1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ................. to ...................
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0321760
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of April 30, 2001 Common stock, $0.01 par value per share
133,457,055 shares
2
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED MARCH 31, 2001
PAGE NO.
COVER PAGE.......................................................................................1
TABLE OF CONTENTS................................................................................2
PART I. FINANCIAL INFORMATION...................................................................3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets....................................................3
Consolidated Statements of Income..............................................4
Consolidated Statements of Cash Flows..........................................5
Notes to Consolidated Financial Statements.....................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................21
PART II. OTHER INFORMATION......................................................................22
ITEM 1. LEGAL PROCEEDINGS..............................................................22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................22
ITEM 5. OTHER INFORMATION..............................................................22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................22
SIGNATURES.......................................................................................23
EXHIBIT INDEX....................................................................................24
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
MARCH 31, DECEMBER 31,
---------- ------------
2001 2000
---------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 304,563 $ 144,456
Marketable securities ..................................................... 604,050 717,678
Accounts receivable ....................................................... 161,703 153,452
Rig inventory and supplies ................................................ 41,123 40,698
Prepaid expenses and other ................................................ 44,296 44,673
---------- ----------
Total current assets ..................................... 1,155,735 1,100,957
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION .................................................. 1,894,957 1,902,415
GOODWILL, NET OF ACCUMULATED AMORTIZATION ................................... 50,901 55,205
OTHER ASSETS ................................................................ 22,200 20,929
---------- ----------
Total assets ............................................. $3,123,793 $3,079,506
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ......................................... $ 9,732 $ 9,732
Accounts payable .......................................................... 57,180 59,021
Accrued liabilities ....................................................... 53,537 53,923
Taxes payable ............................................................. 3,813 337
---------- ----------
Total current liabilities ................................ 124,262 123,013
LONG-TERM DEBT .............................................................. 856,804 856,559
DEFERRED TAX LIABILITY ...................................................... 330,083 316,627
OTHER LIABILITIES ........................................................... 13,325 15,454
---------- ----------
Total liabilities ........................................ 1,324,474 1,311,653
---------- ----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock (par value $0.01, 25,000,000 shares authorized, none
issued and outstanding) ................................................. -- --
Common stock (par value $0.01, 500,000,000 shares authorized,
133,232,793 and 133,150,447 issued and outstanding at March 31, 2001
and December 31, 2000, respectively) .................................... 1,333 1,332
Additional paid-in capital ................................................ 1,255,066 1,248,665
Retained earnings ......................................................... 537,370 517,186
Accumulated other comprehensive income .................................... 5,550 670
---------- ----------
Total stockholders' equity ............................... 1,799,319 1,767,853
---------- ----------
Total liabilities and stockholders' equity ............... $3,123,793 $3,079,506
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
3
4
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
REVENUES ................................................. $ 205,225 $ 167,828
OPERATING EXPENSES:
Contract drilling ................................. 108,697 100,823
Depreciation and amortization ..................... 41,559 36,875
General and administrative ........................ 6,887 6,020
--------- ---------
Total operating expenses ..................... 157,143 143,718
--------- ---------
OPERATING INCOME ......................................... 48,082 24,110
OTHER INCOME (EXPENSE):
Gain on sale of assets ............................ 121 14,017
Interest income ................................... 11,687 8,622
Interest expense .................................. (8,318) (1,234)
Other, net ........................................ 3,105 (89)
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE ......................... 54,677 45,426
INCOME TAX EXPENSE ....................................... (17,849) (15,938)
--------- ---------
NET INCOME ............................................... $ 36,828 $ 29,488
========= =========
EARNINGS PER SHARE:
Basic ............................................. $ 0.28 $ 0.22
========= =========
Diluted ........................................... $ 0.27 $ 0.21
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Shares of common stock ............................ 133,165 135,688
Dilutive potential shares of common stock ......... 9,862 9,876
--------- ---------
Total weighted average shares outstanding .... 143,027 145,564
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
4
5
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
OPERATING ACTIVITIES:
Net income .......................................................... $ 36,828 $ 29,488
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ..................................... 41,559 36,875
Gain on sale of assets ............................................ (121) (14,017)
Gain on sale of investment securities ............................. (6,111) --
Deferred tax provision ............................................ 14,230 7,648
Accretion of discounts on investment securities ................... (2,115) (2,197)
Amortization of debt issuance costs ............................... 426 138
Amortization of discount on zero coupon convertible debentures .... 3,579 --
Changes in operating assets and liabilities:
Accounts receivable ............................................... (8,251) 13,810
Rig inventory and supplies and other current assets ............... (48) 6,830
Other assets, non-current ......................................... (1,862) (30)
Accounts payable and accrued liabilities .......................... (2,062) (27,376)
Taxes payable ..................................................... 3,476 (4,032)
Other liabilities, non-current .................................... (2,129) (608)
Other, net ........................................................ 469 132
--------- ---------
Net cash provided by operating activities ..................... 77,868 46,661
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ................................................ (33,779) (79,155)
Proceeds from sale of assets ........................................ 699 32,177
Net change in marketable securities ................................. 128,895 19,976
--------- ---------
Net cash provided by (used in) investing activities ........... 95,815 (27,002)
--------- ---------
FINANCING ACTIVITIES:
Acquisition of treasury stock ....................................... -- (8,489)
Proceeds from sale of put options ................................... 3,068 --
Payment of dividends ................................................ (16,644) (16,979)
Proceeds from stock options exercised ............................... -- 65
--------- ---------
Net cash used in financing activities ......................... (13,576) (25,403)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................................... 160,107 (5,744)
Cash and cash equivalents, beginning of period ...................... 144,456 112,316
--------- ---------
Cash and cash equivalents, end of period ............................ $ 304,563 $ 106,572
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
5
6
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Diamond Offshore Drilling, Inc.
and subsidiaries (the "Company") should be read in conjunction with the Annual
Report on Form 10-K for the year ended December 31, 2000 (File No. 1-13926).
Interim Financial Information
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
disclosures required by generally accepted accounting principles for complete
financial statements. The consolidated financial information has not been
audited but, in the opinion of management, includes all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
consolidated balance sheets, statements of income, and statements of cash flows
at the dates and for the periods indicated. Results of operations for interim
periods are not necessarily indicative of results of operations for the
respective full years.
Cash and Cash Equivalents
Short-term, highly liquid investments that have an original maturity of
three months or less and deposits in money market mutual funds that are readily
convertible into cash are considered cash equivalents.
