Diamond Offshore Drilling (DODRW) 10-Q 27 Apr 10 2010 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information (USD $)
	3 Months Ended Mar. 31, 2010	Apr. 22, 2010	Jun. 30, 2009
Document and Entity Information [Abstract]
Entity Registrant Name	DIAMOND OFFSHORE DRILLING INC
Entity Central Index Key	0000949039
Document Type	10-Q
Document Period End Date	2010-03-31
Amendment Flag	false
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float			$5,694,071,609
Entity Common Stock, Shares Outstanding		139,026,178

Consolidated Balance Sheets (Un

Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands	3 Months Ended Mar. 31, 2010	12 Months Ended Dec. 31, 2009
Current assets:
Cash and cash equivalents	$306,054	$376,417
Marketable securities	650,756	400,853
Accounts receivable, net of provision for bad debts	797,932	791,023
Prepaid expenses and other current assets	146,913	155,077
Total current assets	1,901,655	1,723,370
Drilling and other property and equipment, net of accumulated depreciation	4,414,387	4,432,052
Other assets	408,761	108,839
Total assets	6,724,803	6,264,261
Current liabilities:
Accounts payable	67,250	75,015
Payable for purchase of marketable securities	99,989	0
Accrued liabilities	292,644	301,871
Taxes payable	360,628	32,410
Current portion of long-term debt	4,215	4,179
Total current liabilities	824,726	413,475
Long-term debt	1,495,428	1,495,375
Deferred tax liability	540,669	546,024
Other liabilities	220,837	178,745
Total liabilities	3,081,660	2,633,619
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock (par value $0.01, 500,000,000 shares authorized, 143,942,978 shares issued and 139,026,178 shares outstanding at March 31, 2010 and December 31, 2009)	1,439	1,439
Additional paid-in capital	1,967,451	1,965,513
Retained earnings	1,788,013	1,776,498
Accumulated other comprehensive gain	653	1,605
Treasury stock, at cost (4,916,800 shares at March 31, 2010 and December 31, 2009)	(114,413)	(114,413)
Total stockholders' equity	3,643,143	3,630,642
Total liabilities and stockholders' equity	$6,724,803	$6,264,261

1_Consolidated Balance Sheets (

Consolidated Balance Sheets (Unaudited) (Parenthetical)
	Mar. 31, 2010	Dec. 31, 2009
Stockholders' equity:
Common stock, par value	0.01	0.01
Common stock, shares authorized	500,000,000	500,000,000
Common stock, shares issued	143,942,978	143,942,978
Common stock, shares outstanding	139,026,178	139,026,178
Treasury stock, shares	4,916,800	4,916,800

Consolidated Statements of Oper

Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Revenues:
Contract drilling	$844,438	$855,708
Revenues related to reimbursable expenses	15,243	30,012
Total revenues	859,681	885,720
Operating expenses:
Contract drilling	305,127	297,747
Reimbursable expenses	14,705	29,715
Depreciation	97,402	85,062
General and administrative	16,654	16,315
Gain on disposition of assets	(884)	(55)
Total operating expenses	433,004	428,784
Operating income	426,677	456,936
Other income (expense):
Interest income	1,282	576
Interest expense	(22,321)	(1,117)
Foreign currency transaction gain (loss)	461	(4,125)
Other, net	(87)	1,067
Income before income tax expense	406,012	453,337
Income tax expense	(115,159)	(104,756)
Net income	$290,853	$348,581
Income per share:
Basic	2.09	2.51
Diluted	2.09	2.51
Weighted-average shares outstanding:
Shares of common stock	139,026	139,001
Dilutive potential shares of common stock	103	63
Total weighted-average shares outstanding assuming dilution	139,129	139,064
Cash dividends declared per share of common stock	$2	$2

