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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-14634
GLOBALSANTAFE CORPORATION
(Exact name of registrant as specified in its charter)
CAYMAN ISLANDS 98-0108989
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
15375 MEMORIAL DRIVE, HOUSTON, TEXAS 77079-4101
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 925-6000
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares of the registrant's ordinary shares, par value $.01 per
share, outstanding as of April 30, 2003, was 233,293,718.
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GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS TO FORM 10-Q
QUARTER ENDED MARCH 31, 2003
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants 4
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2003 and 2002 5
Condensed Consolidated Balance Sheets as of
March 31, 2003, and December 31, 2002 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 8
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURE 33
CERTIFICATIONS 34
-----------------------------------
1
FORWARD-LOOKING STATEMENTS
Under the Private Securities Litigation Reform Act of 1995, companies are
provided a "safe harbor" for discussing their expectations regarding future
performance. We believe it is in the best interests of our shareholders and the
investment community to use these provisions and provide such forward-looking
information. We do so in this report and in other communications.
Forward-looking statements are often but not always identifiable by the use of
words such as "anticipate," "believe," "budget," "could," "estimate," "expect,"
"forecast," "intend," "may," "might," "plan," "predict," "project," and
"should." Our forward-looking statements include statements about the following
subjects:
o our funding and financing plans;
o the dates drilling rigs will become available following completion of
current contracts;
o the dates our rigs that are under construction are expected to be
delivered;
o projected cash outlays, the timing of such outlays and expected
sources of funding in connection with the rigs that are under
construction;
o our expectations regarding commencement of certain contracts;
o our contract drilling revenue backlogs and the amounts expected to be
realized in 2003;
o our expectations regarding the length of time mobile assets will be
operating in given locations and our resulting conclusions regarding
the future tax consequences of operating in those locations;
o the expected outcomes of legal and administrative proceedings, their
materiality, and their expected effects on our financial position and
results of operations;
o our expectation that our effective tax rate will continue to fluctuate
from year to year as our operations are conducted in different taxing
jurisdictions;
o our expectations regarding future conditions in various geographic
markets in which we operate and the prospects for future work and
dayrates in those markets;
o that we do not anticipate using stock to satisfy future purchase
obligations in connection with our Zero Coupon Convertible Debentures;
o our estimated capital expenditures in 2003;
o our expectation that we will fund various commitments, primarily
related to our debt and capital lease obligations, leases for office
space and other property and equipment as well as commitments for
construction of drilling rigs, with existing cash and cash
equivalents, and cash generated from operations;
o our ability to service indebtedness;
2
o our ability to meet all of our current obligations, including working
capital requirements, capital expenditures and debt service, from our
existing cash and cash equivalents, and future cash flow from
operations;
o the anticipated effect of the required adoption of SFAS No. 149; and
any other statements that are not historical facts.
Our forward-looking statements speak only as of the date of this report and are
based on available industry, financial and economic data and our operating and
financing plans as of that date. They are also inherently uncertain, and
investors must recognize that events could turn out to be materially different
from what we expect.
Factors that could cause or contribute to such differences include, but are not
limited to (a) changes in rig utilization and dayrates in response to the level
of activity in the oil and natural gas industry, which is significantly affected
by indications and expectations regarding the level and volatility of oil and
natural gas prices, which in turn are affected by such things as political,
economic and weather conditions affecting or potentially affecting regional or
worldwide demand for oil and natural gas, actions or anticipated actions by
OPEC, inventory levels, deliverability constraints, and futures market activity;
(b) the impact of war or other armed hostilities in the Middle East or
elsewhere; (c) presently unknown rig repair needs and/or additional
opportunities to accelerate planned maintenance expenditures due to presently
unanticipated rig downtime; (d) delays in rig construction projects due to such
things as cost over-runs, supply shortages, natural disasters and work stoppages
by shipyard workers; and (e) such other risk factors as may be discussed in the
"Risk Factors" section under Items 1 and 2 and elsewhere in our Annual Report on
Form 10-K for the year ended December 31, 2002 and subsequent reports filed with
the U.S. Securities and Exchange Commission.
YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. EACH
FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE OF THE PARTICULAR
STATEMENT, AND WE DISCLAIM ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY
UPDATES OR REVISIONS TO OUR STATEMENTS, FORWARD-LOOKING OR OTHERWISE, TO REFLECT
CHANGES IN OUR EXPECTATIONS OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES
ON WHICH ANY SUCH STATEMENTS ARE BASED.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of GlobalSantaFe Corporation
We have reviewed the accompanying condensed consolidated balance sheets of
GlobalSantaFe Corporation and subsidiaries as of March 31, 2003, and the related
condensed consolidated statements of income and of cash flows for each of the
three-month periods ended March 31, 2003 and 2002. These interim financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, 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 condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2002, and the related consolidated statements of income, shareholders'
equity, and of cash flows for the year then ended (not presented herein); and in
our report dated March 21, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2002,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
May 7, 2003
4
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
Three Months Ended
March 31,
---------------------
2003 2002
--------- ---------
Revenues:
Contract drilling $ 358.9 $ 401.8
Drilling management services 88.0 85.2
Oil and gas 6.1 1.7
--------- ---------
Total revenues 453.0 488.7
--------- ---------
Expenses:
Contract drilling 254.1 243.1
Drilling management services 85.3 77.5
Oil and gas 1.3 0.8
Depreciation, depletion and amortization 65.5 62.5
General and administrative 13.5 12.0
--------- ---------
Total operating expenses 419.7 395.9
--------- ---------
Operating income 33.3 92.8
Other income (expense):
Interest expense (16.2) (14.3)
Interest capitalized 9.0 3.2
Interest income 2.9 4.4
Other 21.9 (0.9)
--------- ---------
Total other income (expense) 17.6 (7.6)
--------- ---------
Income before income taxes 50.9 85.2
Provision for income taxes:
Current tax provision 8.2 12.2
Deferred tax benefit (3.2) (4.1)
--------- ---------
Total provision for income taxes 5.0 8.1
--------- ---------
Net income $ 45.9 $ 77.1
========= =========
Earnings per ordinary share:
Basic $ 0.20 $ 0.33
Diluted $ 0.20 $ 0.33
Average ordinary shares:
Basic 233.1 233.6
Diluted 234.6 236.8
See notes to condensed consolidated financial statements.
5
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
ASSETS
March 31, December 31,
2003 2002
------------ ------------
Current assets:
Cash and cash equivalents $ 923.0 $ 677.0
Marketable securities - 59.5
Accounts receivable, net of allowances 354.4 346.3
Costs incurred on turnkey drilling projects in progress 11.6 9.1
Prepaid expenses 35.6 49.6
Future income tax benefits 0.7 0.7
Other current assets 1.7 3.4
------------ ------------
Total current assets 1,327.0 1,145.6
------------ ------------
Properties and equipment:
Rigs and drilling equipment, less accumulated
depreciation of $990.3 at March 31, 2003, and
$926.6 at December 31, 2002 4,241.3 4,182.9
Oil and gas properties, full-cost method, less accumulated
depreciation, depletion and amortization of $20.9
at March 31, 2003, and $20.2 at December 31, 2002 10.5 11.1
------------ ------------
Net properties 4,251.8 4,194.0
Goodwill 386.9 386.9
Other assets 81.1 81.7
------------ ------------
Total assets $ 6,046.8 $ 5,808.2
============ ============
See notes to condensed consolidated financial statements.
6
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
($ in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
2003 2002
------------ ------------
Current liabilities:
Accounts payable $ 151.6 $ 209.2
Accrued compensation and related employee costs 55.8 63.8
Accrued income taxes 74.7 87.2
Accrued interest 10.4 8.9
Deferred revenues 28.5 45.5
Other accrued liabilities 80.1 74.2
------------ ------------
Total current liabilities 401.1 488.8
------------ ------------
Long-term debt 1,177.8 925.2
Capital lease obligations 39.7 16.7
Deferred income taxes -- 2.7
Other long-term liabilities 151.4 140.6
Commitments and contingencies (Note 4) -- --
Shareholders' equity:
Ordinary shares, $0.01 par value, 600,000,000 shares
authorized, 233,274,996 shares and 232,889,001 shares
issued and outstanding at March 31, 2003 and
December 31, 2002, respectively 2.3 2.3
Additional paid-in capital 2,957.0 2,950.1
Retained earnings 1,359.4 1,322.4
Accumulated other comprehensive loss (41.9) (40.6)
------------ ------------
Total shareholders' equity 4,276.8 4,234.2
------------ ------------
Total liabilities and shareholders' equity $ 6,046.8 $ 5,808.2
============ ============
See notes to condensed consolidated financial statements.