Marketable Securities
The Company's investments are classified as available for sale and stated
at fair value. Accordingly, any unrealized gains and losses, net of taxes, are
reported in the Consolidated Balance Sheets in "Accumulated other comprehensive
income" until realized. The cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity and such adjustments are
included in the Consolidated Statements of Income in "Interest income." The cost
of debt securities sold is based on the specific identification method and the
cost of equity securities sold is based on the average cost method. Realized
gains or losses and declines in value, if any, judged to be other than temporary
are reported in the Consolidated Statements of Income in "Other income
(expense)."
Supplementary Cash Flow Information
Cash payments made for interest on long-term debt totaled $7.5 million
during each quarter ended March 31, 2001 and 2000. Cash payments made, net of
refunds, for income taxes during the quarters ended March 31, 2001 and 2000
totaled $0.6 million and $13.5 million, respectively.
Capitalized Interest
Interest cost for construction and upgrade of qualifying assets is
capitalized. The Company incurred interest cost, including amortization of debt
issuance costs, of $8.8 million and $3.9 million during the quarters ended March
31, 2001 and 2000, respectively. Interest cost capitalized during the quarters
ended March 31, 2001 and 2000 was $0.4 million and $2.7 million, respectively.
Goodwill
Goodwill is amortized on a straight-line basis over 20 years. Amortization
charged to operating expense during the quarters ended March 31, 2001 and 2000
totaled $0.9 million and $1.1 million, respectively.
6
7
Debt Issuance Costs
Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the terms of the related debt.
Common Equity Put Options
In February 2001, the Company received premiums of $3.1 million for the
sale of put options covering 500,000 shares of common stock. The options give
the holders the right to require the Company to repurchase shares of its common
stock at an exercise price of $40.00 per share at any time prior to their
expiration in February 2002. The Company has the option to settle in cash or
shares of common stock. Premiums received for these options are recorded in
"Additional paid-in capital" in the Consolidated Balance Sheets.
All of the put options sold by the Company in August 2000 were unexercised
and expired by the end of February 2001. The put options covered 750,000 shares
of common stock and gave the holders the right to require the Company to
repurchase shares of its common stock at an exercise price of $37.85 per share
at any time prior to their expiration in February 2001. The Company had the
option to settle in cash or shares of common stock. Premiums of $3.9 million
received for these options were recorded in "Additional paid-in capital" in the
Consolidated Balance Sheets.
Comprehensive Income
Comprehensive income is the change in equity of a business enterprise
during a period resulting from transactions and other events and circumstances
except those from investments by owners and distributions to owners. For the
three months ended March 31, 2001 and 2000, comprehensive income totaled $41.7
million and $29.8 million, respectively. Comprehensive income includes net
income, foreign currency translation gains and losses, and unrealized holding
gains and losses on investments.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimated.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.
7
8
2. EARNINGS PER SHARE
A reconciliation of the numerators and the denominators of the basic and
diluted per-share computations for net income follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
-------- --------
NET INCOME - BASIC (NUMERATOR):
Net income .................................... $ 36,828 $ 29,488
Effect of dilutive potential shares
Convertible notes ........................ 2,401 802
-------- --------
NET INCOME INCLUDING CONVERSIONS .................. $ 39,229 $ 30,290
======== ========
WEIGHTED AVERAGE SHARES - BASIC (DENOMINATOR):
Weighted average shares ....................... 133,165 135,688
Effect of dilutive potential shares
Convertible notes ........................ 9,862 9,876
-------- --------
WEIGHTED AVERAGE SHARES INCLUDING CONVERSIONS ..... 143,027 145,564
======== ========
EARNINGS PER SHARE:
Basic ......................................... $ 0.28 $ 0.22
======== ========
Diluted ....................................... $ 0.27 $ 0.21
======== ========
The number of shares outstanding for the periods presented were increased
to include the weighted average number of shares issuable assuming full
conversion of the Company's $396.6 million of 3.75% convertible subordinated
notes (the "Notes") issued in February 1997. The Notes were convertible into
approximately 9.8 million shares of the Company's common stock at a conversion
price of $40.50 per share, subject to adjustment in certain circumstances, prior
to their redemption by the Company on April 6, 2001. See "-- Long-Term Debt -
Convertible Subordinated Notes."
The computation of diluted earnings per share ("EPS") for the quarter ended
March 31, 2001 does not assume conversion of the Company's 20-year zero coupon
convertible debentures (the "Zero Coupon Debentures"), issued in June 2000, as
there would be an antidilutive effect on EPS. The Zero Coupon Debentures were
issued at a discount with a yield to maturity of 3.50% per year. The Zero Coupon
Debentures are convertible into approximately 6.9 million shares of the
Company's common stock at any time prior to June 6, 2020 at a fixed conversion
rate of 8.6075 shares per Zero Coupon Debenture, subject to adjustment in
certain circumstances.
Non-qualified stock options (i) granted in January 2001 to purchase 2,500
shares of common stock at an exercise price of $39.88 per share and (ii) granted
in July 2000 to purchase 2,500 shares of common stock at an exercise price of
$35.72 per share were included in the computation of diluted EPS for the periods
presented because the options' exercise price was less than the average market
price of the common stock. However, the incremental shares calculated were
immaterial for presentation purposes.
In February 2001, the Company sold put options covering 500,000 shares of
common stock at an exercise price of $40.00 per share. The options were
outstanding through March 31, 2001 but were not included in the computation of
diluted EPS for 2001 because the options' exercise price was less than the
average market price of the common stock.
The number of shares of common stock and dilutive potential shares of
common stock outstanding at the end of the first quarter of 2001 would not have
changed materially had the redemption of the Notes on April 6, 2001 and the
issuance of the 1.5% convertible senior debentures on April 11, 2001 (the "1.5%
Debentures") occurred prior to the end of the first quarter of 2001. See
"- Long-Term Debt."
8
9
3. MARKETABLE SECURITIES
Investments classified as available for sale are summarized as follows:
MARCH 31, 2001
--------------------------------
UNREALIZED MARKET
COST GAIN VALUE
-------- -------- --------
(IN THOUSANDS)
Debt securities issued by the U.S. Treasury:
Due within one year ........................ $223,678 $ 56 $223,734
Due after five years through ten years ..... 266,090 10,738 276,828
Collateralized mortgage obligations ............. 102,228 1,260 103,488
-------- -------- --------
Total ...................................... $591,996 $ 12,054 $604,050
======== ======== ========
DECEMBER 31, 2000
--------------------------------
UNREALIZED MARKET
COST GAIN VALUE
-------- -------- --------
(IN THOUSANDS)
Debt securities issued by the U.S. Treasury:
Due within one year ........................ $149,005 $ 60 $149,065
Due after five years through ten years ..... 265,981 1,045 267,026
Collateralized mortgage obligations ............. 297,446 3,757 301,203
Equity securities ............................... 231 153 384
-------- -------- --------
Total ...................................... $712,663 $ 5,015 $717,678
======== ======== ========
All of the Company's investments are included as current assets in the
Consolidated Balance Sheets in "Marketable securities," representing the
investment of cash available for current operations.
