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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13289
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PRIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0069030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 SAN FELIPE, SUITE 3300
HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 789-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practical date.
Outstanding as of November 8, 2002
Common Stock, par value $.01 per share 134,441,978
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PRIDE INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2002 and December 31, 2001........................ 2
Consolidated Statement of Operations for the three months ended
September 30, 2002 and 2001................................................................. 3
Consolidated Statement of Operations for the nine months ended
September 30, 2002 and 2001................................................................. 4
Consolidated Statement of Cash Flows for the nine months ended
September 30, 2002 and 2001................................................................. 5
Notes to Unaudited Consolidated Financial Statements............................................. 6
Report of Independent Accountants................................................................ 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 14
Item 3A. Quantitative and Qualitative Disclosures about Market Risk................................. 21
Item 4. Controls and Procedures.................................................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................... 22
Signatures........................................................................................... 23
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUES)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 88,743 $ 58,988
Restricted cash............................................................ 40,149 55,400
Trade receivables, net..................................................... 315,019 333,433
Parts and supplies......................................................... 64,903 59,720
Deferred income taxes...................................................... 1,804 2,096
Other current assets....................................................... 163,787 122,503
------------ -------------
Total current assets................................................... 674,405 632,140
------------ -------------
PROPERTY AND EQUIPMENT, net..................................................... 3,373,076 3,371,159
------------ -------------
OTHER ASSETS
Investments in and advances to affiliates.................................. 27,426 26,524
Goodwill .................................................................. 64,656 64,656
Other assets, net.......................................................... 123,147 111,211
------------ -------------
Total other assets..................................................... 215,229 202,391
------------ -------------
$ 4,262,710 $ 4,205,690
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................... $ 138,645 $ 188,686
Accrued expenses........................................................... 191,634 203,527
Short-term borrowings...................................................... 31,998 42,379
Current portion of long-term debt.......................................... 94,354 99,850
Current portion of long-term lease obligations............................. 2,717 2,643
------------ -------------
Total current liabilities.............................................. 459,348 537,085
------------ -------------
OTHER LONG-TERM LIABILITIES..................................................... 109,775 128,293
LONG-TERM DEBT, net of current portion.......................................... 1,797,046 1,624,888
LONG-TERM LEASE OBLIGATIONS, net of current portion............................. 13,034 14,997
DEFERRED INCOME TAXES........................................................... 114,617 137,214
MINORITY INTEREST............................................................... 80,051 66,107
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 50,000 shares authorized; none issued..... -- --
Common stock, $.01 par value; 400,000 shares authorized;
133,243 and 132,847 shares issued and outstanding, respectively........ 1,332 1,328
Paid-in capital............................................................ 1,223,837 1,218,624
Accumulated other comprehensive loss....................................... (4,572) (1,015)
Retained earnings.......................................................... 468,242 478,169
------------ -------------
Total stockholders' equity............................................. 1,688,839 1,697,106
------------ -------------
$ 4,262,710 $ 4,205,690
============ =============
The accompanying notes are an integral part of the consolidated
financial statements.
2
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2001
------------ -------------
REVENUES ....................................................................... $ 286,217 $ 406,298
OPERATING COSTS................................................................. 172,113 248,993
------------ -------------
Gross margin............................................................... 114,104 157,305
DEPRECIATION AND AMORTIZATION................................................... 56,139 49,796
SELLING, GENERAL AND ADMINISTRATIVE............................................. 24,738 26,188
POOLING AND MERGER COSTS........................................................ -- 35,766
------------ -------------
EARNINGS FROM OPERATIONS........................................................ 33,227 45,555
------------ -------------
OTHER INCOME (EXPENSE)
Interest expense........................................................... (34,285) (33,011)
Interest income............................................................ 993 2,477
Other, net................................................................. (1,082) 2,705
------------ -------------
Total other expense, net............................................... (34,374) (27,829)
------------ -------------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST....................... (1,147) 17,726
INCOME TAX PROVISION (BENEFIT).................................................. (344) 9,856
MINORITY INTEREST............................................................... 4,731 2,991
------------ -------------
NET EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM................................... (5,534) 4,879
EXTRAORDINARY ITEM, net......................................................... (189) 564
------------ -------------
NET EARNINGS (LOSS)............................................................. $ (5,723) $ 5,443
============ =============
NET EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM
Basic.................................................................. $ (0.04) $ 0.04
Diluted................................................................ $ (0.04) $ 0.04
NET EARNINGS (LOSS) PER SHARE AFTER EXTRAORDINARY ITEM
Basic.................................................................. $ (0.04) $ 0.04
Diluted................................................................ $ (0.04) $ 0.04
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic.................................................................. 133,212 132,790
Diluted................................................................ 133,212 133,865
The accompanying notes are an integral part of the consolidated
financial statements.
3
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2001
------------ -------------
REVENUES ....................................................................... $ 852,532 $ 1,150,351
OPERATING COSTS................................................................. 513,350 669,699
------------ -------------
Gross margin............................................................... 339,182 480,652
DEPRECIATION AND AMORTIZATION................................................... 167,214 147,509
SELLING, GENERAL AND ADMINISTRATIVE............................................. 70,431 75,805
POOLING AND MERGER COSTS........................................................ -- 35,766
------------ -------------
EARNINGS FROM OPERATIONS........................................................ 101,537 221,572
------------ -------------
OTHER INCOME (EXPENSE)
Interest expense........................................................... (98,665) (81,937)
Interest income............................................................ 4,016 9,451
Other, net................................................................. (11) (2,091)
------------- -------------
Total other expense, net............................................... (94,660) (74,577)
------------ -------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST.............................. 6,877 146,995
INCOME TAX PROVISION............................................................ 2,062 48,626
MINORITY INTEREST............................................................... 13,944 10,857
------------ -------------
NET EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM................................... (9,129) 87,512
EXTRAORDINARY ITEM, net......................................................... (798) 564
------------ -------------
NET EARNINGS (LOSS)............................................................. $ (9,927) $ 88,076
============ =============
NET EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM
Basic.................................................................. $ (0.07) $ 0.67
Diluted................................................................ $ (0.07) $ 0.63
NET EARNINGS (LOSS) PER SHARE AFTER EXTRAORDINARY ITEM
Basic.................................................................. $ (0.07) $ 0.67
Diluted................................................................ $ (0.07) $ 0.63
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic.................................................................. 133,058 131,220
Diluted................................................................ 133,058 145,194
The accompanying notes are an integral part of the consolidated
financial statements.