Consolidated Statements of Cash

Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Operating activities:
Net income	$290,853	$348,581
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	97,402	85,062
Gain on disposition of assets	(884)	(55)
Loss (gain) on sale of marketable securities, net	1	(597)
(Gain) loss on foreign currency forward exchange contracts	(2,099)	25
Deferred tax provision	(4,843)	8,365
Accretion of discounts on marketable securities	(73)	(311)
Amortization/write-off of debt issuance costs	211	113
Amortization of debt discounts	89	62
Stock-based compensation expense	1,938	1,705
Deferred income, net	55,063	62,228
Deferred expenses, net	(30,246)	(9,606)
Other items, net	395	2,625
Proceeds from settlement of foreign currency forward exchange contracts designated as accounting hedges	2,099
Changes in operating assets and liabilities:
Accounts receivable	(44,875)	(114,007)
Prepaid expenses and other current assets	5,052	7,842
Accounts payable and accrued liabilities	(19,762)	(29,142)
Taxes payable	114,560	44,189
Net cash provided by operating activities	464,881	407,079
Investing activities:
Capital expenditures	(107,798)	(130,408)
Proceeds from disposition of assets, net of disposal costs	989	325
Proceeds from sale and maturities of marketable securities	1,200,053	1,348,964
Purchases of marketable securities	(1,349,900)	(1,149,112)
Cost of proceeds from settlement of foreign currency forward exchange contracts not designated as accounting hedges		(24,789)
Net cash (used in) provided by investing activities	(256,656)	44,980
Financing activities:
Debt issuance costs and arrangement fees	(98)
Payment of dividends	(278,597)	(278,257)
Proceeds from stock plan exercises	107
Net cash used in financing activities	(278,588)	(278,257)
Net change in cash and cash equivalents	(70,363)	173,802
Cash and cash equivalents, beginning of period	376,417	336,052
Cash and cash equivalents, end of period	$306,054	$509,854

General Information

General Information
	3 Months Ended Mar. 31, 2010
General Information [Abstract]
General Information	1. General Information The unaudited consolidated financial statements of Diamond Offshore Drilling, Inc. and subsidiaries, which we refer to as Diamond Offshore, we, us or our, should be read in conjunction with our Annual Report on Form 10-K for the year ended December31, 2009 (File No. 1-13926). As of April22, 2010, Loews Corporation, or Loews, owned 50.4% of the outstanding shares of our common stock. Interim Financial Information The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S., or GAAP, for interim financial information and with the instructions to Form 10-Q and Article10 of RegulationS-X of the Securities and Exchange Commission. Accordingly, pursuant to such rules and regulations, they do not include all disclosures required by GAAP for complete financial statements. The consolidated financial information has not been audited but, in the opinion of management, includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the consolidated balance sheets, statements of operations and statements of cash flows at the dates and for the periods indicated. Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with GAAP 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. Cash and Cash Equivalents, Marketable Securities We consider short-term, highly liquid investments that have an original maturity of three months or less and deposits in money market mutual funds that are readily convertible into cash to be cash equivalents. See Note 5. We classify our investments in marketable securities as available for sale and they are stated at fair value in our Consolidated Balance Sheets. Accordingly, any unrealized gains and losses, net of taxes, are reported in our Consolidated Balance Sheets in Accumulated other comprehensive gain until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in our Consolidated Statements of Operations in Interest income. The sale and purchase of securities are recorded on the date of the trade. The cost of debt securities sold is based on the specific identification method. Realized gains or losses, as well as any declines in value that are judged to be other than temporary, are reported in our Consolidated Statements of Operations in Other income (expense). Derivative Financial Instruments Our derivative financial instruments include foreign currency forward exchange, or FOREX, contracts. See Notes 4 and 5. Supplementary Cash Flow Information We paid interest on long-t

Earnings Per Share

Earnings Per Share
	3 Months Ended Mar. 31, 2010
Earnings Per Share [Abstract]
Earnings Per Share	2. Earnings Per Share A reconciliation of the numerators and the denominators of our basic and diluted per-share computations follows: Three Months Ended March 31, 2010 2009 (In thousands, except per share data) Net income basic (numerator): $ 290,853 $ 348,581 Effect of dilutive potential shares Zero Coupon Debentures 24 23 Net income including conversions diluted (numerator) $ 290,877 $ 348,604 Weighted average shares basic (denominator): 139,026 139,001 Effect of dilutive potential shares Zero Coupon Debentures 52 52 Stock options and SARs 51 11 Weighted average shares including conversions diluted (denominator) 139,129 139,064 Earnings per share: Basic $ 2.09 $ 2.51 Diluted $ 2.09 $ 2.51 Our computation of diluted earnings per share, or EPS, for the three months ended March 31, 2010 excludes 441,037 stock appreciation rights, or SARs. The inclusion of such potentially dilutive shares in the computation of diluted EPS would have been antidilutive for the period presented. Our computation of EPS for the three months ended March31, 2009 excludes stock options representing 23,493 shares of common stock and 482,588 SARs. The inclusion of such potentially dilutive shares in the computation of diluted EPS would have been antidilutive for the period presented.