During the three months ended March 31, 2001 and 2000, certain debt
securities due within one year matured for $150.0 million and $270.0 million,
respectively. During the first quarter of 2001, certain debt securities due
after five years through ten years were sold for proceeds of $101.9 million,
with a resulting realized after-tax gain of $1.0 million. Also during the
quarter ended March 31, 2001, certain collateralized mortgage obligations
("CMO's") were sold for proceeds of $191.5 million, with a resulting realized
after-tax gain of $2.9 million. CMO principals were reduced by $8.2 million
during the first quarter of 2001. The after-tax realized losses were immaterial.
In January 2001, the Company sold all of its remaining equity securities for
proceeds of $0.4 million. The resulting after-tax gain was $0.1 million.
4. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
MARCH 31, DECEMBER 31,
----------- ------------
2001 2000
----------- ------------
(IN THOUSANDS)
Drilling rigs and equipment .................................. $ 2,624,346 $ 2,155,924
Construction work in progress ................................ 38,637 474,154
Land and buildings ........................................... 14,235 14,224
Office equipment and other ................................... 18,762 18,480
----------- -----------
Cost ............................................... 2,695,980 2,662,782
Less accumulated depreciation ................................ (801,023) (760,367)
----------- -----------
Drilling and other property and equipment, net .... $ 1,894,957 $ 1,902,415
=========== ===========
In January 2001, approximately $450.0 million was reclassified from
construction work in progress to drilling rigs and equipment upon completion of
the conversion of the Ocean Confidence from an accommodation vessel to a high
specification semisubmersible drilling unit. The customer accepted the rig on
January 5, 2001 at which time it began a five-year drilling program in the Gulf
of Mexico.
9
10
5. GOODWILL
Cost and accumulated amortization of goodwill is summarized as follows:
MARCH 31, DECEMBER 31,
--------- ------------
2001 2000
--------- ------------
(IN THOUSANDS)
Goodwill .................................... $ 79,227 $ 82,628
Less accumulated amortization ............... (28,326) (27,423)
-------- --------
Total ............................. $ 50,901 $ 55,205
======== ========
During the quarter ended March 31, 2001, an adjustment of $3.4 million was
recorded to reduce goodwill before accumulated amortization. The adjustment
represents tax benefits not previously recognized for the excess of tax
deductible goodwill over the book goodwill amount.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
MARCH 31, DECEMBER 31,
--------- ------------
2001 2000
--------- ------------
(IN THOUSANDS)
Personal injury and other claims ............ $ 23,213 $ 21,565
Payroll and benefits ........................ 24,132 22,688
Interest payable ............................ 3,115 5,870
Other ....................................... 3,077 3,800
-------- --------
Total ............................. $ 53,537 $ 53,923
======== ========
7. LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 31, DECEMBER 31,
--------- ------------
2001 2000
--------- ------------
(IN THOUSANDS)
Convertible subordinated notes-3.75% ........ $396,646 $399,980
Zero coupon convertible debentures-3.50% .... 413,790 410,211
Lease-leaseback agreement ................... 56,100 56,100
-------- --------
866,536 866,291
Less current maturities ..................... 9,732 9,732
-------- --------
Total ............................. $856,804 $856,559
======== ========
Convertible Subordinated Notes
As of March 31, 2001, $3.4 million principal amount of the Notes, including
$0.02 million principal amount converted in 2000, had been converted into 82,809
shares of the Company's common stock. On April 6, 2001, the Company redeemed all
of its outstanding Notes in accordance with the indenture under which the Notes
were issued. Prior to April 6, 2001, $12.4 million principal amount of the Notes
had been converted into 307,071 shares of the Company's common stock at the
stated conversion price of $40.50 per share. The remaining $387.6 million
principal amount of the Notes was redeemed at 102.08% of the principal amount
thereof plus accrued interest for a total cash payment of $397.7 million
resulting in an after-tax charge of $7.7 million, which will be reported as an
extraordinary loss in the second quarter of 2001.
10
11
Credit Agreement
The Company's $20.0 million short-term revolving credit agreement with a
U.S. bank expired in April 2001. The credit agreement provided for borrowings at
various interest rates and varying commitment fees dependent upon public credit
ratings. The credit agreement contained certain financial and other covenants
and provisions that had to be maintained by the Company for compliance. As of
March 31, 2001, there were no outstanding borrowings under this credit agreement
and the Company was in compliance with each of the covenants and provisions.
Convertible Senior Subordinated Debentures
On April 11, 2001, the Company issued $460.0 million principal amount of
1.5% Debentures due April 15, 2031. The 1.5% Debentures are convertible into
shares of the Company's common stock at an initial conversion rate of 20.3978
shares per $1,000 principal amount of debentures, subject to adjustment in
certain circumstances. Upon conversion, the Company has the right to deliver
cash in lieu of shares of the Company's common stock. The transaction resulted
in net proceeds of approximately $449.2 million.
Interest on the 1.5% Debentures at the rate of 1.5% per year on the
outstanding principal amount is payable semiannually in arrears on April 15 and
October 15 of each year, beginning October 15, 2001. The 1.5% Debentures are
unsecured obligations of the Company and rank equally with all of the Company's
other unsecured senior indebtedness. The Company will pay contingent interest to
holders of the 1.5% Debentures during any six-month period commencing after
April 15, 2008 if the average market price of a 1.5% Debenture for a measurement
period preceding such six-month period equals 120% or more of the principal
amount of such 1.5% Debenture and the Company pays a regular cash dividend
during such six-month period. The contingent interest payable per $1,000
principal amount of 1.5% Debentures, in respect of any quarterly period will
equal 50% of regular cash dividends paid by the Company per share on its common
stock during that quarterly period multiplied by the conversion rate.
Holders may require the Company to purchase all or a portion of their 1.5%
Debentures on April 15, 2008 at a price equal to 100% of the principal amount of
the 1.5% Debentures to be purchased plus accrued and unpaid interest. The
Company may choose to pay the purchase price in cash or shares of the Company's
common stock or a combination of cash and common stock. In addition, holders may
require the Company to purchase for cash all or a portion of their 1.5%
Debentures upon a change in control (as defined).
The Company may redeem all or a portion of the 1.5% Debentures at any time
on or after April 15, 2008 at a price equal to 100% of the principal amount.
