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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[|X|] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13289
PRIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0069030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 SAN FELIPE, SUITE 3300
HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 789-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [|X|] NO [ ] -
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [|X|] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practical date.
Outstanding as of May 12, 2003
Common Stock, par value $.01 per share 134,205,893
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PRIDE INTERNATIONAL, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION --------
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2003 and December 31, 2002............................ 2
Consolidated Statement of Operations for the three months ended
March 31, 2003 and 2002..................................................................... 3
Consolidated Statement of Cash Flows for the three months ended
March 31, 2003 and 2002..................................................................... 4
Notes to Unaudited Consolidated Financial Statements............................................. 5
Report of Independent Accountants................................................................ 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 19
Item 4. Controls and Procedures.................................................................... 19
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................................................. 20
Item 6. Exhibits and Reports on Form 8-K........................................................... 20
Signatures........................................................................................... 21
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUES)
MARCH 31, DECEMBER 31,
2003 2002
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 69,249 $ 133,986
Restricted cash............................................................... 32,747 52,700
Trade receivables, net........................................................ 299,541 265,885
Parts and supplies, net....................................................... 76,501 64,920
Deferred income taxes......................................................... 3,317 3,332
Other current assets.......................................................... 173,305 148,561
------------ -------------
Total current assets...................................................... 654,660 669,384
------------ -------------
PROPERTY AND EQUIPMENT, net........................................................ 3,384,894 3,395,774
------------ -------------
OTHER ASSETS
Investments in and advances to affiliates..................................... 29,918 29,620
Goodwill, net................................................................. 69,014 72,014
Other assets.................................................................. 144,479 158,203
------------ -------------
Total other assets........................................................ 243,411 259,837
------------ -------------
$ 4,282,965 $ 4,324,995
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................................. $ 170,629 $ 186,657
Accrued expenses.............................................................. 236,948 243,190
Deferred income taxes......................................................... 991 985
Short-term borrowings......................................................... 14,243 17,724
Current portion of long-term debt............................................. 183,336 95,610
Current portion of long-term lease obligations................................ 2,665 2,679
------------ -------------
Total current liabilities................................................. 608,812 546,845
------------ -------------
OTHER LONG-TERM LIABILITIES........................................................ 90,642 91,145
LONG-TERM DEBT, net of current portion............................................. 1,687,413 1,791,619
LONG-TERM LEASE OBLIGATIONS, net of current portion................................ 11,955 12,511
DEFERRED INCOME TAXES.............................................................. 90,774 100,966
MINORITY INTEREST.................................................................. 87,465 82,204
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 50,000 shares authorized; none issued........ - -
Common stock, $.01 par value; 400,000 shares authorized;
134,570 and 134,453 shares issued; 134,201and 134,084 shares outstanding.. 1,346 1,344
Paid-in capital............................................................... 1,238,530 1,237,146
Treasury stock, at cost....................................................... (4,409) (4,409)
Accumulated other comprehensive loss.......................................... (2,533) (3,598)
Retained earnings............................................................. 472,970 469,222
------------ -------------
Total stockholders' equity................................................ 1,705,904 1,699,705
------------ -------------
$ 4,282,965 $ 4,324,995
============ =============
The accompanying notes are an integral part of the consolidated
financial statements.
2
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
REVENUES .......................................................................... $ 395,421 $ 298,557
OPERATING COSTS.................................................................... 262,697 187,398
------------ ------------
Gross margin.................................................................. 132,724 111,159
DEPRECIATION AND AMORTIZATION...................................................... 60,796 54,705
SELLING, GENERAL AND ADMINISTRATIVE................................................ 23,745 23,402
------------ -------------
EARNINGS FROM OPERATIONS........................................................... 48,183 33,052
OTHER INCOME (EXPENSE)
Interest expense.............................................................. (32,679) (31,135)
Interest income............................................................... 254 1,344
Other income (expense), net................................................... (3,264) 2,316
------------ -------------
Total other expense, net.................................................. (35,689) (27,475)
------------ -------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST................................. 12,494 5,577
INCOME TAX PROVISION .............................................................. 3,485 950
MINORITY INTEREST.................................................................. 5,261 4,518
------------ -------------
NET EARNINGS ..................................................................... $ 3,748 $ 109
============ =============
NET EARNINGS PER SHARE
Basic..................................................................... $ 0.03 $ -
Diluted................................................................... $ 0.03 $ -
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic..................................................................... 134,131 132,863
Diluted................................................................... 134,840 133,816
The accompanying notes are an integral part of the consolidated
financial statements.
3
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net earnings.................................................................. $ 3,748 $ 109
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities -
Depreciation and amortization............................................. 60,796 54,705
Discount amortization on zero coupon convertible debentures............... 1,406 3,508
Amortization of deferred loan costs....................................... 1,971 1,651
(Gain) loss on sale of assets............................................. 62 (59)
Deferred income taxes .................................................... (10,171) (5,154)
Minority interest......................................................... 5,261 4,518
Loss on early extinguishment of debt...................................... - 696
Changes in assets and liabilities, net of effects of acquisitions -
Trade receivables.................................................... (40,377) 5,897
Parts and supplies................................................... (11,581) (5,779)
Other current assets................................................. (24,744) (15,073)
Other assets......................................................... 11,728 (5,463)
Accounts payable..................................................... 4,840 (32,102)
Accrued expenses..................................................... (5,177) (1,165)
Other liabilities.................................................... 1,067 5,457
------------ ------------
Net cash provided by (used in) operating activities.............. (1,171) 11,746
------------- ------------
INVESTING ACTIVITIES
Purchases of property and equipment........................................... (62,809) (24,589)
Proceeds from dispositions of property and equipment.......................... 139 94
Investments in and advances to affiliates..................................... (298) (297)
------------ ------------
Net cash used in investing activities................................ (62,968) (24,792)
------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock........................................ 1,265 -
Proceeds from exercise of stock options....................................... 121 2,136
Proceeds from issuance of convertible senior debentures, net of issue costs... - 291,781
Proceeds from debt borrowings................................................. 110,991 60,000
Reduction of debt............................................................. (132,928) (194,206)
Decrease in restricted cash................................................... 19,953 8,234
------------ ------------
Net cash provided by (used in) financing activities.................. (598) 167,945
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... (64,737) 154,899
CASH AND CASH EQUIVALENTS, beginning of period..................................... 133,986 58,988
------------ ------------
CASH AND CASH EQUIVALENTS, end of period........................................... $ 69,249 $ 213,887
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
4
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Principles of Consolidation and Reporting
The unaudited consolidated financial statements included herein have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Certain
reclassifications have been made to the prior periods' condensed financial
statements to conform with the current period presentation. Effective January 1,
2003, the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 145, which eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and classified as extraordinary items.
