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 June 30, 1999
-------------
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 July 19, 1999 Common stock, $0.01 par value per share 135,824,281
shares.
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DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED JUNE 30, 1999
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......................................................11
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..............................................................23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................23
SIGNATURES.......................................................................................24
EXHIBIT INDEX....................................................................................25
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
JUNE 30, DECEMBER 31,
----------- -----------
1999 1998
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 95,623 $ 101,198
Marketable securities .......................................... 585,601 535,774
Accounts receivable ............................................ 160,582 233,719
Rig inventory and supplies ..................................... 37,155 35,794
Prepaid expenses and other ..................................... 44,713 31,939
----------- -----------
Total current assets ........................ 923,674 938,424
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION ....................................... 1,637,750 1,551,820
GOODWILL, NET OF ACCUMULATED AMORTIZATION ........................ 89,801 109,825
OTHER ASSETS ..................................................... 9,136 9,647
----------- -----------
Total assets ................................ $ 2,660,361 $ 2,609,716
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................... $ 60,841 $ 93,938
Accrued liabilities ............................................ 47,511 53,283
Taxes payable .................................................. 40,882 13,180
----------- -----------
Total current liabilities ................... 149,234 160,401
LONG-TERM DEBT ................................................... 400,000 400,000
DEFERRED TAX LIABILITY ........................................... 277,457 263,797
OTHER LIABILITIES ................................................ 11,589 30,260
----------- -----------
Total liabilities ........................... 838,280 854,458
----------- -----------
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,
139,342,381 issued and 135,824,281 outstanding at June 30, 1999
and 139,333,635 issued and 135,815,535 outstanding December 31,
1998) 1,393 1,393
Additional paid-in capital ..................................... 1,302,841 1,302,806
Retained earnings .............................................. 618,873 547,783
Accumulated other comprehensive losses ......................... (12,300) (7,998)
Treasury stock, at cost (3,518,100 shares) ..................... (88,726) (88,726)
----------- -----------
Total stockholders' equity .................. 1,822,081 1,755,258
----------- -----------
Total liabilities and stockholders' equity... $ 2,660,361 $ 2,609,716
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
REVENUES .......................................... $ 215,337 $ 323,517 $ 443,374 $ 609,586
OPERATING EXPENSES:
Contract drilling .......................... 98,801 116,103 209,519 241,436
Depreciation and amortization .............. 35,706 32,747 71,363 64,746
General and administrative ................. 5,921 6,219 11,922 12,991
Gain on sale of assets ..................... (19) (4) (144) (82)
--------- --------- --------- ---------
Total operating expenses .............. 140,409 155,065 292,660 319,091
--------- --------- --------- ---------
OPERATING INCOME .................................. 74,928 168,452 150,714 290,495
OTHER INCOME (EXPENSE):
Interest income ............................ 8,598 7,442 16,949 14,027
Interest expense ........................... (1,990) (3,781) (5,322) (7,624)
Other, net ................................. 327 317 (766) 180
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE .................. 81,863 172,430 161,575 297,078
INCOME TAX EXPENSE ................................ (28,636) (60,765) (56,530) (104,691)
--------- --------- --------- ---------
NET INCOME ........................................ $ 53,227 $ 111,665 $ 105,045 $ 192,387
========= ========= ========= =========
EARNINGS PER SHARE:
Basic ...................................... $ 0.39 $ 0.80 $ 0.77 $ 1.38
========= ========= ========= =========
Diluted .................................... $ 0.37 $ 0.76 $ 0.74 $ 1.32
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Shares of common stock ..................... 135,824 139,328 135,820 139,326
Dilutive potential shares of common stock... 9,876 9,876 9,876 9,876
--------- --------- --------- ---------
Total weighted average shares
outstanding ......................... 145,700 149,204 145,696 149,202
========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income ............................................. $ 105,045 $ 192,387
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................ 71,363 64,746
Gain on sale of assets ............................... (144) (82)
Gain on sale of investment securities ................ (23) (78)
Deferred tax provision ............................... 16,803 42,570
Accretion of discounts on investment securities ...... (5,289) (6,232)
Amortization of debt issuance costs .................. 269 258
Changes in operating assets and liabilities:
Accounts receivable .................................. 73,266 (66,481)
Rig inventory and supplies and other current assets .. (14,135) (16,817)
Other assets, non-current ............................ 242 (1,026)
Accounts payable and accrued liabilities ............. (38,869) 5,310
Taxes payable ........................................ 26,885 7,485
Other liabilities, non-current ....................... (1,485) 2,709
Other, net ........................................... (1,524) (622)
--------- ---------
Net cash provided by operating activities ........ 232,404 224,127
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ................................... (154,485) (73,333)
Proceeds from sale of assets ........................... 174 582
Net change in marketable securities .................... (49,748) (162,232)
--------- ---------
Net cash used in investing activities ............ (204,059) (234,983)
--------- ---------
FINANCING ACTIVITIES:
Payment of dividends ................................... (33,955) (34,832)
Proceeds from stock options exercised .................. 35 211
--------- ---------
Net cash used in financing activities ............ (33,920) (34,621)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................... (5,575) (45,477)
Cash and cash equivalents, beginning of period ......... 101,198 102,958
--------- ---------
Cash and cash equivalents, end of period ............... $ 95,623 $ 57,481
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
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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, 1998 (File No.
1-13926).
