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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 June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0321760
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate 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 practicable date.
As of July 29, 2003 Common stock, $0.01 par value per share 130,336,455 shares
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED JUNE 30, 2003
PAGE NO.
--------
COVER PAGE .............................................................................. 1
TABLE OF CONTENTS ....................................................................... 2
PART I. FINANCIAL INFORMATION .......................................................... 3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets .......................................... 3
Consolidated Statements of Operations ................................ 4
Consolidated Statements of Cash Flows ................................ 5
Notes to Unaudited Consolidated Financial Statements ................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ........................................... 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............ 33
ITEM 4. CONTROLS AND PROCEDURES ............................................... 35
PART II. OTHER INFORMATION ............................................................. 36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................... 36
ITEM 5. OTHER INFORMATION ..................................................... 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................... 36
SIGNATURES .............................................................................. 38
EXHIBIT INDEX ........................................................................... 39
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
JUNE 30, DECEMBER 31,
2003 2002
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 221,761 $ 184,910
Marketable securities ......................................... 393,124 627,614
Accounts receivable ........................................... 151,015 146,957
Rig inventory and supplies .................................... 46,581 45,405
Prepaid expenses and other .................................... 25,727 28,870
----------- -----------
Total current assets ...................................... 838,208 1,033,756
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION .................................... 2,273,081 2,164,627
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $30,684 ............ 17,908 24,714
OTHER ASSETS .................................................... 32,130 35,668
----------- -----------
Total assets .............................................. $ 3,161,327 $ 3,258,765
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................. $ 11,155 $ 11,155
Accounts payable .............................................. 34,784 39,721
Accrued liabilities ........................................... 58,034 63,113
Taxes payable ................................................. 943 4,413
----------- -----------
Total current liabilities ................................. 104,916 118,402
----------- -----------
LONG-TERM DEBT .................................................. 932,170 924,475
DEFERRED TAX LIABILITY .......................................... 356,482 375,309
OTHER LIABILITIES ............................................... 35,454 33,065
----------- -----------
Total liabilities ......................................... 1,429,022 1,451,251
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9) .......................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock (par value $0.01, 25,000,000 shares
authorized, none issued or outstanding) ..................... -- --
Common stock (par value $0.01, 500,000,000 shares
authorized, 133,457,055 issued, 130,336,455 outstanding at
June 30, 2003 and December 31, 2002) ........................ 1,335 1,335
Additional paid-in capital .................................... 1,263,692 1,263,692
Retained earnings ............................................. 550,505 621,342
Accumulated other comprehensive loss .......................... (5,102) (730)
Treasury stock, at net cost (3,120,600 shares at
June 30, 2003 and December 31, 2002) ........................ (78,125) (78,125)
----------- -----------
Total stockholders' equity ................................ 1,732,305 1,807,514
----------- -----------
Total liabilities and stockholders' equity ................ $ 3,161,327 $ 3,258,765
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES:
Contract drilling ............................. $ 157,038 $ 179,674 $ 296,897 $ 373,342
Revenues related to reimbursable expenses ..... 6,162 8,113 12,452 15,995
--------- --------- --------- ---------
Total revenues .............................. 163,200 187,787 309,349 389,337
--------- --------- --------- ---------
OPERATING EXPENSES:
Contract drilling ............................. 124,606 120,254 238,276 241,200
Reimbursable expenses ......................... 5,525 7,343 11,263 14,555
Depreciation .................................. 41,553 44,585 88,830 87,282
General and administrative .................... 8,214 7,440 15,414 14,088
Gain on sale of assets ........................ (57) (33) (58) (65)
--------- --------- --------- ---------
Total operating expenses .................... 179,841 179,589 353,725 357,060
--------- --------- --------- ---------
OPERATING INCOME (LOSS) ......................... (16,641) 8,198 (44,376) 32,277
OTHER INCOME (EXPENSE):
Interest income ............................... 3,337 7,651 7,493 17,232
Interest expense .............................. (5,378) (6,290) (10,953) (11,760)
Gain (loss) on sale of marketable securities .. (1,071) 8,671 (1,132) 12,163
Other, net .................................... 1,290 341 3,032 1,161
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE ......... (18,463) 18,571 (45,936) 51,073
INCOME TAX BENEFIT (EXPENSE) .................... 1,776 (6,609) 7,683 (16,553)
--------- --------- --------- ---------
NET INCOME (LOSS) ............................... $ (16,687) $ 11,962 $ (38,253) $ 34,520
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
BASIC ..................................... $ (0.13) $ 0.09 $ (0.29) $ 0.26
========= ========= ========= =========
DILUTED ................................... $ (0.13) $ 0.09 $ (0.29) $ 0.26
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OF COMMON STOCK:
Shares of common stock ........................ 130,336 131,553 130,336 131,669
Dilutive potential shares of common stock ..... -- 8 -- 9,426
--------- --------- --------- ---------
Total weighted average shares
outstanding assuming dilution ............. 130,336 131,561 130,336 141,095
========= ========= ========= ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED
JUNE 30,
--------
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income (loss) ............................................ $ (38,253) $ 34,520
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ................................................. 88,830 87,282
(Gain) on sale of assets ..................................... (58) (65)
(Gain) loss on sale of marketable securities ................. 1,132 (12,163)
Deferred tax provision (benefit) ............................. (9,666) 10,414
Accretion of discounts on marketable securities .............. (1,378) (2,028)
Amortization of debt issuance costs .......................... 594 655
Accretion of discount on zero coupon convertible debentures .. 7,695 7,432
Changes in operating assets and liabilities:
Accounts receivable .......................................... (4,058) 23,445
Rig inventory and supplies and other current assets .......... 1,967 12,629
Other assets, non-current .................................... 2,944 551
Accounts payable and accrued liabilities ..................... (10,016) 8,606
Taxes payable ................................................ (3,470) (751)
Other liabilities, non-current ............................... 2,389 (3,263)
Other items, net ............................................. (2,244) (1,673)
----------- -----------
Net cash provided by operating activities ................ 36,408 165,591
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (excluding rig acquisitions) ............ (134,114) (117,823)
Rig acquisitions ............................................. (63,500) --
Proceeds from sale of assets ................................. 388 1,348
Proceeds from sale of marketable securities .................. 1,603,006 2,218,678
Purchase of marketable securities ............................ (1,374,768) (2,217,939)
Securities sold under repurchase agreements, net ............. -- 53,126
Proceeds from settlement of forward contracts ................ 2,015 912
----------- -----------
Net cash provided by (used in) investing activities ...... 33,027 (61,698)
----------- -----------
FINANCING ACTIVITIES:
Payment of dividends ......................................... (32,584) (32,951)
Acquisition of treasury stock ................................ -- (20,000)
Settlement of put options .................................... -- (1,193)
----------- -----------
Net cash used in financing activities .................... (32,584) (54,144)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS .......................... 36,851 49,749
Cash and cash equivalents, beginning of period ............... 184,910 398,990
----------- -----------
Cash and cash equivalents, end of period ..................... $ 221,761 $ 448,739
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION
The consolidated financial statements of Diamond Offshore Drilling, Inc.
and subsidiaries (the "Company") should be read in conjunction with the Annual
Report on Form 10-K for the year ended December 31, 2002 (File No. 1-13926).
As of July 29, 2003, Loews Corporation ("Loews") owned 53.8% of the
outstanding shares of common stock of Diamond Offshore Drilling, Inc., which was
a wholly owned subsidiary of Loews prior to its initial public offering in
October 1995.
Interim Financial Information
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
disclosures required by generally accepted accounting principles for complete
financial statements. The consolidated financial information has not been
audited but, in the opinion of management, includes all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
consolidated balance sheets, statements of operations, and statements of cash
flows at the dates and for the periods indicated. Results of operations for
interim periods are not necessarily indicative of results of operations for the
respective full years.
Cash and Cash Equivalents and Marketable Securities
Short-term, highly liquid investments that have an original maturity of
three months or less and deposits in money market mutual funds that are readily
convertible into cash are considered cash equivalents.
The Company's investments are classified as available for sale and stated
at fair value. Accordingly, any unrealized gains and losses, net of taxes, are
reported in the Consolidated Balance Sheets in "Accumulated other comprehensive
loss" until realized. The cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity and such adjustments are
included in the Consolidated Statements of Operations in "Interest income." The
sale and purchase of securities are recorded on the date of the trade. The cost
of debt securities sold is based on the specific identification method. Realized
gains or losses and declines in value, if any, judged to be other than temporary
are reported in the Consolidated Statements of Operations in "Other income
(expense)."
Securities Sold Under Agreements to Repurchase
From time to time the Company may lend securities to unrelated parties,
primarily major brokerage firms. Borrowers of these securities must transfer to
the Company cash collateral equal to the securities transferred. Cash deposits
from these transactions are invested in short-term investments and are included
in the Consolidated Balance Sheets in "Cash and cash equivalents." A liability
is recognized for the obligation to return the cash collateral. The Company
continues to receive interest income on the loaned debt securities, as
beneficial owner, and accordingly, the loaned debt securities are included in
the Consolidated Balance Sheets in "Marketable securities." Interest expense
associated with the related liability is recorded as an offset to "Interest
income" in the Consolidated Statements of Operations. During the six months
ended June 30, 2002, loaned debt securities that were outstanding at December
31, 2001, were returned to the Company. The Company did not have any loaned debt
securities outstanding at June 30, 2003 or December 31, 2002.
Derivative Financial Instruments
Derivative financial instruments of the Company include forward exchange
contracts and a contingent interest provision that is embedded in the 1.5%
convertible senior debentures due 2031 (the "1.5% Debentures") issued on April
11, 2001. See Note 4.
6
Supplementary Cash Flow Information
Cash payments made for interest on long-term debt totaled $3.5 million for
the six months ended June 30, 2003 and 2002.
Cash payments made for foreign income taxes, net of foreign tax refunds,
were $5.3 million and $6.6 million during the six months ended June 30, 2003 and
2002, respectively. There were no payments of U.S. income taxes in the first
half of 2003. A $14.5 million net cash refund of U.S. income tax was received
during the six months ended June 30, 2002.
Capitalized Interest
Interest cost for construction and upgrade of qualifying assets is
capitalized. A reconciliation of the Company's total interest cost to "Interest
expense" as reported in the Consolidated Statements of Operations is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS)
Total interest cost including amortization of
debt issuance costs ......................... $ 6,518 $ 6,602 $ 13,017 $ 13,186
Capitalized interest ........................... (1,140) (312) (2,064) (1,426)
-------- -------- -------- --------
Total interest expense as reported ......... $ 5,378 $ 6,290 $ 10,953 $ 11,760
======== ======== ======== ========
Debt Issuance Costs
Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the respective terms of the related debt.
Treasury Stock and Common Equity Put Options
Depending on market conditions, the Company may, from time to time,
purchase shares of its common stock or issue put options in the open market or
otherwise. The purchase of treasury stock is accounted for using the cost method
which reports the cost of the shares acquired in "Treasury stock" as a deduction
from stockholders' equity in the Consolidated Balance Sheets.
The Company did not purchase any of its common stock during the first half
of 2003. During the first half of 2002 the Company purchased 500,000 shares of
its common stock at an aggregate cost of $20.0 million, or at an average cost of
$40.00 per share, upon the exercise of put options sold in February 2001. The
Company reduced "Additional paid-in capital" in the Consolidated Balance Sheet
by $3.1 million, the amount of the premium received for the sale of these put
options, and reported the net cost of the shares, $16.9 million, in "Treasury
stock."
