to have a significant
impact on the Company's consolidated financial statements and related
disclosures upon adoption.
RECLASSIFICATION - Certain prior period amounts in the consolidated
financial statements have been reclassified for comparative purposes. Such
reclassifications had no effect on net income or the overall financial
condition of the Company.
B) BUSINESS COMBINATION
Effective December 1, 1998, a change in control of the Company occurred
as a result of the merger of RBF Cliffs Acquisition Corp., a wholly-owned
subsidiary of R&B Falcon Corporation ("R&B Falcon"), with and into the
Company (the "Merger"). As a result of the Merger, each outstanding share
of common stock, $0.01 par value ("Common Stock") of the Company was
converted into 1.7 shares of R&B Falcon common stock and cash in lieu of
fractional shares, as provided for in an Agreement and Plan of Merger dated
August 21, 1998 (the "Merger Agreement"). The Company is now a wholly-owned
subsidiary of R&B Falcon.
The Merger was accounted for using the purchase method of accounting.
Accordingly, an allocation of the purchase price was assigned to the assets
and liabilities of the Company based on their estimated fair values. The
purchase price adjustments were "pushed down" to the consolidated financial
statements of the Company.
The accompanying Consolidated Statement of Operations includes the
effects of the Merger beginning December 1, 1998. Unaudited pro forma
consolidated operating results of the Company for the nine months ended
September 30, 1998, assuming the Merger was effective as of January 1,
1998, are summarized as follows (in thousands):
Revenues $ 269,239
Operating income 75,121
Net income 39,874
The pro forma information for the nine months ended September 30, 1998
includes adjustments for additional depreciation of $4.0 million based on
the fair market values of the drilling rigs and other property and
equipment, goodwill amortization of $1.4 million and a reduction in income
taxes of $1.9 million. The pro forma information is not necessarily
indicative of the results of operations had the Merger occurred on the
assumed dates or the results of operations for any future period.
C) LONG-TERM OBLIGATIONS
Long-term debt at September 30, 1999 consists solely of 10.25% Senior
Notes due 2003 (the "Senior Notes") in the aggregate principal amount of
$199.7 million and debt premium, net of amortization, of $2.4 million. In
addition to the $150.0 million of Senior Notes sold during 1996, the
Company sold $50.0 million of Senior Notes on August 7, 1997 at a premium
of $3.9 million. Considering the premium, the effective interest rate on
the $50.0 million Senior Notes is 9.5%. Interest on the Senior Notes is
payable semi-annually during each May and November. The Senior Notes do not
require any payments of principal prior to their stated maturity on May 15,
2003, but the Company is required to make offers to purchase Senior Notes
upon the occurrence of certain events as defined in the indenture, such as
asset sales or a change of control of the Company.
Upon consummation of the Merger, the Company offered to purchase for
cash all of the outstanding Senior Notes at a purchase price equal to 101%
of the principal amount, plus accrued and unpaid interest to the change of
control payment date, as required by the indenture governing the Senior
Notes (the "Change of Control Offer"). On January 28, 1999, the Company
purchased the $.3 million principal amount of Senior Notes that were
tendered pursuant to the Change of Control Offer.
The Senior Notes are senior unsecured obligations of the Company,
ranking pari passu in right of payment with all senior indebtedness and
senior to all subordinated indebtedness. The Senior Notes are
unconditionally guaranteed (the "Subsidiary Guarantees") on a senior
unsecured basis by the Company's principal subsidiaries (the "Subsidiary
Guarantors"). Each Subsidiary Guarantor is 100% owned by the Company. R&B
Falcon is not a guarantor of the Senior Notes.
Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented because management has determined
such financial statements and other disclosures are not material to
investors. The assets, equity, income and cash flows of the non-guarantor
subsidiaries on an individual and combined basis are less than 1% of the
consolidated assets, equity, income and cash flows, respectively, of the
Company and are inconsequential. The combined condensed financial
information of the Company's Subsidiary Guarantors is as follows:
September 30, December 31,
1999 1998
--------- ---------
(in thousands)
Current assets $ 7,625 $ 7,133
Non-current assets 71,385 68,766
--------- ---------
Total assets $ 79,010 $ 75,899
========= =========
Current liabilities $ 2,680 $ 3,794
Non-current liabilities 63,685 63,089
Equity 12,645 9,016
--------- ---------
Total liabilities and equity $ 79,010 $ 75,899
========= =========
Nine Months Ended
September 30,
------------------------
1999 1998
--------- ---------
(in thousands)
Revenues $ 13,958 $ 19,247
Operating income $ 2,881 $ 5,311
Net income $ 1,695 $ 3,253
D) RIG MANAGEMENT AGREEMENT
Effective April 1, 1999, the Company entered into a rig management
agreement to lease 10 of its jack-up drilling rigs operating in the U.S.