Marketable Securities

Marketable Securities
	3 Months Ended Mar. 31, 2010
Marketable Securities [Abstract]
Marketable Securities	3. Marketable Securities We report our investments as current assets in our Consolidated Balance Sheets in Marketable securities, representing the investment of cash available for current operations. Our investments in marketable securities are classified as available for sale and are summarized as follows: March 31, 2010 Amortized Unrealized Market Cost (Loss) Gain Value (In thousands) Due within one year $ 649,960 $ (2 ) $ 649,958 Mortgage-backed securities 738 60 798 Total $ 650,698 $ 58 $ 650,756 December 31, 2009 Amortized Unrealized Market Cost (Loss) Gain Value (In thousands) Due within one year $ 399,997 $ (1 ) $ 399,996 Mortgage-backed securities 792 65 857 Total $ 400,789 $ 64 $ 400,853 Marketable securities at March31, 2010 include $100.0million in U.S. Treasury Bills purchased on March31, 2010 that did not settle until April2010. The offsetting amount for this transaction has been reported as a $100.0million Payable for purchase of marketable securities in our Consolidated Balance Sheets at March31, 2010. Proceeds from sales and maturities of marketable securities and gross realized gains and losses are summarized as follows: Three Months Ended March 31, 2010 2009 (In thousands) Proceeds from sales $ 53 $ 1,448,943 Proceeds from maturities 1,200,000 Gross realized gains 732 Gross realized losses (1 ) (135 ) Proceeds from sales of marketable securities for the three months ended March31, 2009 include $100.0million in securities sold on March31, 2009 that did not settle until April2009.

Derivative Financial Instrument

Derivative Financial Instruments
	3 Months Ended Mar. 31, 2010
Derivative Financial Instruments [Abstract]
Derivative Financial Instruments	4. Derivative Financial Instruments Foreign Currency Forward Exchange Contracts Our international operations expose us to foreign exchange risk associated with our costs payable in foreign currencies for employee compensation, foreign income tax payments and purchases from foreign suppliers. We may utilize FOREX contracts to reduce our foreign exchange risk. Our FOREX contracts may obligate us to exchange predetermined amounts of foreign currencies on specified dates or to net settle the spread between the contracted foreign currency exchange rate and the spot rate on the contract settlement date, which, for most of our contracts, is the average spot rate for the contract period. We enter into FOREX contracts when we believe market conditions are favorable to purchase contracts for future settlement with the expectation that such contracts, when settled, will reduce our exposure to foreign currency gains/losses on foreign currency expenditures in the future. The amount and duration of such contracts is based on our monthly forecast of expenditures in the significant currencies in which we do business and for which there is a financial market (i.e., Australian dollars, Brazilian reais, British pounds sterling, Mexican pesos and Norwegian kroner). These forward contracts are derivatives as defined by GAAP. In accordance with GAAP, each derivative contract is stated in the balance sheet at its fair value with gains and losses reflected in the income statement except that, to the extent the derivative qualifies for, and is designated, as an accounting hedge, the gains and losses are reflected in income in the same period as offsetting losses and gains on the qualifying hedged positions. Realized gains or losses upon settlement of derivative contracts not designated as cash flow hedges are reported as Foreign currency transaction gain (loss) in our Consolidated Statements of Operations. In May2009, we began a hedging strategy and designated certain of our qualifying FOREX contracts as cash flow hedges. These hedges are expected to be highly effective, and therefore, adjustments to record the carrying value of the effective portion of our derivative financial instruments to their fair value is recorded as a component of Accumulated other comprehensive gain, or AOCG, in our Consolidated Financial Statements. The effective portion of the cash flow hedge will remain in AOCG until it is reclassified into earnings in the period or periods during which the hedged transaction affects earnings or it is determined that the hedged transaction will not occur. Adjustments to record the carrying value of the ineffective portion of our derivative financial instruments to fair value are recorded as Foreign currency transaction gain (loss) in our Consolidated Statements of Operations. Realized gains or losses upon settlement of derivative contracts designated as cash flow hedges are reported as a component of Contract drilling expense in our Consolidated Statements of Operations to offset the impact of foreign currency fluctuations in our expenditures in local foreign currencies in the countries in which we operate. For derivative