Interim Financial Information
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles 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 which are considered part of the Company's cash
management activities, rather than part of its investing activities, 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 losses" 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 both the six months ended June 30, 1999 and 1998. Cash payments made,
net of refunds, for income taxes during the six months ended June 30, 1999 and
1998 totaled $29.0 million and $54.5 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 $3.9 million and $7.7 million during the quarter and six
months ended June 30, 1999, respectively. Interest cost capitalized during the
quarter and six months ended June 30, 1999 was $1.9 million and $2.4 million,
respectively. The Company incurred interest costs of $3.9 million and $7.8
million during the quarter and six months ended June 30, 1998, respectively.
Interest cost capitalized during the quarter and six months ended June 30, 1998
was not material.
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Goodwill
Goodwill from the merger with Arethusa (Off-Shore) Limited
("Arethusa") is amortized on a straight-line basis over 20 years. Amortization
expense totaled $1.3 million and $2.8 million for the quarter and six months
ended June 30, 1999, respectively. For the quarter and six months ended June
30, 1998, amortization expense totaled $1.6 million and $3.2 million,
respectively.
Debt Issuance Costs
Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the term of the related debt.
Treasury Stock
In July 1998, the Board of Directors authorized the purchase of shares
of the Company's common stock in the open market, from time to time, depending
on market conditions. The purchase of treasury stock is accounted for using the
cost method, which reports the cost of the shares acquired in "Treasury stock"
as a deduction from stockholders' equity in the Consolidated Balance Sheets. No
purchases of treasury stock were made during the six months ended June 30, 1999
or 1998.
Comprehensive Income
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. For the
quarter and six months ended June 30, 1999, comprehensive income totaled $50.1
million and $100.7 million, respectively. For the quarter and six months ended
June 30, 1998, comprehensive income totaled $111.6 million and $191.3 million,
respectively. Comprehensive income includes net income, foreign currency
translation gains and losses, and unrealized holding gains and losses on
investments.
Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing
net income by the weighted average number of shares of common stock outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted earnings per share was
calculated by dividing net income, adjusted to eliminate the after-tax effect
of interest expense, by the weighted average number of shares of common stock
outstanding and the weighted average number of shares of common stock issuable
assuming full conversion of the convertible subordinated notes as of the
beginning of the periods presented.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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2. MARKETABLE SECURITIES
Investments classified as available for sale are summarized as follows:
JUNE 30, 1999
---------------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
---------------------------------------
(IN THOUSANDS)
Debt securities issued by the U.S. Treasury
Due within one year ..................... $160,661 $ (7) $ 160,654
Due after one year through five years ... 273,946 (2,109) 271,837
Collateralized mortgage obligations .......... 153,035 (3,341) 149,694
Equity securities ............................ 12,117 (8,701) 3,416
-------- --------- ---------
Total ................................... $599,759 $ (14,158) $ 585,601
======== ========= =========
DECEMBER 31, 1998
---------------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
---------------------------------------
(IN THOUSANDS)
Debt securities issued by the U.S. Treasury
Due within one year ..................... $304,224 $ (21) $ 304,203
Due after one year through five years ... 24,982 91 25,073
Collateralized mortgage obligations .......... 203,504 (452) 203,052
Equity securities ............................ 12,117 (8,671) 3,446
-------- --------- ---------
Total ................................... $544,827 $ (9,053) $ 535,774
======== ========= =========
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 six months ended June 30, 1999 and 1998, certain debt
securities due within one year were sold or matured for proceeds of $393.9
million and $95.4 million, respectively. Certain debt securities due after one
year were sold for proceeds of $50.5 million during the six months ended June
30, 1999. Also during the six months ended June 30, 1998, equity securities
were sold for proceeds of $2.4 million and investments through repurchase
agreements with third parties were sold for their contracted amounts totaling
$350.0 million. The resulting after-tax realized gain and loss for the six
months ended June 30, 1999 and 1998 was not material.
3. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
JUNE 30, DECEMBER 31,
-----------------------------
1999 1998
-----------------------------
(IN THOUSANDS)
Drilling rigs and equipment ......................... $ 1,976,460 $ 1,929,540
Construction work in progress ....................... 193,645 88,266
Land and buildings .................................. 13,896 13,874
Office equipment and other .......................... 16,224 14,100
----------- -----------
Cost ............................................. 2,200,225 2,045,780
Less accumulated depreciation ....................... (562,475) (493,960)
----------- -----------
Drilling and other property and equipment, net .. $ 1,637,750 $ 1,551,820
=========== ===========
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4. GOODWILL
The merger with Arethusa in 1996 generated an excess of the purchase
price over the estimated fair value of the net assets acquired. Cost and
accumulated amortization of such goodwill are summarized as follows:
JUNE 30, DECEMBER 31,
---------------------------
1999 1998
---------------------------
(IN THOUSANDS)
Goodwill........................................... $ 110,232 $ 127,418
Less accumulated amortization...................... (20,431) (17,593)
--------- ---------
Total.................................... $ 89,801 $ 109,825
========= =========
During the six months ended June 30, 1999, an adjustment of $17.2
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.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JUNE 30, DECEMBER 31,
---------------------------
1999 1998
---------------------------
(IN THOUSANDS)
Personal injury and other claims................... $ 17,976 $ 20,676
Payroll and benefits............................... 17,661 18,701
Interest payable................................... 5,667 5,667
Other.............................................. 6,207 8,239
--------- ---------
Total.................................... $ 47,511 $ 53,283
========= =========
6. COMMITMENTS AND CONTINGENCIES
A former subsidiary of Arethusa, which is now a subsidiary of the
Company, defended and indemnified Zapata Off-Shore Company and Zapata
Corporation (the "Zapata Defendants"), pursuant to a contractual defense and
indemnification agreement, in a suit for tortious interference with contract
and conspiracy to tortiously interfere with contract. The plaintiffs sought
$14.0 million in actual damages and unspecified punitive damages, plus costs of
court, interest and attorneys' fees. In November 1997, the jury awarded a take
nothing judgment in favor of the Zapata Defendants. The plaintiffs appealed the
judgment and the appellate court ordered the parties to mediation. The case
went to mediation in July 1998 with no resolution. In May 1999, the case went
before the Texas First Court of Appeals, Houston, and oral arguments were
heard. The Company is awaiting the Court's decision. No provision for any
liability has been made in the financial statements.