Gulf of Mexico to R&B Falcon Drilling USA, Inc. ("RBF USA") (the
"Management Agreement"). Based upon the terms of the Management Agreement,
RBF USA manages these rigs for a fixed daily rate and earns 20% of the net
profit and bears 20% of the net loss generated by each rig. The Company
recognizes the remaining 80% of the net profit or loss from each rig. The
Company recognized revenues of $4.4 million and $8.9 million, and operating
expenses of $6.4 million and $12.2 million associated with the Management
Agreement for the three and nine months ended September 30, 1999,
respectively.
E) EXECUTIVE TERMINATIONS
Certain executive officers of the Company were terminated during the
period from May to July of 1999 as a result of the Merger. Certain
executive officers of R&B Falcon have assumed the responsibilities
previously performed by these individuals.
F) SEGMENT INFORMATION
The Company's operating results by business segment are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(in thousands)
Revenues:
Daywork drilling $ 25,274 $ 62,177 $ 98,523 $ 177,117
Engineering services 45,327 38,338 153,687 108,427
MOPU operations 1,245 2,347 3,698 7,027
Corporate office and other 43 328 172 550
Eliminations (a) (9,850) (8,693) (30,689) (23,882)
-------- -------- --------- ---------
Consolidated $ 62,039 $ 94,497 $ 225,391 $ 269,239
======== ======== ========= =========
Operating income (loss):
Daywork drilling $ (2,904) $ 22,456 $ 1,026 $ 62,885
Engineering services 7,921 9,244 30,822 25,580
MOPU operations 1,097 734 1,318 2,630
Corporate office and other (6,031) (5,268) (10,759) (10,557)
-------- -------- --------- ---------
Consolidated $ 83 $ 27,166 $ 22,407 $ 80,538
======== ======== ========= =========
(a) Eliminations include intersegment sales between the Daywork
Drilling and Engineering Services business segments.
In April 1998, Cliffs Drilling was awarded a contract from PDVSA
Exploration and Production ("PDVSA") to drill 60 turnkey wells in
Venezuela. The drilling program commenced in March 1998 and the program was
expected to extend over approximately three and one-half years and was
expected to utilize 7 of the Company's land drilling rigs in Venezuela.
However, during the first quarter of 1999, in response to the downturn in
the market, PDVSA and the Company renegotiated prices for the next 14 wells
to be drilled under this program. In the fourth quarter of 1999,
negotiations were completed for the following seven wells to be drilled
under this program at further reduced margins. As of September 30, 1999,
the Company had completed 24 wells with 11 wells remaining to be completed.
Such remaining wells are expected to be completed by the end of the first
quarter in 2000. In regards to the remaining 25 of the original 60 wells,
a contractual commitment no longer exists and no assurance can be given
that such wells will ultimately be drilled.
For the three and nine months ended September 30, 1999, revenues from
PDVSA of $38.5 million and $120.5 million, respectively, reported in the
engineering services and land operations segment, accounted for 62% and
53%, respectively, of the Company's consolidated operating revenues.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Effective December 1, 1998, a change in control of the Company occurred
as a result of the Merger. The Company is now a wholly-owned subsidiary of
R&B Falcon. The Merger was accounted for using the purchase method of
accounting. Accordingly, an allocation of the purchase price was assigned
to the assets and liabilities of the Company based on their estimated fair
values. The purchase price adjustments were "pushed down" to the
consolidated financial statements of the Company, which affects the
comparability of the post-acquisition and pre-acquisition results of
operations and cash flows.