Accordingly, the consolidated statement of operations for the three months ended
March 31, 2002 reflects a reclassification of $454,000 from extraordinary item
into other, net and tax provision. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto of Pride International, Inc. (the "Company" or
"Pride") included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
In the opinion of management, the unaudited consolidated financial
information included herein reflects all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for a full year or any other interim period.
PricewaterhouseCoopers LLP, the Company's independent accountants, have
performed a review of the unaudited consolidated financial statements included
herein in accordance with standards established by the American Institute of
Certified Public Accountants. Pursuant to Rule 436(c) under the Securities Act
of 1933, the report of PricewaterhouseCoopers LLP, included herein, should not
be considered a part of any registration statement prepared or certified within
the meanings of Sections 7 and 11 of the Securities Act, and the liability
provisions of Section 11 of the Securities Act do not apply to such report.
Comprehensive Income
Comprehensive income is the change in the Company's equity from all
transactions except those resulting from investments by or distributions to
owners. Comprehensive income (loss) was as follows:
THREE MONTHS ENDED
MARCH 31,
2003 2002
---------- ----------
(IN THOUSANDS)
Net earnings................................ $ 3,748 $ 109
Foreign currency translation gain (loss), net 1,065 (465)
---------- ----------
Comprehensive income (loss)................. $ 4,813 $ (356)
=========== ===========
Rig Construction Contracts
The Company has historically constructed drilling rigs only for its own
use. However, at the request of some of its significant customers, the Company
has entered into contracts to design, construct and mobilize specialized
drilling rigs through the Company's technical services group. The Company also
has entered into contracts to operate the rigs on behalf of the customers.
Construction contract revenues and related costs are recognized using the
percentage of completion method. Contract revenues and costs include revenues
and costs associated with unpriced changes in contract specifications that are
estimable and expected to be recovered through a change in the contract price.
Revenues recognized in excess of billings to the customer are accumulated and
reported as part of other assets, which as of March 31, 2003 and December 31,
2002 were $34.3 million and $3.5 million, respectively. Costs incurred in excess
of (less than)
5
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
costs recognized are accumulated and reported as part of other
assets (other long-term liabilities), which as of March 31, 2003 and December
31, 2002 were ($7.6) million and $24.9 million, respectively.
Beginning October 1, 2002, the Company's technical services group is
reported as a separate business segment, with the first three quarters of 2002
adjusted to reflect the change in presentation, which had no effect on
consolidated gross margin, earnings from operations or net earnings (loss). The
consolidated statement of operations for three months ended March 31, 2002,
reflects an increase in revenues and operating costs of $15.7 million for the
change in presentation.
Stock-Based Compensation
The Company uses the intrinsic value based method of accounting for
stock-based compensation prescribed by Accounting Principles Board ("APB")
Opinion No. 25 "Accounting for Stock Issued to Employees" and related
interpretations. Under this method, the Company records no compensation expense
for stock options granted when the exercise price for options granted is equal
to the fair market value of the Company's stock on the date of the grant.
Under SFAS No. 123, the fair value of stock-based awards is calculated
using option pricing models. The Company's calculations were made using the
Black-Scholes option pricing model with the following significant assumptions:
MARCH 31,
2003 2002
-----------------------
Expected term............................... 5 years 5 years
Volatility.................................. 60.44% 59.45%
Risk free interest rate..................... 3.19% 4.73%
Dividend yield.............................. 0.00% 0.00%
The weighted average fair values per share of options granted during
the three months ended March 31, 2003 and 2002 were $8.31 and $7.94,
respectively.
If the fair value based method of accounting prescribed by SFAS No. 123
had been applied, the Company's pro forma net earnings (loss), net earnings
(loss) per share and stock-based compensation cost would approximate the amounts
indicated below. The effects of applying SFAS No. 123 in this pro forma
disclosure are not indicative of future amounts.
THREE MONTHS ENDED MARCH 31,
2003 2002
------------ -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net earnings, as reported............................................... $ 3,748 $ 109
Add: Stock-based compensation included in reported net
earnings, net of tax.................................................. - -
Deduct: Total stock-based employee compensation expense
determined under the fair value method, net of tax.................... (2,992) (2,003)
----------- ----------
Pro forma net earnings (loss)........................................... $ 756 $ (1,894)
=========== ===========
Net earnings (loss) per share:
Basic-- as reported................................................... $ 0.03 $ -
Basic-- pro forma..................................................... $ - $ (0.01)
Diluted-- as reported................................................. $ 0.03 $ -
Diluted-- pro forma................................................... $ - $ (0.01)
Sale of Non-Core Assets
The Company is currently exploring various opportunities to reduce debt
through sales of certain non-core assets. The Company has agreed to sell certain
non-core marine assets for approximately $170.0 million. The transaction is
subject to
6
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
numerous contingencies, including inspection of the rigs to the buyer's
satisfaction and the buyer's obtaining certain approvals. Accordingly, no
assurance can be given that the sale will be completed.
Supplemental Cash Flow Information
Non cash transactions are as follows:
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- ----------
(IN THOUSANDS)
Increase (decrease) in capital expenditures in
accounts payable................................ $ (18,645) $ 23,793
New Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51".
FIN No. 46 requires a company to consolidate a variable interest entity, as
defined, when the company will absorb a majority of the variable interest
entity's expected losses, receive a majority of the variable interest entity's
expected residual returns, or both. FIN No. 46 also requires certain disclosures
relating to consolidated variable interest entities and unconsolidated variable
interest entities in which a company has a significant variable interest. The
Company has adopted the disclosure provisions of FIN No. 46, as well as the
consolidation provisions of FIN No. 46 for variable interest entities created
after January 31, 2003, and for variable interest entities in which the Company
obtained an interest after January 31, 2003. With respect to variable interest
entities in which a company holds a variable interest that is acquired before
February 1, 2003, the consolidation provisions are required to be applied no
later than the company's first fiscal year or interim period beginning after
June 15, 2003. FIN No.46 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows
when adopted.
