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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
Commission File Number 1-14634
GLOBALSANTAFE CORPORATION
(Exact name of registrant as specified in its charter)
CAYMAN ISLANDS 98-0108989
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
15375 MEMORIAL DRIVE, HOUSTON, TEXAS 77079-4101
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 925-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares of the registrant's ordinary shares, par value $.01 per
share, outstanding as of July 31, 2003, was 233,406,585.
- --------------------------------------------------------------------------------
1
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS TO FORM 10-Q
QUARTER ENDED JUNE 30, 2003
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants 5
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2003 and 2002 6
Condensed Consolidated Balance Sheets as of
June 30, 2003, and December 31, 2002 7
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 9
Notes to Condensed Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 6. Exhibits and Reports on Form 8-K 36
SIGNATURE 38
2
FORWARD-LOOKING STATEMENTS
Under the Private Securities Litigation Reform Act of 1995, companies are
provided a "safe harbor" for discussing their expectations regarding future
performance. We believe it is in the best interests of our shareholders and the
investment community to use these provisions and provide such forward- looking
information. We do so in this report and in other communications.
Forward-looking statements are often but not always identifiable by the use of
words such as "anticipate," "believe," "budget," "could," "estimate," "expect,"
"forecast," "intend," "may," "might," "plan," "predict," "project," and
"should."
Our forward-looking statements include statements about the following subjects:
- our funding and financing plans;
- the dates drilling rigs will become available following completion of
current contracts;
- the dates our rigs that are under construction are expected to be
delivered;
- projected cash outlays, the timing of such outlays and expected
sources of funding in connection with the rigs that are under
construction;
- our expectations regarding commencement of certain contracts;
- our intention to exit our platform rig operations;
- our expectations regarding the time period in which rigs will remain
idle;
- our statements that certain rigs will be cold-stacked (see definition
in statement);
- our expectations regarding the length of time mobile assets will be
operating in given locations and our resulting conclusions regarding
the future tax consequences of operating in those locations;
- the expected outcomes of legal and administrative proceedings, their
materiality, and their expected effects on our financial position and
results of operations;
- our expectation that our effective tax rate will continue to fluctuate
from year to year as our operations are conducted in different taxing
jurisdictions;
- our expectations regarding future conditions in various geographic
markets in which we operate and the prospects for future work and
dayrates in those markets;
- that we do not anticipate using stock to satisfy future purchase
obligations in connection with our Zero Coupon Convertible Debentures;
- our estimated capital expenditures in 2003;
3
- our expectation that we will fund various commitments, primarily
related to our debt and capital lease obligations, leases for office
space and other property and equipment as well as commitments for
construction of drilling rigs, with existing cash and cash
equivalents, and cash generated from operations;
- our ability to service indebtedness;
- our ability to meet all of our current obligations, including working
capital requirements, capital expenditures and debt service, from our
existing cash and marketable securities balances, and future cash flow
from operations;
- the anticipated effect of the required adoption of SFAS No. 149; and
any other statements that are not historical facts.
Our forward-looking statements speak only as of the date of this report and are
based on available industry, financial and economic data and our operating and
financing plans as of that date. They are also inherently uncertain, and
investors must recognize that events could turn out to be materially different
from what we expect.
Factors that could cause or contribute to such differences include, but are not
limited to (a) changes in rig utilization and dayrates in response to the level
of activity in the oil and natural gas industry, which is significantly affected
by indications and expectations regarding the level and volatility of oil and
natural gas prices, which in turn are affected by such things as political,
economic and weather conditions affecting or potentially affecting regional or
worldwide demand for oil and natural gas, actions or anticipated actions by
OPEC, inventory levels, deliverability constraints, and futures market activity;
(b) the unforeseen startup problems inherent in commencing operations with any
new rig, including such things engineering, permitting crewing and equipment
problems; (c) changes to timing of scheduled rig upgrade and repair projects;
(d) delays in rig construction projects due to such things as cost over-runs,
supply shortages, natural disasters and work stoppages by shipyard workers; and
(e) such other risk factors as may be discussed herein, in the "Risk Factors"
section under Items 1 and 2 and elsewhere in our Annual Report on Form 10-K for
the year ended December 31, 2002, and subsequent reports filed with the U.S.
Securities and Exchange Commission.
WE URGE YOU NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. EACH
FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE OF THE PARTICULAR
STATEMENT, AND WE DISCLAIM ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY
UPDATES OR REVISIONS TO OUR STATEMENTS, FORWARD-LOOKING OR OTHERWISE, TO REFLECT
CHANGES IN OUR EXPECTATIONS OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES
ON WHICH ANY SUCH STATEMENTS ARE BASED.
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of GlobalSantaFe Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
GlobalSantaFe Corporation and subsidiaries as of June 30, 2003, and the related
condensed consolidated statements of income for each of the three- and six-month
periods ended June 30, 2003 and 2002 and the condensed consolidated statements
of cash flows for the six-month periods ended June 30, 2003 and 2002. These
interim financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2002, and the related consolidated statements of income, shareholders'
equity, and of cash flows for the year then ended (not presented herein); and in
our report dated March 21, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2002,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
August 8, 2003
5
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues:
Contract drilling $ 357.2 $ 406.9 $ 716.1 $ 808.7
Drilling management services 134.9 92.3 222.9 177.5
Oil and gas 5.3 2.5 11.4 4.2
--------- --------- --------- ---------
Total revenues 497.4 501.7 950.4 990.4
--------- --------- --------- ---------
Expenses:
Contract drilling 231.4 245.4 485.5 488.5
Drilling management services 131.7 88.8 217.0 166.3
Oil and gas 1.3 1.0 2.6 1.8
Depreciation, depletion and amortization 67.5 64.9 133.0 127.4
Restructuring costs 2.9 - 2.9 -
General and administrative 11.4 12.9 24.9 24.9
--------- --------- --------- ---------
Total operating expenses 446.2 413.0 865.9 808.9
--------- --------- --------- ---------
Operating income 51.2 88.7 84.5 181.5
Other income (expense):
Interest expense (17.6) (14.3) (33.8) (28.6)
Interest capitalized 10.2 4.3 19.2 7.5
Interest income 2.9 3.8 5.8 8.2
Other 2.3 0.5 24.2 (0.4)
--------- --------- --------- ---------
Total other income (expense) (2.2) (5.7) 15.4 (13.3)
--------- --------- --------- ---------
Income before income taxes 49.0 83.0 99.9 168.2
Provision for income taxes:
Current tax provision 16.1 13.3 24.3 25.5
Deferred tax benefit (11.0) (3.7) (14.2) (7.8)
--------- --------- --------- ---------
Total provision for income taxes 5.1 9.6 10.1 17.7
--------- --------- --------- ---------
Net income $ 43.9 $ 73.4 $ 89.8 $ 150.5
========= ========= ========= =========
Earnings per ordinary share:
Basic $ 0.19 $ 0.31 $ 0.39 $ 0.64
Diluted $ 0.19 $ 0.31 $ 0.38 $ 0.63
See notes to condensed consolidated financial statements.
