===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13289
----------------------
PRIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 76-0069030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 SAN FELIPE, SUITE 3300
HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 789-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practical date.
Outstanding as of November 10, 2000
Common Stock, no par value 67,087,764
===============================================================================
PRIDE INTERNATIONAL, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2000 and December 31, 1999... 2
Consolidated Statement of Operations for the three months ended
September 30, 2000 and 1999............................................... 3
Consolidated Statement of Operations for the nine months ended
September 30, 2000 and 1999............................................... 4
Consolidated Statement of Cash Flows for the nine months ended
September 30, 2000 and 1999............................................... 5
Notes to Unaudited Consolidated Financial Statements........................ 6
Report of Independent Accountants........................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................ 19
Signatures....................................................................... 20
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................... $ 129,507 $ 111,627
Short-term investments....................................... - 42,877
Trade receivables, net....................................... 204,349 129,311
Parts and supplies........................................... 47,873 36,295
Other current assets......................................... 68,655 77,380
---------- ----------
Total current assets........................................ 450,384 397,490
---------- ----------
PROPERTY AND EQUIPMENT, net................................... 1,997,362 1,893,680
---------- ----------
OTHER ASSETS
Investments in affiliates.................................... 54,012 51,012
Goodwill, net................................................ 53,926 3,120
Other assets, net............................................ 53,096 43,375
---------- ----------
Total other assets.......................................... 161,034 97,507
---------- ----------
$2,608,780 $2,388,677
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................. $ 134,875 $ 106,391
Accrued expenses............................................. 127,789 96,593
Short-term borrowings........................................ 55,291 402
Current portion of long-term debt............................ 89,028 53,097
Current portion of long-term lease obligations............... 8,526 8,336
---------- ----------
Total current liabilities................................... 415,509 264,819
---------- ----------
DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES............. 72,596 51,163
LONG-TERM DEBT, net of current portion........................ 856,100 898,237
LONG-TERM LEASE OBLIGATIONS, net of current portion........... 28,911 34,176
ZERO COUPON CONVERTIBLE SUBORDINATED DEBENTURES............... 224,213 216,473
DEFERRED INCOME TAXES......................................... 38,130 48,064
MINORITY INTEREST............................................. 44,739 50,476
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value; 100,000,000 shares authorized;
66,844,561 and 60,470,552 shares issued and 66,790,341
and 60,416,332 shares outstanding, respectively............. 1 1
Paid-in capital.............................................. 748,532 637,424
Treasury stock, at cost...................................... (191) (191)
Retained earnings............................................ 180,240 188,035
---------- ----------
Total shareholders' equity.................................. 928,582 825,269
---------- ----------
$2,608,780 $2,388,677
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
2
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------ ------
REVENUE................................................... $231,810 $142,128
OPERATING COSTS........................................... 149,814 98,936
-------- --------
Gross margin............................................. 81,996 43,192
DEPRECIATION AND AMORTIZATION............................. 34,229 23,839
SELLING, GENERAL AND ADMINISTRATIVE....................... 20,799 16,318
-------- --------
EARNINGS FROM OPERATIONS.................................. 26,968 3,035
-------- --------
OTHER INCOME (EXPENSE)
Other income (expense), net.............................. 2,797 2,586
Interest income.......................................... 2,470 3,180
Interest expense......................................... (24,539) (16,913)
-------- --------
Total other income (expense), net....................... (19,272) (11,147)
-------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES & MINORITY INTEREST... 7,696 (8,112)
INCOME TAX PROVISION (BENEFIT)............................ 2,382 (1,869)
MINORITY INTEREST......................................... 4,185 97
-------- --------
NET EARNINGS (LOSS)....................................... $ 1,129 $ (6,340)
======== ========
NET EARNINGS (LOSS) PER SHARE:
Basic................................................... $ .02 $ (.11)
Diluted................................................. $ .02 $ (.11)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................... 65,701 56,194
Diluted................................................. 68,013 56,194
The accompanying notes are an integral part of the
consolidated financial statements.
3
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------ ------
REVENUE.................................................... $626,957 $464,030
OPERATING COSTS............................................ 414,053 336,714
RESTRUCTURING CHARGES...................................... - 12,817
-------- --------
Gross margin.............................................. 212,904 114,499
DEPRECIATION AND AMORTIZATION.............................. 95,263 70,338
SELLING, GENERAL AND ADMINISTRATIVE........................ 58,358 55,337
RESTRUCTURING CHARGES...................................... - 25,700
-------- --------
EARNINGS (LOSS) FROM OPERATIONS............................ 59,283 (36,876)
-------- --------
OTHER INCOME (EXPENSE)
Other income (expense), net............................... 1,332 4,014
Interest income........................................... 6,933 5,439
Interest expense.......................................... (66,700) (44,403)
-------- --------
Total other income (expense), net........................ (58,435) (34,950)
-------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES & MINORITY INTEREST.... 848 (71,826)
INCOME TAX PROVISION (BENEFIT)............................. (169) (20,134)
MINORITY INTEREST.......................................... 8,812 960
-------- --------
NET EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM.............. (7,795) (52,652)
EXTRAORDINARY GAIN, NET.................................... - 3,884
-------- --------
NET EARNINGS (LOSS)........................................ $ (7,795) $(48,768)
======== ========
NET EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic.................................................... $ (.12) $ (1.00)
Diluted.................................................. $ (.12) $ (1.00)
NET EARNINGS (LOSS) PER SHARE AFTER EXTRAORDINARY ITEM:
Basic.................................................... $ (.12) $ (.93)
Diluted.................................................. $ (.12) $ (.93)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.................................................... 63,774 52,526
Diluted.................................................. 63,774 52,526
The accompanying notes are an integral part of the
consolidated financial statements.
