<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 March 31, 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.
<TABLE>
<S> <C> <C>
As of April 18, 1997 Common stock, $.01 par value per share 69,645,368 shares
</TABLE>
<PAGE> 2
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED MARCH 31, 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.....................................................11
PART II. OTHER INFORMATION......................................................................17
ITEM 1. LEGAL PROCEEDINGS..............................................................17
ITEM 2. CHANGES IN SECURITIES..........................................................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................17
ITEM 5. OTHER INFORMATION..............................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................17
SIGNATURES.......................................................................................18
INDEX OF EXHIBITS................................................................................19
</TABLE>
2
<PAGE> 3
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>
MARCH 31, DECEMBER 31,
--------------- ---------------
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 39,258 $ 28,180
Investment securities .......................................................... 213,465 --
Accounts receivable ............................................................ 180,318 172,214
Rig inventory and supplies ..................................................... 30,754 30,407
Prepaid expenses and other ..................................................... 16,873 12,166
--------------- ---------------
Total current assets ......................................... 480,668 242,967
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION ....................................................... 1,247,561 1,198,160
LONG-TERM INVESTMENT SECURITIES ..................................................... 98,912 --
GOODWILL, LESS ACCUMULATED AMORTIZATION ............................................. 125,999 129,825
OTHER ASSETS ........................................................................ 10,619 3,548
--------------- ---------------
Total assets ................................................. $ 1,963,759 $ 1,574,500
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 55,187 $ 63,172
Accrued liabilities ............................................................ 34,600 28,451
Taxes payable .................................................................. 18,745 26,377
Short-term borrowings .......................................................... -- 10,000
--------------- ---------------
Total current liabilities .................................... 108,532 128,000
LONG-TERM DEBT ...................................................................... 400,000 63,000
DEFERRED TAX LIABILITY .............................................................. 188,149 176,296
OTHER LIABILITIES ................................................................... 16,494 12,472
--------------- ---------------
Total liabilities ............................................ 713,175 379,768
--------------- ---------------
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, 68,395,368
and 68,353,409 shares issued and outstanding at March 31, 1997 and
December 31, 1996, respectively) ........................................... 684 684
Additional paid-in capital ..................................................... 1,220,365 1,220,032
Retained earnings (accumulated deficit) ........................................ 31,174 (25,056)
Cumulative translation adjustment .............................................. (1,372) (928)
Unrealized loss on investment securities ....................................... (267) --
--------------- ---------------
Total stockholders' equity ................................... 1,250,584 1,194,732
--------------- ---------------
Total liabilities and stockholders' equity ................... $ 1,963,759 $ 1,574,500
=============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
REVENUES .......................................................... $ 204,733 $ 106,868
OPERATING EXPENSES:
Contract drilling.............................................. 89,739 66,157
Depreciation and amortization.................................. 25,812 12,069
General and administrative..................................... 4,941 3,103
Gain on sale of assets......................................... (65) (157)
-------------- --------------
Total operating expenses.................................. 120,427 81,172
-------------- --------------
OPERATING INCOME ..................................................... 84,306 25,696
OTHER INCOME (EXPENSE):
Interest income................................................ 2,893 256
Other, net..................................................... (185) 178
-------------- --------------
INCOME BEFORE INCOME TAX EXPENSE...................................... 87,014 26,130
INCOME TAX EXPENSE.................................................... (30,784) (7,398)
-------------- --------------
NET INCOME ........................................................... $ 56,230 $ 18,732
============== ==============
NET INCOME PER SHARE AND COMMON EQUIVALENT SHARE...................... $ 0.79 $ 0.37
============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
COMMON SHARES.................................................. 68,384 50,000
COMMON EQUIVALENT SHARES....................................... 3,018 --
-------------- --------------
ADJUSTED....................................................... 71,402 50,000
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................... $ 56,230 $ 18,732