11
12
8. COMMITMENTS AND CONTINGENCIES
Raymond Verdin v. R&B Falcon Drilling USA, Inc., et al; No. G-00-488 in the
United States District Court for the Southern District of Texas, Galveston
Division, filed October 10, 2000. The Company was named as a defendant in a
proposed class action suit filed on behalf of offshore oil workers against all
of the major offshore drilling companies. The proposed class includes persons
hired in the United States by the companies to work in the Gulf of Mexico and
around the world. The allegation is that the companies, through trade groups,
shared wage information in order to fix and suppress the wages of the workers in
violation of the Sherman Antitrust Act and various state laws. Plaintiff Thomas
Bryant has replaced the named plaintiff as the proposed class representative. No
class has been certified at this time, however, a hearing on class certification
is currently scheduled for July 12, 2001. The lawsuit is seeking damages as well
as attorney's fees and costs. During the first quarter of 2001, the Company
recorded a $10.0 million reserve for this pending litigation in the Company's
Consolidated Statements of Income.
In August 1999, a customer terminated a contract for use of one of the
Company's drilling rigs located offshore Australia. The termination was made in
accordance with the terms of the contract and was not the result of performance
failures by the Company or its equipment. The Company believed that the contract
required the customer to pay approximately $16.5 million in remaining revenue
through the end of the contract period, which was previously scheduled to end in
early January 2000. However, the customer believed that there was no further
obligation under the contract and refused to pay the $16.5 million early
termination fee. The Company filed suit in Australia in August 1999 requesting
reconstruction of the contract and a declaratory judgment requiring the customer
to pay such early termination fee. In January 2001, the Company and the customer
entered into an out-of-court settlement of the claim. The Company received $7.3
million from the customer which is included in the Company's Consolidated
Statements of Income in the first quarter of 2001. At the same time, the Company
entered into contracts with the customer to work two of its previously idle rigs
at favorable dayrates, both of which began work during the first quarter of
2001.
Various other claims have been filed against the Company in the ordinary
course of business, particularly claims alleging personal injuries. Management
believes that the Company has established adequate reserves for any liabilities
that may reasonably be expected to result from these claims. In the opinion of
management, no pending or threatened claims, actions or proceedings against the
Company are expected to have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
9. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS
The Company reports its operations as one reportable segment, contract
drilling of offshore oil and gas wells. Although the Company provides contract
drilling services from different types of offshore drilling rigs and provides
such services in many geographic locations, these operations have been
aggregated into one reportable segment based on the similarity of economic
characteristics among all divisions and locations, including the nature of
services provided and the type of customers of such services.
Similar Services
Revenues from external customers for contract drilling and similar services
by equipment-type are listed below (eliminations offset dayrate revenues earned
when the Company's rigs are utilized in its integrated services):
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
High Specification Floaters .... $ 76,666 $ 56,862
Other Semisubmersibles ......... 80,969 88,511
Jack-ups ....................... 43,468 21,019
Integrated Services ............ 5,490 2,601
Eliminations ................... (1,368) (1,165)
--------- ---------
Total revenues ......... $ 205,225 $ 167,828
========= =========
12
13
Geographic Areas
At March 31, 2001, the Company had drilling rigs located offshore seven
countries other than the United States. As a result, the Company is exposed to
the risk of changes in social, political and economic conditions inherent in
foreign operations and the Company's results of operations and the value of its
foreign assets are affected by fluctuations in foreign currency exchange rates.
Revenues by geographic area are presented by attributing revenues to the
individual country or areas where the services were performed.
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Revenues from unaffiliated customers:
United States ............................ $ 127,040 $ 79,620
Foreign:
Europe/Africa ............................ 13,081 22,813
Australia/Southeast Asia ................. 13,780 18,432
South America ............................ 51,324 46,963
--------- ---------
Total revenues ...................... $ 205,225 $ 167,828
========= =========
10. OTHER INCOME AND EXPENSE (OTHER, NET)
Other, net consists of the following:
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Realized gain on marketable securities ...... $ 6,111 $ --
Miscellaneous ............................... (3,006) (89)
--------- ---------
Total other, net .................... $ 3,105 $ (89)
========= =========
Miscellaneous consists primarily of a $10.0 million reserve for pending
litigation offset by a $7.3 million receipt from the settlement of past
litigation.
13
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) included
elsewhere herein. References to the "Company" mean Diamond Offshore Drilling,
Inc., a Delaware corporation, and its subsidiaries.
The Company is a leader in deep water drilling with a fleet of 45 offshore
drilling rigs. The fleet consists of 30 semisubmersibles, 14 jack-ups and one
drillship.
RESULTS OF OPERATIONS
General
Revenues. The Company's revenues vary based upon demand, which affects the
number of days the fleet is utilized and dayrates earned. Revenues can also
increase or decrease as a result of the acquisition or disposal of rigs. In
order to improve utilization or realize higher dayrates, the Company may
mobilize its rigs from one market to another. During periods of mobilization,
however, revenues may be adversely affected. As a response to changes in demand,
the Company may withdraw a rig from the market by stacking it or may reactivate
a rig previously stacked, which may decrease or increase revenues, respectively.
Revenues from dayrate drilling contracts are recognized currently. The
Company may receive lump-sum payments in connection with specific contracts.
Such payments are recognized as revenues over the term of the related drilling
contract. Mobilization revenues, less costs incurred to mobilize an offshore rig
from one market to another, are recognized over the term of the related drilling
contract.
Revenues from offshore turnkey contracts are accrued to the extent of costs
until the specified turnkey depth and other contract requirements are met.
Income is recognized on the completed contract method. Provisions for future
losses on turnkey contracts are recognized when it becomes apparent that
expenses to be incurred on a specific contract will exceed the revenue from that
contract.
Operating Income. Operating income is primarily affected by revenue
factors, but is also a function of varying levels of operating expenses.
Operating expenses generally are not affected by changes in dayrates and may not
be significantly affected by fluctuations in utilization. For instance, if a rig
is to be idle for a short period of time, the Company may realize few decreases
in operating expenses since the rig is typically maintained in a prepared state
with a full crew. In addition, when a rig is idle, the Company is responsible
for certain operating expenses such as rig fuel and supply boat costs, which are
typically charged to the operator under drilling contracts. However, if the rig
is to be idle for an extended period of time, the Company may reduce the size of
a rig's crew and take steps to "cold stack" the rig, which lowers expenses and
partially offsets the impact on operating income. The Company recognizes as
operating expenses activities such as inspections, painting projects and routine
overhauls, which meet certain criteria, that maintain rather than upgrade its
rigs. These expenses vary from period to period. Costs of rig enhancements are
capitalized and depreciated over the expected useful lives of the enhancements.
Increased depreciation expense decreases operating income in periods subsequent
to capital upgrades.