Industry Conditions
Activity in the contract drilling industry and related oil service
businesses has deteriorated significantly in the past year due to decreased
worldwide demand for drilling rigs and related services resulting from a
substantial decline in crude oil prices experienced in 1998 and through the
first quarter of 1999. In recent months, crude oil prices have recovered
somewhat, but there can be no assurance that demand for drilling rigs and
services will increase. The financial condition and results of operations
of the Company and other drilling contractors are dependent upon the price
of oil and natural gas, as demand for their services is primarily dependent
upon the level of spending by oil and gas companies for exploration,
development and production activities. In late 1998 and early 1999, lower
crude oil prices affected exploration and production spending, which led to
significantly lower dayrates and utilization for offshore drilling
companies, particularly in the U.S. Gulf of Mexico. Crude oil and natural
gas prices have continued to fluctuate over the last several years. If
crude oil prices decline from current levels, or a weakness in crude oil
prices continued for an extended period, there could be a further
deterioration in both rig utilization and dayrates.
The Company's daywork drilling operations benefited during early 1998
from the tight supply of jack-up drilling rigs both in the U.S. Gulf of
Mexico and internationally. Increased exploration activity coupled with a
reduction in rig availability resulted in increased dayrates and
utilization of the Company's drilling rigs. The same factors both
positively and negatively affected the Company's engineering services
business segment during early 1998, in that increased exploration activity
caused an increase in demand for the Company's engineering services;
however, reduced rig availability made it more difficult for the Company to
contract drilling rigs required for performance of turnkey drilling
operations.
The oil and gas industry has experienced extreme market cycles over the
past decade. The Company has endeavored to mitigate the effect of this
volatility by diversifying its scope of operations. To achieve its
strategic objective, the Company established separate but related lines of
business in daywork drilling, engineering services and mobile offshore
production unit ("MOPU") operations. The Company also has pursued foreign
drilling and production opportunities in order to expand geographically.
Each of the Company's business segments will continue to be affected,
however, by the unsettled energy markets, which are influenced by a variety
of factors, including general economic conditions, the extent of worldwide
oil and gas production and demand therefor, government regulations and
environmental concerns.
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 1998
The Company recognized a loss of $2.7 million during the third quarter
of 1999 compared to net income of $14.6 million in the third quarter of
1998. Revenues decreased $32.5 million and operating income decreased $27.1
million in the same period. The decrease in operating income was partially
offset by a decrease in income taxes of $9.3 million. Decreased operating
results from the Company's daywork drilling business segment contributed to
the reduction in operating income.
Three Months Ended
September 30,
-------------------- Increase
1999 1998 (Decrease)
-------- -------- --------
(in thousands)
Revenues:
Daywork drilling $ 25,274 $ 62,177 $(36,903)
Engineering services 45,327 38,338 6,989
MOPU operations 1,245 2,347 (1,102)
Corporate office and other 43 328 (285)
Eliminations (9,850) (8,693) (1,157)
-------- -------- --------
Consolidated $ 62,039 $ 94,497 $(32,458)
======== ======== ========
Operating income (loss):
Daywork drilling $ (2,904) $ 22,456 $(25,360)
Engineering services 7,921 9,244 (1,323)
MOPU operations 1,097 734 363
Corporate office (6,031) (5,268) (763)
-------- -------- --------
Consolidated $ 83 $ 27,166 $(27,083)
======== ======== ========
Daywork Drilling
Daywork drilling revenues decreased $36.9 million and operating income
decreased $25.4 million in the third quarter of 1999 compared to the third
quarter of 1998. The decreases in revenues and operating income were
primarily due to reduced dayrates and utilization.
Effective April 1, 1999, the Company entered into a rig management
agreement to lease 10 of its jack-up drilling rigs operating in the U.S.
Gulf of Mexico to RBF USA. Based upon the terms of the Management
Agreement, RBF USA manages these rigs for a fixed daily rate and earns 20%
of the net profit and bears 20% of the net loss generated by each rig. The
Company recognizes the remaining 80% of the net profit or loss from each
rig. The Company recognized revenues of $4.4 million and operating expenses
of $6.4 million associated with this Management Agreement during the third
quarter of 1999.
The Company operates its drilling rigs on both a term and a spot (well-
to-well) basis. The following table summarizes revenues for significant
classes of the Company's drilling rigs:
Three Months Ended
September 30,
-------------------- Increase
1999 1998 (Decrease)
-------- -------- ---------
(in thousands)
Daywork drilling revenues (1):
Jack-up rigs:
International $ 3,260 $ 15,366 $ (12,106)
Domestic 4,299 25,967 (21,668)
Land rigs 15,688 15,163 525
Platform / Workover rigs 2,027 6,392 (4,365)
Other (2) - (711) 711
-------- -------- ---------
Total $ 25,274 $ 62,177 $ (36,903)
======== ======== =========
- --------------
(1) Includes revenues earned from affiliates.