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.
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7. 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. The data below is
presented in accordance with Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which the Company has retroactively adopted for all periods presented.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
(IN THOUSANDS)
Fourth-Generation Semisubmersibles... $ 72,909 $ 68,030 $ 136,869 $ 138,975
Other Semisubmersibles .............. 120,390 191,378 259,843 344,652
Jack-ups ............................ 19,978 63,236 44,047 123,322
Integrated Services ................. 3,942 5,438 7,410 21,149
Eliminations ........................ (1,882) (4,565) (4,795) (18,512)
--------- --------- --------- ---------
Total revenues .............. $ 215,337 $ 323,517 $ 443,374 $ 609,586
========= ========= ========= =========
Geographic Areas
At June 30, 1999, the Company had operations 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 where the services were performed.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------
(IN THOUSANDS)
Revenues from unaffiliated customers:
United States ..................... $ 96,947 $192,994 $208,155 $368,029
Foreign:
Europe/Africa .................. 56,629 72,859 121,084 142,522
Australia/Southeast Asia ....... 28,086 36,109 56,353 64,555
South America .................. 33,675 21,555 57,782 34,480
-------- -------- -------- --------
Total revenues ............ $215,337 $323,517 $443,374 $609,586
======== ======== ======== ========
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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.
The Company is a leader in deep water drilling with a fleet of 46
offshore drilling rigs. The fleet consists of 30 semisubmersibles, 15 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 the 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 which was 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 are not affected by changes in dayrates, nor are they
necessarily significantly affected by fluctuations in utilization. For
instance, if a rig is to be idle for a short period of time, the Company
realizes few decreases in operating expenses since the rig is typically
maintained in a prepared state with a full crew. 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 associated with the loss of
revenues. The Company recognizes as operating expenses activities such as
painting, inspections and routine overhauls that maintain rather than upgrade
its rigs. These expenses vary from period to period. Costs of rig enhancements
and upgrades are capitalized and depreciated over the expected useful lives of
the enhancements. Increased depreciation expense decreases operating income in
periods subsequent to capital upgrades. From time to time, the Company sells
assets in the ordinary course of its business and gains or losses associated
with such sales are included in operating income.
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THREE MONTHS ENDED JUNE 30, 1999 AND 1998
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
JUNE 30,
------------------------- INCREASE/
1999 1998 (DECREASE)
--------------------------------------
(IN THOUSANDS)
REVENUES
Fourth-Generation Semisubmersibles...... $ 72,909 $ 68,030 $ 4,879
Other Semisubmersibles.................. 120,390 191,378 (70,988)
Jack-ups................................ 19,978 63,236 (43,258)
Integrated Services..................... 3,942 5,438 (1,496)
Eliminations............................ (1,882) (4,565) 2,683
--------- --------- ----------
Total Revenues..................... $ 215,337 $ 323,517 $ (108,180)
========= ========= ==========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles...... $ 21,383 $ 19,961 $ 1,422
Other Semisubmersibles.................. 54,738 65,622 (10,884)
Jack-ups................................ 19,987 27,880 (7,893)
Integrated Services..................... 3,513 5,451 (1,938)
Other................................... 1,062 1,754 (692)
Eliminations............................ (1,882) (4,565) 2,683
--------- --------- ----------
Total Contract Drilling Expense.... $ 98,801 $ 116,103 $ (17,302)
========= ========= ==========
OPERATING INCOME
Fourth-Generation Semisubmersibles...... $ 51,526 $ 48,069 $ 3,457
Other Semisubmersibles.................. 65,652 125,756 (60,104)
Jack-ups................................ (9) 35,356 (35,365)
Integrated Services..................... 429 (13) 442
Other................................... (1,062) (1,754) 692
Depreciation and Amortization Expense... (35,706) (32,747) (2,959)
General and Administrative Expense...... (5,921) (6,219) 298
Gain on Sale of Assets.................. 19 4 15
--------- --------- ----------
Total Operating Income............. $ 74,928 $ 168,452 $ (93,524)
========= ========= ==========
Fourth-Generation Semisubmersibles.
Revenues. Revenues from fourth-generation semisubmersibles during the
three months ended June 30, 1999 increased by $4.9 million from the same period
in 1998. This increase resulted primarily from an increase in revenues of
approximately $9.6 million from the Ocean Victory, which worked during the
second quarter of 1999. During most of the second quarter of 1998, the Ocean
Victory was in the shipyard for repairs required as a result of a fire in the
engine room, which occurred in February 1998. This increase was partially
offset by a reduction in revenues of $4.5 million due to rig downtime for
upgrades and repairs on the Ocean Clipper during the second quarter of 1999.