4
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2002 2001
------------ -------------
OPERATING ACTIVITIES
Net earnings (loss)........................................................ $ (9,927) $ 88,076
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities -
Depreciation and amortization.............................................. 167,214 147,509
Discount amortization on zero coupon debentures............................ 8,676 12,477
Amortization of deferred loan costs........................................ 6,081 1,509
Gain on sale of assets..................................................... (163) (739)
Minority interest.......................................................... 13,944 10,857
Extraordinary item......................................................... 798 (564)
Changes in assets and liabilities, net of effects of acquisitions -
Trade receivables...................................................... 18,414 (85,480)
Parts and supplies..................................................... (5,183) (2,687)
Other current assets................................................... (41,284) (48,522)
Other assets........................................................... (9,873) 18,381
Accounts payable....................................................... (97,281) (6,570)
Accrued expenses....................................................... (15,451) 72,303
Other long-term liabilities............................................ (18,518) 15,277
Deferred income taxes ................................................. (22,198) 15,595
------------ -------------
Net cash provided (used) by operating activities.................. (4,751) 237,422
------------- -------------
INVESTING ACTIVITIES
Purchase of net assets of acquired entities, less cash acquired............ - (8,934)
Purchases of property and equipment........................................ (122,243) (219,010)
Proceeds from sales of property and equipment.............................. 590 1,445
Investments in and advances to affiliates.................................. (902) (17,329)
------------ -------------
Net cash used in investing activities............................. (122,555) (243,828)
------------ -------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock..................................... - 62,000
Proceeds from exercise of stock options.................................... 5,111 7,508
Proceeds from issuance of notes and debentures, net of issue costs......... 291,781 254,500
Proceeds from debt borrowings.............................................. 360,000 71,266
Reduction of debt.......................................................... (515,082) (355,486)
Change in restricted cash.................................................. 15,251 2,128
------------ -------------
Net cash provided by financing activities......................... 157,061 41,916
------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 29,755 35,510
CASH AND CASH EQUIVALENTS, beginning of period.................................. 58,988 77,182
------------ -------------
CASH AND CASH EQUIVALENTS, end of period........................................ $ 88,743 $ 112,692
============ =============
SUPPLEMENTAL CASH FLOW INFORMATION
Capital expenditures in accounts payable................................... $ 47,240 $ 42,606
The accompanying notes are an integral part of the consolidated
financial statements.
5
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Principles of Consolidation and Reporting
The unaudited consolidated financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Certain
reclassifications have been made to the prior periods' condensed financial
statements to conform with the current period presentation. Operating costs for
the current period have been reduced by $3.4 million as a result of the reversal
of reserves expensed in prior periods primarily for maintenance costs that are
not expected to be incurred. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto of Pride International, Inc. (the "Company" or "Pride")
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
In the opinion of management, the unaudited consolidated financial
information included herein reflects all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for a full year or any other interim period.
PricewaterhouseCoopers LLP, the Company's independent accountants, have
performed a review of the unaudited consolidated financial statements included
herein in accordance with standards established by the American Institute of
Certified Public Accountants. Pursuant to Rule 436(c) under the Securities Act
of 1933, the report of PricewaterhouseCoopers LLP, included herein, should not
be considered a part of a registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meanings of Sections 7 and 11 of the
Securities Act, and the liability provisions of Section 11 of the Securities Act
do not apply to such report.
Comprehensive Income
Comprehensive income is the change in the Company's equity from all
transactions except those resulting from investments by or distributions to
owners. Comprehensive income (loss) for the three and nine months ended
September 30, 2002 and 2001 was as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- -------- -------- ---------
Net earnings (loss)........................................... $ (5,723) $ 5,443 $ (9,927) $ 88,076
Foreign currency translation gain (loss), net................. (5,256) (689) (3,557) 62
--------- -------- -------- ---------
Comprehensive income (loss)................................... $ (10,979) $ 4,754 $(13,484) $ 88,138
========= ======== ======== =========
Long-Term Assets
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
effective January 1, 2002. The Company will review long-term assets for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of long-term assets may not be recoverable from their
undiscounted future cash flows and will recognize an impairment loss for the
difference between the carrying amount and the fair value of the asset. The
adoption of SFAS No. 144 did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002
with early adoption encouraged.
6
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections." SFAS No.
145 eliminates the requirement that gains and losses from the extinguishment of
debt be aggregated and classified as extraordinary items and requires
sale-leaseback accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002 with early adoption
encouraged. Upon adoption, previously reported extraordinary items from the
extinguishment of debt will be combined with other income (expense).
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost that is associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002 with early
application encouraged.
SFAS Nos. 143, 145 and 146 are not expected to have a material impact on
the Company's consolidated financial position, results of operations or cash
flows when adopted.
2. GOODWILL
Effective January 1, 2002, the Company adopted SFAS No. 142, which
eliminates the amortization of goodwill and requires that goodwill be reviewed
annually for impairment. The Company ceased amortizing goodwill on January 1,
2002. The Company performed a transitional impairment test of goodwill during
the second quarter of 2002 and determined that the fair value exceeded the
recorded cost as of January 1, 2002; accordingly, no impairment was recorded.
The Company's net earnings and net earnings per share, adjusted to exclude
goodwill amortization expense, for the three and nine months ended September 30,
2001, are as follows:
SEPTEMBER 30, 2001
--------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net earnings as reported............................................. $ 5,443 $ 88,076
Goodwill amortization, net of tax.................................... 634 1,868
--------- ---------
Adjusted net earnings................................................ $ 6,077 $ 89,944
========= =========
BASIC EARNINGS PER SHARE
Net basic earnings per share as reported............................. $ 0.04 $ 0.67
Goodwill amortization, net of tax.................................... -- 0.01
--------- --------
Adjusted basic earnings per share.................................... $ 0.04 $ 0.68
========= =========
DILUTED EARNINGS PER SHARE
Net diluted earnings per share as reported........................... $ 0.04 $ 0.63
Goodwill amortization, net of tax.................................... -- 0.01
--------- ---------
Adjusted diluted earnings per share.................................. $ 0.04 $ 0.64
========= =========
7
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT
Long-term debt as of September 30, 2002 and December 31, 2001 consisted of
the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
(IN THOUSANDS)
Senior secured term loan............................................... $ 199,000 $ --
Senior secured revolving credit facilities............................. 100,000 100,000
9 3/8% Senior Notes due 2007........................................... 325,000 325,000
10% Senior Notes due 2009.............................................. 200,000 200,000
Drillship loans........................................................ 246,218 288,687
Semisubmersible loans.................................................. 215,371 250,000
2 1/2% Convertible Senior Notes Due 2007............................... 300,000 --
Zero Coupon Convertible Senior Debentures Due 2021..................... 97,408 268,545
Zero Coupon Convertible Subordinated Debentures Due 2018............... 110,170 177,575
Senior convertible notes payable....................................... 85,853 85,853
Limited-recourse collateralized term loans............................. 11,820 16,274
Note payable to seller................................................. -- 11,556
Other notes payable.................................................... 560 1,248
------------ -------------
1,891,400 1,724,738
Current portion of long-term debt...................................... 94,354 99,850
------------ -------------
Long-term debt, net of current portion................................. $ 1,797,046 $ 1,624,888
============ =============
In August and September 2002, the Company purchased on the open market and
then extinguished a total of $50.9 million principal amount at maturity of its
zero coupon convertible senior debentures due 2021. The total purchase price was
$32.2 million, and the accreted value of the debentures, less offering costs,
was $32.0 million, resulting in an extraordinary loss after estimated income
taxes of $0.1 million. In March 2002, the Company purchased on the open market
and then extinguished a total of $227.0 million principal amount at maturity of
the debentures. The total purchase price was $140.5 million, and the accreted
value of the debentures, less offering costs, was $139.8 million, resulting in
an extraordinary loss after estimated income taxes of $0.5 million. The holders
of the debentures have the right to require the Company to purchase their
debentures in January 2003. These debentures are classified as long-term debt
based on the Company's ability and intent to refinance the debentures using
existing cash and available credit facilities.