The Company settled put options which covered 1,000,000 shares of its
common stock during the first quarter of 2002 with cash payments totaling $1.2
million. The Company reduced "Additional paid-in capital" in the Consolidated
Balance Sheet for amounts paid to settle these put options. The Company's
remaining put options sold in 2001, which covered 187,321 shares of the
Company's common stock, expired during the first half of 2002.
There were no common equity put options issued or outstanding at December
31, 2002, June 30, 2003 or during the six months ended June 30, 2003.
7
Comprehensive Income (Loss)
A reconciliation of net income (loss) to comprehensive income (loss) is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS)
Net income (loss) ................................. $(16,687) $ 11,962 $(38,253) $ 34,520
Other comprehensive gains (losses), net of tax:
Foreign currency translation loss .............. (62) (507) (149) (524)
Unrealized holding gain (loss) on investments .. (1,921) 3,360 (4,214) (625)
Reclassification adjustment for gain (loss)
included in net income (loss) ................ 4 3,955 (9) 1,345
-------- -------- -------- --------
Comprehensive income (loss) ....................... $(18,666) $ 18,770 $(42,625) $ 34,716
======== ======== ======== ========
Currency Translation
The Company's primary functional currency is the U.S. dollar. Certain of
the Company's subsidiaries use the local currency in the country where they
conduct operations as their functional currency. These subsidiaries translate
assets and liabilities at period-end exchange rates while income and expense
accounts are translated at average exchange rates. Translation adjustments are
reflected in the Consolidated Balance Sheets in "Accumulated other comprehensive
loss." Currency transaction gains and losses are included in the Consolidated
Statements of Operations in "Other income (expense)." Re-measurement translation
gains and losses of subsidiaries operating in hyperinflationary economies, when
applicable, are included in operating results.
Stock-Based Compensation
The Company accounts for its 2000 Stock Option Plan in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation expense has been recognized for the
options granted to employees under the plan. Had compensation expense for the
Company's stock options been recognized based on the fair value of the options
at the grant dates, using the methodology prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) and earnings (loss) per share
would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported ......................... $ (16,687) $ 11,962 $ (38,253) $ 34,520
Add: Stock-based employee compensation
expense included in reported net income (loss),
net of related tax effects ......................... -- -- -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects ......................... (273) (224) (537) (432)
---------- ---------- ---------- ----------
Pro forma net income (loss) ........................... $ (16,960) $ 11,738 $ (38,790) $ 34,088
========== ========== ========== ==========
Earnings (loss) per share of common stock:
As reported ........................................ $ (0.13) $ 0.09 $ (0.29) $ 0.26
Pro forma .......................................... $ (0.13) $ 0.09 $ (0.30) $ 0.26
Earnings (loss) per share of common stock -
assuming dilution:
As reported ........................................ $ (0.13) $ 0.09 $ (0.29) $ 0.26
Pro forma .......................................... $ (0.13) $ 0.09 $ (0.30) $ 0.26
8
Revenue Recognition
Income from dayrate drilling contracts is recognized currently. In
connection with such drilling contracts, the Company may receive lump-sum fees
for the mobilization of equipment and personnel. Any excess in these lump-sum
mobilization fees received over the related costs incurred to mobilize an
offshore rig from one market to another is recognized in income over the primary
term of the related drilling contract. Absent a contract, mobilization costs are
recognized currently. Other lump-sum payments received from customers relating
to specific contracts are deferred and amortized to income over the primary term
of the related drilling contract.
Income from offshore turnkey drilling contracts is recognized on the
completed contract method, with revenues accrued to the extent of costs until
the specified turnkey depth and other contract requirements are met. Provisions
for future losses on turnkey drilling contracts are recognized when it becomes
apparent that expenses to be incurred on a specific contract will exceed the
revenue from that contract. During the quarter ended June 30, 2003, the Company
elected not to pursue contracts for integrated services, which includes
turnkey contracts, except in very limited circumstances.
Income from reimbursements received for the purchase of supplies,
equipment, personnel services and other services provided at the request of the
Company's customers in accordance with a contract or agreement is recorded, for
the gross amount billed to the customer, as "Revenues related to reimbursable
expenses" in the Consolidated Statements of Operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimated.
Changes in Accounting Estimates
In April 2003 the Company commissioned a study from an independent
appraiser to evaluate the economic lives of its drilling rigs. As a result of
this independent study the Company recorded changes in accounting estimates by
increasing the estimated service lives and salvage values of most of the
Company's drilling rigs to better reflect their remaining economic lives and
value. The effect of this change in accounting estimates resulted in an increase
to net income (after-tax) for the quarter and six months ended June 30, 2003 of
$5.8 million, or $0.04 per share. Prior periods were not affected.
Reclassifications
Certain amounts applicable to prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.
Recent Accounting Pronouncements
In May 2003 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." This statement requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company's adoption of SFAS No. 150 is not
expected to have an impact on the Company's consolidated results of operations,
financial position or cash flows.
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133. SFAS No. 149 is to be applied prospectively for
contracts entered into or modified after June 30,
9
2003. For contracts involving hedging relationships, SFAS No. 149 should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The Company's adoption of SFAS No. 149 is not expected to have a material
impact on the Company's consolidated 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." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for financial statements for fiscal years
ending after December 15, 2002. The Company accounts for stock-based employee
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company has adopted the provisions of SFAS No. 148 which
require prominent disclosure regarding the method of accounting for stock-based
employee compensation in its annual and interim financial statements. See
"-Stock-Based Compensation."
In July 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company's adoption of SFAS No. 146 has
not had a material impact on the Company's consolidated results of operations,
financial position or cash flows.
2. EARNINGS (LOSS) PER SHARE
A reconciliation of the numerators and the denominators of the basic and
diluted per-share computations follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) - basic (numerator): ........... $ (16,687) $ 11,962 $ (38,253) $ 34,520
Effect of dilutive potential shares
1.5% Debentures .............................. -- -- -- 2,083
--------- --------- --------- ---------
Net income (loss) including conversions -
diluted (numerator) ............................ $ (16,687) $ 11,962 $ (38,253) $ 36,603
========= ========= ========= =========
Weighted average shares - basic (denominator): ... 130,336 131,553 130,336 131,669
Effect of dilutive potential shares
1.5% Debentures .............................. -- -- -- 9,383
Stock options ................................ -- 8 -- 6
Put options .................................. -- -- -- 37
--------- --------- --------- ---------
Weighted average shares including conversions -
diluted (denominator) .......................... 130,336 131,561 130,336 141,095
========= ========= ========= =========
Earnings (loss) per share:
Basic ........................................ $ (0.13) $ 0.09 $ (0.29) $ 0.26
========= ========= ========= =========
Diluted ...................................... $ (0.13) $ 0.09 $ (0.29) $ 0.26
========= ========= ========= =========
The computation of diluted earnings per share ("EPS") for the quarters and
six month periods ended June 30, 2003 and 2002 excludes approximately 6.9
million potentially dilutive shares issuable upon conversion of the Company's
zero coupon convertible debentures due 2020 ("Zero Coupon Debentures"). The
computation of diluted EPS for each of the quarters ended June 30, 2003 and 2002
and the six months ended June 30, 2003 excludes approximately 9.4 million
potentially dilutive shares issuable upon conversion of the Company's 1.5%
Debentures. Potentially dilutive shares were excluded from the computation of
diluted EPS for the quarters and six month periods ended June 30, 2003 and 2002
because the inclusion of such shares would be antidilutive.
10
Put options covering 1,687,321 shares of common stock at various stated
exercise prices per share were outstanding during part of the six months ended
June 30, 2002 prior to their expiration or settlement. The computation of
diluted EPS for the quarter and six months ended June 30, 2002 excluded put
options covering 1,687,321 shares and 1,187,321 shares of common stock,
respectively, because the options' exercise prices were less than the average
market price per share of the common stock. There were no put options
outstanding during the quarter and six months ended June 30, 2003.
Certain stock options were excluded from the computation of diluted EPS
because the options' exercise prices were more than the average market price per
share of the common stock. Stock options representing 380,025 shares and 182,700
shares of common stock were excluded from the computation of diluted EPS for the
quarters and six month periods ended June 30, 2003 and 2002, respectively.
Other stock options with average market prices that exceeded their
exercise prices during the period (in-the-money options) were excluded from the
computation of diluted EPS because potential shares of common stock are not
included when a loss from continuing operations exists. Stock options
representing 85,250 shares of common stock were excluded from the computation of
diluted EPS for the quarter and six months ended June 30, 2003.
3. MARKETABLE SECURITIES
Investments classified as available for sale are summarized as follows:
JUNE 30, 2003
-------------
UNREALIZED FAIR
COST LOSS VALUE
---- ---- -----
(IN THOUSANDS)
Debt securities issued by the U.S. Treasury
and other U.S. government agencies:
Due within one year ........................ $101,436 $ (526) $100,910
Due after five through ten years ........... 199,956 -- 199,956
Collateralized mortgage obligations .......... 94,063 (1,805) 92,258
-------- -------- --------
Total ...................................... $395,455 $ (2,331) $393,124
======== ======== ========
DECEMBER 31, 2002
-----------------
UNREALIZED FAIR
COST GAIN VALUE
---- ---- -----
(IN THOUSANDS)
Debt securities issued by the U.S. Treasury
and other U.S. government agencies:
Due within one year ........................ $449,445 $ 20 $449,465
Collateralized mortgage obligations .......... 174,003 4,146 178,149
-------- -------- --------
Total ...................................... $623,448 $ 4,166 $627,614
======== ======== ========
All of the Company's investments are included as current assets in the
Consolidated Balance Sheets in "Marketable securities," representing the
investment of cash available for current operations.
11
Proceeds from sales of marketable securities and gross realized gains and
losses are summarized as follows:
THREE MONTHS ENDED
JUNE 30,
--------
2003 2002
---- ----
(IN THOUSANDS)
Proceeds from sales .... $ 725,045 $1,304,494
Gross realized gains ... -- 8,671
Gross realized losses .. (1,071) --
SIX MONTHS ENDED
JUNE 30,
--------
2003 2002
---- ----
(IN THOUSANDS)
Proceeds from sales .... $ 1,603,006 $ 2,218,678
Gross realized gains ... 108 14,935
Gross realized losses .. (1,240) (2,772)
4. DERIVATIVE FINANCIAL INSTRUMENTS
Forward Exchange Contracts
The Company operates internationally, resulting in exposure to foreign
exchange risk. This risk is primarily associated with costs payable in foreign
currencies for employee compensation and for purchases from foreign suppliers.
The Company's primary technique for minimizing its foreign exchange risk
involves structuring customer contracts to provide for payment in both the U. S.
dollar and the foreign currency whenever possible. The payment portion
denominated in the foreign currency is based on anticipated foreign currency
requirements over the contract term. In some instances, when customer contracts
cannot be structured to generate a sufficient amount of foreign currency for
operating purposes, a foreign exchange forward contract may be used to minimize
the forward exchange risk. A forward exchange contract obligates the Company to
exchange predetermined amounts of specified foreign currencies at specified
foreign exchange rates on specified dates.
