<PAGE> 1
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 June 30, 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 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0321760
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(713) 492-5300
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of June 30, 1996 Common stock, $.01 par value per share 68,259,836 shares
<PAGE> 2
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
COVER PAGE ............................................................... 1
DOCUMENT TABLE OF CONTENTS ............................................... 2
PART I. FINANCIAL INFORMATION ........................................... 3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets ............................... 3
Consolidated Statements of Operations ..................... 4
Consolidated Statements of Cash Flows ..................... 5
Notes to Consolidated Financial Statements ................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................. 10
PART II. OTHER INFORMATION .............................................. 18
ITEM 1. LEGAL PROCEEDINGS ......................................... 18
ITEM 2. CHANGES IN SECURITIES ..................................... 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ........................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....... 18
ITEM 5. OTHER INFORMATION ......................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 19
SIGNATURES ............................................................... 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ -------------
1996 1995
------------ -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 5,051 $ 10,306
Short-term investments........................................ 5,202 5,041
Restricted cash............................................... 3,270 --
Accounts receivable........................................... 144,812 74,496
Rig inventory and supplies.................................... 31,085 15,330
Prepaid expenses and other.................................... 11,935 10,601
------------ -------------
Total current assets....................... 201,355 115,774
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION...................................... 1,076,893 502,278
GOODWILL, NET OF AMORTIZATION.................................... 85,356 --
OTHER ASSETS..................................................... 3,725 --
------------ -------------
Total assets.............................. $ 1,367,329 $ 618,052
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $ 22,437 $ 18,322
Accrued liabilities........................................... 52,370 33,929
------------ -------------
Total current liabilities.................. 74,807 52,251
LONG-TERM DEBT.................................................... 70,000 --
DEFERRED TAX LIABILITY............................................ 117,678 72,907
OTHER LIABILITIES................................................. 5,924 --
------------- -------------
Total liabilities.......................... 268,409 125,158
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01, 25,000,000 shares
authorized, none issued and outstanding)................... -- --
Common stock (par value $.01, 200,000,000 shares authorized,
68,259,836 and 50,000,000 shares issued and outstanding at
June 30, 1996 and December 31, 1995, respectively)......... 683 500
Additional paid-in capital.................................... 1,219,204 665,107
Accumulated deficit........................................... (119,690) (171,444)
Cumulative translation adjustment............................. (1,277) (1,269)
------------ -------------
Total stockholders' equity................. 1,098,920 492,894
------------ -------------
Total liabilities and stockholders' equity. $ 1,367,329 $ 618,052
============ =============
</TABLE>
3
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
1996 1995 1996 1995
---------- ---------- ----------- ----------
<C> <C> <C> <C> <C>
REVENUES......................................... $ 146,983 $ 76,106 $ 253,851 $ 146,866
OPERATING EXPENSES:
Contract drilling............................... 81,597 59,681 147,754 121,432
General and administrative...................... 3,449 3,334 6,552 6,474
Depreciation and amortization................... 18,396 13,076 30,465 28,064
Gain on sale of assets.......................... (3,073) (41) (3,230) (430)
---------- ---------- ----------- ----------
Total operating expenses....................... 100,369 76,050 181,541 155,540
---------- ---------- ----------- ----------
OPERATING INCOME (LOSS).......................... 46,614 56 72,310 (8,674)
OTHER INCOME (EXPENSE):
Interest expense................................ (104) (8,779) (104) (17,263)
Currency transaction gains (losses)............. (10) (12) 76 (46)
Other........................................... 284 436 632 823
---------- ---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT 46,784 (8,299) 72,914 (25,160)
INCOME TAX (EXPENSE) BENEFIT..................... (13,762) 5,529 (21,160) 10,818
---------- ---------- ----------- ----------
NET INCOME (LOSS)................................ $ 33,022 $ (2,770) $ 51,754 $ (14,342)
========== ========== =========== ==========
NET INCOME PER SHARE............................. $ 0.53 $ 0.92
========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING.............. 62,166 56,083
========== ===========
</TABLE>
4
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1995
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................. $ 51,754 $ (14,342)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization................................ 30,465 25,993
Gain on sale of assets....................................... (3,230) (430)
Write-down of asset.......................................... -- 2,071
Accrued interest converted to notes payable to Loews......... -- 17,263
Deferred tax provision (benefit)............................. 18,774 (11,224)
Changes in operating assets and liabilities:
Restricted cash.............................................. (219) --
Accounts receivable.......................................... (35,974) (5,980)
Rig inventory and supplies and other current assets.......... (3,344) (2,671)
Other assets, non-current.................................... (1,435) --
Accounts payable and accrued liabilities..................... 9,980 363
Other liabilities, non-current............................... 1,167 --
Other, net................................................... (80) (55)
---------- ------------
Net cash provided by operating activities................ 67,858 10,988
---------- ------------
INVESTING ACTIVITIES:
Cash acquired in Arethusa merger............................. 17,832 --
Capital expenditures......................................... (100,463) (22,485)
Proceeds from sales of assets................................ 4,842 482
Change in short-term investments............................. (161) --
---------- ------------
Net cash used in investing activities.................... (77,950) (22,003)
---------- ------------
FINANCING ACTIVITIES:
Net borrowings on revolving line of credit................... 70,000 --
Repayment of debt assumed in Arethusa merger................. (67,477) --
Deferred financing costs..................................... (1,873) --
Proceeds from stock options exercised........................ 4,187 --
Net borrowings from Loews.................................... -- 9,000
---------- ------------
Net cash provided by financing activities................ 4,837 9,000
---------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS.......................... (5,255) (2,015)
Cash and cash equivalents, beginning of period............... 10,306 17,770
---------- ------------
Cash and cash equivalents, end of period..................... $ 5,051 $ 15,755
========== ============
</TABLE>
5
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Diamond Offshore Drilling,
Inc. and subsidiaries (the "Company") should be read in conjunction with
the Annual Report on Form 10-K for the year ended December 31, 1995 (File
No. 1-13926).