7
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 45.9 $ 77.1
Adjustments to reconcile net income to net
cash flow provided by operating activities:
Depreciation, depletion and amortization 65.5 62.5
Deferred income taxes (3.2) (4.1)
Increase in accounts receivable (9.5) (1.4)
Decrease in prepaid expenses and other
current assets 12.3 7.2
(Decrease) increase in accounts payable (54.9) 12.2
Decrease in accrued liabilities (22.3) (20.4)
Decrease in deferred revenues (12.7) (4.0)
Other, net 11.1 (6.7)
-------- --------
Net cash flow provided by operating activities 32.2 122.4
-------- --------
Cash flows from investing activities:
Capital expenditures (127.0) (107.7)
Purchases of held-to-maturity marketable securities -- (116.8)
Proceeds from maturities of held-to-maturity
marketable securities 59.5 119.5
Proceeds from maturities of available-for-sale
marketable securities 4.2 --
Proceeds from sales of properties and equipment 1.8 67.6
-------- --------
Net cash flow used in investing activities (61.5) (37.4)
-------- --------
Cash flows from financing activities:
Dividend payments (7.6) (7.6)
Issuance of long-term debt, net of discount 249.4 --
Deferred financing costs (3.4) --
Lease/leaseback transaction 37.0 --
Payments on capitalized lease obligation (6.5) --
Proceeds from issuance of ordinary shares 6.4 12.5
-------- --------
Net cash flow provided by financing activities 275.3 4.9
-------- --------
Increase in cash and cash equivalents 246.0 89.9
Cash and cash equivalents at beginning of period 677.0 578.3
-------- --------
Cash and cash equivalents at end of period $ 923.0 $ 668.2
======== ========
See notes to condensed consolidated financial statements.
8
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
GlobalSantaFe Corporation (the "Company" or "GlobalSantaFe") is an oil and gas
drilling contractor, owning or operating a fleet of over 100 marine and land
drilling rigs. The Company's fleet currently includes 13 floating rigs, 44
cantilevered jackup rigs, 31 land rigs and one platform rig. In addition, the
Company has four rigs under construction. The Company or its affiliates also
operate 11 platform rigs for third parties, and it operates two semisubmersible
rigs for third parties under a joint venture agreement. The Company provides
offshore oil and gas contract drilling services to the oil and gas industry
worldwide on a daily rate ("dayrate") basis. The Company also provides offshore
oil and gas drilling management services on either a dayrate or
completed-project, fixed-price ("turnkey") basis, as well as drilling
engineering and drilling project management services, and it participates in oil
and gas exploration and production activities.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of GlobalSantaFe Corporation and its consolidated subsidiaries.
Intercompany accounts and transactions have been eliminated. Unless the context
otherwise requires, the term "Company" refers to GlobalSantaFe Corporation and
its consolidated subsidiaries. The condensed consolidated financial statements
and related footnotes are presented in U.S. dollars and in accordance with
accounting principles generally accepted in the United States of America.
The financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods. Such adjustments are considered to be of a normal recurring nature
unless otherwise identified. Interim-period results may not be indicative of
results expected for the full year. The year-end condensed consolidated balance
sheet was derived from audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. These interim financial statements should be read in
conjunction with the Company's audited financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
The Company's independent accountants have performed a review of, and issued a
report on, these consolidated interim financial statements in accordance with
standards established by the American Institute of Certified Public Accountants.
Pursuant to Rule 436(c) under the U.S. Securities Act of 1933, this report
should not be considered a part of any registration statement prepared or
certified within the meanings of Sections 7 and 11 of the Securities Act.
The Company accounts for cost reimbursements received from customers in
accordance with the consensus reached on Emerging Issues Task Force ("EITF")
Issue 01-14, "Income Statement Characterization of Reimbursement Received for
'Out-of-Pocket' Expenses Incurred." The EITF consensus requires that all
reimbursements received for out-of-pocket expenses incurred be characterized as
revenue in the income statement. The Company previously recorded certain
reimbursements received from customers as a reduction of the related expenses
incurred. As part of the implementation of the guidance on this issue, the
Company has reclassified certain reimbursements received from customers in the
three months ended March 31, 2002, as revenues and related operating expenses to
conform to the current presentation. Cost reimbursements included in Contract
drilling revenues and expenses reclassified in accordance with this consensus
totaled $19.0 million and $18.9 million for the three
9
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
months ended March 31, 2003 and 2002, respectively. Cost reimbursements included
in drilling management services revenues and expenses for these same periods
totaled $0.9 million and $5.8 million, respectively. Operating income and net
income for all periods presented were not affected by this reclassification.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans using the
intrinsic-value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Accordingly, the Company computes compensation cost for these plans as
the amount by which the quoted market price of the Company's ordinary shares on
the date of grant exceeds the amount the employee must pay to acquire the
shares. The amount of compensation cost, if any, is charged to income over the
vesting period. No compensation cost has been recognized for options granted
under the Company's employee share purchase plan or for any of the Company's
outstanding stock options, all of which have exercise prices equal to or greater
than the market price of the Company's ordinary shares on the date of grant. The
Company does, however, recognize compensation cost for all grants of
performance-based stock awards.
Had compensation cost for the Company's stock-based compensation plans been
determined based on fair values as of the dates of grant, the Company's net
income and earnings per ordinary share would have been reported as follows:
Three Months Ended March 31,
--------------------------------------
2003 2002
------------ ------------
(In millions, except per share amounts)
Net income, as reported $ 45.9 $ 77.1
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects (7.7) (2.0)
------------ ------------
Pro forma net income $ 38.2 $ 75.1
============ ============
Basic earnings per ordinary share - as reported $ 0.20 $ 0.33
- pro forma $ 0.16 $ 0.32
Diluted earnings per ordinary share - as reported $ 0.20 $ 0.33
- pro forma $ 0.16 $ 0.32
Estimates of fair values for stock options granted under the Company's
stock-based compensation plans for purposes of calculating the pro forma data in
the preceding table are computed using the Black-Scholes option-pricing model.
Fair values for performance-based stock awards are determined by the market
price of the Company's ordinary shares at the date of grant. The pro forma
figures in the preceding table may not be representative of pro forma amounts in
future years.
10
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - EARNINGS PER ORDINARY SHARE
A reconciliation of the numerators and denominators of the basic and diluted per
share computations for net income follows:
Three Months Ended March 31,
-------------------------------------------------
2003 2002
------------------- -------------------
(In millions, except share and per share amounts)
Net income (numerator): $ 45.9 $ 77.1
=================== ===================
Ordinary shares (denominator):
Ordinary shares - Basic 233,058,965 233,604,596
Add effect of employee stock options 1,543,793 3,221,021
------------------- -------------------
Ordinary shares - Diluted 234,602,758 236,825,617
=================== ===================
Earnings per ordinary share:
Basic $ 0.20 $ 0.33
Diluted $ 0.20 $ 0.33
The computation of diluted earnings per ordinary share for both periods
presented excludes outstanding stock options with exercise prices greater than
the average market price of the Company's ordinary shares for the period,
because the inclusion of such options would have the effect of increasing
diluted earnings per ordinary share (i.e. their effect would be "antidilutive").
The number of antidilutive options excluded from the computation of diluted
earnings per ordinary share represented 14,686,291 shares and 11,751,527 shares
for the three months ended March 31, 2003 and 2002, respectively.
Diluted earnings per ordinary share for the three months ended March 31, 2003
and 2002, also excludes 4,875,062 potentially dilutive shares issuable upon
conversion of the Company's Zero Coupon Convertible Debentures because the
inclusion of such shares would be antidilutive given the level of net income for
the first quarters of 2003 and 2002.
Holders of the Zero Coupon Convertible Debentures have the right to require the
Company to repurchase the debentures as early as June 23, 2005. The Company may
pay the repurchase price with either cash or stock or a combination thereof. The
Company does not anticipate using stock to satisfy any such future purchase
obligation.