In June 2002 the Company entered into forward contracts to purchase
approximately 50.0 million Australian dollars, 4.2 million Australian dollars to
be purchased monthly from August 29, 2002 through June 26, 2003 and 3.8 million
to be purchased on July 31, 2003. In July 2001 the Company entered into twelve
forward contracts to purchase 3.5 million Australian dollars at each month
through July 31, 2002. These forward contracts are derivatives as defined by
SFAS No. 133. SFAS No. 133 requires that each derivative be stated in the
balance sheet at its fair value with gains and losses reflected in the income
statement except that, to the extent the derivative qualifies for hedge
accounting, the gains and losses are reflected in income in the same period as
offsetting losses and gains on the qualifying hedged positions. SFAS No. 133
further provides specific criteria necessary for a derivative to qualify for
hedge accounting. The forward contracts purchased by the Company in 2002 and
2001 do not qualify for hedge accounting. At June 30, 2003, an asset of $0.5
million, reflecting the fair value of the forward contracts, was included with
"Prepaid expenses and other" in the Consolidated Balance Sheet. A pre-tax gain
of $1.0 million (comprised of a $1.3 million realized gain and a $0.3 million
unrealized loss) and $2.3 million (comprised of a $2.0 million realized gain and
a $0.3 million unrealized gain) was recorded in the Consolidated Statements of
Operations for the quarter and six months ended June 30, 2003 in "Other income
(expense)." For the quarter and six months ended June 30, 2002 a pre-tax gain of
$0.5 million (comprised of a $0.6 million realized gain and a $0.1 million
unrealized loss) and $1.2 million (comprised of a $0.9 million realized gain and
a $0.3 million unrealized gain), respectively, was recorded in the Consolidated
Statements of Operations in "Other income (expense)."
Contingent Interest
The Company's $460.0 million principal amount of 1.5% Debentures which
were issued on April 11, 2001 and are due on April 15, 2031, contain a
contingent interest provision. The contingent interest component is an embedded
derivative as defined by SFAS No. 133 and accordingly must be split from the
host instrument and
12
recorded at fair value on the balance sheet. The contingent interest component
had no value at issuance, at December 31, 2002 or at June 30, 2003.
5. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
JUNE 30, DECEMBER 31,
2003 2002
---- ----
(IN THOUSANDS)
Drilling rigs and equipment ......................... $ 3,244,189 $ 3,091,892
Construction work-in-progress ....................... 185,752 141,247
Land and buildings .................................. 15,035 15,035
Office equipment and other .......................... 21,558 21,076
----------- -----------
Cost ............................................ 3,466,534 3,269,250
Less: accumulated depreciation ...................... (1,193,453) (1,104,623)
----------- -----------
Drilling and other property and equipment, net .. $ 2,273,081 $ 2,164,627
=========== ===========
In April 2003 the Company commissioned a study from an independent
appraiser to evaluate the economic lives of its drilling rigs. As a result of
this independent study the Company recorded changes in accounting estimates by
increasing the estimated service lives and salvage values of most of the
Company's drilling rigs to better reflect their remaining economic lives and
value. The effect of this change in accounting estimates resulted in an increase
to net income (after-tax) for the quarter and six months ended June 30, 2003 of
$5.8 million, or $0.04 per share. Prior periods were not affected.
Construction work-in-progress at June 30, 2003 included $175.2 million for
the significant upgrade of the Ocean Rover to high specification capabilities.
The upgrade was completed on time and under budget in July 2003 for an estimated
total cost of $189 million. The rig has begun a three well drilling program for
Murphy Sabah Oil Company, Ltd. offshore Malaysia.
In March 2003, Diamond Offshore Drilling Limited, a subsidiary of the
Company, completed the acquisition of the third-generation semisubmersible
drilling rig, Omega, renamed Ocean Patriot, for $65.0 million. The Company
capitalized $63.5 million to drilling rigs and equipment and recorded $1.5
million to rig inventory.
In December 2002, the acquisition of the third-generation semisubmersible
drilling rig, West Vanguard, renamed Ocean Vanguard, was completed for $68.5
million. The Company capitalized $67.0 million to drilling rigs and equipment
and recorded $1.5 million to rig inventory.
6. GOODWILL
Goodwill from the merger with Arethusa (Off-Shore) Limited ("Arethusa") in
1996 was generated from an excess of the purchase price over the net assets
acquired. Prior to January 1, 2002 the Company amortized goodwill on a
straight-line basis over 20 years. The Company adopted SFAS No. 142 on January
1, 2002 and, accordingly, suspended amortization of goodwill at that time.
For purposes of applying SFAS No. 142, the Company determined that it has
one reporting unit to which to assign goodwill. The Company performed the annual
goodwill impairment test on December 31, 2002 and determined that the fair value
of the reporting unit exceeded its carrying value, and accordingly, no further
steps were required for testing goodwill impairment at that time. Annual
goodwill impairment testing will be performed at each year-end.
There were no recognized intangible assets other than goodwill associated
with the Arethusa merger.
During each of the six month periods ended June 30, 2003 and 2002, an
adjustment of $6.8 million was recorded to reduce goodwill. The adjustments
represent the tax benefits not previously recognized for the excess of tax
deductible goodwill over book goodwill. The Company will continue to reduce
goodwill in future periods as the tax benefits of excess tax goodwill over book
goodwill are recognized. Goodwill is expected to be reduced to zero during the
year 2004.
13
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JUNE 30, DECEMBER 31,
2003 2002
---- ----
(IN THOUSANDS)
Payroll and benefits .............. $30,132 $29,337
Personal injury and other claims .. 6,815 6,815
Interest payable .................. 2,869 1,588
Deferred revenue .................. 2,757 3,539
Other ............................. 15,461 21,834
------- -------
Total ......................... $58,034 $63,113
======= =======
8. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
2003 2002
---- ----
(IN THOUSANDS)
Zero Coupon Debentures .................... $ 447,383 $ 439,688
1.5% Debentures ........................... 460,000 460,000
Ocean Alliance lease-leaseback agreement .. 35,942 35,942
--------- ---------
943,325 935,630
Less: Current maturities .................. (11,155) (11,155)
--------- ---------
Total ................................. $ 932,170 $ 924,475
========= =========
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 2002, are as follows:
(DOLLARS IN THOUSANDS)
----------------------
2003 ...................... $ 11,155
2004 ...................... 11,969
2005 ...................... 12,818
2006 ...................... --
2007 ...................... --
Thereafter ................ 907,383
---------
943,325
Less: Current maturities .. (11,155)
---------
Total ................. $ 932,170
=========
Convertible Senior Debentures
The Company's $460.0 million principal amount of 1.5% Debentures that were
issued on April 11, 2001 are due April 15, 2031. The 1.5% Debentures are
convertible into shares of the Company's common stock at an initial conversion
rate of 20.3978 shares per $1,000 principal amount of the 1.5% Debentures,
subject to adjustment in certain circumstances. Upon conversion, the Company has
the right to deliver cash in lieu of shares of the Company's common stock.
Interest of 1.5% per year on the outstanding principal amount is payable
semiannually in arrears on April 15 and October 15 of each year, beginning
October 15, 2001. The 1.5% Debentures are unsecured obligations of the Company
and rank equally with all of the Company's other unsecured senior indebtedness.
14
Holders may require the Company to purchase all or a portion of their 1.5%
Debentures on April 15, 2008, at a price equal to 100% of the principal amount
of the 1.5% Debentures to be purchased plus accrued and unpaid interest. The
Company may choose to pay the purchase price in cash or shares of the Company's
common stock or a combination of cash and common stock. In addition, holders may
require the Company to purchase, for cash, all or a portion of their 1.5%
Debentures upon a change in control (as defined).
The Company may redeem all or a portion of the 1.5% Debentures at any time
on or after April 15, 2008, at a price equal to 100% of the principal amount
plus accrued and unpaid interest.
Zero Coupon Convertible Debentures
The Company's Zero Coupon Debentures, issued On June 6, 2000, are due June
6, 2020 at a price of $499.60 per $1,000 debenture, which represents a yield to
maturity of 3.50% per year. The Company will not pay interest prior to maturity
unless it elects to convert the Zero Coupon Debentures to interest-bearing
debentures upon the occurrence of certain tax events. The Zero Coupon Debentures
are convertible at the option of the holder at any time prior to maturity,
unless previously redeemed, into the Company's common stock at a fixed
conversion rate of 8.6075 shares of common stock per Zero Coupon Debenture,
subject to adjustments in certain events. The Zero Coupon Debentures are senior
unsecured obligations of the Company.
The Company has the right to redeem the Zero Coupon Debentures, in whole
or in part, after June 6, 2005, for a price equal to the issuance price plus
accrued original issue discount through the date of redemption. Holders have the
right to require the Company to repurchase the Zero Coupon Debentures on the
fifth, tenth and fifteenth anniversaries of issuance at the accreted value
through the date of repurchase. The Company may pay such repurchase price with
either cash or shares of the Company's common stock or a combination of cash and
shares of common stock.
Ocean Alliance Lease-Leaseback
The Company entered into a lease-leaseback agreement with a European bank
in December 2000. The lease-leaseback agreement provides for the Company to
lease the Ocean Alliance, one of the Company's high specification
semisubmersible drilling rigs, to the bank for a lump-sum payment of $55.0
million plus an origination fee of $1.1 million and for the bank to then
sub-lease the rig back to the Company. Under the agreement, which has a
five-year term, the Company is to make five annual payments of $13.7 million.
Two of the five annual payments have been made as of December 31, 2002. This
financing arrangement has an effective interest rate of 7.13% and is an
unsecured subordinated obligation of the Company.
9. COMMITMENTS AND CONTINGENCIES
Various claims have been filed against the Company in the ordinary course
of business, including claims by offshore workers alleging personal injuries.
Management believes that the Company has established adequate reserves for any
liabilities that may reasonably be expected to result from these claims. In the
opinion of management, no pending or threatened claims, actions or proceedings
against the Company are expected to have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash flows.
10. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS
The Company reports its operations as one reportable segment, contract
drilling of offshore oil and gas wells. Though the Company provides contract
drilling services from different types of offshore drilling rigs and provides
such services in many geographic locations, these operations have been
aggregated into one reportable segment based on the similarity of economic
characteristics among all divisions and locations, including the nature of
services provided and the type of customers of such services.
15
Similar Services
Revenues from external customers for contract drilling and similar
services by equipment-type are listed below (eliminations offset dayrate
revenues earned when the Company's rigs are utilized in its integrated
services):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS)
High Specification Floaters ................ $ 72,660 $ 75,748 $ 136,294 $ 150,395
Other Semisubmersibles ..................... 61,265 73,977 112,968 162,057
Jack-ups ................................... 23,116 26,839 46,682 56,339
Integrated Services ........................ -- 4,406 1,189 6,229
Other ...................................... (3) (436) (3) (436)
Eliminations ............................... -- (860) (233) (1,242)
--------- --------- --------- ---------
Total Contract Drilling Revenues ......... 157,038 179,674 296,897 373,342
Revenues Related to Reimbursable Expenses .. 6,162 8,113 12,452 15,995
--------- --------- --------- ---------
Total revenues ....................... $ 163,200 $ 187,787 $ 309,349 $ 389,337
========= ========= ========= =========
Geographic Areas
At June 30, 2003, the Company had drilling rigs located offshore nine
countries other than the United States. As a result, the Company is exposed to
the risk of changes in social, political, economic and other conditions inherent
in foreign operations and the Company's results of operations and the value of
its foreign assets are affected by fluctuations in foreign currency exchange
rates. Revenues by geographic area are presented by attributing revenues to the
individual country or areas where the services were performed.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS)
Revenues from unaffiliated customers:
United States ........................ $ 83,915 $ 74,181 $163,674 $171,524
Foreign:
South America ...................... 40,804 44,987 81,279 86,918
Europe/Africa ...................... 15,009 26,812 20,871 57,938
Australia/Southeast Asia ........... 22,570 41,807 42,623 72,957
Mexico ............................. 902 -- 902 --
-------- -------- -------- --------
Total revenues ................... $163,200 $187,787 $309,349 $389,337
======== ======== ======== ========
16
11. INCOME TAXES
In 2002 the Company formed a Cayman Island corporation, Diamond Offshore
International Limited, which is a wholly-owned subsidiary of the Company.
