<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 September 30, 1997
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)
(281) 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 October 17, 1997 Common stock, $.01 par value per share 139,308,948 shares
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DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
<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 Income........................ 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......................13
PART II. OTHER INFORMATION................................................23
ITEM 1. LEGAL PROCEEDINGS........................................23
ITEM 2. CHANGES IN SECURITIES....................................23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..........................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......23
ITEM 5. OTHER INFORMATION........................................23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................24
SIGNATURES.................................................................25
INDEX OF EXHIBITS..........................................................26
</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>
SEPTEMBER 30, DECEMBER 31,
------------- -----------
1997 1996
------------- -----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 70,860 $ 28,180
Investment securities ...................................................... 312,305 --
Accounts receivable ........................................................ 217,236 172,214
Rig inventory and supplies ................................................. 32,314 30,407
Prepaid expenses and other ................................................. 21,720 12,166
------------- -----------
Total current assets...................................... 654,435 242,967
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION.................................................... 1,414,710 1,198,160
GOODWILL, NET OF AMORTIZATION ................................................... 122,698 129,825
OTHER ASSETS .................................................................... 9,684 3,548
------------- -----------
Total assets.............................................. $ 2,201,527 $ 1,574,500
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 53,158 $ 63,172
Accrued liabilities ........................................................ 42,765 28,451
Taxes payable .............................................................. 17,200 26,377
Short-term borrowings ...................................................... -- 10,000
------------- -----------
Total current liabilities................................. 113,123 128,000
LONG-TERM DEBT................................................................... 400,000 63,000
DEFERRED TAX LIABILITY........................................................... 202,320 176,296
OTHER LIABILITIES ............................................................... 20,493 12,472
------------- -----------
Total liabilities ........................................ 735,936 379,768
------------- -----------
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, 139,308,948
and 68,353,409 shares issued and outstanding at September 30, 1997 and
December 31, 1996, respectively) ....................................... 1,393 684
Additional paid-in capital.................................................. 1,302,708 1,220,032
Retained earnings (accumulated deficit) .................................... 163,792 (25,056)
Cumulative translation adjustment .......................................... (2,231) (928)
Unrealized loss on investment securities ................................... (71) --
------------- -----------
Total stockholders' equity................................ 1,465,591 1,194,732
------------- -----------
Total liabilities and stockholders' equity................ $ 2,201,527 $ 1,574,500
============= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
3
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES ....................................................... $ 250,497 $ 170,622 $ 683,764 $ 424,473
OPERATING EXPENSES:
Contract drilling......................................... 99,907 94,355 287,867 242,109
Depreciation and amortization............................. 28,546 21,597 81,588 52,062
General and administrative................................ 5,045 4,109 14,845 10,661
Gain on sale of assets.................................... (14) (6,959) (84) (10,189)
---------- ---------- ---------- ---------
Total operating expenses............................. 133,484 113,102 384,216 294,643
---------- ---------- ---------- ---------
OPERATING INCOME................................................. 117,013 57,520 299,548 129,830
OTHER INCOME (EXPENSE):
Interest income........................................... 5,245 271 13,637 749
Interest expense.......................................... (3,591) -- (6,940) (104)
Other, net................................................ 671 138 496 368
---------- ---------- ---------- ---------
INCOME BEFORE INCOME TAX EXPENSE................................. 119,338 57,929 306,741 130,843
INCOME TAX EXPENSE............................................... (41,507) (19,449) (107,446) (40,609)
---------- ---------- ---------- ---------
NET INCOME....................................................... $ 77,831 $ 38,480 $ 199,295 $ 90,234
========== ========== ========== =========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE................ $ 0.54 $ 0.28 $ 1.39 $ 0.75
========== ========== ========== =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
COMMON SHARES ........................................ 139,303 136,563 138,308 120,358
COMMON EQUIVALENT SHARES.............................. 9,876 -- 8,610 --
---------- ---------- ---------- ---------
ADJUSTED.............................................. 149,179 136,563 146,918 120,358
========== ========== ========== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
4
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1997 1996
---------------- ----------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................... $ 199,295 $ 90,234
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................... 81,588 52,062
Gain on sale of assets...................................... (84) (10,189)
Gain on sale of investment securities....................... (1,362) --
Deferred tax provision...................................... 33,739 34,773
Accretion of discounts on investment securities............. (9,421) (151)
Amortization of debt issuance costs......................... 330 267
Changes in operating assets and liabilities:
Accounts receivable......................................... (44,606) (27,509)
Rig inventory and supplies and other current assets......... (11,461) (2,082)
Other assets, non-current................................... 813 (1,566)
Accounts payable and accrued liabilities.................... 4,051 12,944
Taxes payable............................................... (11,560) 3,119
Other liabilities, non-current.............................. 3,114 1,113
Other, net.................................................... (744) (263)
---------------- ----------------
Net cash provided by operating activities................ 243,692 152,752
---------------- ----------------
INVESTING ACTIVITIES:
Cash acquired in Arethusa merger.............................. -- 20,883
Capital expenditures.......................................... (214,496) (174,863)
Purchase of accommodation vessel.............................. (80,952) --
Proceeds from sales of assets................................. 2,360 14,062
Net purchases of short-term investment securities............. (417,889) --
Purchases of long-term investment securities.................. (124,242) --
Proceeds from sales of long-term investment securities........ 125,082 --
Proceeds from maturities of short-term investment securities.. 115,000 --
---------------- ----------------
Net cash used in investing activities.................... (595,137) (139,918)
---------------- ----------------
FINANCING ACTIVITIES:
Payment of dividend........................................... (9,751) --
Issuance of common stock...................................... 82,282 --
Net (repayments) borrowings on revolving line of credit....... (63,000) 55,000
Net repayments on short-term borrowings....................... (10,000) --
Issuance of convertible subordinated notes.................... 400,000 --
Repayment of debt assumed in Arethusa merger.................. -- (67,477)
Debt issuance costs........................................... (6,062) (2,070)
Proceeds from stock options exercised......................... 656 4,399
---------------- ----------------
Net cash provided by financing activities................ 394,125 (10,148)
---------------- ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................ 42,680 2,686
Cash and cash equivalents, beginning of period................ 28,180 10,306
---------------- ----------------
Cash and cash equivalents, end of period...................... $ 70,860 $ 12,992
================ ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
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, 1996 (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 income, 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
Short-term, highly liquid investments that have an original maturity of
three months or less which are considered part of the Company's cash management
activities, rather than part of its investing activities, are considered cash
equivalents.