6
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
June 30, December 31,
2003 2002
---------- ------------
Current assets:
Cash and cash equivalents $ 890.1 $ 677.0
Marketable securities 54.8 59.5
Accounts receivable, net of allowances 351.1 346.3
Costs incurred on turnkey drilling projects in progress 3.7 9.1
Prepaid expenses 28.6 49.6
Other current assets 2.9 4.1
---------- ----------
Total current assets 1,331.2 1,145.6
---------- ----------
Properties and equipment:
Rigs and drilling equipment, less accumulated
depreciation of $1,055.2 at June 30, 2003, and
$926.6 at December 31, 2002 4,292.3 4,182.9
Oil and gas properties, full-cost method, less accumulated
depreciation, depletion and amortization of $21.6
at June 30, 2003, and $20.2 at December 31, 2002 9.4 11.1
---------- ----------
Net properties 4,301.7 4,194.0
Goodwill 386.3 386.9
Deferred income taxes 12.3 0.2
Other assets 84.8 81.5
---------- ----------
Total assets $ 6,116.3 $ 5,808.2
========== ==========
See notes to condensed consolidated financial statements.
7
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
($ in millions)
June 30, December 31,
2003 2002
----------- ------------
Current liabilities:
Accounts payable $ 154.9 $ 209.2
Accrued compensation and related employee costs 60.5 63.8
Accrued income taxes 77.9 87.2
Accrued interest 13.7 8.9
Deferred revenue 26.9 45.5
Other accrued liabilities 83.0 74.2
---------- ----------
Total current liabilities 416.9 488.8
---------- ----------
Long-term debt 1,181.8 925.2
Capital lease obligations 40.2 16.7
Deferred income taxes - 2.7
Other long-term liabilities 161.1 140.6
Commitments and contingencies (Note 4) - -
Shareholders' equity:
Ordinary shares, $0.01 par value, 600,000,000 shares
authorized, 233,368,625 shares and 232,889,001 shares
issued and outstanding at June 30, 2003, and
December 31, 2002, respectively 2.3 2.3
Additional paid-in capital 2,958.9 2,950.1
Retained earnings 1,394.6 1,322.4
Accumulated other comprehensive loss (39.5) (40.6)
---------- ----------
Total shareholders' equity 4,316.3 4,234.2
---------- ----------
Total liabilities and shareholders' equity $ 6,116.3 $ 5,808.2
========== ==========
See notes to condensed consolidated financial statements.
8
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Six Months Ended June 30,
-------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 89.8 $ 150.5
Adjustments to reconcile net income to net
cash flow provided by operating activities:
Depreciation, depletion and amortization 133.0 127.4
Deferred income taxes (14.2) (7.8)
(Increase) decrease in accounts receivable (6.6) 20.7
Decrease (increase) in prepaid expenses and other
current assets 25.8 (44.4)
(Decrease) increase in accounts payable (50.5) 13.8
Decrease in accrued liabilities (7.6) (24.4)
Decrease in deferred revenues (20.5) (1.8)
Increase (decrease) in other long-term liabilities 22.4 (6.6)
Other, net 7.2 4.6
--------- ---------
Net cash flow provided by operating activities 178.8 232.0
--------- ---------
Cash flows from investing activities:
Capital expenditures (245.1) (216.0)
Purchases of held-to-maturity marketable securities (54.8) (223.2)
Proceeds from maturities of held-to-maturity
marketable securities 59.5 226.4
Proceeds from maturities of available-for-sale
marketable securities 4.4 -
Proceeds from sales of properties and equipment 2.4 69.2
--------- ---------
Net cash flow used in investing activities (233.6) (143.6)
--------- ---------
Cash flows from financing activities:
Dividend payments (16.3) (15.2)
Issuance of long-term debt, net of discount 249.4 -
Deferred financing costs (3.4) -
Lease-leaseback transaction 37.0 -
Payments on capitalized lease obligation (6.5) -
Proceeds from issuance of ordinary shares 7.7 24.8
--------- ---------
Net cash flow provided by financing activities 267.9 9.6
--------- ---------
Increase in cash and cash equivalents 213.1 98.0
Cash and cash equivalents at beginning of period 677.0 578.3
--------- ---------
Cash and cash equivalents at end of period $ 890.1 $ 676.3
========= =========
See notes to condensed consolidated financial statements.
9
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
GlobalSantaFe Corporation (the "Company" or "GlobalSantaFe") is an oil and gas
drilling contractor, owning or operating a fleet of over 100 marine and land
drilling rigs. The Company's fleet currently includes 13 floating rigs, 45
cantilevered jackup rigs, 31 land rigs and one platform rig, including the
high-performance cantilevered jackup, GSF Constellation I, which was delivered
in June 2003. The Company has two ultra-deepwater semisubmersibles and one
high-performance cantilevered jackup under construction. The Company or its
affiliates also currently operate 11 platform rigs in the North Sea for third
parties, and it operates two semisubmersible rigs for third parties under a
joint venture agreement. The Company provides oil and gas contract drilling
services to the oil and gas industry worldwide on a daily rate ("dayrate")
basis. The Company also provides oil and gas drilling management services on
either a dayrate or completed-project, fixed-price ("turnkey") basis, as well as
drilling engineering and drilling project management services, and it
participates in oil and gas exploration and production activities.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of GlobalSantaFe Corporation and its consolidated subsidiaries.
Intercompany accounts and transactions have been eliminated. Unless the context
otherwise requires, the term "Company" refers to GlobalSantaFe Corporation and
its consolidated subsidiaries. The condensed consolidated financial statements
and related footnotes are presented in U.S. dollars and in accordance with
accounting principles generally accepted in the United States of America.
The financial statements reflect all adjustments, which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods. Such adjustments are considered to be of a normal recurring nature
unless otherwise identified. Interim-period results may not be indicative of
results expected for the full year. The year-end condensed consolidated balance
sheet was derived from audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. These interim financial statements should be read in
conjunction with the Company's audited financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
The Company's independent accountants have performed a review of, and issued a
report on, these consolidated interim financial statements in accordance with
standards established by the American Institute of Certified Public Accountants.
Pursuant to Rule 436(c) under the U.S. Securities Act of 1933, this report
should not be considered a part of any registration statement prepared or
certified within the meanings of Sections 7 and 11 of the Securities Act.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans using the
intrinsic-value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Accordingly, the Company computes compensation cost for these plans as
the amount by which the quoted market price of the Company's ordinary shares on
the date of grant exceeds the amount the employee must pay to acquire the
shares. The amount of compensation cost, if any, is charged to income over the
vesting period. No compensation cost has been recognized for any of the
Company's outstanding stock options, all of which have exercise prices
10
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
equal to or greater than the market price of the Company's ordinary shares on
the date of grant, or for options granted under the Company's employee share
purchase plan. The Company does, however, recognize compensation cost for all
grants of performance-based stock awards.
Had compensation cost for the Company's stock-based compensation plans been
determined based on fair values as of the dates of grant in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per ordinary
share would have been reported as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ---------- ----------- ----------
(In millions, except per share amounts)
Net income, as reported $ 43.9 $ 73.4 $ 89.8 $ 150.5
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all
awards, net of related tax effects (8.1) (5.0) (15.8) (6.9)
----------- ---------- ---------- ----------
Pro forma net income $ 35.8 $ 68.4 $ 74.0 $ 143.6
=========== ========== ========== ==========
Basic earnings per ordinary share - as reported $ 0.19 $ 0.31 $ 0.39 $ 0.64
- pro forma $ 0.15 $ 0.29 $ 0.32 $ 0.61
Diluted earnings per ordinary share - as reported $ 0.19 $ 0.31 $ 0.38 $ 0.63
- pro forma $ 0.15 $ 0.29 $ 0.31 $ 0.60
Estimates of fair values for stock options granted under the Company's
stock-based compensation plans for purposes of calculating the pro forma data in
the preceding table are computed using the Black-Scholes option-pricing model.