14
15
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset dayrate revenues earned
when the Company's rigs are utilized in its integrated services). Certain
amounts applicable to the prior period have been reclassified to conform to the
classifications currently followed. Such reclassifications do not affect
earnings.
THREE MONTHS ENDED
MARCH 31,
---------------------- INCREASE/
2001 2000 (DECREASE)
--------- --------- ---------
(IN THOUSANDS)
REVENUES
High Specification Floaters ................ $ 76,666 $ 56,862 $ 19,804
Other Semisubmersibles ..................... 80,969 88,511 (7,542)
Jack-ups ................................... 43,468 21,019 22,449
Integrated Services ........................ 5,490 2,601 2,889
Other ...................................... -- -- --
Eliminations ............................... (1,368) (1,165) (203)
--------- --------- ---------
Total Revenues ..................... $ 205,225 $ 167,828 $ 37,397
========= ========= =========
CONTRACT DRILLING EXPENSE
High Specification Floaters ................ $ 28,003 $ 23,350 $ 4,653
Other Semisubmersibles ..................... 50,543 54,892 (4,349)
Jack-ups ................................... 25,385 19,845 5,540
Integrated Services ........................ 5,155 3,071 2,084
Other ...................................... 979 830 149
Eliminations ............................... (1,368) (1,165) (203)
--------- --------- ---------
Total Contract Drilling Expense .... $ 108,697 $ 100,823 $ 7,874
========= ========= =========
OPERATING INCOME
High Specification Floaters ................ $ 48,663 $ 33,512 $ 15,151
Other Semisubmersibles ..................... 30,426 33,619 (3,193)
Jack-ups ................................... 18,083 1,174 16,909
Integrated Services ........................ 335 (470) 805
Other ...................................... (979) (830) (149)
Depreciation and Amortization Expense ...... (41,559) (36,875) (4,684)
General and Administrative Expense ......... (6,887) (6,020) (867)
--------- --------- ---------
Total Operating Income ............. $ 48,082 $ 24,110 $ 23,972
========= ========= =========
High Specification Floaters.
Revenues. Revenues from high specification floaters during the first
quarter of 2001 increased by $19.8 million from the same period in 2000.
Approximately $14.1 million of the revenue increase was generated by the Ocean
Confidence, which began a five-year drilling program in the Gulf of Mexico on
January 5, 2001 after completion of a conversion to a high specification
semisubmersible drilling unit. In addition, revenues increased approximately
$4.6 million due to an increase in operating dayrates compared to 2000. The
average operating dayrate for high specification floaters, excluding the Ocean
Confidence, during the first quarter of 2001 was approximately $101,600 per day
compared to approximately $95,000 per day during the first quarter of 2000.
Contract Drilling Expense. Contract drilling expense for high specification
floaters during the first quarter of 2001 increased by $4.7 million from the
same period in 2000. This increase resulted primarily from costs incurred by the
Ocean Confidence, which began operations in January 2001.
Other Semisubmersibles.
Revenues. Revenues from other semisubmersibles during the first quarter of
2001 decreased $7.5 million from the same period in 2000. This decrease was
primarily the result of a lower average operating dayrate in 2001 for the Ocean
Princess that operated, until the second quarter of 2000, under a term contract
at dayrates in excess of then current market rates. Revenues in the first
quarter of 2001 were also lower when compared to the same period in
15
16
2000 due to the inactivity of the Ocean Nomad, which spent the first quarter of
2001 in a shipyard undergoing stability enhancements and other upgrades.
Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the first quarter of 2001 decreased $4.3 million from
the same period in 2000. This reduction in expense resulted primarily from
higher costs in 2000 for the Ocean Lexington associated with a mandatory
inspection and repairs, lower costs in 2001 for the Ocean Rover as a result of
cold stacking the rig in the third quarter of 2000, and lower costs in 2001 for
the Ocean Nomad as a result of capitalizing the rig's upgrade costs while in the
shipyard.
Jack-Ups.
Revenues. Revenues from jack-ups during the first quarter of 2001 increased
$22.4 million from the same period in 2000. Approximately $19.1 million of the
increase in revenues resulted from higher operating dayrates in 2001 compared to
2000. The average operating dayrate for jack-ups during the first quarter of
2001 was approximately $40,000 per day compared to approximately $20,000 per day
during the first quarter of 2000. In addition, revenues increased approximately
$3.7 million due to improvements in utilization compared to the first quarter of
2000. Utilization for the Company's jack-ups during the first quarter of 2001
was 87% compared to 82% during the first quarter of 2000.
Contract Drilling Expense. Contract drilling expense for jack-ups during
the first quarter of 2001 increased $5.5 million over the same period in 2000.
Approximately $2.8 million of the increase is due to operating costs for the
Ocean Tower and the Ocean Champion, which operated in 2001 but were stacked
during the first quarter of 2000. In addition, costs were higher in 2001 due to
the inspection and repair of the Ocean Nugget during the first quarter.
Integrated Services.
Revenues and contract drilling expense for integrated services increased as
a result of the difference in type and magnitude of projects in the first
quarter of 2001 compared to the first quarter of 2000. During the first quarter
of 2001, integrated services contributed operating income of $0.3 million to the
Company's consolidated results of operations primarily due to the completion of
one international turnkey project. During the same period in 2000, an operating
loss of $0.5 million resulted primarily from the completion of a turnkey project
in the Gulf of Mexico and integrated services provided in Aberdeen, Scotland.
Depreciation and Amortization Expense.
Depreciation and amortization expense of $41.6 million for the first
quarter of 2001 increased $4.7 million from $36.9 million for the same period in
2000. This increase resulted primarily from an increase in depreciation for the
Ocean Confidence which completed its conversion from an accommodation vessel to
a high specification semisubmersible drilling unit and commenced operations in
January 2001.
General and Administrative Expense.
General and administrative expense of $6.9 million for the first quarter of
2001 increased $0.9 million from $6.0 million for the same period in 2000
primarily due to costs associated with the Company's participation in the Subsea
Mudlift Drilling Joint Industry Project.
Gain on Sale of Assets.
Gain on sale of assets for the first quarter of 2001 was $0.1 million
compared to $14.0 million for the same period in 2000. Gain on sale of assets in
2000 included the sale of the Company's jack-up drilling rig, Ocean Scotian, for
$32.0 million in cash that resulted in a gain of $13.9 million ($9.0 million
after-tax). The rig had been cold stacked offshore The Netherlands prior to the
sale.
16
17
Interest Income.
Interest income of $11.7 million for the first quarter of 2001 increased
$3.1 million from $8.6 million for the same period in 2000. This increase
resulted primarily from the investment of excess cash generated by the sale of
the Company's 20-year zero coupon convertible debentures (the "Zero Coupon
Debentures") on June 6, 2000.