2. LONG-TERM DEBT
Long-term debt consisted of the following:
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
(IN THOUSANDS)
Senior secured term loan.................................................. $ 198,000 $ 198,500
Senior secured revolving credit facilities................................ 220,500 110,000
9 3/8% Senior Notes due 2007.............................................. 325,000 325,000
10% Senior Notes due 2009................................................. 200,000 200,000
Drillship loans........................................................... 222,615 231,966
Semisubmersible loans..................................................... 197,085 215,371
2 1/2% Convertible Senior Notes due 2007.................................. 300,000 300,000
Zero Coupon Convertible Senior Debentures due 2021........................ 3 98,220
Zero Coupon Convertible Subordinated Debentures due 2018.................. 112,779 111,481
Senior convertible notes payable.......................................... 85,853 85,853
Limited-recourse collateralized term loans................................ 8,669 10,263
Other notes payable....................................................... 245 575
------------ ------------
1,870,749 1,887,229
Current portion of long-term debt......................................... 183,336 95,610
------------ ------------
Long-term debt, net of current portion.................................... $ 1,687,413 $ 1,791,619
============ ============
The Company has a senior secured revolving credit facility with a group
of banks that provides aggregate availability of up to $250.0 million. The
Company may issue up to $50.0 million of letters of credit under the facility.
As of March 31, 2003, $135.5 million of borrowings and an additional $17.4
million of letters of credit were outstanding under the facility. The Company
also has a senior revolving credit facility with non-U.S. banks that provides
aggregate availability
7
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
of up to $95.0 million. As of March 31, 2003, there was $85.0 million
outstanding under this credit facility. Together with the revolving credit
facility discussed above, the Company had $107.1 million in aggregate
availability as of March 31, 2003.
In January 2003, the Company purchased substantially all of the
outstanding zero coupon convertible senior debentures due 2021 for $98.2
million. In March 2003, the Company offered to purchase for cash all of the
outstanding zero coupon convertible subordinated debentures due 2018 on April
24, 2003, as required by the terms of the debentures, and $226.5 million face
amount of the debentures were surrendered for purchase. The Company paid $112.0
million to purchase such debentures, which was equal to their accreted value on
such date. The purchase price was funded through borrowings under the Company's
senior secured revolving credit facilities and available cash. As of March 31,
2003, the zero coupon convertible subordinated debentures were classified as
long-term debt based on the Company's intended refinancing of the debentures
with its senior secured revolving credit facility. Debentures with a face amount
of $2.1 million, and an accreted value of $1.1 million as of April 24, 2003,
were not surrendered for purchase and remain outstanding.
In April and May 2003, the Company issued $300 million aggregate
principal amount of 3.25% convertible senior notes due 2033. Substantially all
of the net proceeds (after estimated expenses) of approximately $294.8 million
were or are to be used to repay amounts outstanding under the Company's $250
million senior secured revolving credit facility and $95 million senior
revolving credit facility, which included borrowings used to fund a portion of
the purchase price of the zero coupon convertible subordinated debentures due
2018. The notes bear interest at a rate of 3.25% per annum. The Company also
will pay contingent interest during any six-month interest period commencing
on or after May 1, 2008 for which the trading price of the notes for each of
the five trading days immediately preceding such period equals or exceeds 120%
of the principal amount of the notes. Beginning May 5, 2008, the Company may
redeem any of the notes at a redemption price of 100% of the principal amount
redeemed plus accrued and unpaid interest. In addition, noteholders may
require the Company to repurchase the notes on May 1 of 2008, 2010, 2013, 2018,
2023 and 2028 at a repurchase price of 100% of the principal amount redeemed
plus accrued and unpaid interest. The Company may elect to pay all or a portion
of the repurchase price in common stock instead of cash, subject to certain
conditions. The notes are convertible under specified circumstances into shares
of the Company's common stock at a conversion rate of 38.9045 shares per $1,000
principal amount of notes (which is equal to a conversion price of $25.704),
subject to adjustment. Upon conversion, the Company will have the right to
deliver, in lieu of shares of its common stock, cash or a combination of cash
and common stock.
As of March 31, 2003, $32.7 million of the Company's cash balances,
which amount is included in restricted cash, consists of funds held in trust in
connection with the Company's drillship and semisubmersible loans and its
limited-recourse collateralized term loans and, accordingly, is not available
for use by the Company.
3. INCOME TAXES
The Company's consolidated effective income tax rate for the three
months ended March 31, 2003 was 27.9%, as compared to 17.0% for the three months
ended March 31, 2002. The increase in the effective tax rate resulted primarily
from decreased income in foreign jurisdictions with zero to low effective tax
rates and increased income in higher tax jurisdictions.
4. NET EARNINGS PER SHARE
Basic net earnings per share has been computed based on the weighted
average number of shares of common stock outstanding during the applicable
period. Diluted net earnings per share has been computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period, as if stock options, convertible debentures and
other convertible debt were converted into common stock, after giving
retroactive effect to the elimination of interest expense, net of income tax
effect, applicable to the convertible debentures and other convertible debt.
8
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information necessary to calculate basic
and diluted net earnings per share:
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
--------- --------
(IN THOUSANDS)
Net earnings........................................ $ 3,748 $ 109
Interest expense on convertible debentures and notes - -
Income tax effect................................... - -
--------- --------
Adjusted net earnings............................... $ 3,748 $ 109
========= ========
Weighted average shares outstanding ................ 134,131 132,863
Convertible debentures and notes.................... - -
Stock options ...................................... 709 953
--------- --------
Adjusted weighted average shares outstanding........ 134,840 133,816
========= ========
The calculation of diluted weighted average shares outstanding excludes
34.3 million and 29.8 million common shares for the three months ended March 31,
2003 and 2002, respectively, issuable pursuant to convertible debt and
outstanding options. These shares were excluded as their effect was antidilutive
or the exercise price of stock options exceeded the average price of the
Company's common stock for the period.
5. COMMITMENTS AND CONTINGENCIES
In April 2002, the Company contributed $14.1 million to the settlement
of a wage-related antitrust lawsuit, of which $5.1 million, not within the
policy limits of the Company's insurance, had previously been recognized in
2001. The Company's insurance carrier has not yet agreed to pay the remaining
amount, and the Company has commenced litigation against this insurer. The
Company believes it will prevail in this matter and collect the approximately
$10.2 million receivable, representing the insured settlement amount and legal
costs, included in other assets in the accompanying balance sheet.