4
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
--------- ---------
OPERATING ACTIVITIES
Net earnings (loss)...................................................... $ (7,795) $ (48,768)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities -
Depreciation and amortization......................................... 95,263 70,338
Discount amortization on zero coupon convertible subordinated
debentures.......................................................... 7,740 8,183
Gain on sale of assets................................................ (1,717) (697)
Deferred tax provision (benefit)...................................... (12,990) (44,614)
Minority interest..................................................... 8,812 1,042
Extraordinary item.................................................... - (6,825)
Changes in assets and liabilities, net of effects of acquisitions -
Trade receivables................................................... (53,656) 55,093
Parts and supplies.................................................. (4,693) 493
Other current assets................................................ 1,613 (3,198)
Other assets........................................................ (8,316) (6,646)
Accounts payable.................................................... 4,743 (21,180)
Accrued expenses.................................................... 12,019 34,176
Other liabilities................................................... 12,433 15,432
--------- ---------
Net cash provided by operating activities........................ 53,456 52,829
--------- ---------
INVESTING ACTIVITIES
Purchase of net assets of acquired entities, less cash acquired.......... (45,755) -
Purchases of property and equipment...................................... (111,909) (320,029)
Proceeds from sales of property and equipment............................ 2,858 98,104
Investments in affiliates................................................ (3,000) 1,035
Proceeds from sales of short-term investments............................ 72,931 -
Purchases of short-term investments...................................... (30,054) -
--------- ---------
Net cash used in investing activities............................ (114,929) (220,890)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of common stock................................... 105,700 37,500
Proceeds from exercise of stock options.................................. 4,414 445
Proceeds from debt borrowings............................................ 52,047 454,281
Reduction of debt........................................................ (82,808) (215,228)
--------- ---------
Net cash provided by financing activities........................ 79,353 276,998
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................. 17,880 108,937
CASH AND CASH EQUIVALENTS, beginning of period............................. 111,627 86,540
--------- ---------
CASH AND CASH EQUIVALENTS, end of period................................... $ 129,507 $ 195,477
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Capital expenditures in accounts payable................................. $ 30,983 $ 8,525
The accompanying notes are an integral part of the
consolidated financial statements.
5
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The unaudited consolidated financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto of Pride International, Inc.
(the "Company") included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999. Certain reclassifications have been made to prior
year amounts to conform with the current year presentation.
In the opinion of management, the unaudited consolidated financial
information included herein reflects all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for a full year or any other interim period.
2. LONG-TERM DEBT
Long-term debt as of September 30, 2000 and December 31, 1999 consisted of
the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
9 3/8% Senior Notes due 2007................. $325,000 $325,000
10% Senior Notes due 2009.................... 200,000 200,000
Drillship loans.............................. 337,135 356,491
Limited-recourse collateralized term loans... 23,021 26,699
Senior convertible note payable.............. 21,250 21,250
Collateralized term loans.................... 12,543 18,771
Note payable to seller....................... 22,389 -
Other notes payable.......................... 3,790 3,123
-------- --------
945,128 951,334
Current portion of long-term debt............ 89,028 53,097
-------- --------
Long-term debt, net of current portion....... $856,100 $898,237
======== ========
In connection with the construction of two new ultra-deepwater drillships,
the Pride Africa and the Pride Angola, the two joint venture companies in which
the Company has a 51% interest have financing arrangements with a group of banks
for up to $398 million of the total cost of $470 million for the drillships. As
of September 30, 2000, loans totaling $337.1 million were outstanding under the
arrangements, and $47.0 million was undrawn. These loans are secured by the two
drillships and proceeds from the related drilling contracts and are non-recourse
to the joint venture partners.
As of September 30, 2000, $28.9 million of the Company's cash balances,
which amount is included in cash and cash equivalents, consists of funds held in
trust in connection with the drillship loans and the limited-recourse
collateralized term loans and is not available for use by the Company.
The Company has a senior secured credit facility with a U.S. bank under
which up to $25 million of letters of credit may be issued. Outstanding letters
of credit issued under this credit facility are secured by the Company's cash
and cash equivalents maintained at such bank. The letter of credit facility
expires in March 2003. As of September 30, 2000, there were $12.6 million of
letters of credit issued under this credit facility.
6
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. RESTRUCTURING CHARGES
During the first quarter of 1999, the Company implemented a restructuring
plan to address the dramatic decline in drilling and workover activity that had
occurred since the third quarter of 1998. The restructuring consisted of
regional base consolidations, downsizing of administrative staffs and other
reductions in personnel which resulted in a pretax charge of $38.5 million for
current and future cash expenditures. During the fourth quarter of 1999, $1.8
million of the charge was reversed. Charges included the estimated costs of
involuntary employee termination benefits, including severance, wage
continuation, medical and other benefits, facility closures and other costs in
connection with the restructuring plan. The Company incurred approximately
$34.7 million of such costs attributable to involuntary employee termination
benefits relating to 767 operational employees and 88 management and
administrative employees, $900,000 attributable to facility closures and $1.1
million of other costs in connection with the restructuring.
4. INCOME TAXES
The Company's consolidated effective income tax rate for the three months
ended September 30, 2000 was 31.0% as compared to 23.0% for the corresponding
period in 1999. The increase in the effective tax rate resulted primarily from
operations in certain non-U.S. countries with deemed profit tax regimes in
which the Company's tax liability is based on revenues rather than actual income
or loss.
The Company's consolidated effective income tax rate for the nine months
ended September 30, 2000 was 19.9%, as compared to 28.0% for the corresponding
period in 1999. The decrease in the effective income tax rate for the nine
months ended September 30, 2000 resulted from the tax effect of certain
operations in low effective tax rate jurisdictions.