Investment Securities
The Company's investments are classified as available for sale and stated
at fair value under the terms of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, any unrealized gains and losses, net of taxes, are
recorded as a separate component of stockholders' equity until realized. The
cost of debt securities is adjusted for accretion of discounts to maturity and
such accretion is included in interest income. The cost of securities sold is
based on the specific identification method and realized gains or losses and
declines in value, if any, judged to be other than temporary are reported in the
Consolidated Statements of Income in "Other income (expense)."
Supplementary Cash Flow Information
Non-cash financing activities for the nine months ended September 30, 1997
included $0.7 million for the issuance of 69.6 million shares of common stock in
connection with a two-for-one stock split in the form of a stock dividend (see
Note 2).
Non-cash financing activities for the nine months ended September 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 nine months ended September 30, 1996 included
$532.9 million of net assets acquired in the merger with Arethusa (see Note 8).
Cash payments made for interest on long-term debt, including commitment
fees, during the nine months ended September 30, 1997 and 1996 totaled $8.7
million and $2.5 million, respectively. Cash payments made for income taxes
during the nine months ended September 30, 1997 and 1996 totaled $92.0 million
and $2.1 million, respectively.
6
<PAGE> 7
Capitalized Interest
Interest cost for construction and upgrade of qualifying assets is
capitalized. During the quarter and nine months ended September 30, 1997, the
Company incurred interest cost, including amortization of debt issuance costs,
of $3.9 million and $10.7 million, respectively. Interest cost capitalized
during the quarter and the nine months ended September 30, 1997 was $0.4 million
and $3.8 million, respectively. Total interest cost incurred of $1.2 million and
$2.5 million was capitalized during the quarter and nine months ended September
30, 1996, respectively.
Goodwill
Goodwill from the merger with Arethusa (see Note 8) is amortized on a
straight-line basis over 20 years. Amortization expense totaled $1.7 million and
$4.9 million for the quarter and nine months ended September 30, 1997,
respectively. For the quarter and nine months ended September 30, 1996,
amortization expense totaled $1.1 million and $1.8 million, respectively.
Debt Issuance Costs
Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the term of the related debt.
Income Tax Expense
Except for selective dividends, the Company's practice has been to reinvest
the earnings of its non-U.S. subsidiaries and postpone their remittance
indefinitely. Thus, no additional U.S. taxes were provided on earnings of these
non-U.S. subsidiaries. However, beginning in 1997, the Company changed its
practice and now intends to repatriate these earnings in the foreseeable future.
As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on
all undistributed non-U.S. earnings. The disparity in the effective tax rates
between 1997 and 1996 reflects this change in practice.
Net Income Per Share
Net income per common and common equivalent share was computed by dividing
net income by the weighted average number of shares of common stock and common
stock equivalents outstanding during the periods, giving retroactive effect to
the July 1997 two-for-one stock split in the form of a stock dividend (see Note
2). The convertible subordinated notes (see Note 7) are considered to be common
stock equivalents. Consequently, the number of shares issuable assuming full
conversion of these notes as of the issuance date, February 4, 1997, was added
to the number of common shares outstanding with net income also adjusted to
eliminate the after-tax effect of interest expense on these notes. Fully diluted
earnings per share is not presented as there are no other material contingent
issuances of common stock.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which requires dual presentation of basic and diluted
earnings per share for entities with complex capital structures. Basic earnings
per share excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. SFAS No. 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997. The Company plans to
adopt SFAS No. 128 for the fourth quarter of 1997 and, after the effective date,
all prior period earnings per share data presented will be restated to conform
to these provisions. For the three months ended September 30, 1997 and 1996, pro
forma earnings per share amounts computed using SFAS No. 128 would have been
$0.56 and $0.28, respectively, for basic earnings per share and $0.54 and $0.28,
respectively, for diluted earnings per share. Pro forma earnings per share
amounts for the nine months ended September 30, 1997 and 1996 would have been
$1.44 and $0.75, respectively, for basic earnings per share and $1.39 and $0.75,
respectively, for diluted earnings per share.
7
<PAGE> 8
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. COMMON STOCK
In July 1997, the Board of Directors declared a two-for-one stock split in
the form of a stock dividend which was distributed on August 14, 1997 to
stockholders of record on July 24, 1997. The dividend was charged to retained
earnings in the amount of $0.7 million, which was based on the par value of 69.6
million shares of common stock. Weighted average shares outstanding and all per
share amounts included in the accompanying consolidated financial statements and
notes thereto are based on the increased number of shares, giving retroactive
effect to the stock dividend.
In April 1997, the Company completed a public offering of 1.25 million
shares of common stock generating net proceeds of approximately $82.3 million.
The net proceeds were used to acquire the Polyconfidence, a semisubmersible
accommodation vessel (see Note 4).
3. INVESTMENT SECURITIES
Investment securities classified as available for sale at September 30,
1997 were as follows:
<TABLE>
<CAPTION>
------------ ------------ ---------
AMORTIZED UNREALIZED MARKET
COST LOSSES VALUE
------------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Due within 1 year: Debt securities
issued by the U.S. Treasury ..... $312,416 $ (111) $312,305
-------- -------- --------
Total...................... $312,416 $ (111) $312,305
======== ======== ========
</TABLE>
During the quarter and nine months ended September 30, 1997, certain
investment securities due within one year were sold for proceeds of $197.1
million and $396.5 million, respectively. The resulting net realized gains were
not material. All investment securities due after one year which were purchased
in March 1997 and April 1997 were sold in July 1997 for proceeds of $125.1
million, resulting in an after-tax gain of $0.7 million.
8
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4. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment........ $ 1,656,736 $ 1,332,980
Construction work in progress...... 85,304 116,770
Land and buildings ................ 12,515 13,154
Office equipment and other ........ 9,536 8,181
----------- -----------
Cost ......................... 1,764,091 1,471,085
Less accumulated depreciation...... (349,381) (272,925)
----------- -----------
Total .................... $ 1,414,710 $ 1,198,160
=========== ===========
</TABLE>
Asset Acquisitions
In May 1997, the Company acquired the Polyconfidence, a semisubmersible
accommodation vessel with dynamic positioning capabilities, for approximately
$81.0 million in cash. The Polyconfidence is bareboat chartered through late
1997 to the seller of the vessel until completion of its existing commitment.
The Company recently entered into a letter of intent with a major oil company
for the conversion of the Polyconfidence to a semisubmersible drilling rig in
connection with a five-year contract in the Gulf of Mexico anticipated to
commence in the fourth quarter of 1999.