Interest Expense.
Interest expense of $8.3 million for the first quarter of 2001 increased
$7.1 million from $1.2 million for 2000 primarily as a result of the issuance of
the Zero Coupon Debentures on June 6, 2000, less interest being capitalized due
to the completion of the Ocean Confidence conversion and interest expense
related to the December 2000 lease-leaseback of the Ocean Alliance. Interest
costs in the first quarter of 2001 were $4.9 million higher than the same period
in 2000. Interest cost capitalized in the first quarter of 2001 was $0.4 million
compared to $2.7 million in the first quarter of 2000.
Income Tax Expense.
Income tax expense of $17.8 million for the first quarter of 2001 increased
$1.9 million from $15.9 million for the same period in 2000. This increase
resulted from higher income before income taxes of $9.3 million in 2001 which
was partially offset by a lower effective income tax rate for the first quarter
of 2001 compared to the first quarter of 2000. The lower effective income tax
rate in 2001 was primarily due to the Company's decision to permanently reinvest
the earnings of its UK subsidiaries.
Other Income and Expense (Other, net).
Other income of $3.1 million for the first quarter of 2001 increased $3.2
million from other expense of $0.1 million for the same period in 2000. This
increase resulted primarily from the $6.1 million gain realized on the sale of
marketable securities and a $7.3 million receipt for resolved litigation which
was partially offset by a $10.0 million reserve for pending litigation.
OUTLOOK
During the first quarter of 2001, oil and natural gas prices remained above
historical averages. The continuation of higher than average product prices has
contributed to improving dayrates and utilization in all of the markets in which
the Company competes. Assuming higher than average product prices continue, at
least in the short term, the Company expects continued growth for the offshore
drilling industry.
The Company's domestic jack-up market, which improved in 2000 as
independent operators acted quickly to take advantage of high natural gas
prices, has remained robust during the first quarter of 2001. The Company
believes this market is continuing to strengthen.
The Company also believes the outlook for its semisubmersible rig fleet is
good. Deepwater capable semisubmersible offshore rigs have experienced higher
renewal dayrates throughout the quarter and for work commitments going forward.
Intermediate water-depth semisubmersible offshore rigs, which lagged behind the
recovery experienced in the jack-up market in 2000, have also achieved higher
dayrates and units previously idle have been put to work. The Company currently
anticipates the revival of dayrates and utilization in this market to continue
in 2001.
Historically, the offshore drilling industry has been highly competitive
and cyclical, and the Company cannot predict the extent to which the current
favorable conditions may continue. Although the Company is optimistic about the
near-term future of the offshore drilling industry and its place in it, a
decline in oil or gas prices could reduce demand for the Company's drilling
services and adversely affect both utilization and dayrates.
LIQUIDITY
At March 31, 2001, the Company's cash and marketable securities totaled
$908.6 million, up from $862.1 million at December 31, 2000. Cash provided by
operating activities for the quarter ended March 31, 2001 increased by $31.2
million to $77.9 million, compared to $46.7 million for the same period of the
prior year. This increase in cash was primarily attributable to improved results
of operations in 2001. Net income improved in 2001 despite higher non-cash
expenses such as depreciation, deferred taxes and the amortization of debt
issuance costs.
17
18
Net income, after adjustment for non-cash items, resulted in an increase in cash
of $30.3 million. Cash usage due to changes in net working capital components
was $0.9 million lower in the first quarter of 2001, which also contributed to
the 2001 increase in cash provided by operating activities.
Investing activities provided $95.8 million of cash during the first
quarter of 2001, compared to cash usage of $27.0 million during the same period
in 2000. The increase of $122.8 million in cash provided was primarily due to
the sale of certain of the Company's investments in collateralized mortgage
obligations ("CMO's") and debt securities issued by the U.S. Treasury. In
addition, cash usage for capital expenditures in 2001 decreased by $45.4 million
primarily due to the completion of the conversion of the Ocean Confidence. A
$31.5 million decrease in cash provided by proceeds from the sale of assets was
primarily due to the sale of the Ocean Scotian in January 2000.
Cash used in financing activities for the first quarter of 2001 decreased
$11.8 million to $13.6 million compared to $25.4 million for the same period in
2000. Cash used in financing activities for the quarter ended March 31, 2001
resulted from $16.6 million in dividends paid to stockholders which were
partially offset by premiums of $3.1 million received for the February 2001 sale
of put options covering 500,000 shares of the Company's common stock. The
options give the holders the right to require the Company to repurchase shares
of its common stock at an exercise price of $40.00 per share at any time prior
to expiration through February 2002. The Company has the option to settle in
cash or shares of its common stock. Cash used in financing activities for the
first quarter of 2000 resulted primarily from dividends of $17.0 million paid to
stockholders and $8.5 million paid for the acquisition of shares of the
Company's outstanding common stock, par value $0.01 per share.
As of March 31, 2001, $3.4 million principal amount of the Company's 3.75%
convertible subordinated notes (the "Notes"), including $0.02 million principal
amount converted in 2000, had been converted into 82,809 shares of the Company's
common stock. On April 6, 2001, the Company redeemed all of its outstanding
Notes in accordance with the indenture under which the Notes were issued. Prior
to April 6, 2001, $12.4 million principal amount of the Notes had been converted
into 307,071 shares of the Company's common stock at the stated conversion price
of $40.50 per share. The remaining $387.6 million principal amount of the Notes
was redeemed at 102.08% of the principal amount thereof plus accrued interest
for a total cash payment of $397.7 million, resulting in an after-tax charge of
$7.7 million, which will be reported as an extraordinary loss in the second
quarter of 2001.
On April 11, 2001, the Company issued $460.0 million principal amount of
1.5% convertible senior debentures (the "1.5% Debentures") due April 15, 2031.
The 1.5% Debentures are convertible into shares of the Company's common stock at
an initial conversion rate of 20.3978 shares per $1,000 principal amount of the
1.5% Debentures, subject to adjustment in certain circumstances. Upon
conversion, the Company has the right to deliver cash in lieu of shares of the
Company's common stock. The transaction resulted in net proceeds of
approximately $449.2 million.