5. NET EARNINGS PER SHARE
Basic net earnings per share has been computed based on the weighted
average number of shares of common stock outstanding during the applicable
period. Diluted net earnings per share for the three months ended September 30,
2000 has been computed assuming the exercise of 2.3 million stock options and
warrants outstanding during the period. Common shares issuable pursuant to
outstanding convertible debt securities have been excluded from the calculation
of diluted earnings per share for the three months ended September 30, 2000,
because their effect is antidilutive. As a result of net losses for the three
months ended September 30, 1999 and nine months ended September 30, 2000 and
1999, diluted net earnings per share is the same as basic net earnings per share
for such periods. Common shares issuable pursuant to outstanding stock options
and convertible debt securities have been excluded from the calculation of
diluted loss per share because their effect is antidilutive for these periods.
The following table presents the number of shares of common stock excluded for
each period:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------------
2000 1999 2000 1999
------- ------- ------- --------
(IN THOUSANDS)
Shares of common stock excluded from diluted calculation... 7,340 15,291 11,394 17,314
7
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. ACQUISITIONS AND SALES OF COMMON EQUITY
In April 2000, the Company's wholly-owned subsidiary, Twin Oaks Financial
Ltd. ("Twin Oaks"), acquired all the outstanding capital stock of Servicios
Especiales San Antonio S.A. ("San Antonio") from Perez Companc S.A. ("Perez
Companc"). The purchase price was $61 million, consisting of $35 million in
cash and a $26 million promissory note of Twin Oaks guaranteed by San Antonio
and payable in monthly installments equal to the lesser of (a) 25% of the
revenues of San Antonio for the relevant month from services provided by it to
Perez Companc and its affiliates or (b) $722,222. Interest on the outstanding
balance of the note is payable quarterly at LIBOR plus 2.75%, (9.3675% as of
September 30, 2000). Perez Companc is also entitled to "earn-out" payments of
up to $12 million in the aggregate until April 2004. Assets acquired and
liabilities assumed consisted of current assets of $32.1 million, long-term
assets of $59.6 million, current liabilities of $77.4 million and long-term
liabilities of $32.1 million, resulting in acquisition goodwill of $52.8
million. To finance the acquisition and to improve the Company's overall
liquidity, the Company capitalized Twin Oaks with 4.5 million shares of the
Company's common stock, and Twin Oaks, in turn, sold those shares to a fund
managed by First Reserve Corporation ("First Reserve") for $72 million in cash.
First Reserve funds owned a total of 10.2 million shares of the Company's common
stock as of September 30, 2000, or approximately 15.3% of the total shares
outstanding at that date.
In June 2000, the Company established the Pride International, Inc. Direct
Stock Purchase Plan which provides a convenient way for investors to purchase
shares of the Company's common stock without paying brokerage commissions or
service charges. Under this plan, the Company sold 1.4 million shares during the
three months ended September 30, 2000 for $33.7 million.
In September 2000, the Company acquired the remaining 40% minority interest
in Compania Boliviana de Perforacion S.A.M. for $11.6 million in cash,
increasing the Company's ownership to 100%.
8
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In September 2000, the Company entered into an agreement to buy two
semisubmersible drilling rigs located in the North Sea for $42 million in cash,
$75 million in shares of its common stock and a warrant to purchase 400,000
shares of the Company's common stock. The transaction is subject to execution of
a definitive purchase agreement and certain other conditions, and is expected to
be completed by year-end.
In October 2000, the Company acquired a 250-foot water depth jackup drilling
rig for $22 million in cash. The Company had been operating the rig under a
bare boat charter arrangement offshore Bangladesh since September 1999.
7. COMMITMENTS AND CONTINGENCIES
The Company is routinely involved in litigation incidental to its business,
which at times involves claims for significant monetary amounts, some of which
would not be covered by insurance. The Company was recently named as a defendant
in a proposed class action suit filed on behalf of offshore workers against a
number of major offshore drilling companies. The allegation is that the
companies "conspired to fix wages and benefits paid to drilling employees." The
plaintiff seeks an unspecified amount of treble damages and other relief on
behalf of himself and the alleged class. The Company believes the case is
without merit and will vigorously contest it. In the opinion of management, none
of the Company's existing litigation should have a material adverse effect on
the Company's financial position, results of operations or cash flows.
8. OTHER EVENTS
The Company has a 26.4% equity interest in a joint venture company
organized to construct, own and operate four dynamically positioned, Amethyst-
class semisubmersible drillings rigs. Two of the rigs, the Pride Brazil and the
Pride Carlos Walter, have been constructed in South Korea and are now undergoing
equipment commissioning and testing. These two rigs are expected to be
delivered by the shipyard in December 2000 and January 2001, respectively.
The other two rigs, the Amethyst 4 and Amethyst 5, are under construction
in the United States. The Company currently expects that the Amethyst 4 and
Amethyst 5 will be delivered by the shipyard in late 2001. The joint venture was
formed to build, own and operate its four rigs under charter and service
contracts with Petroleo Brasilerio S.A. ("Petrobras") having initial terms of
six to eight years. Petrobras has given notice of its intention to cancel
those contracts for late delivery of the rigs, and the joint venture has
obtained a preliminary injunction in a Brazilian court against that
cancellation. Based on Petrobras' announced deepwater drilling program and
related rig requirements, the Company believes that Petrobras likely will employ
at least two of the joint venture's rigs, the Pride Brazil and the Pride Carlos
Walter. However, there can be no assurance that any of the four rigs will be
chartered to Petrobras or to any other customer.