Fair values for performance-based stock awards are determined by the market
price of the Company's ordinary shares at the date of grant. The pro forma
figures in the preceding table may not be representative of pro forma amounts in
future years.
RESTRUCTURING COSTS
Estimated costs related to the closure of Global Marine Inc.'s former Houston,
Texas, office were accrued as part of Restructuring costs in the Company's
consolidated financial statements for the year ended December 31, 2001. These
estimated costs were based on the assumption that this office space would be
subleased to a third party. The Company was unsuccessful in subleasing this
office space in 2002, and, based on management's best estimates at the time,
increased its remaining liability at December 31, 2002, by $2.9 million. Based
on current Houston commercial real estate market conditions, the Company now
believes it is probable that it will not be able to sublease this office space
before the end of the lease term. As a result, the Company accrued an additional
$2.9 million in Restructuring costs during the second quarter of 2003, and has
now accrued the entire liability under the lease as of June 30, 2003.
As of June 30, 2003, the Company's remaining liability related to its
merger-related restructuring activities totaled $22.0 million, consisting of the
following: $16.2 million related to office closures and consolidation of
facilities, which will be relieved over the remaining terms of the various
office leases ranging up to 5 1/2
11
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
years; $3.8 million related to employee separation costs, which will be paid out
pursuant to the terms of various severance agreements, over terms ranging up to
three years from the date of separation; and $2.0 million related to special
retirement termination costs, which will be satisfied pursuant to the payment
terms of the retirement plans affected.
NOTE 2 - EARNINGS PER ORDINARY SHARE
A reconciliation of the numerators and denominators of the basic and diluted
per-share computations for net income follows:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
($ in millions, except per share data)
Net income (numerator): $ 43.9 $ 73.4 $ 89.8 $ 150.5
=============== =============== =============== ===============
Shares (denominator):
Ordinary Shares - Basic 233,139,986 234,631,618 233,099,475 234,118,107
Add:
Effect of employee stock -based
compensation 1,788,097 3,788,092 1,665,946 3,504,556
--------------- --------------- --------------- ---------------
Ordinary Shares - Diluted 234,928,083 238,419,710 234,765,421 237,622,663
=============== =============== =============== ===============
Earnings per ordinary share:
Basic $ 0.19 $ 0.31 $ 0.39 $ 0.64
Diluted $ 0.19 $ 0.31 $ 0.38 $ 0.63
The computation of diluted earnings per ordinary share for all periods presented
excludes outstanding options to purchase GlobalSantaFe ordinary shares with
exercise prices greater than the average market price of GlobalSantaFe ordinary
shares for the period, because the inclusion of such options would have the
effect of increasing diluted earnings per ordinary share (i.e., their effect
would be "antidilutive"). Options to purchase a total of 14,476,389 ordinary
shares and 14,581,340 ordinary shares were excluded from the computation of
diluted earnings per ordinary share for the three and six months ended June 30,
2003, respectively. Options to purchase a total of 3,880,014 ordinary shares and
7,815,771 ordinary shares were excluded from the computation of diluted earnings
per ordinary share for the three and six months ended June 30, 2002,
respectively.
Diluted earnings per ordinary share for all periods presented also excludes
4,875,062 potentially dilutive shares issuable upon conversion of the Company's
Zero Coupon Convertible Debentures because the inclusion of such shares would be
antidilutive given the level of net income for these periods.
Holders of the Zero Coupon Convertible Debentures have the right to require the
Company to repurchase the debentures as early as June 25, 2005. The Company may
pay the repurchase price with either cash or stock or a combination thereof. The
Company does not anticipate using stock to satisfy any such future purchase
obligation.
12
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SEGMENT INFORMATION
Information by operating segment, together with reconciliations to the
consolidated totals, is presented in the following table:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
($ in millions)
Revenues from external customers:
Contract drilling $ 357.2 $ 406.9 $ 716.1 $ 808.7
Drilling management services 134.9 92.3 222.9 177.5
Oil and gas 5.3 2.5 11.4 4.2
--------- --------- --------- ---------
Consolidated $ 497.4 $ 501.7 $ 950.4 $ 990.4
========= ========= ========= =========
Intersegment revenues:
Contract drilling $ 0.8 $ 1.6 $ 1.5 $ 3.9
Drilling management services 1.6 2.8 3.7 4.8
Intersegment elimination (2.4) (4.4) (5.2) (8.7)
--------- --------- --------- ---------
Consolidated $ - $ - $ - $ -
========= ========= ========= =========
Total revenues:
Contract drilling $ 358.0 $ 408.5 $ 717.6 $ 812.6
Drilling management services 136.5 95.1 226.6 182.3
Oil and gas 5.3 2.5 11.4 4.2
Intersegment elimination (2.4) (4.4) (5.2) (8.7)
--------- --------- --------- ---------
Consolidated $ 497.4 $ 501.7 $ 950.4 $ 990.4
========= ========= ========= =========
Segment income:
Contract drilling $ 60.2 $ 97.9 $ 101.2 $ 195.4
Drilling management services 3.2 3.5 5.9 11.2
Oil and gas 3.3 0.9 7.4 1.3
--------- --------- --------- ---------
Total segment income 66.7 102.3 114.5 207.9
Restructuring costs (2.9) - (2.9) -
Corporate expenses (12.6) (13.6) (27.1) (26.4)
--------- --------- --------- ---------
Operating income 51.2 88.7 84.5 181.5
Other income (expense) (2.2) (5.7) 15.4 (13.3)
--------- --------- --------- ---------
Income before income taxes $ 49.0 $ 83.0 $ 99.9 $ 168.2
========= ========= ========= =========
Drilling management services operating results for the three and six
months ended June 30, 2003 and 2002, were favorably affected by downward
revisions to cost estimates for certain wells completed in prior periods. Such
revisions increased segment operating income by $2.1 million and $3.4 million,
respectively, for the three and six months ended June 30, 2003, and by $2.3
million and $2.8 million, respectively, for the three and six months ended June
30, 2002.
13
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS
The Company currently has definitive contracts with PPL Shipyard PTE, Ltd. of
Singapore ("PPL") for construction of two ultra-deepwater semisubmersibles and
one high-performance jackup, with options for two additional similarly priced
semisubmersibles. In June 2003, the Company took delivery of the GSF
Constellation I, the first of two high-performance cantilevered jackups ordered
from PPL, at a total cost of $133 million, excluding capitalized interest,
capital spares, startup expenses and mobilization costs. Contractual
obligations in connection with the remaining high-performance cantilevered
jackup, excluding capitalized interest, capital spares, startup expenses and
mobilization costs, are also expected to total approximately $133 million, of
which $79 million had been incurred as of June 30, 2003. Contractual
obligations in connection with the two ultra-deepwater semisubmersibles,
excluding capitalized interest, capital spares, startup expenses and
mobilization costs, are expected to total approximately $570 million, or an
average of $285 million per rig. Of the $570 million, $354 million had been
incurred as of June 30, 2003.
In January 2003, in order to take advantage of an attractive financing
structure, the Company entered into a lease-leaseback arrangement with a
European bank related to the Company's Britannia cantilevered jackup. Pursuant
to this arrangement, the Company leased the Britannia to the bank for a
five-year term for a lump-sum payment of approximately $37 million, net of
origination fees of approximately $1.5 million. The bank then leased the rig
back to the Company for a five-year term with an effective annual interest rate
based on the 3-month British Pound Sterling LIBOR plus a margin of 0.625%, under
which the Company will make annual lease payments of approximately $8.0 million,
payable in advance. The Company has classified this arrangement as a capital
lease.
