<PAGE> 1
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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, 1996
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: 0-18309
------------------------------
MARINE DRILLING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2558926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS 77478-3556
(Address of principal executive offices and zip code)
(713) 243-3000
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and formal
fiscal year, if changed since last report)
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 .
---- ----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT APRIL 30, 1996 -- 44,203,109
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MARINE DRILLING COMPANIES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Index to Financial Statements
Independent Auditors' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets --
March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations --
Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES
</TABLE>
(i)
<PAGE> 3
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
Marine Drilling Companies, Inc.:
We have reviewed the accompanying consolidated balance sheet of Marine
Drilling Companies, Inc. and subsidiaries as of March 31, 1996, and the related
consolidated statements of operations and cash flows for the three month
periods ended March 31, 1996 and 1995. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our reviews 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 reviews, we are not aware of any material modifications
that should be made to the consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Marine Drilling
Companies, Inc. and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended (not presented here); and in our report dated January 26,
1996, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1995, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
KPMG PEAT MARWICK LLP
Houston, Texas
April 26, 1996
1
<PAGE> 4
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 15,141 $ 12,260
Accounts receivable - trade and other, net 15,135 18,078
Inventory 1,269 1,272
Prepaid expenses and other 1,275 1,380
------------ ------------
Total current assets 32,820 32,990
Property and Equipment 129,947 123,442
Less accumulated depreciation 24,759 22,090
------------ ------------
Property and equipment, net 105,188 101,352
Other 190 203
------------ ------------
$ 138,198 $ 134,545
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,500 $ 1,000
Accounts payable 4,627 5,721
Accrued expenses 2,456 1,927
Employer's liability claims, current 1,535 1,026
------------ ------------
Total current liabilities 10,118 9,674
Long-Term Debt 8,500 9,000
Employer's Liability Claims, non-current 1,460 2,155
Deferred Income Taxes 6,711 6,144
Shareholders' Equity:
Common stock, par value $.01. Authorized 200,000,000
shares; issued 44,217,143 and outstanding 44,021,250
shares as of March 31, 1996; issued 44,169,643 and
outstanding 43,635,433 shares as of December 31, 1995 442 442
Common stock restricted (649) (505)
Treasury stock, at cost (195,893 shares in 1996 and
534,210 shares in 1995) (710) (2,016)
Additional paid-in capital 93,540 92,720
Retained earnings from January 1, 1993 18,786 16,931
------------ ------------
Total shareholders' equity 111,409 107,572
------------ ------------
Commitments and contingencies
$ 138,198 $ 134,545
============ ============
</TABLE>
See notes to consolidated financial statements
and accompanying accountants' review report.
2
<PAGE> 5
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues $ 21,239 $ 12,545
Costs and Expenses:
Contract drilling 13,532 13,875
Depreciation and amortization 2,697 2,144
General and administrative 1,410 1,752
------------ ------------
17,639 17,771
------------ ------------
Operating income (loss) 3,600 (5,226)
------------ ------------
Other Income (Expense):
Interest expense (181) (299)
Interest income 192 458
Other income (expense) 58 86
------------ ------------
69 245
------------ ------------
Income (loss) before income taxes 3,669 (4,981)
Income tax expense (benefit) 1,357 (1,744)
------------ ------------
Net income (loss) $ 2,312 $ (3,237)
============ ============
Income (loss) per common share $ 0.05 $ (0.07)
============ ============
Weighted average common shares
outstanding 43,804,288 44,033,448
============ ============
</TABLE>
See notes to consolidated financial statements
and accompanying accountants' review report.