(2) Includes labor maintenance contracts in the third quarter of 1998.
Engineering Services
Engineering services revenues increased $7.0 million and operating
income decreased $1.3 million in the third quarter of 1999 compared to the
third quarter of 1998. The Company completed nine turnkey contracts in the
third quarter of 1999 compared to five turnkey contracts completed in the
third quarter of 1998. Five of the nine contracts completed during the
third quarter of 1999 were international contracts in Venezuela compared to
four international contract completions in the third quarter of 1998. The
Company has expanded its turnkey operations in the U.S. Gulf of Mexico and
completed four contracts in the third quarter of 1999 compared to only one
completion in the third quarter of 1998.
International operating margins are currently stronger than domestic
margins. Domestic turnkey contractors continue to bid wells very
aggressively, resulting in intense competition which has affected the
Company's domestic turnkey margins, as well as margins of other
competitors.
In April 1998, the Company was awarded a contract from PDVSA Exploration
and Production ("PDVSA") to drill 60 turnkey wells in Venezuela. The
drilling program commenced in March 1998 and the program was expected to
extend over approximately three and one-half years and was expected to
utilize 7 of the Company's land drilling rigs in Venezuela. However, during
the first quarter of 1999, in response to the downturn in the market, PDVSA
and the Company renegotiated prices for the next 14 wells to be drilled
under this program. In the fourth quarter of 1999, negotiations were
completed for the following seven wells to be drilled under this program at
further reduced margins. As of September 30, 1999, the Company had
completed 24 wells with 11 wells remaining to be completed. Such remaining
wells are expected to be completed by the end of the first quarter in 2000.
In regards to the remaining 25 of the original 60 wells, a contractual
commitment no longer exists and no assurance can be given that such wells
will ultimately be drilled.
For the three months ended September 30, 1999, revenues from PDVSA of
$38.5 million accounted for 62% of the Company's consolidated operating
revenues.
At September 30, 1999, the Company had seven turnkey wells in progress
in Venezuela and no turnkey wells in progress in the U.S. Gulf of Mexico.
MOPU Operations
MOPU revenues decreased $1.1 million and operating income increased $.4
million in the third quarter of 1999 compared to the third quarter of 1998.
The Company currently owns four MOPUs, three of which are under contract
and currently operating. The decrease in revenues were primarily due to one
MOPU that was stacked during 1999.
Corporate Office and Other
Corporate Office and Other includes corporate overhead and other non-
reportable business segments. Operating losses were higher in the third
quarter of 1999 as compared to the third quarter of 1998 despite a
reduction in the Company's personnel and the consolidation of the Company's
corporate office which was relocated to R&B Falcon's corporate office in
July 1999. Such increase is due to the allocation of overhead from R&B
Falcon (see Note A of Notes to Interim Consolidated Financial Statements)
and the amortization of goodwill during the third quarter of 1999.
Other Income (Expense) and Income Taxes
The Company recognized $2.8 million of other expense, including income
taxes, during the third quarter of 1999 compared to $12.6 million of other
expense during the same period in 1998. The net decrease resulted primarily
from a $9.3 million decrease in income taxes. In 1999, the Company will
file federal income taxes as part of the R&B Falcon consolidated group. See
"Liquidity and Capital Resources."
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 1998
The Company recognized net income of $5.8 million in the first nine
months of 1999 compared to net income of $43.4 million during the same
period in 1998. Revenues decreased $43.8 million and operating income
decreased $58.1 million in the same period. These decreases were partially
offset by a reduction in income taxes of $20.2 million. Decreased operating
results from the Company's daywork drilling business segment contributed to
the reduction in revenues and operating income.