Interest on the 1.5% Debentures at the rate of 1.5% per year on the
outstanding principal amount is payable semiannually in arrears on April 15 and
October 15 of each year, beginning October 15, 2001. The 1.5% Debentures are
unsecured obligations of the Company and rank equally with all of the Company's
other unsecured senior indebtedness. The Company will pay contingent interest to
holders of the 1.5% Debentures during any six-month period commencing after
April 15, 2008 if the average market price of a 1.5% Debenture for a measurement
period preceding such six-month period equals 120% or more of the principal
amount of such 1.5% Debenture and the Company pays a regular cash dividend
during such six-month period. The contingent interest payable per $1,000
principal amount of 1.5% Debentures in respect of any quarterly period will
equal 50% of regular cash dividends paid by the Company per share on its common
stock during that quarterly period multiplied by the conversion rate. Holders
may require the Company to purchase all or a portion of their 1.5% Debentures on
April 15, 2008 at a price equal to 100% of the principal amount of the 1.5%
Debentures to be purchased plus accrued and unpaid interest. The Company may
choose to pay the purchase price in cash or shares of the Company's common stock
or a combination of cash and common stock. In addition, holders may require the
Company to purchase for cash all or a portion of their 1.5% Debentures upon a
change in control (as defined).
The Company may redeem all or a portion of the 1.5% Debentures at any time
on or after April 15, 2008 at a price equal to 100% of the principal amount.
The Company has the ability to issue an aggregate of approximately $117.5
million in debt, equity and other securities under a shelf registration
statement. In addition, the Company may issue, from time to time, up to eight
million shares of common stock, which shares are registered under an acquisition
shelf registration statement (upon
18
19
effectiveness of an amendment thereto reflecting the effect of the two-for-one
stock split declared in July 1997), in connection with one or more acquisitions
by the Company of securities or assets of other businesses.
The Company believes it has the financial resources needed to meet its
business requirements in the foreseeable future, including capital expenditures
for rig upgrades and continuing rig enhancements, and working capital
requirements.
CAPITAL RESOURCES
Cash required to meet the Company's capital commitments is determined by
evaluating rig upgrades to meet specific customer requirements and by evaluating
the Company's continuing rig enhancement program, including water depth and
drilling capability upgrades. It is management's opinion that operating cash
flows and the Company's cash reserves will be sufficient to meet these capital
commitments; however, periodic assessments will be made based on industry
conditions. In addition, the Company may, from time to time, issue debt or
equity securities, or a combination thereof, to finance capital expenditures,
the acquisition of assets and businesses, or for general corporate purposes. The
Company's ability to effect any such issuance will be dependent on the Company's
results of operations, its current financial condition, current market
conditions, and other factors, many of which are beyond its control.
During the first quarter of 2001, the Company expended $19.8 million,
including capitalized interest expense, primarily for the Ocean Baroness and
Ocean Nomad rig upgrades. During 2001, the Company expects to spend
approximately $145.0 million for rig upgrade capital expenditures with $125.0
million projected for the deepwater upgrade of the Ocean Baroness and
approximately $20.0 million for accommodations and stability enhancement
upgrades on the Ocean Nomad.
The significant upgrade of the Company's semisubmersible rig, the Ocean
Baroness, to high specification capabilities is expected to result in an
enhanced version of the Company's previous Victory-class upgrades. The upgrade
includes the following enhancements: capability for operation in 6,500 foot
water depths; approximately 5,590 metric tons variable deckload; a 15,000 psi
blow-out prevention system; and riser with a multiplex control system.
Additional features including a high capacity deck crane, significantly enlarged
cellar deck area and a 25 foot by 90 foot moon pool will provide enhanced subsea
completion and development capabilities. Water depths in excess of 6,500 feet
should be achievable utilizing preset taut-leg mooring systems on a case by case
basis. The initial estimated cost for the deepwater upgrade of the Ocean
Baroness is approximately $180.0 million with an expected delivery date in the
first quarter of 2002. During the first quarter of 2001, the Company expended
$8.2 million for the deepwater upgrade of the Ocean Baroness.
During the first quarter of 2001, the Company expended $14.0 million in
association with its continuing rig enhancement program and to meet other
corporate requirements. These expenditures included the upgrade of pre-load
tanks and jacking systems, purchases of king-post cranes, anchor chain, riser,
and other drilling equipment. The Company has budgeted $106.0 million for 2001
capital expenditures associated with its continuing rig enhancement program and
other corporate requirements.
The Company continues to consider transactions which include, but are not
limited to, the purchase of existing rigs, construction of new rigs and the
acquisition of other companies engaged in contract drilling or related
businesses. Certain of these potential transactions reviewed by the Company
would, if completed, result in its entering new lines of business. In general,
however, these opportunities have been related in some manner to the Company's
existing operations. Although the Company does not, as of the date hereof, have
any commitment with respect to a material acquisition, it could enter into such
an agreement in the future and such acquisition could result in a material
expansion of its existing operations or result in the Company entering a new
line of business. Some of the potential acquisitions considered by the Company
could, if completed, result in the expenditure of a material amount of funds or
the issuance of a material amount of debt or equity securities.
INTEGRATED SERVICES
The Company's wholly owned subsidiary, Diamond Offshore Team Solutions,
Inc. ("DOTS"), from time to time, selectively engages in drilling services
pursuant to turnkey or modified-turnkey contracts under which DOTS agrees to
drill a well to a specified depth for a fixed price. In such cases, DOTS
generally is not entitled to payment unless the well is drilled to the specified
depth and other contract requirements are met. Profitability of the contract is
dependent
19
20
upon its ability to keep expenses within the estimates used in determining the
contract price. Drilling a well under a turnkey contract therefore typically
requires a greater cash commitment by the Company and exposes the Company to
risks of potential financial losses that generally are substantially greater
than those that would ordinarily exist when drilling under a conventional
dayrate contract. DOTS also offers a portfolio of drilling services including
overall project management, extended well tests, and completion operations.
During the first quarter of 2001, DOTS contributed operating income of $0.3
million to the Company's consolidated results of operations primarily from the
completion of one international turnkey project. During the same period in 2000,
DOTS generated an operating loss of $0.5 million to the Company's consolidated
results of operations primarily from the completion of a turnkey project in the
Gulf of Mexico and integrated services provided in Aberdeen, Scotland.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June
2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS No.
133 to clarify four areas causing difficulties in implementation. The amendment
included expanding the normal purchase and sale exemption for supply contracts,
permitting the offsetting of certain intercompany foreign currency derivatives
and thus reducing the number of third party derivatives, permitting hedge
accounting for foreign currency denominated assets and liabilities, and
redefining interest rate risk to reduce sources of ineffectiveness. The Company
adopted SFAS No. 133 and the corresponding amendments under SFAS No. 138 on
January 1, 2001. Adoption of SFAS No. 133, as amended by SFAS No. 138, has not
had nor is it expected to have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference from
time to time by the Company or its representatives are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, performance or achievements, and may
contain the words "expect," "intend," "plan," "anticipate," "estimate,"
"believe," "will be," "will continue," "will likely result," and similar
expressions. Statements by the Company in this report that contain
forward-looking statements include, but are not limited to, discussions
regarding future market conditions and the effect of such conditions on the
Company's future results of operations (see "-- Outlook"), future uses of and
requirements for financial resources, including but not limited to, expenditures
related to the deepwater upgrade of the Ocean Baroness (see "-- Liquidity" and
"-- Capital Resources"). Such statements inherently are subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, casualty losses, industry fleet
capacity, changes in foreign and domestic oil and gas exploration and production
activity, competition, changes in foreign, political, social and economic
conditions, regulatory initiatives and compliance with governmental regulations,
customer preferences and various other matters, many of which are beyond the
Company's control. The risks included here are not exhaustive. Other sections of
this report and the Company's other filings with the Securities and Exchange
Commission include additional factors that could adversely impact the Company's
business and financial performance. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement to reflect any change
in the Company's expectations with regard thereto or any change in events,
conditions or circumstances on which any forward-looking statement is based.