Interim Financial Information
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all
disclosures required by generally accepted accounting principles for
complete financial statements. The consolidated financial information
has not been audited but, in the opinion of management, includes all
adjustments (consisting only of normal recurring accruals) necessary for
a fair presentation of the consolidated balance sheets, statements of
operations, and statements of cash flows at the dates and for the periods
indicated. Results of operations for interim periods are not necessarily
indicative of results of operations for the respective full years.
Cash and Cash Equivalents
All short-term, highly liquid investments that have an original
maturity of three months or less are considered cash equivalents.
Restricted Cash
Restricted cash is comprised primarily of balances maintained to
guarantee the Company's performance under drilling contracts in Indonesia
and India and rig availability for certain drilling contract bids.
Supplementary Cash Flow Information
Non-cash financing activities for the six months ended June 30, 1996
included $550.7 million for the issuance of 17.9 million shares of common
stock and the assumption of 0.5 million stock options in connection with
the merger between the Company and Arethusa (Off-Shore) Limited
("Arethusa"). Non-cash investing activities for the six months ended
June 30, 1996 included $532.9 million of net assets acquired in the
merger with Arethusa (see Note 2).
Non-cash financing activities for the six months ended June 30, 1995
included $17.3 million of interest expense accrued and included in
long-term debt.
Cash payments made for interest, including commitment fees, on
long-term debt and for U.S. income taxes for the six months ended
June 30, 1996 totaled $1.7 million and $1.4 million, respectively.
Drilling and Other Property and Equipment
For financial reporting purposes, depreciation is provided on the
straight-line method over the remaining estimated useful lives from the
date the asset is placed into service. The Company believes that certain
offshore drilling rigs, due to their upgrade and design capabilities and
maintenance history, have an
6
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operating life in excess of their depreciable life as originally
assigned. For this reason, a change in accounting estimate, effective
January 1, 1996, increased the estimated useful lives for certain classes
of offshore drilling rigs. As compared to the original estimate of
useful lives, the effect of such change reduced depreciation expense and
increased net income for the quarter ended June 30, 1996 by approximately
$2.1 million and $1.4 million ($0.02 per share), respectively. For the
six months ended June 30, 1996, the effect of such change reduced
depreciation expense and increased net income by approximately $4.2
million and $2.7 million ($0.05 per share), respectively. The estimated
useful lives of the Company's offshore drilling rigs, after the change in
estimate, range from 10 to 25 years.
Goodwill
Goodwill is amortized on a straight-line basis over 20 years.
Amortization as of June 30, 1996 totaled $0.7 million.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimated.
Reclassifications
Certain amounts applicable to the prior periods have been
reclassified to conform to the classifications currently followed. Such
reclassifications do not affect earnings.
2. MERGER WITH ARETHUSA
On April 29, 1996, the Company acquired 100% of the stock of
Arethusa. Arethusa owned a fleet of 11 mobile offshore drilling rigs,
operated two additional mobile offshore drilling rigs pursuant to
bareboat charters and provided drilling services worldwide to
international and government-controlled oil and gas companies. The
consideration consisted of the following (in thousands):
<TABLE>
<S> <C>
Common stock issued to Arethusa shareholders $ 539,296
Arethusa stock options assumed.............. 11,381
---------
Total equity consideration................. 550,677
Acquisition costs........................... 10,300
---------
Total consideration........................ $ 560,977
=========
</TABLE>
The Company issued 17.9 million common shares to the Arethusa
shareholders based on an exchange ratio of .88 shares for each share of
issued and outstanding Arethusa common stock. The shares were valued for
financial reporting purposes at $30.14 based on a seven-day average of
the closing price at the time the merger was announced (December 7,
1995).