3
<PAGE> 6
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 2,312 $ (3,237)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Deferred income taxes 567 (1,828)
Tax benefits related to common stock issued pursuant to
long-term incentive plan 652 85
Depreciation and amortization 2,697 2,144
Gain on disposition of equipment (57) (115)
Accrual of compensation expense, net 96 118
Issuance of common stock to the employee retirement plan
and the Non-Employee Directors' Plan 214 230
Changes in operating assets and liabilities:
Receivables 2,943 3,590
Other current assets 108 663
Payables, accrued expenses and employer's liability claims (751) 2,006
Other -- 30
------------ ------------
Net cash provided by operating activities 8,781 3,686
------------ ------------
Cash Flows From Investing Activities:
Proceeds from matured short-term investments -- 16,150
Purchase of equipment (6,660) (4,325)
Proceeds from disposition of equipment 197 218
------------ ------------
Net cash provided by (used in) investing activities (6,463) 12,043
------------- ------------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options 563 150
Payments of debt -- (5,000)
Purchase of treasury stock -- (522)
------------ ------------
Net cash provided by (used in) financing activities 563 (5,372)
------------ ------------
Net increase in cash and cash equivalents 2,881 10,357
Cash and cash equivalents at beginning of period 12,260 18,872
------------ ------------
Cash and cash equivalents at end of period $ 15,141 $ 29,229
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 219 $ 299
Income taxes paid $ 73 $ (1)
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of 47,500 and 43,500 shares in 1996 and 1995,
respectively, of restricted common stock $ 240 $ 108
</TABLE>
See notes to consolidated financial statements
and accompanying accountants' review report.
4
<PAGE> 7
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) INTERIM FINANCIAL INFORMATION
The consolidated interim financial statements of Marine Drilling
Companies, Inc. (the ``Company'' or the ``Registrant'') presented herein have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and notes
required by generally accepted accounting principles for complete financial
statements have been condensed or omitted. In the opinion of management, these
statements include all adjustments (all of which consist of normal recurring
adjustments except as otherwise noted herein) necessary to present fairly the
Company's financial position and results of operations for the interim periods
presented. The financial data for the three months ended March 31, 1996
included herein has been subjected to a limited review by KPMG Peat Marwick
LLP, the Registrant's independent public accountants, whose report is included
herein. These statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995. The results of operations
for the three months ended March 31, 1996 are not necessarily indicative of the
results of operations that may be expected for the year.
(2) RECLASSIFICATION OF ACCOUNTS
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform with the 1996 presentation.
(3) INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Current:
U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65 $ --
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (1)
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 --
----------- ------------
138 (1)
----------- -------------
Other:
U.S. federal - deferred . . . . . . . . . . . . . . . . . . . . . 567 (1,828)
Tax benefits related to common
stock issued pursuant to long-
term incentive plan . . . . . . . . . . . . . . . . . . . . . . 652 85
----------- ------------
1,219 (1,743)
----------- ------------
Total tax provision (benefit) . . . . . . . . . . . . . . . . . . . $ 1,357 $ (1,744)
=========== ============
</TABLE>
5
<PAGE> 8
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
For the three months ended March 31, 1996, the effective tax rate of
37% for financial reporting purposes approximates the U.S. federal statutory
rate of 35%, plus the effect of foreign taxes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1996 and December 31, 1995 are presented below.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . $ 30,796 $ 31,361
Investment tax, general business and alternative
tax credit carryforwards . . . . . . . . . . . . . . . . . . 10,465 11,356
Employer's liability claims . . . . . . . . . . . . . . . . . . 1,048 1,113
Allowance for bad debts . . . . . . . . . . . . . . . . . . . . 45 45
------------ -------------
Total gross deferred tax assets . . . . . . . . . . . . . . . . 42,354 43,875
Less valuation allowance . . . . . . . . . . . . . . . . . . . . (35,745) (36,738)
------------- -------------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . 6,609 7,137
------------ -------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation . . . . . . . . . . . . . . . . . . . . . . . 12,015 11,896
Deferred intercompany gains and losses . . . . . . . . . . . . . 1,305 1,385
------------ -------------
Total gross deferred tax liabilities . . . . . . . . . . . . . . 13,320 13,281
------------ -------------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . $ 6,711 $ 6,144
============ =============
</TABLE>
(4) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share for the three months ended March 31,
1996 and 1995 excludes the effect of outstanding stock options inasmuch as the
potential dilution from their exercise is less than three percent.
(5) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in certain claims and litigation arising out
of operations in the normal course of business. In the opinion of management,
uninsured losses, if any, will not be material to the Company's financial
position or results of operations.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Demand for offshore drilling services is primarily driven by the
economics of oil and gas exploration, development and production, which in
turn, are closely linked to current and projected oil and gas prices. Since
the mid-1980's, oil and gas prices have been unstable and generally lower than
prices experienced during the early 1980's, resulting in volatile and generally
reduced demand for offshore drilling services. In addition, during the early
1980's, the industry built a substantial number of new offshore drilling rigs.