NOTE 3 - SEGMENT INFORMATION
Information by operating segment, together with reconciliations to the
consolidated totals, is presented in the following table:
11
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31,
-----------------------------
2003 2002
---------- -------------
($ in millions)
Revenues from external customers:
Contract drilling $ 358.9 $ 401.8
Drilling management services 88.0 85.2
Oil and gas 6.1 1.7
---------- -------------
Consolidated $ 453.0 $ 488.7
========== =============
Intersegment revenues:
Contract drilling $ 0.7 $ 2.3
Drilling management services 2.1 2.0
Intersegment elimination (2.8) (4.3)
---------- -------------
Consolidated $ -- $ --
========== =============
Total revenues:
Contract drilling $ 359.6 $ 404.1
Drilling management services 90.1 87.2
Oil and gas 6.1 1.7
Intersegment elimination (2.8) (4.3)
---------- -------------
Consolidated $ 453.0 $ 488.7
========== =============
Segment operating income:
Contract drilling $ 41.0 $ 97.5
Drilling management services 2.7 7.7
Oil and gas 4.1 0.4
---------- -------------
Total segment operating income 47.8 105.6
Corporate expenses (14.5) (12.8)
---------- -------------
Operating income 33.3 92.8
Other income (expense) 17.6 (7.6)
---------- -------------
Income before income taxes $ 50.9 $ 85.2
========== =============
Drilling management services operating results for the three months ended March
31, 2003 and 2002, were favorably affected by downward revisions to cost
estimates for certain wells completed in prior periods. Such revisions increased
segment income by $3.1 million and $1.0 million for the three months ended March
31, 2003 and 2002, respectively. The effect of these revisions was offset by the
deferral of turnkey drilling profit totaling $3.5 million and $2.2 million for
the three months ended March 31, 2003 and 2002, respectively, related to wells
in which Challenger Minerals Inc., the Company's wholly owned subsidiary, was
either the operator or held a working interest.
Subsequent to March 31, 2003, three turnkey projects underway at quarter-end
encountered unforeseen delays and difficulties in completion, which will result
in an estimated second quarter 2003 pretax loss recognition for these projects
of approximately $4.4 million.
12
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS
The Company has definitive contracts with PPL Shipyard PTE, Ltd. of Singapore
for construction of two ultra-deepwater semisubmersibles and two
high-performance jackups, with options for two additional similarly priced
semisubmersibles. The Company does not intend to exercise these options. The
Company had options, which have now expired, for up to four additional
high-performance jackups. Contractual obligations in connection with the two
ultra-deepwater semisubmersibles, excluding capitalized interest, capital
spares, startup expenses and mobilization costs, are expected to total
approximately $570 million, or an average of $285 million per rig. Of the $570
million, $323 million had been incurred as of March 31, 2003. Contractual
obligations in connection with the two high-performance jackups, excluding
capitalized interest, capital spares, startup expenses and mobilization costs,
are expected to total approximately $264 million, or an average of $132 million
per rig. Of the $264 million, $188 million had been incurred as of March 31,
2003.
In January 2003, the Company entered into a lease-leaseback arrangement with a
European bank related to the Company's Britannia cantilevered jackup. Pursuant
to this arrangement, the Company leased the Britannia to the bank for a
five-year term for a lump-sum payment of approximately $37 million, net of
origination fees of approximately $1.5 million. The bank then leased the rig
back to the Company for a five-year term, under which the Company will make
annual lease payments of approximately $8.0 million, payable in advance. The
Company has classified this arrangement as a capital lease.
LEGAL PROCEEDINGS
In February 2003, the Company settled all outstanding disputes between it,
Harland and Wolff Shipbuilding and Heavy Industries, Ltd. and Olsen Energy ASA
relating to the construction of two drillships for the Company. For more
information regarding the settlement, see Item 3, Legal Proceedings, in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002, filed
with the Securities and Exchange Commission on March 26, 2003.
The Company filed a claim in 1993 in the amount of $40.6 million with the United
Nations Compensation Commission ("UNCC") for losses suffered as a result of the
Iraqi invasion of Kuwait in 1990. The claim was for the loss of four rigs and
associated equipment, lost revenue, and miscellaneous expenditures. During the
first quarter of 2003, the Governing Council of the UNCC awarded the Company
compensation in the amount of $22.1 million in a final, non-appealable,
adjudication of the claim. The Company recognized $22.1 million in Other income
on the Condensed Consolidated Statement of Income for the three months ended
March 31, 2003. The Company received the settlement proceeds in April 2003.
ENVIRONMENTAL MATTERS
The Company has certain potential liabilities in the area of claims under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
and similar state acts regulating cleanup of various waste disposal sites,
including those described below. CERCLA is intended to expedite the remediation
of hazardous substances without regard to fault. Potentially responsible parties
("PRPs") for each site include present and former owners and operators of,
transporters to and generators
13
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of the substances at the site. Liability is strict and can be joint and several.
The Company has been named as a PRP in connection with a site located in Santa
Fe Springs, California known as the Waste Disposal, Inc. site. The Company and
other PRPs have agreed with the U.S. Environmental Protection Agency ("EPA") and
the U.S. Department of Justice ("DOJ") to settle their potential liabilities for
this site by agreeing to perform the remaining remediation required by the EPA.
The form of the agreement is a consent decree which has not yet been lodged or
entered by the court. Although the settlement is not final until the decree is
entered by the court, the Company expects the decree to be entered by the court.
The parties to the settlement have entered into a participation agreement which
makes the Company liable for an estimated 7.7% of the remediation costs.
Although the remediation costs cannot be determined with certainty until the
remediation is complete, the consultant advising the group with respect to
remediation believes that the remediation costs will be such that the Company's
share of the remaining remediation costs will be less than $800,000. There are
additional potential liabilities related to the site, but these cannot be
quantified, and there is no reason at this time to believe that they will be
material.
The Company has also been named as a PRP in connection with a site in California
known as the Casmalia Resources Site. The Company and other PRPs have entered
into an agreement with EPA and DOJ to resolve their potential liabilities. This
agreement is also not final until the agreed-upon consent decree is entered by
the court, but it is likely that it will be. Under the settlement, the Company
is not likely to owe any substantial additional amounts for this site beyond
what the Company has already paid. There are additional potential liabilities
related to this site, but these cannot be quantified at this time, and there is
no reason to believe that they will be material.
The Company has been named as one of many PRPs in connection with a site located
in Carson, California formerly maintained by Cal Compact Landfill. On February
15, 2002, the Company was served with a required 90-day notification that eight
California cities, on behalf of themselves and other PRPs, intend to commence an
action against the Company under the Resource Conservation and Recovery Act
("RCRA"). On April 1, 2002, a complaint was filed by the cities against the
Company and others alleging that they have liabilities in connection with the
site. However, the complaint has not been served. The site was closed in or
around 1965, and the Company does not have sufficient information to enable it
to assess its potential liability, if any, for this site.
Resolutions of other claims by the EPA, the involved state agency and/or PRPs
are at various stages of investigation. These investigations involve
determinations of:
- the actual responsibility attributed to the Company and the other PRPs at
the site;
- appropriate investigatory and/or remedial actions; and
- allocation of the costs of such activities among the PRPs and other site
users.
The Company's ultimate financial responsibility in connection with those sites
may depend on many factors, including:
- the volume and nature of material, if any, contributed to the site for
which the Company is responsible;
14
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- the numbers of other PRPs and their financial viability; and
- the remediation methods and technology to be used.
It is difficult to quantify with certainty the potential cost of these
environmental matters, particularly in respect of remediation obligations.
Nevertheless, based upon the information currently available, the Company
believes that its ultimate liability arising from all environmental matters,
including the liability for all other related pending legal proceedings,
asserted legal claims and known potential legal claims which are likely to be
asserted, is adequately accrued and should not have a material effect on the
Company's financial position or ongoing results of operations. Estimated costs
of future expenditures for environmental remediation obligations are not
discounted to their present value.
CONTINGENCIES AND OTHER LEGAL MATTERS
Pursuant to capital lease agreements on the Company's two dynamically
positioned, ultra-deepwater drillships, the Glomar C.R. Luigs and the Glomar
Jack Ryan, the Company has deposited with three large foreign banks (the
"Payment Banks") amounts equal to the progress payments that the Lessors were
required to make under the construction contracts, less a lease benefit of
approximately $62 million (the "Defeasance Payment"). In exchange for the
deposits, the Payment Banks have assumed liability for making rental payments
required under the leases and the Lessors have legally released the Company as
the primary obligor of such rental payments. Accordingly, the Company has
recorded no capital lease obligations on its balance sheet with respect to the
two drillships. The Glomar C.R. Luigs and the Glomar Jack Ryan began operating
under contract in April and December 2000, respectively.
The Company has interest rate risk in connection with these fully defeased
financing leases for the Glomar Jack Ryan and Glomar C. R. Luigs. The Defeasance
Payment earns interest based on the British Pound Sterling three-month LIBOR,
which approximated 8.00% at the time of the agreement. Should the Defeasance
Payment earn less than the assumed 8.00% rate of interest, the Company will be
required to make additional payments as necessary to augment the annual payments
made by the Payment Banks pursuant to the agreements. If the March 31, 2003,
LIBOR rate of 3.66% were to continue over the next ten years, the Company would
be required to fund an additional estimated $55 million during that period. Any
additional payments made by the Company pursuant to the financing leases would
increase the carrying value of its leasehold interest in the rigs and therefore
be reflected in higher depreciation expense over their then-remaining useful
lives. The Company does not expect that, if required, any additional payments
made under these leases would be material to its financial position or results
of operations in any given year.
There are no other material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, to which the
Company is a party or of which any of its property is the subject.