LEGAL PROCEEDINGS
The Company filed a claim in 1993 in the amount of $40.6 million with the United
Nations Compensation Commission ("UNCC") for losses suffered as a result of the
Iraqi invasion of Kuwait in 1990. The claim was for the loss of four rigs and
associated equipment, lost revenue, and miscellaneous expenditures. During the
first quarter of 2003, the Governing Council of the UNCC awarded the Company
compensation in the amount of $22.1 million in a final, non-appealable,
adjudication of the claim. The Company recognized $22.1 million in "Other
income" on the Condensed Consolidated Statement of Income in the first quarter
of 2003. The Company received an additional $0.2 million award from the UNCC
during the second quarter of 2003 as settlement for an additional claim for lost
revenue filed by one of its subsidiaries.
The Company and two of its subsidiaries are defendants in a lawsuit filed on
July 28, 2003, by Transocean Inc. ("Transocean") in the United States District
Court for the Southern District of Texas, Houston Division. The lawsuit alleges
that the dual drilling structure and method utilized by the Company's two
ultra-deepwater semisubmersibles under construction in Singapore infringe on
United States patents granted to Transocean. The lawsuit seeks damages,
royalties and attorney's fees, together with an injunction that would prevent
the use of the dual drilling capabilities of the rigs. The Company believes that
the allegations are without merit and intends to vigorously defend the lawsuit.
The Company does not
14
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
expect that the matter will have an adverse effect on the Company's business or
financial position, results of operations or cash flows.
ENVIRONMENTAL MATTERS
The Company has certain potential liabilities under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and similar
state acts regulating cleanup of various waste disposal sites, including those
described below. CERCLA is intended to expedite the remediation of hazardous
substances without regard to fault. Potentially responsible parties ("PRPs") for
each site include present and former owners and operators of, transporters to
and generators of the substances at the site. Liability is strict and can be
joint and several.
The Company has been named as a PRP in connection with a site located in Santa
Fe Springs, California known as the Waste Disposal, Inc. site. The Company and
other PRPs have agreed with the U.S. Environmental Protection Agency ("EPA") and
the U.S. Department of Justice ("DOJ") to settle their potential liabilities for
this site by agreeing to perform the remaining remediation required by the EPA.
The form of the agreement is a consent decree, which has not yet been entered by
the court. Although the settlement is not final until the decree is entered by
the court, the Company expects the decree to be entered by the court. The
parties to the settlement have entered into a participation agreement, which
makes the Company liable for an estimated 7.7% of the remediation costs.
Although the remediation costs cannot be determined with certainty until the
remediation is complete, the consultant advising the group with respect to
remediation thinks that the remediation costs will be such that the Company's
share of the remaining remediation costs will be less than $800,000. There are
additional potential liabilities related to the site, but these cannot be
quantified, and there is no reason at this time to believe that they will be
material.
The Company has also been named as a PRP in connection with a site in California
known as the Casmalia Resources Site. The Company and other PRPs have entered
into an agreement with the EPA and the DOJ to resolve their potential
liabilities. This agreement is also not final until the agreed-upon consent
decree is entered by the court, but it is likely that it will be. Under the
settlement, the Company is not likely to owe any substantial additional amounts
for this site beyond what the Company has already paid. There are additional
potential liabilities related to this site, but these cannot be quantified at
this time, and there is no reason at this time to believe that they will be
material.
The Company has been named as one of many PRPs in connection with a site located
in Carson, California formerly maintained by Cal Compact Landfill. On February
15, 2002, the Company was served with a required 90-day notification that eight
California cities, on behalf of themselves and other PRPs, intend to commence an
action against the Company under the Resource Conservation and Recovery Act
("RCRA"). On April 1, 2002, a complaint was filed by the cities against the
Company and others alleging that they have liabilities in connection with the
site. However, the complaint has not been served. The site was closed in or
around 1965, and the Company does not have sufficient information to enable it
to assess its potential liability, if any, for this site.
Resolutions of other claims by the EPA, the involved state agency and/or PRPs
are at various stages of investigation. These investigations involve
determinations of:
15
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- the actual responsibility attributed to the Company and the other PRPs
at the site;
- appropriate investigatory and/or remedial actions; and
- allocation of the costs of such activities among the PRPs and other site
users.
The Company's ultimate financial responsibility in connection with those sites
may depend on many factors, including:
- the volume and nature of material, if any, contributed to the site for
which the Company is responsible;
- the numbers of other PRPs and their financial viability; and
- the remediation methods and technology to be used.
It is difficult to quantify with certainty the potential cost of these
environmental matters, particularly in respect of remediation obligations.
Nevertheless, based upon the information currently available, the Company
believes that its ultimate liability arising from all environmental matters,
including the liability for all other related pending legal proceedings,
asserted legal claims and known potential legal claims which are likely to be
asserted, is adequately accrued and should not have a material effect on the
Company's financial position or ongoing results of operations. Estimated costs
of future expenditures for environmental remediation obligations are not
discounted to their present value.
CONTINGENCIES AND OTHER LEGAL MATTERS
In 1998, the Company entered into fixed-price contracts for the construction of
two dynamically positioned, ultra-deepwater drillships, the Glomar C.R. Luigs
and the Glomar Jack Ryan. Pursuant to two 20-year capital lease agreements, the
Company subsequently novated the construction contracts for the drillships to
two financial institutions (the "Lessors"), which now own the drillships and
lease them to the Company. The Company has deposited with three large foreign
banks (the "Payment Banks") amounts equal to the progress payments that the
Lessors were required to make under the construction contracts, less a lease
benefit of approximately $62 million (the "Defeasance Payment"). In exchange for
the deposits, the Payment Banks have assumed liability for making rental
payments required under the leases and the Lessors have legally released the
Company as the primary obligor of such rental payments. Accordingly, the Company
has recorded no capital lease obligations on its balance sheet with respect to
the two drillships. The Glomar C.R. Luigs and the Glomar Jack Ryan began
operating under contract in April and December 2000, respectively.
The Company has interest rate risk in connection with these fully defeased
financing leases for the Glomar Jack Ryan and Glomar C. R. Luigs. The Defeasance
Payment earns interest based on the British Pound Sterling three-month LIBOR,
which approximated 8.00% at the time of the agreement. Should the Defeasance
Payment earn less than the assumed 8.00% rate of interest, the Company will be
required to make additional payments as necessary to augment the annual payments
made by the Payment Banks pursuant to the agreements. If the June 30, 2003,
LIBOR rate of 3.64% were to continue over the next ten years, the Company would
be required to fund an additional estimated $58 million during that period. Any
additional payments made by the Company pursuant to the financing leases would
increase the carrying
16
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
value of its leasehold interest in the rigs and therefore be reflected in higher
depreciation expense over their then-remaining useful lives. The Company does
not expect that, if required, any additional payments made under these leases
would be material to its financial position, results of operations or cash flows
in any given year.
There are no other material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, to which the
Company is a party or of which any of its property is the subject.
