EXHIBIT 13.1
2006 ANNUAL REPORT TO SHAREHOLDERS
THE COMPANY
This Annual Report is for Atwood Oceanics, Inc. and its subsidiaries, which
are collectively referred to as "we", "our", or the "Company" except where
stated otherwise. We are engaged in the international offshore drilling and
completion of exploratory and developmental oil and gas wells and related
support, management and consulting services. Presently, we own and operate a
premium, modern fleet of eight mobile offshore drilling units and manage the
operations of two operator-owned platform drilling units currently located in
Northwest Australia. Since fiscal year 1997, we invested approximately $510
million in upgrading seven mobile offshore drilling units and constructing an
ultra-premium jack-up unit, the ATWOOD BEACON. Upon its expected delivery on or
before September 2008, the ATWOOD AURORA will be our ninth active mobile
offshore drilling unit. We support our operations from our Houston headquarters
and offices currently located in Australia, Malaysia, Malta, Egypt, Indonesia,
Singapore and the United Kingdom.
FINANCIAL HIGHLIGHTS
2006 2005
---- ----
(In Thousands)
FOR THE YEAR ENDED SEPTEMBER 30:
REVENUES $276,625 $176,156
NET INCOME 86,122 26,011
CAPITAL EXPENDITURES 78,464 25,563
AT SEPTEMBER 30:
NET PROPERTY AND EQUIPMENT $436,166 $390,778
TOTAL ASSETS 593,829 495,694
TOTAL SHAREHOLDERS' EQUITY 458,894 362,137
1
TO OUR SHAREHOLDERS AND EMPLOYEES:
We are pleased to report revenues, operating cash flows and net income for
fiscal year 2006 were the highest in our thirty-nine year history. Our net
income of $86 million, or $2.74 per diluted share, was more than twice our
previous record net income in fiscal year 1998.
Fiscal year 2006 ends with the Company in a strong position for the future.
Our fleet utilization for the fiscal year was 100% and there were a number of
accomplishments during the fiscal year in other key areas. Our contract backlog
in terms of available rig days for our eight units, all contracted at
historically high dayrates, is approximately 95% for fiscal year 2007, 80% for
fiscal year 2008 and 40% for fiscal year 2009. This contract backlog provides
strong upside visibility for fiscal year 2007 and further upside potential
beyond fiscal year 2007, particularly with our deepwater and international
jack-up leverage and with the ATWOOD HUNTER, ATWOOD SOUTHERN CROSS and RICHMOND
contracts repricing in fiscal year 2008. Also, this year, our future visibility
is enhanced with the change from well or well-to-well contracts to term
contracts on the VICKSBURG, ATWOOD HUNTER, ATWOOD FALCON, SEAHAWK and ATWOOD
BEACON. The ATWOOD SOUTHERN CROSS has a contract that continues into fiscal
year 2008, and the ATWOOD EAGLE has a two-year contract at a high dayrate,
currently estimated to commence in the first quarter of fiscal year 2009. Our
new, ultra-premium jack-up, the ATWOOD AURORA, scheduled for delivery on or
before September 2008, will offer growth potential when it commences operation
as our ninth owned offshore drilling unit. Our remaining unit, the RICHMOND, is
operating in the U.S. Gulf of Mexico. The RICHMOND has operated profitably in
the Gulf of Mexico for many years.
We continue to focus daily on safe, high standards of performance, our
people and the continuing development of our organization for the future. Our
safety and operational performance this fiscal year has been recognized by many
of our clients.
The Company also continued its fleet upgrade, enhancement and new
construction program during the year with the successful completion of three
shipyard update projects (the ATWOOD SOUTHERN CROSS, SEAHAWK and ATWOOD FALCON).
Total expenditures of approximately $50 million for these projects brought our
total project expenditures, since 1997, for fleet upgrade, renewal and
construction completed, to over $500 million. Construction of our new,
ultra-premium jack-up, the ATWOOD AURORA, also commenced this year.
We are pleased with the Company's current position: a strong balance sheet
with a current debt to total capitalization ratio of approximately 12% and a
continuing trend for improvements in cash flows and financial results at
historic levels. The demand by our clients for the services and equipment that
our Company provides continues at a high level. Our strategy of focusing on
safe, quality operations, premium equipment, long-standing client relationships,
and being leveraged to attractive international markets has served us well - and
we believe will serve us well in the future.
We are in a position to be opportunistic, when the time is right, and,
accordingly, continue to pursue and explore other future opportunities, as well
as evaluating the best use of future cash flow balances.
As always, we thank our shareholders for their confidence and our employees
for their many contributions and achievements during fiscal year 2006, and we
look forward to fiscal year 2007.
/S/ JOHN R. IRWIN
John R. Irwin
2
Atwood Oceanics, Inc. and Subsidiaries
FIVE YEAR FINANCIAL REVIEW
(In thousands, except per share amounts, fleet At or For the Years Ended September 30,
data and ratios) 2006 2005 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
Revenues $ 276,625 $ 176,156 $163,454 $144,765 $149,157
Contract drilling costs (144,366) (102,849) (98,936) (98,500) (75,088)
Depreciation (26,401) (26,735) (31,582) (25,758) (23,882)
General and administrative expenses (20,630) (14,245) (11,389) (14,015) (10,080)
Gain on sale of equipment 10,548 - - - -
-------- -------- -------- -------- --------
OPERATING INCOME 95,776 32,327 21,547 6,492 40,107
Other expense (3,940) (6,719) (9,145) (4,856) (1,330)
Tax (provision) benefit (5,714) 403 (4,815) (14,438) (10,492)
-------- -------- -------- -------- -------
NET INCOME (LOSS) $ 86,122 $ 26,011 $ 7,587 $(12,802) $ 28,285
========= ======== ======== ======== ========
PER SHARE DATA(1):
Earnings (loss) per common share:
Basic $ 2.78 $ 0.86 $ 0.27 $ (0.46) $ 1.02
Diluted $ 2.74 $ 0.83 $ 0.27 $ (0.46) $ 1.01
Average common shares outstanding:
Basic 30,936 30,412 27,718 27,692 27,678
Diluted 31,442 31,220 28,064 27,692 27,988
FLEET DATA:
Number of rigs owned or managed, at end
of period 10 11 11 11 10
Utilization rate for in-service rigs (2) 100% 98% 93% 92% 86%
BALANCE SHEET DATA:
Cash and cash equivalents $ 32,276 $ 18,982 $ 16,416 $ 21,551 $ 27,655
Working capital 86,308 35,894 32,913 26,063 43,735
Net property and equipment 436,166 390,778 401,141 443,102 368,397
Total assets 593,829 495,694 498,936 522,674 445,238
Total long-term debt (including current portion) 64,000 90,000 181,000 205,000 115,000
Shareholders' equity (3) (4) 458,894 362,137 271,589 263,467 276,133
Ratio of current assets to current liabilities 2.41 1.64 1.55 1.52 2.44
Notes -
(1) Fiscal years 2005, 2004, 2003 and 2002 have been restated to
reflect a two-for-one stock split effected on March 2, 2006. See
Note 7 to the consolidated financial statements for further
dicussion.
(2) Excludes managed rigs, the SEASCOUT (sold in fiscal year
2006), and contractual downtime on rigs upgraded.
(3) We have never paid any cash dividends on our common stock.
(4) In October 2004, we sold 2,350,000 shares of common stock in
a public offering.
3
OFFSHORE DRILLING OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
MAXIMUM PERCENTAGE LOCATION AT
YEAR WATER OF FY 2006 DECEMBER 12, CONTRACT STATUS AT
RIG NAME UPGRADED DEPTH REVENUES 2006 CUSTOMER DECEMBER 12, 2006
-------- --------- ----- -------- ------------ -------- -----------------
SEMISUBMERSIBLES -
ATWOOD EAGLE 2000/2002 5,000 Ft. 17% Offshore BHP BILLITON The rig is currently working under a
Australia PETROLEUM PTY drilling program for BHPB which could
("BHPB") extend, if all option wells are drilled,
to November 2007. Upon completion of
this drilling commitment, the rig has a
one (1) well contract commitment with
ENI Australia BV, followed by a two (2)
year contract commitment with Woodside
Energy, Ltd. It should take until
December 2009 before these drilling
commitments are completed.
ATWOOD HUNTER 1997/2001 5,000 Ft. 23% Offshore WOODSIDE ENERGY, The rig is currently working under a
Mauritania LTD. ("WOODSIDE") drilling program for Woodside which
extends to April 2008.
ATWOOD FALCON 1998/2006 5,000 Ft. 11% Offshore SARAWAK SHELL The rig is currently working under a
Malaysia BERHAD ("SHELL") long-term drilling commitment with Shell
which extends to July 2009.
4
ATWOOD SOUTHERN 1997/2006 2,000 Ft. 11% Offshore TOREADOR TURKEY The rig is currently working under
CROSS Turkey LIMITED drilling commitments for six (6) wells
("TOREADOR") plus two (2) options for Toreador and
AND MELROSE Melrose which could take until July 2007
RESOURCES to complete. Following completion of
("MELROSE") these commitments, the rig has drilling
commitments in the Black Sea for Turkiye
Petrolleri A.O. and Vanco which could
extend to April 2008.
CANTILEVER JACK-UPS -
ATWOOD BEACON Constructed 400 Ft. 12% Offshore GUJARAT STATE The rig is currently being mobilized to
in 2003 India PETROLEUM India to commence a twenty-five (25)
CORPORATION LTD. month contract for GSPC.
("GSPC")
VICKSBURG 1998 300 Ft. 11% Offshore CHEVRON OVERSEAS The rig is currently working under a
Thailand PETROLEUM long-term drilling commitment for Chevron
("CHEVRON") which will extend to June 2009.
ATWOOD AURORA Under 400 Ft. 0% N/A N/A The rig is under construction in
Construction Brownsville, Texas with expected
completion on or before September 2008.
5
SUBMERSIBLE -
RICHMOND 2000/2002 70 Ft. 7% U.S. Gulf of HELIS OIL & The rig is currently working for Helis
Mexico GAS ("HELIS") under a contract which could extend to
May/June 2007.
SEMISUBMERSIBLE TENDER ASSIST UNIT -
SEAHAWK 1992/1999/ 600 Ft. 4% Offshore AMERADA HESS The rig is currently working under a
2006 Equatorial EQUATORIAL two-year contractual commitment with Hess
Guinea GUINEA, INC. which extends to September 2008. Hess
("HESS") also has four (4) six-month options.
MODULAR PLATFORMS -
MANAGEMENT CONTRACT
GOODWYN `A' and N/A 4%* Australia WOODSIDE Both the GOODWYN `A' and NORTH RANKIN `A'
NORTH RANKIN `A' are idle with planned breaks in drilling
We are currently providing rig
maintenance services to these rigs.
*For both units, collectively.
6
SECURITIES LITIGATION SAFE HARBOR STATEMENT
Statements included in this report which are not historical facts
(including any statements concerning plans and objectives of management for
future operations or economic performance, or assumptions related thereto) are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, we and our representatives may from
to time to time make other oral or written statements which are also
forward-looking statements.
These forward-looking statements are made based upon management's current
plans, expectations, estimates, assumptions and beliefs concerning future events
impacting us and therefore involve a number of risks and uncertainties. We
caution that forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied in the
forward-looking statements.