See "--Outlook."
Contract Drilling Expense. Contract drilling expense for
fourth-generation semisubmersibles during the three months ended June 30, 1999
increased $1.4 million from the same period in 1998. This increase resulted
primarily from an increase in contract drilling expense for the Ocean Victory
of approximately $1.3 million. During most of the second quarter of 1998,
operating expenses for the Ocean Victory were capitalized in conjunction with
shipyard repairs.
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Other Semisubmersibles.
Revenues. Revenues from other semisubmersibles during the three months
ended June 30, 1999 decreased $71.0 million from the same quarter in 1998. This
decrease resulted primarily from reduced revenues of $39.9 million attributable
to a decline in utilization as compared to the three months ended June 30, 1998
and $15.8 million due to rigs removed from service in late 1998. In addition,
revenues were reduced by $6.4 million due to rig downtime associated with the
mandatory inspection and stability modifications for the Ocean Concord.
Revenues were also reduced by approximately $8.6 million from decreased
operating dayrates as compared to the same period of 1998. The average
operating dayrate for other semisubmersibles was $86,900 per day during the
second quarter of 1999, as compared to $95,500 per day during the second
quarter of 1998.
Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the three months ended June 30, 1999 decreased $10.9
million from the same quarter in 1998. This decrease resulted primarily from
expense reductions from rigs that were idle for all or part of the current
quarter and from rigs removed from service in late 1998. Partially offsetting
these decreases was an increase in costs of approximately $2.0 million
associated with the mobilization of the Ocean Winner from the Gulf of Mexico to
Brazil during the second quarter of 1999.
Jack-Ups.
Revenues. Revenues from jack-ups during the three months ended June 30,
1999 decreased $43.3 million from the same quarter in 1998. This decrease was
primarily due to reductions in revenues of $31.9 million resulting from
decreased utilization and six rigs removed from service in late 1998 and the
first quarter of 1999. See "--Outlook." In addition, revenues decreased by $11.4
million as a result of decreased operating dayrates. The average operating
dayrate for jack-ups was $29,900 per day during the second quarter of 1999, as
compared to $53,500 per day during the second quarter of 1998.
Contract Drilling Expense. Contract drilling expense for jack-ups
during the three months ended June 30, 1999 decreased $7.9 million over the
same quarter in 1998. This decrease was the result of the decline in
utilization and the removal of rigs from service in late 1998 and the first
quarter of 1999.
Integrated Services.
Revenues and contract drilling expense for integrated services
decreased as a result of fewer projects during the second quarter of 1999 as
compared to the second quarter of 1998.
Depreciation and Amortization Expense.
Depreciation and amortization expense for the three months ended June
30, 1999 of $35.7 million increased $3.0 million from $32.7 million for the
three months ended June 30, 1998. This increase resulted primarily from
increased expenditures associated with the Company's continuing rig enhancement
program.
Interest Income.
Interest income of $8.6 million for the three months ended June 30,
1999 increased $1.2 million from $7.4 million for the same period in 1998. This
increase resulted primarily from the investment of additional excess cash in
1999. See "--Liquidity."
Interest Expense.
Interest expense of $2.0 million for the three months ended June 30,
1999 decreased $1.8 million from $3.8 million for the same period in 1998. This
decrease resulted primarily from an increase in capitalized interest cost based
on the average amount of accumulated expenditures for the Ocean Confidence. See
"--Capital Resources."
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Income Tax Expense.
Income tax expense of $28.6 million for the three months ended June
30, 1999 decreased $32.2 million from $60.8 million for the three months ended
June 30, 1998. This decrease resulted primarily from the $90.6 million decrease
in income before income tax expense as compared to the three months ended June
30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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.
SIX MONTHS ENDED
JUNE 30,
------------------------ INCREASE/
1999 1998 (DECREASE)
-----------------------------------------
(IN THOUSANDS)
REVENUES
Fourth-Generation Semisubmersibles ........ $ 136,869 $ 138,975 $ (2,106)
Other Semisubmersibles .................... 259,843 344,652 (84,809)
Jack-ups .................................. 44,047 123,322 (79,275)
Integrated Services ....................... 7,410 21,149 (13,739)
Eliminations .............................. (4,795) (18,512) 13,717
--------- --------- ---------
Total Revenues .................... $ 443,374 $ 609,586 $(166,212)
========= ========= =========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles ........ $ 45,773 $ 40,576 $ 5,197
Other Semisubmersibles .................... 116,989 144,898 (27,909)
Jack-ups .................................. 42,695 49,040 (6,345)
Integrated Services ....................... 6,950 20,956 (14,006)
Other ..................................... 1,907 4,478 (2,571)
Eliminations .............................. (4,795) (18,512) 13,717
--------- --------- ---------
Total Contract Drilling Expense ... $ 209,519 $ 241,436 $ (31,917)
========= ========= =========
OPERATING INCOME
Fourth-Generation Semisubmersibles ........ $ 91,096 $ 98,399 $ (7,303)
Other Semisubmersibles .................... 142,854 199,754 (56,900)
Jack-ups .................................. 1,352 74,282 (72,930)
Integrated Services ....................... 460 193 267
Other ..................................... (1,907) (4,478) 2,571
Depreciation and Amortization Expense ..... (71,363) (64,746) (6,617)
General and Administrative Expense ........ (11,922) (12,991) 1,069
Gain on Sale of Assets .................... 144 82 62
--------- --------- ---------
Total Operating Income ............ $ 150,714 $ 290,495 $(139,781)
========= ========= =========
Fourth-Generation Semisubmersibles.