In July 2002, the Company purchased on the open market and then
extinguished a total of $57.5 million principal amount at maturity of its zero
coupon convertible subordinated debentures due 2018. The total purchase price
was $27.2 million, and the accreted value of the debentures, less offering
costs, was $27.1 million, resulting in an extraordinary loss after estimated
income taxes of $0.1 million. In June 2002, the Company purchased on the open
market and then extinguished a total of $95.9 million principal amount at
maturity of the debentures. The total purchase price was $45.4 million, and the
accreted value of the debentures, less offering costs, was $45.2 million,
resulting in an extraordinary loss after estimated income taxes of $0.1 million.
The holders of the debentures have the right to require the Company to purchase
their debentures in April 2003. These debentures are classified as long-term
debt based on the Company's ability and intent to refinance the debentures using
existing cash and available credit facilities.
In June 2002, the Company entered into senior secured credit facilities
with a group of banks providing for aggregate availability of up to $450.0
million, consisting of a five-year $200.0 million term loan and a three-year
$250.0 million revolving credit facility. Proceeds from the term loan were used
to refinance a portion of the amounts outstanding under other credit facilities.
Borrowings under the revolving credit facility are available for general
corporate purposes. The Company may issue up to $50.0 million of letters of
credit under the facility. As of September 30, 2002, $25.0 million of borrowings
and an additional $7.7 million of letters of credit were outstanding under the
facility. The facilities are secured by two deepwater semisubmersible rigs, the
Pride North America and the Pride South Pacific, and 28 jackup rigs. Borrowings
under the facilities, as amended effective September 2002, currently bear
interest at variable rates based on LIBOR plus a spread based on the credit
rating of the facility or, if unrated, index debt, currently 3.5% for the term
loan and 3.0% for the revolving credit facility. The interest rate on the term
loan was 5.5% at September 30, 2002. The credit
8
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
facilities contain provisions that limit the ability of the Company and its
subsidiaries, with certain exceptions, to pay dividends or make other restricted
payments and investments; incur additional debt; create liens; incur dividend or
other payment restrictions affecting subsidiaries; consolidate, merge or
transfer all or substantially all of its assets; sell assets or subsidiaries;
enter into speculative hedging arrangements outside the ordinary course of
business; enter into transactions with affiliates; make maintenance capital
expenditures and incur long-term operating leases. The credit facilities also
require the Company to comply with specified financial tests, including a ratio
of net debt to EBITDA, an interest coverage ratio, a ratio of net debt to total
capitalization and a minimum net worth.
The Company also has a senior revolving credit facility with non-U.S. banks
that provides aggregate availability of up to $105.0 million. The credit
facility terminates in June 2005. Borrowings under the credit facility bear
interest at variable rates based on LIBOR plus a spread ranging from 1.00% to
1.55%. As of September 30, 2002, there was $75.0 million outstanding under this
credit facility. Together with the revolving credit facility discussed above,
the Company had $247.3 million in aggregate availability as of September 30,
2002.
The Company has a senior secured credit facility with a U.S. bank under
which up to $25.0 million of letters of credit may be issued. Outstanding
letters of credit issued under this credit facility are secured by the Company's
cash and cash equivalents maintained at such bank. The letter of credit facility
expires in March 2003. As of September 30, 2002, there were $5.4 million of
letters of credit issued under this credit facility.
In March 2002, the Company issued $300.0 million principal amount of 2 1/2%
convertible senior notes due March 1, 2007. The net proceeds to the Company,
after deducting underwriting discounts and offering costs, were $291.8 million.
The notes are convertible into approximately 18.2 million shares of common stock
of the Company (equal to a conversion rate of 60.5694 shares of common stock per
$1,000 principal amount, or $16.51 per share). Interest on the notes is payable
semiannually in March and September. On or after March 4, 2005, the notes are
redeemable at the Company's option, in whole or in part, for cash at redemption
prices starting at 101% and declining to 100% by March 1, 2007, in each case
plus accrued and unpaid interest. The Company may redeem some or all of the
notes at any time prior to March 4, 2005 at 100% of the principal amount, plus
accrued and unpaid interest and an amount equal to 7.5% of the principal amount,
less the amount of any interest actually paid on the notes on or prior to the
redemption date, if the closing price of the Company's common stock has exceeded
150% of the conversion price per share then in effect for at least 20 trading
days within a period of 30 consecutive trading days. In connection with the
issuance of the notes, a private equity fund related to First Reserve
Corporation purchased 7.9 million shares of the Company's common stock from
third parties. First Reserve manages private equity funds that specialize in the
energy industry.
As of September 30, 2002, $40.1 million of the Company's cash balances,
which amount is included in restricted cash, consists of funds held in trust in
connection with the Company's drillship and semisubmersible loans and its
limited-recourse collateralized term loans and, accordingly, is not available
for use by the Company.
4. INCOME TAXES
The Company's consolidated effective income tax rate for the nine months
ended September 30, 2002 was 30.0%, as compared to 33.1% for the nine months
ended September 30, 2001. The Company's consolidated effective income tax rate
for the three months ended September 30, 2002 was 30.0%, as compared to 55.6%
for the corresponding period in 2001. The decrease in the effective tax rates
resulted primarily from the estimated non-deductibility for U.S. federal income
tax purposes of a substantial portion of the pooling and merger costs incurred
in 2001 in connection with the merger with Marine Drilling Companies, Inc. in
September 2001.
9
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. NET EARNINGS PER SHARE
Basic net earnings per share has been computed based on the weighted
average number of shares of common stock outstanding during the applicable
period. Diluted net earnings per share has been computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period, as if stock options, convertible debentures and
other convertible debt were converted into common stock, after giving
retroactive effect to the elimination of interest expense, net of income tax
effect, applicable to the convertible debentures and other convertible debt.
The following table presents information necessary to calculate basic and
diluted net earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- -------- -------- ---------
(IN THOUSANDS)
Net earnings (loss) before extraordinary item................. $ (5,534) $ 4,879 $ (9,129) $ 87,512
Extraordinary item, net....................................... (189) 564 (798) 564
--------- -------- -------- ---------
Net earnings (loss) after extraordinary item.................. (5,723) 5,443 (9,927) 88,076
Interest expense on convertible debentures and notes.......... -- -- -- 6,235
Income tax effect............................................. -- -- -- (2,182)
--------- -------- -------- ---------
Adjusted net earnings (loss) after extraordinary item.... $ (5,723) $ 5,443 $ (9,927) $ 92,129
========= ======== ======== =========
Weighted average shares outstanding .......................... 133,212 132,790 133,058 131,220
Convertible debentures and notes.............................. -- -- -- 11,958
Stock options ................................................ -- 1,075 -- 2,016
--------- -------- -------- ---------
Adjusted weighted average shares outstanding............. 133,212 133,865 133,058 145,194
========= ======== ======== =========
The calculation of diluted weighted average shares outstanding excludes
37.1 million and 26.2 million common shares for the three months ended September
30, 2002 and 2001, respectively, and 33.0 million and 9.8 million common shares
for the nine months ended September 30, 2002 and 2001, respectively, issuable
pursuant to convertible debt and outstanding options. These shares were excluded
as their effect was antidilutive or the exercise price of stock options exceeded
the average price of the Company's common stock for the period.