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................... 25,812 12,069
Gain on sale of assets ..................................... (65) (157)
Deferred tax provision ..................................... 13,870 7,124
Amortization of investment securities....................... (2,331) (69)
Amortization of debt issuance costs......................... 72 52
Changes in operating assets and liabilities:
Accounts receivable ........................................ (7,887) (13,128)
Rig inventory and supplies and other current assets ........ (5,054) 2,339
Other assets, non-current .................................. (176) (2,583)
Accounts payable and accrued liabilities ................... (1,836) (2,716)
Taxes payable............................................... (7,632) 541
Other liabilities, non-current ............................. 2,520 1,740
Other, net.................................................... 129 (288)
----------------- ------------------
Net cash provided by operating activities ............... 73,652 23,656
----------------- ------------------
INVESTING ACTIVITIES:
Capital expenditures ......................................... (73,923) (43,757)
Proceeds from sales of assets ................................ 440 478
Net purchases of investment securities........................ (211,200) --
Purchases of long-term investment securities.................. (99,474) --
----------------- ------------------
Net cash used in investing activities ................... (384,157) (43,279)
----------------- ------------------
FINANCING ACTIVITIES:
Net (repayments) borrowings on revolving line of credit....... (63,000) 15,000
Net repayments on short-term borrowings....................... (10,000) --
Issuance of convertible subordinated notes.................... 400,000 --
Debt issuance costs .......................................... (5,750) (1,816)
Proceeds from stock options exercised......................... 333 --
----------------- ------------------
Net cash provided by financing activities ............... 321,583 13,184
----------------- ------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................... 11,078 (6,439)
Cash and cash equivalents, beginning of period ............... 28,180 10,306
----------------- ------------------
Cash and cash equivalents, end of period ..................... $ 39,258 $ 3,867
================= ==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
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 amortization of premiums and accretion
of discounts to maturity and such amortization 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
Cash payments made for interest on long-term debt, including commitment
fees, during the three months ended March 31, 1997 and 1996 totaled $524,000
and $37,000, respectively. Cash payments made for U.S. income taxes during the
three months ended March 31, 1997 totaled $23.6 million. No cash payments for
U.S. income taxes were made during the three months ended March 31, 1996. Cash
payments made for foreign income taxes during the three months ended March 31,
1997 and 1996 totaled $835,000 and $238,000, respectively.
Goodwill
Goodwill from the merger with Arethusa (Off-Shore) Limited ("Arethusa")
is amortized on a straight-line basis over 20 years.
6
<PAGE> 7
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.
Net Income Per Share
Net income per share and common equivalent share was computed by dividing
net income by the weighted number of shares of common stock and common stock
equivalents outstanding during the periods. 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
February 4, 1997, the issuance date, was added to the number of common shares.
There was no adjustment needed to eliminate the interest on these notes due to
the capitalization of interest cost (see Note 4). Fully diluted earnings per
share is not presented as there are no other contingent issuances of common
stock.
In February 1997, the Financial Accounting Standards Board ("FASB")
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. For the three months ended March 31, 1997 and 1996, pro forma
earnings per share amounts computed using SFAS No. 128 would have been $0.82
and $0.37, respectively, for basic earnings per share and $0.79 and $0.37,
respectively, for diluted earnings per share.
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
In April 1996, the Company acquired 100 percent of the stock of Arethusa
(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. The consideration consisted of the
following (in thousands):
<TABLE>
<S> <C>
Common stock issued to Arethusa shareholders.................. $ 539,305
Arethusa stock options assumed................................ 11,381
-------------
Total equity consideration............................... $ 550,686
=============
</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
of the Company's common stock at the time the Arethusa Merger was announced
(December 7, 1995). In addition to equity consideration, the Company incurred
approximately $16.9 million of acquisition costs associated with the Arethusa
Merger.
7
<PAGE> 8
The Arethusa Merger was accounted for as a purchase. The purchase price
included, at estimated fair value, current assets of $67.2 million, drilling
and other property and equipment of $505.5 million, and the assumption of
current liabilities of $19.0 million, other net long-term liabilities of $2.2
million, and debt of $67.5 million. In addition, a deferred tax liability of
$66.8 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 $133.5 million, which has been accounted for as goodwill and is
being amortized over 20 years using the straight-line method (see Note 5).