Revenues. Revenues from fourth-generation semisubmersibles during the
six months ended June 30, 1999 decreased $2.1 million from the same period in
1998. This decrease resulted primarily from reduced revenues of $8.4 million
due to rig downtime for upgrades and repairs performed on the Ocean Clipper
during 1999 and reduced revenues of $6.8 million due to rig downtime associated
with the mandatory inspection and repairs for the Ocean America. These
decreases were partially offset by an increase in revenues of approximately
$14.2 million from the Ocean Victory, which worked during the first half of
1999. During most of the first half of 1998, the Ocean Victory was in the
shipyard for repairs required as a result of a fire in the engine room, which
occurred in February 1998.
Contract Drilling Expense. Contract drilling expense for
fourth-generation semisubmersibles during the six months ended June 30, 1999
increased $5.2 million from the same period in 1998. This increase resulted
primarily from approximately $2.0 million in costs incurred for the
mobilization of the Ocean Alliance from the North Sea to Angola during the
first quarter of 1999 and $3.8 million in costs associated with the mandatory
inspection and repairs for the Ocean America. In addition, contract drilling
expense for the Ocean Victory increased approximately $2.1 million due to the
capitalization of costs associated with shipyard repairs during most of the
first half of 1998.
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These increases were offset by a $4.4 million decrease in contract drilling
expense for the Ocean Clipper due to the capitalization of costs during upgrades
performed in the first half of 1999. See "--Outlook."
Other Semisubmersibles.
Revenues. Revenues from other semisubmersibles during the six months
ended June 30, 1999 decreased $84.8 million from the same period in 1998. This
decrease resulted, in part, from reduced revenues of $45.6 million attributable
to a decline in utilization as compared to 1998 and $30.8 million due to rigs
removed from service in late 1998. In addition, revenues were reduced by $30.1
million due to rig downtime for mandatory inspections and repairs for the Ocean
New Era, the Ocean Yatzy, the Ocean Concord, and the Ocean Winner. Partially
offsetting these decreases in revenues were increases of $24.3 million from six
other rigs which were undergoing mandatory inspections in the first half of
1998.
Contract Drilling Expense. Contract drilling expenses for other
semisubmersibles during the six months ended June 30, 1999 decreased $27.9
million from the same period in 1998. This decrease resulted primarily from
expense reductions of approximately $23.9 million from rigs that were idle for
all or part of the first half of 1999. Partially offsetting these decreases was
an increase in costs of $4.0 million associated with the mobilization of the
Ocean Winner from the Gulf of Mexico to Brazil during the first half of 1999.
Jack-Ups.
Revenues. Revenues from jack-ups during the six months ended June 30,
1999 decreased $79.3 million from the same period in 1998. This decrease was
primarily due to reductions in revenues of $27.2 million resulting from
decreased operating dayrates and $45.0 million resulting from decreased
utilization and the removal of six rigs from service in late 1998 and the first
quarter of 1999. See "--Outlook." The average operating dayrate for jack-ups was
$28,500 per day during the first half of 1999 as compared to $52,100 per day
during the first half of 1998. Revenues also decreased by $7.1 million from the
first half of 1998 due to rig downtime for the installation of new engines and
other equipment on the Ocean King, which was completed in March 1999.
Contract Drilling Expense. Contract drilling expense for jack-ups
during the six months ended June 30, 1999 decreased $6.3 million over the same
period in 1998. This decrease resulted primarily from expense reductions from
rigs that were removed from service in late 1998 and the first quarter of 1999.
Integrated Services.
Revenues and contract drilling expense for integrated services
decreased as a result of fewer projects during the first half of 1999 as
compared to the first half of 1998.
Other.
Other contract drilling expense of $1.9 million during the first half
of 1999 decreased $2.6 million from $4.5 million during the first half of 1998.
This decrease resulted primarily from a reduction in expenditures during the
first half of 1999 for crew training programs and various other non-recurring
charges.
Depreciation and Amortization Expense.
Depreciation and amortization expense for the six months ended June
30, 1999 of $71.3 million increased $6.6 million from $64.7 million for the six
months ended June 30, 1998. This increase resulted primarily from increased
expenditures associated with the Company's continuing rig enhancement program.
General and Administrative Expense.
General and administrative expense of $11.9 million for the six months
ended June 30, 1999 decreased $1.1 million primarily due to a decrease in legal
and personnel costs as compared to the same period in 1998.
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Interest Income.
Interest income of $16.9 million for the six months ended June 30,
1999 increased $2.9 million from $14.0 million for the same period in 1998.
This increase resulted primarily from the investment of additional excess cash
in 1999. See "--Liquidity."
Interest Expense.
Interest expense of $5.3 million for the six months ended June 30,
1999 decreased $2.3 million from $7.6 million for the same period in 1998. This
decrease resulted primarily from an increase in capitalized interest cost based
on the average amount of accumulated expenditures for the Ocean Confidence. See
"--Capital Resources."
Income Tax Expense.