NOTE 5 - DEBT OFFERING
On February 11, 2003, the Company issued $250 million of 5% Notes due 2013 (the
"5% Notes") and received cash proceeds of approximately $247.4 million after
deduction for discount, underwriting fees and other related expenses. Interest
on the 5% Notes is payable on February 15 and August 15 of each year beginning
on August 15, 2003. No principal payments are required with respect to the 5%
Notes prior to their final maturity date. The Company has filed a registration
statement with the U.S. Securities and Exchange Commission, relating to an offer
to exchange the 5% Notes for registered notes having substantially identical
terms.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
In June 2003, the Company's Board of Directors declared a regular quarterly cash
dividend for the second quarter of 2003 of $0.0375 per ordinary share, payable
to shareholders of record as of the close of business on June 30, 2003. The
second quarter dividend in the amount of $8.8 million was paid on July 15, 2003.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides three
alternative methods of transition and disclosure requirements for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The three alternative methods available are: (1) the prospective
method, (2) the modified prospective method, and (3) the retroactive restatement
method. Under the prospective method, which is available only for companies
adopting SFAS No. 123 prior to December 16, 2003, compensation cost is
recognized for awards granted, modified or settled after the beginning of the
year of adoption. The modified prospective method recognizes compensation costs
from the beginning of the year of adoption as if the fair value method had been
used for all grants awarded, modified or settled in fiscal years beginning after
December 15, 1994. The retroactive restatement method provides that all periods
presented are restated to reflect compensation costs as if the fair value method
had been used for all grants awarded, modified or settled in fiscal years
beginning after December 15, 1994. In addition to providing compensation cost
recognition methods, SFAS No. 148 also requires certain disclosures, including
the accounting method used for each period presented, a description of the
method used to report the change in accounting principle and continuing tabular
presentation of proforma net income and earnings per share effects for any
awards outstanding under the intrinsic value method of Accounting Principles
Board Opinion No. 25. SFAS No. 148 is
17
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
effective for fiscal years ending after December 15, 2002. The Company has
reflected the disclosure provisions of SFAS No. 148 in Note 1, and is currently
evaluating the recognition provisions of SFAS No. 148 together with an overall
reconsideration of its stock-based compensation plans.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
interpretation provides guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights, or variable-interest entities ("VIEs"). FIN 46 is effective for
public entities with VIEs created before February 1, 2003, at the beginning of
the first interim or annual reporting period starting after June 15, 2003. For
VIEs created after January 31, 2003, FIN 46 is effective immediately. Upon the
applicable effective date, FIN 46 will become the guidance that determines
whether consolidation is required and whether the variable-interest accounting
model must be used to account for existing and new entities. The Company does
not believe that it currently has any VIEs within the scope of FIN 46.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. This statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. The Company does
not expect the adoption of SFAS No. 149 to have a material effect on its results
of operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Debt and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both debt and equity and is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not currently have any financial
instruments within the scope of SFAS 150.
18
GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a leading oil and gas drilling contractor, owning or operating a
high quality, technologically advanced fleet of over 100 marine and land
drilling rigs. The Company's fleet currently includes 13 floating rigs, 45
cantilevered jackup rigs, 31 land rigs and one platform rig, including the
high-performance cantilevered jackup, GSF Constellation I, which was delivered
in June 2003. The Company has two ultra-deepwater semisubmersibles and one
high-performance jackup under construction. The Company operates two
semisubmersible rigs for third parties under a joint venture agreement, and the
Company or its affiliates also currently operate 11 platform rigs in the North
Sea for third parties. The Company intends to exit its platform rig operations,
which have historically not had a material effect on the Company's consolidated
operating results. The Company provides oil and gas contract drilling services
to the oil and gas industry worldwide on a daily rate ("dayrate") basis. The
Company also provides oil and gas drilling management services on either a
dayrate or completed-project, fixed-price ("turnkey") basis, as well as drilling
engineering and drilling project management services, and it participates in oil
and gas exploration and production activities.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's consolidated financial statements are impacted by the accounting
policies used and the estimates and assumptions made by management during their
preparation. These policies, estimates and assumptions affect the carrying
values of assets and liabilities and disclosures of contingent assets and
liabilities at the balance sheet date and the amounts of revenues and expenses
recognized during the period. Actual results could differ from such estimates
and assumptions. For a discussion of the critical accounting policies and
estimates that the Company uses in the preparation of its condensed consolidated
financial statements, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002. There have been no changes to
these policies during the six months ended June 30, 2003.
19
OPERATING RESULTS
SUMMARY
Data relating to the Company's operations by business segment follows (dollars
in millions):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- Increase / ----------------------- Increase /
2003 2002 (Decrease) 2003 2002 (Decrease)
--------- --------- ---------- --------- --------- ----------
Revenues:
Contract drilling $ 358.0 $ 408.5 (12)% $ 717.6 $ 812.6 (12)%
Drilling management services 136.5 95.1 44 % 226.6 182.3 24 %
Oil and gas 5.3 2.5 112 % 11.4 4.2 171 %
Less: Intersegment revenues (2.4) (4.4) (45)% (5.2) (8.7) (40)%
--------- --------- --------- ---------
$ 497.4 $ 501.7 (1)% $ 950.4 $ 990.4 (4)%
========= ========= ========= =========
Operating income:
Contract drilling $ 60.2 $ 97.9 (39)% $ 101.2 $ 195.4 (48)%
Drilling management services 3.2 3.5 (9)% 5.9 11.2 (47)%
Oil and gas 3.3 0.9 267 % 7.4 1.3 469 %
Restructuring costs (2.9) - N/A (2.9) - N/A
Corporate expenses (12.6) (13.6) (7)% (27.1) (26.4) 3 %
--------- --------- --------- ---------
$ 51.2 $ 88.7 (42)% $ 84.5 $ 181.5 (53)%
========= ========= ========= =========
Operating income for the second quarter of 2003 decreased by $37.5 million to
$51.2 million from $88.7 million for the second quarter of 2002, due primarily
to lower utilization and dayrates for the Company's drilling fleet, a lower
contribution from the drilling management services segment and an increase in
the Company's restructuring liability discussed below. These factors were
partially offset by higher average natural gas prices and production and lower
corporate expenses.
Estimated costs related to the closure of Global Marine Inc.'s former Houston,
Texas, office were accrued as part of Restructuring costs in the Company's
consolidated financial statements for the year ended December 31, 2001. These
estimated costs were based on the assumption that this office space would be
subleased to a third party. The Company was unsuccessful in subleasing this
office space in 2002, and, based on management's best estimates at the time,
increased its remaining liability at December 31, 2002, by $2.9 million. Based
on current Houston commercial real estate market conditions, the Company now
believes it is probable that it will not be able to sublease this office space
before the end of the lease term. As a result, the Company accrued an additional
$2.9 million in Restructuring costs during the second quarter of 2003, and has
now accrued the entire liability under the lease as of June 30, 2003.
Operating income for the six months ended June 30, 2003, decreased by $97.0
million to $84.5 million from $181.5 million for the same period in 2002 due
primarily to lower utilization and dayrates for the Company's drilling fleet, a
lower contribution from the drilling management services segment, an increase in
corporate expenses and an increase in the Company's restructuring liability.
These factors were partially offset by higher average natural gas prices and
production.
20
The Company's contract drilling backlog at June 30, 2003, totaled approximately
$928 million, of which approximately $450 million is expected to be realized
during the remainder of 2003. Contract drilling backlog at December 31, 2002,
was $1.2 billion.