Since the second quarter of 2002, Venezuela has experienced political
and economic turmoil, including prolonged labor strikes, demonstrations and an
attempt to overthrow the government. Much of the turmoil has negatively impacted
Petroleos de Venezuela, S.A. ("PDVSA"), which is the Company's principal
customer in Venezuela, and led to the dismissal of more than 12,000 PDVSA
employees by the government. The implications and results of the political,
economic and social instability in Venezuela are uncertain at this time, but the
instability has had and is continuing to have an adverse effect on the Company's
business. As of March 31, 2003, 16 of the Company's 47 rigs in the country were
working. Venezuela implemented exchange controls, which together with recent
employee dismissals and reorganization within PDVSA, have led to a slower rate
of collection of the Company's trade receivables and could limit the Company's
ability to convert local currency into U.S. dollars and transfer funds out of
Venezuela.
The Company is routinely involved in other litigation, claims and
disputes incidental to its business, which at times involves claims for
significant monetary amounts, some of which would not be covered by insurance.
In the opinion of management, none of the existing litigation will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
6. INVESTMENT IN AMETHYST JOINT VENTURE
As of March 31, 2003, the Company had a 30.0% equity interest in a
joint venture company that is constructing two dynamically-positioned, deepwater
semisubmersible drilling rigs, currently referred to as the Amethyst 4 and
Amethyst 5. The rigs are being constructed at a shipyard in Maine and are
anticipated to be completed in late 2003. The joint venture company has financed
87.5% of the cost of construction of these rigs through credit facilities, with
repayment of the
9
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
borrowings under those facilities guaranteed by the United States Maritime
Administration ("MARAD"). Advances under the credit facilities are being
provided without recourse to any of the joint venture owners. The remaining
12.5% of the cost of construction is being provided by the joint venture company
from equity contributions that have been made by the joint venture partners.
Through March 31, 2003, the Company's equity contributions to the joint venture
totaled $29.9 million, including capitalized interest of $6.4 million. Based on
the availability of funds under performance and payment bonds issued on behalf
of a prior construction contractor and draws remaining under the
MARAD-guaranteed credit facilities, the Company believes the Amethyst 4 and
Amethyst 5 will be completed without requiring additional contributions by the
joint venture partners.
7. SEGMENT INFORMATION
The following table sets forth selected consolidated financial
information of the Company by operating segment:
THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
---------------- ----------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenues:
Gulf of Mexico ...................... $ 56.3 14.2% $ 32.6 10.9%
International offshore............... 163.1 41.3 159.7 53.5
International land................... 99.8 25.2 73.1 24.5
E&P services ....................... 24.6 6.2 17.1 5.7
Technical services................... 51.6 13.1 16.1 5.4
------- ----- ------- -----
Total revenues................. 395.4 100.0 298.6 100.0
------- ----- ------- -----
Operating Costs:
Gulf of Mexico ...................... 43.1 16.4 29.6 15.7
International offshore............... 81.0 30.8 80.2 42.8
International land................... 68.2 26.0 50.0 26.7
E&P services ....................... 18.1 6.9 11.9 6.4
Technical services................... 52.3 19.9 15.7 8.4
------- ----- ------- -----
Total operating costs.......... 262.7 100.0 187.4 100.0
------- ----- ------- -----
Gross Margin:
Gulf of Mexico ...................... 13.2 10.0 3.0 2.7
International offshore............... 82.1 61.9 79.5 71.5
International land................... 31.6 23.8 23.1 20.8
E&P services ....................... 6.5 4.9 5.2 4.7
Technical services................... (0.7) (0.6) 0.4 0.3
------- ----- ------- -----
Total gross margin............. $ 132.7 100.0% $ 111.2 100.0%
======= ===== ======= =====
Significant Customers
No single customer accounted for 10% or more of consolidated revenues
for the three months ended March 31, 2003. Two customers in the international
offshore segment accounted for approximately $73.1 million, or 24.5%, of
consolidated revenues for the three months ended March 31, 2002.
10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Pride International, Inc.:
We have reviewed the accompanying consolidated balance sheet of Pride
International, Inc. as of March 31, 2003, and the related consolidated
statements of operations and cash flows for the three month periods ended March
31, 2003 and 2002. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2002, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended (not
presented herein) and in our report dated March 25, 2003, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2002 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
May 15, 2003
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction
with the accompanying unaudited consolidated financial statements as of March
31, 2003 and for the three months ended March 31, 2003 and 2002 included
elsewhere herein, and with our Annual Report on Form 10-K for the year ended
December 31, 2002. The following information contains forward-looking
statements. Please read "Forward-Looking Statements" for a discussion of
limitations inherent in such statements.
GENERAL
We provide contract drilling and related services to oil and gas
companies worldwide, operating both offshore and on land. As of April 30, 2003,
we operated a global fleet of 331 rigs, including two ultra-deepwater
drillships, 11 semisubmersible rigs, 35 jackup rigs, 29 tender-assisted, barge
and platform rigs and 254 land-based drilling and workover rigs. We operate in
more than 30 countries and marine provinces. We have five principal operating
segments: Gulf of Mexico, International Offshore, International Land, E&P
Services and Technical Services.
BUSINESS ENVIRONMENT AND OUTLOOK
General
Our revenues depend principally upon the number of our available rigs,
the number of days these rigs are utilized and the contract day rates received.
The number of days our rigs are utilized and the contract day rates received are
largely dependent upon the balance of supply and demand for drilling and related
services in the different geographic regions in which we operate. The number of
available rigs may increase or decrease as a result of the acquisition,
relocation or disposal of rigs, the construction of new rigs and the number of
rigs being upgraded or repaired at any time. In order to improve utilization or
realize higher contract day rates, we may mobilize our rigs from one market to
another.
Oil and gas companies' exploration and development drilling programs
drive the demand for drilling and related services. These drilling programs are
affected by their expectations about oil and natural gas prices, anticipated
production levels, demand for crude oil and natural gas products, government
regulations and many other factors. Oil and gas prices are volatile, which has
historically led to significant fluctuations in expenditures for oil and gas
drilling and related services.
The following table summarizes average daily revenue and percentage
utilization for our Gulf of Mexico and international offshore rig fleets for the
three months ended March 31, 2003 and 2002. In this quarterly report, average
daily revenue information is based on total revenues for each rig type divided
by actual days worked by all rigs of that type. Average daily revenue will
differ from average contract day rates for a rig due to billing adjustments for
any non-productive time, mobilization fees, performance bonuses and charges to
the customer for ancillary services. Percentage utilization is calculated as the
total days worked divided by the total days available for work by all rigs of
that type.