Financial Instruments and Fair

Financial Instruments and Fair Value Disclosures
	3 Months Ended Mar. 31, 2010
Financial Instruments and Fair Value Disclosures [Abstract]
Financial Instruments and Fair Value Disclosures	5. Financial Instruments and Fair Value Disclosures Concentrations of Credit and Market Risk Financial instruments which potentially subject us to significant concentrations of credit or market risk consist primarily of periodic temporary investments of excess cash, trade accounts receivable and investments in debt securities, including residential mortgage-backed securities. We place our excess cash investments in high quality short-term money market instruments through several financial institutions. At times, such investments may be in excess of the insurable limit. We periodically evaluate the relative credit standing of these financial institutions as part of our investment strategy. A majority of our investments in debt securities are U.S. government securities with minimal credit risk. However, we are exposed to market risk due to price volatility associated with interest rate fluctuations. Concentrations of credit risk with respect to our trade accounts receivable are limited primarily due to the entities comprising our customer base. Since the market for our services is the offshore oil and gas industry, this customer base consists primarily of major and independent oil and gas companies and government-owned oil companies. In general, before working for a customer with whom we have not had a prior business relationship and/or whose financial stability may be uncertain to us, we perform a credit review on that company. Based on that analysis, we may require that the customer present a letter of credit, prepay or provide other credit enhancements. Our business has experienced negative effects of the current economic downturn such as customer credit problems, customers attempting to renegotiate or terminate contracts, and one customer seeking bankruptcy protection. We provide allowances for potential credit losses on a specific customer basis when necessary; however, we have not historically experienced significant losses on our trade receivables. At March31, 2010 and December31, 2009, our allowance for doubtful accounts receivable was $40.6million and $41.7million, respectively, related to our operations in Egypt and the insolvency of one of our customers in the United Kingdom. No additional allowances were deemed necessary for the periods presented. During 2009, we amended an existing contractual agreement at a customers request to provide short-term financial relief. The amended contract obligates the customer to pay us, over the term of the six-well drilling program, $75,000 per day in accordance with our normal credit terms (due 30days after receipt of invoice) and the remainder of the contractual dayrate, $485,000 per day, through the conveyance of a 27% net profits interest, or NPI, in certain developmental oil-and-gas producing properties. Based on the current production payout estimate, we anticipate that the first payment from the conveyance of the NPI will commence in the second quarter of 2010. Payment of such amounts, and the timing of such payments, are contingent upon such production and upon energy sale prices. At March31, 2010, the $94.5million portion of this trade receivable payable from the

Prepaid Expenses and Other Curr

Prepaid Expenses and Other Current Assets
	3 Months Ended Mar. 31, 2010
Prepaid Expenses and Other Current Assets [Abstract]
Prepaid Expenses and Other Current Assets	6. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following: March 31, December 31, 2010 2009 (In thousands) Rig spare parts and supplies $ 51,551 $ 49,122 Deferred mobilization costs 71,584 45,502 Prepaid insurance 3,725 11,478 Deferred tax assets 7,235 7,235 Deposits 3,540 3,562 Prepaid taxes 676 26,109 FOREX contracts 1,505 2,634 Other 7,097 9,435 Total $ 146,913 $ 155,077

Drilling and Other Property and

Drilling and Other Property and Equipment
	3 Months Ended Mar. 31, 2010
Drilling and Other Property and Equipment [Abstract]
Drilling and Other Property and Equipment	7. Drilling and Other Property and Equipment Cost and accumulated depreciation of drilling and other property and equipment are summarized as follows: March 31, December 31, 2010 2009 (In thousands) Drilling rigs and equipment $ 7,025,047 $ 6,950,303 Land and buildings 48,283 44,640 Office equipment and other 39,554 38,203 Cost 7,112,884 7,033,146 Less: accumulated depreciation (2,698,497 ) (2,601,094 ) Drilling and other property and equipment, net $ 4,414,387 $ 4,432,052

Accrued Liabilities

Accrued Liabilities
	3 Months Ended Mar. 31, 2010
Accrued Liabilities [Abstract]
Accrued Liabilities	8. Accrued Liabilities Accrued liabilities consist of the following: March 31, December 31, 2010 2009 (In thousands) Accrued project/upgrade expenses $ 73,744 $ 115,778 Payroll and benefits 62,236 69,065 Deferred revenue 74,625 46,666 Rig operating expenses 32,462 29,141 Interest payable 30,055 22,710 Personal injury and other claims 11,814 10,018 FOREX contracts 560 230 Other 7,148 8,263 Total $ 292,644 $ 301,871

Long-Term Debt

Long-Term Debt
	3 Months Ended Mar. 31, 2010
Long-Term Debt [Abstract]
Long-Term Debt	9. Long-Term Debt Long-term debt consists of the following: March 31, December 31, 2010 2009 (In thousands) Zero Coupon Debentures (due 2020) $ 4,215 $ 4,179 5.15% Senior Notes (due 2014) 249,697 249,682 4.875% Senior Notes (due 2015) 249,684 249,671 5.875% Senior Notes (due 2019) 499,307 499,292 5.70% Senior Notes (due 2039) 496,740 496,730 1,499,643 1,499,554 Less: Current maturities 4,215 4,179 Total $ 1,495,428 $ 1,495,375 At March31, 2010, there was $6.0million aggregate principal amount at maturity, or $4.2 million accreted, or carrying value, of our Zero Coupon Debentures outstanding. Certain of our long-term debt payments may be accelerated due to rights that the holders of our debt securities have to put the securities to us. The holders of our outstanding Zero Coupon Debentures have the right to require us to purchase all or a portion of their outstanding debentures on June6, 2010. The aggregate maturities of long-term debt for each of the five years subsequent to March31, 2010, are as follows: (Dollars in thousands) 2010 $ 4,215 2011 2012 2013 2014 249,697 Thereafter 1,245,731 1,499,643 Less: Current maturities 4,215 Total $ 1,495,428