CURRENT MARKET CONDITIONS
The drilling business has historically been cyclical, marked by periods of low
demand, excess rig supply and low dayrates, followed by periods of high demand,
short rig supply and increasing dayrates. These cycles are highly volatile and
are traditionally influenced by a number of factors, including oil and gas
prices, the spending plans of the Company's customers and the highly competitive
nature of the offshore drilling industry. Even when rig markets appear to have
stabilized at a certain level of utilization and dayrates, these markets can
change swiftly, making it difficult to predict trends or conditions in the
market. The relocation of rigs from weak markets to stable or strong markets may
also have a significant impact on utilization and dayrates in the affected
markets. A summary of current market conditions in the Company's areas of
operations follows:
North Sea. The Company's North Sea fleet currently includes four
semisubmersibles, five cantilevered heavy-duty harsh environment ("HDHE")
jackups, three cantilevered jackups and a platform rig. The Company or its
affiliates also currently operate 11 platform rigs in the North Sea for third
parties. The Company intends to exit its platform rig operations, which have
historically not had a material effect on the Company's consolidated operating
results.
The North Sea semisubmersible market continues to be characterized by
significant overcapacity. Two of the Company's four semisubmersibles are
contracted into the fourth quarter of 2003, one has recently been released and
is idle and another is cold-stacked in Scotland (i.e., the rig is removed from
service, the crew is released, and little or no scheduled maintenance is
performed in anticipation of a prolonged period before the rig reenters
service). The Company expects utilization rates for semisubmersible rigs in the
North Sea to remain weak or deteriorate over the fall and winter months.
The medium-term prospects for the HDHE jackup market are brighter than for the
semisubmersible sector in the North Sea. Several programs have been announced to
commence in the fourth quarter of this year and the first quarter of 2004, with
some visibility for additional work through the middle of 2004, which could
result in strengthening of this market sector. The Company was successful in
securing contracts for the GSF Galaxy I and GSF Galaxy III following idle
periods during the first half of 2003. The GSF Galaxy I is contracted until the
end of September 2003 and the GSF Galaxy III is contracted until mid-November
2003, but both are working on standard specification jackup projects that
command lower dayrates than HDHE projects. Following an approximate 55-day idle
period, the GSF Monitor will commence a one-well contract in the southern North
Sea and then mobilize to a multi-well contract offshore Trinidad and Tobago in
the fourth quarter of 2003. The GSF Magellan will complete its current contract
assignment in mid-August and following a period of repairs will be marketed in
the North Sea area. The remaining HDHE jackup, GSF Monarch, continues under a
long-term contract into late 2004.
The standard specification jackups, GSF Labrador and GSF Adriatic XI, continue
under contract into the third and fourth quarter of 2003, respectively, and the
Britannia continues under a long-term contract into late 2004. The Company's
platform rig is under contract through the end of 2003.
U.S. Gulf of Mexico. The Company currently operates ten cantilevered jackups and
two semisubmersibles in the U.S. Gulf of Mexico market. With the mobilization of
a number of jackups to other markets, the
21
supply and demand outlook for jackups is improving, although this market
continues to be characterized by short-term contracts. During the second quarter
of 2003, the Company experienced an increase in demand for its cantilevered
jackup rigs, with utilization rates increasing from 91% in the first quarter of
2003 to 99.6% in the second quarter, while the industry utilization rate for all
jackups increased from 71% to 75% for the same period. Dayrates for the
Company's jackups are expected to increase during the third quarter from second
quarter levels.
Although the current industry utilization rate for semisubmersibles in the U.S.
Gulf of Mexico is 63%, the Company was successful in securing contracts for its
two semisubmersibles, one of which will expire in the third quarter of 2003 and
the other will expire in the fourth quarter of 2003. The U.S. Gulf of Mexico
market for semisubmersibles is expected to remain weak for the remainder of this
year.
Ultra-deepwater drillship market. The Company currently operates three
drillships in the ultra-deepwater market. Two are under contract in the U.S.
Gulf of Mexico and one has completed a contract in Australia and is moving to
the Atlantic Basin. The worldwide ultra-deepwater market is currently
oversupplied, and numerous units in this class have contracts expiring in 2003
and 2004. Most of the original contracts for these units were for terms of three
to five years. The Company believes that as these contracts expire, the market
for these rigs will shift to shorter-term contracts, sometimes for a single
well. This shift may have the effect of exposing these rigs to periods of
downtime between contracts.
During the second quarter of 2003, the Company was successful in securing an
extension to the contract for the Glomar C.R. Luigs until the first quarter of
2004. The Glomar Jack Ryan has completed its contract in Australia and is moving
to the Atlantic Basin where there are several prospects for work, although such
prospects are not in direct continuation of its prior contract. The contract for
the Glomar Explorer has been extended into the fourth quarter of 2003.
West Africa. The Company currently operates two semisubmersibles and nine
cantilevered jackups in this market. The West Africa market continues to be
dominated by the level of rig demand in Nigeria, traditionally the area with the
largest concentration of rigs in this market. The market was stable in West
Africa through the first quarter of 2003 until several operators announced the
early termination of rig contracts due to funding difficulties with their
partner, the Nigerian national oil company. The Company currently expects that
these operators' jackup requirements will increase later this year or early in
2004, at which time the Company expects that supply and demand for jackups will
return to a more balanced condition. Both of the Company's semisubmersibles in
this market are contracted through 2003. The Company's utilization rate for its
nine cantilevered jackup rigs declined from 98% during the first quarter of 2003
to 93% during the second quarter, while industry utilization rates for jackups
in West Africa experienced a similar decline. Four of the Company's jackups in
this market are contracted through the end of 2003.
Middle East and Mediterranean. The Company currently operates six cantilevered
jackups in the Middle East region, three cantilevered jackups in the
Mediterranean region offshore North Africa and has a moored drillship
cold-stacked in Malta. With the exception of a three-month repair project ending
mid-September 2003 on the GSF Key Singapore, all nine of the Company's jackups
are contracted for the balance of 2003.
Southeast Asia. The Company currently operates seven cantilevered jackups in
this market. The recently constructed GSF Constellation I will commence a
multi-well contract in this region in August 2003. Of
22
the remaining six jackups, one is contracted until the fourth quarter of 2003,
while four are contracted into 2004. The remaining jackup is being upgraded in a
Singapore shipyard and has received a letter of intent for a contract
immediately following the upgrade project. Although the market is generally
balanced in this region and utilization remains high, the Company has observed a
reduction in dayrates with recent contract fixtures.
Other. The Company currently operates one semisubmersible and one HDHE jackup
offshore eastern Canada. The semisubmersible commenced a two-year contract in
July 2003. The jackup is under contract into the first quarter of 2004. In
Trinidad and Tobago, the Company currently operates one cantilevered jackup,
which will commence a new contract in September 2003 after completing an upgrade
project.
Land drilling fleet. The Company owns 31 land drilling rigs, with 19 of these
located in the Middle East (12 rigs in Kuwait, four in Saudi Arabia and three in
Oman), four in North Africa and eight in Venezuela. Seven of the Company's 12
land rigs in Kuwait are currently operating, five of which are contracted into
the third quarter of 2004. The Company has four land rigs in Saudi Arabia, three
of which have contracts expiring in October and November 2003, and January 2004,
respectively. The Company expects its four land rigs in Egypt and two of its
three land rigs in Oman to be fully utilized for the balance of 2003. Although
the labor strike has ceased in Venezuela, none of the Company's eight land rigs
located there are currently operating.