3. INVESTMENT SECURITIES
Investment securities classified as available for sale at March 31, 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 . . . . . . . . . . . . . $ 213,523 $ (58) $213,465
Due after 1 year through 5 years:
Debt securities issued by the U.S.
Treasury . . . . . . . . . . . . . 99,265 (353) 98,912
--------------------------------------------
Total $ 312,788 $ (411) $312,377
============================================
</TABLE>
During the three months ended March 31, 1997, certain investment
securities were sold for proceeds of $99.8 million. The resulting realized loss
was not material.
4. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-----------------------------------------
1997 1996
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment . . . . . . . $ 1,427,618 $ 1,332,980
Construction work in progress. . . . . . . 95,232 116,770
Land and buildings . . . . . . . . . . . . 13,164 13,154
Office equipment and other . . . . . . . . 8,619 8,181
-----------------------------------------
Cost . . . . . . . . . . . . . . . . 1,544,633 1,471,085
Less accumulated depreciation . . . . . . (297,072) (272,925)
-----------------------------------------
Total. . . . . . . . . . . . . . $ 1,247,561 $ 1,198,160
=========================================
</TABLE>
For the three months ended March 31, 1997, the Company capitalized total
interest cost incurred of $2.8 million in construction work in progress with
respect to qualifying construction projects.
8
<PAGE> 9
5. GOODWILL
The Arethusa Merger generated an excess of the purchase price over the
estimated fair value of the net assets acquired. Cost and accumulated
amortization of such goodwill are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-----------------------------------------
1997 1996
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill . . . . . . . . . . . . . . $ 132,170 $ 134,331
Less accumulated amortization . . . (6,171) (4,506)
-----------------------------------------
Total . . . . . . . . . . $ 125,999 $ 129,825
=========================================
</TABLE>
During the three months ended March 31, 1997, an adjustment of
approximately $2.2 million was recorded to reduce goodwill before accumulated
amortization. This adjustment was primarily necessary to properly reflect the
fair value of the net assets acquired in the Arethusa Merger.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-----------------------------------------
1997 1996
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Personal injury and other claims. . . $ 20,217 $ 18,629
Payroll and benefits . . . . . . . . 8,648 8,336
Other . . . . . . . . . . . . . . . . 5,735 1,486
-----------------------------------------
Total . . . . . . . . . . . $ 34,600 $ 28,451
=========================================
</TABLE>
7. LONG-TERM DEBT
Convertible Subordinated Notes
On February 4, 1997, the Company issued $400.0 million, including $50.0
million from an over-allotment option, of 3 3/4 percent convertible
subordinated notes (the "Notes") 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, unless previously redeemed, into shares of the Company's common stock, at
a conversion price of $81 per share (equivalent to a conversion rate of 12.346
shares per $1,000 principal amount of Notes), subject to adjustment in certain
circumstances. Interest on the Notes is payable in cash semi-annually on each
February 15 and August 15, commencing on August 15, 1997. Upon conversion, any
accrued interest will be deemed paid by the appropriate portion of the common
stock received by the holder.
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.
9
<PAGE> 10
Credit Facility
The Company may borrow up to $200.0 million at various interest rates, at
the Company's option, under the terms of a revolving credit facility with a
group of banks (the "Credit Facility") available through December 2001. The
Credit Facility contains provisions regarding the maintenance of certain
consolidated financial ratios, certain indebtedness limitations, and
limitations on dividends and similar payments. As of March 31, 1997, the
Company was in compliance with each of these covenants. Commitment fees are
paid based on the unused available portion of the maximum credit commitment. No
amounts were outstanding under the Credit Facility at March 31, 1997.
In addition, 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 March 31, 1997.
8. 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. 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. The
Company has not established a liability for such claim at this time.
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 or results of operations.
9. SUBSEQUENT EVENT
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 Company expects to use the net proceeds to acquire the Polyconfidence, a
semisubmersible accommodation vessel, currently working in the U.K. sector of
the North Sea. The Company's cost to acquire the vessel is expected to be
approximately $81.0 million in cash.