20
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information included in this Item is considered to constitute
"forward-looking statements" for purposes of the statutory safe harbor provided
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements" in Item 2 of Part I of this report.
The Company's financial instruments include the Notes, the Zero Coupon
Debentures, the Ocean Alliance lease-leaseback agreement, and investments in
debt securities, including U.S. Treasury securities, treasury inflation-indexed
protective bonds ("TIP's"), and CMO's.
The Company's Notes, which were due February 15, 2007, had a stated
interest rate of 3.75% and an effective interest rate of 3.93%. At March 31,
2001, the fair value of the Notes, based on quoted market prices, was
approximately $403.3 million, compared to a carrying amount of $396.6 million.
On April 6, 2001, the Company redeemed all of its outstanding Notes in
accordance with the indenture under which the Notes were issued. Prior to April
6, 2001, $12.4 million principal amount of the Notes were converted into 307,071
shares of the Company's common stock at the stated conversion price of $40.50
per share. The remaining $387.6 million principal amount of the Notes was
redeemed at 102.08% of the principal amount thereof plus accrued interest for a
total cash payment of $397.7 million, resulting in an after-tax charge of $7.7
million, which will be reported as an extraordinary loss in the second quarter
of 2001.
At March 31, 2001, the fair value of the Company's Zero Coupon Debentures,
based on quoted market prices, was approximately $412.6 million, compared to a
carrying amount of $413.8 million.
At March 31, 2001, the fair value of the Company's Ocean Alliance
lease-leaseback agreement, based on the present value of estimated future cash
flows using a discount rate of 8.00%, was approximately $54.8 million, compared
to a carrying amount of $56.1 million.
At March 31, 2001, the fair market value of the Company's investment in
debt securities issued by the U.S. Treasury, excluding TIP's and CMO's, was
approximately $223.7 million, which includes an unrealized holding gain of
$56,000. These securities bear interest at rates ranging from 4.8% to 5.2%.
These securities are U.S. government-backed, generally short-term and readily
marketable.
The fair market value of the Company's investment in TIP's at March 31,
2001 was approximately $276.8 million, which includes an unrealized holding gain
of $10.7 million. These securities bear a fixed interest rate of 3.625% and have
an inflation-adjusted principal. The amount of each semiannual interest payment
is based on the securities' inflation-adjusted principal amount on an interest
payment date and, at maturity, the securities will be redeemed at the greater of
their inflation-adjusted principal or par amount at original issue. The TIP's
are short-term and readily marketable.
The fair market value of the Company's investment in CMO's at March 31,
2001 was approximately $103.5 million, which includes an unrealized holding gain
of $1.3 million. The CMO's are also short-term and readily marketable with an
implied AAA rating backed by U.S. government guaranteed mortgages.
Other than trade accounts receivable and trade accounts payable, the
Company does not currently have financial instruments that are sensitive to
foreign currency exchange rates.
21
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Raymond Verdin v. R&B Falcon Drilling USA, Inc., et al; No. G-00-488 in the
United States District Court for the Southern District of Texas, Galveston
Division, filed October 10, 2000. The Company was named as a defendant in a
proposed class action suit filed on behalf of offshore oil workers against all
of the major offshore drilling companies. The proposed class includes persons
hired in the United States by the companies to work in the Gulf of Mexico and
around the world. The allegation is that the companies, through trade groups,
shared wage information in order to fix and suppress the wages of the workers in
violation of the Sherman Antitrust Act and various state laws. Plaintiff Thomas
Bryant has replaced the named plaintiff as the proposed class representative. No
class has been certified at this time, however, a hearing on class certification
is currently scheduled for July 12, 2001. The lawsuit is seeking damages as well
as attorney's fees and costs. During the first quarter of 2001, the Company
recorded a $10.0 million reserve for this pending litigation in the Company's
Consolidated Statements of Income in contemplation of a potential settlement.
The Company and its subsidiaries are named defendants in various lawsuits
and are involved from time to time as parties to governmental proceedings, all
arising in the ordinary course of business. Although the outcome of lawsuits or
other proceedings involving the Company and its subsidiaries cannot be predicted
with certainty and the amount of any liability that could arise with respect to
such lawsuits or other proceedings cannot be predicted accurately, management
does not expect these matters to have a material adverse effect on the financial
position, results of operations, or cash flows of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See the Exhibit Index for a list of those exhibits filed herewith.
(b) The Company filed the following reports on Form 8-K during the first
quarter of 2001:
Date of Report Description of Report
-------------- ---------------------
January 23, 2001 Item 9 Regulation FD disclosure (Informational only)
February 12, 2001 Item 9 Regulation FD disclosure (Informational only)
February 27, 2001 Item 9 Regulation FD disclosure (Informational only)
March 7, 2001 Plan to redeem, on April 6, 2001, all outstanding Notes
March 21, 2001 Item 9 Regulation FD disclosure (Informational only)
22
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAMOND OFFSHORE DRILLING, INC.
(Registrant)
Date 04-May-2001 By: \s\ Gary T. Krenek
----------- ------------------------------------------
Gary T. Krenek
Vice President and Chief Financial Officer
Date 04-May-2001 \s\ Beth G. Gordon
------------ -------------------------------------------
Beth G. Gordon
Controller (Chief Accounting Officer)
23
24
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998).
3.2* Amended and Restated By-laws of the Company.
4.1 Indenture, dated as of February 4, 1997, between the Company and
The Chase Manhattan Bank, as Trustee (incorporated by reference
to Exhibit 4.1 to the Company's Current Report on Form 8-K filed
February 11, 1997).
4.2* Third Supplemental Indenture, dated as of April 11, 2001, between
the Company and The Chase Manhattan Bank, as Trustee.
10.1* Purchase Agreement, dated April 6, 2001, between the Company and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
10.2* Registration Rights Agreement, dated April 11, 2001, between the
Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
- ---------
* Filed herewith.
24