Asset Dispositions
In April 1997, the Company sold a warehouse facility on approximately 6.6
acres of land near Houston, Texas, which was acquired in the merger with
Arethusa for approximately $0.6 million (see Note 8). No gain or loss was
recognized on this sale.
During the nine months ended September 30, 1996, the Company sold two of
its shallow water jack-up drilling rigs that had previously been stacked,
increasing net income by $6.4 million, or $0.05 per share. The Ocean Magallanes
was sold in May 1996 for approximately $4.2 million and generated an after-tax
gain during the second quarter of 1996 of $2.0 million, or $0.02 per share. The
Ocean Conquest was sold in July 1996 for approximately $9.0 million and
generated an after-tax gain during the third quarter of 1996 of $4.4 million, or
$0.03 per share.
9
<PAGE> 10
5. GOODWILL
The merger with Arethusa generated an excess of the purchase price over the
estimated fair value of the net assets acquired (see Note 8). Cost and
accumulated amortization of such goodwill is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------- -----------------
1997 1996
---------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill .......................... $ 132,170 $ 134,331
Less accumulated amortization...... (9,472) (4,506)
--------- ---------
Total ................... $ 122,698 $ 129,825
========= =========
</TABLE>
During the nine months ended September 30, 1997, an adjustment of
approximately $2.2 million was recorded to reduce goodwill before accumulated
amortization. This adjustment resulted primarily from a change in the fair value
of the net assets acquired in the merger with Arethusa.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------- --------------
1997 1996
---------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Personal injury and other claims........ $22,797 $18,629
Payroll and benefits ................... 15,886 8,336
Interest payable ....................... 1,933 172
Other .................................. 2,149 1,314
------- -------
Total ........................ $42,765 $28,451
======= =======
</TABLE>
7. LONG-TERM DEBT
Convertible Subordinated Notes
In February 1997, the Company issued $400.0 million of convertible
subordinated notes (the "Notes") due February 15, 2007. The Notes are
convertible into shares of the Company's common stock, at a conversion price of
$40.50 per share, subject to adjustment in certain circumstances. The Notes have
a stated interest rate of 3.75 percent and an effective interest rate of 3.93
percent. Interest is payable in cash semi-annually on each February 15 and
August 15.
The Notes are redeemable, in whole or, from time to time, in part, at the
option of the Company, at any time on or after February 22, 2001, at specified
redemption prices, plus accrued and unpaid interest to the date of redemption.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to the prior payment in full of the principal and premium, if
any, and interest on all indebtedness of the Company for borrowed money, other
than the Notes, with certain exceptions, and effectively subordinated in right
of payment to the prior payment in full of all indebtedness of the Company's
subsidiaries. The Notes do not restrict the Company's ability to incur other
indebtedness or additional indebtedness of the Company's subsidiaries.
10
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Credit Facility
In August 1997, the Company terminated its credit agreement with a group of
banks whereby up to $200.0 million could be borrowed at various interest rates,
at the Company's option, under the terms of a revolving credit facility (the
"Credit Facility") which was available through December 2001. No amounts were
outstanding under this agreement upon its termination. At December 31, 1996,
$63.0 million was outstanding under the Credit Facility.
The Company has lines of credit for short-term financing aggregating $30.0
million from two U.S. banks. These arrangements provide for borrowings at
various interest rates and may be used on such terms as the Company and the
banks mutually agree. No amounts were outstanding under these agreements at
September 30, 1997. At December 31, 1996, $10.0 million was outstanding under
these agreements.
8. MERGER WITH ARETHUSA
In April 1996, the Company acquired 100 percent of the stock of Arethusa
(the "Arethusa Merger") in exchange for approximately 35.8 million shares of the
Company's common stock. The shares were valued for financial reporting purposes
at $15.07 per share based on a seven-day average of the closing price of the
Company's common stock at the time the Arethusa Merger was announced (December
7, 1995). In addition to equity consideration of approximately $550.7 million,
the Company incurred approximately $16.9 million of cash acquisition costs
associated with the Arethusa Merger.
The Arethusa Merger was accounted for as a purchase and, accordingly, the
accompanying Consolidated Statements of Income reflect the operating results of
Arethusa since April 29, 1996, the effective date of the Arethusa Merger. If the
Arethusa Merger had been effective as of January 1, 1996, revenues for the nine
months ended September 30, 1996 would have increased on an unaudited pro forma
basis to $480.6 million and net income and net income per share would have
changed on an unaudited pro forma basis to $97.3 million and $0.72,
respectively. The pro forma information is not necessarily indicative of the
results of operations had the transaction been effected on the assumed date or
the results of operations for any future periods.
9. COMMITMENTS AND CONTINGENCIES
The survivors of a deceased employee of a subsidiary of the Company,
Diamond M Onshore, Inc., have sued such subsidiary in Duval County, Texas, for
damages as a result of the death of the employee. The plaintiffs have obtained a
judgment in the trial court for $15.7 million plus post-judgment interest. The
Company is vigorously prosecuting an appeal of the judgment. The Company has
received notices from certain of its insurance underwriters reserving their
rights to deny coverage on the Company's insurance policies in excess of $2.0
million for damages resulting from such lawsuit. Management believes that the
Company has complied with all conditions of coverage for final unappealable
damages, if any, in the case. While the ultimate liability in this matter is
difficult to assess, it is management's belief that the final outcome is not
reasonably likely to have a material adverse effect on the Company's
consolidated financial position. The Company has not established a liability for
such claim at this time.
A former subsidiary of Arethusa, which is now a subsidiary of the Company,
is defending and indemnifying Zapata Off-Shore Company and Zapata Corporation
(the "Zapata Defendants"), pursuant to a contractual defense and indemnification
agreement, in a suit for tortious interference with contract and conspiracy to
tortiously interfere with contract. The plaintiffs seek $14.0 million in actual
damages and unspecified punitive damages, plus costs of court, interest and
attorney's fees. The Company believes the Zapata Defendants have adequate
defenses and intends to vigorously defend their position, thus no provision for
any liability has been made in the financial statements.
11
<PAGE> 12
Various other claims have been filed against the Company in the ordinary
course of business, particularly claims alleging personal injuries. Management
believes that the Company has established adequate reserves for any liabilities
that may reasonably be expected to result from these claims. In the opinion of
management, no pending or threatened claims, actions or proceedings against the
Company are expected to have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
10. SUBSEQUENT EVENT
In October 1997, the board of directors declared a cash dividend of $0.07
per common share payable on December 1, 1997 to shareholders of record as of
November 3, 1997.