Certain of the Company's rigs that operate internationally are now owned and
operated, directly or indirectly, by the Cayman Island subsidiary. Effective
January 1, 2003 the Company began to postpone remittance of the earnings from
this subsidiary to the U.S. and indefinitely reinvest these earnings
internationally. Consequently, no U.S. taxes were provided on these earnings and
no U.S. tax benefits were recognized on losses in the first half of 2003. The
9.6% effective tax rate for the three months ended June 30, 2003 resulted from a
revision of the estimated annual effective tax rate from 21.5% in the first
quarter of 2003 to 16.7% in the second quarter of 2003.
In 2002 a portion of the earnings from the Company's U.K. subsidiaries was
considered to be indefinitely reinvested. No U.S. taxes were provided on these
earnings in the three or six month periods ended June 30, 2002 and the estimated
annual effective tax rate as of June 30, 2002 was 32.4%. The effective rate of
35.6% for the three months ended June 30, 2002 resulted from a revision of the
estimated annual effective tax rate from 30.6% in the first quarter of 2002 to
32.4% in the second quarter of 2002. These U.K. subsidiaries are now owned,
directly or indirectly, by Diamond Offshore International Limited. Consequently,
earnings and losses from the U.K. subsidiaries for the three and six month
periods ended June 30, 2003 are part of the earnings and losses of the Cayman
Island subsidiary on which no U.S. taxes are provided.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) included
elsewhere herein. References to the "Company" mean Diamond Offshore Drilling,
Inc., a Delaware corporation, and its subsidiaries.
The Company is a leader in deep water drilling with a fleet of 47 offshore
drilling rigs. The fleet consists of 32 semisubmersibles, 14 jack-ups and one
drillship.
GENERAL
Revenues. The Company's revenues vary based upon demand, which affects the
number of days the fleet is utilized and the dayrates earned. When a rig is
idle, no dayrate is earned and revenues will decrease as a result. Revenues can
also increase or decrease as a result of the acquisition or disposal of rigs. In
order to improve utilization or realize higher dayrates, the Company may
mobilize its rigs from one market to another. However, during periods of
mobilization revenues may be adversely affected. As a response to changes in
demand, the Company may withdraw a rig from the market by stacking it or may
reactivate a rig stacked previously, which may decrease or increase revenues,
respectively.
Revenues from dayrate drilling contracts are recognized currently. The
Company may receive lump-sum payments in connection with specific contracts.
Such payments are recognized as revenues over the term of the related drilling
contract. Mobilization revenues, less costs incurred to mobilize an offshore rig
from one market to another, are recognized over the primary term of the related
drilling contract.
Revenues from offshore turnkey drilling contracts are accrued to the
extent of costs until the specified turnkey depth and other contract
requirements are met. Income is recognized on the completed contract method.
Provisions for future losses on turnkey contracts are recognized when it becomes
apparent that expenses to be incurred on a specific contract will exceed the
revenue from that contract. During the quarter ended June 30, 2003, the Company
elected not to pursue contracts for integrated services, which includes
turnkey contracts, except in very limited circumstances.
Revenues from reimbursements received for the purchase of supplies,
equipment, personnel services and other services provided at the request of the
Company's customers in accordance with a contract or agreement are recorded for
the gross amount billed to the customer, as "Revenues related to reimbursable
expenses" in the Consolidated Statements of Operations.
Operating Income. Operating income is primarily affected by revenue
factors, but is also a function of varying levels of operating expenses.
Operating expenses generally are not affected by changes in dayrates and may not
be significantly affected by fluctuations in utilization. For instance, if a rig
is to be idle for a short period of time, the Company may realize few decreases
in operating expenses since the rig is typically maintained in a prepared state
with a full crew. In addition, when a rig is idle, the Company is responsible
for certain operating expenses such as rig fuel and supply boat costs, which are
typically a cost of the operator under a drilling contract. However, if the rig
is to be idle for an extended period of time, the Company may reduce the size of
a rig's crew and take steps to "cold stack" the rig, which lowers expenses and
partially offsets the impact on operating income. The Company recognizes as
operating expenses activities such as inspections, painting projects and routine
overhauls, meeting certain criteria, which maintain rather than upgrade its
rigs. These expenses vary from period to period. Costs of rig enhancements are
capitalized and depreciated over the expected useful lives of the enhancements.
Higher depreciation expense decreases operating income in periods subsequent to
capital upgrades.
CRITICAL ACCOUNTING ESTIMATES
The Company's significant accounting policies are included in Note 1 of
its Notes to Consolidated Financial Statements in Part I, Item 1 of this report.
Management's judgments, assumptions and estimates are inherent in the
preparation of the Company's financial statements and the application of its
significant accounting policies. The Company believes that its most critical
accounting estimates are as follows:
Property, Plant and Equipment. Drilling and other property and equipment
is carried at cost. Maintenance and routine repairs are charged to income
currently while replacements and betterments, which meet certain criteria, are
capitalized. Depreciation is amortized on the straight-line method over the
remaining estimated useful lives.
18
In April 2003 the Company commissioned a study from an independent
appraiser to evaluate the economic lives of its drilling rigs. As a result of
this independent study the Company recorded changes in accounting estimates by
increasing the estimated service lives and salvage values for most of the
Company's drilling rigs to better reflect their remaining economic lives and
value. The effect of this change in accounting estimate resulted in an increase
to net income (after-tax) for the quarter and six months ended June 30, 2003 of
$5.8 million, or $0.04 per share. Prior periods were not affected. Management
makes judgments, assumptions and estimates regarding capitalization, useful
lives and salvage values. Changes in these assumptions could produce results
that differ from those reported.
The Company evaluates its property and equipment for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Management's assumptions are an inherent part of an asset
impairment evaluation and the use of different assumptions could produce results
that differ from those reported.
Personal Injury Claims. The Company's retention of liability for personal
injury claims, which primarily results from Jones Act liability in the Gulf of
Mexico, is $0.5 million per claim with an aggregate annual deductible of $1.5
million. The Company estimates its liability for personal injury claims based on
the existing facts and circumstances in conjunction with historical experience
regarding past personal injury claims. Eventual settlement or adjudication of
these claims could differ significantly from the estimated amounts.
19
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior periods have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.
THREE MONTHS ENDED
JUNE 30,
-------- FAVORABLE/
2003 2002 (UNFAVORABLE)
---- ---- -------------
(in thousands)
CONTRACT DRILLING REVENUE
High Specification Floaters ............. $ 72,660 $ 75,748 $ (3,088)
Other Semisubmersibles .................. 61,265 73,977 (12,712)
Jack-ups ................................ 23,116 26,839 (3,723)
Integrated Services ..................... -- 4,406 (4,406)
Other ................................... (3) (436) 433
Eliminations ............................ -- (860) 860
--------- --------- ---------
TOTAL CONTRACT DRILLING REVENUE ......... $ 157,038 $ 179,674 $ (22,636)
========= ========= =========
REVENUES RELATED TO REIMBURSABLE EXPENSES $ 6,162 $ 8,113 $ (1,951)
CONTRACT DRILLING EXPENSE
High Specification Floaters ............. $ 38,555 $ 39,545 $ 990
Other Semisubmersibles .................. 57,810 53,445 (4,365)
Jack-ups ................................ 27,012 22,735 (4,277)
Integrated Services ..................... 841 4,689 3,848
Other ................................... 388 700 312
Eliminations ............................ -- (860) (860)
--------- --------- ---------
TOTAL CONTRACT DRILLING EXPENSE ......... $ 124,606 $ 120,254 $ (4,352)
========= ========= =========
REIMBURSABLE EXPENSES ................... $ 5,525 $ 7,343 $ (1,818)
OPERATING INCOME (LOSS)
High Specification Floaters ............. $ 34,105 $ 36,203 $ (2,098)
Other Semisubmersibles .................. 3,455 20,532 (17,077)
Jack-ups ................................ (3,896) 4,104 (8,000)
Integrated Services ..................... (841) (283) (558)
Other ................................... (391) (1,136) 745
Reimbursable expenses, net .............. 637 770 (133)
Depreciation ............................ (41,553) (44,585) 3,032
General and Administrative Expense ...... (8,214) (7,440) (774)
Gain on Sale of Assets .................. 57 33 24
--------- --------- ---------
TOTAL OPERATING INCOME (LOSS) ........... $ (16,641) $ 8,198 $ (24,839)
========= ========= =========
High Specification Floaters.
Revenues. Revenues from high specification floaters decreased $3.1 million
during the quarter ended June 30, 2003 compared to the same quarter in 2002.
Lower average operating dayrates contributed $9.7 million to the overall
decrease as the average dayrate fell from $115,000 per day in the second quarter
of 2002 to $96,300 per day in the second quarter of 2003. There were significant
changes in the average operating dayrates of the Ocean Baroness ($120,200 from
$177,400), the Ocean Valiant ($42,300 from $82,600) and the Ocean Victory
($70,200 from $97,400).
20
An improvement in utilization for high specification floaters, from 80%
during the second quarter of 2002 to 92% in the second quarter of 2003,
contributed $6.6 million to revenues and partially offset the negative effect of
lower average dayrates. The Ocean America and the Ocean Star worked the entire
second quarter of 2003 but both rigs were stacked during part of the second
quarter of 2002. Utilization also improved for the Ocean Baroness which worked a
majority of the second quarter of 2003 compared to the same period in 2002 when
the rig was down for approximately one month due to the parting of its marine
riser. The improvement in utilization was partially offset as a result of
downtime incurred by the Ocean Alliance for repairs and by the Ocean Valiant for
its five-year special survey. These rigs were stacked approximately three weeks
longer during the second quarter of 2003 compared to the second quarter of 2002.
Contract Drilling Expense. Contract drilling expense for high
specification floaters for the quarter ended June 30, 2003 decreased $1.0
million from the same period in 2002. The Ocean Baroness incurred higher
contract drilling expenses during the second quarter of 2002 due to costs
incurred in connection with the recovery of its marine riser, net of costs
charged to an associated insurance claim, although the expenses were partially
offset by lower operating expenses during the riser recovery period. In
addition, various maintenance projects performed on the Ocean America while the
rig was stacked during the second quarter of 2002 and mobilization costs
incurred to return the rig to work contributed to higher contract drilling
expenses in the second quarter of 2002 compared to the same period in 2003.
Partially offsetting the lower contract drilling expenses in the second quarter
of 2003 were higher costs from maintenance projects for the Ocean Quest and
Ocean Valiant.
Other Semisubmersibles.