Commitments and Contingencies

Commitments and Contingencies
	3 Months Ended Mar. 31, 2010
Commitments and Contingencies [Abstract]
Commitments and Contingencies	10. Commitments and Contingencies Various claims have been filed against us in the ordinary course of business, including claims by offshore workers alleging personal injuries. We have assessed each claim or exposure to determine the likelihood that the resolution of the matter might ultimately result in an adverse effect on our financial condition, results of operations and cash flows. When we determine that an unfavorable resolution of a matter is probable and such amount of loss can be determined, we record a reserve for the estimated loss at the time that both of these criteria are met. Our management believes that we have established adequate reserves for any liabilities that may reasonably be expected to result from these claims. Litigation. We are one of several unrelated defendants in lawsuits filed in the Circuit Courts of the State of Mississippi alleging that defendants manufactured, distributed or utilized drilling mud containing asbestos and, in our case, allowed such drilling mud to have been utilized aboard our offshore drilling rigs. The plaintiffs seek, among other things, an award of unspecified compensatory and punitive damages. We expect to receive complete defense and indemnity from Murphy Exploration Production Company pursuant to the terms of our 1992 asset purchase agreement with them. We are unable to estimate our potential exposure, if any, to these lawsuits at this time but do not believe that ultimate liability, if any, resulting from this litigation will have a material adverse effect on our financial condition, results of operations and cash flows. Various other claims have been filed against us in the ordinary course of business. In the opinion of our management, no pending or known threatened claims, actions or proceedings against us are expected to have a material adverse effect on our consolidated financial position, results of operations and cash flows. We intend to defend these matters vigorously; however, we cannot predict with certainty the outcome or effect of any litigation matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits. Personal Injury Claims. Our deductible for liability coverage for personal injury claims, which primarily result from Jones Act liability in the Gulf of Mexico, is currently $5.0million per occurrence, with no aggregate deductible. The Jones Act is a federal law that permits seamen to seek compensation for certain injuries during the course of their employment on a vessel and governs the liability of vessel operators and marine employers for the work-related injury or death of an employee. We engage outside consultants to assist us in estimating our aggregate reserve for personal injury claims based on our historical losses and utilizing various actuarial models. At March31, 2010, our estimated liability for personal injury claims was $33.6million, of which $11.2million and $22.4million were recorded in Accrued liabilities and Other liabilities, respectively, in our Consolidated Balance Sheets. At December31, 2009, our estimated liability for personal injury

Segments and Geographic Area An

Segments and Geographic Area Analysis
	3 Months Ended Mar. 31, 2010
Segments and Geographic Area Analysis [Abstract]
Segments and Geographic Area Analysis	11. Segments and Geographic Area Analysis Although we provide contract drilling services with different types of offshore drilling rigs and also provide such services in many geographic locations, we have aggregated these operations into one reportable segment based on the similarity of economic characteristics among all divisions and locations, including the nature of services provided and the type of customers of such services, in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting. Revenues from contract drilling services by equipment-type are listed below: Three Months Ended March 31, 2010 2009 (In thousands) High-Specification Floaters $ 383,788 $ 312,134 Intermediate Semisubmersibles 380,701 417,000 Jack-ups 79,949 126,574 Total contract drilling revenues 844,438 855,708 Revenues related to reimbursable expenses 15,243 30,012 Total revenues $ 859,681 $ 885,720 Geographic Areas At March31, 2010, our drilling rigs were located offshore twelve countries in addition to the United States. As a result, we are exposed to the risk of changes in social, political and economic conditions inherent in international operations and our results of operations and the value of our international assets are affected by fluctuations in foreign currency exchange rates. Revenues by geographic area are presented below by attributing revenues to the individual country or areas where the services were performed. Three Months Ended March 31, 2010 2009 (In thousands) United States $ 238,547 $ 356,315 International: South America 283,115 124,701 Australia/Asia/Middle East 158,929 174,225 Europe/Africa/Mediterranean 136,606 149,832 Mexico 42,484 80,647 Total revenues $ 859,681 $ 885,720