10
<PAGE> 11
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
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 2 to the Company's Consolidated Financial Statements.
11
<PAGE> 12
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
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
and 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 September 1996 and March 1997, the Company completed its major
upgrades of the Ocean Quest and the Ocean Star, 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 the rigs in Other
Semisubmersibles). The Company's drillship, the Ocean Clipper I, is included in
Other Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------- INCREASE/
1997 1996 (DECREASE)
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles......... $ 42,643 $ 21,465 $ 21,178
Other Semisubmersibles .................... 116,833 52,995 63,838
Jack-ups .................................. 43,554 20,136 23,418
Turnkey ................................... 4,311 13,626 (9,315)
Land ...................................... -- 5,102 (5,102)
Eliminations .............................. (2,608) (6,456) 3,848
--------- --------- ---------
Total Revenues .................... $ 204,733 $ 106,868 $ 97,865
========= ========= =========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles......... $ 11,473 $ 7,898 $ 3,575
Other Semisubmersibles .................... 55,336 31,490 23,846
Jack-ups .................................. 21,260 14,927 6,333
Turnkey ................................... 4,259 14,128 (9,869)
Land ...................................... -- 4,772 (4,772)
Other ..................................... 361 102 259
Eliminations .............................. (2,950) (7,160) 4,210
--------- --------- ---------
Total Contract Drilling Expense.... $ 89,739 $ 66,157 $ 23,582
========= ========= =========
OPERATING INCOME
Fourth-Generation Semisubmersibles......... $ 31,170 $ 13,567 $ 17,603
Other Semisubmersibles .................... 61,497 21,505 39,992
Jack-ups .................................. 22,294 5,209 17,085
Turnkey ................................... 52 (502) 554
Land ...................................... -- 330 (330)
Other ..................................... (361) (102) (259)
Eliminations .............................. 342 704 (362)
Depreciation and Amortization Expense...... (25,812) (12,069) (13,743)
General and Administrative Expense......... (4,941) (3,103) (1,838)
Gain on Sale of Assets .................... 65 157 (92)
--------- --------- ---------
Total Operating Income ............ $ 84,306 $ 25,696 $ 58,610
========= ========= =========
</TABLE>
Revenues. The $21.2 million increase in revenues from
fourth-generation rigs resulted primarily from $9.2 million in revenues
generated during the three months ended March 31, 1997 by the Ocean Quest and
the Ocean Star upon completion of their upgrade projects in September 1996 and
March 1997, respectively, and $8.7 million generated during the three months
ended March 31, 1997 by increased operating dayrates in the Gulf of Mexico and
the North Sea. Also, improvements in utilization contributed approximately $3.2
million in revenues for the three months ended March 31, 1997. This increase in
utilization was primarily associated with shipyard
12
<PAGE> 13
repairs performed on the Ocean Alliance, which reduced the days worked during
the comparable period of the prior year. The $63.8 million increase in revenues
from other semisubmersibles resulted primarily from $37.5 million in revenues
generated during the three months ended March 31, 1997 by the eight
semisubmersibles acquired in the Arethusa Merger. Approximately $16.3 million
in additional revenues were generated from increased operating dayrates during
the three months ended March 31, 1997. Improvements in utilization contributed
approximately $10.0 million in revenues for the three months ended March 31,
1997, primarily due to a reduction in revenues in the first quarter of 1996
during the completion of modifications on the Ocean Princess and the Ocean
Baroness. The $23.4 million increase in revenues from jack-ups resulted
primarily from $12.8 million in revenues contributed by increased operating
dayrates, primarily in the Gulf of Mexico. In addition, $10.2 million in
revenues was generated during the three months ended March 31, 1997 by the four
jack-ups acquired in the Arethusa Merger. The $9.3 million decrease in revenues
from turnkey operations resulted from turnkey projects of greater magnitude
completed during the three months ended March 31, 1996, while revenues for the
three months ended March 31, 1997 consisted primarily of revenues from project
management services. The $5.1 million decrease in revenues from land operations
resulted from the sale of the Company's land division in December 1996.