Since 1993, the worldwide jack-up market has shown general improvement compared
to the 1986-1992 period. This improvement can be generally attributed to
improved jack-up rig demand and a continuing reduction in jack-up rig supply.
Although this period can be characterized as showing general improvement,
certain significant jack-up markets have experienced short periods of reduced
rig demand and/or excess rig supply. During those periods of low rig
utilization, day rates were adversely impacted and drilling contractors
competing in those markets suffered poorer financial results until rig demand
improved or rigs left those markets for other markets.
DRILLING MARKETS AND UTILIZATION
General
Historically, the Company has derived substantially all of its revenues
from offshore drilling in the U.S. Gulf of Mexico and in the Bay of Campeche.
Three of the Company's rigs, MARINE 300, MARINE 304 and MARINE 201, are
configured to work in international markets outside the U.S. Gulf of Mexico and
the Bay of Campeche. In addition, the Company has recently fabricated quarters
for the MARINE 303 in order to facilitate that rig's use in international
markets. These additions could be added to the rig in a relatively short time
frame to allow that rig to obtain an international contract. The Company's
other rigs could, if applicable modifications were made and certifications
obtained, operate in certain areas outside of the U.S. Gulf of Mexico and the
Bay of Campeche. The Company's rigs are not, however, suitable for areas, such
as the North Sea, that require hostile environment operating capabilities.
Most of the world's significant jack-up drilling markets have
recently experienced improved rig utilization and day rates. According to
Offshore Data Services, as of April 30, 1996, worldwide jack-up utilization was
84% (321 rigs working out of a supply of 384 rigs) compared to 73% (286 rigs
working out of a supply of 390 rigs) during the first three months of 1995,
while jack-up utilization outside of the U.S. Gulf of Mexico was 82% (203 rigs
working out of a supply of 247 rigs) compared to 77% during the first three
months of 1995.
Due to the highly cyclical nature of the offshore drilling business,
the Company is seeking to obtain longer term contracts for the employment of
its rigs. These contacts help to mitigate the cycliciity of the Company's
results. Historically, most longer term contracts have been available
primarily in international markets. Accordingly, the Company is marketing
certain of its rigs in selected international markets with a view to obtaining
longer term contracts. The Company will also seek to obtain, however, longer
term contracts, to the extent available, in the U.S. Gulf of Mexico.
7
<PAGE> 10
U.S. Gulf of Mexico
The jack-up drilling market in the U.S. Gulf of Mexico is highly
competitive. A significant number of offshore drilling companies have rigs in
this market and, as a result, no one contractor is able to materially affect
pricing levels. Day rates can and have fluctuated significantly on relatively
small changes in the rig supply and demand situation in this market.
Throughout the period from late 1992 through 1994, jack-up operations
in the U.S. Gulf of Mexico were characterized by improving rig demand. In late
1994 and early 1995, however, the combination of reduced jack-up demand and
increased rig supply had a depressing effect on U.S. Gulf of Mexico operations.
During this period of reduced utilization, day rate levels fell and contractors
experienced reduced levels of earnings. Since mid-1995, a combination of
improved jack-up rig demand and mobilizations of rigs to improving
international markets has resulted in improved jack-up day rates and
utilization.
With 12 of its 13 rigs located in the U.S. Gulf of Mexico, the Company
is well positioned to benefit from any upturn in that market. The improved
utilization of jack-up rigs in the U.S. Gulf of Mexico during the third and
fourth quarters of 1995 continued in the first quarter of 1996. The industry
wide utilization of jack-up rigs in the U.S. Gulf of Mexico as of April 30,
1996, was 86%, as compared with an average of 67% for the first three months
of 1995.