The merger with Arethusa was accounted for as a purchase. The
purchase price included, at estimated fair value, current assets of $68.6
million, drilling and other property and equipment of $505.5 million, and
the assumption of current liabilities of $12.0 million, other net
long-term liabilities of $3.9 million, and debt of $67.5 million. In
addition, a deferred tax liability of $26.1 million was recorded
primarily for the difference in the basis for tax and financial reporting
purposes of the net assets acquired. The excess of the purchase price
over the estimated fair value of net assets acquired amounted to
approximately $86.1 million, which has been accounted for as goodwill and
is being amortized over 20 years using the straight-line method. This
allocation was based on preliminary estimates and may be
7
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revised at a later date. It is not expected that the final allocation of
the purchase price will result in any material difference.
The accompanying consolidated statements of operations reflect the
operating results of Arethusa since April 29, 1996, the effective date of
the merger. Pro forma consolidated operating results of the Company and
Arethusa for the six months ended June 30, 1996 and 1995, assuming the
acquisition had been made as of January 1, 1996 and 1995, are summarized
below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
1996 1995
------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue ...................... $309,964 $207,290
Net income (loss) ............ 58,799 (7,499)
Net income (loss) per share... 0.87 (0.11)
</TABLE>
The pro forma information for the six months ended June 30, 1996 and
1995 includes adjustments for additional depreciation based on the fair
market value of the drilling and other property and equipment acquired
and the amortization of goodwill arising from the transaction. The pro
forma information for the six months ended June 30, 1995 also includes
adjustments for (i) the acquisition of the Arethusa Yatzy, which occurred
on May 3, 1995, (ii) the sale of the Treasure Stawinner by Arethusa,
which occurred June 30, 1995, (iii) the dividend and capital distribution
declared by Arethusa on June 30, 1995 and paid July 28, 1995, (iv) the
Company's initial public offering and, in connection therewith, the use
of the proceeds to repay all of the Company's then outstanding
indebtedness to Loews Corporation ("Loews") and to fund the payment of a
special dividend to Loews, and (v) interest expense for working capital
borrowings, and commitment and other fees, under a credit facility as if
each had occurred at the beginning of the period. The pro forma
information is not necessarily indicative of the results of operations
had the transactions been effected on the assumed dates.
3. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------
1996 1995
----------------------------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment.... $1,221,384 $ 689,438
Construction work in progress.. 77,390 19,016
Land and buildings............. 13,081 3,655
Office equipment and other..... 8,464 6,300
----------------------------
1,320,319 718,409
Less accumulated depreciation.. (243,426) (216,131)
----------------------------
Total.................... $1,076,893 $ 502,278
============================
</TABLE>
For the six months ended June 30, 1996, the Company capitalized
interest cost of $1.3 million in construction work in progress with
respect to qualifying construction projects.
During May 1996, the Company sold the Ocean Magallanes, a jack-up
drilling rig which had previously been stacked in Punta Arenas, Chile,
for approximately $3.1 million. The sale generated an after-tax gain
during the second quarter of 1996 of $2.0 million, or $0.03 per share.
8
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4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------
1996 1995
----------------------
(IN THOUSANDS)
<S> <C> <C>
Compensation and benefits.. $25,303 $17,402
Other...................... 27,067 16,527
----------------------
Total.................. $52,370 $33,929
======================
</TABLE>
5. LONG-TERM DEBT
In connection with the merger between the Company and Arethusa, the
Company assumed long-term debt (including the current portion) of $67.5
million on two credit agreements with a group of banks. During May 1996,
using cash acquired in the merger and the Company's $150.0 million
revolving credit facility with a group of banks (the "Credit Facility"),
both Arethusa loans were repaid in full. Interest expense includes
interest for the period from the effective date of the merger to the date
of repayment of the loans and the payment of breakage and penalty
charges.
The Credit Facility is a revolving line of credit for a five-year
term expiring in 2001 which provides a maximum credit commitment of
$150.0 million. The unused credit available under the Credit Facility at
June 30, 1996 was $80.0 million. Interest expense on borrowings under
the Credit Facility are capitalized to qualified construction projects
(see Note 3). The weighted average interest rate, including commitment
and arrangement fees, was 9.3% at June 30, 1996. The Company is
required, under the Credit Facility, to maintain certain consolidated
financial ratios and the Credit Facility places certain limitations on
dividends and similar payments.
6. INCOME TAXES
The Company's income tax expense for the quarter and six months
ended June 30, 1996 differs from that expected using statutory tax rates
because of net income for which income tax expense is provided at other
than U.S. rates. For the quarter and six months ended June 30, 1995, the
Company's tax benefit was higher than that using statutory rates
primarily due to profits in foreign jurisdictions where the Company's tax
liability was minimal.
7. SUBSEQUENT EVENT
During July 1996, the Company sold the Ocean Conquest, a jack-up
drilling rig located in the Gulf of Mexico, for approximately $9.0
million, net of commissions. The sale will generate an after-tax gain
during the third quarter of 1996 of approximately $4.5 million, or
$0.06 per share.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements (including the Notes thereto)
included elsewhere herein.