Revenues. Revenues from other semisubmersibles for the quarter ended June
30, 2003 decreased $12.7 million from the same period in 2002. Average operating
dayrates dropped to $57,600 (excluding the Ocean Vanguard and the Ocean Patriot)
during the second quarter of 2003 from $71,500 during the second quarter of
2002, resulting in a decline in revenues of $10.0 million. The largest decreases
in average operating dayrate were experienced by the rigs working in the North
Sea where average operating dayrates declined for the Ocean Guardian ($93,300 to
$49,900), the Ocean Princess ($74,800 to $40,000) and the Ocean Nomad ($70,300
to $43,100).
Lower utilization resulted in $8.1 million of the overall revenue decline
as utilization fell from 54% during the second quarter of 2002 to 51% (excluding
the Ocean Vanguard and the Ocean Patriot) during the same quarter of 2003. The
Ocean Epoch and the Ocean Whittington were stacked the entire second quarter of
2003 while the Ocean Bounty was in the shipyard undergoing a special survey for
approximately one-half of the second quarter of 2003. Each of these rigs worked
all of the same period in 2002. Partially offsetting the utilization decline
were improvements from the Ocean Lexington and the Ocean Saratoga. Both of these
rigs worked the entire second quarter of 2003 but were stacked the majority of
the second quarter of 2002. In addition, the Ocean General was working the
entire second quarter of 2003 compared to the same period in 2002 when the rig
was in a shipyard undergoing a special survey for approximately one-half of the
quarter.
Partially offsetting the overall decrease in revenues was $5.4 million
generated by the Ocean Patriot and the Ocean Vanguard, which the Company
acquired in March 2003 and December 2002, respectively.
Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the second quarter of 2003 increased $4.4 million
compared to the same period in 2002 primarily due to operating expenses for the
Ocean Patriot and the Ocean Vanguard. Contract drilling expenses were also
higher during the quarter ended June 30, 2003 due to costs associated with the
special surveys of the Ocean Nomad and Ocean Bounty and increased maintenance
projects on the Ocean Guardian and the Ocean Princess. Partially offsetting the
overall higher operating expenses were lower costs for the Ocean Liberator and
the Ocean New Era. These rigs were cold stacked during the second quarter of
2003 but were partially crewed and actively marketed in the same period of 2002.
Jack-Ups.
Revenues. Revenues from jack-ups decreased $3.7 million during the second
quarter of 2003 compared to the same quarter in 2002. Lower utilization resulted
in $2.2 million of the overall revenue decline as utilization fell from 74%
during the second quarter of 2002 to 68% during the second quarter of 2003. The
Ocean Sovereign spent all of the second quarter of 2003 in a shipyard primarily
completing its leg extension upgrade. The Ocean Tower spent approximately
one-half of the second quarter of 2003 completing additional shipyard projects
subsequent to its cantilever upgrade that was completed in March 2003. The Ocean
Titan spent approximately one-half of the second quarter of 2003 in a shipyard
beginning its cantilever upgrade. Partially offsetting the overall lower
utilization
21
during the second quarter of 2003 were increased operating days from the Ocean
Spartan and Ocean Spur, which were undergoing leg extension upgrades during the
three months ended June 30, 2002. Both of these rigs worked most of the second
quarter of 2003.
Average operating dayrates dropped to $26,700 per day during the second
quarter of 2003, from $28,700 per day during the second quarter of 2002,
resulting in a $1.5 million reduction in revenue. The Ocean Heritage experienced
the largest average dayrate decrease from $97,600 to $47,300.
Contract Drilling Expense. Contract drilling expense for jack-ups during
the second quarter of 2003 rose $4.3 million from the same period in 2002.
Operating costs increased for the Ocean Spartan and Ocean Spur as these rigs
worked most of the second quarter of 2003 compared to the same period in 2002
when these rigs were undergoing leg extension upgrades. In addition, the Ocean
Tower experienced higher contract drilling expenses for the quarter ended June
30, 2003 due to various shipyard projects and its mobilization out of the
shipyard. Partially offsetting was a reduction in expenses for the Ocean Titan
due to the capitalization of a majority of its costs when it began its
cantilever upgrade in the second quarter of 2003.
Integrated Services.
During the second quarter of 2003 integrated services had an $0.8 million
loss. The loss was comprised of project income of $0.1 million from the
completion of one turnkey plug and abandonment project in the Gulf of Mexico
during the first quarter of 2003 which was more than offset by operating
overhead costs and insurance premiums. During the same period in 2002, an
integrated services' operating loss of $0.3 million resulted from a turnkey well
in the Gulf of Mexico.
Reimbursable expenses, net.
Reimbursable expenses include items that the Company purchases, and/or
services it performs, at the request of its customers. Revenues related to
reimbursable items, offset by the related expenditures for these items, were
$0.6 million and $0.8 million for the quarters ended June 30, 2003 and 2002,
respectively.
Depreciation.
Depreciation expense decreased $3.0 million to $41.6 million in the second
quarter of 2003 compared to $44.6 million in the second quarter of 2002. This
decrease resulted from increasing the estimated service lives and salvage values
of most of the Company's drilling rigs to better reflect their remaining
economic lives. The effect of these changes in accounting estimates was a $6.9
million reduction in depreciation expense. This reduction was partially offset
by depreciation of the Ocean Vanguard and the Ocean Patriot, which the Company
acquired in December 2002 and March 2003, respectively, and additional
depreciation for five of the Company's recently upgraded jack-up rigs.
General and Administrative Expense.
General and administrative expense for the quarter ended June 30, 2003 of
$8.2 million increased $0.8 million over $7.4 million for the same period in
2002. This increase was primarily due to severance pay associated with the
elimination of certain positions in the Company as part of a cost reduction
program and higher professional expenses for legal fees and tax planning for
foreign operations. Partially offsetting was a reduction in other personnel
costs.
Interest Income.
Interest income of $3.3 million earned during the quarter ended June 30,
2003 declined $4.4 million, from $7.7 million earned during the same period in
2002. These earnings were lower primarily due to less cash investment in the
second quarter of 2003 in addition to lower interest rates earned on cash and
marketable securities compared to the same period in 2002.
Gain (Loss) on Sale of Marketable Securities.
A loss on the sale of marketable securities of $1.1 million occurred in
the quarter ended June 30, 2003 compared to an $8.7 million gain on the sale of
marketable securities during the same period in 2002.
22
Income Tax Benefit (Expense).
An income tax benefit of $1.8 million was recognized on a pre-tax loss of
$18.5 million in the second quarter of 2003 compared to tax expense of $6.6
million which was recognized on pre-tax income of $18.6 million in the second
quarter of 2002.
In 2002 the Company formed a Cayman Island corporation, Diamond Offshore
International Limited, which is a wholly-owned subsidiary of the Company.
Certain of the Company's rigs that operate internationally are now owned and
operated, directly or indirectly, by the Cayman Island subsidiary. Effective
January 1, 2003 the Company began to postpone remittance of the earnings from
this subsidiary to the U.S. and indefinitely reinvest these earnings
internationally. Consequently, no U.S. taxes were provided on these earnings and
no U.S. tax benefits were recognized on losses in the second quarter of 2003.
The 9.6% effective tax rate for the three months ended June 30, 2003 resulted
from a revision of the estimated annual effective tax rate from 21.5% in the
first quarter of 2003 to 16.7% in the second quarter of 2003.
In 2002 a portion of the earnings from the Company's U.K. subsidiaries was
considered to be indefinitely reinvested. No U.S. taxes were provided on these
earnings in the second quarter of 2002 and the estimated annual effective tax
rate as of June 30, 2002 was 32.4%. The effective rate of 35.6% for the three
months ended June 30, 2002 resulted from a revision of the estimated annual
effective tax rate from 30.6% in the first quarter of 2002 to 32.4% in the
second quarter of 2002. These U.K. subsidiaries are now owned, directly or
indirectly, by Diamond Offshore International Limited. Consequently, earnings
and losses from the U.K. subsidiaries for the three month period ended June 30,
2003 are part of the earnings and losses of the Cayman Island subsidiary on
which no U.S. taxes are provided.
23
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior periods have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.
SIX MONTHS ENDED
JUNE 30,
-------- FAVORABLE/
2003 2002 (UNFAVORABLE)
---- ---- -------------
(in thousands)
CONTRACT DRILLING REVENUE
High Specification Floaters ............. $ 136,294 $ 150,395 $ (14,101)
Other Semisubmersibles .................. 112,968 162,057 (49,089)
Jack-ups ................................ 46,682 56,339 (9,657)
Integrated Services ..................... 1,189 6,229 (5,040)
Other ................................... (3) (436) 433
Eliminations ............................ (233) (1,242) 1,009
--------- --------- ---------
TOTAL CONTRACT DRILLING REVENUE ......... $ 296,897 $ 373,342 $ (76,445)
========= ========= =========
REVENUES RELATED TO REIMBURSABLE EXPENSES $ 12,452 $ 15,995 $ (3,543)
CONTRACT DRILLING EXPENSE
High Specification Floaters ............. $ 76,831 $ 75,073 $ (1,758)
Other Semisubmersibles .................. 107,527 110,317 2,790
Jack-ups ................................ 51,263 48,417 (2,846)
Integrated Services ..................... 2,090 7,530 5,440
Other ................................... 798 1,105 307
Eliminations ............................ (233) (1,242) (1,009)
--------- --------- ---------
TOTAL CONTRACT DRILLING EXPENSE ......... $ 238,276 $ 241,200 $ 2,924
========= ========= =========
REIMBURSABLE EXPENSES ................... $ 11,263 $ 14,555 $ (3,292)
OPERATING INCOME (LOSS)
High Specification Floaters ............. $ 59,463 $ 75,322 $ (15,859)
Other Semisubmersibles .................. 5,441 51,740 (46,299)
Jack-ups ................................ (4,581) 7,922 (12,503)
Integrated Services ..................... (901) (1,301) 400
Other ................................... (801) (1,541) 740
Reimbursable expenses, net .............. 1,189 1,440 (251)
Depreciation ............................ (88,830) (87,282) (1,548)
General and Administrative Expense ...... (15,414) (14,088) (1,326)
Gain on Sale of Assets .................. 58 65 (7)
--------- --------- ---------
TOTAL OPERATING INCOME (LOSS) ........... $ (44,376) $ 32,277 $ (76,653)
========= ========= =========
High Specification Floaters.
Revenues. Revenues from high specification floaters decreased $14.1
million in the first half of 2003 compared to the same period in 2002. Lower
average operating dayrates for most of the rigs in this classification resulted
in a $20.5 million reduction in revenue. Average operating dayrates fell from
$111,500 during the first half of 2002 to $105,600 during the first half of 2003
(excluding the Ocean Baroness).
24
An overall improvement in utilization for high specification floaters in
the first half of 2003 contributed $7.9 million to revenues and partially offset
the negative effect of lower average operating dayrates. Utilization improved to
89% for the six months ended June 30, 2003 from 85% for the same period in 2002
(excluding the Ocean Baroness). Utilization improved significantly for the Ocean
America and the Ocean Star as both rigs worked the entire first half of 2003.
During the first half of 2002 the Ocean America was stacked approximately four
months and the Ocean Star was stacked approximately three months in a shipyard
for inspection and repairs.
The Ocean Baroness contributed less revenue in the first half of 2003 than
in the first half of 2002 primarily due to a significant drop in its average
operating dayrate from $175,000 to $88,700. Partially offsetting was an
improvement in utilization in 2003 compared to the same period in 2002 when the
rig spent most of the first quarter completing its upgrade to high specification
capabilities.