Nine Months Ended
September 30,
---------------------- Increase
1999 1998 (Decrease)
--------- --------- ---------
(in thousands)
Revenues:
Daywork drilling $ 98,523 $ 177,117 $ (78,594)
Engineering services 153,687 108,427 45,260
MOPU operations 3,698 7,027 (3,329)
Corporate office and other 172 550 (378)
Eliminations (30,689) (23,882) (6,807)
--------- --------- ---------
Consolidated $ 225,391 $ 269,239 $ (43,848)
========= ========= =========
Operating income (loss):
Daywork drilling $ 1,026 $ 62,885 $ (61,859)
Engineering services 30,822 25,580 5,242
MOPU operations 1,318 2,630 (1,312)
Corporate office and other (10,759) (10,557) (202)
--------- --------- ---------
Consolidated $ 22,407 $ 80,538 $ (58,131)
========= ========= =========
Daywork Drilling
Daywork drilling revenues decreased $78.6 million and operating income
decreased $61.9 million in the first nine months of 1999 compared to the
same period in 1998. The decreases in revenues and operating income were
primarily due to reduced dayrates and utilization. These decreases were
partially offset by revenues and operating income from 3 rigs which
commenced operations subsequent to the second quarter of 1998 and revenues
associated with a contract termination during the first quarter of 1999.
Contract termination revenues of $1.5 million recorded in the first
quarter of 1999 represent unrecovered costs for modifications made to the
jack-up drilling rig which operated in Qatar. In accordance with the terms
of the contract for this rig, the Company will also receive additional
contract termination revenues in the amount of $2.4 million, which will be
recognized as revenue over the remaining term of the contract or until such
time as the rig begins a new contract.
Effective April 1, 1999, the Company entered into a rig management
agreement to lease 10 of its jack-up drilling rigs operating in the U.S.
Gulf of Mexico to RBF USA. Based upon the terms of the Management
Agreement, RBF USA manages these rigs for a fixed daily rate and earns 20%
of the net profit and bears 20% of the net loss generated by each rig. The
Company recognizes the remaining 80% of the net profit or loss from each
rig. The Company recognized revenues of $8.9 million and operating expenses
of $12.2 million associated with this Management Agreement during the first
nine months of 1999.
See "Results of Operations Three Months Ended September 30, 1999 and
1998."
The following table summarizes revenues for significant classes of the
Company's drilling rigs:
Nine Months Ended
September 30,
--------------------- Increase
1999 1998 (Decrease)
-------- --------- ---------
(in thousands)
Daywork drilling revenues (1):
Jack-up rigs:
International $ 24,687 $ 43,371 $ (18,684)
Domestic 16,522 77,509 (60,987)
Land rigs 49,238 36,882 12,356
Platform / Workover rigs 8,076 18,934 (10,858)
Other (2) - 421 (421)
-------- --------- ---------
Total $ 98,523 $ 177,117 $ (78,594)
======== ========= =========
- ---------
(1) Includes revenues earned from affiliates.
(2) Includes labor maintenance contracts in the first nine months of 1998.
Engineering Services
Engineering services revenues increased $45.3 million and operating
income increased $5.2 million in the first nine months of 1999 compared to
the same period in 1998. The Company completed 29 turnkey contracts in the
first nine months of 1999 compared to 14 turnkey contracts in the same
period in 1998. Fifteen of the contracts completed during the first nine
months of 1999 were international contracts in Venezuela compared to 10
international contract completions in the same period in 1998. The Company
has expanded its turnkey operations in the U.S. Gulf of Mexico and
completed 14 contracts in the first nine months of 1999 compared to four
wells completed during the same period in 1998. The 14 domestic turnkey
contracts completed in the first nine months of 1998 incurred losses which
negatively affected margins in that period.
In April 1998, the Company was awarded a contract from PDVSA to drill 60
turnkey wells in Venezuela. The drilling program commenced in March 1998
and the program was expected to extend over approximately three and one-
half years and was expected to utilize 7 of the Company's land drilling
rigs in Venezuela. However, during the first quarter of 1999, in response
to the downturn in the market, PDVSA and the Company renegotiated prices
for the next 14 wells to be drilled under this program. In the fourth
quarter of 1999, negotiations were completed for the following seven wells
to be drilled under this program at further reduced margins. As of
September 30, 1999, the Company had completed 24 wells with 11 wells
remaining to be completed. Such remaining wells are expected to be
completed by the end of the first quarter in 2000. In regards to the
remaining 25 of the original 60 wells, a contractual commitment no longer
exists and no assurance can be given that such wells will ultimately be
drilled.