GENERAL
Effective April 29, 1996, the merger between the Company and
Arethusa (Off-Shore) Limited ("Arethusa") was completed (the "Merger").
Arethusa owned a fleet of 11 mobile offshore drilling rigs, operated two
additional mobile offshore drilling rigs pursuant to bareboat charters,
and provided drilling services worldwide to international and
government-controlled oil and gas companies. Because the Merger was
accounted for as a purchase for financial reporting purposes, results of
operations include those of Arethusa from the effective date of the
Merger. See Note 2 to the Company's Consolidated Financial Statements.
10
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Comparative data relating to the Company's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when the Company's rigs are utilized in its turnkey
operations). The Company's drillship, Ocean Clipper I, is included in
Other Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------- INCREASE/
1996 1995 (DECREASE)
-----------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles....... $ 26,378 $ 15,596 $10,782
Other Semisubmersibles................... 84,948 40,621 44,327
Jack-ups................................. 28,097 15,446 12,651
Turnkey.................................. 4,891 403 4,488
Land..................................... 5,440 4,189 1,251
Eliminations............................. (2,771) (149) (2,622)
----------------------------------
Total Revenues....................... $146,983 $ 76,106 $70,877
==================================
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles....... $ 8,937 $ 9,192 $ (255)
Other Semisubmersibles................... 49,390 31,462 17,928
Jack-ups................................. 18,540 15,399 3,141
Turnkey.................................. 3,928 252 3,676
Land..................................... 4,392 3,856 536
Other.................................... (819) (331) (488)
Eliminations............................. (2,771) (149) (2,622)
----------------------------------
Total Contract Drilling Expense...... $ 81,597 $ 59,681 $21,916
==================================
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles....... $ 17,441 $ 6,404 $11,037
Other Semisubmersibles................... 35,558 9,159 26,399
Jack-ups................................. 9,557 47 9,510
Turnkey.................................. 963 151 812
Land..................................... 1,048 333 715
Other.................................... 819 331 488
General and Administrative Expense....... (3,449) (3,334) (115)
Depreciation and Amortization Expense.... (18,396) (13,076) (5,320)
Gain on Sale of Assets................... 3,073 41 3,032
----------------------------------
Total Operating Income (Loss)........ $ 46,614 $ 56 $46,558
==================================
</TABLE>
Revenues. The $10.8 million increase in revenues from
fourth-generation semisubmersibles resulted from improvements in dayrates
($7.5 million) and increases in utilization ($3.3 million). During the
second quarter of 1995, the days worked by fourth-generation rigs were
negatively impacted by downtime for modifications upon the relocation of
two fourth-generation rigs during the first half of 1995. The $44.3
million increase in revenues from other semisubmersibles was partially
attributable to revenues of $24.2 million generated by the eight
semisubmersibles acquired in the Merger. In addition, improvements in
dayrates, primarily in the Gulf of Mexico and the North Sea, contributed
an increase of $21.9 million. The $12.7 million increase in revenues
from jack-ups reflect $6.5 million generated by the five jack-ups
acquired in the Merger and $5.5 million from improvements in dayrates.
The $4.5 million increase in turnkey revenues resulted primarily from
overall project management services performed for two
11
<PAGE> 12
customers during the quarter ended June 30, 1996. The $1.3 million
increase in land drilling revenues resulted primarily from an increase in
utilization during the current quarter.
Contract Drilling Expense. Contract drilling expense for
fourth-generation semisubmersibles was relatively unchanged from the
second quarter of the prior year. The $17.9 million increase in expenses
for other semisubmersibles resulted from $8.7 million associated with
rigs acquired in the Merger and increased expenses for shipyard repairs
on two rigs during the quarter ended June 30, 1996. The three months
ended June 30, 1996 include additional operating expenses incurred on a
semisubmersible in the Gulf of Mexico which was cold stacked in the
comparable period of the prior year. The $3.1 million increase in
expenses for jack-ups resulted primarily from the additional rigs
acquired in the Merger. The $3.7 million increase in turnkey expense
resulted from project management services provided during the quarter
ended June 30, 1996.
General and Administrative Expense. General and administrative
expense of $3.4 million for the quarter ended June 30, 1996 increased due
to the Merger; however, these increases were offset by cost savings in
rent due to the February 1996 purchase of the building in which the
Company has its corporate headquarters. In addition, approximately $0.4
million of general and administrative expenses associated with
construction on the Ocean Quest, Ocean Star, and Ocean Clipper I were
capitalized to these projects during the second quarter of 1996.