Income tax expense of $56.5 million for the six months ended June 30,
1999 decreased $48.2 million from $104.7 million for the six months ended June
30, 1998. This decrease resulted primarily from the $135.5 million decrease in
income before income tax expense as compared to the six months ended June 30,
1998.
OUTLOOK
In late 1997 and throughout 1998, decreasing product prices resulted
in reduced exploration and development activity by most oil and gas companies.
As a result, the Company experienced decreasing utilization and renewal rates
for its offshore drilling fleet. In response to these declines, the Company
removed eight rigs located in the Gulf of Mexico from service in late 1998 and
the first quarter of 1999. Recently, product prices have recovered
significantly; however, market conditions have been slow to react as reflected
by continuing depressed utilization levels and low renewal rates. The Company
has experienced marginal improvements in 1999 and, as a result, has returned to
service two of its previously cold stacked rigs on a well-to-well basis.
Continued improvements in market conditions depend upon, among other factors,
the Company's customers' belief that the improved product prices currently in
effect are sustainable. Several of the Company's other rigs remain idle in
various markets but the Company believes that, with its fleet size and
composition, it is well positioned to take advantage of opportunities when
market conditions improve.
The depressed conditions in the oil and gas industry have also
increased the susceptibility of term contracts previously committed at dayrates
in excess of current market rates to be terminated or renegotiated by the
customer. Although the Company has not been advised, other than as discussed
below, of contracts at risk, certain of its existing term contracts provide for
dayrates in excess of current market rates. Cancellation or renegotiation of
these contracts could have an adverse effect on the Company's results of
operations.
In June 1999, a customer notified the Company of its intention to
terminate a contract for use of one of the Company's drilling rigs. The Company
has notified the customer that, in accordance with the terms of the contract,
it is responsible for payment of approximately $16 million in remaining revenue
through the end of the contract period, which was previously scheduled to end
in January 2000. The Company intends to vigorously pursue fulfillment of these
contract terms.
The conversion of the Ocean Confidence from an accommodation vessel to
a semisubmersible drilling unit capable of operating in harsh environments and
ultra-deep water is in progress. The upgrade and associated sea trials are
anticipated to be completed in April 2000, when the rig is scheduled to begin a
five-year contract in the Gulf of Mexico. See "-- Capital Resources." Increased
rig construction and enhancement programs are also ongoing by the Company's
competitors. This increase in the supply of technologically advanced rigs
capable of drilling in deep water has produced a marginal oversupply of such
equipment in the current market and, in turn, adversely affected the
utilization level and average operating dayrates available for the Company's
rigs, particularly its higher specification semisubmersible units.
The Company's drillship, the Ocean Clipper, completed testing in May
1999 in connection with modifications, upgrades, and the replacement of the
blow-out preventer control system. The tests were successful and the drillship
is currently operating under a turnkey contract in the Gulf of Mexico, which is
expected to be completed in August 1999. See "--Integrated Services." Upon
completion, the Ocean Clipper will return to a shipyard to install required
equipment and perform necessary modifications in connection with its
three-year contract offshore Brazil. This
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contract is anticipated to commence at the end of 1999 and is expected to
generate revenues of approximately $103.0 million over the three-year period.
The Company's results of operations for 1999 have been adversely
affected by the loss of revenues and associated costs incurred during required
regulatory inspections of its drilling rigs. Five of these inspections were
completed during the six months ended June 30, 1999. While no further
inspections are scheduled for the remainder of 1999, the Company may perform
additional inspections or undertake modifications to take advantage of rig
downtime. The Company intends to focus on returning these rigs to operation as
soon as reasonably possible, in order to minimize downtime and associated loss
of revenues, but the extent of such downtime cannot be accurately predicted.
Historically, the offshore contract drilling market has been highly
competitive and cyclical, and the Company cannot predict the extent to which
current conditions may or may not continue.
LIQUIDITY
At June 30, 1999, cash and marketable securities totaled $681.2
million, up from $637.0 million at December 31, 1998. Cash provided by
operating activities for the six months ended June 30, 1999 increased by $8.3
million to $232.4 million, as compared to $224.1 million for the prior year.
This increase was primarily attributable to a $139.7 million increase in cash
resulting from decreases in accounts receivable, partially offset by a $87.3
million decrease in net income and a $44.2 million decrease in cash resulting
from decreases in accounts payable and accrued liabilities.
Investing activities used $204.1 million of cash during the six months
ended June 30, 1999, as compared to $235.0 million during the same period of
the prior year. This decrease resulted primarily from a $112.5 million decrease
in cash used for investments in marketable securities, partially offset by a
$81.2 million increase in capital expenditures primarily attributable to the
Ocean Confidence.
In April 1999, the Company entered into a $20.0 million short-term
revolving credit agreement with a U.S. bank. The agreement provides for
borrowings at various interest rates and varying commitment fees dependent upon
public credit ratings. The Company intends to use the facility primarily for
letters of credit that the Company must post, from time to time, for bid and
performance guarantees required in certain parts of the world. The agreement
contains certain financial and other covenants and provisions that must be
maintained by the Company for compliance. As of June 30, 1999, there were no
outstanding borrowings under this agreement and the Company was in compliance
with each of the covenants and provisions.
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 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. In current market conditions, the
Company may determine that rig upgrades or enhancements in addition to those
budgeted should be undertaken while rigs are idle in order to prudently make
use of funds and take advantage of rig downtime.