15
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - DEBT OFFERING
On February 11, 2003, the Company issued $250 million of 5% Notes due 2013 (the
"5% Notes") and received cash proceeds of approximately $247.4 million after
deduction for discount, underwriting fees and estimated expenses. The Company
plans to use the funds for general corporate purposes. Until then, the net
proceeds will be invested in short-term investments. Interest on the 5% Notes is
payable on February 15 and August 15 of each year beginning on August 15, 2003.
No principal payments are required with respect to the 5% Notes prior to their
final maturity date. The Company has agreed to file a registration statement
with the Securities and Exchange Commission by May 12, 2003, relating to an
offer to exchange the 5% Notes for registered notes having substantially
identical terms.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION - NONCASH FINANCING ACTIVITY
In March 2003, the Company's Board of Directors increased the regular quarterly
cash dividend for the first quarter of 2003 to $0.0375 from $0.0325 per ordinary
share, payable to shareholders of record as of the close of business on March
31, 2003. The first quarter dividend in the amount of $8.7 million was paid on
April 15, 2003.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes
accounting standards for the recognition and measurement of liabilities in
connection with asset retirement obligations, and is effective for fiscal years
beginning after June 15, 2002. The Company adopted the provisions of SFAS No.
143 effective January 1, 2003. The required adoption of SFAS No. 143 in 2003 did
not have a material effect on the Company's results of operations, financial
position or cash flows.
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 associated with an exit or disposal activity be recognized when the
liability is incurred, rather than the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company adopted the
provisions of SFAS No. 146 effective January 1, 2003. The required adoption of
SFAS No. 146 in 2003 had no effect on the Company's results of operations,
financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides three
alternative methods of transition and disclosure requirements for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The three alternative methods available are: (1) the prospective
method, (2) the modified prospective method, and (3) the retroactive restatement
method. Under the prospective method, which is available only for companies
adopting SFAS No. 123 prior to December 16, 2003, compensation cost is
recognized for awards granted, modified or settled after the beginning of the
year of adoption. The modified prospective method recognizes compensation costs
from the beginning of the year of adoption as if the fair value method had been
used for all grants awarded, modified or settled in fiscal years beginning after
16
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 15, 1994. The retroactive restatement method provides that all periods
presented are restated to reflect compensation costs as if the fair value method
had been used for all grants awarded, modified or settled in fiscal years
beginning after December 15, 1994. In addition to providing compensation cost
recognition methods, SFAS No. 148 also requires certain disclosures, including
the accounting method used for each period presented, a description of the
method used to report the change in accounting principle and continuing tabular
presentation of proforma net income and earnings per share effects for any
awards outstanding under the intrinsic value method of Accounting Principles
Board Opinion No. 25. SFAS No. 148 is effective for fiscal years ending after
December 15, 2002. The Company has adopted the disclosure provisions of SFAS No.
148, and is currently evaluating the recognition provisions of SFAS No. 148 in
light of an overall reconsideration of its stock-based compensation plans.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). This Interpretation provides disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued and clarifies that a
liability for the fair value of the obligation undertaken in issuing certain
guarantees shall be recognized at inception of the guarantee. The initial
recognition and initial measurement provisions of FIN 45 are applicable to
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company believes that it has
no material guarantees within the scope of FIN 45 other than the fully defeased
financing leases for two of its drillships (see Note 4).
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
interpretation provides guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights, or variable-interest entities ("VIEs"). FIN 46 is effective for
public entities with VIEs created before February 1, 2003, at the beginning of
the first interim or annual reporting period starting after June 15, 2003. For
VIEs created after January 31, 2003, FIN 46 is effective immediately. Upon the
applicable effective date, FIN 46 will become the guidance that determines
whether consolidation is required and whether the variable-interest accounting
model must be used to account for existing and new entities. The Company does
not believe that it currently has any VIEs within the scope of FIN 46.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. This statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. The Company does
not expect the adoption of SFAS No. 149 to have a material effect on its results
of operations, financial condition or cash flows.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a leading oil and gas drilling contractor, owning or operating a
high quality, technologically advanced fleet of over 100 marine and land
drilling rigs. The Company's fleet currently includes 13 floating rigs, 44
cantilevered jackup rigs, 31 land rigs and one platform rig. In addition, the
Company has four rigs under construction. The Company or its affiliates also
operate 11 platform rigs for third parties, and it operates two semisubmersible
rigs for third parties under a joint venture agreement. The Company provides
offshore oil and gas contract drilling services to the oil and gas industry
worldwide on a daily rate ("dayrate") basis. The Company also provides offshore
oil and gas drilling management services on either a dayrate or
completed-project, fixed-price ("turnkey") basis, as well as drilling
engineering and drilling project management services, and it participates in oil
and gas exploration and production activities.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's consolidated financial statements are impacted by the accounting
policies used and the estimates and assumptions made by management during their
preparation. These policies, estimates and assumptions affect the carrying
values of assets and liabilities and disclosures of contingent assets and
liabilities at the balance sheet date and the amounts of revenues and expenses
recognized during the period. Actual results could differ from such estimates
and assumptions. For a discussion of the critical accounting policies and
estimates that the Company uses in the preparation of its condensed consolidated
financial statements, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002. There have been no changes to
these policies in the three months ended March 31, 2003.
OPERATING RESULTS
SUMMARY
Data relating to the Company's operations by business segment follows (dollars
in millions):
Three Months Ended
March 31,
-------------------------- Increase/
2003 2002 (Decrease)
--------- ---------- -----------
Revenues:
Contract drilling $ 359.6 $ 404.1 (11) %
Drilling management services 90.1 87.2 3 %
Oil and gas 6.1 1.7 259 %
Less: Intersegment revenues (2.8) (4.3) (35) %
--------- ---------
$ 453.0 $ 488.7 (7) %
========= =========
Operating income:
Contract drilling $ 41.0 $ 97.5 (58) %
Drilling management services 2.7 7.7 (65) %
Oil and gas 4.1 0.4 925 %
Corporate expenses (14.5) (12.8) 13 %
--------- ---------
$ 33.3 $ 92.8 (64) %
========= =========
18
Operating income decreased by $59.5 million to $33.3 million for the first
quarter of 2003 from $92.8 million for the first quarter of 2002, due primarily
to lower utilization and dayrates and higher operating expenses for the
Company's drilling fleet, lower contribution from the drilling management
services segment mainly due to loss wells and profit deferrals, and an increase
in corporate expenses. These factors were partially offset by higher average oil
and gas prices and production in the first quarter of 2003 as compared to the
prior year's quarter.
The Company's contract drilling backlog at March 31, 2003, totaled approximately
$953 million, of which approximately $570 million is expected to be realized
during the remainder of 2003. Contract drilling backlog at December 31, 2002,
was $1.2 billion.
MARKET CONDITIONS
The drilling business has historically been cyclical, marked by periods of low
demand, excess rig supply and low dayrates, followed by periods of high demand,
short rig supply and increasing dayrates. These cycles are highly volatile and
are traditionally influenced by a number of factors, including oil and gas
prices, the spending plans of the Company's customers and the highly competitive
nature of the offshore drilling industry. Even when rig markets appear to have
stabilized at a certain level of utilization and dayrates, these markets can
change swiftly, making it difficult to predict trends or conditions in the
market. The relocation of rigs from weak markets to stable or strong markets may
also have a significant impact on utilization and dayrates in the affected
markets. A summary of current market conditions in the Company's areas of
operations follows:
North Sea. The Company's North Sea fleet currently includes four
semisubmersibles, five cantilevered heavy-duty harsh environment ("HDHE")
jackups, three cantilevered jackups and a platform rig. One of the Company's
semisubmersibles in this area, the GSF Arctic II, is undergoing a major paint
project that is near completion, upon which the rig will be cold-stacked in
Scotland. Although overcapacity continues to exist in the North Sea market, the
Company's other three semisubmersibles are currently under contract or expected
to work through the end of the second quarter of 2003. In the high-specification
HDHE jackup fleet, the Company was successful in securing contracts for the GSF
Galaxy I and GSF Galaxy III following idle periods during the first quarter of
2003. The GSF Galaxy III returned to work in April 2003, and the GSF Galaxy I is
expected to return to work by mid-May 2003. However, the contracted dayrates are
at the prevailing level for lower specification standard North Sea jackups,
which are substantially below those previously earned for high-specification
HDHE work. The cantilevered jackup Glomar Adriatic XI was idle for the last half
of the first quarter of 2003 and is being marketed to several clients for
projects commencing mid-year 2003. Of the Company's remaining five jackups in
the North Sea, three rigs are operating under contracts expiring at the end of
the second quarter of 2003, and two rigs are operating under contracts expiring
at the end of the third quarter of 2004. The Company's platform rig is under
contract through the end of 2003.