Contract Drilling Expense. Contract drilling expense for high
specification floaters for the six months ended June 30, 2003 increased $1.8
million from the same period in 2002. Operating expenses for the Ocean Baroness
were higher in the first half of 2003 as the rig worked most of the period
compared to the same period in 2002 when the rig began operations late in the
first quarter upon completion of its upgrade. Higher operating expenses for the
Ocean Baroness during the six months ended June 30, 2003 compared to the same
period in 2002 were partially offset by costs incurred during 2002 for the
recovery of its marine riser, net of costs charged to an associated insurance
claim. In addition, operating expenses were higher in the first half of 2003 due
to the mobilization, inspection and repair of the Ocean Valiant. The increased
contract drilling expense was partially offset by lower operating costs in 2003
for the Ocean Star which incurred mobilization, inspection and repair costs
during the first half of 2002.
Other Semisubmersibles.
Revenues. Revenues from other semisubmersibles for the six months ended
June 30, 2003 decreased $49.1 million from the same period in 2002. A decline in
utilization reduced revenues $31.7 million as utilization rates fell from 61%
during the first half of 2002 to 48% during the first half of 2003 (excluding
the Ocean Vanguard and the Ocean Patriot). The Ocean Whittington was stacked and
the Ocean Liberator was cold stacked the entire first half of 2003 while the
Ocean Epoch and Ocean Princess were stacked most of the first half of 2003. The
Ocean Guardian and the Ocean Bounty spent three months and two months,
respectively, of the six months ended June 30, 2003 in a shipyard for inspection
and repairs. Each of these rigs worked most of the same period in 2002.
Partially offsetting was an increase in revenue in 2003 from the Ocean General
which was idle for two months during the first half of 2002 and the Ocean
Saratoga which was in a shipyard undergoing a special survey during the same
period.
Lower average operating dayrates for other semisubmersibles resulted in a
$23.7 million revenue reduction as average operating dayrates fell from $69,400
in the first half of 2002 to $58,800 in the same period of 2003 (excluding the
Ocean Vanguard and the Ocean Patriot). The most significant decreases in
dayrates were to the Ocean Princess ($72,900 to $40,000), the Ocean Nomad
($72,200 to $41,700), and the Ocean Winner ($77,700 to $49,600).
Partially offsetting the overall decrease in revenues was $6.3 million
generated by the Ocean Vanguard and the Ocean Patriot, which the Company
acquired in December 2002 and March 2003, respectively.
Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the first half of 2003 was lower by $2.8 million
compared to the same period in 2002. Cost savings were realized from four rigs
(the Ocean Voyager, Ocean Liberator, Ocean Endeavor and Ocean New Era) which
were cold stacked the entire first half of 2003. All of these rigs, except the
Ocean New Era, worked part of the first half of 2002. Also, contract drilling
expenses for the Ocean Worker were lower in first half of 2003 compared to the
same period in 2002, when costs were incurred for the rig's mobilization,
inspection and repairs. Partially offsetting the lower contract drilling
expenses were operating costs generated by the Ocean Patriot and Ocean Vanguard
and costs associated with the special surveys of the Ocean Nomad, Ocean
Ambassador and the Ocean Bounty during 2003.
Jack-Ups.
Revenues. Revenues from jack-ups decreased $9.7 million during the first
half of 2003 compared to the same period in 2002. Lower utilization resulted in
$5.9 million of the overall revenue decline as utilization fell from 82% during
the first half of 2002 to 68% during the same period of 2003. The Ocean
Sovereign spent most of the first
25
half of 2003 in a shipyard completing its leg extension upgrade. The Ocean Tower
spent most of the first half of 2003 in a shipyard undergoing a cantilever
upgrade and various other projects. In comparison these rigs operated throughout
most of the first half of 2002. Partially offsetting, utilization improved for
the Ocean Spartan and Ocean Spur, as both of these rigs worked most of the first
half of 2003 but spent approximately three months of the first half of 2002
undergoing leg extension upgrades.
Lower average operating dayrates resulted in a $3.8 million revenue
reduction. Average dayrates dropped to $27,200 during the first half of 2003
from $29,300 during the first half of 2002. The Ocean Heritage experienced the
largest decrease from $83,600 to $47,000.
Contract Drilling Expense. Contract drilling expense for jack-ups during
the first half of 2003 rose $2.8 million from the same period in 2002. Higher
costs for the Ocean Spartan and the Ocean Spur for the six months ended June 30,
2003 occurred because a majority of costs for these rigs were capitalized in
connection with their leg extension upgrades during the comparable period in
2002. In addition, higher costs were incurred by the Ocean Warwick during the
first half of 2003 in conjunction with its mobilization to a shipyard for its
special survey and repairs. Costs were reduced on the Ocean Champion which was
cold stacked all of the first half of 2003 compared to only part of the first
half of 2002.
Integrated Services.
During the first half of 2003 integrated services had a loss of $0.9
million. The loss was comprised of project income of $0.4 million from the
completion of one turnkey plug and abandonment project in the Gulf of Mexico
during the first quarter of 2003 which was more than offset by operating
overhead costs and insurance premiums. During the first half of 2002, an
operating loss of $1.3 million resulted from two turnkey projects in the Gulf of
Mexico.
Reimbursable expenses, net.
Reimbursable expenses include items that the Company purchases, and/or
services it performs, at the request of its customers. Revenues related to
reimbursable items, offset by the related expenditures for these items, were
$1.2 million and $1.4 million for the six months ended June 30, 2003 and 2002,
respectively.
Depreciation.
Depreciation expense increased $1.5 million to $88.8 million in the first
half of 2003 compared to $87.3 million in the same period of 2002. This increase
resulted, in part, from depreciation of the Ocean Vanguard and the Ocean
Patriot, which the Company acquired in December 2002 and March 2003,
respectively. Depreciation also rose from additional depreciation for five of
the Company's recently upgraded jack-up rigs and additional depreciation for the
Ocean Baroness which completed its upgrade in March 2002. These higher
depreciation expenses were partially offset when the Company increased the
estimated service lives and salvage values of most its drilling rigs effective
April 1, 2003 to better reflect their remaining economic lives. The effect of
these changes in accounting estimates was a $6.9 million reduction in
depreciation expense.
General and Administrative Expense.
General and administrative expense of $15.4 million was $1.3 million
higher in the first half of 2003 than the $14.1 million incurred during the
first half of 2002. This increase was primarily due to severance pay associated
with the elimination of certain positions in the Company as part of a cost
reduction program and higher professional expenses for legal fees. Partially
offsetting was a reduction in other personnel costs.
Interest Income.
Interest income of $7.5 million earned during the first half of 2003
declined $9.7 million, from $17.2 million earned during the same period in 2002.
These earnings were lower primarily due to less cash investment during the first
six months of 2003 in addition to lower interest rates earned on cash and
marketable securities compared to the same period in 2002.
26
Gain (Loss) on Sale of Marketable Securities.
A loss on the sale of marketable securities of $1.1 million occurred in
the first half of 2003 compared to a $12.2 million gain on the sale of
marketable securities for the same period in 2002.
Income Tax Benefit (Expense).
An income tax benefit of $7.7 million was recognized on a pre-tax loss of
$45.9 million in the first half of 2003 compared to tax expense of $16.6 million
which was recognized on pre-tax income of $51.1 million in the first half of
2002.
The Company's estimated aggregate annual effective income tax rate for the
six months ended June 30, 2003 was 16.7%. In 2002 the Company formed a Cayman
Island corporation, Diamond Offshore International Limited, which is a wholly
owned subsidiary of the Company. Certain of the Company's rigs that operate
internationally are now owned and operated, directly or indirectly, by the
Cayman Island subsidiary. Effective January 1, 2003 the Company began to
postpone remittance of the earnings from this subsidiary to the U.S. and to
indefinitely reinvest these earnings internationally. Consequently, no U.S.
taxes were provided on these earnings and no U.S. tax benefits were recognized
on losses in the first half of 2003.
The Company's estimated effective income tax rate for the first half of
2002 was 32.4%. In the first quarter of 2002, a portion of the earnings from the
Company's U.K. subsidiaries was considered to be indefinitely reinvested and no
U.S. taxes were provided on those earnings. These U.K. subsidiaries are now
owned, directly or indirectly, by Diamond Offshore International Limited.
Consequently, earnings and losses from the U.K. subsidiaries for the six months
ended June 30, 2003 are part of the earnings and losses of the Cayman Island
subsidiary on which no U.S. taxes are provided.
INDUSTRY CONDITIONS
Demand for offshore contract drilling services continues to be soft. In
the U.S. Gulf of Mexico, deepwater semisubmersibles are rolling off of long-term
contracts and are exerting downward pressure on dayrates as these rigs compete
for short term jobs. Utilization for the Company's deepwater semisubmersible
fleet is steady but average dayrates have declined recently. Well-to-well
contracts persist for the Company's deepwater semisubmersible, mid-water
semisubmersible and jack-up fleets in the U.S. Gulf of Mexico with a limited
backlog of work. The Company believes that this well-to-well environment will
persist at least for the short-term. However, rates have recently increased for
heavy duty 350 ft. jack-up rigs, as higher natural gas prices have encouraged an
increasing number of operators to begin exploring for deep shelf natural gas
reserves. The Company believes that, over time, this improved activity combined
with lower specification jack-up rigs moving to work offshore Mexico may support
better utilization and firming day rates across the entire jack-up market in the
Gulf of Mexico, though there is no assurance that this will occur.
Increased activity offshore Mexico is attracting rigs from U.S. waters and
abroad as Pemex-Exploracion Y Produccion ("Pemex"), Mexico's state-owned oil
company works to increase its natural gas production. The Company has
participated in this growing market by securing long-term contracts for three of
its semisubmersible rigs, the Ocean Ambassador, the Ocean Whittington and the
Ocean Worker. Additional tenders have been announced for both semisubmersible
and jack-up rigs for work beginning in late 2003, and more tenders are
anticipated in 2004, though there is no assurance that the Company will elect to
bid on these jobs or that it will be successful in the bidding process. The
Company is hopeful that the repositioning of rigs from the U.S. Gulf of Mexico
and other markets will improve demand for its services worldwide as the supply
of rigs tightens up though it makes no assurances that this will occur.
Other International markets are expected to remain relatively unchanged
with little improvement in utilization or dayrates expected in the near term.
However, the Company believes there is potential for increased activity offshore
West Africa and India, though there is no assurance that the Company would elect
to participate in future contract tenders or that it would be successful in the
bidding process. The recently upgraded semisubmersible rig, Ocean Rover, has
begun a three well program offshore Malaysia. However, the Ocean Yorktown, a
semisubmersible rig that has worked offshore Brazil for many years, is
mobilizing back to the U.S. Gulf of Mexico without a current contract.
27
OPERATIONS OUTSIDE THE UNITED STATES
The Company's non-U.S. operations are subject to certain political,
economic and other uncertainties not normally encountered in U.S. operations,
including risks of war and civil disturbances (or other risks that may limit or
disrupt markets), expropriation and the general hazards associated with the
assertion of national sovereignty over certain areas in which operations are
conducted. No prediction can be made as to what governmental regulations may be
enacted in the future that could adversely affect the international offshore
contract drilling industry. The Company's operations outside the United States
may also face the additional risk of fluctuating currency values, hard currency
shortages, controls of currency exchange and repatriation of income or capital.