Bay of Campeche
During most of 1993 and early 1994, demand for jack-up rigs was strong
in the Bay of Campeche, offshore Mexico in the southern Gulf of Mexico. The
Bay of Campeche drilling market, however, generally deteriorated in late 1994
and early 1995. The Company contracted two of its rigs (the MARINE 301 and the
MARINE 303) into this market in late 1992 and another (the MARINE 300) in
mid-1993. The first two rigs completed their contracts in late 1993 and early
1994, respectively, and subsequently returned to the U.S. Gulf of Mexico. The
third rig completed its contract and returned to the U.S. Gulf of Mexico in
May, 1995. Although Mexico has devalued its currency and is currently
experiencing a recession, the Company is continuing to actively market its
fleet in the Bay of Campeche. The demand for rigs in the Bay of Campeche has
dropped from a high of 22 rigs in 1993 to 7 rigs in 1995. The utilization rate
in the Bay of Campeche at the end of 1995 was approximately 58% for all rigs.
Recently, however, drilling activity has improved and the Company expects that
jack-up rig demand and utilization will increase during the remainder of 1996.
India
In August 1995, the Company entered into a one-year term contract for
the MARINE 201 to operate off the east coast of India. Under the contract, the
customer has options to extend the contract for up to eight three-month
extension periods. The rig reached India during the second week of November
and drilling operations commenced shortly thereafter. Demand for jack-ups in
India has generally averaged between 20 to 25 rigs during the past few years.
During this time, the supply of rigs has generally been equal to demand
resulting in utilization rates of 90% to 100%. The government of India
recently approved investment by non-Indian energy companies. As a result of
these investments, jack-up rig demand has recently increased, and most industry
analysts expect that demand could increase further in the next few months.
8
<PAGE> 11
The following table sets forth certain industry and Company historical
data for the periods indicated. Industry data includes many rigs that are
dissimilar to the Company's rigs in terms of performance capabilities, age,
operational criteria and environmental capabilities. Certain of the Company's
competitors operate rigs other than jack- up rigs that can compete with jack-up
rigs under certain circumstances.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------------ --------------------
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
INDUSTRY:(a)
U.S. Gulf of Mexico:
Total jack-up rig . . . . . . . . . . . . . . 137.2 140.5 140.1 135.8
Working jack-up rigs . . . . . . . . . . . . . 113.5 94.3 104.6 102.9
Utilization . . . . . . . . . . . . . . . . . 83% 67% 75% 76%
All other markets:
Total jack-up rigs . . . . . . . . . . . . . . 246.7 249.5 246.7 255.5
Working jack-up rigs . . . . . . . . . . . . . 203.3 191.7 197.5 192.5
Utilization . . . . . . . . . . . . . . . . . 82% 77% 80% 75%
COMPANY:(b)
Total jack-up rigs . . . . . . . . . . . . . . 13 13 13.0 12.1
Working jack-up rigs . . . . . . . . . . . . . 11.1 7.6 8.9 9.8
Utilization . . . . . . . . . . . . . . . . . 85% 58% 69% 81%
Non-marketed rigs . . . . . . . . . . . . . . 1.2 2.9 3.0 0.8
Utilization of marketed rigs . . . . . . . . . 94% 75% 89% 87%
Average day rates(c) . . . . . . . . . . . . . $21,026 $18,357 $19,289 $19,686
</TABLE>
- -------------------------
(a) Average of weekly data published by Offshore Data Services.
(b) The numbers included in the table represent the average number of rigs
operated by the Company for the periods indicated.
(c) ``Average day rate'' is determined by dividing the total gross revenue
earned by the Company's rigs during a given period by the total number of
days that the Company's rigs were under contract and working during that
period.
COMPETITION
The offshore contract drilling market is highly competitive with a
large number of contractors competing for available work. Drilling contracts
are generally awarded on a competitive bid basis. Pricing and rig water depth
capabilities are generally the most important competitive factors in the
drilling industry. Other competitive factors include the technical
capabilities of specialized drilling equipment and personnel, operational
experience, rig suitability, efficiency, equipment condition, safety record,
reputation and customer relations.
The Company seeks to capitalize on customer recognition of the
Company's safety record, crew quality and the quality of its service and
equipment. Many of the Company's competitors, however, are larger, or are
subsidiaries of larger companies, and have greater financial resources and more
diverse fleets than the Company, which may enable them to better withstand
industry downturns, to compete more effectively on the basis of price, to build
new rigs or to acquire existing rigs that become available for purchase.