12
<PAGE> 13
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
Business. The Company is a leader in deep water drilling with a fleet of 47
offshore drilling rigs. The fleet consists of 31 semisubmersibles (including an
accommodation vessel), 15 jack-ups and one drillship and operates in the waters
of six of the world's seven continents.
Merger with Arethusa (Off-Shore) Limited. Effective April 29, 1996, the
merger with Arethusa (Off-Shore) Limited ("Arethusa") was completed (the
"Arethusa 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 Arethusa Merger was
accounted for as a purchase for financial reporting purposes, results of
operations include those of Arethusa from the effective date of the Arethusa
Merger. See Note 8 to the Company's Consolidated Financial Statements.
13
<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior period have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.
During July 1997, March 1997, and September 1996, the Company completed its
major upgrades of the Ocean Clipper I, the Ocean Star, and the Ocean Quest,
respectively, expanding these rigs to have fourth-generation capabilities. Upon
completion, these rigs are included in Fourth-Generation Semisubmersibles for
discussion purposes (prior period information will continue to include these
rigs in Other Semisubmersibles).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------- INCREASE/
1997 1996 (DECREASE)
------------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles .......$ 54,270 $ 28,779 $ 25,491
Other Semisubmersibles ................... 145,516 99,263 46,253
Jack-ups ................................. 47,133 35,001 12,132
Integrated Services ...................... 9,645 8,702 943
Land ..................................... -- 5,838 (5,838)
Other .................................... 1,380 -- 1,380
Eliminations ............................. (7,447) (6,961) (486)
--------- --------- ---------
Total Revenues ...................$ 250,497 $ 170,622 $ 79,875
========= ========= =========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles .......$ 18,797 $ 9,000 $ 9,797
Other Semisubmersibles ................... 55,001 56,456 (1,455)
Jack-ups ................................. 23,998 25,573 (1,575)
Integrated Services ...................... 9,182 7,476 1,706
Land ..................................... -- 4,582 (4,582)
Other .................................... 947 (963) 1,910
Eliminations ............................. (8,018) (7,769) (249)
--------- --------- ---------
Total Contract Drilling Expense...$ 99,907 $ 94,355 $ 5,552
========= ========= =========
OPERATING INCOME
Fourth-Generation Semisubmersibles .......$ 35,473 $ 19,779 $ 15,694
Other Semisubmersibles ................... 90,515 42,807 47,708
Jack-ups ................................. 23,135 9,428 13,707
Integrated Services ...................... 463 1,226 (763)
Land ..................................... -- 1,256 (1,256)
Other .................................... 433 963 (530)
Eliminations ............................. 571 808 (237)
Depreciation and Amortization Expense .... (28,546) (21,597) (6,949)
General and Administrative Expense ....... (5,045) (4,109) (936)
Gain on Sale of Assets ................... 14 6,959 (6,945)
--------- --------- ---------
Total Operating Income ...........$ 117,013 $ 57,520 $ 59,493
========= ========= =========
</TABLE>
Revenues. The $25.5 million increase in revenues from fourth-generation
rigs resulted primarily from $19.0 million in revenues generated during the
three months ended September 30, 1997 by the Ocean Clipper I, the Ocean Star,
and the Ocean Quest upon completion of their upgrade projects in July 1997,
March 1997, and September 1996, respectively. However, utilization on the Ocean
Clipper I was less than expected during the quarter ended September 30, 1997 due
to subsea system equipment difficulties. Dayrate improvements in the Gulf
14
<PAGE> 15
of Mexico and the North Sea for the fourth-generation rigs generated $7.1
million of additional revenues. The $46.3 million increase in revenues from
other semisubmersibles resulted primarily from $43.8 million in additional
revenues from increased dayrates. The $12.1 million increase in revenues from
jack-ups resulted primarily from $13.9 million in revenues contributed by
increased operating dayrates. Revenues from integrated services for the three
months ended September 30, 1997 were relatively unchanged from the comparable
period of the prior year. The $5.8 million decrease in revenues from land
operations resulted from the sale of the Company's land division in December
1996. The $1.4 million of revenues from other operations for the three months
ended September 30, 1997 resulted from bareboat charter fees earned by the
Polyconfidence, an accommodation vessel purchased in May 1997. See " - Capital
Resources."
Contract Drilling Expense. The $9.8 million increase in contract drilling
expense for fourth-generation rigs resulted primarily from operating costs
generated by the Ocean Clipper I, the Ocean Star, and the Ocean Quest during the
three months ended September 30, 1997 upon completion of their upgrade projects
in July 1997, March 1997, and September 1996, respectively. The $1.5 million
decrease in contract drilling expense for other semisubmersibles resulted
primarily from increased costs during the comparable period of the prior year
associated with a special survey and shipyard repairs performed on the Ocean
Rover. In addition, the completion of work for the Company by the Ocean Zephyr
during the three months ended September 30, 1997 pending sale of the rig
resulted in a reduction in contract drilling expense. Partially offsetting these
decreases were (i) increased operating costs incurred during 1997 in connection
with the reactivation of the Ocean Century to work in the Gulf of Mexico and
(ii) normal operating costs incurred on the Ocean Winner in 1997 as compared to
reduced operating costs in 1996 while in the shipyard for a major modification.
The $1.6 million decrease in contract drilling expense for jack-ups resulted
primarily from the termination of operations of a rig operated under a bareboat
charter in 1996 and from increased expenses during the quarter ended September
30, 1996 associated with the write-off of rebillable items deemed uncollectible.
Partially offsetting these decreases were increased costs during the quarter
ended September 30, 1997 associated with (i) a special survey and associated
maintenance on the Ocean Crusader and (ii) operating expenses incurred on the
Ocean Titan while in the shipyard for leg reinforcement modifications. The $1.7
million increase in expense from integrated services resulted primarily from
increased intercompany rates charged for rigs utilized in project management
services (offset in eliminations) and from credits recognized during the third
quarter of 1996 for collections from an insurance claim previously expensed. The
$4.6 million decrease in expenses from land operations resulted from the sale of
the Company's land division in December 1996. The $1.9 million increase in other
contract drilling expense is primarily due to credits recognized during the
comparable period of the prior year which resulted from the collection of a
settlement associated with a lawsuit. In addition, expenses incurred during the
three months ended September 30, 1997 associated with crew training programs for
new employees resulted in increased contract drilling expense as compared to the
prior year.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the three months ended September 30, 1997 of $28.5 million increased
$6.9 million from $21.6 million due to additional expense for (i) the Ocean
Clipper I, the Ocean Star, and the Ocean Quest which completed their upgrades in
July 1997, March 1997, and September 1996, respectively, (ii) capital
expenditures associated with the Company's continuing rig enhancement program,
and (iii) the Polyconfidence which was acquired in May 1997. See " - Capital
Resources."