THREE MONTHS ENDED MARCH 31,
2003 2002
------------------------------------------------------
DAILY REVENUE UTILIZATION DAILY REVENUE UTILIZATION
-------------- ----------- ------------- -----------
GULF OF MEXICO
Jackup Rigs................... $ 30,500 62% $ 26,100 34%
Platform Rigs................. $ 20,100 30% $ 19,700 40%
INTERNATIONAL OFFSHORE
Drillships/Semisubmersible
Rigs.......................... $ 112,700 95% $ 134,400 95%
Jackup Rigs................... $ 50,300 88% $ 49,600 80%
Tender and Barge Rigs......... $ 33,400 88% $ 34,700 94%
12
Gulf of Mexico
Throughout 2002 and the first three months of 2003, we experienced
particularly weak conditions in the U.S. Gulf of Mexico jackup and platform rig
markets. High natural gas inventory storage levels at the start of 2002 resulted
in reduced demand for rig services. Although natural gas prices have recently
increased significantly and natural gas storage levels have declined
dramatically, demand for drilling services in the U.S. Gulf of Mexico has shown
only a marginal improvement to date. Recently, however, we have seen an increase
in demand for platform rigs and we have obtained contracts for six platform rigs
that are expected to commence operations by mid-May 2003.
In response to the poor market conditions, we have actively marketed a
number of rigs in our U.S. Gulf of Mexico fleet to international markets. During
2002, we obtained long-term contracts for nine jackup rigs and one platform rig
with Petroleos Mexicanos S.A. ("Pemex") in the Mexican sector of the Gulf of
Mexico and for two jackup rigs in other international markets, one in Nigeria
and one in India. Additionally, we obtained a long-term contract with Pemex in
Mexico for the Pride South Seas, a semisubmersible rig that we mobilized from
South Africa. All of these rigs completed redeployment in 2002 and worked
throughout the first three months of 2003. We continue to market additional rigs
into Mexico and other international markets as suitable opportunities arise.
There can be no assurance, however, that any additional contracts will result
from these efforts.
As of April 30, 2003, nine of our Gulf of Mexico jackups were working
offshore Mexico on contracts with an average remaining term of 2.7 years and an
average contract day rate of $34,000, seven were working in the U.S. Gulf of
Mexico, of which five were on short-term contracts, with an average contract day
rate of $23,500, and nine rigs were available. Additionally, two of our platform
rigs were working offshore Mexico on contracts with an average contract day rate
of $19,600 and two were working in the U.S. Gulf of Mexico at an average
contract day rate of $13,700.
We expect that revenues and gross margins derived from our entire Gulf
of Mexico operations will continue to improve during the remainder of 2003 due
to the impact of the newly obtained contracts for the six platform rigs in the
U.S. sector of the Gulf. In addition, the timing and terms under which any of
our available jackup rigs are contracted could have a significant impact on our
results.
International Offshore
Our international offshore segment has continued to experience high
levels of activity, and we have maintained essentially full utilization of six
of our seven high-specification deepwater rigs throughout the first three months
of 2003. The seventh deepwater rig, the Pride South America semisubmersible rig,
received its five-year periodic inspection and related maintenance in the first
quarter of 2003 and was out of service for approximately 70 days.
Our intermediate water-depth semisubmersibles experienced 88%
utilization during the first quarter of 2003. The non-productive time was
primarily due to one of the rigs undergoing its five-year periodic survey during
the period. We expect to achieve near full utilization of these rigs during the
remainder of 2003.
Following the transfer of two independent-leg jackup rigs to Nigeria
and India under two-year contracts in 2002, we currently have eight jackup rigs
working in international waters outside of the Gulf of Mexico. All of these rigs
are currently working under long-term contracts, two of which are expected to
expire in the third quarter of 2003. These jackup rigs experienced 88%
utilization in the first quarter of 2003. The non-productive time was primarily
due to two of these rigs undergoing shipyard repairs in the period.
Additionally, we manage two jackup rigs on behalf of Petroleos de Venezuela,
S.A. ("PDVSA") in Venezuela under contracts that expire in June 2003.
International Land
During 2002, our international land segment was adversely affected by
the economic and political instability in Argentina. The Argentine peso declined
in value against the U.S. dollar following the Argentine government's decision
to abandon the country's fixed dollar-to-peso exchange rate at the end of 2001.
The devaluation, coupled with the government's mandated conversion of all
dollar-based contracts to pesos, severely pressured our margins. During the
first quarter of 2002, we engaged in discussions with all of our Argentine
customers regarding recovery of losses sustained from the devaluation of
accounts receivable and the basis on which new business would be contracted. We
restructured most of our contracts on a basis that we believe limits our
exposure to further devaluations. Activity levels have recovered from mid-2002
as high oil prices positively impacted our customers' cash flows. The average
rate of utilization of our rig fleet in Argentina was 87% in the three months
ended March 31, 2003 as compared with 57% in the corresponding period in 2002.
As of April 30, 2003, 131 rigs, or 88% of our total fleet of 149 rigs, in
Argentina were under contract.
13
Venezuela also has been experiencing political, economic and social
instability. A prolonged strike by PDVSA employees that ended in February 2003
led to the dismissal of more than 12,000 employees by the government. The recent
turmoil in Venezuela led to a reduction in our level of operations in that
country during the first quarter of 2003. Since the conclusion of the strike,
our rig activity has recovered and currently exceeds the level that existed
before the strike. As of April 30, 2003, we had 15 rigs, or 36% of our
land-based rigs, and all five of our offshore rigs in Venezuela under contract
as compared with only seven rigs at the end of the strike. Venezuela has also
recently implemented exchange controls which, together with recent employee
dismissals and reorganization within PDVSA, initially led to a slower rate of
collection of our trade receivables, which has recently improved, and could
limit our ability to convert local currency to U.S. dollars and transfer funds
out of the country. Our billed trade receivables in Venezuela decreased from
$30.6 million as of December 31, 2002 to $26.9 million as of March 31, 2003.
Management believes that all such receivables will be recovered and that the
recently implemented exchange controls will not have a significant impact on our
financial position or results of operations.