Important factors that could cause our actual results of operations or our
actual financial conditions to differ include, but are not necessarily limited
to:
* our dependence on the oil and gas industry;
* the operational risks involved in drilling for oil and gas;
* changes in rig utilization and dayrates in response to the level of
activity in the oil and gas industry, which is significantly affected
by indications and expectations regarding the level and volatility of
oil and gas prices, which in turn are affected by such things as
political, economic and weather conditions affecting or potentially
affecting regional or worldwide demand for oil and gas, actions or
anticipated actions by OPEC, inventory levels, deliverability
constraints, and future market activity;
* the extent to which customers and potential customers continue to
pursue deepwater drilling;
* exploration success or lack of exploration success by our customers
and potential customers;
* the highly competitive and cyclical nature of our business, with
periods of low demand and excess rig availability;
* the impact of the war with Iraq or other military operations,
terrorist acts or embargoes elsewhere;
* our ability to enter into and the terms of future drilling contracts;
* the availability of qualified personnel;
* our failure to retain the business of one or more significant
customers;
* the termination or renegotiation of contracts by customers;
* the availability of adequate insurance at a reasonable cost;
* the occurrence of an uninsured loss;
* the risks of international operations, including possible economic,
political, social or monetary instability, and compliance with
foreign laws;
* the effect public health concerns could have on our international
operations and financial results;
* compliance with or breach of environmental laws;
* the incurrence of secured debt or additional unsecured indebtedness
or other obligations by us or our subsidiaries;
7
* the adequacy of sources of liquidity;
* currently unknown rig repair needs and/or additional opportunities to
accelerate planned maintenance expenditures due to presently
unanticipated rig downtime;
* higher than anticipated accruals for performance-based compensation due
to better than anticipated performance by us, higher than anticipated
severance expenses due to unanticipated employee terminations, higher
than anticipated legal and accounting fees due to unanticipated
financing or other corporate transactions, and other factors that could
increase general and administrative expenses;
* the actions of our competitors in the offshore drilling industry,
which could significantly influence rig dayrates and utilization;
* changes in the geographic areas in which our customers plan to
operate, which in turn could change our expected effective tax rate;
* changes in oil and gas drilling technology or in our competitors'
drilling rig fleets that could make our drilling rigs less competitive
or require major capital investments to keep them competitive;
* rig availability;
* the effects and uncertainties of legal and administrative proceedings
and other contingencies;
* the impact of governmental laws and regulations and the uncertainties
involved in their administration, particularly in some foreign
jurisdictions;
* changes in accepted interpretations of accounting guidelines and
other accounting pronouncements and tax
laws;
* the risks involved in the construction, upgrade, and repair of our
drilling units; and
* such other factors as may be discussed in our reports filed with the
Securities and Exchange Commission, or SEC.
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. The words "believe," "impact,"
"intend," "estimate," "anticipate," "plan" and similar expressions identify
forward-looking statements. These forward-looking statements are found at
various places throughout this report. When considering any forward-looking
statement, you should also keep in mind the risk factors described in our Form
10-K for the year ended September 30, 2006, particularly in Item 1A Risk
Factors, to which this Annual Report is an exhibit, and in other reports or
filings we make with the SEC from time to time. Undue reliance should not be
placed on these forward-looking statements, which are applicable only on the
date hereof. Neither we nor our representatives have a general obligation to
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof or to reflect the occurrence of
unanticipated events.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK
Revenues, operating cash flows and net income for fiscal year 2006 were the
highest in our thirty-nine year history. All of our eight drilling units have
contractual dayrate commitments that are the highest in their respective
histories. Currently, we have approximately 95% and 80% of our available rig
days contracted for fiscal years 2007 and 2008, respectively. A comparison of
the average per day revenues for fiscal years 2006 and 2005 for each of our
eight drilling units to their highest currently contracted dayrate commitment is
as follows:
AVERAGE AVERAGE HIGHEST
PER DAY PER DAY CURRENTLY PERCENTAGE
REVENUES REVENUES CONTRACTED CHANGE
FOR FISCAL FOR FISCAL DAYRATE FROM FISCAL
YEAR 2005 YEAR 2006 COMMITMENT YEAR 2006
----------- ---------- ---------- -----------
ATWOOD EAGLE $95,000 $129,000 $405,000 214%
ATWOOD HUNTER $61,000 172,000 245,000 42%
ATWOOD FALCON $82,000 83,000 200,000 141%
ATWOOD SOUTHERN CROSS $30,000 82,000 305,000 272%
ATWOOD BEACON $66,000 88,000 133,500 52%
VICKSBURG $65,000 82,000 154,000 88%
SEAHAWK $38,000 32,000 68,430 114%
RICHMOND $33,000 55,000 80,000 45%
The ATWOOD EAGLE is currently working under a contractual commitment
offshore Australia at dayrates ranging from $150,000 to approximately $170,000
which should extend to November 2007. Following completion of this contract
commitment, the rig will drill one (1) well at a dayrate of $360,000 and then
commence a two-year contract commitment at a dayrate of $405,000 which should
extend to December 2009. The ATWOOD HUNTER is currently working offshore Africa
at dayrates ranging from $240,000 to $245,000 under a long-term contract
commitment which should extend to April 2008. The ATWOOD FALCON has a
contractual commitment offshore Malaysia at dayrates ranging from $93,000 to
$200,000 which should extend into July 2009. Under this contractual commitment,
during the period August 2006 to early November 2006 the rig incurred a $30
million water depth upgrade along with certain equipment refurbishments of which
the customer will pay $24 million of such costs along with payment of a $90,000
dayrate during this shipyard period. The $24 million will be amortized into
income on a straight-line basis over the term of the contract through July 2009.
The ATWOOD SOUTHERN CROSS is currently working in the Black Sea and has several
drilling commitments at dayrates ranging from $125,000 to $305,000 that should
extend through the first half of fiscal year 2008. Currently, the ATWOOD BEACON
is being relocated to India to commence a 25-month contract at dayrates ranging
from $113,000 to $133,500. The VICKSBURG has contract commitments offshore
Thailand at dayrates ranging from $94,500 to $154,000 that should extend to June
2009. The SEAHAWK is currently working offshore West Africa under a long-term
drilling program that should extend to September 2008. This drilling contract
provides for four six month options with a dayrate for the firm and option
periods of $68,430. After the first year, the stated dayrate of $68,430 will
increase based upon certain cost escalations. Our only rig in the U.S. Gulf of
Mexico, the RICHMOND, has a current contract commitment at a dayrate of $80,000
which could extend to May/June 2007. The ATWOOD AURORA, an ultra premium jack-up
to become our ninth owned offshore drilling unit upon its delivery, is under
construction at Brownsville, Texas. The construction of this rig is currently
expected to be completed on or before September 2008 at a total cost (including
capitalized interest) of $160 million.
9
The current strong market environment is not only supporting high equipment
utilization with historical high dayrate environments, but also has resulted in
a significant increase in our operating costs. Over the next few months, we
expect daily operating costs for the ATWOOD EAGLE to average between $80,000 and
$85,000. The ATWOOD HUNTER, during the time it works offshore Mauritania and
Libya, is expected to incur daily operating costs between $55,000 and $60,000;
however, costs could be higher during any relocation period or during any period
when the rig is undergoing required inspections. The ATWOOD HUNTER is expected
to be off dayrate for ten to fourteen days in December 2006 for required
regulatory inspections and maintenance. Operating costs during this period could
average between $60,000 and $65,000 per day. We expect that the ATWOOD FALCON
will incur average daily operating costs between $45,000 and $50,000 while
working offshore Malaysia; however, costs will be significantly higher during
the first quarter of fiscal year 2007 ($85,000 to $95,000 per day) due to
expensing certain costs incurred during the period the rig was in the shipyard
undergoing its water depth upgrade. The ATWOOD SOUTHERN CROSS is also expected
to have average daily operating costs in the Black Sea between $45,000 and
$50,000; however, during the rig's relocation to the Black Sea during October
2006, operating costs were expected to average around $60,000 per day. Operating
costs for our bottom supported drilling units (ATWOOD BEACON, VICKSBURG, and
RICHMOND) should average between $30,000 and $35,000 per day. The SEAHAWK is
expected to incur operating costs between $60,000 and $65,000 per day while
working offshore Equatorial Guinea; however, these figures include an
approximate $16,000 per day amortization of certain deferred costs on a
straight-line basis over the life of the applicable drilling contract which will
be more than offset by the amortization of related deferred fees of
approximately $19,000 per day which are also recognized and earned on a
straight-line basis over the life of the contract. Operating costs will vary for
all rigs depending upon each rig's specific operating activities. For example,
cost may increase when a rig is being relocated to a new drilling location, when
a rig is undergoing required inspection or when a rig is undergoing
extraordinary maintenance or equipment replacement.
Despite the increase in operating costs for fiscal year 2006, our operating
results significantly increased for fiscal year 2006 compared to fiscal year
2005. Although we anticipate a continuing trend for increases in operating costs
during the next fiscal year, with our backlog of contracted days providing
increasing revenue expectations, we anticipate that revenues, operating cash
flows and earnings for fiscal years 2007 and 2008 will reflect a significant
improvement over fiscal year 2006 operating results and are expected to be the
highest in our history.
RESULTS OF OPERATIONS
Fiscal Year 2006 Versus Fiscal Year 2005
Revenues for fiscal year 2006 increased 57% compared to the prior fiscal
year. A comparative analysis of revenues by rig for fiscal years 2006 and 2005
is as follows:
REVENUES
(In millions)
-----------------------------------
Fiscal Fiscal
2006 2005 Variance
-------- -------- ---------
ATWOOD HUNTER $ 62.8 $ 22.1 $ 40.7
ATWOOD SOUTHERN CROSS 29.9 10.8 19.1
ATWOOD EAGLE 47.0 34.6 12.4
RICHMOND 20.2 11.9 8.3
ATWOOD BEACON 32.1 24.2 7.9
AUSTRALIA MANAGEMENT CONTRACTS 12.9 5.2 7.7
VICKSBURG 30.0 23.6 6.4
ATWOOD FALCON 30.1 29.8 0.3
SEAHAWK 11.6 13.9 (2.3)
------ ------ ------
$276.6 $176.1 $100.5
====== ====== ======
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The increase in fleetwide revenues is primarily attributable to the
increase in average dayrates due to improving market conditions and strong
demand for offshore drilling equipment as noted in Market Outlook. Thus, unless
otherwise noted below, the increase in revenues for each rig is due to the
increases in contractual dayrates in fiscal year 2006 compared to fiscal year
2005.
During the last quarter of fiscal year 2005, the ATWOOD SOUTHERN CROSS was
relocated from Southeast Asia to the Mediterranean Sea with no revenues being
realized during this relocation period. This relocation resulted in earned
mobilization fees for the ATWOOD SOUTHERN CROSS increasing from $0.8 million in
fiscal year 2005 to $8.1 million in fiscal year 2006, which, along with
increases in contracted dayrates accounts for its increase in revenues.
Increases in revenues for the ATWOOD HUNTER, ATWOOD EAGLE, VICKSBURG, ATWOOD
BEACON, ATWOOD FALCON and the RICHMOND were related to each of these drilling
units working under higher dayrate contracts in fiscal year 2006 compared to
fiscal year 2005. The increase in revenues from the AUSTRALIA MANAGEMENT
CONTRACTS was due to one of these managed rigs returning to active drilling. The
decline in revenues for the SEAHAWK was due to the unit being upgraded in fiscal
year 2006, with no revenues being realized during this upgrade period.
Contract drilling costs for fiscal year 2006 increased 40% compared to the
prior fiscal year. A comparative analysis of contract drilling costs by rig for
fiscal years 2006 and 2005 is as follows:
CONTRACT DRILLING
COSTS
(In millions)
------------------------------------
Fiscal Fiscal
2006 2005 Variance
------- ------- --------
ATWOOD SOUTHERN CROSS $ 24.2 $ 9.1 $ 15.1
ATWOOD HUNTER 18.8 11.9 6.9
AUSTRALIA MANAGEMENT CONTRACTS 10.8 4.7 6.1
ATWOOD EAGLE 26.8 21.9 4.9
VICKSBURG 11.9 8.8 3.1
ATWOOD BEACON 10.4 8.5 1.9
ATWOOD FALCON 16.5 14.6 1.9
RICHMOND 10.4 8.9 1.5
SEAHAWK 8.4 9.9 (1.5)
OTHER 6.2 4.5 1.7
------ ------ ------
$144.4 $102.8 $ 41.6
====== ====== ======
The increase in fleetwide drilling costs was primarily attributable to four
areas: rising personnel costs due to wage increases, increased repairs and
maintenance expenses and freight costs due to the amount and timing of various
repairs and maintenance projects and equipment enhancements and rising insurance
costs due to increased premiums. Thus, unless otherwise noted below, the
increase in drilling costs for each rig is primarily due to the four areas
mentioned above.
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Besides the four areas discussed above, the increase in drilling costs for
the ATWOOD SOUTHERN CROSS is also due to $8.6 million of mobilization expense
amortization during the fiscal year 2006, compared to $0.8 million of deferred
mobilization expense during fiscal year 2005 as the rig relocated from Southeast
Asia to the Mediterranean during the fourth quarter of fiscal year 2005. The
increase in drilling costs for the ATWOOD HUNTER also includes higher agent
commissions due to increased revenues when compared to the prior fiscal year and
due to its relocation from Egypt to Mauritania where operating costs are higher.