General and Administrative Expense. General and administrative expense for
the three months ended September 30, 1997 of $5.0 million increased $0.9 million
from $4.1 million for the three months ended September 30, 1996 primarily due to
increased accruals for the Company's bonus and retention plan. The increased
accruals resulted from a higher estimated bonus pool for the 1997 performance
year and for additional participants in the plan. In addition, general and
administrative expense capitalized to major upgrades decreased to $0.1 million
for the three months ended September 30, 1997 from $0.3 million for the three
months ended September 30, 1996.
Gain on Sale of Assets. Gain on sale of assets for the quarter ended
September 30, 1997 resulted primarily from sales of miscellaneous equipment. For
the quarter ended September 30, 1996, gain on sale of assets resulted primarily
from the sale of the Ocean Conquest, a shallow water jack-up drilling rig. See
Note 4 to the Company's Consolidated Financial Statements included in Item 1 of
this Report.
Interest Income. Interest income of $5.2 million for the three months ended
September 30, 1997 consists primarily of the accretion of discounts and interest
earned on investment securities purchased in 1997.
15
<PAGE> 16
Interest Expense. Interest expense of $3.6 million for the three months
ended September 30, 1997 consists primarily of $3.9 million interest on $400.0
million of convertible subordinated notes issued in February 1997 (the "Notes"),
partially offset by $0.4 million interest capitalized to major upgrades.
Income Tax Expense. Income tax expense of $41.5 million for the three
months ended September 30, 1997 increased $22.1 million from $19.4 million for
the three months ended September 30, 1996. This increase resulted primarily from
the $61.4 million increase in income before income tax expense as compared to
the three months ended September 30, 1996. In addition, the Company changed its
practice, beginning in 1997, to accrue U.S. taxes on all undistributed non-U.S.
earnings. See Note 1 to the Company's Consolidated Financial Statements included
in Item 1 of this Report.
16
<PAGE> 17
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior period have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.
During July 1997, March 1997, and September 1996, the Company completed its
major upgrades of the Ocean Clipper I, the Ocean Star, and the Ocean Quest,
respectively, expanding these rigs to have fourth-generation capabilities. Upon
completion, these rigs are included in Fourth-Generation Semisubmersibles for
discussion purposes (prior period information will continue to include these
rigs in Other Semisubmersibles).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------- INCREASE/
1997 1996 (DECREASE)
--------- -------- - ---------
(in thousands)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles ... $ 146,127 $ 76,622 $ 69,505
Other Semisubmersibles ............... 393,265 237,206 156,059
Jack-ups ............................. 137,511 83,235 54,276
Integrated Services .................. 15,241 27,219 (11,978)
Land ................................. -- 16,380 (16,380)
Other ................................ 2,062 -- 2,062
Eliminations ......................... (10,442) (16,189) 5,747
--------- --------- ---------
Total Revenues .............. $ 683,764 $ 424,473 $ 259,291
========= ========= =========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles ... $ 44,349 $ 25,860 $ 18,489
Other Semisubmersibles ............... 167,142 137,311 29,831
Jack-ups ............................. 69,971 59,040 10,931
Integrated Services .................. 14,858 25,533 (10,675)
Land ................................. -- 13,748 (13,748)
Other ................................ 3,133 (1,174) 4,307
Eliminations ......................... (11,586) (18,209) 6,623
--------- --------- ---------
Total Contract Drilling Expense .. $ 287,867 $ 242,109 $ 45,758
========= ========= =========
OPERATING INCOME
Fourth-Generation Semisubmersibles ... $ 101,778 $ 50,762 $ 51,016
Other Semisubmersibles ............... 226,123 99,895 126,228
Jack-ups ............................. 67,540 24,195 43,345
Integrated Services .................. 383 1,686 (1,303)
Land ................................. -- 2,632 (2,632)
Other ................................ (1,071) 1,174 (2,245)
Eliminations ......................... 1,144 2,020 (876)
Depreciation and Amortization
Expense............................. (81,588) (52,062) (29,526)
General and Administrative Expense.... (14,845) (10,661) (4,184)
Gain on Sale of Assets ............... 84 10,189 (10,105)
--------- --------- ---------
Total Operating Income ...... $ 299,548 $ 129,830 $ 169,718
========= ========= =========
</TABLE>
Revenues. The $69.5 million increase in revenues from fourth-generation
semisubmersibles resulted primarily from $43.7 million in revenues generated
during the nine months ended September 30, 1997 by the Ocean Clipper I, the
Ocean Star, and the Ocean Quest upon completion of their upgrade projects in
July 1997, March 1997, and September 1996, respectively. However, utilization on
the Ocean Clipper I was less than expected during the nine months ended
September 30, 1997 due to subsea system equipment difficulties. Improvements in
dayrates in the Gulf of Mexico and the North Sea contributed $23.2 million of
additional revenue and increased utilization in the North Sea contributed $3.2
million of additional revenue. The $156.1 million increase in revenues from
other semisubmersibles resulted, in part, from $60.5 million of additional
revenues from increased utilization
17
<PAGE> 18
during the nine months ended September 30, 1997 for the eight other
semisubmersibles acquired in the Arethusa Merger. This increase was primarily
due to the inclusion of operating results for these rigs for nine months in 1997
as compared to the inclusion of only five months in 1996. Also, during 1997,
improvements in dayrates for other semisubmersibles resulted in $84.6 million of
additional revenue. Improved utilization from several rigs that were idle in
early 1996 due to mobilizations and repairs necessary for new contracts or
locations contributed an additional $10.9 million of revenue as compared to the
nine months ended September 30, 1996. The $54.3 million increase in revenues
from jack-ups resulted primarily from $42.8 million of revenue contributed by
improvements in dayrates. In addition, the inclusion of operating results for
the jack-up rigs acquired in the Arethusa Merger for nine months in 1997 as
compared to the inclusion of only five months in 1996 resulted in $13.0 million
of additional revenue. The $12.0 million decrease in revenues from integrated
services was primarily due to turnkey projects and project management services
of greater magnitude completed during the nine months ended September 30, 1996.
The $16.4 million decrease in revenues from land operations resulted from the
sale of the Company's land division in December 1996. The $2.1 million of
revenues from other operations for the nine months ended September 30, 1997
resulted from bareboat charter fees for the Polyconfidence, an accommodation
vessel purchased in May 1997. See " - Capital Resources."