For the nine months ended September 30, 1999, revenues from PDVSA of
$120.5 million accounted for 53% of the Company's consolidated operating
revenues.
See "Results of Operations Three Months Ended September 30, 1999 and
1998."
MOPU Operations
MOPU revenues decreased $3.3 million and operating income decreased $1.3
million in the first nine months of 1999 compared to the same period in
1998. The decreases in revenues and operating income were primarily due to
one MOPU which was stacked during the first nine months of 1999. The
Company's other three MOPUs are currently under contract and operating.
See "Results of Operations Three Months Ended September 30, 1999 and
1998."
Corporate Office and Other
Corporate Office and Other includes corporate overhead and other non-
reportable business segments. Operating losses were higher in the first
nine months of 1999 as compared to the same period in 1998 despite a
reduction in the Company's personnel and the consolidation of the Company's
corporate office which was relocated to R&B Falcon's corporate office in
July 1999. Such increase is due to the allocation of overhead from R&B
Falcon (see Note A of Notes to Interim Consolidated Financial Statements)
and the amortization of goodwill during the first nine months of 1999.
See "Results of Operations Three Months Ended September 30, 1999 and
1998."
Other Income (Expense) and Income Taxes
The Company recognized $16.6 million of other expense, including income
taxes, during the first nine months of 1999 compared to $37.1 million of
other expense during the same period in 1998. The net decrease resulted
primarily from a decrease in income taxes of $20.2 million. See "Liquidity
and Capital Resources."
See "Results of Operations Three Months Ended September 30, 1999 and
1998."
Liquidity and Capital Resources
Cash and cash equivalents increased $43.0 million from $36.3 million at
December 31, 1998 to $79.3 million at September 30, 1999. The increase
resulted from $53.4 million provided by operating activities, offset in
part by $10.0 million used in investing activities and $.3 million used in
financing activities.
Operating Activities
Net cash of $53.4 million provided by operating activities included
$20.1 million provided by working capital and other activities. "Drilling
Contracts in Progress" decreased due to the completion of the 8 turnkey
contracts that were in progress at December 31, 1998.
Investing Activities
Net cash of $10.0 million used in investing activities during the first
nine months of 1999 included capital expenditures of $10.5 million used
primarily to fund renovation activities on various drilling rigs and to
purchase drill pipe.
The Company has capital expenditure plans totaling approximately $8.8
million during the remainder of 1999 and 2000 primarily for drilling rig
capital expenditures and drill pipe purchases. The Company intends to fund
these capital expenditures with available cash and internally-generated
cash flow. The Company's projection of the remainder of 1999 and 2000
capital expenditures is based upon a continuation of the Company's program
to upgrade rigs and related equipment. The actual level of capital
expenditures may be higher due to contract requirements or in the event of
unforeseen breakdown of equipment that was not scheduled for replacement,
or lower in the event of inadequate cash flow from operations.
Financing Activities
Long-term debt at September 30, 1999 consists solely of Senior Notes in
the aggregate principal amount of $199.7 million and debt premium, net of
amortization, of $2.4 million. In addition to the $150.0 million of Senior
Notes sold during 1996, the Company sold $50.0 million of Senior Notes on
August 7, 1997 at a premium of $3.9 million. Considering the premium, the
effective interest rate on the $50.0 million Senior Notes is 9.5%. Interest
on the Senior Notes is payable semi-annually during each May and November.
The Senior Notes do not require any payments of principal prior to their
stated maturity on May 15, 2003, but the Company is required to make offers
to purchase Senior Notes upon the occurrence of certain events as defined
in the indenture, such as asset sales or a change of control of the
Company.
Upon consummation of the Merger, the Company offered to purchase for
cash all of the outstanding Senior Notes at a purchase price equal to 101%
of the principal amount, plus accrued and unpaid interest to the change of
control payment date, as required by the indenture governing the Senior
Notes. On January 28, 1999, the Company purchased all of the $.3 million
principal amount of Senior Notes tendered pursuant to the Change of Control
Offer.
On or after May 15, 2000, the Senior Notes are redeemable at the option
of the Company, in whole or in part, at a price of 105% of principal if
redeemed during the twelve months beginning May 15, 2000, at a price of
102.5% of principal if redeemed during the twelve months beginning May 15,
2001, or at a price of 100% of principal if redeemed after May 15, 2002, in
each case together with interest accrued to the redemption date.