It is management's opinion that operating cash flows and the Company's
cash reserves will be sufficient to meet its 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
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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 beyond its control.
The Company has budgeted $173.7 million for rig upgrade capital
expenditures during 1999, including approximately $138.7 million for 1999
expenditures associated with the conversion of the Ocean Confidence. During the
six months ended June 30, 1999, the Company expended $105.1 million, including
capitalized interest expense, for rig upgrades, primarily the conversion of the
Ocean Confidence from an accommodation vessel to a semisubmersible drilling
unit capable of operating in harsh environments and ultra-deep waters. The
Company previously estimated the cost of conversion for this rig to be
approximately $210.0 million. However, previous estimates were developed prior
to the completed structural engineering. The Company now estimates the cost of
conversion for this rig at approximately $275.0 million. Upon completion of the
conversion and rig acceptance, the rig is scheduled to begin a five-year
drilling program in the Gulf of Mexico, which is expected to generate
approximately $320.0 million of revenues. The drilling contract contains a
provision allowing the customer to cancel the contract should the unit not be
delivered by July 1, 2000. The Company believes that the project will be
completed timely and within the revised budget, although, as with any major rig
conversion, the possibility of unforeseen delays and costs overruns exists.
The Company has also budgeted $134.1 million for 1999 capital
expenditures associated with its continuing rig enhancement program, spare
equipment inventory, and other corporate requirements. During the six months
ended June 30, 1999, the Company expended $49.4 million in association with its
continuing rig enhancement program to maintain spare equipment inventory levels
and meet other corporate requirements. These expenditures included purchases of
riser, drill pipe, and other drilling equipment.
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
agreement in the future and such acquisition could result in a material
expansion of its existing operations or result in its 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, through its 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. Generally,
DOTS is not entitled to payment unless the well is drilled to the specified
depth and profitability of the contract depends upon its ability to keep
expenses within the estimates used by DOTS 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 is
currently operating under a turnkey contract in the Gulf of Mexico, utilizing
the Company's drillship, the Ocean Clipper, which is expected to be completed in
August 1999.
YEAR 2000 ISSUES
Introduction.
The Company began to address Year 2000 ("Y2K") compliance issues in
1997 when it formed a committee (the "Y2K Committee") to develop the Company's
Y2K compliance initiative. The Company is continuing to take steps to determine
the potential effect of the change to calendar Year 2000 on its computer
hardware, software and embedded technology systems and any impact it may have
on the Company's business.
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State of Readiness.
The Company manages its Y2K compliance initiative through the Y2K
Committee. The Y2K Committee has focused its efforts on both information
technology ("IT") systems (e.g., computer software and hardware) and
non-information technology ("Non-IT") systems (e.g., embedded technology such
as micro-controllers) in the Company's domestic and international onshore
locations, aboard the Company's drilling rigs and among its key suppliers. The
Y2K Committee is focusing on critical safety, production, and operational
systems on-board the Company's fleet of drilling rigs. The Company's Y2K
initiative consists of the following five phases:
Phase 1 Awareness of Y2K Issues (appointment of the Y2K Committee,
initial research on Y2K compliance issues);
Phase 2 Identification and Investigation of the Company's Systems
(inventory of systems and investigation of readiness);
Phase 3 Communications with Suppliers (discussions and requests for
information regarding Y2K initiatives and compliance status);
Phase 4 Development and Implementation of Corrective Measures
(coordination with the Company's software and hardware vendors); and
Phase 5 Risk Assessment and Contingency Planning (evaluation of risk
of business interruptions and development of contingency plans).
The Company has completed Phases 1 and 2 for IT and Non-IT systems
utilized in the Company's onshore and offshore operations and substantially
completed the final three phases of its Y2K initiative.
Cost to Address the Company's Y2K Issues.
The total cost associated with required modifications to become Y2K
compliant is not expected to be material to the Company's financial position
primarily because the Company has utilized existing personnel resources to
assist in the implementation of its Y2K compliance initiative. The Company has
recently completed the implementation of certain major business and financial
systems apart from the Y2K compliance initiative. However, because the replaced
systems were not Y2K compliant, the Y2K initiative also benefited from their
replacement. The total cost of the implementation was approximately $5.0
million, of which approximately $3.3 million was incurred and capitalized prior
to 1999. The total cost does not include the Company's internal costs,
principally the related payroll cost for its information systems group, which
are not separately tracked.
Y2K Risks and Contingency Planning.
The Company is continuing to monitor, on an ongoing basis, the
problems and uncertainties associated with its Y2K issues and their potential
consequences on the Company's onshore locations, drilling operations and
suppliers as well as the legal risks associated with interruption in the
provision of drilling services and/or the delivery of supplies and equipment.
The Company has developed contingency plans intended to address worst-case
business interruptions, such as the interruption of drilling services aboard
the Company's drilling rigs or interruptions in the delivery of equipment and
materials utilized in the Company's drilling operations. Such contingency plans
take into account the existence of certain redundant systems on some of the
Company's drilling rigs and may, in part, involve manual operation of certain
systems for a period of time in the event of Y2K related disruptions.
The Company's failure to fully implement its Y2K initiative or the
occurrence of an unexpected Y2K problem could result in the disruption of
normal business activities or operations and have a material adverse effect on
the Company's results of operations, liquidity or financial condition. However,
based upon the work performed to date, the Company does not believe that such
matters will have a material adverse effect on its results of operations. With
respect to third parties, there can be no assurance that their systems will be
rendered Y2K compliant on a timely basis or that any resulting Y2K issues would
not have a material adverse effect on the results of operations of the Company.