Contract Drilling Expense. The $18.5 million increase in contract drilling
expense for fourth-generation semisubmersibles was primarily due to $15.6
million of operating expenses generated by the Ocean Clipper I, the Ocean Star,
and the Ocean Quest upon completion of their upgrade projects in July 1997,
March 1997, and September 1996, respectively. The $29.8 million increase in
contract drilling expense for other semisubmersibles resulted primarily from
$31.2 million of additional costs generated by the other semisubmersibles rigs
acquired in the Arethusa Merger. These additional costs were primarily due to
the inclusion of operating results for these rigs for nine months in 1997 as
compared to the inclusion of only five months in 1996. In addition, an
inspection and associated repairs on the Ocean Saratoga in early 1997 and higher
operating costs incurred in connection with the reactivation of the Ocean
Century to work in the Gulf of Mexico resulted in increased expenses as compared
to 1996. Partially offsetting these increases was a decrease of approximately
$4.3 million due to the reclassification of operations for the Ocean Clipper I
to fourth-generation semisubmersibles upon completion of its upgrade in July
1997. The $10.9 million increase in jack-up expense resulted primarily from
additional costs generated by the jack-up rigs acquired in the Arethusa Merger.
The $10.7 million decrease in integrated services expense resulted from turnkey
projects and project management services of greater magnitude completed during
the nine months ended September 30, 1996. The $13.7 million decrease in expense
from land operations resulted from the sale of the Company's land division in
December 1996. The $4.3 million increase in other contract drilling expense is
primarily due to expenses incurred during the nine months ended September 30,
1997 associated with crew training programs for new employees. In addition,
other expense was reduced during the comparable period of the prior year due to
credits which resulted from the collection of a settlement associated with a
lawsuit.
Depreciation and Amortization Expense. Depreciation and amortization
expense of $81.6 million for the nine months ended September 30, 1997 increased
due to additional expense for (i) the eleven rigs acquired in the Arethusa
Merger, (ii) goodwill amortization expense associated with the Arethusa Merger,
(iii) the Ocean Clipper I, the Ocean Star, and the Ocean Quest which completed
their upgrades in July 1997, March 1997, and September 1996, respectively, (iv)
capital expenditures associated with the Company's continuing rig enhancement
program, and (v) the Polyconfidence which was acquired in May 1997. See " -
Capital Resources."
General and Administrative Expense. General and administrative expense of
$14.8 million for the nine months ended September 30, 1997 increased $4.1
million from $10.7 million for the nine months ended September 30, 1996
primarily due to additional overhead resulting from the Arethusa Merger and
increased accruals for the Company's bonus and retention plan. The increased
accruals resulted from a higher estimated bonus pool for the 1997 performance
year and for additional participants in the plan.
Gain on Sale of Assets. Gain on sale of assets for the nine months ended
September 30, 1997 resulted primarily from sales of miscellaneous equipment. For
the nine months ended September 30, 1996, gain on sale of assets resulted
primarily from the sale of two of the Company's shallow water jack-up drilling
rigs, the Ocean Magallanes and the Ocean Conquest. See Note 4 to the Company's
Consolidated Financial Statements included in Item 1 of this Report.
18
<PAGE> 19
Interest Income. Interest income of $13.6 million for the nine months ended
September 30, 1997 consists primarily of the accretion of discounts and interest
earned on investment securities purchased in 1997.
Interest Expense. Interest expense of $6.9 million for the nine months
ended September 30, 1997 consists primarily of $10.7 million interest on the
Notes, partially offset by $3.8 million interest capitalized to major upgrades.
Income Tax Expense. Income tax expense for the nine months ended September
30, 1997 was $107.4 million as compared to $40.6 million for the comparable
period of the prior year. This change resulted primarily from the increase of
$175.9 million in the Company's income before income tax expense. In addition,
the Company changed its practice beginning in 1997 to accrue U.S. taxes on all
undistributed non-U.S. earnings. See Note 1 to the Company's Consolidated
Financial Statements in Item 1 of this Report.
OUTLOOK
The Company continues to benefit from increased demand and from the recent
tight supply of major offshore drilling rigs worldwide. These conditions are
due, in part, to technological advances which have improved oil and gas
exploration and development economics. To address the current tight supply
situation, customers continue to seek to contract rigs for longer terms and
often will pay for upgrades and modifications necessary for more challenging
drilling locations in order to assure rig availability. The Company seeks to
have a foundation of long-term contracts with a reasonable balance of short-term
or well-to-well contracts to minimize risk while participating in the benefit of
increasing dayrates in a rising market.
The Company continues to enhance its fleet to meet customer demand for
diverse drilling capabilities. The Ocean Clipper I recently began a four-year
contract in the deep water market of the Gulf of Mexico following its upgrade
project. Utilization of the Ocean Clipper I, however, was less than expected due
to subsea system equipment difficulties. The Company expects improvements in
utilization in the fourth quarter of 1997 for the drillship following the
completion of necessary modifications. The Ocean Victory is completing
its upgrade project in connection with a three-year deep water drilling program
anticipated to begin during the fourth quarter of 1997. In addition, the Company
expects to begin the conversion of the Polyconfidence, a semisubmersible
accommodation vessel, in early 1998 in connection with a five-year commitment in
the Gulf of Mexico anticipated to begin in late 1999.
The improved opportunities for the offshore contract drilling industry
worldwide have resulted in increased demand for and a shortage of experienced
personnel and equipment, including drill pipe and riser, necessary on offshore
drilling rigs. The Company does not consider the shortage of such personnel and
equipment currently to be a material factor in its business. However, because
the demand for oil field services is increasing rapidly, a significant increase
in costs, including compensation and training, is likely to occur if present
trends continue for an extended period.
In addition, the recent improvement in the current results of operations
and prospects for the offshore contract drilling industry as a whole has led to
increased rig construction and enhancement programs by the Company's
competitors. A significant increase in the supply of technologically advanced
rigs capable of drilling in deep water may have an adverse effect on the average
operating dayrates for the Company's rigs, particularly its more advanced
semisubmersible units, and on the overall utilization of the Company's fleet. In
such case, the Company's results of operations would be adversely affected.
The offshore contract drilling industry historically has been highly
competitive and cyclical, and the Company cannot predict the extent to which
current conditions will continue. The Company's ability to maintain the recent
favorable trends will be largely dependent on the condition of the oil and gas
industry and, specifically, the exploration and production expenditures of oil
and gas companies.