6. COMMITMENTS AND CONTINGENCIES
The Company and a number of other offshore drilling contractors with
operations in the Gulf of Mexico were defendants in a lawsuit in the U.S.
District Court of the Southern District of Texas entitled Verdin v. R&B Falcon
Drilling USA, Inc. The plaintiff, who purported to be an "offshore worker"
previously employed by R&B Falcon Drilling USA, Inc., alleged that the
defendants engaged in a conspiracy to depress wages and benefits paid to the
defendants' offshore employees in violation of federal and state antitrust laws.
The Company vigorously denied these allegations; however, to avoid the cost and
uncertainties of continued litigation, it agreed to participate in a settlement.
In April 2002, the court certified the settlement class and entered a final
judgment approving the settlement. The Company's portion of the settlement
amount was $14.1 million. The judgment is now final and non-appealable and fully
discharges the Company from any and all past or future liability specifically
related to this matter. In June 2001, the Company recognized a $5.1 million
charge for the portion of its share of the settlement amount that is not within
the policy limits of its insurance. The Company's insurance carrier has not yet
agreed to pay the remaining amount and the Company has commenced litigation
against this insurer.
The Company is routinely involved in other litigation incidental to its
business, which at times involves claims for significant monetary amounts, some
of which would not be covered by insurance. In the opinion of management, none
of the existing litigation will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
10
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. INVESTMENT IN AMETHYST JOINT VENTURE
As of September 30, 2002, the Company had a 26.4% equity interest in a
joint venture company that is constructing two dynamically-positioned, deepwater
semisubmersible drilling rigs, yet to be named and currently referred to as the
Amethyst 4 and Amethyst 5. In October 2002, the two First Reserve funds that
collectively held an 11.9% interest in the joint venture transferred their
interests to the Company in exchange for a total of 527,652 shares of the
Company's common stock. As a result, the Company currently owns a 38.3% interest
in the joint venture. The other joint venture partner has an option expiring in
late November 2002 to acquire up to 70% of the interest acquired by the Company
in the First Reserve exchange, which would reduce the Company's interest to 30%.
The exercise price of that option is payable in shares of the Company's common
stock. As a result of the exchange and other purchases of the Company's common
stock by First Reserve managed funds, First Reserve funds owned as of October
31, 2002 approximately 20.0 million shares of the Company's common stock, or
approximately 15.0% of the total shares outstanding.
Amethyst 4 and Amethyst 5 have been moved to the Cianbro Corporation
shipyard in Maine in order to complete construction after Friede Goldman Halter,
Inc. ("FGH"), the original builder of the rigs, filed for bankruptcy. FGH had
posted performance bonds to ensure completion of the construction and the surety
has funded into escrow approximately $160.0 million towards the cost of
completing the rigs. The Company anticipates that the construction of the rigs
will be completed in late 2003. The joint venture company has financed 87.5% of
the cost of construction of these rigs through credit facilities, with repayment
of the borrowings under those facilities guaranteed by the United States
Maritime Administration ("MARAD"). Advances under the credit facilities are
being provided without recourse to any of the joint venture owners. The
remaining 12.5% of the cost of construction is being provided by the joint
venture company from equity contributions that have been made by the joint
venture partners. Through September 30, 2002, the Company's equity contributions
to the joint venture totaled $27.4 million, including capitalized interest of
$5.8 million. In the opinion of management, the performance and payment bonds
issued by the surety on behalf of FGH, together with additional draws under the
MARAD-guaranteed credit facilities, will provide sufficient funds to complete
the Amethyst 4 and Amethyst 5 without requiring additional contributions by the
joint venture partners.
8. SEGMENT INFORMATION
The following table sets forth selected consolidated financial information
of the Company by operating segment:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ -------------------------------------
2002 2001 2002 2001
---------------- ---------------- ----------------- -----------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenues:
Gulf of Mexico............... $ 41.2 14.4% $ 108.2 26.6% $ 115.4 13.5% $ 365.5 31.8%
International offshore....... 152.0 53.1 139.3 34.3 469.5 55.1 350.7 30.5
International land........... 74.9 26.2 121.8 30.0 216.9 25.4 327.0 28.4
E&P services................. 18.1 6.3 37.0 9.1 50.7 6.0 107.1 9.3
-------- ------- -------- ------- -------- -------- -------- --------
Total revenues............. 286.2 100.0 406.3 100.0 852.5 100.0 1,150.3 100.0
-------- ------- -------- ------- -------- -------- -------- --------
Operating Costs:
Gulf of Mexico............... 34.8 20.2 57.8 23.2 98.9 19.3 171.3 25.6
International offshore....... 75.2 43.7 74.5 29.9 233.0 45.4 188.7 28.2
International land........... 48.9 28.4 87.6 35.2 145.3 28.3 228.8 34.2
E&P services................. 13.2 7.7 29.1 11.7 36.1 7.0 80.9 12.0
-------- ------- -------- ------- -------- -------- -------- --------
Total operating costs...... 172.1 100.0 249.0 100.0 513.3 100.0 669.7 100.0
-------- ------- -------- ------- -------- -------- -------- --------
Gross Margin:
Gulf of Mexico............... 6.4 5.6 50.4 32.0 16.5 4.9 194.2 40.4
International offshore....... 76.8 67.3 64.8 41.2 236.5 69.7 162.0 33.7
International land........... 26.0 22.8 34.2 21.8 71.6 21.1 98.2 20.4
E&P services................. 4.9 4.3 7.9 5.0 14.6 4.3 26.2 5.5
-------- ------- -------- ------- -------- -------- -------- --------
Total gross margin......... $ 114.1 100.0% $ 157.3 100.0% $ 339.2 100.0% $ 480.6 100.0%
======== ======= ======== ======= ======== ======== ======== ========
11
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Significant Customers
Two customers accounted for approximately $72.9 million and $205.3 million,
or 25.5% and 24.1%, respectively, of consolidated revenues for the three and
nine months ended September 30, 2002. Two customers accounted for approximately
$90.9 million and $264.8 million, or 22.4% and 23.0%, respectively, of
consolidated revenues for the three and nine months ended September 30, 2001.
12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Pride International, Inc.:
We have reviewed the accompanying consolidated balance sheet of Pride
International, Inc. as of September 30, 2002, and the related consolidated
statements of operations for each of the three month and nine month periods
ended September 30, 2002 and 2001, and the related consolidated statement of
cash flows for the nine month periods ended September 30, 2002 and 2001. These
financial statements are the responsibility of the Company's management.
The unaudited consolidated financial statements give retroactive effect to
the merger of Marine Drilling Companies, Inc. on September 13, 2001 in a
transaction accounted for as a pooling-of-interests. We did not review the
financial statements of Marine Drilling Companies, Inc., whose revenues for the
six month period ended June 30, 2001 constituted 25% of the consolidated totals.