The Senior Notes are senior unsecured obligations of the Company,
ranking pari passu in right of payment with all senior indebtedness and
senior to all subordinated indebtedness. The Senior Notes are
unconditionally guaranteed on a senior unsecured basis by the Subsidiary
Guarantors, and the Subsidiary Guarantees rank pari passu in right of
payment with all senior indebtedness of the Subsidiary Guarantors and
senior to all subordinated indebtedness of the Subsidiary Guarantors. The
Subsidiary Guarantees may be released under certain circumstances. The
Senior Notes and the Subsidiary Guarantees are effectively subordinated to
all secured indebtedness, including amounts outstanding under the Revolving
Credit Facility, as hereinafter defined. The Subsidiary Guarantees provide
that each Subsidiary Guarantor will unconditionally guarantee, jointly and
severally, the full and prompt performance of the Company's obligations
under the indenture and the Senior Notes. Each Subsidiary Guarantor is 100%
owned by the Company. R&B Falcon is not a guarantor of the Senior Notes.
The indenture under which th e Senior Notes are issued imposes
significant operating and financial restrictions on the Company. Such
restrictions affect, and in many respects limit or prohibit, among other
things, the ability of the Company to incur additional indebtedness, make
capital expenditures, create liens, sell assets and make dividends or
other payments.
The Company currently maintains a $35.0 million revolving credit
facility ("Revolving Credit Facility") with ING (U.S.) Capital Corporation
("ING") which matures on January 3, 2000. At September 30, 1999, the
Company had no indebtedness outstanding under the Revolving Credit
Facility, but had $.4 million in letters of credit outstanding, thereby
leaving $34.6 million available under the credit facility.
Foreign Operations
Approximately 83% of the Company's revenues and a substantial portion of
its operating income were derived from its foreign operations, primarily
Venezuela, in the first nine months of 1999. These operations are subject
to customary political and foreign currency risks in addition to
operational risks. The Company has attempted to reduce these risks through
insurance and the structure of its contracts. The Company may be exposed to
the risk of foreign currency losses in connection with its foreign
operations. Such losses are the result of holding net monetary assets (cash
and receivables in excess of payables) denominated in foreign currencies
during periods of a strengthening U.S. dollar. The Company's foreign
exchange gains and losses are primarily attributable to the Venezuelan
Bolivar. The effects of these transactions resulted in a loss of $.5
million in the first nine months of 1999 which is included in "Operating
Expenses" in the Consolidated Statements of Operations. The Company does
not speculate in foreign currencies or maintain significant foreign
currency cash balances. The Company will continue to be exposed to future
foreign currency gains and losses if the currency continues to be volatile.
Cautionary Statements
The ability of the Company to fund working capital, capital expenditures
and debt service in excess of cash on hand will depend upon the success of
the Company's domestic and foreign operations. To the extent that internal
sources are insufficient to meet those cash requirements, the Company can
draw on its available credit facility or seek other debt or equity
financing; however, the Company can give no assurance that such other debt
or equity financing would be available on terms acceptable to the Company.
In any case, the satisfaction of long-term capital requirements will
depend upon successful implementation by the Company of its business
strategy and future results of operations. Management believes it has
successfully implemented the strategy to achieve results of operations
commensurate with its immediate and near-term liquidity requirements.
Year 2000
The Company is dependent upon R&B Falcon for its Year 2000 ("Y2K")
compliance and the following is a description of R&B Falcon's Y2K
compliance efforts. R&B Falcon has focused its Y2K compliance efforts in
three areas: information technology systems, embedded technology systems
and systems used by third parties with which R&B Falcon and the Company
have a substantial relationship. R&B Falcon has completed its investigation
and evaluation of these systems and has substantially completed the process
of correcting the identified problems.
Information Technology Systems
The testing and validation phase for information technology systems
includes testing of each individual information technology system that
could be affected. Through the information technology systems
investigation, R&B Falcon determined that the accounting software utilized
by the Company required substantial modification or replacement. The
domestic accounting software was replaced with Y2K compliant software
during the fourth quarter of 1998 at a total cost of approximately $2.3
million, the majority of which was capitalized. Software replacements in
the Company's foreign offices has been completed during 1999 at a total
cost of approximately $.2 million. R&B Falcon additionally determined that
certain of its remaining accounting software and systems were not Y2K
compliant. R&B Falcon personnel have completed the majority of these
modifications and the remaining non-compliant software will phased out.