Depreciation and Amortization Expense. Depreciation and
amortization expense of $18.4 million for the quarter ended June 30, 1996
included a change in accounting estimate to increase the estimated useful
lives for certain classes of rigs which reduced depreciation expense by
approximately $2.1 million, as compared to the quarter ended June 30,
1995. Offsetting this decrease were increases in depreciation for (i)
the eight semisubmersibles and three jack-up drilling rigs acquired in
the Merger, (ii) three rig upgrades completed in the third and fourth
quarters of 1995 and (iii) capital expenditures associated with the
Company's continuing rig enhancement program.
Gain on Sale of Assets. Gain on sale of assets for the quarter
ended June 30, 1996 consists of a gain on the sale of the Company's
jack-up drilling rig located in Punta Arenas, Chile.
Interest Expense. Interest expense of $0.1 million for the quarter
ended June 30, 1996 consists of interest costs incurred of $1.1 million,
net of capitalized interest of $1.0 million. The decrease from $8.8
million for the same period of the prior year was attributable to a
reduction in the outstanding indebtedness resulting from the repayment of
the Company's loan from Loews Corporation ("Loews") in connection with
the initial public offering in October 1995. See Notes 3 and 5 to the
Company's Consolidated Financial Statements.
Income Tax (Expense) Benefit. The income tax (expense) benefit for
the quarter ended June 30, 1996 was $(13.8) million as compared to $5.5
million for the comparable period of the prior year. This change
resulted primarily from the increase of $55.1 million in the Company's
income before income tax (expense) benefit. In addition, during the
quarter ended June 30, 1995, the Company's tax benefit reflects the
effects of profits in foreign jurisdictions where the Company's tax
liability was minimal.
Net Income (Loss). Net income for the quarter ended June 30, 1996
increased $35.8 million to $33.0 million, as compared to a net loss of
$(2.8) million for the comparable period of the prior year. The increase
resulted primarily from an increase in operating income of $46.6 million
and a decrease in interest expense of $8.7 million, partially offset by
an increase in income tax expense of $19.3 million.
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<PAGE> 13
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Comparative data relating to the Company's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when the Company's rigs are utilized in its turnkey
operations). The Company's drillship, Ocean Clipper I, is included in
Other Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------- INCREASE/
1996 1995 (DECREASE)
------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles....... $47,843 $27,298 $20,545
Other Semisubmersibles................... 137,943 76,134 61,809
Jack-ups................................. 48,233 32,371 15,862
Turnkey.................................. 18,517 3,547 14,970
Land..................................... 10,542 9,665 877
Other.................................... -- 67 (67)
Eliminations............................. (9,227) (2,216) (7,011)
------------------------------------
Total Revenues...................... $253,851 $146,866 $106,985
====================================
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles....... $16,834 $17,487 $ (653)
Other Semisubmersibles................... 80,880 62,235 18,645
Jack-ups................................. 33,467 30,905 2,562
Turnkey.................................. 18,056 4,919 13,137
Land..................................... 9,165 8,565 600
Other.................................... (1,421) (463) (958)
Eliminations............................. (9,227) (2,216) (7,011)
------------------------------------
Total Contract Drilling Expense..... $147,754 $121,432 $ 26,322
====================================
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles....... $31,009 $9,811 $ 21,198
Other Semisubmersibles................... 57,063 13,899 43,164
Jack-ups................................. 14,766 1,466 13,300
Turnkey.................................. 461 (1,372) 1,833
Land..................................... 1,377 1,100 277
Other.................................... 1,421 530 891
General and Administrative Expense....... (6,552) (6,474) (78)
Depreciation and Amortization Expense.... (30,465) (28,064) (2,401)
Gain on Sale of Assets................... 3,230 430 2,800
------------------------------------
Total Operating Income (Loss)....... $72,310 $(8,674) $80,984
====================================
</TABLE>
Revenues. The $20.5 million increase in revenues from
fourth-generation semisubmersibles resulted from improvements in dayrates
($13.8 million) and increases in utilization ($6.7 million). The
improvement in utilization for 1996 was partially attributable to the
relocation of two fourth-generation rigs during the comparable period of
the prior year, reducing the days worked for these rigs during that
period. The $61.8 million increase in revenues from other
semisubmersibles was primarily attributable to the addition of eight
semisubmersibles acquired in the Merger and increases in dayrates in both
the North Sea and the Gulf of Mexico. These increases were partially
offset by a reduction in revenues during the first six months of 1996 of
approximately $3.6 million due to the Ocean Baroness being out of service
while modifications were being performed for a term contract in South
America which began in April 1996. The $15.9 million increase in
revenues from jack-ups resulted primarily from revenues associated with
rigs acquired in the Merger and improvements in dayrates in the Gulf of
Mexico. The $15.0 million increase in turnkey revenues resulted from
turnkey projects of greater magnitude and overall project
13
<PAGE> 14
management services completed during 1996 as compared to those completed
during the same period of the prior year.