As previously mentioned, one of our managed platform rigs in Australia commenced
a new drilling program during the current fiscal year, and thus, service
activities for our AUSTRALIA MANAGEMENT CONTRACTS for fiscal year 2006 have
increased accordingly when compared to fiscal year 2005. The decrease in
drilling costs for the SEAHAWK is due to $4.0 million of deferred mobilization
costs for fiscal year 2006 due to the relocation of the rig from Southeast Asia
to West Africa compared to no deferred mobilization costs in the prior fiscal
year. Other drilling costs for fiscal year 2006 have increased primarily due to
the recording of stock option compensation expense (resulting from adoption of
Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment",
or SFAS 123(R) on October 1, 2005) for field personnel.
Depreciation expense for fiscal year 2006 decreased 1% as compared to the
prior fiscal year. A comparative analysis of depreciation expense by rig for
fiscal years 2006 and 2005 is as follows:
DEPRECIATION EXPENSE
(In millions)
-------------------------------
Fiscal Fiscal
2006 2005 Variance
------ ------ --------
SEAHAWK $ 1.6 $ 0.5 $ 1.1
ATWOOD HUNTER 5.4 5.3 0.1
VICKSBURG 2.8 2.7 0.1
ATWOOD BEACON 5.3 5.2 0.1
RICHMOND 0.9 0.9 -
ATWOOD FALCON 2.8 2.8 -
ATWOOD EAGLE 4.6 4.7 (0.1)
ATWOOD SOUTHERN CROSS 2.9 4.5 (1.6)
OTHER 0.1 0.1 -
----- ----- -----
$26.4 $26.7 $(0.3)
===== ===== =====
The increase in depreciation expense for the SEAHAWK was due to the
completion of a $16 million life enhancing upgrade during the fourth quarter
of the current fiscal year. During the first quarter of the current fiscal year,
the ATWOOD SOUTHERN CROSS underwent a life enhancing upgrade whereby the useful
life of the rig was extended from approximately two to five years. Depreciation
expense for our other units was relatively unchanged in fiscal year 2006 as
compared to fiscal year 2005.
In October 2005, we sold our semisubmersible hull, SEASCOUT, for $10
million (net after certain expenses) and our spare 15,000 P.S.I. BOP Stack for
approximately $15 million. For the 2006 fiscal year period, gains on the sales
of these two assets and other excess equipment totaled approximately $10.5
million in the aggregate. We had no operations or revenues associated with these
assets prior to their sale.
General and administrative expenses for fiscal year 2006 have increased 45%
compared to the prior fiscal year due primarily to the following: $3.7 million
of stock option compensation expense (resulting from adoption of SFAS 123(R) on
October 1, 2005), a $1.5 million increase in professional fees primarily related
to higher Sarbanes-Oxley compliance costs, and a $0.6 million increase in annual
bonus compensation. Interest expense has decreased primarily due to the
reduction of our outstanding debt while interest income has increased when
compared to the prior fiscal year due to higher interest rates earned on higher
cash balances.
Virtually all of our tax provision for fiscal year 2006 relates to taxes in
foreign jurisdictions. As a result of working in foreign jurisdictions, we
earned a high level of operating income in certain nontaxable and deemed profit
tax jurisdictions which significantly reduced our effective tax rate for the
current fiscal year when compared to the United States statutory rate. In
addition, we reversed a $1.8 million tax contingent liability due to the
12
expiration of the statute of limitations in a foreign jurisdiction. Also, we
were advised by a foreign tax authority that it had approved acceptance of
certain amended prior year tax returns. The acceptance of these amended tax
returns, along with the fiscal year 2005 tax return in this foreign
jurisdiction, resulted in the recognition of a $4.6 million tax benefit in the
third quarter. Including the two previously mentioned discrete items, which
reduced our rate by 7%, our effective tax rate for fiscal year 2006 was
approximately 6%.
Excluding any discrete items that may occur, we expect our effective tax
rate to be approximately 15-20% for fiscal year 2007 due to increased earnings
in foreign jurisdictions with high statutory tax rates.
Fiscal Year 2005 Versus Fiscal Year 2004
Revenues for fiscal year 2005 increased 8% compared to the fiscal year
2004. A comparative analysis of revenues by rig for fiscal years 2005 and 2004
is as follows:
REVENUES
(In millions)
-----------------------------------
Fiscal Fiscal
2005 2004 Variance
------- -------- --------
ATWOOD EAGLE $ 34.6 $ 30.4 $ 4.2
ATWOOD FALCON 29.8 26.0 3.8
ATWOOD BEACON 24.2 20.7 3.5
AUSTRALIA MANAGEMENT CONTRACTS 5.2 2.0 3.2
ATWOOD HUNTER 22.1 19.4 2.7
RICHMOND 11.9 9.6 2.3
VICKSBURG 23.6 24.3 (0.7)
ATWOOD SOUTHERN CROSS 10.8 12.5 (1.7)
SEAHAWK 13.9 18.6 (4.7)
------ ------ ------
$176.1 $163.5 $ 12.6
====== ====== ======
During fiscal year 2005, the ATWOOD EAGLE was fully utilized at dayrates
ranging from $89,000 to $109,000 compared to approximately 90% utilization at
the same dayrates during fiscal year 2004. The increase in revenues for the
ATWOOD FALCON was due to the rig being fully utilized during fiscal year 2005 at
an average dayrate of $82,000 compared to 90% utilization at an average dayrate
of $78,000 during fiscal year 2004. The ATWOOD BEACON had average per day
revenues during fiscal year 2005 of $66,000 (which includes 100 days of business
interruption proceeds) compared to average per day revenues during fiscal year
2004 of $62,000 (which includes 35 days of business interruption proceeds and 30
days of zero rate downtime immediately following its July 2004 incident which
damaged its legs and derrick). Refer to Note 4 to the consolidated financial
statements for further discussion of the Atwood Beacon incident. Since the end
of fiscal year 2001, there has been a planned break in drilling activities on
the GOODWYN `A' and NORTH RANKIN `A' platform rigs during which we have provided
a limited amount of maintenance services to these platform rigs. However, during
fiscal year 2005, service activities for NORTH RANKIN `A' increased due to a
planned drilling program to commence during fiscal year 2006. The ATWOOD HUNTER
was fully utilized during fiscal year 2005 at an average dayrate of $61,000
compared to 95% utilization during fiscal year 2004 at an average dayrate of
$55,000. The increase in revenue for the RICHMOND was due to an increase in the
average dayrate from $26,000 during fiscal year 2004 to $33,000 during fiscal
year 2005. Revenues for the VICKSBURG were relatively consistent for fiscal
years 2004 and 2005 while revenues for the ATWOOD SOUTHERN CROSS declined due to
a decrease in the amount of earned mobilization revenue from $4.1 million in
fiscal year 2004 to $0.8 million in fiscal year 2005 as the rig relocated twice
during fiscal year 2004 and only once during fiscal year 2005. This decrease was
partially offset by an increase in dayrates ranging from $35,000 to $40,000
during fiscal year 2005 compared to $30,000 to $35,000 during fiscal year 2004.
The SEAHAWK was fully utilized during the fiscal year 2004 at an average dayrate
of $50,000 compared to 85% utilization during fiscal year 2005 at an average
dayrate of $45,000.
13
Contract drilling costs for fiscal year 2005 increased 4% compared to
fiscal year 2004. A comparative analysis of contract drilling costs by rig for
fiscal years 2005 and 2004 is as follows:
CONTRACT DRILLING
COSTS
(In millions)
-----------------------------------
Fiscal Fiscal
2005 2004 Variance
------- ------- --------
AUSTRALIA MANAGEMENT CONTRACTS $ 4.7 $ 2.1 $ 2.6
ATWOOD EAGLE 21.9 20.7 1.2
RICHMOND 8.9 7.9 1.0
SEAHAWK 9.9 9.0 0.9
VICKSBURG 8.8 8.3 0.5
ATWOOD HUNTER 11.9 12.0 (0.1)
ATWOOD FALCON 14.6 15.1 (0.5)
ATWOOD BEACON 8.5 10.2 (1.7)
ATWOOD SOUTHERN CROSS 9.1 12.3 (3.2)
OTHER 4.5 1.3 3.2
------ ------ -----
$102.8 $ 98.9 $ 3.9
====== ====== =====
With the increase in service activities for NORTH RANKIN `A' during fiscal
year 2005 due to a planned drilling program to commence during fiscal year 2006,
drilling costs as well as revenues increased from our management of this
platform rig. The increase in drilling costs for the ATWOOD EAGLE was due to
higher labor costs due to local operating requirements offshore Australia, its
location for all of the fiscal year 2005. The increase in drilling costs for the
RICHMOND and SEAHAWK were primarily due to higher repair and maintenance
expenses incurred on the rigs during the fiscal year ended September 30, 2005
compared to the fiscal year ended September 30, 2004. Drilling costs for the
VICKSBURG, ATWOOD HUNTER, and ATWOOD FALCON remained relatively consistent for
fiscal year 2005 compared to fiscal year 2004. The decline in drilling costs for
the ATWOOD BEACON was due to a decrease in repair and maintenance expenses
primarily resulting from the recording of a $1.0 million insurance deductible
during fiscal year 2004 related to damage incurred during the rig's July 2004
incident. During most of the fourth quarter of fiscal year 2005, the ATWOOD
SOUTHERN CROSS was being mobilized from Southeast Asia to the Mediterranean.
Virtually all costs incurred during a mobilization period are deferred and
amortized as an expense over the term of the new contract. Having deferred
mobilization costs at the end of fiscal year 2005 compared to having no such
deferred costs at the end of fiscal year 2004 accounts for its decline in
drilling costs. The increase of other drilling costs during fiscal year 2005 was
due to a $1.0 million reduction in the amount of insurance premium refunds
received during fiscal year 2005 when compared to fiscal year 2004 and also due
to fiscal year 2004 including the settlement of a dispute with a client which
resulted in a reduction of operation costs of $0.6 million along with various
other increases of non-drilling unit specific costs.
14
Depreciation expense for fiscal year 2005 decreased 16% as compared to
fiscal year 2004. A comparative analysis of depreciation expense by rig for
fiscal years 2005 and 2004 is as follows:
DEPRECIATION EXPENSE
(In millions)
--------------------------------
Fiscal Fiscal
2005 2004 Variance
------- ------- --------
ATWOOD SOUTHERN CROSS $ 4.5 $ 4.2 $ 0.3
VICKSBURG 2.7 2.6 0.1
ATWOOD FALCON 2.8 2.7 0.1
ATWOOD BEACON 5.2 5.2 -
RICHMOND 0.9 0.9 -
ATWOOD EAGLE 4.7 4.8 (0.1)
ATWOOD HUNTER 5.3 5.4 (0.1)
SEAHAWK 0.5 5.1 (4.6)
OTHER 0.1 0.7 (0.6)
----- ----- -----
$26.7 $31.6 $(4.9)
===== ===== =====
Effective October 1, 2004, we extended the remaining depreciable life of
the SEAHAWK from 2 months to 5 years. The depreciable life of this rig was
extended based upon entry into a contract that extended the rig's commercial
viability for up to 5 years, coupled with our intent to continue marketing and
operating the rig beyond 2 months. The decrease in other depreciation is due to
certain non-rig assets becoming fully depreciated during the last quarter of
fiscal year 2004 and the first quarter of fiscal year 2005. Depreciation expense
for our other units was relatively unchanged in fiscal year 2005 as compared to
fiscal year 2004.
General and administrative expenses for fiscal year 2005 increased 25%
compared to fiscal year 2004 due to significantly increased professional fees
primarily resulting from compliance requirements of the Sarbanes-Oxley Act and
due to $0.7 million of bonuses paid during fiscal year 2005, compared with no
bonus payments during fiscal year 2004. Although the level of our outstanding
debt has been reduced significantly from fiscal year 2004, the reduction of
interest expense was partially offset by rising interest rates during fiscal
year 2005. Interest income has increased when compared to fiscal year 2004 due
to higher interest rates earned on cash balances and interest income earned on
income tax refunds.
Virtually all of our tax provision for fiscal years 2005 and 2004 related
to taxes in foreign jurisdictions, with fiscal year 2005 also impacted by a $3.3
million United States tax benefit recognized. During fiscal year 2005 our
provision was also offset by two other foreign discrete items. During the first
quarter of fiscal year 2005, we received a $1.7 million tax refund in Malaysia
related to a previously reserved tax receivable. In addition, a $1.0 million
deferred tax benefit was recognized in June 2005 due to the filing and
subsequent acceptance by the local tax authority, of amended prior year tax
returns. On December 1, 2005, we received notification from the United States
Department of Treasury that a previously reserved United States income tax
refund we had been pursuing for over two years had been approved for payment.