During the quarter ended June 30, 2003, the Company entered into contracts
to operate three of its semisubmersible rigs offshore Mexico for the national
oil company of Mexico. The terms of these contracts expose the Company to
greater risks than it normally assumes such as exposure to greater environmental
liability. While the Company believes that the financial terms of the contracts
and the Company's operating safeguards in place mitigate these risks, there can
be no assurance that the increased risk exposure will not have a negative impact
on future operations or financial results.
LIQUIDITY
At June 30, 2003, the Company's cash and marketable securities totaled
$614.9 million, down from $812.5 million at December 31, 2002. A discussion of
the sources and uses of cash for the six months ended June 30, 2003 compared to
the same period in 2002 follows.
SIX MONTHS ENDED
JUNE 30,
--------
2003 2002 CHANGE
---- ---- ------
(IN THOUSANDS)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income (loss) ............................. $ (38,253) $ 34,520 $ (72,773)
Depreciation .................................. 88,830 87,282 1,548
Deferred tax provision ........................ (9,666) 10,414 (20,080)
Other non-cash items, net ..................... 7,985 (6,169) 14,154
Net changes in operating assets and liabilities (12,488) 39,544 (52,032)
--------- --------- ---------
$ 36,408 $ 165,591 $(129,183)
========= ========= =========
Cash generated by a net loss adjusted for non-cash items, including
depreciation, for the six months ended June 30, 2003 decreased $129.2 million
compared to the same period in 2002 primarily due to a decline in the results of
operations in 2003.
SIX MONTHS ENDED
JUNE 30,
--------
2003 2002 CHANGE
---- ---- ------
(IN THOUSANDS)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures (excluding rig acquisition) $ (134,114) $ (117,823) $ (16,291)
Rig acquisition ................................. (63,500) -- (63,500)
Proceeds from sale of assets .................... 388 1,348 (960)
Proceeds from sale of marketable securities ..... 1,603,006 2,218,678 (615,672)
Purchase of marketable securities ............... (1,374,768) (2,217,939) 843,171
Securities sold under repurchase agreements, net -- 53,126 (53,126)
Proceeds from settlement of forward contracts ... 2,015 912 1,103
----------- ----------- -----------
$ 33,027 $ (61,698) $ 94,725
=========== =========== ===========
Net cash provided by investing activities increased $94.7 million in the
first half of 2003 compared to the first half of 2002. During the six months
ended June 30, 2003 cash was provided by the net sale of certain of the
Company's investments in marketable securities, the settlement of forward
contracts at favorable exchange rates and the sale of miscellaneous equipment.
Cash used during the first half of 2003 was for the purchase of the
28
semisubmersible rig, Omega, renamed the Ocean Patriot, and higher capital
expenditures primarily for the upgrade of the Ocean Rover and the upgrades of
three of the Company's jack-up rigs compared to similar purchases in the same
period of 2002. During the six months ended June 30, 2002, $53.1 million was
provided by the return of loaned debt securities that were outstanding at
December 31, 2001. There were no outstanding loaned debt securities at June 30,
2003.
SIX MONTHS ENDED
JUNE 30,
--------
2003 2002 CHANGE
---- ---- ------
(IN THOUSANDS)
NET CASH USED IN FINANCING ACTIVITIES
Payment of dividends .............. $(32,584) $(32,951) $ 367
Acquisition of treasury stock ..... -- (20,000) 20,000
Settlement of put options ......... -- (1,193) 1,193
-------- -------- --------
$(32,584) $(54,144) $ 21,560
======== ======== ========
The Company paid cash dividends of $32.6 million to stockholders in the
first half of 2003 compared to $33.0 million in the same period of 2002. The
lower dividends for the six months ended June 30, 2003 reflect the Company's
purchase of shares of its common stock during 2002.
During the six months ended June 30, 2002, the Company purchased 500,000
shares of its common stock at an aggregate cost of $20.0 million, or $40.00 per
share, upon the exercise of put options sold in February 2001. See " -- Treasury
Stock and Common Equity Put Options" in Note 1 to the Company's Consolidated
Financial Statements in Item 1 of Part I of this report. Depending on market
conditions, the Company may, from time to time, purchase shares of its common
stock or issue put options in the open market or otherwise.
Cash was also used during the first half of 2002 for payments totaling
$1.2 million for the settlement of put options which covered 1,000,000 shares of
the Company's common stock. The options gave the holders the right to require
the Company to repurchase up to the contracted number of shares of its common
stock at the stated exercise price per share at any time prior to their
expiration. The Company had the option to settle in cash or shares of its common
stock. See "--Treasury Stock and Common Equity Put Options" in Note 1 to the
Company's Consolidated Financial Statements in Item 1 of Part I of this report.
Contractual Cash Obligations.
The Company's long-term debt and operating leases have not changed
materially from those discussed and reported in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
The Company is contingently liable as of June 30, 2003 in the amount of
$69.2 million under certain performance, bid, customs and export bonds. Banks
have issued letters of credit securing certain of these bonds. All of these
obligations expire in less than one year.
Other.
The Company has an effective shelf registration statement under which it
has the ability to issue an aggregate of approximately $117.5 million in debt,
equity and other securities. In addition, the Company may issue, from time to
time, up to eight million shares of common stock, which shares are registered
under an acquisition shelf registration statement (upon effectiveness of an
amendment thereto reflecting the effect of the two-for-one stock split declared
in July 1997), in connection with one or more acquisitions by the Company of
securities or assets of other businesses.
At June 30, 2003 and December 31, 2002, the Company had no off-balance
sheet debt.
The Company believes it has the financial resources needed to meet its
business requirements in the foreseeable future, including capital expenditures
for rig upgrades and continuing rig enhancements, and working capital
requirements.
29
CAPITAL RESOURCES
Cash required to meet the Company's capital commitments is determined by
evaluating the need to upgrade rigs to meet specific customer requirements and
by evaluating the Company's ongoing rig equipment replacement and enhancement
programs, including water depth and drilling capability upgrades. It is
management's opinion that operating cash flows and the Company's cash reserves
will be sufficient to meet these capital commitments; however, the Company will
continue to make periodic assessments based on industry conditions. In addition,
the Company may, from time to time, issue debt or equity securities, or a
combination thereof, to finance capital expenditures, the acquisition of assets
and businesses or for general corporate purposes. The Company's ability to
effect any such issuance will be dependent on the Company's results of
operations, its current financial condition, current market conditions and other
factors beyond its control.
During the first half of 2003, the Company spent $81.4 million, including
capitalized interest expense, for rig upgrades, of which $56.1 million was for
the deepwater upgrade of the Ocean Rover and $25.2 million was for the upgrade
of six of the Company's jack-up rigs. The Company expects to spend a total of
approximately $115 million for rig upgrade capital expenditures during 2003 ($70
million to complete the Ocean Rover upgrade and $45 million to complete the
upgrades to three of the Company's jack-up rigs).
The upgrade of the Ocean Rover, which began in January 2002, was completed
early in July 2003 on time and under budget. The project was completed for
approximately $189 million, below management's original estimated cost of $200
million. The rig commenced its contract with Murphy Sabah Oil Company, Ltd. on
July 10, 2003 for a minimum three well drilling program offshore Malaysia.
The Company's two year program to expand the capabilities of its jack-up
fleet by significantly upgrading six of its 14 jack-up rigs is now more than 80%
complete. Three of these upgrades were completed in 2002 and two have been
completed in 2003. The Ocean Sovereign, a 250-foot water depth independent-leg
cantilever rig prior to the upgrade, completed leg extension installations in
May 2003 allowing the rig to work in water depths up to 300 feet. The cost of
this upgrade was approximately $11 million. The Ocean Tower, a 350-foot water
depth capability independent-leg slot rig prior to its upgrade, completed its
cantilever upgrade in March 2003 for approximately $27 million. The installation
of a cantilever package on the Ocean Titan began in May 2003 and is scheduled
for completion in the fourth quarter of 2003.
During the six months ended June 30, 2003, the Company spent $52.7 million
on its continuing rig enhancement program and to meet other corporate capital
expenditure requirements. In addition, the Company spent $65.0 million ($63.5
million capitalized to rig equipment) for the purchase of the third-generation
semisubmersible drilling rig, Omega, renamed the Ocean Patriot. The Company
expects to spend a total of approximately $100 to $110 million in 2003 for
capital expenditures associated with its continuing rig enhancement program
(other than rig upgrades) and other corporate requirements.
The Company expects to finance these capital expenditures through the use
of existing cash balances or internally generated funds.
INTEGRATED SERVICES
The Company's wholly owned subsidiary, Diamond Offshore Team Solutions,
Inc. ("DOTS"), from time to time, selectively engages in drilling services
pursuant to turnkey or modified-turnkey contracts under which DOTS agrees to
drill a well to a specified depth for a fixed price. In such cases, DOTS
generally is not entitled to payment unless the well is drilled to the specified
depth and other contract requirements are met. Profitability of the contract is
dependent upon its ability to keep expenses within the estimates used in
determining the contract price. Drilling a well under a turnkey contract
therefore typically requires a greater cash commitment by the Company and
exposes the Company to risks of potential financial losses that generally are
substantially greater than those that would ordinarily exist when drilling under
a conventional dayrate contract. During the six months ended June 30, 2003
integrated services had project income of $0.4 million from the completion of
one turnkey plug and abandonment project in the Gulf of Mexico during the first
quarter of 2003 which was more than offset by operating overhead costs and
insurance premiums. During the six months ended June 30, 2002 an operating loss
of $1.3 million resulted primarily from two turnkey projects, also in the Gulf
of Mexico. It is the Company's intent not to pursue contracts for integrated
services, which includes turnkey contracts, except in very limited
circumstances.
30
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This statement requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. Restatement is not
permitted. The Company's adoption of SFAS No. 150 is not expected to have an
impact on the Company's consolidated results of operations, financial position
or cash flows.
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133. SFAS No. 149 is to be applied prospectively for
contracts entered into or modified after June 30, 2003. For contracts involving
hedging relationships, SFAS No. 149 should be applied to both existing contracts
and new contracts entered into after June 30, 2003. The Company's adoption of
SFAS No. 149 is not expected to have a material impact on the Company's
consolidated 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." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for financial statements for fiscal years
ending after December 15, 2002. The Company accounts for stock-based employee
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has adopted the
provisions of SFAS No. 148 which require prominent disclosure regarding the
method of accounting for stock-based employee compensation in its annual and
interim financial statements. See "-Stock-Based Compensation" in Note 1 to the
Company's Consolidated Financial Statements in Item 1 of Part 1 of this report.
In July 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company's adoption of SFAS No. 146 has
not had a material impact on the Company's consolidated results of operations,
financial position or cash flows.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference from
time to time by the Company or its representatives are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical fact are, or may be deemed to be, forward-looking statements.