Embedded Technology Systems
Embedded technology systems primarily relate to the technology on board
R&B Falcon's (including the Company's) drilling units. The testing and
validation phase for the embedded technology systems includes testing each
high and medium priority system, which consists primarily of all systems
located on drilling units included in the Deepwater and Shallow Water
Divisions. For systems on board the Inland Water units, R&B Falcon
completed on site testing and received confirmation of Y2K compliance from
the manufactures of these systems.
To facilitate the embedded technology systems investigation, R&B Falcon
hired an additional employee whose primary responsibility is the evaluation
of these technology systems. This evaluation was completed in the second
quarter of 1999. The equipment evaluated did not demonstrate any equipment
failures or other significant Y2K compliance issues. Based on these
evaluations, R&B Falcon estimates that the total cost to replace or upgrade
non-compliant embedded technology systems will be less than $.5 million.
Third Party Systems
R&B Falcon is contacting third parties with which it and the Company
have substantial relationships to determine what actions may be needed to
mitigate its risks relating to the effects third party technology failures
may have on R&B Falcon and the Company. R&B Falcon sent out requests for
information to all of its electrical and electronic contractors in August
1998 and has received information from 85% of them regarding their Y2K
efforts. Questionnaires were sent in the first quarter of 1999 to all of
R&B Falcon's suppliers and third party vendors. Based on the responses
received thus far, it is evident that our contractors and suppliers are
placing a priority on achieving Y2K compliance. In the event R&B Falcon's
and the Company's major suppliers or customers do not successfully and
timely achieve Y2K compliance, R&B Falcon's and the Company's operations
could be adversely affected.
Contingency Plans
R&B Falcon is continuing to monitor, on an ongoing basis, the problems
and uncertainties associated with Y2K issues and their potential
consequences. R&B Falcon and the Company have accepted the position that
there will be some finite levels of risk that some systems will not fully
function after Y2K. A risk-based approach has identified those items where
absolute compliance is not guaranteed by the vendor or supplier, and
contingency plans are being developed to deal with any safety related
possibilities. These contingency plans were completed in the second quarter
of 1999.
In addition to the safety related contingency plans directly related to
uncertainties with equipment, R&B Falcon (including the Company) maintains
plans for all critical safety equipment as part of its normal business.
These critical safety plans are currently being modified to fit the Y2K
criteria. These modifications primarily include: having personnel standing
by at critical equipment stations before the specified time changes, having
no crane lifts in operation and having all drilling units in a non-drilling
mode. Failure of this type of equipment, whether related to normal
operational risk or Y2K problems, must be managed with contingency
planning. For this reason, additional risk due to the Y2K issue does not
measurably affect the risk to personnel or equipment beyond the normal
failure due to other causes.
Other
Certain executive officers of the Company were terminated during the
period from May to July of 1999 as a result of the Merger. Certain
executive officers of R&B Falcon have assumed the responsibilities
previously performed by these individuals.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates with respect to its
debt obligation. The Company's debt obligation as of September 30, 1999
consists of Senior Notes in the aggregate principal amount of $199.7
million and debt premium, net of amortization, of $2.4 million at a fixed
rate of 10.25% due 2003. The estimated fair value of the Company's debt
obligation at September 30, 1999 was $209.6 million.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal actions arising in the normal
course of business. After taking into consideration the evaluation of such
actions by counsel for the Company, management is of the opinion that the
outcome of all known and potential claims and litigation will not have a
material adverse effect on the Company's business or consolidated financial
position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule. (Exhibit 27 is being submitted as an
exhibit only in the electronic format of this Quarterly Report
on Form 10-Q being submitted to the Securities and Exchange
Commission.)
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed by the Company during
the three months ended September 30, 1999.
SIGNATURE
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.
CLIFFS DRILLING COMPANY
Date: November 15, 1999 By: /s/T. W. Nagle
--------------------
T. W. Nagle
Vice President
(Principal Financial Officer)
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<LEGEND>
This schedule contains summary financial information extracted from the
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to such financial statements.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
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<PERIOD-END> SEP-30-1999
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