U.S. Gulf of Mexico. The Company currently operates two semisubmersibles and ten
cantilevered jackups in the U.S. Gulf of Mexico market, which is characterized
by short-term contracts. Although the U.S. Gulf of Mexico jackup market has
historically responded to changes in natural gas prices, recent high natural gas
prices have thus far had little effect on industry-wide utilization rates, and
this market is currently experiencing significant idle capacity for both jackups
and semisubmersibles. One of the Company's semisubmersibles in this market is
currently committed until June 2003, and the other is likely to obtain a
contract extending into the third quarter of 2003. While the utilization of the
industry's
19
jackup fleet in the U.S. Gulf of Mexico dropped from 72% to 60% before
recovering to 70% during the first quarter of 2003, the Company's ten jackup
rigs experienced 91% utilization. There is evidence that dayrates are beginning
to increase and a few operators are securing longer-term contracts.
Ultra-deepwater drillship market. The Company currently operates three
drillships in the ultra-deepwater markets in the U.S. Gulf of Mexico (two units)
and Australia (one unit). The worldwide ultra-deepwater market is currently
oversupplied, and the contracts of numerous units in this class worldwide are
expected to expire in 2003 and 2004. Several oil companies with these types of
rigs under contract have offered them to other oil companies at subsidized
dayrates. While the Company's ultra-deepwater drillships have been operating
under long-term contracts, one contract will expire in May 2003, to be followed
by a 75-day contract at a significantly reduced dayrate, and the contracts of
the other two drillships will expire in the third quarter of 2003. The Company
currently has no long-term commitments for its drillships following these
expirations, but it is pursuing short-term exploration projects in the U.S. Gulf
of Mexico and other regions.
West Africa. The Company currently operates two semisubmersibles and nine
cantilevered jackups in this market. One of the Company's semisubmersibles in
this market is contracted through 2003, while the other is contracted through a
substantial portion of 2003. The Company experienced 98% utilization on its nine
jackup rigs during the first quarter of 2003. The Company expects the West
Africa jackup market to soften during the second and third quarters as rigs are
released in Nigeria before firming again in the fourth quarter of 2003. Although
the Company is facing the potential for lower dayrates and utilization for
several of its jackups, four of its jackups in this market are contracted
through 2003.
Middle East and Mediterranean. The Company currently operates six cantilevered
jackups in the Middle East region, three cantilevered jackups in the
Mediterranean region offshore North Africa and has a moored drillship
cold-stacked in Malta. During the first quarter of 2003, the Company relocated a
jackup from the U.S. Gulf of Mexico to the Mediterranean for a two-year contract
and received a one-year contract extension for a jackup in the Middle East
region. The Company anticipates that utilization and dayrates will remain stable
through the second quarter of 2003.
Southeast Asia. The Company currently operates six cantilevered jackups in
Southeast Asia. Four of these jackups are contracted beyond the end of 2003,
with a fifth jackup rig contracted until the fourth quarter of 2003. The
remaining jackup concluded a contract in the first quarter of 2003 and is being
upgraded in a Singapore shipyard, with no contract commitment thereafter.
Although the market is generally balanced in this region and utilization remains
high, the Company has observed a reduction in dayrates in recent contract
placements.
Other. In Northeast Canada, the Company currently operates one semisubmersible
and one HDHE jackup. The semisubmersible is undergoing upgrades and
modifications prior to the expected mid-2003 commencement of a two-year
contract. The jackup is under contract until the fourth quarter of 2003. In
Trinidad and Tobago, the Company currently operates one cantilevered jackup
under a contract expiring in the second quarter of 2003.
Land drilling fleet. The Company owns 31 land drilling rigs, with 19 of these
located in the Middle East (Rig 159, located in the Middle East, is held for
sale), four in North Africa and eight in Venezuela. On March 17, 2003, the
Company suspended drilling operations and evacuated its employees from Kuwait in
response to the threat of war in neighboring Iraq. In April 2003, the Company
resumed operations, with
20
six of its eleven land rigs in Kuwait fully operational by the end of the month.
Of the seven remaining active rigs in the Middle East, one is operating under
contract expiring in the second quarter of 2003, five are operating under
contracts expiring in the second half of 2003 and one is operating under
contract expiring early in the first quarter of 2004. Once operations return to
normal in Kuwait, the Company expects utilization of its land rig fleet in the
Middle East and North Africa to remain relatively stable. Although the labor
strike has ceased in Venezuela, there has been little change in demand for the
Company's services. None of the Company's land rigs located in Venezuela are
currently operating.
FUTURE MARKET FOR NEWBUILDS
The GSF Constellation I, the first of the Company's two high-performance jackups
currently under construction, is scheduled for delivery during the second
quarter of 2003, while the GSF Development Driller I, the first of two
ultra-deepwater semisubmersibles also under construction, and the GSF
Constellation II are scheduled for delivery around the end of the first quarter
of 2004. The GSF Development Driller II, the second of two ultra-deepwater
semisubmersibles, is scheduled for delivery in the second quarter of 2005.
Although the Company has options for construction of additional ultra-deepwater
semisubmersible units beyond the two under construction, it does not intend to
exercise these options. The Company had options, which have now expired, for up
to four additional high-performance jackups. The Company's ability to obtain
contracts for its newbuild rigs and the terms of such contracts will depend on
market conditions at the time these rigs are available for contract. The Company
is actively marketing the GSF Constellation I and the GSF Development Driller I.
While the Company believes that its newbuild rigs will have substantial
advantages in efficiency and capability over competitive equipment in the
industry, it can provide no assurance that it will be able to obtain contracts
for all of its new rigs or that the contract terms will be similar to those for
similar equipment in current market conditions.
21
CONTRACT DRILLING OPERATIONS
Data with respect to the Company's contract drilling operations follows (dollars
in millions, except average dayrates):
Three Months Ended
March 31,
--------------------------- Increase/
2003 2002 (Decrease)
---------- ----------- -----------
Contract drilling revenues by area: (1)
U.S. Gulf of Mexico $ 78.4 $ 92.7 (15) %
North Sea 70.0 110.5 (37) %
West Africa 66.5 49.8 34 %
Middle East 37.7 62.0 (39) %
Southeast Asia 37.1 22.8 63 %
South America 6.4 39.3 (84) %
Other 63.5 27.0 135 %
------------ ------------
$ 359.6 $ 404.1 (11) %
============ ============
Average rig utilization:
Marine rigs 85% 88%
Land rigs 53% 81%
Average dayrate: (2)
Marine rigs $ 71,600 $ 76,600
Land rigs $ 18,100 $ 18,400
- --------------
(1) Includes revenues earned from affiliates.
(2) Average dayrate is the ratio of contract drilling revenues divided by the aggregate
contract days. Non-rig related revenues included in contract drilling revenues,
consisting mainly of cost reimbursements, were $19.0 million and $18.9 million for the
three months ended March 31, 2003 and 2002, respectively. Excluding non-rig related
revenues would decrease the average dayrates reported for the three months ended March
31, 2003 and 2002, by $2,500 and $3,600, respectively, for the Company's marine rigs,
and by $1,500 and $1,100, respectively, for the Company's land rigs.
Contract drilling revenues decreased $44.5 million to $359.6 million for the
first quarter of 2003 as compared to $404.1 million for the comparable 2002
quarter due primarily to lower utilization and dayrates for the Company's marine
drilling fleet, particularly in the North Sea, along with lower utilization for
the Company's land drilling fleet as a result of continuing political
uncertainty in Venezuela and the temporary suspension of drilling operations in
Kuwait.
During the first quarter of 2003, eight of the Company's marine rigs were idle
for various periods due primarily to upgrade projects, and repair and
maintenance work. In addition, seven marine rigs were idle for various periods
during the first quarter of 2003 due to market weakness primarily in the North
Sea and the U.S. Gulf of Mexico. Ten of these fifteen rigs have returned to
work, and four are expected to return to work during the second half of 2003. A
major paint project continued on the remaining idle rig through the first
quarter of 2003, and that rig is expected to be cold-stacked upon the project's
completion. During the comparable 2002 quarter, nine rigs were idle for various
periods due to upgrades and repairs and maintenance, and an additional four rigs
were idle due to market weakness. In addition, the Company's moored drillship
was cold-stacked the entire first quarter of 2003 as compared to operating under
contract the entire first quarter of 2002.
22
Also contributing to the decrease in contract drilling revenues in the first
quarter of 2003 as compared to the 2002 first quarter was the lower utilization
of the Company's land rigs, primarily in Venezuela where all eight rigs were
idle the entire first quarter of 2003 as compared to an average utilization of
55% in the area during the comparable 2002 quarter. In mid-March 2003, the
Company suspended drilling operations in Kuwait on all of the Company's land
rigs due to the then-pending conflict in neighboring Iraq.