FUTURE MARKET FOR NEWBUILDS
In June 2003, the Company took delivery of the GSF Constellation I, the first of
the Company's two high-performance jackups under construction and was successful
in securing a multi-well contract. The GSF Development Driller I, the first of
two ultra-deepwater semisubmersibles under construction, and the second
high-performance jackup, GSF Constellation II, are scheduled for delivery around
the end of the first quarter of 2004. The GSF Development Driller II, the second
of the two ultra-deepwater semisubmersibles, is scheduled for delivery in the
second quarter of 2005. Although the Company has options for construction of
additional ultra-deepwater semisubmersible units beyond the two under
construction, it does not intend to exercise these options. The Company's
ability to obtain contracts for its newbuild rigs and the terms of such
contracts will depend on market conditions at the time these rigs are available
for contract.
23
CONTRACT DRILLING OPERATIONS
Data with respect to the Company's contract drilling operations follows (dollars
in millions, except average revenues per day):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- Increase/ ---------------------- Increase/
2003 2002 (Decrease) 2003 2002 (Decrease)
------- ------- ---------- --------- ------- ----------
Contract drilling revenues
by area: (1)
U.S. Gulf of Mexico $ 78.1 $ 96.2 (19)% $ 156.5 $ 188.1 (17)%
North Sea 70.8 126.2 (44)% 140.8 242.7 (42)%
West Africa 65.1 47.5 37 % 131.6 97.2 35 %
Southeast Asia 36.8 26.1 41 % 73.9 48.4 53 %
Middle East 32.9 56.4 (42)% 70.6 106.8 (34)%
North Africa 26.6 14.7 81 % 51.5 23.7 117 %
South America 5.8 21.6 (73)% 12.2 60.5 (80)%
Other 41.9 19.8 112 % 80.5 45.2 78 %
------- ------- --------- -------
$ 358.0 $ 408.5 (12)% $ 717.6 $ 812.6 (12)%
======= ======= ========= =======
Average marine rig utilization
by area:
U.S. Gulf of Mexico 97% 94% 3 % 94% 93% 1 %
North Sea 78% 94% (17)% 72% 91% (21)%
West Africa 86% 84% 2 % 88% 83% 6 %
Southeast Asia 83% 75% 11 % 86% 72% 19 %
Middle East 100% 100% - % 100% 100% - %
North Africa 87% 100% (13)% 87% 79% 10 %
South America 100% 62% 61 % 100% 81% 23 %
Other 75% 100% (25)% 75% 100% (25)%
Total average rig utilization:
Marine rigs 88% 89% 86% 89%
Land rigs 52% 69% 52% 75%
Average revenues per day:
Marine rigs $69,400 $77,000 $ 70,500 $76,600
Land rigs $17,400 $17,700 $ 17,700 $18,100
- ------------------
(1) Includes revenue earned from affiliates.
Three Months Ended June 30, 2003, Compared to Three Months Ended June 30, 2002
Contract drilling revenues decreased $50.5 million to $358.0 million for the
second quarter of 2003 compared to $408.5 million for the 2002 second quarter.
Lower dayrates for the Company's marine drilling fleet accounted for
approximately $24.3 million of this decrease and lower marine utilization
accounted for approximately $13.5 million. These decreases were due primarily to
lower utilization and dayrates for the Company's marine drilling fleet in the
North Sea, lower dayrates for the Company's deepwater semisubmersible GSF Arctic
I operating in the U.S. Gulf of Mexico and lower utilization for the
24
semisubmersible Glomar Grand Banks located off the east coast of Canada, which
was idle during the entire second quarter of 2003 for planned upgrades. In
addition, the Company's moored drillship, the Glomar Robert F. Bauer, was
cold-stacked during the second quarter of 2003 as compared to operating under
contract for half of the prior year's second quarter. These decreases were
offset in part by increases in dayrates and utilization for the Company's jackup
fleet in the U.S. Gulf of Mexico and by increases in average utilization for the
Company's rigs in West Africa and Southeast Asia.
Lower utilization of the Company's land drilling fleet accounted for an
additional $8.7 million of the decrease in contract drilling revenues.
Approximately $2.2 million of this decrease was due to the temporary suspension
of drilling operations in Kuwait in mid-March 2003 due to the then-pending
conflict in neighboring Iraq. The Company resumed its operations in Kuwait in
April 2003. In addition, as a result of continuing political uncertainty in
Venezuela, two land rigs that were operating under contract during part of the
prior year's second quarter were idle during the second quarter of 2003.
The mobilization of marine rigs between the geographic areas shown in the
following table also affected each area's revenues over the periods indicated.
These mobilizations were as follows:
Completion
Rig Rig Type From To Date
- ------------------- ------------------- ------------------ ------------------ ----------
Glomar Jack Ryan Drillship U.S Gulf of Mexico South America Mar-02
Glomar Jack Ryan Drillship South America U.S Gulf of Mexico May-02
Glomar Jack Ryan Drillship U.S Gulf of Mexico Other (Australia) Oct-02
GSF Labrador Cantilevered Jackup South America North Sea May-02
GSF Baltic Cantilevered Jackup South America West Africa Jul-02
Glomar Grand Banks Semisubmersible North Sea Other (Canada) Jul-02
Glomar Adriatic III Cantilevered Jackup South America U.S Gulf of Mexico Aug-02
GSF Adriatic VI Cantilevered Jackup North Sea West Africa Nov-02
GSF Rig 135 Semisubmersible North Sea West Africa Jan-03
GSF Adriatic IV Cantilevered Jackup U.S Gulf of Mexico North Africa Mar-03
Contract drilling operating expenses decreased by $14.8 million, or 6.0%, in the
second quarter of 2003 as compared to the 2002 second quarter due primarily to
lower labor and reimbursable expenses as a result of the decrease in rig
utilization noted above, and lower repair and maintenance expenses, partly
offset by an increase in insurance expense. The increase in insurance expense
was due primarily to increases in premiums incurred in connection with the
renewal of the Company's insurance program in June 2002. The Company renewed its
insurance program in July 2003 with lower premiums and higher deductibles (see
"Liquidity and Capital Resources - Risk Factors.") Contract drilling
depreciation expense increased by $2.0 million due primarily to upgrades on
several marine rigs during 2002.
Contract drilling operating income and margin decreased to $60.2 million and
17%, respectively, for the second quarter of 2003 from $97.9 million and 24%,
respectively, for the second quarter of 2002, due primarily to lower rig
utilization and dayrates as discussed above.
25
Six Months Ended June 30, 2003, Compared to Six Months Ended June 30, 2002
Contract drilling revenues decreased by $95.0 million to $717.6 million for the
six months ended June 30, 2003, compared to $812.6 million for the six months
ended June 30, 2002. Lower dayrates for the Company's marine drilling fleet
accounted for $39.9 million of this decrease, lower utilization for the
Company's marine fleet accounted for $29.9 million and lower utilization for the
Company's land rigs accounted for $23.4 million. These decreases were due
primarily to lower marine utilization and dayrates in the North Sea, Canada and
deepwater U.S. Gulf of Mexico, and lower utilization of the Company's land rigs
in the Middle East and Venezuela. These decreases were offset in part by
increases in dayrates and utilization for the Company's jackup fleet in the U.S.
Gulf of Mexico and Southeast Asia, and by increases in average marine
utilization in West Africa.