Contract Drilling Expense. Contract drilling expense for
fourth-generation semisubmersibles was relatively unchanged from the
first six months of the prior year. The $18.6 million increase for other
semisubmersibles resulted from the additional rigs acquired in the
Merger, increased expenses for shipyard repairs on two rigs, and
increased expenses on a rig working during the current period but cold
stacked during the comparable period of the prior year. The $2.6 million
increase in jack-up expense resulted primarily from the rigs acquired in
the Merger. The $13.1 million increase in turnkey expense resulted from
more extensive turnkey wells drilled, project management services
provided and cost overruns on one turnkey well during the current year.
General and Administrative Expense. General and administrative
expense of $6.6 million for the six months ended June 30, 1996 increased
due to the Merger; however, these increases were offset by cost savings
in rent due to the February 1996 purchase of the building in which the
Company has its corporate headquarters. In addition, approximately $0.4
million of general and administrative expenses associated with
construction on the Ocean Quest, Ocean Star, and Ocean Clipper I were
capitalized to these projects during the second quarter of 1996.
Depreciation and Amortization Expense. Depreciation and
amortization expense of $30.5 million for the six months ended June 30,
1996 included a change in accounting estimate to increase the estimated
useful lives for certain classes of rigs which reduced depreciation
expense by approximately $4.2 million, as compared to the six months
ended June 30, 1995. Offsetting this decrease were increases in
depreciation for (i) the 11 rigs acquired in the Merger, (ii) three rig
upgrades completed in the third and fourth quarters of 1995, and (iii)
capital expenditures associated with the Company's continuing rig
enhancement program. In addition, depreciation expense for the
comparable period of the prior year included a $2.1 million write-down in
the carrying value of a semisubmersible.
Gain on Sale of Assets. Gain on sale of assets for the six months
ended June 30, 1996 consists primarily of a gain on the sale of the
Company's jack-up drilling rig located in Punta Arenas, Chile.
Interest Expense. Interest expense of $0.1 million for the six
months ended June 30, 1996 consists of interest costs incurred of $1.4
million, net of capitalized interest of $1.3 million. The decrease from
$17.3 million for the same period of the prior year was attributable to a
reduction in the outstanding indebtedness resulting from the repayment of
the Company's loan from Loews in connection with the initial public
offering in October 1995. See Notes 3 and 5 to the Company's
Consolidated Financial Statements.
Income Tax (Expense) Benefit. The income tax (expense) benefit for
the six months ended June 30, 1996 was $(21.2) million as compared to
$10.8 million for the comparable period of the prior year. This change
resulted primarily from the increase of $98.1 million in the Company's
income before income tax (expense) benefit. In addition, during the six
months ended June 30, 1995, the Company's tax benefit reflects the
effects of profits in foreign jurisdictions where the Company's tax
liability was minimal.
Net Income (Loss). Net income for the six months ended June 30,
1996 increased $66.1 million to $51.8 million, as compared to a net loss
of $(14.3) million for the comparable period of the prior year. The
increase resulted primarily from an increase in operating income of $81.0
million and a decrease in interest expense of $17.2 million, partially
offset by an increase in income tax expense of $32.0 million.
14
<PAGE> 15
OUTLOOK
The deep water and harsh environment markets for semisubmersible
rigs have experienced improved demand and higher dayrates during the past
year, due in part to the increasing impact of technological advances,
including 3-D seismic, horizontal drilling, and subsea completion
procedures. Both the Gulf of Mexico and the North Sea semisubmersible
markets have experienced increased utilization and significantly higher
dayrates through the first six months of 1996. Consequently, many
customers are contracting rigs serving those markets under term contracts
(as opposed to contracts let on a single well or well-to-well basis). In
the Gulf of Mexico, the Ocean America contract has been extended for one
year through May 1997 at an improved dayrate. The Ocean Neptune will be
upgraded to 3,000 feet water depth capability and will operate under a
two-year contract. See " - Capital Resources".
The Ocean Victory, presently idle offshore Falmouth, England, will
soon commence mobilization to the Gulf of Mexico for modifications in
connection with a three-year deep water drilling program anticipated to
begin September 1997. The upgrade will include stability enhancements,
addition of a new chain/wire mooring system for operation in 5,000 foot
water depths, and other significant enhancements. The Company's
drillship, the Ocean Clipper I, will be upgraded during 1996 and 1997 to
operate in the ultra-deep water market of the Gulf of Mexico with dynamic
positioning capabilities, in connection with a four-year term contract
with a major oil company that has been agreed to in principle. The oil
company has an option to terminate the contract prior to its scheduled
termination date upon payment to the Company of a termination fee. See "
- Capital Resources". In the North Sea, the Company obtained a two-year
contract for the Ocean Alliance commencing in October 1996. In addition,
the contract for the Ocean Guardian, also in the North Sea, has been
extended for one year through July 1997.
The market for jack-up rigs in the Gulf of Mexico continues to show
signs of strengthening. Dayrates have improved from those earned in the
prior year; however, short-term contracts remain prevalent in this
market. The Company considers its upcoming contract expirations for its
jack-up fleet typical of prevailing market conditions.