For the first quarter of 2003, the Company's average marine dayrate decreased to
$71,600 from the prior year's first quarter average of $76,600, due primarily to
continued weakness in the North Sea and in the U.S. Gulf of Mexico deepwater
markets.
The Company's offshore rig utilization for the first quarter of 2003 averaged
96% in the Middle East, 91% in the U.S. Gulf of Mexico, 89% each in West Africa
and Southeast Asia, 67% in the North Sea and 100% in South America. This
compares with first quarter 2002 average utilization of 90% in the Middle East,
93% in the U.S. Gulf of Mexico, 83% in West Africa, 68% in Southeast Asia, 88%
in the North Sea and 100% in South America. The Company's land drilling fleet
averaged 53% and 81% utilization in the first quarter of 2003 and 2002,
respectively.
The mobilization of rigs between the geographic areas shown in the preceding
table also affected each area's revenues over the periods indicated. The
Company's mobilizations of rigs were as follows: one drillship from the U.S.
Gulf of Mexico to Trinidad in March 2002, back to the U.S. Gulf of Mexico in May
2002 and to Australia in September 2002; one jackup from Trinidad to the North
Sea in May 2002; one jackup from Trinidad to West Africa in July 2002; one
semisubmersible from the North Sea to the east coast of Canada in July 2002; one
jackup from Trinidad to the U.S. Gulf of Mexico in August 2002; one jackup from
the North Sea to West Africa in November 2002; one semisubmersible from the
North Sea to West Africa in January 2003; and one jackup from the U.S. Gulf of
Mexico to North Africa in February 2003.
Contract drilling operating expenses increased by $9.4 million in the first
quarter of 2003 as compared to the 2002 first quarter due primarily to higher
labor, marine insurance, mobilization and freight expenses. Contract drilling
depreciation expense increased by $2.6 million in the first quarter of 2003 as
compared to the prior year's quarter due primarily to upgrades on several rigs
during 2002. Contract drilling operating income and margin decreased to $41.0
million and 11%, respectively, for the first quarter of 2003 from $97.5 million
and 24%, respectively, for the first quarter of 2002. The decrease in operating
income and margin was due primarily to lower marine rig utilization and dayrates
in the North Sea and in the U.S. Gulf of Mexico deepwater fleet, and lower
utilization of the Company's land rigs as discussed above.
As of April 30, 2003, 14 of the Company's offshore drilling rigs were located in
the U.S. Gulf of Mexico; 12 rigs, including its platform rig, were located in
the North Sea; 11 were offshore West Africa; six were in the Middle East; six
were in Southeast Asia; three were offshore North Africa; two were off the
northeast coast of Canada; one was offshore Trinidad and Tobago; one was off the
western coast of Australia; one was cold-stacked in Malta and one was undergoing
a major paint project in a shipyard in Poland, after which it will be
cold-stacked in Scotland.
As of April 30, 2003, 19 of the Company's 31 land rigs were located in the
Middle East; eight were in South America and four were in North Africa.
23
As of April 30, 2003, 54 of the Company's 58 offshore rigs were either committed
or under contract, and 18 of the Company's 31 land rigs were under contract.
DRILLING MANAGEMENT SERVICES
Drilling management services revenues increased by $2.9 million to $90.1 million
in the first quarter of 2003 from $87.2 million in the comparable 2002 quarter
due to an increase in the number of turnkey projects completed along with higher
other revenues, primarily related to well management projects in the North Sea,
partially offset by a decrease in average revenues per turnkey project. The
Company completed 26 turnkey projects in the first quarter of 2003 (20 wells
drilled and 6 well completions) as compared to 23 turnkey projects in the first
quarter of 2002 (18 wells drilled and 5 well completions).
Drilling management services operating income, however, decreased by $5.0
million to $2.7 million in the first quarter of 2003 from $7.7 million in the
first quarter of 2002, and operating profit margin decreased to 3.0% in the
first quarter of 2003 from 8.8% in the comparable 2002 quarter. The Company
incurred losses totaling $1.4 million on three of the 26 turnkey projects
completed in the first quarter of 2003 along with an additional $0.3 million
loss recorded on a well in progress at March 31, 2003. Subsequent to March 31,
three turnkey projects underway at quarter-end, including the recognized loss
well, encountered unforeseen delays and difficulties in completion, which will
result in an estimated second quarter 2003 pretax loss recognition for these
projects of approximately $4.4 million. The Company did not record any losses on
its turnkey projects in the first quarter of 2002.
Also contributing to the decrease in the Company's operating margin in the first
quarter of 2003 as compared to the prior year's quarter was revenue recognized
in the first quarter of 2002 related to a turnkey well drilled in the North Sea
in December 2000. The turnkey contract guaranteed the Company would recover its
turnkey drilling costs upon completion of the well and included a provision for
additional revenue based on cumulative production from the well. The Company
recognized $1.5 million of additional revenue under this turnkey contract in the
first quarter 2002, all of which was operating profit.
Results for the first quarters of 2003 and 2002 were favorably affected by
downward revisions to cost estimates for certain wells completed in prior
periods. Such revisions increased segment income by $3.1 million and $1.0
million for the three months ended March 31, 2003 and 2002, respectively. The
effect of these revisions, however, was offset by the deferral of turnkey
drilling profit totaling $3.5 million and $2.2 million for the three months
ended March 31, 2003 and 2002, respectively, related to wells in which
Challenger Minerals Inc., the Company's wholly owned subsidiary, was either the
operator or held a working interest.
24
OTHER INCOME AND EXPENSE
General and administrative expenses increased to $13.5 million in the first
quarter of 2003 from $12.0 million in the first quarter of 2002 due primarily to
an increase in pension expense. Pension expense increased by $1.5 million
compared to the prior year's quarter as a result of poor pension asset
performance in 2002 and plan amendments. During 2002, the Company made certain
amendments to its pension plans to conform benefits under the Global Marine and
Santa Fe International pension plans as a result of the merger.
Interest expense increased to $16.2 million in the first quarter of 2003 from
$14.3 million in the comparable 2002 quarter due primarily to the issuance of
the 5% Notes on February 11, 2003, discussed in "Liquidity and Capital Resources
- - Financing and Investing Activities."
The Company capitalized $9.0 million and $3.2 million of interest costs for the
three months ended March 31, 2003 and 2002, respectively, in connection with the
Company's rig expansion program discussed in "Liquidity and Capital Resources -
Financing and Investing Activities."
Interest income decreased to $2.9 million in the first quarter of 2003 from $4.4
million in the first quarter of 2002 due primarily to lower interest rates
earned in the first quarter of 2003 on the Company's cash, cash equivalents and
marketable securities balances.
Other income totaled $21.9 million in the first quarter of 2003, which was due
primarily to $22.1 million awarded as a result of the settlement of a claim
filed in 1993 with the United Nations Compensation Commission ("UNCC") for
losses suffered as a result of the Iraqi invasion of Kuwait in 1990. The claim
was for the loss of four rigs and associated equipment, lost revenue and
miscellaneous expenditures. The Company received the settlement proceeds in
April 2003.
INCOME TAXES
The Company's effective income tax rates for financial reporting purposes were
approximately 9.9% and 9.5% for the three months ended March 31, 2003, and 2002,
respectively. The rate for the first quarter of 2003 was reduced by the effect
of the $22.1 million UNCC settlement. Excluding this settlement, the Company's
pretax income would have been $28.8 million, which when divided into the tax
provision of $5.0 million yields an effective tax rate of 17.4% for the first
quarter of 2003. The effective tax rate excluding the effect of the UNCC
settlement is presented because management believes that the settlement is an
unusual item. Based on current anticipated market conditions, the Company also
believes that this rate represents an approximate annual rate for 2003.
The Company is domiciled in the Cayman Islands, and the Cayman Islands does not
impose a corporate income tax. Consequently, income taxes have been provided
based upon the tax laws and rates in effect in the countries in which operations
are conducted and income is earned. The income taxes imposed in these
jurisdictions vary substantially. The Company's effective tax rate for financial
statement purposes will continue to fluctuate from quarter to quarter and year
to year as the Company's operations are conducted in different taxing
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
25
SOURCES OF LIQUIDITY
The Company's primary sources of liquidity are its cash and cash equivalents,
marketable securities and cash generated from operations. As of March 31, 2003,
the Company had $923.0 million of cash and cash equivalents, all of which was
unrestricted. The Company had $736.5 million in cash, cash equivalents and
marketable securities at December 31, 2002, all of which was unrestricted. Cash
generated from operating activities totaled $32.2 million and $122.4 million for
the three months ended March 31, 2003 and 2002, respectively.