Revenues and gross margins from our international land segment are
expected to improve throughout the remainder of 2003 due to the recovery of
activity in Venezuela. Additionally, the first of two large land rigs to work in
Kazakhstan, which has been earning a standby rate since being accepted by the
customer in November 2002, has commenced operations on an artificial island in
the Caspian Sea. The second rig has been mobilized to the drilling location and
is expected to commence operations early in the third quarter of 2003.
E&P Services
Our E&P services activity is generated predominately in South America
and was negatively impacted by the crises in Argentina and Venezuela in 2002.
Revenues in the first three months of 2003, increased due to the recovery of
activity in Argentina and to the commencement of E&P services activity in
Brazil. Revenues from E&P services are expected to increase further in
subsequent quarters due to the improvement of the situation in Venezuela and to
the commencement of new integrated project management contracts in Argentina, as
well as the start-up of cementing operations in Mexico.
Technical Services
The technical services group has five major projects ongoing to design,
engineer, manage construction of and commission deepwater platform drilling
rigs, which are being constructed on behalf of two major oil company customers.
The platforms include spars, tension-leg platforms and other designs. We also
are to provide drilling operations management of the rig packages once they have
been installed on the platforms. The first platform drilling rig is being mated
with the platform before being towed to Angola, where it is expected to commence
drilling operations in late 2003. The four other platform rigs are expected to
enter into service between late 2004 and 2005.
14
RESULTS OF OPERATIONS
We have presented in the following table selected consolidated
financial and operational information by operating segment:
THREE MONTHS ENDED MARCH 31,
2003 2002
---------------- ----------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenues:
Gulf of Mexico ...................... $ 56.3 14.2% $ 32.6 10.9%
International offshore............... 163.1 41.3 159.7 53.5
International land................... 99.8 25.2 73.1 24.5
E&P services ....................... 24.6 6.2 17.1 5.7
Technical services................... 51.6 13.1 16.1 5.4
------- ----- ------- -----
Total revenues................. 395.4 100.0 298.6 100.0
------- ----- ------- -----
Operating Costs:
Gulf of Mexico ...................... 43.1 16.4 29.6 15.7
International offshore............... 81.0 30.8 80.2 42.8
International land................... 68.2 26.0 50.0 26.7
E&P services ....................... 18.1 6.9 11.9 6.4
Technical services................... 52.3 19.9 15.7 8.4
------- ----- ------- -----
Total operating costs.......... 262.7 100.0 187.4 100.0
------- ----- ------- -----
Gross Margin:
Gulf of Mexico ...................... 13.2 10.0 3.0 2.7
International offshore............... 82.1 61.9 79.5 71.5
International land................... 31.6 23.8 23.1 20.8
E&P services ....................... 6.5 4.9 5.2 4.7
Technical services................... (0.7) (0.6) 0.4 0.3
------- ----- ------- -----
Total gross margin............. $ 132.7 100.0% $ 111.2 100.0%
======= ===== ======= =====
Three Months Ended March 31, 2003 Compared to Three Months Ended March
31, 2002.
Revenues. Revenues for the three months ended March 31, 2003 were $96.8
million, or 32.4%, higher than in the three months ended March 31, 2002, due
primarily to increased activity and day rates for our jackup rigs in the Gulf of
Mexico, an increase in land drilling activity due to the recovery in Argentina,
increased activity in Chad, the start-up of activity in Kazakhstan and an
increase in design, engineering and construction management services being
provided by our technical services group.
Operating Costs. Operating costs for the quarter ended March 31, 2003
were $75.3 million, or 40.2%, higher than in the corresponding quarter of 2002
due to increased costs associated with rigs that operated during the first
quarter of 2003 that were stacked or being upgraded during the first quarter of
2002, the start-up of activity in Kazakhstan and the increased number of
technical services projects. These increases in costs were partially offset by
the favorable impact of the devaluation of the currencies in Argentina and
Venezuela on expenses denominated in their local currencies. Operating costs as
a percentage of revenues increased by 3.7% to 66.4% in the quarter ended March
31, 2003, from 62.8% in the corresponding quarter in 2002, principally due to an
increase in low margin activity associated with our technical services segment.
Depreciation and Amortization. Depreciation expense increased by $6.1
million, or 11.1%, to $60.8 million in the quarter ended March 31, 2003, from
$54.7 million in the corresponding period in 2002. The increase is primarily
attributable to depreciation on rig refurbishments and upgrades and other
capital projects completed after the first quarter of 2002.
Selling, General and Administrative. Selling, general and
administrative expenses increased by $0.3 million, or 1.5%, to $23.7 million for
the three months ended March 31, 2003, from $23.4 million for the three months
ended March 31, 2002, primarily due to salary increases.
15
Other Income (Expense). Other expense for the three months ended March
31, 2003 increased by $8.2 million, or 29.9%, as compared to the corresponding
period in 2002. Interest expense increased by $1.5 million principally due to an
increase in the average amount of outstanding debt and to a reduction in
interest capitalized from $0.9 million in the three months ended March 31, 2002
to $0.3 million in the three months ended March 31, 2003. Interest income
declined $1.1 million due to a reduction in average cash balances held on
deposit and to a reduction in interest rates. Other, net, which is an expense in
the three-month period ended March 31, 2003, was principally comprised of net
foreign exchange losses on our Euro and Venezuelan Bolivar denominated net
monetary assets. Other, net in the corresponding period in 2002 was principally
comprised of net unrealized foreign exchange gains.
Income Tax Provision. Our consolidated effective income tax rate for
the three months ended March 31, 2003 was 27.9%, as compared to 17.0% for the
corresponding period in 2002. The increase in the effective tax rate resulted
primarily from decreased income in foreign jurisdictions with zero to low
effective tax rates and increased income in higher tax jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $45.8 million and $122.5 million as of
March 31, 2003 and December 31, 2002, respectively. Our current ratio, the ratio
of current assets to current liabilities, was 1.1 as of March 31, 2003 and 1.2
as of December 31, 2002. The decrease in net working capital was attributable
primarily to a decrease in cash used to repurchase our remaining outstanding
zero coupon convertible senior debentures in January 2003 and an increase in the
current portion of long-term debt as a result of the reclassification of
approximately $86 million of senior convertible notes that mature in March 2004
from long-term to current liabilities.
