| General Information | 1. General Information
The unaudited condensed 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 No. 1-13926).
As of October 26, 2017, Loews Corporation owned approximately
53% of the outstanding shares of our common stock.
Interim Financial Information
The accompanying unaudited condensed 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 S-X
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.
Drilling and Other Property and Equipment
We carry our drilling and other property and equipment at cost,
less accumulated depreciation. Maintenance and routine repairs are
charged to income currently while replacements and betterments that
upgrade or increase the functionality of our existing equipment and
that significantly extend the useful life of an existing asset are
capitalized. During the nine-month period ended September 30,
2017 and the year ended December 31, 2016, we capitalized
$33.7 million and $177.6 million, respectively, in
replacements and betterments of our drilling fleet. See Note 6.
Impairment of Long-Lived Assets
We evaluate our property and equipment for impairment whenever
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable (such as, but not limited to, a
decision to retire, scrap or cold stack a rig, contracted backlog
of less than one year for a rig, or excess spending over budget on
a newbuild construction project or major rig upgrade). We utilize
an undiscounted probability-weighted cash flow analysis in testing
an asset for potential impairment. Our assumptions and estimates
underlying this analysis include the following:
• dayrate by rig;
• utilization rate by rig if active,
warm stacked or cold stacked (expressed as the actual percentage of
time per year that the rig would be used at certain dayrates);
• the per day operating cost for each
rig if active, warm stacked or cold stacked;
• the estimated annual cost for rig
replacements and/or enhancement programs;
• the estimated maintenance, inspection
or other reactivation costs associated with a rig returning to
work;
• salvage value for each rig; and
• estimated proceeds that may be
received on disposition of each rig.
Based on these assumptions, we develop a matrix for each rig under
evaluation using multiple utilization/dayrate scenarios, to each of
which we assign a probability of occurrence. We arrive at a
projected probability-weighted cash flow for each rig based on the
respective matrix and compare such amount to the carrying value of
the asset to assess recoverability.
The underlying assumptions and assigned probabilities of occurrence
for utilization and dayrate scenarios are developed using a
methodology that examines historical data for each rig, which
considers the rig’s age, rated water depth and other
attributes, and then assesses the rig’s future marketability
in light of the current and projected market environment at the
time of assessment. Other assumptions, such as operating,
maintenance, inspection and reactivation costs, are estimated using
historical data adjusted for known developments, cost projections
for re-entry
Management’s assumptions are necessarily subjective and are
an inherent part of our asset impairment evaluation, and the use of
different assumptions could produce results that differ from those
reported. Our methodology generally involves the use of significant
unobservable inputs, representative of a Level 3 fair value
measurement, which may include assumptions related to future
dayrate revenue, costs and rig utilization, quotes from rig
brokers, the long-term future performance of our rigs and future
market conditions. Management’s assumptions involve
uncertainties about future demand for our services, dayrates,
expenses and other future events, and management’s
expectations may not be indicative of future outcomes. Significant
unanticipated changes to these assumptions could materially alter
our analysis in testing an asset for potential impairment. For
example, changes in market conditions that exist at the measurement
date or that are projected by management could affect our key
assumptions. Other events or circumstances that could affect our
assumptions may include, but are not limited to, a further
sustained decline in oil and gas prices, cancelations of our
drilling contracts or contracts of our competitors, contract
modifications, costs to comply with new governmental regulations,
growth in the global oversupply of oil and geopolitical events,
such as lifting sanctions on oil-producing
Capitalized Interest
We capitalize interest cost for rig construction or upgrades, as
well as other qualifying projects. A reconciliation of our total
interest cost to “Interest expense, net of amounts
capitalized” as reported in our Condensed Consolidated
Statements of Operations is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In
thousands)
Total interest cost, including amortization of debt issuance
costs $ 28,590 $ 27,016 $ 83,440 $ 83,888
Capitalized interest (28 ) (7,984 ) (31 ) (15,184 )
Total interest expense as reported $ 28,562 $ 19,032 $ 83,409 $ 68,704
Stock-Based Compensation
In March 2016, the Financial Accounting Standards Board, or FASB,
issued Accounting Standards Update, or
ASU, No. 2016-09, Compensation
- Stock Compensation (Topic 718) 2016-09. 2016-09 2016-09
The guidance requiring (i) excess tax benefits to be recorded
in the condensed consolidated statement of operations,
(ii) exclusion of excess tax benefits from the computation of
assumed proceeds under the treasury stock method when calculating
earnings per share, and (iii) presentation of excess tax
benefits as an operating activity on the statement of cash flows,
rather than as a financing activity, has been applied prospectively
effective January 1, 2017. We have elected to account for
forfeitures of share-based awards in the period in which such
forfeitures occur rather than using an estimated forfeiture rate
and have adopted this change using a modified retrospective
approach, which resulted in a $0.6 million reduction in
opening retained earnings. The impact to our Condensed Consolidated
Balance Sheets is as follows:
Retained Additional Paid-in Capital
(In
thousands)
Balance as of January 1, 2017 before adoption $ 1,946,765 $ 2,004,514
Adjustment for making election to account for forfeitures as they
occur (634 ) 634
Balance as of January 1, 2017 after adoption $ 1,946,131 $ 2,005,148
Recent Accounting Pronouncements
In October 2016, the FASB issued ASU No. 2016-16, Income
Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory, 2016-16. 2016-16 2016-16. 2016-16
In August 2016, the FASB issued ASU No. 2016-15, Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments 2016-15. 2016-15 zero-coupon 2016-15 2016-15 2016-15 2016-15
In February 2016, the FASB issued
ASU No. 2016-02, Leases
(Topic 842) 2016-02, non-lease 2016-02, 2016-02 Non-lease 2014-09. 2016-02 2016-02 2016-02 2016-02
In May 2014, the FASB issued ASU No. 2014-09, Revenue
from Contracts with Customers (Topic 606) 2014-09. 2014-09 2015-14, 2014-09. 2014-09 2014-09
When applying the new standard, we plan to account for the
integrated services provided within our drilling contracts as a
single performance obligation composed of a series of distinct time
increments, which will be satisfied over time. We will determine
the total transaction price for each individual contract by
estimating both fixed and variable consideration expected to be
earned over the term of the contract. Consideration that does not
relate to a distinct good or service, such as mobilization,
demobilization, and contract preparation revenue, will be allocated
across the single performance obligation and recognized ratably
over the term of the contract. All other components of
consideration within a contract, including the dayrate revenue,
will continue to be recognized in the period when the services are
performed. We expect our revenue recognition under
ASU 2014-09 |