Historically, the offshore contract drilling market has been highly
competitive and cyclical, and the Company cannot predict the extent to
which current conditions will continue.
LIQUIDITY
Net cash provided by operating activities for the six months ended
June 30, 1996 increased by $56.9 million to $67.9 million, as compared to
$11.0 million for the comparable period of the prior year. This increase
was attributable to a $66.1 million increase in net income and a $9.6
million increase in accounts payable and accrued liabilities for 1996,
partially offset by an increase of $30.0 million in accounts receivable.
The increases in working capital during the six months ended June 30,
1996 resulted primarily from the Merger. See Note 2 to the Company's
Consolidated Financial Statements. Cash used in investing activities
increased $56.0 million primarily due to capital expenditures for major
upgrades during 1996 of $90.1 million, partially offset by cash acquired
in the Merger. Cash provided by financing activities for the six months
ended June 30, 1996 decreased $4.2 million primarily due to repayment of
debt assumed in the Merger, partially offset by net borrowings of $70.0
million on the Credit Facility as compared to $9.0 million of net
borrowings on the Company's indebtedness to Loews during the same period
of the prior year.
The Company uses funds available under a revolving credit facility
with a group of banks (the "Credit Facility"), together with cash flow
from operations, to fund its capital expenditure and working capital
requirements. The Credit Facility is a revolving line of credit for a
five-year term providing a maximum credit commitment of $150.0 million
until February 1998, at which time and at the end of each six-month
period thereafter, the commitment will decrease by $12.5 million to a
final maximum credit commitment of $75.0 million during the last six
months. Borrowings under the Credit Facility bear interest, at the
Company's option, at a per annum rate equal to a base rate (equal to the
greater of (i) the prime rate
15
<PAGE> 16
announced by Bankers Trust Company or (ii) the Federal Funds rate plus
.50%) plus .25% or the Eurodollar rate plus 1.25%. The Company is
required to pay a commitment fee of .375% on the unused available portion
of the maximum credit commitment. Borrowings are secured by security
interests in certain of the Company's assets. The Credit Facility also
contains covenants that limit the amount of total consolidated debt,
require the maintenance of certain consolidated financial ratios and
limit dividends and similar payments. As of June 30, 1996, the Company
was in compliance with each of these covenants.
It is anticipated that the Credit Facility will be used primarily to
fund rig upgrades and similar capital expenditure requirements. In
management's opinion, the Company's cash generated from operations and
borrowings available under its Credit Facility are sufficient to meet its
anticipated short and long-term liquidity needs, including its capital
expenditure requirements.
CAPITAL RESOURCES
Cash requirements for capital commitments result from rig upgrades to
meet specific customer requirements and from the Company's continuing rig
enhancement program, including top-drive drilling system installations and
water depth and drilling capability upgrades. The Company has revised its
capital budget for the additional rigs acquired in the Merger. The
Company expects to spend approximately $240.0 million, including interest
expense to be capitalized, during 1996 for rig upgrades in connection with
contract requirements. Included in this amount is approximately $41.2
million for 1996 expenditures in conjunction with the upgrade of the Ocean
Clipper I to operate in deep water with dynamic positioning capabilities,
$22.3 million to increase the water depth capability to 3,000 feet on the
Ocean Neptune, and $17.7 million for 1996 expenditures to upgrade the
Ocean Victory for deep water drilling in the Gulf of Mexico. In addition,
approximately $114.6 million is included for the upgrades relating to the
letter of intent and the contract for the Ocean Star and Ocean Quest,
respectively. Because these projects are accompanied by term contracts at
favorable dayrates, the expenditures are, in the Company's opinion,
financially justified. During the six months ended June 30, 1996, $90.1
million was expended on these projects. The Company expects to evaluate
other projects as opportunities arise. In addition, the Company has
budgeted $60.3 million for 1996 capital expenditures associated with its
continuing rig enhancement program. Through June 30, 1996, $10.3 million
has been expended on this program. It is management's opinion that
significant improvements in operating cash flow resulting from current
conditions of improved dayrates and utilization and the increasing number
of term contracts for rigs in certain markets, in conjunction with
borrowings under the Credit Facility, will be sufficient to meet these
capital requirements.
The Company is analyzing financing alternatives that may be
available to it in the public or private capital markets. Proceeds of
any such financing transactions may be used for repayment of higher cost
debt, to fund rig upgrades or acquisitions or for other corporate
purposes. The Company's ability to effect any such financings will be
dependent on its historical results of operations, its current financial
condition and other factors beyond the Company's control.
Also, from time to time the Company reviews acquisition
opportunities, although the Company has no current plans to purchase or
otherwise acquire additional rigs.
OTHER
Sale of Asset. During July 1996, the Company sold a jack-up
drilling rig, Ocean Conquest, for approximately $9.0 million, net of
commissions. The rig was previously stacked in the Gulf of Mexico. The
sale will generate an after-tax gain during the third quarter of 1996 of
approximately $4.5 million for the Company.