If Petrobras were to cancel the charters for the Pride Brazil and the Pride
Carlos Walter, such cancellation would constitute an event of default under the
joint venture company's financing arrangements that are providing substantially
all of the financing for construction of those rigs. The Company has provided
the lenders financing construction of the Pride Brazil and Pride Carlos Walter
with certain commitments and guarantees, the principal one being a guarantee for
repayment of up to $32.4 million of loans aggregating up to $340 million. In
November 1999, the joint venture issued $53 million of senior secured notes,
which are partially secured by a Company guarantee of up to $30 million. The
$32.4 million Company guarantee of borrowings under the credit facilities is
separate from, and in addition to, the Company's guarantee of up to $30 million
of the venture's senior secured notes. The Company's other commitments and
guarantees to the lenders under the credit facilities for the Pride Brazil and
Pride Carlos Walter include (a) a guarantee of cost overruns of up to an
aggregate of $6 million; (b) a guarantee of the cost of the two rigs in excess
of related refund guarantees supporting their construction contracts and (c)
guarantees relating to the performance of its subsidiaries and affiliates under
their management agreements and charters relating to the rigs.
9
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
If Petrobras accepts delivery of the joint venture's rigs under the existing
charters, it will be entitled to impose late delivery penalties which, in the
case of the Pride Brazil and Pride Carlos Walter, could be as much as $29.4
million based on the dates those rigs are currently expected to commence
operations under their respective Petrobras charters. In connection with the
credit facilities for the Amethyst 4 and Amethyst 5, the Company has guaranteed
payment of up to $20.5 million of late delivery penalties that are accruing and
may be payable under the charters relating to those two rigs. If the Amethyst 4
and Amethyst 5 are completed and delivered to Petrobras under their existing
charters, the maximum late delivery penalties Petrobras would be entitled to
impose for those rigs would be $56.0 million. The Company has not expressly
guaranteed payment of more than $20.5 million of late delivery penalties for any
of the Amethyst rigs but may be called upon to advance 30% of those penalties if
the venture does not have or is unable to obtain funds to pay those penalties or
if Petrobras refuses to allow such penalties to be paid or charged against
charter payments over the terms of the charters, as it has done in the past with
offshore drilling rigs it has chartered from other firms.
9. SEGMENT INFORMATION
The following table sets forth selected consolidated financial information
of the Company by operating segment for the periods indicated. Operating costs
for the nine-month period ended September 30, 1999 include restructuring
charges.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(in millions, except percentages)
Revenue:
United States offshore............. $ 37.5 16.2% $ 16.8 11.8% $ 89.2 14.2% $ 68.6 14.8%
International offshore............. 78.9 34.0 60.7 42.7 237.8 37.9 204.0 44.0
International land................. 88.9 38.4 64.6 45.5 245.6 39.2 191.4 41.2
E&P services....................... 26.5 11.4 - - 54.3 8.7 - -
------ ----- ------ ----- ------ ----- ------ -----
Total revenue..................... 231.8 100.0 142.1 100.0 626.9 100.0 464.0 100.0
------ ----- ------ ----- ------ ----- ------ -----
Operating Costs:....................
United States offshore............. 23.8 15.9 14.7 14.9 62.2 15.0 52.1 14.9
International offshore............. 42.5 28.4 36.3 36.7 129.4 31.3 142.4 40.8
International land................. 64.3 42.9 47.9 48.4 183.1 44.2 155.0 44.3
E&P services....................... 19.2 12.8 - - 39.3 9.5 - -
------ ----- ------ ----- ------ ----- ------ -----
Total operating costs............. 149.8 100.0 98.9 100.0 414.0 100.0 349.5 100.0
------ ----- ------ ----- ------ ----- ------ -----
Gross Margin:.......................
United States offshore............. 13.7 16.7 2.1 4.8 27.0 12.7 16.5 14.5
International offshore............. 36.4 44.4 24.4 56.5 108.4 50.9 61.6 53.7
International land................. 24.6 30.0 16.7 38.7 62.5 29.4 36.4 31.8
E&P services....................... 7.3 8.9 - - 15.0 7.0 - -
------ ----- ------ ----- ------ ----- ------ -----
Total gross margin................ $ 82.0 100.0% $ 43.2 100.0% $212.9 100.0% $114.5 100.0%
====== ===== ====== ===== ====== ===== ====== =====
10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Pride International, Inc.:
We have reviewed the accompanying consolidated balance sheet of Pride
International, Inc. as of September 30, 2000, and the related consolidated
statement of operations for each of the three-month and nine-month periods ended
September 30, 2000 and 1999, and the related consolidated statement of cash
flows for the nine-month periods ended September 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements for
them to be in conformity with generally accepted accounting principles.
We have previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended (not presented
herein), and in our report dated March 30, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1999 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
November 13, 2000
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our unaudited consolidated financial statements as of September 30, 2000 and for
the three-month and nine-month periods ended September 30, 2000 and 1999
included elsewhere herein, and with our Annual Report on Form 10-K for the year
ended December 31, 1999. The following information contains forward-looking
statements. Please read "Forward-Looking Statements" for a discussion of
limitations inherent in such statements.
GENERAL
Pride is a leading international provider of contract drilling and related
services, operating both offshore and on land. Currently, we operate a global
fleet of 294 rigs, including two ultra-deepwater drillships, three
semisubmersible rigs, 19 jackup rigs, five tender-assisted rigs, three barge
rigs, 21 offshore platform rigs and 241 land-based drilling and workover rigs.
We operate in more than 20 countries and marine provinces. The significant
diversity of our rig fleet and areas of operations enables us to provide a broad
range of services and to take advantage of market upturns while reducing our
exposure to sharp downturns in any particular market sector or geographic
region.