We have a senior secured revolving credit facility with a group of
banks that provides aggregate availability of up to $250.0 million. Letters of
credit of up to $50.0 million may be issued under the facility. As of March 31,
2003, $135.5 million of borrowings and an additional $17.4 million of letters of
credit were outstanding under the facility. We also have a senior secured
revolving credit facility with non-U.S. banks that provides aggregate
availability of up to $95.0 million. As of March 31, 2003, there was $85.0
million outstanding under this credit facility.
In January 2003, we purchased substantially all of our outstanding zero
coupon convertible senior debentures due 2021 for $98.2 million. In March 2003,
we offered to purchase for cash all of the outstanding zero coupon convertible
subordinated debentures due 2018 on April 24, 2003, as required by the terms of
the debentures, and $226.5 million face amount of the debentures were
surrendered for purchase. We paid $112.0 million to purchase those debentures,
which was equal to their accreted value on such date. The purchase price was
funded through borrowings under our senior secured revolving credit facilities
and available cash. Debentures with a face amount of $2.1 million, and an
accreted value of $1.1 million as of April 24, 2003, were not surrendered for
purchase and remain outstanding.
In April and May 2003, we issued $300 million aggregate principal
amount of 3.25% convertible senior notes due 2033. Substantially all of the net
proceeds (after estimated expenses) of approximately $294.8 million were or are
to be used to repay amounts outstanding under our $250 million senior secured
revolving credit facility and $95 million senior revolving credit facility,
which included borrowings used to fund a portion of the purchase price of our
zero coupon convertible subordinated debentures due 2018. The notes bear
interest at a rate of 3.25% per annum. We also will pay contingent interest
during any six-month interest period commencing on or after May 1, 2008 for
which the trading price of the notes for each of the five trading days
immediately preceding such period equals or exceeds 120% of the principal
amount of the notes. Beginning May 5, 2008, we may redeem any of the notes at
a redemption price of 100% of the principal amount redeemed plus accrued and
unpaid interest. In addition, noteholders may require us to repurchase the
notes on May 1 of 2008, 2010, 2013, 2018, 2023 and 2028 at a repurchase price
of 100% of the principal amount redeemed plus accrued and unpaid interest. We
may elect to pay all or a portion of the repurchase price in common stock
instead of cash, subject to certain conditions. The notes are convertible
under specified circumstances into shares of our common stock at a conversion
rate of 38.9045 shares per $1,000 principal amount of notes (which is equal to
a conversion price of $25.704), subject to adjustment. Upon conversion, we will
have the right to deliver, in lieu of shares of common stock, cash or a
combination of cash and common stock. After the application of the net proceeds
from the offering of the notes, as of April 30, 2003, we had outstanding
borrowings of $95.0 million and aggregate availability of $242.6 million under
our senior secured revolving credit facilities.
Additions to property and equipment during the three months ended March
31, 2003 totaled $48.4 million, including $16.1 million for the upgrade of one
large land rig to work in Kazakhstan, $12.2 million for the acquisition of the
Viking, a conventionally moored semisubmersible rig, $9.0 million for other rig
upgrades, refurbishments and reactivations, and
16
approximately $11.1 million for sustaining capital projects. Approximately $18.4
million of these expenditures have been reimbursed by our customers.
As of March 31, 2003, we had a 30.0% equity interest in a joint venture
company that is constructing two dynamically-positioned, deepwater
semisubmersible drilling rigs, currently referred to as the Amethyst 4 and
Amethyst 5. The rigs are being constructed at a shipyard in Maine and are
anticipated to be completed in late 2003. The joint venture company has financed
87.5% of the cost of construction of these rigs through credit facilities, with
repayment of the borrowings under those facilities guaranteed by the United
States Maritime Administration ("MARAD"). Advances under the credit facilities
are being provided without recourse to any of the joint venture owners. The
remaining 12.5% of the cost of construction is being provided by the joint
venture company from equity contributions that have been made by the joint
venture partners. Through March 31, 2003, our equity contributions to the joint
venture totaled $29.9 million, including capitalized interest of $6.4 million.
Based on the availability of funds under performance and payment bonds issued on
behalf of a prior construction contractor and draws remaining under the
MARAD-guaranteed credit facilities, we believe the Amethyst 4 and Amethyst 5
will be completed without requiring additional contributions by the joint
venture partners.
As of March 31, 2003, we had approximately $4.3 billion in total assets
and $1.9 billion of long-term debt and capital lease obligations. We do not
expect that our level of total indebtedness will have a material adverse impact
on our financial position, results of operations or liquidity in future periods.
As of March 31, 2003, $32.7 million of our cash balances, which amount
is included in restricted cash, consists of funds held in trust in connection
with our drillship and semisubmersible loans and our limited-recourse
collateralized term loans and, accordingly, is not available for our use.
Management believes that the cash and cash equivalents on hand,
together with the cash generated from our operations and borrowings under our
credit facilities, will be adequate to fund normal ongoing capital expenditures,
working capital and debt service requirements for the foreseeable future.