Contract Drilling Expense. The $3.6 million increase in contract
drilling expense for fourth-generation rigs resulted primarily from operating
costs generated by the Ocean Quest and the Ocean Star during the three months
ended March 31, 1997 upon completion of their upgrade projects in September
1996 and March 1997, respectively. The $23.8 million increase in contract
drilling expense for other semisubmersibles resulted primarily from $18.4
million costs generated during the three months ended March 31, 1997 by the
rigs acquired in the Arethusa Merger. In addition, expenses for the three
months ended March 31, 1996 were reduced by the capitalization of costs
associated with modifications in progress on the Ocean Princess and the Ocean
Baroness. The $6.3 million increase in contract drilling expense for jack-ups
resulted from the four jack-ups acquired in the Arethusa Merger. The $9.9
million decrease in expenses from turnkey operations resulted from turnkey
projects of greater magnitude completed and cost overruns on one turnkey well
during the three months ended March 31, 1996. Expenses from turnkey operations
for the three months ended March 31, 1997 consisted primarily of costs
associated with project management services. The $4.8 million decrease in
expenses from land operations resulted from the sale of the Company's land
division in December 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the three months ended March 31, 1997 increased $13.7 million from
$12.1 million for the three months ended March 31, 1996 primarily due to
additional expense for (i) the eight semisubmersibles and three jack-up
drilling rigs acquired in the Arethusa Merger, (ii) goodwill amortization
expense associated with the Arethusa Merger, and (iii) the Ocean Quest and the
Ocean Star which completed their upgrades in September 1996 and March 1997,
respectively.
General and Administrative Expense. General and administrative expense
for the three months ended March 31, 1997 of $4.9 million increased $1.8
million from $3.1 million for the three months ended March 31, 1996 primarily
due to the Arethusa Merger. In addition, increased accruals during the three
months ended March 31, 1997 for the Company's bonus and retention plan
contributed to higher expenses. The increased accruals resulted from a higher
estimated bonus pool for the 1997 performance year and for additional
participants in the plan. Partially offsetting these increases was $0.3 million
of general and administrative expense capitalized to the major upgrades of the
Ocean Star, the Ocean Victory, and the Ocean Clipper I during the three months
ended March 31, 1997.
Interest Income. Interest income of $2.9 million for the three months
ended March 31, 1997 consisted primarily of the amortization of discounts and
interest earned on investment securities purchased in the first quarter of
1997.
Income Tax Expense. Income tax expense of $30.8 million for the three
months ended March 31, 1997 increased $23.4 million from $7.4 million for the
three months ended March 31, 1996. This increase resulted primarily from the
$60.9 million increase in income before income tax expense as compared to the
three months ended March 31, 1996.
13
<PAGE> 14
OUTLOOK
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.
The Company expects its current revenue and operating income trends to
continue in 1997, as worldwide deep water exploration continues to provide
opportunities for the Company's fleet. The Company's revenue growth, in part,
will be dependent on the condition of the oil and gas industry and,
specifically, the exploration and production expenditures of oil and gas
companies. The increasing impact of technological advances, including 3-D
seismic, horizontal drilling, and subsea completion procedures, has improved
demand and resulted in higher dayrates, especially in the deep water and harsh
environment markets. Customers increasingly are seeking to contract rigs for a
stated term (as opposed to contracts for the drilling of a single well or a
group of wells). As a result, more than 80 percent of the Company's estimated
1997 revenue is committed under existing contracts.
Also, the completion of three major upgrades and their associated
multi-year commitments are expected to provide additional revenue in 1997. In
March 1997, the Company completed the upgrade of the Ocean Star and the rig
began a three-year commitment. The rig, which had been cold stacked, now has
fourth-generation capabilities, including stability and other enhancements such
as water depth capabilities of up to 4,500 feet, increased variable deck load
of approximately 6,000 long tons, a top-drive drilling system, a 15,000 psi
blow-out prevention system, increased deck area, and additional mud pit and
tensioner capacity. The Company's drillship, the Ocean Clipper I, is currently
being upgraded to operate in the deep water market of the Gulf of Mexico with
dynamic positioning capabilities and is scheduled to be completed in mid-1997.