Most recently, we have focused on increasing the size of our fleet
capable of drilling in deeper waters. We have a 51% ownership interest in joint
ventures that own and operate two ultra-deepwater drillships, the Pride Africa
and the Pride Angola, that were placed in service in October 1999 and May 2000,
respectively. We have a 26.4% interest in a separate joint venture that is
engaged in the construction of four fourth-generation Amethyst-class
semisubmersible rigs. Two of these rigs, the Pride Brazil and the Pride Carlos
Walter, have been constructed in Korea and are currently undergoing equipment
commissioning and testing. The other two rigs are under construction in the
United States. In September 2000, we entered into an agreement to buy two
semisubmersible drilling rigs located in the North Sea. We also have expanded
the range of services we provide to our customers in South America with the
acquisition in April 2000 of Servicios Especiales San Antonio S.A. ("San
Antonio").
OUTLOOK
With market conditions improving as a result of the increases in oil
and gas prices since mid-1999, management anticipates continued increases in
utilization and dayrates through the remainder of 2000. If commodity prices
remain near their current levels, we expect that our financial results will
improve in the fourth quarter of 2000 and throughout 2001. However, due to the
volatility of oil and gas prices, which affect the demand for our drilling
services, we cannot predict with any certainty whether these improving
conditions will continue to affect our financial results positively or whether
commodity prices and demand for our services will decline substantially.
The depressed industry conditions over the latter part of 1998 and in
1999 led us to reduce our workforce significantly. In the first quarter of
1999, we recorded charges of $28.9 million, net of income taxes, for current and
future cash expenditures related to a company-wide restructuring plan
implemented to address the dramatic decline in drilling and workover activity.
We believe the restructuring has resulted in annual cost savings in excess of
$25 million.
12
RESULTS OF OPERATIONS
We have presented in the following table selected consolidated financial
information by operating segment for the periods indicated. Operating costs for
the nine-month period ended September 30, 1999 include restructuring charges.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- --------------
(in millions, except percentages)
Revenue:
United States offshore............. $ 37.5 16.2% $ 16.8 11.8% $ 89.2 14.2% $ 68.6 14.8%
International offshore............. 78.9 34.0 60.7 42.7 237.8 37.9 204.0 44.0
International land................. 88.9 38.4 64.6 45.5 245.6 39.2 191.4 41.2
E&P services....................... 26.5 11.4 - - 54.3 8.7 - -
------ ----- ------ ----- ------ ----- ------ -----
Total revenue..................... 231.8 100.0 142.1 100.0 626.9 100.0 464.0 100.0
------ ----- ------ ----- ------ ----- ------ -----
Operating Costs:....................
United States offshore............. 23.8 15.9 14.7 14.9 62.2 15.0 52.1 14.9
International offshore............. 42.5 28.4 36.3 36.7 129.4 31.3 142.4 40.8
International land................. 64.3 42.9 47.9 48.4 183.1 44.2 155.0 44.3
E&P services....................... 19.2 12.8 - - 39.3 9.5 - -
------ ----- ------ ----- ------ ----- ------ -----
Total operating costs............. 149.8 100.0 98.9 100.0 414.0 100.0 349.5 100.0
------ ----- ------ ----- ------ ----- ------ -----
Gross Margin:.......................
United States offshore............. 13.7 16.7 2.1 4.8 27.0 12.7 16.5 14.5
International offshore............. 36.4 44.4 24.4 56.5 108.4 50.9 61.6 53.7
International land................. 24.6 30.0 16.7 38.7 62.5 29.4 36.4 31.8
E&P services....................... 7.3 8.9 - - 15.0 7.0 - -
------ ----- ------ ----- ------ ----- ------ -----
Total gross margin................ $ 82.0 100.0% $ 43.2 100.0% $212.9 100.0% $114.5 100.0%
====== ===== ====== ===== ====== ===== ====== =====
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999.
Revenue. Revenue for the three months ended September 30, 2000 increased
$89.7 million, or 63.1%, as compared to the corresponding period in 1999. Of
this increase, $26.5 million related to the initiation of E&P services through
the acquisition of San Antonio. Revenue from international land operations
increased $24.3 million, primarily due to higher utilization of our land-based
fleet in South America. Revenue from United States offshore operations increased
$20.7 million, due to increased utilization and higher dayrates for our Gulf of
Mexico jackup and platform rigs. Revenue from international offshore operations
increased $18.2 million, which reflects commencement of operations of our two
new drillships, partially offset by lower utilization of our semi-submersible
rigs and rigs that we manage for others.
Operating Costs. Operating costs for the three months ended September 30,
2000 increased $50.9 million, or 51.5%, as compared to the corresponding period
in 1999. Of this increase, $19.2 million related to the addition of San
Antonio. Operating costs for international land operations increased $16.4
million, primarily due to higher utilization of our land-based fleet in South
America. Operating costs for our United States offshore operations increased
$9.1 million, due to increased utilization of our Gulf of Mexico jackup and
platform rigs. Operating costs for our international offshore operations
increased $6.2 million primarily due to commencement of operations of our two
new drillships, partially offset by reduced operating costs due to lower
utilization of our international semi-submersible rigs and rigs that we manage
for others.
Depreciation and Amortization. Depreciation and amortization for the three
months ended September 30, 2000 increased $10.4 million, or 43.6%, as compared
to the corresponding period in 1999. Of this amount, $4.7 million related to
our two new drillships, $3.3 million related to the assets acquired in the
San Antonio acquisition, $1.3 million was attributable to the additions of other
deepwater fleet assets and $1.1 million related to the expansion of our Gulf of
Mexico jackup rig fleet.
13
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended September 30, 2000 increased $4.5 million,
or 27.5%, as compared to the corresponding period in 1999. Of this increase,
$1.9 million was attributable to the addition of the San Antonio operations and
$2.2 million was due to increased insurance and personnel related expenses.