LIQUIDITY
At September 30, 1997, cash and short-term investment securities totaled
$383.2 million, up from $28.2 million at December 31, 1996. Cash provided by
operating activities for the nine months ended September 30, 1997
19
<PAGE> 20
increased by $90.9 million to $243.7 million, from $152.8 million for the
comparable period of the prior year. This increase in operating cash flow was
primarily attributable to a $109.1 million increase in net income for the first
nine months of 1997 and a $29.5 million increase in depreciation and
amortization primarily resulting from the Arethusa Merger and completion of
upgrade projects.
Investing activities used $595.1 million in cash during the nine months
ended September 30, 1997, compared to $139.9 million during the comparable
period of 1996. During the nine months ended September 30, 1997, the Company
purchased the Polyconfidence, a semisubmersible accommodation vessel working in
the U.K. sector of the North Sea, for approximately $81.0 million in cash. See "
- - Capital Resources." In addition, the Company purchased U.S. Treasury bills and
U.S. Treasury notes with a portion of the proceeds from the sale of the Notes,
resulting in an increase in cash used in investing activities. Capital
expenditures also increased substantially during the nine months ended September
30, 1997, as the Company continued to invest in major upgrades of its existing
fleet.
Cash provided by financing activities for the nine months ended September
30, 1997 increased $404.2 million to $394.1 million, as compared to $10.1
million of cash used in financing activities for the comparable period of 1996.
Sources of financing during 1997 consisted primarily of the Company's issuance
of the Notes, which resulted in net proceeds of approximately $393.9 million.
The Notes, issued in February 1997, have a stated and effective interest rate of
3.75 percent and 3.93 percent, respectively, and are due February 15, 2007. The
Notes are convertible, in whole or in part, at the option of the holder at any
time prior to the close of business on the business day immediately preceding
the maturity date into shares of the Company's common stock, at a conversion
price of $40.50 per share. The Notes are redeemable, in whole or, from time to
time, in part, at the option of the Company, at any time on or after February
22, 2001, at specified redemption prices. Also, in April 1997, the Company
completed a public offering of 1.25 million shares of common stock generating
net proceeds of approximately $82.3 million. Financing applications of cash
during the nine months ended September 30, 1997 included repayment of amounts
outstanding under the Company's short and long-term credit arrangements and the
payment of a cash dividend to stockholders.
In August 1997, the Company terminated its revolving line of credit which
provided a maximum credit commitment of $200.0 million. However, the Company has
available uncommitted lines of credit for short-term financing aggregating $30.0
million from two U.S. banks. These arrangements provide for borrowing at various
interest rates and may be used on such terms as the Company and the banks
mutually agree. The Company also maintains the ability to issue an aggregate of
approximately $117.5 million in debt, equity and other securities under a
Securities and Exchange Commission shelf registration statement. In addition,
the Company may issue, from time to time, up to four million shares of its
common stock, which shares are registered under a shelf registration statement,
in connection with one or more acquisitions by the Company of securities or
assets of other businesses.
The Company believes that it has the financial resources necessary to meet
its business requirements in the foreseeable future, including capital
expenditures for major upgrades and continuing rig enhancements, and working
capital 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. The Company expects to spend approximately $189.2 million during 1997
for rig upgrades, including approximately $162.5 million for expenditures in
conjunction with the upgrades of the Ocean Clipper I, the Ocean Star, and the
Ocean Victory for deep water drilling in the Gulf of Mexico. The Company
expended $152.4 million on these projects during the nine months ended September
30, 1997. In addition, the Company expects to spend approximately $25.0 million
for a cantilever conversion project on the Company's jack-up rig, the Ocean
Warwick, and approximately $15.0 million for leg strengthening and other
modifications to the Company's jack-up rig, the Ocean Tower. Approximately $3.7
million and $1.0 million have been expended through September 30, 1997 on these
projects for the Ocean Warwick and the Ocean Tower, respectively. The Company
expects to evaluate other projects as opportunities arise.
In addition, the Company has budgeted $70.7 million for 1997 capital
expenditures associated with its continuing rig enhancement program, spare
equipment, and other corporate requirements. During the first nine
20
<PAGE> 21
months of 1997, $53.0 million was expended on this program.
It is management's opinion that significant improvements in operating cash
flow resulting from current conditions of improved dayrates and the increasing
number of term contracts for rigs in certain markets, in conjunction with
proceeds from the Notes, will be sufficient to meet these capital requirements.
In May 1997, the Company acquired the Polyconfidence, a semisubmersible
accommodation vessel working in the U.K. sector of the North Sea. The Company's
cost to acquire the vessel was approximately $81.0 million in cash. See " -
Liquidity." The Polyconfidence was constructed in 1987 and has Class III dynamic
positioning capabilities. The Company recently entered into a letter of intent
with a major oil company for a five-year commitment in the Gulf of Mexico,
following conversion of the vessel to a drilling unit capable of operating in
harsh environments and ultra-deep water. The Company's preliminary estimate of
conversion cost is approximately $190.0 million. The Polyconfidence would begin
this conversion at the conclusion of its present accommodation unit contract,
which is expected to occur in December 1997, with anticipated delivery in late
1999. The Company expects to finance the conversion of the Polyconfidence
through the use of cash on hand or internally generated funds.
The Company is continually considering potential transactions, including,
but not limited to, enhancement of existing rigs, the purchase of additional
rigs, construction of new rigs and the acquisition of other companies engaged in
contract drilling. Certain of the potential transactions reviewed by the Company
would, if completed, result in its entering new lines of business, although, in
general, these opportunities have been related in some manner to the Company's
existing operations. For example, the Company has explored the possibility of
acquiring certain floating production systems, crew accommodation units similar
to the Polyconfidence, oil service companies providing subsea products,
technology and services, oil and gas exploration companies, and shipping assets
such as oil tankers, through the acquisition of existing businesses or assets or
new construction. Although the Company does not, as of the date hereof, have a
pending commitment with respect to any material business opportunity, it could
enter into such an agreement in the future. Some of the potential acquisitions
considered by the Company could, if completed, result in the expenditure of a
material amount of funds or the issuance of a material amount of debt or equity
securities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The statement provides
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments to be
reported in interim financial statements. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997, with restatement of prior years'
comparative information required.