9
<PAGE> 12
DRILLING OPERATIONS AND CUSTOMERS
The Company's existing drilling contracts provide for compensation on a
"daywork" basis. Under daywork contracts, the Company receives a fixed amount
per day for providing drilling services using the rigs it operates. Under most
daywork contracts, the customer also pays the cost of moving the rig and related
equipment to the job site and the costs of drilling the well (other than the
costs of operating the rig, which are borne by the drilling contractor).
Daywork contracts may provide for lower rates during periods when drilling
operations are interrupted or restricted by equipment breakdowns, adverse
weather or water conditions or other conditions beyond the control of the
Company. Historically, the Company has not marketed its rigs under fixed price
or turnkey contracts.
FINANCIAL CONDITION -- GENERAL
The following is a discussion of the Company's financial condition,
results of operations, historical financial resources and working capital.
This discussion and analysis should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included in Item 1 of this
report.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
The Company had working capital at March 31, 1996 of $22,702,000 as
compared to working capital of $23,316,000 at December 31, 1995. Net cash
provided by operating activities was $8,781,000 for the three months ended
March 31, 1996 compared to $3,686,000 for the three months ended March 31,
1995, an increase of $5,095,000 or 138%. Cash used in investing activities was
$6,463,000 for the three months ended March 31, 1996 resulting primarily from
the purchases of equipment of $6,660,000 compared to cash provided by investing
activities of $12,043,000 for the three months ended March 31, 1995. Capital
expenditures for the three months ended March 31, 1996 consisted of (i) drill
pipe purchases, (ii) the addition of a top drive drilling system and other
upgrades to the MARINE 15, (iii) the installation of a top drive drilling
system and the fabrication of additional leg sections for the MARINE 300 and
(iv) the fabrication of international quarters for the MARINE 303. Net cash
provided by financing activities was $563,000 consisting of common stock option
exercises.
Outlook
In late 1994, the Company commenced a program (the ''Rig Upgrade
Program'') to upgrade the operational capabilities of certain of its rigs.
This program includes the following upgrades: (i) converting the power systems
of selected mechanically powered rigs, (ii) adding top drive drilling systems
to selected rigs and (iii) other potential rig upgrades such as (a) increased
water depth ratings and (b) additions of cantilever features to slot type rigs.
Future expenditures for the Rig Upgrade Program will be subject to the
Company's outlook for drilling market conditions, as well as changes in the
Company's financial condition.
10
<PAGE> 13
The Company continues to pursue the acquisition of additional drilling
rigs to enhance its fleet. At this time, however, the Company has no planned
or pending rig acquisitions. Future acquisitions, if any, would likely be
funded from the Company's working capital or through debt and/or equity
financing. The Company cannot predict whether it would be successful in
acquiring additional rigs, and obtaining financing therefor, on acceptable
terms. Depending upon the Company's success in acquiring rigs in the future,
as well as future industry conditions, the Company may elect to defer or
suspend portions of the Rig Upgrade Program discussed in the preceding
paragraph in order to preserve its working capital resources.
At this time, the Company estimates its 1996 capital expenditures to be
approximately $9,400,000, including the $6,660,000 spent in the first quarter,
consisting of (i) drill pipe expenditures, (ii) the addition of a top drive
drilling system and the fabrication of components to increase the water depth
of the MARINE 300, (iii) the fabrication of international quarters for the
MARINE 303, (iv) completion of the reactivation, refurbishment, power system
conversion and installation of a top drive drilling system to the MARINE 15
and (v) other miscellaneous expenditures.
On December 1, 1994, Keyes Holding Corporation ("KHC"), a
wholly-owned subsidiary of the Company, entered into a revolving credit/term
loan agreement with a U.S. financial institution pursuant to which KHC may,
subject to the conditions stated in the agreement, borrow up to the lesser of
(i) $35,000,000, or (ii) 50% of the appraised value of MARINE 300, 301 and 303.