Other Income (Expense). Other expense for the three months ended September
30, 2000 increased $8.1 million, or 72.9%, as compared to the corresponding
period in 1999. Of this increase, $6.5 million was due to interest expense on
the permanent financing for our two newly-built drillships, which had been
capitalized prior to the commencement of operations of each of the vessels.
Interest expense increased an additional $1.0 million due to increased
borrowings to fund other asset additions. Interest income decreased by $0.7
million due to a decrease in average cash balances available for investment.
Other income for the three months ended September 30, 2000 includes a gain from
settlement of a lawsuit, partially offset by losses on foreign currency exchange
contracts.
Income Tax Provision. Our consolidated effective income tax rate for the
three months ended September 30, 2000 was 31.0% as compared to approximately
23.0% for the corresponding period in 1999. The increase in effective tax rate
resulted primarily from operations in certain non-U.S. countries with deemed
profit tax regimes in which our tax liability is based on revenues rather than
actual income or loss.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999.
Revenue. Revenue for the nine months ended September 30, 2000 increased
$162.9 million, or 35.1%, as compared to the corresponding period in 1999. Of
this increase, $54.3 million related to the addition of San Antonio in April
2000. Revenue from international land operations increased $54.2 million,
primarily due to higher utilization and dayrates for our land-based fleet in
South America. Revenue from United States offshore operations increased $20.6
million due to higher utilization and dayrates for our Gulf of Mexico jack-up
and platform rigs. Revenue from international offshore operations increased
$33.8 million, due to commencement of operations of our two new drillships,
partially offset by lower utilization and day rates for certain of our other
international offshore rigs and rigs that we manage for others.
Operating Costs. Operating costs for the nine months ended September 30,
2000 increased $64.5 million, or 18.5%, as compared to the corresponding period
in 1999. Of this increase, $39.3 million related to the addition of San Antonio.
Operating costs for our international land operations increased $28.1 million,
primarily due to higher utilization of our land-based fleet in South America.
Operating costs for our United States offshore operations increased $10.1
million, due to increased utilization of our Gulf of Mexico jackup and platform
rigs. These increases were offset by a decrease in operating costs of $13.0
million for our international offshore operations. Although operating costs for
this segment increased with the commencement of operations of our two new
drillships, such increase was more than offset by reduced operating costs due to
lower utilization of several of our other international offshore rigs, as well
as a reduction in activity levels for rigs that we manage for others.
Depreciation and Amortization. Depreciation and amortization increased
$24.9 million, or 35.4%, for the nine months ended September 30, 2000 as
compared to the corresponding period in 1999. Of this increase, $6.5 million
related to the San Antonio acquisition, $10.3 million related to our two new
drillships, $3.5 million related to the expansion of our other deepwater fleet
assets and $4.6 million related to the additions to our Gulf of Mexico jackup
rig fleet.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $22.7 million, or 28.0%, for the nine months ended September
30, 2000 as compared to the corresponding period in 1999, as a result of non-
recurring restructuring charges recorded in the first quarter of 1999 and the
effect of reduced expenses as a result of the restructuring in the third quarter
of 2000, partially offset by increases related to the acquisition of San Antonio
and increased insurance and personnel expenses.
Other Income (Expense). Other expense for the nine months ended September
30, 2000 increased $23.5 million, or 67.2%, over the corresponding period in
1999. Of this increase, $11.9 million related to increased borrowings to fund
drillship construction and other deepwater asset expansion projects, and $9.5
million related to interest expense on the permanent financing for our two
newly-built drillships, which had
14
been capitalized prior to the commencement of operations of each of the vessels.
Other income for the nine months ended September 30, 2000 includes a gain from
settlement of a lawsuit, partially offset by losses on foreign currency exchange
contracts. Interest income increased $1.5 million due to an increase in the
average cash balances available for investment.
Income Tax Provision. Our consolidated effective income tax rate for the
nine months ended September 30, 2000 was 19.9% as compared to 28.0% for the
corresponding period in 1999. The decrease in the effective income tax rate
resulted from tax effect of the operations in lower effective tax rate
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $34.9 million and $132.7 million as of September
30, 2000 and December 31, 1999, respectively. Our current ratio, the ratio of
current assets to current liabilities, was 1.1 as of September 30, 2000 and 1.5
as of December 31, 1999. The decreases were attributable to the expenditure of
cash and incurrence and assumption of debt in connection with the April 2000 San
Antonio acquisition, certain capital expenditures, and the partial repayment of
drillship and other loans partially offset by sales of common equity and net
sales of certain short-term investments. As of September 30, 2000, we had
approximately $47 million outstanding under short-term loans for which we intend
to be reimbursed from the drillship joint venture companies described below
with future draws under the long-term drillship loans.
During the nine months ended September 30, 2000, our capital expenditures
consisted of $58.4 million for the acquisition of San Antonio, $22.0 million for
the construction of the Pride Africa and the Pride Angola, $13.8 million for the
acquisition and outfitting of a 3,000 horsepower land rig, $25.7 million
relating to the acquisition and refurbishment of the Pride Cabinda jackup rig,
$43.2 million for certain other construction and refurbishment expenditures
begun in 1998 and 1999 and approximately $38.2 million for other enhancement and
sustaining capital projects. We expect to spend approximately $10 to $15 million
during the remainder of 2000 for enhancements and sustaining capital projects.
We currently have senior bank credit facilities with foreign banks that
provide aggregate availability of up to $165.0 million. The credit facilities
terminate between January 2002 and February 2005. Borrowings under each of the
credit facilities bear interest at variable rates based on LIBOR plus a spread
ranging from 0.55% to 1.70%. As of September 30, 2000, there were no advances
outstanding under these credit facilities.