Based upon this approval, we reduced our income tax provision by the refund
amount of $3.3 million for the year ended September 30, 2005. Furthermore,
during fiscal year 2005, operating income earned in certain nontaxable and
deemed profit tax jurisdictions was higher when compared to fiscal year 2004,
including business interruption proceeds earned by the ATWOOD BEACON in a zero
tax jurisdiction for approximately three and a half months, which contributed to
our lower effective tax rate. As a result of these items, our effective tax rate
for fiscal year 2005 was significantly less when compared to fiscal year 2004
and the United States statutory rate.
15
LIQUIDITY AND CAPITAL RESOURCES
Since we operate in a very cyclical industry, maintaining high equipment
utilization in up, as well as down, cycles is a key factor in generating cash to
satisfy current and future obligations. For fiscal years 2001 through 2005, net
cash provided by operating activities ranged from a low of approximately $13.7
million in fiscal year 2003 to a high of approximately $62.3 million in fiscal
year 2001 compared to net cash provided by operating activities of approximately
$85.5 million for fiscal year 2006. Our operating cash flows are primarily
driven by our operating income, which reflects dayrates and rig utilization. The
low level of net cash provided by operating activities in fiscal year 2003 was
due to a downturn in market conditions during which we pursued short-term
contract opportunities in high operating cost areas in order to maintain high
utilization of our fleet. Operating results in fiscal years 2004, 2005 and 2006
reflected continuing improvements in market conditions which enabled us to have
higher cash flows and earnings in these years compared to fiscal year 2003. Due
to the significant increase in future dayrate commitments at historically high
levels, we have pursued longer-term contract opportunities for some of our
drilling units. We currently have approximately 95% and 80% of our available
operating rig days committed for fiscal years 2007 and 2008, respectively. With
the current historically high dayrate commitments on all eight of our actively
owned drilling units, we anticipate significant improvement in cash flows and
earnings during fiscal years 2007 and 2008. Other than our expected capital
expenditures of $110 million to $115 million for fiscal year 2007, the only
additional cash commitment for fiscal year 2007, outside of funding current rig
operations, is our required quarterly repayments under the term portion of our
senior secured credit facility which will total $36 million for fiscal year
2007. We expect to generate more than sufficient cash flows from operations to
satisfy all of these obligations.
In October 2004, we sold in a public offering 2,350,000 shares of our
common stock at an effective net price (before expenses) of $22.92 for net
proceeds of approximately $53.6 million. We used these proceeds and cash on hand
to repay the $55 million outstanding under the revolving portion of our credit
facility. As of September 30, 2006, we only had $54 million outstanding under
the term portion of our credit facility, with $10 million (repaid in October
2006) outstanding under the revolving portion of our credit facility. Our total
debt to capitalization ratio (debt/(debt + equity)) is 12% as of September 30,
2006. This ratio will continue to decline unless we identify an acceptable
growth opportunity. However, we will continue to explore opportunities for value
enhancing growth as they arise.
We are in compliance with all financial covenants at September 30, 2006 and
expect to remain in compliance with all financial covenants during fiscal year
2007. Further, at all times during fiscal year 2004, 2005 and 2006 when we were
required to determine compliance with our financial covenants, we were in
compliance with those covenants. Aside from the financial covenants, no other
provisions exist in the credit facility that could result in acceleration of the
April 1, 2008 maturity date.
At September 30, 2006, the collateral for our credit facility consists
primarily of preferred mortgages on all eight of our active drilling units (with
an aggregate net book value at September 30, 2006 totaling approximately $397
million). We are not required to maintain compensating balances; however, we are
required to pay a fee of approximately 0.60% per annum on the unused revolving
portion of our credit facility and certain other administrative costs.
In October 2005, we sold our semisubmersible hull, SEASCOUT, for $10
million (net after certain expenses) and our spare 15,000 P.S.I. BOP Stack for
approximately $15 million. For the 2006 fiscal year period, gains on the sales
of these two assets and other excess equipment totaled approximately $10.5
million in the aggregate. The approximate $26 million in cash received from the
sales of excess equipment, plus borrowings under the revolving portion of our
credit facility ($10 million outstanding at September 30, 2006) along with our
operating cash flows, has allowed us to expend approximately $30 million toward
the construction of the ATWOOD AURORA, approximately $16 million on upgrading
the SEAHAWK, approximately $5 million in completing the ATWOOD SOUTHERN CROSS
upgrade, approximately $16 million toward the ATWOOD FALCON upgrade and
approximately $11 million in other capital expenditures during fiscal year 2006
and have cash and cash equivalents remaining on hand at September 30, 2006 of
approximately $32 million.
16
Our accounts receivable have increased by $40.4 million since September 30,
2005, primarily due to our increased rig utilization and higher dayrates. Our
portfolio of accounts receivable is comprised of major international corporate
entities with stable payment experience. Historically, we have not encountered
significant difficulty in collecting receivables and typically do not require
collateral for our receivables; however, we have a $0.8 million allowance for
doubtful accounts at September 30, 2006. The insurance receivable of $0.6
million at September 30, 2005 and September 30, 2006, relates to repairs to be
made to the ATWOOD BEACON. Final repairs on this rig were completed in November
2006, and we expect to collect the remaining $0.6 million insurance receivable
associated therewith in fiscal year 2007.
Long-term deferred credits have increased by $22.3 million since September
30, 2005, primarily due to deferred fees associated with the current fiscal year
upgrades and mobilizations of the ATWOOD FALCON and SEAHAWK.
COMMITMENTS
The following table summarizes our obligations and commitments (in
thousands) at September 30, 2006:
Fiscal
Fiscal Fiscal Fiscal Fiscal 2011 and
2007 2008 2009 2010 thereafter
------ ------ ------ ------ ----------
Long-Term Debt (1) $36,000 $28,000 $ - $ - $ -
Purchase Commitments (2) 61,854 28,282 - - -
Operating Leases 1,916 1,102 978 845 3,570
------- ------- ----- ----- -------
$99,770 $57,384 $ 978 $ 845 $ 3,570
======= ======= ===== ===== =======
(1) Excluded from the above table is interest associated with borrowings
under our credit facility because the applicable interest rate is
variable. The principal amount outstanding under our credit facility
included in the above table is $64 million which currently bears
interest at a rate of approximately 7%.
(2) Rig construction and upgrade commitments for the ATWOOD AURORA and the
ATWOOD FALCON, respectively.
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are included in Note 2 to our consolidated
financial statements for the year ended September 30, 2006. These policies,
along with the underlying assumptions and judgments made by management in their
application, have a significant impact on our consolidated financial statements.
We identify our most critical accounting policies as those that are the most
pervasive and important to the portrayal of our financial position and results
of operations, and that require the most difficult, subjective and/or complex
judgments by management regarding estimates about matters that are inherently
uncertain. Our most critical accounting policies are those related to revenue
recognition, property and equipment, impairment of assets, income taxes, and
employee stock-based compensation.
We account for the drilling and management contract revenue in accordance
with the terms of the underlying drilling or management contract. These
contracts generally provide that revenue is earned and recognized on a daily
rate (i.e. "dayrate") basis and dayrates are typically earned for a particular
level of service over the life of a contract. Dayrate contracts can be for a
specified period of time or the time required to drill a specified well or
number of wells. Revenues from dayrate drilling operations, which are classified
under contract drilling services, are recognized on a per day basis as the work
progresses. In addition, lump-sum fees received at commencement of the drilling
contract as compensation for the cost of relocating drilling rigs from one
major operating area to another, as well as equipment and upgrade costs
reimbursed by the customer are recognized as earned on a straight-line method
over the term of the related drilling contract, as are the dayrates associated
with such contract. However, lump-sum fees received upon termination of a
drilling contract are recognized as earned during the period termination occurs.
In addition, we defer the mobilization costs relating to moving a drilling rig
to a new area and customer requested equipment purchases that will revert to the
customer at the end of the applicable drilling contract. We amortize such costs
on a straight-line basis over the life of the applicable drilling contract.
17
We currently operate eight active offshore drilling units. These assets are
premium equipment and should provide many years of quality service. At September
30, 2006, the carrying value of our property and equipment totaled $436.2
million, which represents 73% of our total assets. This carrying value reflects
the application of our property and equipment accounting policies, which
incorporate estimates, assumptions and judgments by management relative to the
useful lives and salvage values of our units. Once a rig is placed in service,
it is depreciated on the straight-line method over its estimated useful life,
with depreciation discontinued only during the period when a drilling unit is
out of service while undergoing a significant upgrade that extends its useful
life. The estimated useful lives of our drilling units and related equipment
range from 3 years to 25 years and our salvage values are generally based on 5%
of capitalized costs. Any future increases in our estimates of useful lives or
salvage values will have the effect of decreasing future depreciation expense in
future years and spreading the expense to later years. Any future decreases in
our useful lives or salvage values will have the effect of accelerating future
depreciation expense.
We evaluate the carrying value of our property and equipment when events or
changes in circumstances indicate that the carrying value of such assets may be
impaired. Asset impairment evaluations are, by nature, highly subjective.
Operations of our drilling equipment are subject to the offshore drilling
requirements of oil and gas exploration and production companies and agencies of
foreign governments. These requirements are, in turn, subject to fluctuations in
government policies, world demand and price for petroleum products, proved
reserves in relation to such demand and the extent to which such demand can be
met from onshore sources. The critical estimates which result from these
dynamics include projected utilization, dayrates, and operating expenses, each
of which impact our estimated future cash flows. Over the last ten years, our
equipment utilization rate has averaged approximately 90%; however, if a
drilling unit incurs significant idle time or receives dayrates below operating
costs, its carrying value could become impaired. The estimates, assumptions and
judgments used by management in the application of our property and equipment
and asset impairment policies reflect both historical experience and
expectations regarding future industry conditions and operations. The use of
different estimates, assumptions and judgments, especially those involving the
useful lives of our rigs and vessels and expectations regarding future industry
conditions and operations, would likely result in materially different carrying
values of assets and results of operations.
We conduct operations and earn income in numerous foreign countries and are
subject to the laws of taxing jurisdictions within those countries, as well as
United States federal and state tax laws. At September 30, 2006, we have a $16.0
million net deferred income tax liability. This balance reflects the application
of our income tax accounting policies in accordance with statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Such accounting
policies incorporate estimates, assumptions and judgments by management relative
to the interpretation of applicable tax laws, the application of accounting
standards, and future levels of taxable income. The estimates, assumptions and
judgments used by management in connection with accounting for income taxes
reflect both historical experience and expectations regarding future industry
conditions and operations. Changes in these estimates, assumptions and judgments
could result in materially different provisions for deferred and current income
taxes.
Effective October 1, 2005, we adopted Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment", or SFAS 123(R), using the modified
prospective application transition method. Under this method, stock-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the requisite service
period (generally the vesting period of the equity grant). In addition,
stock-based compensation cost recognized includes compensation cost for unvested
stock-based awards as of October 1, 2005. Prior to October 1, 2005, we accounted
for share-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", or APB No. 25. No
share-based employee compensation cost has been reflected in net income prior to
October 1, 2005. Before that date, we reported the entire tax benefit related to
the exercise of stock options as an operating cash flow. SFAS 123(R) requires us
to report the tax benefit from the tax deduction that is in excess of recognized
compensation costs (excess tax benefits) as a financing cash flow rather than as
an operating cash flow. The cumulative effect of the change in accounting
principle from APB No. 25 to FAS 123(R) was not material.
18
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement 109." FIN 48 prescribes a
comprehensive model for recognizing, measuring, presenting, and disclosing
uncertain tax positions within the financial statements. The provisions of FIN
48 are effective for fiscal years beginning after December 15, 2006. We are
currently evaluating the impact of the adoption of FIN 48 on our consolidated
financial position, results of operations and cash flows.
In September 2005, the FASB issued SFAS No. 157, "Fair Value Measurements",
or SFAS No. 157, which defines fair value, establishes methods used to measure
fair value and expands disclosure requirements about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal year
beginning after November 15, 2007, and interim periods within those fiscal
periods. We are currently analyzing the provisions of SFAS No. 157 and
determining how it will affect accounting policies and procedures, but we have
not yet made a determination of the impact the adoption will have on our
consolidated financial position, results of operations and cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements", or SAB 108, which provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. SAB 108 requires that the materiality of the effect of a misstated
amount be evaluated on each financial statement and the related financial
statement disclosures, and that materiality evaluation be based on quantitative
and qualitative factors. SAB 108 is effective for fiscal years beginning after
November 15, 2006. We do not believe this guidance will have a material impact
on our financial position, results of operations or cash flows.
DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including adverse changes in interest rates
and foreign currency exchange rates as discussed below.
Interest Rate Risk
All of the $64 million of long-term debt outstanding at September 30, 2006,
was floating rate debt. As a result, our annual interest costs in fiscal year
2006 will fluctuate based on interest rate changes. Because the interest rate on
our long-term debt is a floating rate and due to our debt maturing in 2008, the
fair value of our long-term debt approximated carrying value as of September 30,
2006. The impact on annual cash flow of a 10% change in the floating rate
(approximately 70 basis points) would be approximately $0.4 million, which we
believe to be immaterial. We did not have any open derivative contracts relating
to our floating rate debt at September 30, 2006.
Foreign Currency Risk
Certain of our subsidiaries have monetary assets and liabilities that are
denominated in a currency other than their functional currencies. Based on
September 30, 2006 amounts, a decrease in the value of 10% in the foreign
currencies relative to the United States dollar from the year-end exchange rates
would result in a foreign currency transaction gain of approximately $0.2
million. Thus, we consider our current risk exposure to foreign currency
exchange rate movements, based on net cash flows, to be immaterial. We did not
have any open derivative contracts relating to foreign currencies at September
30, 2006.
19
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Company management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Our internal control over
financial reporting was designed by management, under the supervision of the
Chief Executive Officer and Chief Financial Officer, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States, and includes those policies
and procedures that:
(i) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in
the United States, and that receipts and expenditures of the
Company are being made only in accordance with authorizations
of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the Company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of September 30, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based on our evaluation under the framework in Internal Control-Integrated
Framework, management has concluded that the Company maintained effective
internal control over financial reporting as of September 30, 2006.
PricewaterhouseCoopers LLP, our independent registered public accounting firm,
has audited our assessment of the effectiveness of the Company's internal
control over financial reporting as of September 30, 2006, as stated in their
report which appears on the following page.
ATWOOD OCEANICS, INC.
by
/s/ John R. Irwin /s/ James M. Holland
John R. Irwin James M. Holland
Director, President Senior Vice President and
and Chief Executive Officer Chief Financial Officer
December 12, 2006
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Atwood Oceanics, Inc.
We have completed integrated audits of Atwood Oceanics, Inc.'s 2006 and
2005 consolidated financial statements and of its internal control over
financial reporting as of September 30, 2006 and an audit of its 2004
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of the Company at September 30, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2006 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, in 2006
the Company changed its method of accounting for share-based compensation as a
result of adopting the provisions of Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment."
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, which appears
on the preceding page, that the Company maintained effective internal control
over financial reporting as of September 30, 2006 based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
21
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
/s/PricewaterhouseCoopers LLP
Houston, Texas
December 12, 2006
22
CONSOLIDATED BALANCE SHEETS
Atwood Oceanics, Inc. and Subsidiaries
September 30,
- -------------------------------------------------------------------------------------------------
(In thousands) 2006 2005
- -------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,276 $ 18,982
Accounts receivable, net of an allowance
of $750 and $189 at September 30, 2006
and 2005, respectively 80,222 39,865
Income tax receivable 65 3,278
Insurance receivable 550 550
Inventories of materials and supplies 22,124 15,640
Deferred tax assets 2,563 3,080
Prepaid expenses and deferred costs 9,873 10,658
--------- ---------
Total Current Assets 147,673 92,053
--------- ---------
NET PROPERTY AND EQUIPMENT 436,166 390,778
ASSET HELD FOR SALE - 9,017
DEFERRED COSTS AND OTHER ASSETS 9,990 3,846
--------- ---------
$ 593,829 $ 495,694
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable $ 36,000 $ 36,000
Accounts payable 11,760 6,473
Accrued liabilities 13,201 11,088
Deferred credits 404 2,598
--------- ---------
Total Current Liabilities 61,365 56,159
--------- ---------
LONG-TERM DEBT,
net of current maturities: 28,000 54,000
--------- ---------
28,000 54,000
--------- ---------
LONG TERM LIABILITIES:
Deferred income taxes 18,591 20,140
Deferred credits 23,284 994
Other 3,695 2,264
--------- ---------
45,570 23,398
--------- ---------
COMMITMENTS AND CONTENGENCIES (SEE NOTE 11)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value;
1,000 shares authorized, none outstanding - -
Common stock, $1 par value, 50,000 shares
authorized with 31,046 and 30,682 issued
and outstanding at September 30, 2006
and 2005, respectively (1) 31,046 30,682
Paid-in capital (1) 115,916 105,645
Retained earnings 311,932 225,810
--------- ---------
Total Shareholders' Equity 458,894 362,137
--------- ---------
$ 593,829 $ 495,694
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Fiscal year 2005 balances have been restated to reflect a two-for-one
stock split effected on March 2, 2006. See Note 7 for further discussion.
23
Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
- -----------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 2006 2005 2004
- -----------------------------------------------------------------------------------------------------------
REVENUES:
Contract drilling $276,625 $168,500 $161,074
Business interruption proceeds - 7,656 2,380
-------- -------- --------
276,625 176,156 163,454
COSTS AND EXPENSES:
Contract drilling 144,366 102,849 98,936
Depreciation 26,401 26,735 31,582
General and administrative 20,630 14,245 11,389
Gain on sale of equipment (10,548) - -
-------- -------- --------
180,849 143,829 141,907
-------- -------- --------
OPERATING INCOME 95,776 32,327 21,547
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense, net of capitalized interest (5,166) (7,352) (9,202)
Interest income 1,226 633 57
-------- -------- --------
(3,940) (6,719) (9,145)
-------- -------- --------
INCOME BEFORE INCOME TAXES 91,836 25,608 12,402
PROVISION (BENEFIT) FOR INCOME TAXES 5,714 (403) 4,815
-------- -------- --------
NET INCOME $ 86,122 $ 26,011 $ 7,587
======== ======== ========
EARNINGS PER COMMON SHARE (1):
Basic $ 2.78 $ 0.86 $ 0.27
Diluted 2.74 0.83 $ 0.27
AVERAGE COMMON SHARES OUTSTANDING (1) :
Basic 30,936 30,412 27,718
Diluted 31,442 31,220 28,064
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Fiscal years 2005 and 2004 have been restated to reflect a two-for-one
stock split effected on March 2, 2006. See Note 7 for further discussion.
Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended September 30,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 2006 2005 2004
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 86,122 $ 26,011 $ 7,587
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 26,401 26,735 31,582
Amortization of debt issuance costs 804 804 711
Amortization of deferred items (1,254) 292 (5,957)
Provision for doubtful accounts 726 189 -
Provision for inventory obsolescence - - 250
Deferred federal income tax benefit (1,032) (1,580) (2,040)
Stock-based compensation expense 4,568 - -
(Gain) loss on sale of assets (10,548) - 163
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (41,083) (7,579) 1,667
(Increase) decrease in insurance receivable - 9,133 (9,133)
(Increase) decrease in income tax receivable 3,213 (3,278) -
Increase in inventory (6,484) (2,839) (315)
(Increase) decrease in prepaid expenses (5,061) 1,585 931
Increase in deferred costs and other assets (11,419) (10,422) (9,213)
Increase (decrease) in accounts payable 5,287 (2,925) (487)
Increase (decrease) in accrued liabilities 3,985 (2,734) 4,971
Increase in deferred credits and other liabilities 31,226 5,429 4,883
Tax benefit from the exercise of stock options - 2,250 75
Other 1 21 (62)
-------- -------- --------
(670) 15,081 18,026
-------- -------- --------
Net Cash Provided by Operating Activities 85,452 41,092 25,613
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (78,464) (25,563) (6,527)
Collection of insurance receivable - 15,750 -
Proceeds from sale of assets 26,239 - -
-------- -------- --------
Net Cash Used by Investing Activities (52,225) (9,813) (6,527)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from debt 20,000 10,000 -
Principal payments on debt (46,000) (101,000) (24,000)
Debt issuance costs paid - - (681)
Proceeds from common stock offering - 53,607 -
Proceeds from exercise of stock options 6,067 8,680 460
-------- -------- --------
Net Cash Provided Used by Financing Activities (19,933) (28,713) (24,221)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 13,294 $ 2,566 $ (5,135)
CASH AND CASH EQUIVALENTS, at beginning of period $ 18,982 $ 16,416 $ 21,551
-------- -------- --------
CASH AND CASH EQUIVALENTS, at end of period $ 32,276 $ 18,982 $ 16,416
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for domestic and foreign income taxes $ 2,654 $ 5,977 $ 5,549
======== ======== ========
Cash paid during the year for interest, net of amounts capitalized $ 5,033 $ 7,705 $ 9,208
======== ======== ========
Non-cash Activities:
Increase in receivable related to reduction in value of the
ATWOOD BEACON $ - $ - $ 16,300
======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
25
Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
Total
Common Stock Paid-in Retained Stockholders'
(In thousands) Shares Amount Capital Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------
September 30, 2003 (1) 27,702 $ 27,702 $ 43,553 $192,212 $263,467
Net income - - - 7,587 7,587
Exercise of employee stock options 44 44 416 - 460
Tax benefit from exercise of employee stock options - - 75 - 75
------ -------- -------- -------- --------
September 30, 2004 (1) 27,746 $ 27,746 $ 44,044 $199,799 $271,589
Net income - - - 26,011 26,011
Exercise of employee stock options 586 586 8,094 - 8,680
Common stock offering 2,350 2,350 51,257 - 53,607
Tax benefit from exercise of employee stock options - - 2,250 - 2,250
------ -------- -------- -------- --------
September 30, 2005 (1) 30,682 $ 30,682 $105,645 $225,810 $362,137
Net income - - - 86,122 86,122
Restricted stock awards 5 5 (5) - -
Exercise of employee stock options 359 359 5,708 - 6,067
Stock option and restricted stock
award compensation expense - - 4,568 - 4,568
------ -------- -------- -------- --------
September 30, 2006 31,046 $ 31,046 $115,916 $311,932 $458,894
====== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Fiscal years 2005, 2004 and 2003 have been restated to reflect a two-for-one
stock split effected on March 2, 2006. See Note 7 for further discussion.
26
Atwood Oceanics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
Atwood Oceanics, Inc., together with its subsidiaries (collectively
referred to herein as "we," "our" or the "Company"), is engaged in offshore
drilling and completion of exploratory and developmental oil and gas wells and
related support, management and consulting services principally in international
locations. Presently, we own and operate a premium, modern fleet of eight mobile
offshore drilling units and manage the operations of two operator-owned platform
drilling units located in Northwest Australia. Currently, we are involved in
active operations in the territorial waters of Australia, Malaysia, Thailand,
India, Turkey, Mauritania, Equatorial Guinea and the United States.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Atwood
Oceanics, Inc. and all of its domestic and foreign subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
Cash and cash equivalents consist of cash in banks and highly liquid debt
instruments, which mature within three months of the date of purchase.
Foreign exchange
The United States dollar is the functional currency for all areas of our
operations. Accordingly, monetary assets and liabilities denominated in foreign
currency are converted to United States dollars at the rate of exchange in
effect at the end of the fiscal year, items of income and expense are remeasured
at average monthly rates, and property and equipment and other nonmonetary
amounts are remeasured at historical rates. Gains and losses on foreign currency
transactions and remeasurements are included in contract drilling costs in our
consolidated statements of operations. We recorded a foreign exchange loss of
$0.1 million during fiscal year 2006, a foreign exchange gain of $0.1 million
during fiscal year 2005, and no foreign exchange gain or loss during fiscal year
2004.
Accounts Receivable
We record trade accounts receivable at the amount we invoice our customers.
These accounts do not bear interest. Our portfolio of accounts receivable is
comprised of major international corporate entities and government organizations
with stable payment experience. Historically, our uncollectible accounts
receivable have been immaterial, and typically, we do not require collateral for
our receivables. We provide an allowance for uncollectible accounts, as
necessary, on a specific identification basis. We had an allowance for doubtful
accounts of $0.8 million and $0.2 million, as of September 30, 2006 and 2005,
respectively.
Insurance receivable
We had an insurance receivable of $0.6 million as of September 30, 2006 and
2005, related to a claim filed as a result of damage sustained by the ATWOOD
BEACON in July 2004 while positioning for a well offshore Indonesia. We expect
to collect the remaining receivable during fiscal year 2007. See Note 4 for
further discussion regarding the ATWOOD BEACON incident.