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, events, performance or achievements,
and may contain or be identified by the words "expect," "intend," "plan,"
"predict," "anticipate," "estimate," "believe," "should," "could," "may,"
"might," "will be," "will continue," "will likely result," "project,"
"forecast," "budget" and similar expressions. Statements by the Company in this
report that contain forward-looking statements include, but are not limited to,
information concerning possible or assumed future results of operations of the
Company and statements about the following subjects:
- future market conditions and the effect of such conditions on the
Company's future results of operations (see " - Industry
Conditions");
- future uses of and requirements for financial resources, including,
but not limited to, expenditures related to the upgrade of the Ocean
Titan, one of the Company's jack-up rigs (see " - Liquidity" and " -
Capital Resources");
31
- interest rate and foreign exchange risk (see "Quantitative and
Qualitative Disclosures About Market Risk");
- future contractual obligations (see " - Liquidity - Contractual Cash
Obligations");
- business strategy;
- growth opportunities;
- competitive position;
- expected financial position;
- future cash flows;
- future dividends;
- financing plans;
- tax planning;
- budgets for capital and other expenditures (see "--Capital
Resources");
- timing and cost of completion of rig upgrades and other capital
projects (see "--Capital Resources");
- delivery dates and drilling contracts related to rig conversion and
upgrade projects (see " -- Industry Conditions" and "--Capital
Resources");
- plans and objectives of management;
- performance of contracts (see " -- Operations Outside the United
States);
- outcomes of legal proceedings;
- compliance with applicable laws; and
- adequacy of insurance or indemnification.
Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected or expressed in forward-looking statements. Such risks and
uncertainties include, among others, the following:
- general economic and business conditions;
- worldwide demand for oil and natural gas;
- changes in foreign and domestic oil and gas exploration, development
and production activity;
- oil and natural gas price fluctuations and related market
expectations;
- the ability of the Organization of Petroleum Exporting Countries,
commonly called OPEC, to set and maintain production levels and
pricing, and the level of production in non-OPEC countries;
- policies of the various governments regarding exploration and
development of oil and gas reserves;
- advances in exploration and development technology;
- the political environment of oil-producing regions;
- casualty losses;
- operating hazards inherent in drilling for oil and gas offshore;
- industry fleet capacity;
- market conditions in the offshore contract drilling industry,
including dayrates and utilization levels;
- competition;
- changes in foreign, political, social and economic conditions;
- risks of international operations, compliance with foreign laws and
taxation policies and expropriation or nationalization of equipment;
- foreign exchange and currency fluctuations and regulations, and the
inability to repatriate income or capital;
- risks of war, military operations, other armed hostilities,
terrorist acts and embargoes;
- changes in offshore drilling technology, which could require
significant capital expenditures in order to maintain
competitiveness;
- regulatory initiatives and compliance with governmental regulations;
- compliance with environmental laws and regulations;
- customer preferences;
- effects of litigation;
- cost, availability and adequacy of insurance;
- adequacy of the Company's sources of liquidity;
- risks inherent in turnkey operations, including the risk of failure
to complete a well and cost overruns;
- the availability of qualified personnel to operate and service the
Company's drilling rigs; and
- various other matters, many of which are beyond the Company's
control.
32
The risks included here are not exhaustive. Other sections of this report
and the Company's other filings with the Securities and Exchange Commission
include additional factors that could adversely affect the Company's business,
results of operations and financial performance. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements. Forward-looking statements included in this report speak only as of
the date of this report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any
forward-looking statement is based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information included in this Item 3 is considered to constitute
"forward-looking statements" for purposes of the statutory safe harbor provided
in Section 27A of the Securities Act and Section 21E of the Exchange Act. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements" in Item 2 of Part I of this report.
The Company's measure of market risk exposure represents an estimate of
the change in fair value of its financial instruments. Market risk exposure is
presented for each class of financial instrument held by the Company at June 30,
2003 and December 31, 2002 assuming immediate adverse market movements of the
magnitude described below. The Company believes that the various rates of
adverse market movements represent a measure of exposure to loss under
hypothetically assumed adverse conditions. The estimated market risk exposure
represents the hypothetical loss to future earnings and does not represent the
maximum possible loss or any expected actual loss, even under adverse
conditions, because actual adverse fluctuations would likely differ. In
addition, since the Company's investment portfolio is subject to change based on
its portfolio management strategy as well as in response to changes in the
market, these estimates are not necessarily indicative of the actual results
which may occur.
Exposure to market risk is managed and monitored by senior management.
Senior management approves the overall investment strategy employed by the
Company and has responsibility to ensure that the investment positions are
consistent with that strategy and the level of risk acceptable to it. The
Company may manage risk by buying or selling instruments or entering into
offsetting positions.
Interest Rate Risk
The Company has exposure to interest rate risk arising from changes in the
level or volatility of interest rates. The Company's investments in marketable
securities are primarily in fixed maturity securities. The Company monitors its
sensitivity to interest rate risk by evaluating the change in the value of its
financial assets and liabilities due to fluctuations in interest rates. The
evaluation is performed by applying an instantaneous change in interest rates by
varying magnitudes on a static balance sheet to determine the effect such a
change in rates would have on the recorded market value of the Company's
investments and the resulting effect on stockholders' equity. The analysis
presents the sensitivity of the market value of the Company's financial
instruments to selected changes in market rates and prices which the Company
believes are reasonably possible over a one-year period.
The sensitivity analysis estimates the change in the market value of the
Company's interest sensitive assets and liabilities that were held on June 30,
2003 and December 31, 2002 due to instantaneous parallel shifts in the yield
curve of 100 basis points, with all other variables held constant.
The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Accordingly the analysis
may not be indicative of, is not intended to provide, and does not provide a
precise forecast of the effect of changes of market interest rates on the
Company's earnings or stockholders' equity. Further, the computations do not
contemplate any actions the Company could undertake in response to changes in
interest rates.
The Company's long-term debt, as of June 30, 2003 and December 31, 2002 is
denominated in U.S. dollars. The Company's debt has been primarily issued at
fixed rates, and as such, interest expense would not be impacted by interest
rate shifts. The impact of a 100 basis point increase in interest rates on fixed
rate debt would result in a decrease in market value of $154.3 million and
$153.8 million, respectively. A 100 basis point decrease would result in an
increase in market value of $192.4 million and $192.7 million, respectively.
33
Foreign Exchange Risk
Foreign exchange rate risk arises from the possibility that changes in
foreign currency exchange rates will impact the value of financial instruments.
In mid-2002, the Company had contracted to purchase approximately 50.0 million
Australian dollars, 4.2 million Australian dollars to be purchased monthly from
August 29, 2002 through June 26, 2003 and 3.8 million to be purchased on July
31, 2003. These foreign exchange forward contracts are recorded at their fair
value determined by discounting future cash flows at current forward rates. An
asset of $0.5 million and $0.2 million reflecting the fair value of the forward
contracts was included with "Prepaid expenses and other" in the Consolidated
Balance Sheet at June 30, 2003 and December 31, 2002, respectively. The
sensitivity analysis assumes an instantaneous 20% change in the foreign currency
exchange rates versus the U.S. dollar from their levels at June 30, 2003 and
December 31, 2002, with all other variables held constant.
The following table presents the Company's market risk by category
(interest rates and foreign currency exchange rates):
FAIR VALUE ASSET (LIABILITY) MARKET RISK
---------------------------------- -----------------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
CATEGORY OF RISK EXPOSURE: 2003 2002 2003 2002
--------- --------- --------- ---------
(IN THOUSANDS)
Interest rate:
Marketable securities .... $ 393,124 (a) $ 627,614 (a) $ 4,500 (c) $ 21,500 (c)
Long-term debt .......... (922,800)(b) (901,800)(b)
Foreign Exchange ............ 474 151 -- (d) 2,300 (d)
(a) The fair market value of the Company's investment in marketable
securities is based on the quoted closing market prices on June 30, 2003 and
December 31, 2002.
(b) The fair values of the Company's 1.5% convertible senior debentures
due 2031 and zero coupon convertible debentures due 2020 are based on the quoted
closing market prices on June 30, 2003 and December 31, 2002. The fair value of
the Company's Ocean Alliance lease-leaseback agreement is based on the present
value of estimated future cash flows using a discount rate of 4.91% for June 30,
2003 and 6.62% for December 31, 2002.
(c) The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of an increase in
interest rates of 100 basis points at June 30, 2003 and December 31, 2002.
(d) The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of a decrease in
foreign exchange rates of 20% at June 30, 2003 and December 31, 2002.
34
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management formed a disclosure controls and procedures
committee (the "Disclosure Committee") in 2002. The purpose and responsibility
of the Disclosure Committee is to coordinate and review the process by which
information is recorded, processed, summarized and reported on a timely basis as
required to be disclosed by the Company in its reports filed, furnished or
submitted under the Exchange Act. In addition, the Disclosure Committee is
responsible for ensuring that this information is accumulated and communicated
to the Company's management, including its principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
Evaluation of Disclosure Controls and Procedures
Based upon their evaluation, as of the end of the period covered by this
report, of the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)), the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are adequate to ensure that information the Company is
required to disclose in reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
Changes in Internal Controls
In connection with such evaluation, no change was identified in the
Company's internal control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
35
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders (the "Annual Meeting") of Diamond
Offshore Drilling, Inc. was held on May 20, 2003 in New York, New York. At the
Annual Meeting, the holders of 128,041,203 shares of common stock out of
130,336,455 shares entitled to vote as of the record date were represented in
person or by proxy, constituting a quorum. The following matters were voted on
and adopted by the margins indicated:
a. To elect seven directors, each to serve until the next annual
meeting of stockholders and until their respective successors are
elected and qualified or until their earlier resignation or removal.
NUMBER OF SHARES
----------------------------------------------
BROKER
FOR WITHHELD NON-VOTE
----------- ----------- --------
James S. Tisch 100,438,844 27,602,359 0
Lawrence R. Dickerson 100,438,959 27,602,244 0
Alan R. Batkin 127,201,915 839,288 0
Herbert C. Hofmann 101,133,011 26,908,192 0
Arthur L. Rebell 108,009,168 20,032,035 0
Michael H. Steinhardt 127,195,795 845,408 0
Raymond S. Troubh 127,185,690 855,513 0
b. To ratify the appointment of Deloitte & Touche LLP as independent
certified public accountants for the Company and its subsidiaries
for fiscal year 2003.
For 127,558,205
Against 441,050
Abstain 41,948
Broker Non-Vote 0
ITEM 5. OTHER INFORMATION.
Effective July 10, 2003, Michael H. Steinhardt resigned his position as a
member of the Company's Board of Directors and the Company's audit committee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See the Exhibit Index for a list of those exhibits filed herewith.
(b) The Company made the following reports on Form 8-K during the second
quarter of 2003:
Date of Report Description of Report
-------------- ---------------------
April 7, 2003 Disclosure of filing of definitive additional proxy materials to
supplement & correct definitive proxy statement on Schedule 14A
April 16, 2003 Item 9 Regulation FD disclosure (informational only)
April 17, 2003 Item 9 Regulation FD disclosure (informational only)
April 30, 2003 Item 9 Regulation FD disclosure (informational only)
May 13, 2003 Item 9 Regulation FD disclosure (informational only)
May 28, 2003 Item 9 Regulation FD disclosure (informational only)
June 2, 2003 Disclosure of the Pemex contracts
36
June 11, 2003 Item 9 Regulation FD disclosure (informational only)
June 24, 2003 Item 9 Regulation FD disclosure (informational only)
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAMOND OFFSHORE DRILLING, INC.
(Registrant)
Date 04-Aug-2003 By: /s/ Gary T. Krenek
-------------------------------------
Gary T. Krenek
Vice President and Chief
Financial Officer
Date 04-Aug-2003 /s/ Beth G. Gordon
-------------------------------------
Beth G. Gordon
Controller (Chief Accounting Officer)
38
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1* Amended and Restated Certificate of Incorporation of the
Company.
3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2001).
31.1* Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2* Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1* Section 1350 Certification of the Chief Executive Officer.
32.2* Section 1350 Certification of the Chief Financial Officer.
* Filed or furnished herewith.
39