Those statements were reviewed by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Marine Drilling Companies, Inc., is based solely on the
report of the other auditors.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated March 27, 2002, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2001 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
November 13, 2002
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the accompanying unaudited consolidated financial statements as of September 30,
2002 and for the three and nine months ended September 30, 2002 and 2001
included elsewhere herein, and with our Annual Report on Form 10-K for the year
ended December 31, 2001. The following information contains forward-looking
statements. Please read "Forward-Looking Statements" for a discussion of
limitations inherent in such statements.
GENERAL
Pride is a leading international provider of contract drilling and related
services, operating both offshore and on land. As of November 8, 2002, we
operated a global fleet of 328 rigs, including two ultra-deepwater drillships,
12 semisubmersible rigs, 35 jackup rigs, 29 tender-assisted, barge and platform
rigs and 250 land-based drilling and workover rigs. We operate in more than 30
countries and marine provinces. We have four principal operating segments: Gulf
of Mexico, International Offshore, International Land and E&P Services.
BUSINESS ENVIRONMENT
The demand for our drilling and E&P services is driven by the capital
spending programs of our customers. Our customers' capital spending is affected
by their expectations about oil and natural gas prices, anticipated production
levels, demand for crude oil and natural gas products, government regulations
and many other factors. Due to the volatility of commodity prices, it is
difficult to predict with any certainty whether conditions for a particular
sector of our business will improve or deteriorate.
Prices for oil and natural gas increased during 2000 and early 2001, which
had a favorable impact on utilization, day rates and demand for our services.
From mid-2001, however, activity in the U.S. Gulf of Mexico began to weaken, and
in the fourth quarter of 2001 and the first nine months of 2002, we experienced
particularly weak conditions in the U.S. Gulf of Mexico jackup and platform rig
markets as high natural gas inventory storage levels resulted in reduced demand
for rig services. In response to these poor market conditions, we have actively
marketed a number of rigs in our U.S. Gulf of Mexico fleet to international
markets. During 2002, we have obtained long-term contracts for nine jackup rigs
and one platform rig in the Mexican sector of the Gulf of Mexico and for two
jackup rigs in other international markets, one in Nigeria and one in India.
Additionally, we have obtained a long-term contract in Mexico for the Pride
South Seas, a semisubmersible rig that recently completed work in South Africa.
As these rigs complete redeployment and commence work, we expect these contracts
to have a positive impact on our 2002 fourth quarter and 2003 results.
Our international offshore segment has continued to experience high levels
of activity, and we have maintained essentially full utilization of six of our
seven high-specification deepwater rigs during the first nine months of 2002.
The seventh deepwater rig, the Pride South Pacific, completed its contract in
April 2002 and is now undergoing shipyard work in preparation for a new contract
offshore Angola that is expected to commence in December 2002. Our intermediate
water-depth semisubmersibles experienced 74% utilization during the third
quarter of 2002. Utilization of these rigs is expected to remain at about the
same level in the fourth quarter of 2002 even though certain rigs are mobilizing
to new contracts or, in the case of one of these rigs, is undergoing its
five-year periodic survey during the fourth quarter. Following the recent
transfer of two independent-leg jackup rigs to Nigeria and India under two-year
contracts, we currently have eight jackup rigs working in international waters
outside of the Gulf of Mexico. All of these rigs are currently working under
long-term contracts, two of which expire in the second and third quarters of
2003.
Average utilization of our Gulf of Mexico jackup fleet during the third
quarter of 2002 decreased to 47% from 80% during the third quarter of 2001, but
increased from 38% during the first half of 2002 due to the commencement of the
contracts in Mexico. Average day rates for our Gulf of Mexico rigs decreased to
$25,000 in the third quarter of 2002 from $42,000 in the prior year third
quarter and from $25,400 in the first half of 2002. Currently the average
dayrate for the five jackups on contact in Mexico is $33,000, while the seven
rigs working in the U.S. Gulf of Mexico are averaging $22,500 per day. As of
November 8, 2002, 13 of our total fleet of 25 jackups located in the Gulf of
Mexico were either available or mobilizing for contracts.
During the first nine months of 2002, our international land and E&P
services segments were adversely affected by the economic and political
instability in Argentina and Venezuela. The Argentine peso declined in value
against the U.S. dollar following the Argentine government's decision to abandon
the country's fixed dollar-to-peso exchange rate at the end of 2001. The
devaluation, coupled with the government's mandated conversion of all
dollar-based contracts to pesos, severely pressured our margins. During the
first quarter, we engaged in discussions with all of our Argentine customers
14
regarding recovery of losses sustained from the devaluation of accounts
receivable and the basis on which new business would be contracted. We have
restructured most of our contracts on a basis that limits our exposure to
further devaluations. Worldwide demand for our land drilling and workover
services declined from the third quarter of 2001 compared to the corresponding
quarter of 2002. The average utilization rates for our international land
drilling and workover rig fleets fell from 80% in the third quarter of 2001 to
63% in the third quarter of 2002.
OUTLOOK
Our international offshore segment is expected to benefit in the fourth
quarter of 2002 from the commencement of operations in Nigeria and India for two
jackup rigs that had been in the Gulf of Mexico. Additionally, the commencement
of a new contract for the Pride South Pacific offshore Angola is expected to
have a positive impact on operating results in 2003.
Results for our Gulf of Mexico segment are expected to improve in the final
quarter of the year due to the increasing activity offshore Mexico. Despite a
declining reserve base, high natural gas inventory storage levels in the United
States suggest that recovery of demand for drilling and workover services in the
U.S. Gulf of Mexico is likely to be gradual.
Results from our international land and E&P services segments are expected
to show modest improvement in the last quarter of the year. Since the end of the
third quarter, we have contracted three drilling and seven workover rigs in
Venezuela that had been idle. Additionally, the first of two rigs for Kazakhstan
has now arrived on location in the Caspian Sea region. After acceptance, the rig
will earn a standby rate during the winter and will earn a full day rate when
drilling commences in the spring of 2003. The second rig is expected to commence
operations in Kazakhstan in mid-2003.
15
RESULTS OF OPERATIONS
We have presented in the following table selected consolidated financial
and operational information by operating segment:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ --------------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- -----------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenues:
Gulf of Mexico............... $ 41.2 14.4% $ 108.2 26.6% $ 115.4 13.5% $ 365.5 31.8%
International offshore....... 152.0 53.1 139.3 34.3 469.5 55.1 350.7 30.5
International land........... 74.9 26.2 121.8 30.0 216.9 25.4 327.0 28.4
E&P services................. 18.1 6.3 37.0 9.1 50.7 6.0 107.1 9.3
-------- ------- -------- ------- -------- -------- -------- --------
Total revenues............. 286.2 100.0 406.3 100.0 852.5 100.0 1,150.3 100.0
-------- ------- -------- ------- -------- -------- -------- --------
Operating Costs:
Gulf of Mexico............... 34.8 20.2 57.8 23.2 98.9 19.3 171.3 25.6
International offshore....... 75.2 43.7 74.5 29.9 233.0 45.4 188.7 28.2
International land........... 48.9 28.4 87.6 35.2 145.3 28.3 228.8 34.2
E&P services................. 13.2 7.7 29.1 11.7 36.1 7.0 80.9 12.0
-------- ------- -------- ------- -------- -------- -------- --------
Total operating costs...... 172.1 100.0 249.0 100.0 513.3 100.0 669.7 100.0
-------- ------- -------- ------- -------- -------- -------- --------
Gross Margin:
Gulf of Mexico............... 6.4 5.6 50.4 32.0 16.5 4.9 194.2 40.4
International offshore....... 76.8 67.3 64.8 41.2 236.5 69.7 162.0 33.7
International land........... 26.0 22.8 34.2 21.8 71.6 21.1 98.2 20.4
E&P services................. 4.9 4.3 7.9 5.0 14.6 4.3 26.2 5.5
-------- ------- -------- ------- -------- -------- -------- --------
Total gross margin......... $ 114.1 100.0% $ 157.3 100.0% $ 339.2 100.0% $ 480.6 100.0%
======== ======= ======== ======= ======== ======== ======== =======
Days Worked:
Gulf of Mexico............... 1,750 2,721 4,777 9,331
International offshore....... 2,422 2,208 6,898 5,457
International land........... 11,851 13,840 32,199 39,373
Utilization:
Gulf of Mexico............... 46% 71% 42% 82%
International offshore....... 88% 91% 89% 84%
International land........... 63% 80% 61% 79%
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001.