Currency Risk. Certain of the Company's subsidiaries use the local
currency in the country where they conduct operations as their functional
currency. Currency environments in which the Company has material
business operations include the U.K., Australia and Brazil. The Company
generally attempts to minimize its currency exchange risk by seeking
international contracts payable in local currency in
16
<PAGE> 17
amounts equal to the Company's estimated operating costs payable in local
currency and in U.S. dollars for the balance of the contract. Because of
this strategy, the Company has minimized its unhedged net asset or
liability positions denominated in local currencies and has not
experienced significant gains or losses associated with changes in
currency exchange rates. However, contracts presently covering three of
the Company's four rigs operating in the U.K. sector of the North Sea are
payable in U.S. dollars. The Company has not hedged its exposure to
changes in the exchange rate between U.S. dollars and pounds sterling for
operating costs payable in pounds sterling, although it may seek to do so
in the future.
Currency translation adjustments are accumulated in a separate
section of stockholders' equity. However, when the Company ceases its
operations in a currency environment, the accumulated adjustments are
recognized currently in results of operations. Translation gains and
losses for the Company's operations in Brazil have been recognized
currently due to the hyperinflationary status of this environment. The
effect on results of operations has not been material and is not expected
to have a significant effect in the future due to the recent
stabilization of currency rates in Brazil.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of the Company held on April
29, 1996, the matters voted upon and the number of votes cast for,
against or withheld, as well as the number of abstentions and broker
non-votes as to such matters (including a separate tabulation with
respect to each nominee for office) were as follows:
Item 1. To vote upon a proposal to approve the issuance of up to
18,000,000 shares of common stock, par value $0.01 per share, of
the Company in connection with the acquisition by the Company of
Arethusa, pursuant to which Arethusa will become a wholly owned
subsidiary of the Company.
<TABLE>
<CAPTION>
For Against or Withheld Abstain Broker Non-Vote
<S> <C> <C> <C>
41,872,648 200 75,000 0
</TABLE>
Item 2. To elect five directors, each to serve until the next annual
meeting of stockholders and until their successors are elected
and qualified.
<TABLE>
<CAPTION>
For Against or Withheld Broker Non-Vote
<S> <C> <C> <C>
James S. Tisch 41,947,648 200 0
David M. Ifshin 41,947,648 200 0
Herbert C. Hofmann 41,947,648 200 0
Robert E. Rose 41,947,648 200 0
Raymond S. Troubh 41,947,648 200 0
</TABLE>
Item 3. To ratify the appointment of Deloitte & Touche LLP as
independent accountants and auditors for the Company for 1996.
<TABLE>
<CAPTION>
For Against or Withheld Abstain Broker Non-Vote
<S> <C> <C> <C>
41,872,648 100 75,100 0
</TABLE>
18
<PAGE> 19
ITEM 5. OTHER INFORMATION
In July 1996, Mr. Arthur Rebell was elected to the Board of
Directors of the Company. Mr. Rebell is a Professor of Mergers &
Acquisitions at New York University's Graduate School of Business and was
previously a Managing Director with Schroder Wertheim & Co., Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the
second quarter of 1996:
<TABLE>
<CAPTION>
Date of Report Description of Event
-------------- ----------------------------------------
<S> <C>
May 13, 1996 Merger with Arethusa (Off-Shore) Limited
</TABLE>
19
<PAGE> 20
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.
DIAMOND OFFSHORE DRILLING, INC.
(Registrant)
Date 29-Jul-1996 By: \s\ Lawrence R. Dickerson
----------- ----------------------------------------
Lawrence R. Dickerson
Senior Vice President and Chief
Financial Officer
Date 29-Jul-1996 \s\ Gary T. Krenek
----------- ----------------------------------------
Gary T. Krenek
Controller and Principal Accounting
Officer
20
<PAGE> 21
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,051
<SECURITIES> 5,202
<RECEIVABLES> 144,812
<ALLOWANCES> 0
<INVENTORY> 31,085
<CURRENT-ASSETS> 201,355
<PP&E> 1,320,319
<DEPRECIATION> 243,426
<TOTAL-ASSETS> 1,367,329
<CURRENT-LIABILITIES> 74,807
<BONDS> 70,000
<COMMON> 683
0
0
<OTHER-SE> 1,098,237
<TOTAL-LIABILITY-AND-EQUITY> 1,367,329
<SALES> 0
<TOTAL-REVENUES> 253,851
<CGS> 0
<TOTAL-COSTS> 147,754<F1>
<OTHER-EXPENSES> 33,787<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104
<INCOME-PRETAX> 72,914
<INCOME-TAX> 21,160
<INCOME-CONTINUING> 51,754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,754
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
<FN>
<F1>INCLUDES CONTRACT DRILLING EXPENSES ONLY.
<F2>INCLUDES OTHER OPERATING EXPENSES.
</FN>
</TABLE>