In addition, the Ocean Victory, previously cold stacked, is undergoing
modifications in connection with its three-year deep water drilling program
anticipated to begin during the fourth quarter of 1997.
However, historically, the offshore contract drilling industry has been
highly competitive and cyclical, and the Company cannot predict the extent to
which current conditions will continue. 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 and, if present trends
continue for an extended period, may lead to new entrants into the market. 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.
LIQUIDITY
As of March 31, 1997, total cash and short and long-term investment
securities totaled $351.6 million, up from $28.2 million at December 31, 1996.
Cash provided by operating activities for the three months ended March 31, 1997
increased by $50.0 million to $73.7 million, as compared to $23.7 million for
the comparable period of the prior year. This increase in operating cash flow
was primarily attributable to a $37.5 million increase in net income for the
first quarter of 1997 and a $13.7 million increase in depreciation and
amortization primarily resulting from the Arethusa Merger.
Investing activities used $384.2 million in cash during the three months
ended March 31, 1997, compared to $43.3 million during the comparable period of
1996. The Company purchased U.S. Treasury bills and U.S. Treasury notes with a
portion of the proceeds from the sale of $400.0 million convertible
subordinated notes (the
14
<PAGE> 15
"Notes") resulting in an increase in cash used in investing activities. In
addition, capital expenditures increased substantially during the three months
ended March 31, 1997, as the Company continued to invest in major upgrades of
its existing fleet.
Cash provided by financing activities for the three months ended March
31, 1997 increased $308.4 million to $321.6 million, as compared to $13.2
million 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 $394.3 million. The Notes, issued in February
1997, bear interest at 3 3/4 percent and are due February 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 $81
per share (equivalent to a conversion rate of 12.346 shares per $1,000
principal amount of Notes). Financing applications of cash during the three
months ended March 31, 1997 included repayment of amounts outstanding under the
Company's short and long-term credit arrangements.
Other sources of liquidity include the Company's revolving line of credit
for a five-year term providing a maximum credit commitment of $200.0 million
(the "Credit Facility"). In addition, the Company has 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 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 Company expects to use the net proceeds to acquire the Polyconfidence, a
semisubmersible accommodation vessel currently working in the U.K. sector of
the North Sea. The Company's cost to acquire the vessel is expected to be
approximately $81.0 million in cash. See " - Capital Resources."
The Company believes that it has the financial resources needed to meet
its business requirements in the foreseeable future, including capital
expenditures for major upgrades and continuing rig enhancements and for 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 $61.4 million on these projects during the three months ended
March 31, 1997. In addition, the Company expects to spend approximately $20.6
million for a cantilever conversion project on the Company's jack-up rig, the
Ocean Warwick, although only preliminary surveys and assessments related to
this project are in progress. 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 quarter of 1997,
$9.2 million was expended on this program.
In April 1997, the Company agreed to acquire the Polyconfidence, a
semisubmersible accommodation vessel currently working in the U.K. sector of
the North Sea. The Company's cost to acquire the vessel is expected to be
approximately $81.0 million in cash. See "- Liquidity." The Polyconfidence was
constructed in 1987 and has Class III dynamic positioning capabilities. The
Company is in discussions with several oil companies regarding conversion of
the Polyconfidence to a semisubmersible drilling unit with fourth- or
fifth-generation capabilities. Such a conversion would be dependent upon the
receipt of a term contract commitment at favorable dayrates. Although the
extent of the conversion would be dependent upon the particular demands of the
customer, the Company's preliminary estimate of conversion cost is
approximately $160.0 to $175.0 million. The Polyconfidence would begin its
conversion at the conclusion of its present accommodation unit contract, which
is
15
<PAGE> 16
estimated to occur no later than March 1998. Prior to expiration of this
contract, the Company will receive approximately $15,000 per day under a
bareboat charter of the vessel. The Company expects to finance the conversion
of the Polyconfidence through the use of cash on hand or internally generated
funds. There can be no assurance that the vessel can or will be upgraded to
fourth- or fifth- generation capability in a cost-effective manner, that if the
vessel is so upgraded there will be adequate demand for its services, or that
competitors will not achieve comparable capabilities through other means
attractive to customers.