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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 the Private Securities Litigation Reform Act
of 1995. 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 the effect of market conditions on the Company's future results of
operations (see "-- Outlook"), completion dates for construction or other
capital projects (see "--Outlook"), commencement and completion dates of
drilling contracts and upgrade projects (see "--Outlook" and "--Capital
Resources"), future uses of and requirements for financial resources, including
but not limited to, expenditures related to the upgrade of the Ocean Confidence
(see "-- Liquidity" and "-- Capital Resources"), and the impact of the Y2K
issues on the Company's business (see "-- Year 2000 Issues").
Forward-looking 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, Y2K issues 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 affect 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.
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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 this Report.
INTEREST RATE AND EQUITY PRICE SENSITIVITY
The Company's financial instruments that are potentially sensitive to
changes in interest rates include the Company's convertible subordinated notes
and investments in debt securities, including U.S. Treasury securities and
collateralized mortgage obligations ("CMO's"). The Company's convertible
subordinated notes, which are due February 15, 2007, have a stated interest
rate of 3.75 percent and an effective interest rate of 3.93 percent. The fair
value of these notes at June 30, 1999, based on quoted market prices, was
approximately $397.6 million, as compared to a carrying amount of $400.0
million. At June 30, 1999, the fair market value of the Company's investment in
debt securities issued by the U.S. Treasury was approximately $432.5 million,
which includes an unrealized holding loss of $2.1 million. These securities
bear interest at rates ranging from 4.00 percent to 5.00 percent and do not
impose a significant market risk to the Company as they are U.S.
government-backed and generally short-term and readily marketable. The fair
value of the Company's investment in CMO's at June 30, 1999 was approximately
$149.7 million, which includes an unrealized holding loss of $3.3 million. The
CMO's are also short-term and readily marketable with an implied AAA rating
backed by U.S. government guaranteed mortgages.
In addition, the Company's investment in equity securities is
sensitive to equity price risk. At June 30, 1999, the fair value of the
Company's investment in equity securities was approximately $3.4 million, which
includes an unrealized holding loss of $8.7 million.
Based on consideration of past market movements and reasonably
possible, near-term market movements, the Company does not believe that
potential, near-term losses in future earnings, fair values, or cash flows
are likely to be material.
EXCHANGE RATE SENSITIVITY
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the
334th Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs sued Zapata Off-Shore Company and Zapata Corporation (the "Zapata
Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract seeking $14.0 million in actual damages and
unspecified punitive damages, plus costs of court, interest and attorneys'
fees. A former subsidiary of Arethusa (Off-Shore) Limited, which is now a
subsidiary of the Company, defended and indemnified the Zapata Defendants
pursuant to a contractual defense and indemnification agreement. In November
1997, the jury awarded a take-nothing judgment in favor of the Zapata
Defendants. The plaintiffs appealed the judgment and the appellate court
ordered the parties to mediation. The case went to mediation in July 1998 with
no resolution. In May 1999, the case went before the Texas First Court of
Appeals, Houston, and oral arguments were heard.
The Company is awaiting the Court's decision.
The Company and its subsidiaries are named defendants in certain other
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.
The Annual Meeting of Stockholders (the "Annual Meeting") of Diamond
Offshore Drilling, Inc. was held on May 12, 1999 in New York, New York. At the
Annual Meeting, the holders of 127,780,849 shares out of 135,815,535 shares
entitled to vote as of the record date were represented in person or by proxy,
constituting a quorum. The following matters were voted on and adopted by the
margins indicated:
a. To elect six directors, each to serve until the next annual
meeting of stockholders and until their respective successors
are elected and qualified or until their earlier resignation
or removal.
NUMBER OF SHARES
--------------------------------------------
BROKER
FOR WITHHELD NON-VOTE
--------------------------------------------
James S. Tisch 126,442,535 1,338,314 0
Lawrence R. Dickerson 126,415,417 1,365,432 0
Herbert C. Hofmann 126,568,130 1,212,719 0
Arthur L. Rebell 126,417,040 1,363,809 0
Michael H. Steinhardt 126,742,409 1,038,440 0
Raymond S. Troubh 126,779,657 1,001,192 0
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b. To ratify the appointment of Deloitte & Touche LLP as
independent certified public accountants for the Company and
its subsidiaries for fiscal year 1999.
For 127,665,297
Against or Withheld 59,134
Abstain 56,418
Broker Non-Vote 0
ITEM 5. OTHER INFORMATION.
In July 1999, the Company elected Alan R. Batkin to its board of
directors. Mr. Batkin is Vice-Chairman of Kissinger Associates, Inc., a
geopolitical consulting firm. The board now consists of seven directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See Exhibit Index for a list of those exhibits filed herewith.
(b) There were no reports on Form 8-K filed during the second quarter of
1999.
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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 29-Jul-1999 By: /s/ Gary T. Krenek
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Gary T. Krenek
Vice President and Chief Financial Officer
Date 29-Jul-1999 /s/ Leslie C. Knowlton
----------- ------------------------------------------
Leslie C. Knowlton
Controller (Chief Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of 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 (incorporated by reference
to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998).
11.1* Statement Re Computation of Per Share Earnings.
27.1* Financial Data Schedule.
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* Filed herewith.