Also in June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting comprehensive income
and its components and requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. The statement is effective for fiscal years beginning after
December 15, 1997, with reclassification of prior years' comparative information
required.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," and SFAS No. 128, "Earnings per Share." SFAS No. 129
establishes standards for disclosing information about an entity's capital
structure and SFAS No. 128 requires dual presentation of basic and diluted
earnings per share for entities with complex capital structures. Basic earnings
per share excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Both statements are effective for financial statements for
both interim and annual periods ending after December 15, 1997. All prior period
earnings per share data presented after the effective date must be restated to
conform to these provisions.
21
<PAGE> 22
The Company does not expect the adoption of these statements to have a
material effect on its financial position or results of operations.
FORWARD-LOOKING INFORMATION
When included in this Report, the words "expects," "intends," "plans,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, industry fleet capacity, changes in
foreign and domestic oil and gas exploration and production activity,
competition, changes in foreign, political, social and economic conditions,
regulatory initiatives and compliance with government regulations, customer
preferences and various other matters, many of which are beyond the Company's
control. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the 334th
Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs have sued Zapata Off-Shore Company and Zapata Corporation (the
"Zapata Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract. Plaintiffs seek $14.0 million in actual
damages and unspecified punitive damages, plus costs of court, interest and
attorney's fees. A former subsidiary of Arethusa, which is now a subsidiary of
the Company, is defending and indemnifying the Zapata Defendants pursuant to a
contractual defense and indemnification agreement. The Company believes the
Zapata Defendants have adequate defenses and intends to vigorously defend their
position.
The Company and its subsidiaries are named defendants in certain other
lawsuits and are involved from time to time as parties to governmental
proceedings, all arising in the ordinary course of business. For a description
of one such lawsuit, see Note 9 to the Company's Consolidated Financial
Statements in Part I of this Report. Although the outcome of lawsuits or other
proceedings involving the Company and its subsidiaries cannot be predicted with
certainty and the amount of any liability that could arise with respect to such
lawsuits or other proceedings cannot be predicted accurately, management does
not expect these matters to have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
23
<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits for a list of those exhibits filed herewith.
(b) The Company filed the following reports on Form 8-K during the third
quarter of 1997:
Description of Event
--------------------
Date of Report Board of Directors declaration of a two-for-one
July 14, 1997 stock split in the form of a stock dividend and
a quarterly cash dividend of $0.07 per common
share payable on August 7, 1997 to shareholders
of record July 24, 1997.
September 19, 1997 The Company's entry into (i) an Underwriting
Agreement with Loews Corporation ("Loews") and
Goldman, Sachs & Co. in connection with the sale
by Loews of its 3-1/8% Exchangeable Subordinated
Notes due September 15, 2007, which are
exchangeable into shares of the Company's common
stock, pursuant to an underwritten offering and
(ii) a related Registration Rights Agreement
Amendment, amending the Registration Rights
Agreement, dated as of October 16, 1995, between
the Company and Loews.
24
<PAGE> 25
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 28-Oct-1997 By: /s/ Lawrence R. Dickerson
--------------------- ----------------------------------------
Lawrence R. Dickerson
Senior Vice President and Chief
Financial Officer
Date 28-Oct-1997 /s/ Gary T. Krenek
--------------------- ----------------------------------------
Gary T. Krenek
Controller and Chief Accounting Officer
25
<PAGE> 26
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
3.2 By-laws of the Company, as amended (incorporated by reference
to Exhibits 3.2, 3.2.1 and 3.2.2 of the Company's Registration
Statement No. 333-2680 on Forms S-4/S-1).
4.1 Indenture, dated as of February 4, 1997, between the Company
and The Chase Manhattan Bank, as Trustee (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form
8-K filed February 11, 1997).
4.2 Supplemental Indenture, dated as of February 4, 1997, between
the Company and The Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K filed February 11, 1997).
11.1* Statement Re Computation of Per Share Earnings.
27.1* Financial Data Schedule.
</TABLE>
- ----------------------
* Filed herewith.
26
<PAGE> 1
EXHIBIT 11.1
DIAMOND OFFSHORE DRILLING, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
----------------------------------- ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES (1) PER SHARE INCOME SHARES(1) PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income...................................... $ 77,831 139,303 $199,295 138,308
Issuance of convertible notes 2/4/97 (2)........ 2,306 9,876 4,418 8,610
------------------------------- ------------------------------------
Net income per common and common
equivalent share ........................ $ 80,137 149,179 $ 0.54 $203,713 146,918 $ 1.39
=============================== ====================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------------------------ -----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES (1) PER SHARE INCOME SHARES(1) PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income................................... $ 38,480 136,563 $ 90,234 120,358
----------------------------------- ----------------------------------
Net income per common and common
equivalent share ..................... $ 38,480 136,563 $ 0.28 $ 90,234 120,358 $ 0.75
=================================== ==================================
</TABLE>
(1) The weighted average shares reflect the retroactive effect of the
two-for-one stock split in the form of a stock dividend to stockholders of
record on July 24, 1997.
(2) On February 4, 1997, the Company issued $400.0 million of 3.75 percent
convertible subordinated notes due February 15, 2007. The notes are convertible
into approximately 9.8 million shares of the Company's common stock at any time
prior to February 15, 2007 at a conversion price of $40.50 per share. The number
of shares outstanding for the three and nine months ended September 30, 1997 was
increased to include the weighted average number of shares issuable assuming
full conversion of the notes on February 4, 1997 and net income was adjusted to
eliminate the after-tax effect of interest expense on these notes.
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 70,860
<SECURITIES> 312,305
<RECEIVABLES> 217,236
<ALLOWANCES> 0
<INVENTORY> 32,314
<CURRENT-ASSETS> 654,435
<PP&E> 1,764,091
<DEPRECIATION> (349,381)
<TOTAL-ASSETS> 2,201,527
<CURRENT-LIABILITIES> 113,123
<BONDS> 400,000
0
0
<COMMON> 1,393
<OTHER-SE> 1,464,198
<TOTAL-LIABILITY-AND-EQUITY> 2,201,527
<SALES> 0
<TOTAL-REVENUES> 683,764
<CGS> 0
<TOTAL-COSTS> 287,867<F1>
<OTHER-EXPENSES> 96,349<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,940)
<INCOME-PRETAX> 306,741
<INCOME-TAX> (107,446)
<INCOME-CONTINUING> 199,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 199,295
<EPS-PRIMARY> 1.39<F3>
<EPS-DILUTED> 1.39<F3>
<FN>
<F1> Includes contract drilling expenses only.
<F2> Includes other operating expenses.
<F3> Per share amounts reflect the retroactive effect of the two-for-one stock
split in the form of a stock dividend to stockholders of record on July 24,
1997.
</FN>
</TABLE>