We have a senior secured credit facility with a U.S. bank under which up to
$25 million of letters of credit may be issued. Outstanding letters of credit
issued under this credit facility are secured by our cash and cash equivalents
maintained at such bank. The letter of credit facility expires in March 2003.
As of September 30, 2000, there were $12.6 million of letters of credit issued
under this credit facility.
In connection with the construction of the Pride Africa and the Pride
Angola, the two joint venture companies in which we have a 51% interest have
financing arrangements with a group of banks for up to $398 million of the total
cost of $470 million for the drillships. As of September 30, 2000, loans
totaling $337.1 million were outstanding under these arrangements, and $47.0
million was undrawn. These loans are secured by the two drillships and proceeds
from the related drilling contracts and are non-recourse to the joint venture
partners.
Pride has a 26.4% equity interest in a joint venture company organized to
construct, own and operate four dynamically positioned, Amethyst-class
semisubmersible drilling rigs. Two of the rigs, the Pride Brazil and the Pride
Carlos Walter, have been constructed in South Korea and are now undergoing
equipment commissioning and testing. These two rigs are expected to be delivered
by the shipyard in December 2000 and January 2001, respectively.
The other two rigs, the Amethyst 4 and Amethyst 5, are under construction
in the United States. We currently
15
expect that the Amethyst 4 and Amethyst 5 will be delivered by the
shipyard in late 2001. The joint venture was formed to build, own and operate
its four rigs under charter and service contracts with Petroleo Brasilerio S.A.
("Petrobras") having initial terms of six to eight years. Petrobras has given
notice of its intention to cancel those contracts for late delivery of the rigs,
and the joint venture has obtained a preliminary injunction in a Brazilian court
against that cancellation. Based on Petrobras' announced deepwater drilling
program and related rig requirements, we believe that Petrobras likely will
employ at least two of the joint venture's rigs, the Pride Brazil and the Pride
Carlos Walter. However, there can be no assurance that any of the four rigs will
be chartered to Petrobras or to any other customer.
If Petrobras were to cancel the charters for the Pride Brazil and the
Pride Carlos Walter, such cancellation would constitute an event of default
under the joint venture company's financing arrangements that are providing
substantially all of the financing for construction of those rigs. Pride has
provided the lenders financing construction of the Pride Brazil and Pride Carlos
Walter with certain commitments and guarantees, the principal one being a
guarantee for repayment of up to $32.4 million of loans aggregating up to $340
million. In November 1999, the joint venture issued $53 million of senior
secured notes, which are partially secured by a Pride guarantee of up to $30
million. The $32.4 million Pride guarantee of borrowings under the credit
facilities is separate from, and in addition to, Pride's guarantee of up to $30
million of the venture's senior secured notes. Pride's other commitments and
guarantees to the lenders under the credit facilities for the Pride Brazil and
Pride Carlos Walter include (a) a guarantee of cost overruns of up to an
aggregate of $6 million; (b) a guarantee of the cost of the two rigs in excess
of related refund guarantees supporting their construction contracts and (c)
guarantees relating to the performance of our subsidiaries and affiliates under
their management agreements and charters relating to the rigs.
If Petrobras accepts delivery of the joint venture's rigs under the
existing charters, it will be entitled to impose late delivery penalties which,
in the case of the Pride Brazil and Pride Carlos Walter, could be as much as
$29.4 million based on the dates those rigs are currently expected to commence
operations under their respective Petrobras charters. In connection with the
credit facilities for the Amethyst 4 and Amethyst 5, Pride has guaranteed
payment of up to $20.5 million of late delivery penalties that are accruing and
may be payable under the charters relating to those two rigs. If the Amethyst 4
and Amethyst 5 are completed and delivered to Petrobras under their existing
charters, the maximum late delivery penalties Petrobras would be entitled to
impose for those rigs would be $56.0 million. Pride has not expressly
guaranteed payment of more than $20.5 million of late delivery penalties for any
of the Amethyst rigs but may be called upon to advance 30% of those penalties if
the venture does not have or is unable to obtain funds to pay those penalties or
if Petrobras refuses to allow such penalties to be paid or charged against
charter payments over the terms of the charters, as it has done in the past with
offshore drilling rigs it has chartered from other firms.
In April 2000, our wholly owned subsidiary, Twin Oaks Financial Ltd. ("Twin
Oaks"), acquired all the outstanding capital stock of San Antonio from Perez
Companc S.A. ("Perez Companc"). The purchase price was $61 million, consisting
of $35 million in cash and a $26 million promissory note of Twin Oaks guaranteed
by San Antonio and payable in monthly installments equal to the lesser of (a)
25% of the revenues of San Antonio for the relevant month from services provided
by it to Perez Companc and its affiliates or (b) $722,222. Interest on the
outstanding balance of the note is payable quarterly at LIBOR plus 2.75%, which
was 9.3675% at September 30, 2000. Perez Companc is also entitled to "earn-out"
payments of up to $12 million in the aggregate until April 2004. To finance the
acquisition and to improve the Company's overall liquidity, the Company
capitalized Twin Oaks with 4.5 million shares of our common stock, and Twin
Oaks, in turn, sold those shares to a fund managed by First Reserve Corporation
("First Reserve") for $72 million in cash. First Reserve funds owned a total of
10.2 million shares of our common stock at September 30, 2000, or approximately
15.3% of the total shares outstanding at that date.
In connection with our drillship loans and limited-recourse collateralized
term loans, at September 30, 2000, $28.9 million of our cash balances, which
amount is included in cash and cash equivalents, is held in trust and is not
available for our use.
In June 2000, we established the Pride International, Inc. Direct Stock
Purchase Plan which provides a convenient way for investors to purchase shares
of our common stock without paying brokerage commissions or service
16
charges. Under this plan, we sold 1.4 million shares during the three months
ended September 30, 2000 for $33.7 million.