Revenues. Revenues for the three months ended September 30, 2002 were
$120.1 million, or 29.6%, lower than in the three months ended September 30,
2001, due primarily to reduced activity and day rates for our jackup rigs in the
U.S. Gulf of Mexico and a reduction in activity for our land drilling and E&P
services operations in Argentina and Venezuela. Additionally, one of our seven
high-specification deepwater rigs, the Pride South Pacific, which worked
throughout 2001, did not work during the three months ended September 30, 2002.
These decreases were partially offset by increased jackup activity in Mexico and
the commencement of land drilling operations in Chad earlier in 2002.
Operating Costs. Operating costs for the quarter ended September 30, 2002
were $76.9 million, or 30.9%, lower than in the corresponding quarter of 2001
due to decreased costs associated with rigs that were stacked or being upgraded
during the third quarter of 2002 that operated during the third quarter of 2001
and a reduction in operating costs in Argentina and Venezuela due to reduced
activity levels in those countries and the devaluation of their local
currencies. These reductions in costs were partially offset by costs related to
the increased activity in Mexico and the commencement of operations in Chad.
Operating costs for the current period have been reduced by $3.4 million as a
result of the reversal of reserves expensed in prior periods primarily for
maintenance costs that are not expected to be incurred.
16
Depreciation and Amortization. Depreciation expense increased by $6.3
million, or 12.7%, to $56.1 million in the quarter ended September 30, 2002,
from $49.8 million in the corresponding period in 2001. The increase is
primarily attributable to depreciation on rig refurbishments and upgrades and
other capital projects completed subsequent to the third quarter of 2001. The
increase was partially offset by the elimination of amortization of goodwill
beginning in January 2002.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by $1.5 million, or 5.5%, to $24.7 million for the three
months ended September 30, 2002, from $26.2 million for the three months ended
September 30, 2001, primarily due to cost savings associated with staffing
reductions following our September 2001 acquisition of Marine Drilling
Companies, Inc. Additionally, the devaluation of the currencies in Argentina and
Venezuela favorably impacted expenses denominated in their local currencies.
Pooling and Merger Costs. Costs totaling $35.8 million were incurred in
connection with the merger with Marine in September 2001. The costs consisted
primarily of investment advisory, legal and other professional fees totaling
$24.4 million and costs associated with the closure of duplicate office
facilities and employee termination costs.
Other Income (Expense). Other expense for the three months ended September
30, 2002 increased by $6.5 million, or 23.5%, as compared to the corresponding
period in 2001. Interest expense increased by $1.3 million principally due to an
increase in the average amount of outstanding debt in the three months ended
September 30, 2002 as compared with the corresponding period in 2001. Interest
income declined $1.5 million due to a reduction in average cash balances held on
deposit and to a reduction in interest rates. Other, net, which is an expense in
the three-month period ended September 30, 2002, increased $3.8 million
principally due to net foreign exchange losses in Argentina and Venezuela.
Other, net in the corresponding period in 2001 principally comprised net
unrealized foreign exchange gains.
Income Tax Provision. Our consolidated effective income tax rate for the
three months ended September 30, 2002 was 30.0%, as compared to 55.6% for the
corresponding period in 2001. The higher rate in 2001 was due to a portion of
the pooling and merger costs incurred in the three months ended September 30,
2001 being estimated to be non-deductible for U.S. federal income tax purposes.
Exclusive of such pooling and merger costs, the effective tax rate for the third
quarter of 2001 would have been approximately 29.8%.
Extraordinary Item. The extraordinary loss of $0.2 million, net of
estimated income taxes, for the three months ended September 30, 2002 related to
the early extinguishment of approximately $59.2 million accreted value, net of
offering costs, of our zero coupon convertible senior and subordinated
debentures.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001.
Revenues. Revenues for the nine months ended September 30, 2002 were $297.8
million, or 25.9%, lower than in the nine months ended September 30, 2001,
primarily due to reduced activity and day rates for our jackup and platform rigs
in the U.S. Gulf of Mexico and a reduction in activity for our land drilling and
E&P services operations in Argentina and Venezuela. Additionally, one of our
seven high-specification deepwater rigs, the Pride South Pacific, which worked
throughout 2001, completed its contract in April 2002 and did not work during
the remainder of the nine-month period ended September 30, 2002. These decreases
were partially offset by the start-up of operations in June and July 2001 of the
Pride Carlos Walter and Pride Brazil, two semisubmersible rigs, increased jackup
activity in Mexico and the commencement of land drilling operations in Chad.
Operating Costs. Operating costs for the nine months ended September 30,
2002 were $156.3 million, or 23.3%, lower than in the corresponding period of
2001 due to decreased costs associated with rigs that were stacked or being
upgraded during 2002 that operated during the corresponding period of 2001 and a
reduction in operating costs in Argentina and Venezuela due to reduced activity
levels in these countries and the devaluation of their local currencies. These
reductions in costs were partially offset by operating costs for the full period
in 2002 on two newly constructed semisubmersible rigs placed into service in
June and July of 2001, costs related to the increased activity in Mexico and the
commencement of operations in Chad. Operating costs for the nine months ended
September 30, 2002 have been reduced by $1.5 million as a result of the reversal
of reserves expensed in prior periods primarily for maintenance costs that are
not expected to be incurred.
Depreciation and Amortization. Depreciation expense increased by $19.7
million, or 13.4%, to $167.2 million in the nine months ended September 30,
2002, from $147.5 million in the corresponding period in 2001. The increase is
primarily attributable to incremental depreciation on newly acquired and
constructed rigs and other rig refurbishments and upgrades completed subsequent
to third quarter of 2001. This increase was partially offset by the impact of a
reassessment of
17
residual values and estimated remaining useful lives of certain rigs during the
third quarter of 2001 and the elimination of amortization of goodwill beginning
in January 2002.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by $5.4 million, or 7.1%, to $70.4 million for the nine
months ended September 30, 2002, from $75.8 million for the nine months ended
September 30, 2001, primarily due to cost savings associated with the closure of
duplicate facilities and staffing reductions following our September 2001
acquisition of Marine. Additionally, the devaluation of the currencies in
Argentina and Venezuela favorably impacted expenses denominated in their local
currencies.