The agreement includes an 18-month revolving credit facility which is
convertible on June 1, 1996 into a three-year term loan facility. The term
loan is amortized monthly at the rate of 20% of the initial term loan amount
per year with a balloon payment for the remaining principal (40% of the initial
term loan amount) due at the maturity of the term loan. The agreement provides
that the amounts borrowed will bear interest at floating rates equal to LIBOR +
2.5%. The minimum borrowing under the revolving credit facility is
$10,000,000. If on June 1, 1996, KHC elects to convert less than $10,000,000
into a term loan, it will be required to pay a non-utilization fee equal to 2%
of the excess of $10,000,000 over the amount converted. As of March 31, 1996,
the related debt outstanding was $10,000,000 and the amount available under the
line of credit was $25,000,000. Loan proceeds may be used to purchase
additional jack-up drilling rigs or to make capital improvements to the
Company's existing drilling rig fleet. The Company has guaranteed up to
$8,750,000 of the borrowings under the loan agreement. The borrowings under
the agreement are secured by a mortgage on the MARINE 300, MARINE 301 and
MARINE 303.
Reduced rig demand in the U.S. Gulf of Mexico drilling market in early
1995 adversely affected the Company's operations and cash flow. As a result,
the Company elected to suspend the marketing of three rigs. These rigs were
deactivated in a common offshore location and, after preparation for extended
idle time, were maintained periodically by a small maintenance crew. As of the
date of this report, all of these rigs have been reactivated and are under
contract.
On March 7, 1995, the Company announced that its Board of Directors had
authorized the repurchase of up to 4,000,000 shares of the Company's Common
Stock. The action reflects the Company's view that its shareholders would
benefit from such repurchases. The repurchases may be effected, from time to
time, in accordance with applicable securities laws, through solicited or
unsolicited transactions in the market or in privately negotiated transactions.
No limit was placed on the duration of the repurchase program. Subject to
applicable securities
11
<PAGE> 14
laws, such repurchases shall be at such time and in such amounts as the Company
deems appropriate. The Company will fund such repurchases from working
capital. During 1995, the Company purchased 735,633 shares of its common stock
at an average price of $3.61 per share (aggregate value $2,659,000) pursuant to
the repurchase program. A portion of these shares (201,423 shares) were
subsequently reissued (i) to fund the Company's contributions to its 401(k)
plan, (ii) to provide stock for stock option exercises pursuant to its
employees long term incentive plan and (iii) to remunerate certain non-employee
directors pursuant to the Company's directors compensation plan. During the
first quarter of 1996, no shares were repurchased by the Company; however,
338,317 shares were reissued to fund the Company's contributions to its 401(k)
plan and to provide stock option exercises pursuant to the employee long term
incentive plan. At March 31, 1996, the aggregate number of treasury shares
held by the Company was 195,893 and the number of shares authorized for
repurchase pursuant to its repurchase program was 3,804,107.
The Company believes that its available funds, together with cash
generated from operations and amounts that may be borrowed under the revolving
credit/term loan facility, will be sufficient to fund its capital expenditure,
working capital and debt service requirements for the foreseeable future.
Future cash flows, however, are subject to a number of uncertainties,
particularly the condition of the oil and gas industry. Accordingly, there can
be no assurance that these resources will be sufficient to fund the Company's
cash requirements.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1995
Revenues
Revenues for the first quarter of 1996 increased $8,694,000 (69%) from
$12,545,000 to $21,239,000 compared to the same period in 1995. The increase
in revenues was the result of three factors: (i) a 15% increase in average day
rates from $18,357 in 1995 to $21,026 in 1996, (ii) an increase in the number
of marketed rigs from 10.1 in 1995 to 11.8 in 1996 and (iii) an increase in
utilization of marketed rigs from 75% in 1995 to 94% in 1996. The increases in
utilization and average day rates resulted from increased drilling activity in
the U.S. Gulf of Mexico.
Costs and Expenses
Contract drilling expenses for the first quarter of 1996 decreased
$343,000 (2%) from $13,875,000 to $13,532,000 compared to the same period in
1995. This decrease is primarily the result of the implementation of a new
operating cost structure. Other contributing factors include decreases in
employers liability claims offset by increased insurance costs and decreases
in major repairs and maintenance during the 1996 period.