Inventories of Material and Supplies
Inventories consist of spare parts, material and supplies held for
consumption and are stated principally at the lower of average cost or market,
net of reserves for excess and obsolete inventory of $1.3 million and $1.8
million at September 30, 2006 and 2005, respectively.
27
Income taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Under SFAS
No. 109, deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year-end given the provisions of
enacted tax laws in each respective jurisdiction. Deferred tax assets are
reduced by a valuation allowance when, based upon management's estimates, it is
more likely than not that a portion of the deferred tax assets will not be
realized in a future period.
Property and equipment
Property and equipment are recorded at cost. Interest costs related to
property under construction are capitalized as a component of construction
costs. Interest capitalized during fiscal 2006 was $1.6 million. We had no
capitalized interest during fiscal years 2005 or 2004.
Once a rig is placed in service, it is depreciated on the straight-line
method over its estimated useful life, with depreciation discontinued only
during the period when a drilling unit is out of service while undergoing a
significant upgrade that extends its useful life. Our estimated useful lives of
our various classifications of assets are as follows:
Years
Drilling vessels and related equipment...... 5-25
Drill pipe.................................. 3
Furniture and other......................... 3-10
Maintenance, repairs and minor replacements are charged against income as
incurred; major replacements and upgrades are capitalized and depreciated over
the remaining useful life of the asset as determined upon completion of the
work. The cost and related accumulated depreciation of assets sold, retired or
otherwise disposed are removed from the accounts at the time of disposition, and
any resulting gain or loss is reflected in the Consolidated Statements of
Operations for the applicable period.
Impairment of property and equipment
We periodically evaluate our property and equipment to determine that their
net carrying value is not in excess of their net realizable value. These
evaluations are performed when we have sustained significant declines in
utilization and dayrates and recovery is not contemplated in the near future. We
consider a number of factors such as estimated future cash flows, appraisals and
current market value analysis in determining an asset's fair value. Assets are
written down to their fair value if the carrying amount of the asset is not
recoverable and exceeds its fair value.
Deferred drydocking costs
We defer the costs of scheduled drydocking and charge such costs to expense
over the period to the next scheduled drydocking (normally 30 months). At
September 30, 2006 and 2005, deferred drydocking costs totaling $0.6 million and
$0.7 million, respectively, were included in Deferred Costs and Other Assets in
the accompanying Consolidated Balance Sheets.
Revenue recognition
We account for drilling and management contract revenue in accordance with
the term of the underlying drilling or management contract. These contracts
generally provide that revenue is earned and recognized on a daily basis. We
provide crewed rigs to customers on a daily rate (i.e. "dayrate") basis. Dayrate
contracts can be for a specified period of time or the time required to drill a
specified well or number of wells. Revenues from dayrate drilling operations,
which are classified under contract drilling services, are recognized on a per
day basis as the work progresses. In addition, business interruption proceeds
are also recognized on a per day basis. See Note 4 for further discussion of the
ATWOOD BEACON incident.
28
Deferred fees and costs
Lump-sum fees received at commencement of the drilling contract as
compensation for the cost of relocating drilling rigs from one major operating
area to another, as well as equipment and upgrade costs reimbursed by the
customer are recognized as earned on a straight-line method over the term of
the related drilling contract, as are the dayrates associated with such
contract. However, lump-sum fees received upon termination of a drilling
contract are recognized as earned during the period termination occurs. In
addition, we defer the mobilization costs relating to moving a drilling rig to
a new area and customer requested equipment purchases that will revert to the
customer at the end of the applicable drilling contract. We amortize such costs
on a straight-line basis over the life of the applicable drilling contract.
Contract revenues and drilling costs are reported in the Statements of
Operations at their gross amounts.
At September 30, 2006 and 2005, deferred fees associated with mobilization
as well as equipment purchases and upgrades totaled $23.7 million and $3.6
million, respectively. At September 30, 2006 and 2005 deferred costs associated
with mobilization and equipment purchases totaled $9.0 million and $7.8 million,
respectively. Deferred fees and deferred costs are classified as current or
long-term in the accompanying Consolidated Balance Sheets based on the expected
term of the applicable drilling contracts.
Share-based compensation
Effective October 1, 2005, we adopted Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment", or SFAS 123(R), using the modified
prospective application transition method. Under this method, stock-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the requisite service
period (generally the vesting period of the equity grant). In addition,
stock-based compensation cost recognized includes compensation cost for unvested
stock-based awards as of October 1, 2005. Prior to October 1, 2005, we accounted
for share-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", or APB No. 25. No
share-based employee compensation cost has been reflected in net income prior to
October 1, 2005. Before that date, we reported the entire tax benefit related to
the exercise of stock options as an operating cash flow. SFAS 123(R) requires us
to report the tax benefit from the tax deduction that is in excess of recognized
compensation costs (excess tax benefits) as a financing cash flow rather than as
an operating cash flow. The cumulative effect of the change in accounting
principle from APB No. 25 to SFAS 123(R) was not material. See Note 3 for
additional information.
Earnings per common share
Basic and diluted earnings per share have been computed in accordance with
SFAS No. 128, "Earnings per Share" (EPS). "Basic" EPS excludes dilution and is
computed by dividing net income (loss) by the weighted-average number of common
shares outstanding for the period. "Diluted" EPS reflects the issuance of
additional shares in connection with the assumed conversion of stock options.
Under the modified prospective application transition method of SFAS 123(R), we
have included the impact of pro forma deferred tax assets in calculating the
potential windfall and shortfall tax benefits to determine the amount of diluted
shares using the treasury stock method.
29
The computation of basic and diluted earnings per share under SFAS No. 128
for each of the past three fiscal years is as follows (in thousands, except per
share amounts):
Per Share
Net Income Shares Amount
---------- ------ ---------
Fiscal 2006:
Basic earnings per share $ 86,122 30,936 $ 2.78
Effect of dilutive securities -
Stock options - 506 (0.04)
-------- ------ ------
Diluted earnings per share $ 86,122 31,442 $ 2.74
======== ====== ======
Fiscal 2005:
Basic earnings per share $ 26,011 30,412 $ 0.86
Effect of dilutive securities -
Stock options - 808 (0.03)
-------- ------ ------
Diluted earnings per share $ 26,011 31,220 $ 0.83
======== ====== ======
Fiscal 2004:
Basic earnings per share $ 7,587 27,718 $ 0.27
Effect of dilutive securities -
Stock options - 346 -
-------- ------ ------
Diluted earnings per share $ 7,587 28,064 $ 0.27
======== ====== ======
The calculation of diluted earnings per share for the years ended September
30, 2006 and 2004 excludes consideration of shares of common shares which may be
issued in connection with outstanding stock options of 125,200 and 202,550,
respectively, because such options were antidilutive. These options could
potentially dilute basic EPS in the future. For the year ended September 30,
2005, there were no antidilutive options.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
extensive use of 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 amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 3 - SHARE-BASED COMPENSATION
Effective October 1, 2005, we adopted SFAS 123(R), using the modified
prospective application transition method. Under this method, stock-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the requisite service
period (generally the vesting period of the equity grant). In addition,
stock-based compensation cost recognized includes compensation cost for unvested
stock-based awards as of October 1, 2005. Prior to October 1, 2005, we accounted
for share-based compensation in accordance with APB No. 25. No share-based
employee compensation cost has been reflected in net income prior to October 1,
2005. Before that date, we reported the entire tax benefit related to the
exercise of stock options as an operating cash flow. SFAS 123(R) requires us to
report the tax benefit from the tax deduction that is in excess of recognized
compensation costs (excess tax benefits) as a financing cash flow rather than as
an operating cash flow. The cumulative effect of the change in accounting
principle from APB No. 25 to FAS 123(R) was not material.
30
Under our Amended and Restated 2001 Stock Incentive Plan, or the 2001 Plan,
up to 2,000,000 shares of common stock may be issued to eligible participants in
the form of restricted stock awards or upon exercise of stock options granted
pursuant to the 2001 Plan. Awards of restricted stock and grants of stock
options may be made under the 2001 Plan through September 5, 2011. We also have
another stock incentive plan, the 1996 Plan, under which there are outstanding
stock options. However, no additional options or restricted stock will be
awarded under the 1996 plan.
A summary of share and stock option data for our two stock incentive plans
as of September 30, 2006 is as follows:
2001 1996
Plan Plan
------- --------
Shares available for future awards or grants 755,049 102,000
Outstanding stock option grants 969,200 467,750
Outstanding unvested restricted stock awards 92,600 -
Awards of restricted stock and stock options have both been granted under
our stock incentive plans as of September 30, 2006. We deliver newly issued
shares of common stock for restricted stock awards upon vesting and upon
exercise of stock options. All stock incentive plans currently in effect have
been approved by the shareholders of our outstanding common stock.
For the year ended September 30, 2006, the impact of adopting SFAS 123(R)
had no effect on our cash flows, however, but did have the following effect on
our consolidated statements of operations (in thousands, except per share
amounts):
Increase in contract drilling expenses $ 840
Increase in general and administrative expenses 3,728
Decrease in income tax provision (1,305)
------
Decrease in net income 3,263
======
Decrease in earnings per share:
Basic $ 0.11
Diluted $ 0.10
We recognize compensation expense on grants of share-based compensation
awards on a straight-line basis over the required service period for each award.
As of September 30, 2006, unrecognized compensation cost, net of estimated
forfeitures, related to stock options and restricted stock awards was
approximately $4.6 million and $2.7 million, respectively, which we expect to
recognize over a weighted average period of approximately 2.4 years.
Stock Options
Under our stock incentive plans, the exercise price of each stock option
equals the fair market value of one share of our common stock on the date of
grant, with all outstanding options having a maximum term of 10 years. Options
vest ratably over a period from the end of the first to the fourth year from the
date of grant under the 2001 Plan and from the end of the second to the fifth
year from the date of grant under the 1996 Plan. Each option is for the purchase
of one share of our common stock.
31
The total fair value of stock options vested during years ended September
30, 2006, 2005 and 2004 was $3.2 million, $2.9 million and $2.2 million,
respectively. The per share weighted average fair value of stock options granted
during years ended September 30, 2006, 2005 and 2004 was $17.87, $10.22 and
$7.08, respectively. We estimated the fair value of each stock option on the
date of grant using the Black-Scholes pricing model and the following
assumptions:
Fiscal Fiscal Fiscal
2006 2005 2004
------ ------ -----
Risk-Free Interest Rate 4.50% 4.27% 4.38%
Expected Volatility 41.62% 35.00% 50.00%
Expected Life (Years) 6 6 6
Dividend Yield None None None
The average risk-free interest rate is based on the five-year United States
treasury security rate in effect as of the grant date. We determined expected
volatility using a two to six year historical volatility figure and determined
the expected term of the stock options using 15 years of historical data. The
expected dividend yield is based on the expected annual dividend as a percentage
of the market value of our common stock as of the grant date.
A summary of stock option activity for years ended September 30, 2004, 2005
and 2006 is as follows:
Wtd. Avg.
Wtd. Avg. Remaining Aggregate
Number of Exercise Contractual Intrinsic
Options Price Life (Years) Value (000s)
---------- -------- ----------- -----------
Outstanding at October 1, 2003 1,647,150 $ 15.69
Granted 370,000 13.83
Exercised (42,800) 10.77 $ 377
Forfeited (9,000) 15.54
--------- -------
Outstanding at September 30, 2004 1,965,350 $ 15.46 6.1 $ 16,333
--------- -------
Exercisable at September 30, 2004 1,095,600 $ 15.67 4.8 $ 8,879
========= =======
Outstanding at October 1, 2004 1,965,350 $ 15.46
Granted 340,000 25.16
Exercised (586,800) 14.69 $ 10,095
Forfeited (15,250) 17.85
--------- ------
Outstanding at September 30, 2005 1,703,300 $ 17.64 6.5 $ 42,342
--------- -------
Exercisable at September 30, 2005 934,926 $ 16.27 5.1 $ 24,527
========= =======
Outstanding at October 1, 2005 1,703,300 $ 17.64
Granted 130,300 38.21
Exercised (359,450) 16.93 $ 10,184
Forfeited (37,200) 22.64
--------- ------
Outstanding at September 30, 2006 1,436,950 $ 19.56 6.4 $ 36,518
========= =======
Exercisable at September 30, 2006 889,500 $ 16.61 5.3 $ 25,227
========= =======
32
Restricted Stock
We have also awarded restricted stock to certain employees and to our
non-employee directors. The awards of restricted stock to employees are subject
to three year vesting, and all restricted stock awards to date are restricted
from transfer for three years form the date of grant. Pursuant to the amendments
to our 2001 Plan approved by our shareholders on February 9, 2006, and as
discussed in our definitive proxy statement sent to our shareholders relating to
our annual shareholders meeting and filed with the SEC on January 13, 2006, our
non-employee directors have been granted stock awards vesting immediately
totaling an aggregate of 5,151 shares of our common stock as of September 30,
2006. We value restricted stock awards at fair market value of our common stock
on the date of grant.