In September 2000, we paid $11.6 million to acquire the outstanding 40%
minority interest in Compania Boliviana de Perforacion S.A.M. increasing our
ownerhsip to 100%.
In September 2000, we entered into an agreement to buy two semisubmersible
drilling rigs located in the North Sea for $42 million in cash, $75 million in
shares of our common stock and a warrant to purchase 400,000 shares of our
common stock. The transaction is subject to execution of a definitive purchase
agreement and certain other conditions, and is expected to be completed by year
end.
In October 2000, we acquired a 250-foot water depth jack up drilling rig for
$22 million cash. We had been operating the rig under a bareboat charter
arrangement offshore Bangladesh since September 1999.
As of September 30, 2000, we had approximately $1.3 billion of debt and
capital lease obligations. We do not expect that our level of total
indebtedness will have a material adverse impact on our financial position,
results of operations or liquidity in future periods.
Management believes that the cash and cash equivalents on hand, together
with the cash generated from our operations and borrowings under our credit
facilities, will be adequate to fund normal ongoing capital expenditures,
working capital and debt service requirements for the foreseeable future.
From time to time, we may review possible expansion and acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. From time to time,
we have one or more bids outstanding for contracts that could require
significant capital expenditures and mobilization costs. We expect to fund
acquisitions and project opportunities primarily through a combination of
working capital, cash flow from operations and full or limited recourse debt or
equity financing.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements, other than statements
of historical facts, included in this Quarterly Report on Form 10-Q that address
activities, events or developments that we expect, project, believe or
anticipate will or may occur in the future are forward-looking statements. These
include such matters as:
. future capital expenditures and investments in the construction, acquisition
and refurbishment of rigs (including the amount and nature thereof and the
timing of completion thereof)
. repayment of debt
. expansion and other development trends in the contract drilling industry
. business strategies
. expansion and growth of operations
. utilization rates and contract rates for rigs
. employment of rigs by Petrobras and impact of late-delivery penalties and
. future operating results and financial condition
We have based these statements on assumptions and analyses made by our
management in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. These statements are subject to a number
of assumptions, risks and uncertainties, including:
. general economic and business conditions
17
. prices of oil and gas and industry expectations about future prices
. foreign exchange controls and currency fluctuations
. the business opportunities (or lack thereof) that may be presented to and
pursued by us and
. changes in laws or regulations
Most of these factors are beyond our control. We caution you that forward
looking-statements are not guarantees of future performance and that actual
results or developments may differ materially from those projected in these
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from the use of financial
instruments in the ordinary course of business. These risks arise primarily as
a result of potential changes in the fair market value of financial instruments
that would result from adverse fluctuation in interest rates and foreign
currency exchange rates as discussed below. We entered into these instruments
other than for trading purposes.
Interest Rate Risk. We are exposed to interest rate risk through our
convertible and fixed rate long-term debt. The fair market value of fixed rate
debt will increase as prevailing interest rates decrease. The fair value of our
long-term debt is estimated based on quoted market prices where applicable, or
based on the present value of expected cash flows relating to the debt
discounted at rates currently available to us for long-term borrowings with
similar terms and maturities. The estimated fair value of our long-term debt as
of September 30, 2000 was approximately $1.11 billion, which is approximately
the same as its carrying value. A hypothetical 10% decrease in interest rates
would increase the fair market value of our long-term debt by approximately $45
million.
We enter into interest rate swap and cap agreements to manage our exposure
to interest rate risk. As of September 30, 2000, we held interest rate swap and
cap agreements covering $354 million, fixing our interest payments on related
debt at 7.5%. The weighted average interest rate incurred on the related debt
in the first nine months of 2000 excluding the swap agreements was 7.8%. The
fair market value of our interest rate swap and cap agreements is determined
based upon discounted expected future cash flows using the market interest rate
at the balance sheet date. The estimated fair value of our interest rate swap
and cap agreements as of September 30, 2000 was a gain of approximately $6.3
million. A hypothetical 10% decrease in interest rates would decrease the fair
market value of our interest rate swap and cap agreements by approximately $8.6
million. The change in the cash flows from the interest rate swap and cap
agreements would be offset by a corresponding change in interest expense on the
related debt.
Foreign Currency Exchange Rate Risk. We operate in a number of
international areas and are involved in transactions denominated in currencies
other than U.S. dollars, which expose us to foreign exchange rate risk. We
utilize forward exchange contracts foreign currency contracts, local currency
borrowings and the payment structure of customer contracts to selectively
mitigate our exposure to exchange rate fluctuations in connection with monetary
assets, liabilities and cash flows denominated in certain foreign currencies. A
hypothetical 10% increase in the U.S. dollar relative to the value of all
foreign currencies as of September 30, 2000 would result in an approximate $3.4
million decrease in the fair value of our forward exchange contracts. We do not
hold or issue forward exchange contracts or other derivative financial
instruments for speculative purposes.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are routinely involved in litigation incidental to our business,
which at times involves claims for significant monetary amounts, some of which
would not be covered by insurance. We were recently named as a defendant in a
proposed class action suit filed on behalf of offshore workers against a number
of major offshore drilling companies. The allegation is that the companies
"conspired to fix wages and benefits paid to drilling employees." The plaintiff
seeks an unspecified amount of treble damages and other relief on behalf of
himself and the alleged class. We believe the case is without merit and will
vigorously contest it. In the opinion of management, none of our existing
litigation should have a material adverse effect on our financial position,
results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
15.1 -- Awareness Letter of PricewaterhouseCoopers LLP
27 -- Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended
September 30, 2000.
19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PRIDE INTERNATIONAL, INC.
By: EARL W. McNIEL
----------------------
(EARL W. McNIEL)
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: November 14, 2000
20