FINANCING AND INVESTING ACTIVITIES
The Company has definitive contracts with PPL Shipyard PTE, Ltd. of Singapore
for construction of two ultra-deepwater semisubmersibles and two
high-performance jackups, with options for up to two additional similarly priced
semisubmersibles. The Company does not intend to exercise these options. The
Company had options, which have now expired, for up to four additional
high-performance jackups. Estimated cash outlays in connection with construction
of the two ultra-deepwater semisubmersibles, excluding capitalized interest,
startup costs, capital spares and mobilization costs, are expected to total
approximately $570 million, or an average of $285 million per rig. Of the $570
million, $323 million had been incurred as of March 31, 2003. A total of
approximately $169 million is expected to be incurred in 2003, including $26
million incurred during the three months ended March 31, 2003, and an additional
$104 million is expected to be incurred in 2004. Estimated cash outlays in
connection with the construction of two high-performance jackups, excluding
capitalized interest, startup costs, capital spares and mobilization costs, are
expected to total approximately $264 million, or an average of $132 million per
rig. Of the $264 million, $188 million had been incurred as of March 31, 2003. A
total of approximately $106 million is expected to be incurred in 2003,
including approximately $34 million incurred during the three months ended March
31, 2003, and an additional $4 million is expected to be incurred in 2004. The
first of two high-performance jackups, the GSF Constellation I, is expected to
be delivered in the second quarter of 2003, and the second high-performance
jackup, the GSF Constellation II, and the first of two ultra-deepwater
semisubmersibles, the GSF Development Driller I, are expected to be delivered
around the end of the first quarter of 2004. The second ultra-deepwater
semisubmersible, the GSF Development Driller II, is expected to be delivered in
the second quarter of 2005. The Company expects to fund the construction and
startup of these rigs from its existing cash and cash equivalents and future
cash flow from operations.
None of the four vessels that the Company has under construction has secured a
contract for deployment upon completion. While the Company believes that its
newbuild rigs will have substantial advantages in efficiency and capability over
competitive equipment in the industry, it can provide no assurance that it will
be able to obtain contracts for all of its new rigs or that the contract terms
will be similar to those for similar equipment in current market conditions. The
Company is actively marketing the GSF Constellation I and the GSF Development
Driller I.
In January 2003, the Company entered into a lease-leaseback arrangement with a
European bank related to the Company's Britannia cantilevered jackup. Pursuant
to this arrangement, the Company leased the Britannia to the bank for a
five-year term for a lump-sum payment of approximately $37 million, net of
origination fees of approximately $1.5 million. The bank then leased the rig
back to the Company for a five-year term, under which the Company will make
annual lease payments of approximately $8.0 million, payable in advance. The
Company has classified this arrangement as a capital lease.
26
On February 11, 2003, the Company issued $250 million of 5% Notes due 2013 (the
"5% Notes") and received cash proceeds of approximately $247.4 million after
deduction for discount, underwriting fees and estimated expenses. The Company
plans to use the funds for general corporate purposes. Until then, the net
proceeds will be invested in short-term investments. Interest on the 5% Notes is
payable on February 15 and August 15 of each year beginning on August 15, 2003.
No principal payments are required with respect to the 5% Notes prior to their
final maturity date. The Company has agreed to file a registration statement
with the Securities and Exchange Commission by May 12, 2003, relating to an
offer to exchange the 5% Notes for registered notes having substantially
identical terms.
Other significant financing and investing activities during the three months
ended March 31, 2003, were as follows:
o Paid a quarterly dividend of $7.6 million ($0.0325 per ordinary share)
in January 2003 for the fourth quarter of 2002.
o Announced in March 2003 that the Company's Board of Directors had
increased the regular quarterly cash dividend for the first quarter of
2003 to $0.0375 from $0.0325 per ordinary share. The dividend in the
amount of $8.7 million was paid on April 15, 2003, to shareholders of
record as of the close of business on March 31, 2003.
The Company's debt to capitalization ratio, calculated as the ratio of total
debt, including undefeased capitalized lease obligations, to the sum of total
shareholders' equity and total debt, was 22.3% at March 31, 2003, compared to
18.2% at December 31, 2002. The Company's total debt includes the current
portion of its capitalized lease obligations, which totaled $9.8 million and
$1.8 million at March 31, 2003, and December 31, 2002, respectively.
CASH FLOWS
For the three months ended March 31, 2003, cash flow provided by operating
activities totaled $32.2 million. An additional $249.4 million was provided from
the issuance of the 5% Notes, net of discount, $63.7 million was provided from
maturities of marketable securities, $30.5 million was received in connection
with the lease-leaseback of the Britannia jackup, (net of the initial lease
payment), $6.4 million was provided from the issuance of ordinary shares in
connection with the Company's stock-based compensation plans, and $1.8 million
was provided from the sales of properties and equipment. From the $384.0 million
sum of cash inflows, $127.0 million was used for capital expenditures, $7.6
million was used for dividend payments and $3.4 million was used to pay
financing costs in connection with the 5% Notes and the Britannia jackup
lease-leaseback.
For the three months ended March 31, 2002, cash flow provided by operating
activities totaled $122.4 million. An additional $67.6 million was provided from
the sales of properties and equipment, including $35.0 million of funds received
in connection with the sale of the Glomar Beaufort Sea I in 2001, $12.5 million
was provided from the issuance of ordinary shares in connection with the
Company's stock-based compensation plans, and $2.7 million was provided from
maturities of marketable securities, net of purchases. From the $205.2 million
sum of cash inflows, $107.7 million was used for capital expenditures and $7.6
million was used for dividend payments.
FUTURE CASH REQUIREMENTS
27
As of March 31, 2003, the Company had total long-term debt, including the
current portion of its capital lease obligations, of $1,227.3 million and
shareholders' equity of $4,276.8 million. Long-term debt consisted of $330.0
million (net of discount) Zero Coupon Convertible Debentures due 2020, $301.6
million (net of discount) 7 1/8% Notes due 2007, $296.8 million (net of
discount) 7% Notes due 2028, $249.4 (net of discount) 5% Notes due 2013 and
capital lease obligations, including the current portion, totaling $49.5
million. The Company was in compliance with its debt covenants at March 31,
2003.
Annual interest on the 7 1/8% Notes is $21.4 million, payable semiannually each
March and September. Annual interest on the 7% Notes is $21.0 million, payable
semiannually each June and December. Annual interest on the 5% Notes issued in
February 2003 is $12.5 million, payable semiannually each February and August,
beginning August 15, 2003. No principal payments are due under the three issues
until the maturity date.
The Company may redeem the 7 1/8% Notes, the 7% Notes and the 5% Notes in whole
at any time, or in part from time to time, at a price equal to 100% of the
principal amount thereof plus accrued interest, if any, to the date of
redemption, plus a premium, if any, relating to the then-prevailing Treasury
Yield and the remaining life of the notes. The indentures relating to the 5%
Notes, the Zero Coupon Convertible Debentures, 7 1/8% Notes and 7% Notes contain
limitations on the Company's ability to incur indebtedness for borrowed money
secured by certain liens and on its ability to engage in certain sale/leaseback
transactions. The Zero Coupon Convertible Debentures, 7 1/8% Notes and 7% Notes
continue to be obligations of Global Marine and GlobalSantaFe Corporation has
not guaranteed any of these obligations. GlobalSantaFe Corporation is the sole
obligor under the 5% Notes.
The Zero Coupon Convertible Debentures were issued at a price of $499.60 per
debenture, which represents a yield to maturity of 3.5% per annum to reach an
accreted value at maturity of $1,000 per debenture. The Company has the right to
redeem the debentures in whole or in part on or after June 23, 2005, at a price
equal to the issuance price plus accrued original issue discount through the
date of redemption. Each debenture is convertible into 8.125103 GlobalSantaFe
Ordinary Shares (4,875,062 total shares) at the option of the holder at any time
prior to maturity, unless previously redeemed. Holders have the right to require
the Company to repurchase the debentures on June 23, 2005, June 23, 2010, and
June 23, 2015, at a price per debenture of $594.25 on June 23, 2005, $706.82 per
debenture on June 23, 2010, and $840.73 per debenture on June 23, 2015. These
prices represent the accreted value through the date of repurchase. The Company
may pay the repurchase price with either cash or stock or a combination thereof.
The Company does not anticipate using stock to satisfy any such future purchase
obligation.
In August 2002, the Company's Board of Directors authorized the Company to
repurchase up to $150 million of its ordinary shares from time to time depending
on market conditions, the share price and other factors. No repurchases were
made in the first quarter of 2003. At March 31, 2003, $98.6 million of this
authorized amount remained available for future purchases.
Capital expenditures for 2003 are currently estimated to be approximately $567
million, including $275 million in connection with the construction of the four
newbuild marine rigs, $139 million for expenditures required to maintain the
Company's fleet in accordance with its operating standards, $104 million for
major upgrades to the marine fleet, $37 million for capitalized interest and $12
million for other capital expenditures.