A summary of restricted stock activity for the year ended September 30,
2006, is as follows:
Number of Wtd. Avg.
Shares Fair Value
--------- ----------
Unvested at October 1, 2005 -
Granted 102,151 $ 38.46
Vested (5,151) $ 46.57
Forfeited (4,400) $ 37.15
-------
Unvested at September 30, 2006 92,600 $ 38.07
=======
Prior Year Pro Forma Expense
The following table illustrates the effect on net income and earnings per
share as if the fair value-based method provided by SFAS 123(R) had been applied
for all outstanding and unvested awards for periods prior to our adoption of
SFAS 123(R) as of October 1, 2005 (in thousands, except per share amounts):
Fiscal Fiscal
2005 2004
------- ------
Net income, as reported $ 26,011 $ 7,587
Deduct: Total stock-based
employee compensation
expense determined under fair
value based method for all
awards, net of related tax effects (1,671) (2,517)
-------- -------
Pro Forma, net income $ 24,340 $ 5,070
======== =======
Earnings per share:
Basic - as reported $ 0.86 $ 0.27
Basic - pro forma $ 0.80 $ 0.18
Diluted - as reported $ 0.83 $ 0.27
Diluted - pro forma $ 0.78 $ 0.18
33
NOTE 4 - PROPERTY AND EQUIPMENT
A summary of property and equipment by classification is as follows (in
thousands):
September 30,
-------------------------
2006 2005
------- -------
Drilling vessels and related equipment
Cost $ 691,289 $ 624,118
Accumulated depreciation (261,682) (236,736)
--------- ---------
Net book value 429,607 387,382
--------- ---------
Drill Pipe
Cost 13,271 10,742
Accumulated depreciation (8,257) (8,407)
--------- ---------
Net book value 5,014 2,335
--------- ---------
Furniture and other
Cost 7,920 7,395
Accumulated depreciation (6,375) (6,334)
--------- ---------
Net book value 1,545 1,061
--------- -------
NET PROPERTY AND EQUIPMENT $ 436,166 $ 390,778
========= =========
ATWOOD BEACON -
The ATWOOD BEACON incurred damage to all three legs and its derrick while
positioning for a well offshore of Indonesia in July 2004. The rig and its
damaged legs were transported to the builder's shipyard in Singapore for
inspections and repairs. We had loss of hire insurance coverage of $70,000 per
day up to 180 days, which began after a 30-day waiting period commencing July
28, 2004. Revenue recognized from this insurance coverage totaled approximately
$2.4 million in fiscal year 2004 and $7.7 million in fiscal year 2005 and is
reflected as business interruption proceeds on the Consolidated Statement of
Operations.
As of September 30, 2006 and 2005, all costs incurred to date and business
interruption proceeds earned related to this incident had been reimbursed by the
insurance carrier. During November 2006, we completed the remaining work to
repair the rig, and we expect to collect the remaining $0.6 million insurance
receivable associated therewith in fiscal year 2007.
NOTE 5 - LONG-TERM DEBT
A summary of long-term debt is as follows (in thousands):
September 30,
-------------------
2006 2005
------ ------
Credit facility, bearing interest
(market adjustable) at approximately 7% and 5.25%
per annum at September 30, 2006 and 2005, respectively $ 64,000 $ 90,000
Less - current maturities 36,000 36,000
-------- --------
$ 28,000 $ 54,000
======== ========
34
Our $250 million senior secured credit facility consists of a 5-year $150
million amortizing term loan facility and a 5-year $100 million non-amortizing
revolving loan facility. The term portion of our credit facility requires
quarterly payments of $9 million until maturity on April 1, 2008. The credit
facility permits prepayment of principal at anytime without incurring a penalty.
At September 30, 2005, we had $90 million outstanding under the term portion of
our credit facility and none outstanding under the revolving portion of our
credit facility while at September 30, 2006, we had $54 million outstanding
under the term portion of our credit facility and $10 million outstanding under
the revolving portion of our credit facility. The collateral at September 30,
2006 for the Credit Facility consists primarily of preferred mortgages on all
eight of our active drilling units (with an aggregate net book value at
September 30, 2006 totaling approximately $397 million). We are not required to
maintain compensating balances; however, we are required to pay a fee of
approximately 0.60% per annum on the unused portion of the revolving portion of
our credit facility and certain other administrative costs.
The Credit Facility contains financial covenants, including but not limited
to, requirements for maintaining certain net worth and other financial ratios,
and restrictions on disposing of any material assets, paying cash dividends or
repurchasing any of our outstanding common stock and incurring any additional
indebtedness in excess of $3 million. We are in compliance with all financial
covenants at September 30, 2006. Further, at all times during fiscal year 2004,
2005 and 2006 when we were required to determine compliance with our financial
covenants, we were in compliance with the covenants. Aside from the financial
covenants, no other provisions exist in the Credit Facility that could result in
acceleration of the April 1, 2008 maturity date.
The Credit Facility also supports issuance, when required, of standby
letters of guarantee. At September 30, 2006, standby letters of guarantee in the
aggregate amount of approximately $0.5 million were outstanding.
Future maturities of long-term debt are as follows (in thousands):
FISCAL YEAR AMOUNT
----------- --------
2007 $ 36,000
2008 28,000
---- --------
$ 64,000
========
NOTE 6 - INCOME TAXES
Domestic and foreign income before income taxes for the three-year period
ended September 30, 2006 is as follows (in thousands):
Fiscal Fiscal Fiscal
2006 2005 2004
------ -------- -------
Domestic income (loss) $ 5,738 $ (45) $ 1,094
Foreign income 86,098 25,653 11,308
-------- -------- --------
$ 91,836 $ 25,608 $ 12,402
======== ======== ========
The provision (benefit) for domestic and foreign taxes on income consists
of the following (in thousands):
Fiscal Fiscal Fiscal
2006 2005 2004
------ ------ ------
Current - domestic $ 58 $(3,278) $ 277
Deferred - domestic (392) (270) (990)
Current - foreign 6,688 2,205 6,578
Deferred - foreign (640) 940 (1,050)
------ ------- -------
$5,714 $ (403) $ 4,815
====== ======= =======
35
The components of the deferred income tax assets (liabilities) as of
September 30, 2006 and 2005 are as follows (in thousands):
September 30,
--------------------
2006 2005
------ -----
Deferred tax assets -
Net operating loss carryforwards $ 2,550 $ 5,900
Tax credit carryforwards 1,400 1,390
Stock option compensation expense 1,215 -
Book accruals - 20
-------- --------
5,165 7,310
-------- --------
Deferred tax liabilities -
Difference in book and tax basis of equipment (20,553) (22,530)
Deferred income - (1,330)
-------- --------
(20,553) (23,860)
-------- --------
Net deferred tax liabilities before valuation allowance (15,388) (16,550)
Valuation allowance (640) (510)
-------- --------
$(16,028) $(17,060)
======== ========
Net current deferred tax assets $ 2,563 $ 3,080
Net noncurrent deferred tax liabilities (18,591) (20,140)
-------- --------
$(16,028) $(17,060)
======== ========
The $2.6 million of net operating loss carryforwards ("NOL's"), relates to
Australian NOL's which do not expire. In addition, $0.6 million of the $1.4
million of tax credit carryforwards do not expire, and $0.2 million expire in
2022. Management expects that the NOL's and tax credit carryforwards will be
utilized to offset tax obligations in future periods with the exception of $0.6
million of the tax credit carryforwards that will begin to expire in 2012. Thus,
a corresponding $0.6 million valuation allowance is recorded as of September 30,
2006. An analysis of the change in the valuation allowance during the current
fiscal year is as follows (in thousands):
Valuation Allowance as of September 30, 2005 $ 510
Foreign tax credit carryforwards generated 130
-----
Valuation Allowance as of September 30, 2006 $ 640
=====
Under SFAS 123(R), $1.5 million of United States NOL's relates to windfall
tax benefits which will not be realized or recorded until the deduction
reduces our United States income taxes payable. At such time, the amount will
be recorded as an increase to paid-in-capital. We apply the "with-and-without"
approach when utilizing certain tax attributes whereby windfall tax benefits
are used last to offset taxable income.
We do not record federal income taxes on the undistributed earnings of our
foreign subsidiaries that we consider to be permanently reinvested in foreign
operations. In addition, there was no cumulative amount of such undistributed
earnings and profits at September 30, 2006.
36
The differences between the United States statutory and our effective
income tax rate are as follows:
Fiscal Fiscal Fiscal
2006 2005 2004
------ ------ ------
Statutory income tax rate 35% 35% 35%
Resolution of prior period tax items (7) (23) (3)
Increase (decrease) in tax rate resulting from -
Foreign tax rate differentials, net of foreign tax credit utilization (22) (14) 7
--- --- --
Effective income tax rate 6% (2%) 39%
=== === ==
As a result of working in foreign jurisdictions, we earned a high level of
operating income earned in certain nontaxable and deemed profit tax
jurisdictions which significantly reduced our effective tax rate for the current
fiscal year when compared to the United States statutory rate. In addition, we
reversed a $1.8 million tax contingent liability during fiscal year 2006 due to
the expiration of the statute of limitations in a foreign jurisdiction. Also, we
were advised by a foreign tax authority that it had approved acceptance of
certain amended prior year tax returns. The acceptance of these amended tax
returns, along with the fiscal year 2005 tax return in this foreign
jurisdiction, resulted in the recognition of a $4.6 million tax benefit in the
third quarter of the current fiscal year.
During the first quarter of fiscal year 2005, we received a $1.7 million
tax refund in Malaysia related to a previously reserved tax receivable. A $1.0
million deferred tax benefit was recognized in June 2005 due to the filing and
subsequent acceptance by the local tax authority, of amended prior year tax
returns. On December 1, 2005, we received notification from the United States
Department of Treasury that a previously reserved United States income tax
refund we had been pursuing for over two years had been approved for payment.
Based upon this approval, we reduced our income tax provision by the refund
amount of $3.3 million for the year ended September 30, 2005. Furthermore,
during fiscal year 2005, operating income earned in certain nontaxable and
deemed profit tax jurisdictions was higher when compared to the prior fiscal
year, including business interruption proceeds earned by the ATWOOD BEACON in a
zero tax jurisdiction for approximately three and a half months, which
contributed to our lower effective tax rate. As a result of these items, our
effective tax rate for fiscal year 2005 was significantly less when compared to
the prior fiscal year and the United States statutory rate.
NOTE 7 - CAPITAL STOCK
PREFERRED STOCK-
In 1975, 1,000,000 shares of preferred stock with no par value were
authorized. In October 2002, we designated Series A Junior Participating
Preferred Stock. No preferred shares have been issued.
COMMON STOCK-
During the current fiscal year, our shareholders approved a proposal to
increase the authorized shares of our common stock from 20,000,000 shares to
50,000,000 shares.
On March 2, 2006, the Board of Directors declared a two-for-one stock split
of our common stock effected in the form of a 100% common stock dividend. All
shareholders of record on March 24, 2006 received one additional share of common
stock for each share held on that date. The additional shares of common stock
were distributed in the form of a stock dividend on April 7, 2006. All share and
per share amounts in the accompanying condensed consolidated financial
statements and related notes have been adjusted to reflect the stock split for
all periods presented.
In October 2004, we sold in a public offering 2,350,000 shares of
our common stock at an effective net price (before expenses) of $22.92 for net
proceeds of approximately $53.6 million. We used these proceeds and cash on
hand to repay the $55 million outstanding as of September 30, 2004 under the
revolving portion of our Credit Facility.
37
RIGHTS AGREEMENT -
In September 2002, we authorized and declared a dividend of one Right (as
defined in Rights Agreement effective October 18, 2002, which governs the
Rights) for each outstanding share of common stock as of November 5, 2002,
subject to lender approval and consent, which was obtained. One Right will also
be associated with each share of common stock that becomes outstanding after
November 5, 2002 but before the earliest of the Distribution Date, the
Redemption Date and the Final Expiration Date (as defined in Rights Agreement).