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.
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 and oil service companies
providing subsea products, technology and services, and shipping assets such as
oil tankers, through the acquisition of existing businesses or assets or new
construction. As of the date hereof, except as described above, the Company has
no pending commitment with respect to any material business opportunity. There
can be no assurance that the Company will consummate the Polyconfidence
transaction, make other material acquisitions or investments or that, if made,
such acquisitions or investments will be successful.
16
<PAGE> 17
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 8 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. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits for a list of those exhibits filed herewith,
which index only includes those contracts executed or becoming effective during
the most recent period reflected in this Report pursuant to Instruction 2 to
Item 601(b)(10) of Regulation S-K.
(b) The Company filed the following reports on Form 8-K during the first
quarter of 1997:
<TABLE>
<CAPTION>
Date of Report Description of Event
-------------- --------------------
<S> <C>
January 29, 1997 Plan to offer $300.0 million of convertible subordinated notes
February 11, 1997 Sale of $400.0 million convertible subordinated notes
</TABLE>
17
<PAGE> 18
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-Apr-1997 By: \s\ Lawrence R. Dickerson
----------- -------------------------
Lawrence R. Dickerson
Senior Vice President and
Chief Financial Officer
Date 28-Apr-1997 \s\ Gary T. Krenek
----------- -------------------------
Gary T. Krenek
Controller and Principal
Accounting Officer
18
<PAGE> 19
INDEX OF EXHIBITS
Exhibit No. Description
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 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 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.
- ---------------
* Filed herewith.
19
<PAGE> 1
EXHIBIT 11.1
DIAMOND OFFSHORE DRILLING, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
-----------------------------------------
WEIGHTED
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR)) AMOUNT
----------- -------------- ------------
<S> <C> <C> <C>
Net income ....................................... $ 56,230 68,384
Issuance of convertible notes 2/4/97 (1) ......... -- 3,018
------------ ------------ ------------
Net income per share and common
equivalent share ............................ $ 56,230 71,402 $ 0.79
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
-----------------------------------------
WEIGHTED
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR)) AMOUNT
----------- -------------- ------------
<S> <C> <C> <C>
Net income ....................................... $ 18,732 50,000
------------ ------------ ------------
Net income per share and common
equivalent share ............................ $ 18,732 50,000 $ 0.37
============ ============ ============
</TABLE>
(1) On February 4, 1997, the Company issued $400.0 million of 3 3/4 percent
convertible subordinated notes due February 15, 2007. The notes are
convertible into approximately 4.9 million shares of the Company's common
stock at any time prior to February 15, 2007 at a conversion price of $81
per share. The number of shares outstanding for the three months ended
March 31, 1997 was increased to include the weighted average number of
shares issuable assuming full conversion of the notes on February 4, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 39,258
<SECURITIES> 213,465
<RECEIVABLES> 180,318
<ALLOWANCES> 0
<INVENTORY> 30,754
<CURRENT-ASSETS> 480,668
<PP&E> 1,544,633
<DEPRECIATION> 297,072
<TOTAL-ASSETS> 1,963,759
<CURRENT-LIABILITIES> 108,532
<BONDS> 400,000
0
0
<COMMON> 684
<OTHER-SE> 1,249,900
<TOTAL-LIABILITY-AND-EQUITY> 1,963,759
<SALES> 0
<TOTAL-REVENUES> 204,733
<CGS> 0
<TOTAL-COSTS> 89,739<F1>
<OTHER-EXPENSES> 30,688<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 87,014
<INCOME-TAX> 30,784
<INCOME-CONTINUING> 56,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,230
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
<FN>
<F1>Includes contract drilling expenses only.
<F2>Includes other operating expenses.
</FN>
</TABLE>