Depreciation and amortization expense for the first quarter of 1996
increased $553,000 (26%) from $2,144,000 to $2,697,000 compared to the same
period in 1995. The increase resulted primarily from the costs associated with
the acquisition and refurbishment of the MARINE 201, the addition of a top
drive and related equipment on the MARINE 16 and other capital expenditures.
12
<PAGE> 15
General and administrative expenses decreased $342,000 (20%) from
$1,752,000 for the first quarter of 1995 to $1,410,000 for the same period in
1996. The decrease in the first quarter of 1996 was primarily the result of
decreased labor costs in the first quarter of 1996 and a decrease in
professional services and other administrative expenses.
Interest Expense
Interest expense for the first quarter of 1996 was $181,000 and
consisted of the following: (i) interest of $203,000 based on an average rate
of 8.1% with an average balance of $10,000,000; (ii) credit facility fees of
$16,000 based on a .25% rate with an average unused balance of $25,000,000 and
(iii) offset by capitalized interest of approximately $38,000. Interest
expense for the first quarter of 1995 was $299,000.
Interest Income
Interest income decreased $266,000 from $458,000 for the first quarter
of 1995 to $192,000 for the same period in 1996. The decrease was related
primarily to decreases in cash balances and interest rates.
Income Taxes
Income taxes for the first quarter of 1996 consisted of current portion
of U.S. federal alternative minimum tax, current foreign taxes of $73,000,
deferred U.S. federal tax benefits of $567,000 and tax benefits related to
common stock issued pursuant to the long term incentive plan of $652,000.
13
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has various claims filed against its subsidiaries in the
ordinary course of business, particularly claims alleging personal injuries.
It is the belief of management that the Company has established adequate
reserves for any liabilities which may reasonably be expected to result from
these claims. In the opinion of management, no pending claims, actions or
proceedings against the Company would have a material adverse effect on its
financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
15 Letter regarding unaudited interim financial
information
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 U.S.
Securities and Exchange Commission.)
(b) Reports on Form 8-K:
One report on Form 8-K was filed during the first quarter of 1996.
(1) Report of the Company dated March 18, 1996 regarding the
retirement of William O. Keyes from its board of directors
and as President, Chief Executive Officer and Chairman of
the Board effective May 9, 1996.
14
<PAGE> 17
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.
MARINE DRILLING COMPANIES, INC.
(Registrant)
Date: May 9, 1996 By /s/ WILLIAM H. FLORES
------------------------------
William H. Flores
Chief Operating Officer
Senior Vice President -
Chief Financial Officer and Director
(Principal Financial Officer)
Date: May 9, 1996 By /s/ Joan R. Smith
Joan R. Smith Vice
President, Controller and Secretary
(Principal Accounting Officer)
15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- --------- --------
<S> <C>
15 Letter regarding unaudited interim financial information
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 15
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
The Board of Directors and Shareholders
Marine Drilling Companies, Inc.:
Re: Registration Statement No. 33-56920 on Form S-8 dated
January 11, 1993
No. 33-54909 on Form S-3 dated
August 3, 1994
No. 33-61901 on Form S-8 dated
August 17, 1995
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 26, 1996, related to our
review of interim financial information. Pursuant to Rule 436(c) under the
Securities Act of 1933, such report is not considered part of a registration
statement prepared or certified by an accountant within the meanings of
Sections 7 and 11 of the Act.
KPMG PEAT MARWICK LLP
Houston, Texas
April 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 15,141
<SECURITIES> 0
<RECEIVABLES> 15,135
<ALLOWANCES> 0
<INVENTORY> 1,269
<CURRENT-ASSETS> 32,820
<PP&E> 129,947
<DEPRECIATION> 24,759
<TOTAL-ASSETS> 105,188
<CURRENT-LIABILITIES> 10,118
<BONDS> 0
<COMMON> 442
0
0
<OTHER-SE> 110,967
<TOTAL-LIABILITY-AND-EQUITY> 138,198
<SALES> 21,239
<TOTAL-REVENUES> 21,239
<CGS> 13,532
<TOTAL-COSTS> 13,532
<OTHER-EXPENSES> 2,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181
<INCOME-PRETAX> 3,669
<INCOME-TAX> 1,357
<INCOME-CONTINUING> 2,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,312
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