Pooling and Merger Costs. Costs totaling $35.8 million were incurred in
connection with the merger with Marine in September 2001. The costs consisted
primarily of investment advisory, legal and other professional fees totaling
$24.4 million and costs associated with the closure of duplicate office
facilities and employee termination costs.
Other Income (Expense). Other expense for the nine months ended September
30, 2002 increased by $20.1 million, or 26.9%, as compared to the corresponding
period in 2001. Interest expense increased by $16.7 million principally due to
interest on indebtedness added in the March 2001 acquisition of 100% ownership
of the Pride Carlos Walter and Pride Brazil and interest on construction
financing for these rigs which had been capitalized during their construction.
Interest income declined $5.4 million due to lower cash balances available for
investment and to a reduction in interest rates. Other, net, which is an expense
in the nine-month period ended September 30, 2001, principally comprised a $5.1
million charge for the settlement of a wage related antitrust lawsuit, net
unrealized foreign exchange losses and a gain from the sale of drill pipe.
Income Tax Provision. Our consolidated effective income tax rate was 30.0%
for the nine-month period ended September 30, 2002 and 33.1% for the
corresponding period in 2001. The higher rate in 2001 was due to a portion of
the pooling and merger costs incurred in the three months ended September 30,
2001 being estimated to be non-deductible for U.S. federal income tax purposes.
Exclusive of such pooling and merger costs, the effective tax rate for the nine
months ended September 30, 2001 would have been approximately 29.8%.
Extraordinary Item. The extraordinary loss of $0.8 million, net of
estimated income taxes, for the nine months ended September 30, 2002 related to
the early extinguishment of approximately $244.2 million accreted value, net of
offering costs, of our zero coupon convertible senior and subordinated
debentures.
LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $215.1 million and $95.1 million as of
September 30, 2002 and December 31, 2001, respectively. Our current ratio, the
ratio of current assets to current liabilities, was 1.5 as of September 30, 2002
and 1.2 as of December 31, 2001. The increase in net working capital was
attributable primarily to an increase in other current assets, a decrease in
accounts payable and an increase in cash received from our issuance of $300
million principal amount of 2 1/2 % convertible senior notes in March 2002 and
from borrowings of $200 million under our new senior secured bank term loan, net
of amounts used to retire other bank debt and repurchase our zero coupon
convertible debentures.
Additions to property and equipment during the nine months ended September
30, 2002 totaled $169.5 million, including $10.7 million for the completion of
five mobile land rigs which have commenced operations in Chad, $56.5 million for
upgrades to nine jackup rigs, one platform rig and one semisubmersible rig for
work offshore Mexico and for two additional jackups to work in Nigeria and
India, $52.1 million for other rig upgrades, refurbishments and reactivations,
and approximately $50.2 million for sustaining capital projects.
In June 2002, we entered into senior secured credit facilities with a group
of banks providing for aggregate availability of up to $450.0 million,
consisting of a five-year $200.0 million term loan and a three-year $250.0
million revolving credit facility. Proceeds from the term loan were used to
refinance a portion of the amounts outstanding under other credit facilities.
Borrowings under the revolving credit facility are available for general
corporate purposes. As of September 30, 2002, $25.0 million of borrowings and an
additional $7.7 million of letters of credit were outstanding under the
facility. The facilities are secured by two deepwater semisubmersible rigs, the
Pride North America and the Pride South Pacific, and 28 jackup rigs. Borrowings
under the facilities, as amended effective September 2002, currently bear
interest at variable rates based on LIBOR plus a spread based on the credit
rating of the facility or, if unrated, index debt, currently 3.5% for the term
loan and 3.0% for the revolving credit facility. The interest rate on the term
loan was 5.5% as of September 30, 2002. The credit facilities contain provisions
that limit our ability and the ability of our subsidiaries, with certain
exceptions, to pay dividends or make other restricted payments and investments;
incur additional debt; create liens; incur dividend or other payment
restrictions affecting subsidiaries; consolidate, merge or transfer all or
substantially all of our assets; sell assets or
18
subsidiaries; enter into speculative hedging arrangements outside the ordinary
course of business; enter into transactions with affiliates; make maintenance
capital expenditures and incur long-term operating leases. The credit facilities
also require us to comply with specified financial tests, including a ratio of
net debt to EBITDA, an interest coverage ratio, a ratio of net debt to total
capitalization and a minimum net worth.
We also have a senior credit facility with non-U.S. banks that provide
aggregate availability of up to $105.0 million. The credit facility terminates
in June 2005. Borrowings under the credit facility bear interest at variable
rates based on LIBOR plus a spread ranging from 1.00% to 1.55%. As of September
30, 2002, there were borrowings of $75.0 million outstanding under this credit
facility.
In the nine months ended September 30, 2002, we purchased on the open
market and then extinguished $277.9 million principal amount at maturity of our
zero coupon convertible senior debentures due 2021. The aggregate purchase price
was $172.8 million, and the accreted value of the debentures, less offering
costs, was $171.9 million. Also during that period, we purchased on the open
market and then extinguished a total of $153.3 million principal amount at
maturity of our zero coupon convertible subordinated debentures due 2018. The
total purchase price was $72.7 million, and the accreted value of the
debentures, less offering costs, was $72.6 million. Holders have the right to
require us to purchase their zero coupon convertible senior debentures in
January 2003 at an accreted price of $98.5 million based on the amount
outstanding as of September 30, 2002 and their zero coupon convertible
subordinated debentures in April 2003 at an accreted price of $113.2 million
based on the amount outstanding as of September 30, 2002. If we become obligated
to repurchase the debentures, we intend to use existing cash and available
credit facilities to make the purchases.
In March 2002, we issued $300.0 million principal amount of 2 1/2%
convertible senior notes due 2007. Net proceeds, after deducting underwriting
discounts and offering costs, were $291.8 million. The notes are convertible
into approximately 18.2 million shares of our common stock (equal to a
conversion rate of 60.5694 shares of common stock per $1,000 principal amount,
or $16.51 per share). The net proceeds have been and will be used to repay debt,
including the repurchase of both series of outstanding zero coupon debentures.
In connection with the issuance of the notes, a private equity fund related to
First Reserve Corporation purchased 7.9 million shares of our common stock from
third parties.
As of September 30, 2002, we had a 26.4% equity interest in a joint venture
company that is constructing two dynamically-positioned, deepwater
semisubmersible drilling rigs, yet to be named and currently referred to as the
Amethyst 4 and Amethyst 5. The rigs have been moved to the Cianbro Corporation
shipyard in Maine in order to complete construction after Friede Goldman Halter,
Inc. ("FGH"), the original builder of the rigs, filed for bankruptcy. FGH had
posted performance bonds to ensure completion of the construction and the surety
has funded into escrow approximately $160.0 million towards the cost of
completing the rigs. We anticipate that the construction of the rigs will be
completed in late 2003. The joint venture company has financed 87.5% of the cost
of construction of those rigs through credit facilities, with repayment of the
borrowings under those facilities guaranteed by the United States Maritime
Administration ("MARAD"). Advances under the credit facilities are being
provided without recourse to any of the joint venture owners. The remaining
12.5% of the cost of construction is being provided by the joint venture company
from equity contributions that have been made by the joint venture partners.