The Company has various commitments primarily related to its debt and capital
lease obligations, leases for office space and other property and equipment as
well as commitments for construction of drilling
28
rigs. The Company expects to fund these commitments from its existing cash and
cash equivalents and future cash flow from operations.
As part of the Company's goal of enhancing long-term shareholder value, the
Company has from time to time considered and actively pursued business
combinations and the acquisition or construction of suitable additional drilling
rigs and other assets. If the Company decides to undertake a business
combination or an acquisition or additional construction projects, the issuance
of additional debt or additional shares could be required.
The Company believes it will be able to meet all of its current obligations,
including working capital requirements, capital expenditures and debt service,
from its existing cash and cash equivalents and future cash flow from
operations.
RISK FACTORS
Severe Acute Respiratory Syndrome. Severe Acute Respiratory Syndrome (SARS) is a
highly communicable disease that has been identified in Southeast Asia and other
parts of the world in which the Company operates. Quarantines and travel
restrictions have been imposed on individuals with suspected symptoms in some
countries in which SARS has been found. The spread of SARS could adversely
impact the global economy, the worldwide demand for oil and natural gas and the
level of demand for the Company's services. SARS or other public health threats
could also bring about quarantines of the Company's personnel, the inability to
access its offices or rigs, or restrictions on travel to or through countries in
which the Company operates. These restrictions could curtail the Company's
ability to operate its rigs. Moreover, operations may be prevented if the
Company's personnel or rigs are quarantined. To date, only Southeast Asia has
suffered significant SARS-related travel restrictions, and the Company's
operations have not been materially limited. The Company operates six jackup
rigs in Southeast Asia and has offices in Indonesia, Malaysia, Thailand and
Vietnam. The Company also has two deepwater semisubmersible rigs and two premium
jackup rigs under construction in Singapore. Although the extent of the impact
of the disease on the Company to date has been limited, any quarantine of
personnel or inability to access its offices or rigs could adversely affect the
Company, including delaying the delivery of the four rigs under construction.
Further travel restrictions or operational problems in any part of the world in
which the Company operates, or any reduction in the demand for drilling services
caused by SARS or other public health threats in the future, may materially
impact operations and adversely affect its financial results.
There are additional risk factors inherent in the Company's business and in the
oil and gas industry as a whole, many of which are beyond the Company's control.
For a discussion of these risk factors, see "Risk Factors" under Items 1 and 2
in the Company's Annual Report on Form 10-K for the year ended December 31,
2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes
accounting standards for the recognition and measurement of liabilities in
connection with asset retirement obligations, and is effective for fiscal years
beginning after June 15, 2002. The Company adopted the provisions of SFAS No.
143 effective January 1, 2003. The required adoption of SFAS No. 143 in 2003 did
not have a material effect on the Company's results of operations, financial
position or cash flows.
29
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 associated with an exit or disposal activity be recognized when the
liability is incurred, rather than the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company adopted the
provisions of SFAS No. 146 effective January 1, 2003. The required adoption of
SFAS No. 146 in 2003 had no effect on the Company's results of operations,
financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides three
alternative methods of transition and disclosure requirements for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The three alternative methods available are: (1) the prospective
method, (2) the modified prospective method, and (3) the retroactive restatement
method. Under the prospective method, which is available only for companies
adopting SFAS No. 123 prior to December 16, 2003, compensation cost is
recognized for awards granted, modified or settled after the beginning of the
year of adoption. The modified prospective method recognizes compensation costs
from the beginning of the year of adoption as if the fair value method had been
used for all grants awarded, modified or settled in fiscal years beginning after
December 15, 1994. The retroactive restatement method provides that all periods
presented are restated to reflect compensation costs as if the fair value method
had been used for all grants awarded, modified or settled in fiscal years
beginning after December 15, 1994. In addition to providing compensation cost
recognition methods, SFAS No. 148 also requires certain disclosures, including
the accounting method used for each period presented, a description of the
method used to report the change in accounting principle and continuing tabular
presentation of proforma net income and earnings per share effects for any
awards outstanding under the intrinsic value method of Accounting Principles
Board Opinion No. 25. SFAS No. 148 is effective for fiscal years ending after
December 15, 2002. The Company has adopted the disclosure provisions of SFAS No.
148, and is currently evaluating the recognition provisions of SFAS No. 148 in
light of an overall reconsideration of its stock-based compensation plans.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). This Interpretation provides disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued and clarifies that a
liability for the fair value of the obligation undertaken in issuing certain
guarantees shall be recognized at inception of the guarantee. The initial
recognition and initial measurement provisions of FIN 45 are applicable to
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company believes that it has
no material guarantees within the scope of FIN 45 other than the fully defeased
financing leases for two of its drillships. For a discussion of these
guarantees, see Note 4 of Notes to Condensed Consolidated Financial Statements
in Item 1 of this Quarterly Report on Form 10-Q.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
interpretation provides guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights, or variable-interest entities ("VIEs"). FIN 46 is effective for
public entities with VIEs created before February 1, 2003, at the beginning of
the first interim or annual reporting period starting after June 15, 2003. For
VIEs created after January 31, 2003, FIN 46 is effective immediately. Upon the
applicable
30
effective date, FIN 46 will become the guidance that determines whether
consolidation is required and whether the variable-interest accounting model
must be used to account for existing and new entities. The Company does not
believe that it currently has any VIEs within the scope of FIN 46.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. This statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. The Company does
not expect the adoption of SFAS No. 149 to have a material effect on its results
of operations, financial condition or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in circumstances affecting the Company's
exposure to commodity price, interest rate, fair value, foreign currency or
credit risks since December 31, 2002. For a discussion of the Company's exposure
to these risks, see "Item 7A. Quantitative and Qualitative Disclosures About
Market Risk" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic Securities and Exchange Commission filings.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company completed its evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 2003, the Company settled all outstanding disputes between it,
Harland and Wolff Shipbuilding and Heavy Industries, Ltd. and Olsen Energy ASA
relating to the construction of two drillships for the Company. For more
information regarding the settlement, see Item 3, Legal Proceedings, in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002, filed
with the Securities and Exchange Commission on March 26, 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 11, 2003, the Company issued $250 million of 5% Notes due 2013 (the
"5% Notes") and received cash proceeds of approximately $247.4 million after
deduction for discount, underwriting fees and estimated expenses. The Company
plans to use the funds for general corporate purposes. Until then, the net
proceeds will be invested in short-term investments. Interest on the 5% Notes is
31
payable on February 15 and August 15 of each year beginning on August 15, 2003.
No principal payments are required with respect to the 5% Notes prior to their
final maturity date. The Company has been advised by Goldman, Sachs & Co., the
initial purchasers of the 5% Notes, that they were sold to "qualified
institutional buyers" in reliance on Rule 144A under the Securities Act of 1933.
The Company has agreed to file a registration statement with the Securities and
Exchange Commission by May 12, 2003, relating to an offer to exchange the 5%
Notes for registered notes having substantially identical terms.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement effective as of March 14, 2003, between the
Company and C. Stedman Garber, Jr.
15.1 Letter of Independent Accountants regarding Awareness of Incorporation
by Reference.
99.1 Chief Executive Officer's Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended March 31, 2003:
Date of Report Items Reported Financial Statements Filed
-------------- --------------- --------------------------
February 6, 2003 Item 7, Financial Statements and None
Exhibits; and Item 9, Regulation FD
Disclosure
February 6, 2003 Item 5, Other Events and Item 7, None
Financial Statements and Exhibits
March 7, 2003 Item 7, Financial Statements and None
Exhibits; and Item 9, Regulation FD
Disclosure
32
SIGNATURE
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.
GLOBALSANTAFE CORPORATION
(Registrant)
Dated: May 8, 2003 /s/ W. Matt Ralls
------------------
W. Matt Ralls
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer of the Registrant)
33
CERTIFICATIONS
I, Jon A. Marshall, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GlobalSantaFe
Corporation;
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.
34
Date: May 8, 2003
/s/ Jon A. Marshall
- --------------------------
Jon A. Marshall
President and Chief Executive Officer
35
CERTIFICATIONS
I, W. Matt Ralls, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GlobalSantaFe
Corporation;
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.
36
Date: May 8, 2003
/s/ W. Matt Ralls
- --------------------
W. Matt Ralls
Senior Vice President and Chief Financial Officer
37
Exhibit Index
10.1 Employment Agreement effective as of March 14, 2003, between the Company
and C. Stedman Garber, Jr.
15.1 Letter of Independent Accountants regarding Awareness of Incorporation by
Reference.
99.1 Chief Executive Officer's Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.