The Rights are not exercisable until a person or group of affiliated or
associated persons begin to acquire or acquires beneficial ownership of 15
percent or more of our outstanding common stock. This provision does not apply
to shareholders already holding 15 percent or more of our outstanding common
stock as of November 5, 2002 until they acquire an additional 5 percent.
In connection with the March 2006 stock split, discussed above, and in
accordance with the Rights Agreement, we decreased from one one-thousandth to
one two-thousandth of a share the number of shares of our Series A Junior
Participating Preferred Stock, no par value, purchasable at a price of $150 upon
the exercise of each Right, when exercisable. The redemption price of the Rights
was also decreased from $0.01 to $0.005 in connection with the stock split. The
Rights are subject to further adjustment for certain future events including any
future stock splits. The Rights will expire on November 5, 2012. At September
30, 2006, 500,000 preferred shares have been reserved for issuance in the event
that Rights are exercised.
NOTE 8 - RETIREMENT PLANS
We have two contributory retirement plans (the "Plans") under which
qualified participants may make contributions, which together with our
contributions, can be up to 100% of their compensation, as defined, to a maximum
of $40,000. Participants must contribute from 1 to 5 percent of their earnings
as a required contribution ("the basic contribution"). We make contributions to
the Plans equal to twice the basic contributions. After six consecutive months
of service, an employee can elect to become a participant in a Plan. Our
contributions vest 100% to each participant after three years of service with us
including any period of ineligibility mandated by the Plans. If a participant
terminates employment before becoming fully vested, the unvested portion is
credited to our account and can be used only to offset our future contribution
requirements. During fiscal years 2006 and 2005, no forfeitures were utilized to
reduce our cash contribution requirements while in fiscal year 2004, $120,000 of
forfeitures were utilized to reduce our cash contribution requirements. In
fiscal years 2006, 2005 and 2004, our actual cash contributions totaled
approximately $3.1 million, $2.7 million and $2.4 million, respectively. As of
September 30, 2006, there were approximately $0.1 million of contribution
forfeitures, which can be utilized to reduce our future cash contribution
requirements.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities included in the accompanying
Consolidated Balance Sheets approximate fair value due to the short maturity of
these instruments. Since the Credit Facility (as described in Note 5) has a
market adjustable interest rate, the carrying value approximated fair value as
of September 30, 2006 and 2005.
NOTE 10 - CONCENTRATION OF MARKET AND CREDIT RISK
All of our customers are in the oil and gas offshore exploration and
production industry. This industry concentration has the potential to impact our
overall exposure to market and credit risks, either positively or negatively, in
that our customers could be affected by similar changes in economic, industry or
other conditions. However, we believe that the credit risk posed by this
industry concentration is offset by the creditworthiness of our customer base.
38
Revenues from significant customers from the prior three fiscal years are
as follows (in thousands):
Fiscal Fiscal Fiscal
2006 2005 2004
------ ------ ------
Woodside Energy Ltd. $ 78,442 $ 30,757 $ 5,825
Burullus Gas Company 39,053 22,118 16,734
Sarawak Shell Bhd. 32,841 24,446 -
Hoang Long & Hoan Vu Joint Operating Companies 32,114 16,557 -
ExxonMobil Exploration and Production Malaysia, Inc. 8,733 25,331 33,256
NOTE 11 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Future minimum lease payments for operating leases for fiscal years ending
September 30 are as follows (in thousands):
2007...................................1,916
2008...................................1,102
2009.....................................978
2010.....................................845
2011 and thereafter....................3,570
Total rent expense under operating leases was approximately $3.5 million,
$1.8 million and $0.6 million for fiscal years ended September 30, 2006, 2005,
and 2004 respectively.
LITIGATION
We are party to a number of lawsuits which are ordinary, routine litigation
incidental to our business, the outcome of which, individually, or in the
aggregate, is not expected to have a material adverse effect on our financial
position, results of operations or cash flows.
NOTE 12 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement 109." FIN 48 prescribes a
comprehensive model for recognizing, measuring, presenting, and disclosing
uncertain tax positions within the financial statements. The provisions of FIN
48 are effective for fiscal years beginning after December 15, 2006. We are
currently evaluating the impact of the adoption of FIN 48 on our consolidated
financial position.
In September 2005, the FASB issued SFAS No. 157, "Fair Value Measurements",
or SFAS No. 157, which defines fair value, establishes methods used to measure
fair value and expands disclosure requirements about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal year
beginning after November 15, 2007, and interim periods within those fiscal
periods. We are currently analyzing the provisions of SFAS No. 157 and
determining how it will affect accounting policies and procedures, but we have
not yet made a determination of the impact the adoption will have on our
consolidated financial position, results of operations and cash flows.
39
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements", or SAB 108, which provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. SAB 108 requires that the materiality of the effect of a misstated
amount be evaluated on each financial statement and the related financial
statement disclosures, and that materiality evaluation be based on quantitative
and qualitative factors. SAB 108 is effective for fiscal years beginning after
November 15, 2006. We do not believe this guidance will have a material impact
on our financial position, results of operations or cash flows.
NOTE 13 - OPERATIONS BY GEOGRAPHIC AREAS
We are engaged in offshore contract drilling. Our contract drilling
operations consist of contracting owned or managed offshore drilling equipment
primarily to major oil and gas exploration companies. Operating income is
contract revenues less operating costs, general and administrative expenses and
depreciation. In computing operating income (expense) for each geographic area,
other income (expense) and domestic and foreign income taxes were not
considered. Total assets are those assets that we use in operations in each
geographic area.
A summary of revenues and operating margin for the fiscal years ended
September 30, 2006, 2005 and 2004 and identifiable assets by geographic areas as
of September 30, 2006, 2005 and 2004 is as follows (in thousands):
Fiscal Fiscal Fiscal
2006 2005 2004
-------- -------- -------
REVENUES:
United States $ 20,249 $ 11,869 $ 9,565
Southeast Asia 99,884 100,631 97,654
Mediterranean Sea 68,970 23,829 28,627
Africa 27,676 - -
Australia 59,846 39,827 27,608
-------- -------- --------
$276,625 $176,156 $163,454
======== ======== ========
OPERATING INCOME (EXPENSE):
United States $ 6,778 $ (622) $ (2,197)
Southeast Asia 68,875 45,432 30,070
Mediterranean Sea 25,592 2,142 385
Africa 4,768 - -
Australia 10,393 (380) 4,678
Coporate general and administrative expenses (20,630) (14,245) (11,389)
-------- -------- --------
$ 95,776 $ 32,327 $ 21,547
======== ======== ========
TOTAL ASSETS:
United States $ 69,651 $ 32,583 $ 30,370
Southeast Asia 241,655 302,354 258,648
Mediterranean Sea 42,447 36,980 95,253
Africa 117,760 980 -
Australia 117,637 115,523 113,331
General corporate and other 4,679 7,274 1,334
-------- -------- --------
$593,829 $495,694 $498,936
======== ======== ========
40
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results for fiscal years 2006 and 2005 are as follows
(in thousands, except per share amounts):
QUARTERS ENDED (1)(2)
-------------------------------------------------------
December 31, March 31, June 30, September 30,
----------- --------- -------- ------------
Fiscal 2006
- -----------
Revenues $ 55,414 $ 67,529 $ 71,865 $ 81,817
Income before income taxes 17,027 18,318 28,606 27,885
Net income 14,523 15,629 32,791 23,179
Earnings per common share -
Basic 0.47 0.51 1.06 0.75
Diluted 0.47 0.50 1.04 0.74
Fiscal 2005
- -----------
Revenues $ 45,426 $ 41,017 $ 43,589 $ 46,124
Income before income taxes 8,143 6,100 5,933 5,432
Net income 8,650 4,711 5,989 6,661
Earnings per common share -
Basic 0.29 0.15 0.20 0.22
Diluted 0.28 0.15 0.19 0.21
- -----
(1) The sum of the individual quarterly net income per common share amounts may
not agree with year-to-date net income per common share as each quarterly
computation is based on the weighted average number of common shares
outstanding during that period.
(2) Quarter ended December 31, 2005 and all fiscal year 2005 quarters have been
restated to reflect a two-for-one stock split effected on March 2, 2006.
See Note 7 for futher discussion.
41
DIRECTORS OFFICERS
DEBORAH A. BECK (2, 3, 4) JOHN R. IRWIN
Corporate Executive, Retired President, Chief Executive Officer
Milwaukee, Wisconsin
JAMES M. HOLLAND
ROBERT W. BURGESS (2, 3, 4) Senior Vice President, Chief
Financial Executive, Retired Financial Officer and Secretary
Orleans, Massachusetts
GLEN P. KELLEY
GEORGE S. DOTSON (1, 2, 3, 4) Senior Vice President - Marketing
Corporate Executive, Retired and Administration
Tulsa, Oklahoma
HANS HELMERICH (1, 4)
President, Chief Executive Officer
Helmerich & Payne, Inc.
Tulsa, Oklahoma
JOHN R. IRWIN (1)
President, Chief Executive Officer
Atwood Oceanics, Inc.
Houston, Texas
JAMES M. MONTAGUE (3,4)
Corporate Executive, Retired
Houston, Texas
WILLIAM J. MORRISSEY (2, 4)
Bank Executive, Retired
Elkhorn, Wisconsin
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
(4) Nominating & Corporate Governance Committee
- -------------------------------------------
42
ANNUAL MEETING
The annual meeting of stockholders will be held at 10:00 A.M., Central
Standard Time, on Thursday, February 8, 2007 at our principal office: 15835 Park
Ten Place Drive, Houston, Texas, 77084. A formal notice of the meeting together
with a proxy statement and form of proxy will be mailed to stockholders on or
about January 9, 2007.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
FORM 10-K
A copy of our Form 10-K to which this Annual Report is an exhibit is filed
with the Securities and Exchange Commission and is available free on request by
writing to:
Secretary, Atwood Oceanics, Inc.
P. O. Box 218350
Houston, Texas 77218
We file our annual report on Form 10-K, quarterly and current reports,
proxy statements, and other information with the SEC. Our annual report on Form
10-K for the year ended September 30, 2006 includes as exhibits all required
Sarbanes-Oxley Act Section 302 certifications by our CEO and CFO regarding the
quality of our public disclosure. Our SEC filings are available to the public
over the internet at the SEC's web site at http://www.sec.gov. Our website
address is www.atwd.com. We make available free of charge on or through our
website our annual report on Form 10-K, quarterly reports on Form 10-Q, and
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC. Information on our website is not incorporated by reference into this
report or made a part hereof for any purpose. You may also read and copy any
document we file, including our Form 10-K, at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms and copy
charges.
Each year, our CEO must certify to the NYSE that he is not aware of any
violations of NYSE corporate governance listing standards by us. Our CEO's
certification for fiscal year 2005 was submitted to the NYSE.
STOCK PRICE INFORMATION -
The common stock of Atwood Oceanics, Inc. is traded on the New York Stock
Exchange ("NYSE") under the symbol "ATW". No cash dividends on common stock were
paid in fiscal year 2005 or 2006, and none are anticipated in the foreseeable
future. We have approximately 3,300 beneficial owners of our common stock based
upon information provided to us by a third party shareholder services provider
dated November 27, 2006. As of December 11, 2006, the closing sale price of the
common stock of Atwood Oceanics, Inc., as reported by NYSE, was $50.76 per
share. The following table sets forth the range of high and low sales prices per
share of common stock as reported by the NYSE for the periods indicated.
Fiscal Fiscal
2006 2005
------------------ ------------------
Quarters Ended Low High Low High
- -------------- ------ ------ ----- -----
December 31 $ 32.55 $ 42.75 $ 22.99 $ 26.99
March 31 39.90 51.66 23.53 35.63
June 30 42.29 58.44 25.07 34.95
September 30 39.86 50.64 29.40 43.06
43
BAR CHART - REVENUES ($ MILLIONS)
2002 2003 2004 2005 2006
---- ---- ---- ----- ----
$149.2 $144.8 $163.5 $176.2 $276.6
BAR CHART - CAPITAL EXPENDITURES ($ MILLIONS)
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
$89.4 $101.8 $6.5 $25.6 $78.5
BAR CHART - OPERATING INCOME ($ MILLIONS)
2002 2003 2004 2005 2006
---- ----- ---- ---- ----
$40.1 $6.5 $21.5 $32.3 $95.8
BAR CHART - NET INCOME (LOSS) ($ MILLIONS)
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
$28.3 ($12.8) $7.6 $26.0 $86.1
44