Through September 30, 2002, our equity contributions to the joint venture
totaled $27.4 million, including capitalized interest of $5.8 million. In the
opinion of management, the performance and payment bonds issued by the surety on
behalf of FGH, together with additional draws under the MARAD-guaranteed credit
facilities, will provide sufficient funds to complete the Amethyst 4 and
Amethyst 5 without requiring additional contributions by the joint venture
partners.
In October 2002, the two First Reserve managed funds that collectively held
an 11.9% interest in the joint venture transferred their interests to us in
exchange for a total of 527,652 shares of our common stock. As a result, we
currently own a 38.3% interest in the joint venture. The other joint venture
partner has an option expiring in late November 2002 to acquire up to 70% of the
interest we acquired in the First Reserve exchange, which would reduce our
interest to 30%. The exercise price of that option is payable in shares of our
common stock. As a result of the exchange and other purchases of our common
stock by First Reserve managed funds, First Reserve funds owned as of October
31, 2002 approximately 20.0 million shares of our common stock, or approximately
15.0% of the total shares outstanding.
As of September 30, 2002, we had approximately $4.3 billion in total assets
and $1.9 billion of long-term debt and capital lease obligations. We also had
aggregate availability under our credit facilities of $247.3 million. We do not
expect that our level of total indebtedness will have a material adverse impact
on our financial position, results of operations or liquidity in future periods.
19
As of September 30, 2002, $40.1 million of our cash balances, which amount
is included in restricted cash, consists of funds held in trust in connection
with our drillship and semisubmersible loans and our limited-recourse
collateralized term loans and, accordingly, is not available for our use.
Management believes that the cash and cash equivalents on hand, together
with the cash generated from our operations and borrowings under our credit
facilities, will be adequate to fund normal ongoing capital expenditures,
working capital and debt service requirements for the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002 with early adoption encouraged.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections." SFAS No.
145 eliminates the requirement that gains and losses from the extinguishment of
debt be aggregated and classified as extraordinary items and requires
sale-leaseback accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002 with early adoption
encouraged. Upon adoption, previously reported extraordinary items from the
extinguishment of debt will be combined with other income (expense).
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost that is associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002 with early
application encouraged.
SFAS Nos. 143, 145 and 146 are not expected to have a material impact on
our consolidated financial position, results of operations or cash flows when
adopted.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included in this Quarterly Report on Form 10-Q that address
activities, events or developments that we expect, project, believe or
anticipate will or may occur in the future are forward-looking statements. These
include such matters as:
o future capital expenditures and investments in the construction,
acquisition and refurbishment of rigs(including the amount and nature
thereof and the timing of completion thereof)
o repayment of debt
o market conditions, expansion and other development trends in the contract
drilling industry
o business strategies
o expansion and growth of operations
o utilization rates and contract rates for rigs
o completion and employment of rigs under construction
o future exposure to currency devaluations
o future operating results and financial condition and
o the effectiveness of our disclosure controls and procedures
20
We have based these statements on our assumptions and analyses in light of
our experience and perception of historical trends, current conditions, expected
future developments and other factors we believe are appropriate in the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including:
o general economic and business conditions
o prices of oil and gas and industry expectations about future prices
o foreign exchange controls and currency fluctuations o political stability
in the countries in which we operate
o the business opportunities (or lack thereof) that may be presented to and
pursued by us
o changes in laws or regulations and
o the validity of the assumptions used in the design of our disclosure
controls and procedures
Most of these factors are beyond our control. We caution you that forward
looking-statements are not guarantees of future performance and that actual
results or developments may differ materially from those projected in these
statements. We will not update these statements unless the securities laws
require us to do so.
ITEM 3A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see
"Quantitative and Qualitative Disclosures about Market Risk" in Item 7A of our
Annual Report on Form 10-K for the year ended December 31, 2001. There have been
no material changes to the disclosure regarding our exposure to certain market
risks made in the annual report. For additional information regarding our
long-term debt, see Note 3 of the Notes to Unaudited Consolidated Financial
Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Vice President and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
Based upon that evaluation, our President and Chief Executive Officer and our
Vice President and Chief Financial Officer concluded that our disclosure
controls and procedures are effective, in all material respects, with respect to
the recording, processing, summarizing and reporting, within the time periods
specified in the SEC's rules and forms, of information required to be disclosed
by us in the reports that we file or submit under the Exchange Act.
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation referred to above.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 6 of the Notes to Unaudited Consolidated
Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q
regarding the lawsuit entitled Verdin v. R&B Falcon Drilling USA, Inc. is
incorporated by reference in response to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 -- Amendment No. 1, dated effective as of September 29, 2002, to the
Revolving Credit Agreement, dated as of June 20, 2002, among Pride
Offshore, Inc., Pride International, Inc., certain subsidiaries of
Pride International, Inc., Credit Lyonnais New York Branch, as
administrative agent, and the revolving lenders thereunder.
4.2 -- Amendment No. 1, dated effective as of September 29, 2002, to the
Term Loan Agreement, dated as of June 20, 2002, among Pride
Offshore, Inc., Pride International, Inc., certain subsidiaries
of Pride International, Inc., the term lenders thereunder, and
Credit Lyonnais New York Branch,as administrative agent.
15.1 -- Awareness letter of PricewaterhouseCoopers LLP.
(b) Reports on Form 8-K
In a Current Report on Form 8-K submitted to the SEC on August 14, 2002, we
(i) reported pursuant to Item 9 of Form 8-K that we had furnished executive
sworn statements pursuant to SEC Order No. 4-460 and executive certifications
required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and (ii)
furnished the related statements and certifications pursuant to Item 7 of Form
8-K.
In a Current Report on Form 8-K submitted to the SEC on September 4, 2002,
we (i) furnished pursuant to Item 9 of Form 8-K information regarding the
contract status of our rigs posted to our website on September 4, 2002 and (ii)
furnished pursuant to Item 7 of Form 8-K the related website posting.
22
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PRIDE INTERNATIONAL, INC.
By: /s/ EARL W. MCNIEL
--------------------------
(EARL W. MCNIEL)
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: November 14, 2002
23
CERTIFICATIONS
I, Paul A. Bragg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Pride International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ Paul A. Bragg
----------------------------------------
Paul A. Bragg
President and Chief Executive Officer
24
I, Earl W. McNiel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Pride International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ EARL W. MCNIEL
--------------------------------------
Earl W. McNiel
Vice President and
Chief Financial Officer
25
EXHIBIT INDEX
4.1 -- Amendment No. 1, dated effective as of September 29, 2002, to the
Revolving Credit Agreement, dated as of June 20, 2002, among Pride
Offshore, Inc., Pride International, Inc., certain subsidiaries of
Pride International, Inc., Credit Lyonnais New York Branch, as
administrative agent, and the revolving lenders thereunder.
4.2 -- Amendment No. 1, dated effective as of September 29, 2002, to the
Term Loan Agreement, dated as of June 20, 2002, among Pride
Offshore, Inc., Pride International, Inc., certain subsidiaries
of Pride International, Inc., the term lenders thereunder, and
Credit Lyonnais New York Branch,as administrative agent.
15.1 -- Awareness letter of PricewaterhouseCoopers LLP.