We expect to continue to redeploy assets to more active regions and to
explore opportunities to expand our operations through rig upgrades and
acquisitions from time to time. The timing, size or success of any acquisition
effort and the associated potential capital commitments are unpredictable. From
time to time, we have one or more bids outstanding for contracts that could
require significant capital expenditures and mobilization costs. We expect to
fund acquisitions and project opportunities primarily through a combination of
working capital, cash flow from operations and full or limited recourse debt or
equity financing. In addition, we may consider from time to time opportunities
to dispose of non-core assets where we believe the capital could be more
effectively deployed to reduce debt or for other purposes. In this connection,
we have agreed to sell certain non-core marine assets for approximately $170.0
million. The transaction is subject to numerous contingencies, including
inspection of the rigs to the buyer's satisfaction and the buyer's obtaining
certain approvals. Accordingly, no assurance can be given that the sale will be
completed.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51". FIN No. 46 requires a company to
consolidate a variable interest entity, as defined, when the company will absorb
a majority of the variable interest entity's expected losses, receive a majority
of the variable interest entity's expected residual returns, or both. FIN No. 46
also requires certain disclosures relating to consolidated variable interest
entities and unconsolidated variable interest entities in which a company has a
significant variable interest. We have adopted the disclosure provisions of FIN
No. 46, as well as the consolidation provisions of FIN No. 46 for variable
interest entities created after January 31, 2003, and for variable interest
entities in which we have obtained an interest after January 31, 2003. With
respect to variable interest entities in which a company holds a variable
interest that is acquired before February 1, 2003, the consolidation provisions
are required to be applied no later than the company's first fiscal year or
interim period beginning after June 15, 2003. FIN No. 46 is not expected to have
a material impact on our consolidated financial position, results of operations
or cash flows when adopted.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements, other than
statements of historical facts, included in this Quarterly Report on Form 10-Q
that address activities, events or developments that we
17
expect, project, believe or anticipate will or may occur in the future are
forward-looking statements. These include such matters as:
o market conditions, expansion and other development trends in the
contract drilling industry
o utilization rates and contract rates for rigs
o future capital expenditures and investments in the construction,
acquisition and refurbishment of rigs (including the amount and
nature thereof and the timing of completion thereof)
o future asset sales
o completion and employment of rigs under construction
o repayment of debt
o business strategies
o expansion and growth of operations
o future exposure to currency devaluations
o future operating results and financial condition and
o the effectiveness of our disclosure controls and procedures
We have based these statements on our assumptions and analyses in light
of our experience and perception of historical trends, current conditions,
expected future developments and other factors we believe are appropriate in the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including the following:
o general economic business conditions
o prices of oil and gas and industry expectations about future prices
o foreign exchange controls and currency fluctuations
o political stability in the countries in which we operate
o the business opportunities (or lack thereof) that may be presented
to and pursued by us
o changes in laws or regulations and
o the validity of the assumptions used in the design of our
disclosure controls and procedures
Most of these factors are beyond our control. We caution you that
forward-looking statements are not guarantees of future performance and that
actual results or developments may differ materially from those projected in
these statements. We will not update these statements unless the securities laws
require us to do so.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see
"Quantitative and Qualitative Disclosures about Market Risk" in Item 7A of our
Annual Report on Form 10-K for the year ended December 31, 2002. There have been
no material changes to the disclosure regarding our exposure to certain market
risks made in the annual report. For additional information regarding our
long-term debt, see Note 2 of the Notes to Unaudited Consolidated Financial
Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Vice President and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. In
the course of this evaluation, management considered certain internal control
areas in which we have made and are continuing to make changes to improve and
enhance controls. Based upon that evaluation, our President and Chief Executive
Officer and our Vice President and Chief Financial Officer concluded that our
disclosure controls and procedures are effective, in all material respects, with
respect to the recording, processing, summarizing and reporting, within the time
periods specified in the SEC's rules and forms, of information required to be
disclosed by us in the reports that we file or submit under the Exchange Act.
Beginning with the year ending December 31, 2003, Section 404 of the
Sarbanes-Oxley Act of 2002 will require us to include an internal controls
report with our annual report on Form 10-K. The internal controls report must
assert (i) management's responsibilities to establish and maintain adequate
internal controls and procedures for financial reporting and (ii) management's
conclusions as to the effectiveness of these internal controls and procedures,
based on management's evaluation of them at year end. Our auditors will be
required to attest to and report on these assertions. In order to achieve
compliance with Section 404 within the statutory period, management has formed
an internal controls steering committee and adopted a detailed project work plan
to assess the adequacy of our internal controls, remediate any control
weaknesses that may be identified, validate through testing that controls are
functioning as documented and implement a continuous reporting and improvement
process for internal controls. As a result of this initiative, we may make
changes in our internal controls from time to time during the period prior to
December 31, 2003. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the evaluation referred to above.
19
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information set forth in Note 2 of the Notes to Unaudited
Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report
on Form 10-Q and in Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 2 of Part I of this Quarterly Report on Form
10-Q regarding the issuance on April 24, 2003 of $250 million aggregate
principal amount of our 3.25% convertible senior notes due 2033 and on May 9,
2003 of an additional $50 million aggregate principal amount of notes is
incorporated by reference in response to this item. We have been advised by
Morgan Stanley & Co. Incorporated, the initial purchaser of the notes, that the
notes were issued only to "qualified institutional buyers" in reliance on Rule
144A under the Securities Act of 1933. The notes were issued at 100% of the
principal amount thereof, plus accrued interest. The initial purchaser purchased
the notes from us at 98.5% of the principal amount thereof, plus accrued
interest.
The notes are convertible into shares of our common stock at a
conversion rate of 38.9045 shares per $1,000 principal amount of notes (which is
equal to a conversion price of $25.704), subject to adjustment, but only prior
to the close of business on May 1, 2033 and only under any of the following
circumstances: (1) during any quarter commencing after June 30, 2003 for which
the closing sale price of our common stock exceeded 120% of the conversion price
for at least 20 trading days in the 30 consecutive trading days ending on the
last trading day of the preceding quarter; (2) during the five business day
period immediately after any five consecutive trading day period in which the
trading price per $1,000 principal amount of notes for each day of that period
was less than 98% of the product of the closing sale price of our common stock
and the conversion rate; (3) if the notes have been called for redemption; or
(4) upon the occurrence of specified corporate events.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits*
15 -- Awareness letter of PricewaterhouseCoopers LLP.
99 -- Certification of the Chief Executive Officer and the Chief
Financial Officer of Pride pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- -------------------
* Pride and its subsidiaries are parties to several debt instruments
under which the total amount of securities authorized does not exceed
10% of the total assets of Pride and its subsidiaries on a consolidated
basis. Pursuant to paragraph 4(iii) (A) of Item 601(b) of Regulation
S-K, Pride agrees to furnish a copy of such instruments to the SEC upon
request.
(b) Reports on Form 8-K
In a Current Report on Form 8-K submitted to the SEC on January 27,
2003, we (i) furnished pursuant to Item 9 of Form 8-K information regarding the
contract status of our rigs posted to our website on January 24, 2003 and (ii)
furnished pursuant to Item 7 of Form 8-K the related website posting.
20
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PRIDE INTERNATIONAL, INC.
By: /s/ EARL W. MCNIEL
------------------------------
(EARL W. MCNIEL)
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: May 15, 2003
21
CERTIFICATIONS
I, Paul A. Bragg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pride
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Paul A. Bragg
----------------------------------------
Paul A. Bragg
President and Chief Executive Officer
22
I, Earl W. McNiel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pride
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Earl W. McNiel
----------------------------------------
Earl W. McNiel
Vice President and
Chief Financial Officer
23
INDEX TO EXHIBIT
Exhibit No. Description
- ----------- -----------
15 -- Awareness letter of PricewaterhouseCoopers LLP.
99 -- Certification of the Chief Executive Officer and the Chief
Financial Officer of Pride pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002