During the six months ended June 30, 2003, a total of 11 of the Company's marine
rigs were idle for various periods due primarily to upgrade projects, and repair
and maintenance work. In addition, eight marine rigs were idle for various
periods during the first half of 2003 due to market weakness primarily in the
North Sea and the U.S. Gulf of Mexico. Fourteen of these 19 rigs have returned
to work, two are expected to return to work during the third quarter of 2003 and
two are currently idle. The remaining semisubmersible, GSF Arctic II, underwent
a major paint project during most of the first half of 2003, after which it was
cold-stacked in Scotland. In addition, the Company's moored drillship, the
Glomar Robert F. Bauer, was cold-stacked the entire first half of 2003 as
compared to operating under contract for most of the comparable 2002 period.
During the six months ended June 30, 2002, 11 rigs were idle for various periods
due to upgrades and repairs and maintenance, and an additional seven rigs were
idle due to market weakness.
Contract drilling operating expenses decreased by $5.4 million, or 1.1%, for the
six months ended June 30, 2003, as compared to the six months ended June 30,
2002, due primarily to decreases in reimbursable expenses and repair and
maintenance expense, partly offset by an increase in insurance expense. The
increase in insurance expense was due primarily to increases in premiums
incurred in connection with the renewal of the Company's insurance program in
June 2002. Contract drilling depreciation expense increased by $4.6 million due
primarily to upgrades on several of the Company's marine rigs during 2002.
The Company's operating income and margin for contract drilling operations
decreased to $101.2 million and 14%, respectively, for the first half of 2003
from $195.4 million and 24%, respectively, for the comparable period of 2002,
due primarily to lower rig utilization and dayrates as discussed above.
As of August 1, 2003, 14 of the Company's marine rigs were located in the U.S.
Gulf of Mexico, 13 were located in the North Sea, 11 were offshore West Africa,
seven were in Southeast Asia, six were in the Middle East, three were offshore
North Africa, two were off the east coast of Canada, one was offshore Trinidad
and Tobago, one was moving to the Atlantic Basin and one was cold-stacked
in Malta.
As of August 1, 2003, 19 of the Company's 31 land rigs were located in the
Middle East, eight were in South America and four were in North Africa.
As of August 1, 2003, 52 of the Company's 59 marine rigs and 16 of the Company's
31 land rigs were either committed or under contract.
26
DRILLING MANAGEMENT SERVICES
Three Months Ended June 30, 2003, Compared to Three Months Ended June 30, 2002
Drilling management services revenues increased by $41.4 million to $136.5
million in the second quarter of 2003 from $95.1 million in the comparable 2002
quarter. The increase in revenues consisted of $28.0 million attributable to an
increase in the number of turnkey projects and a $16.5 million increase
attributable to reimbursable, daywork and other revenues, partly offset by a
$3.1 million decrease attributable to lower average revenues per turnkey
project. The Company completed 35 turnkey projects in the second quarter of 2003
(25 wells drilled and ten well completions) as compared to 23 turnkey projects
in the second quarter of 2002 (20 wells drilled and three well completions).
Drilling management services operating income and margin, however, decreased to
$3.2 million and 2.3%, respectively, in the second quarter of 2003 from $3.5
million and 3.7%, respectively, in the second quarter of 2002, due primarily to
lower margins achieved on turnkey wells drilled in 2003. The lower margins in
2003 resulted from losses totaling $4.5 million, primarily on three of the 35
turnkey projects completed in the second quarter of 2003, compared to losses
totaling $1.6 million on four of the 23 turnkey projects completed in the second
quarter of 2002.
Results for the second quarters of 2003 and 2002 were favorably affected by
downward revisions to cost estimates for certain wells completed in prior
periods. Such revisions increased segment operating income by $2.1 million and
$2.3 million, respectively, for the three months ended June 30, 2003 and 2002.
The effect of these revisions, however, was more than offset by the deferral of
turnkey drilling profit totaling $1.9 million and $3.3 million, respectively for
the quarters ended June 30, 2003 and 2002, on wells in which Challenger
Minerals, Inc. ("CMI"), a wholly-owned subsidiary of the Company, was either the
operator or held a working interest. This turnkey profit has been credited to
the Company's full cost pool of oil and gas properties and will be recognized
through a lower depletion rate as reserves are produced.
Subsequent to June 30, 2003, one turnkey project underway at quarter-end
encountered unforeseen delays and difficulties in drilling the well, which will
result in a third quarter 2003 pretax loss recognition for this project
currently estimated at $0.9 million.
Six Months Ended June 30, 2003, Compared to Six Months Ended June 30, 2002
Drilling management services revenues increased by $44.3 million to $226.6
million for the six months ended June 30, 2003, from $182.3 million in the
comparable 2002 period. The increase in revenues consisted of $32.9 million
attributable to an increase in the number of turnkey projects and a $17.3
million increase attributable to reimbursable, daywork and other revenues,
partly offset by a $5.9 million decrease attributable to lower average revenues
per turnkey project. The Company completed 61 turnkey projects in the first half
of 2003 (45 wells drilled and 16 well completions) as compared to 46 turnkey
projects in the comparable period of 2002 (38 wells drilled and eight well
completions).
Drilling management services operating income and margin, however, decreased to
$5.9 million and 2.6%, respectively, for the six months ended June 30, 2003,
from $11.2 million and 6.1%, respectively, in the same period in 2002, due
primarily to lower margins achieved on turnkey wells drilled in 2003. The lower
margins in 2003 resulted from losses totaling $6.0 million, due primarily to
five of the 61 turnkey projects completed in the first half of 2003 compared to
losses totaling $1.6 million on four of the 46 turnkey
27
projects completed in the comparable period of 2002. Operating income for the
2002 period also includes $1.5 million of revenue earned in the first quarter of
2002 related to a turnkey well drilled in the North Sea in December 2000, in
which the Company was entitled to additional payments based on cumulative
production from the well.
Results for the first half of 2003 and 2002 were also favorably affected by
downward revisions to cost estimates of wells completed in prior periods
totaling $3.4 million and $2.8 million, respectively, offset by the deferral of
turnkey drilling profit totaling $4.8 million and $5.7 million, respectively,
related to wells in which CMI was either the operator or held a working
interest.
OTHER INCOME AND EXPENSE
General and administrative expenses decreased to $11.4 million for the second
quarter of 2003 from $12.9 million for the comparable prior year's quarter due
primarily to lower outside services, software and maintenance charges and travel
expenses, offset in part by higher pension expense. General and administrative
expenses totaled $24.9 million for both the six months ended June 30, 2003, and
2002, as an increase in pension expense was offset by lower outside services,
software and maintenance charges and business travel. Pension expense included
in general and administrative expenses for the three and six months ended June
30, 2003, increased by $0.7 million and $2.2 million, respectively, from the
comparable prior year periods as a result of lower than anticipated pension
asset performance in 2002, changes in plan assumptions and plan amendments.
Interest expense increased to $17.6 million and $33.8 million, respectively, for
the three and six months ended June 30, 2003, compared to $14.3 million and
$28.6 million, respectively for the same periods in 2002, due primarily to the
issuance of the 5% Notes on February 11, 2003, as discussed in "Liquidity and
Capital Resources - Financing and Investing Activities."
The Company capitalized $10.2 million and $19.2 million, respectively, of
interest costs for the three and six months ended June 30, 2003, compared to
$4.3 million and $7.5 million, respectively, for the comparable prior year
periods in connection with the Company's rig expansion program as discussed in
"Liquidity and Capital Resources - Financing and Investing Activities."
Interest income decreased to $2.9 million and $5.8 million for the three and six
months ended June 30, 2003, respectively, from $3.8 million and $8.2 million for
the comparable 2002 periods, as a result of lower interest rates earned in 2003
on the Company's cash, cash equivalents and marketable securities balances,
offset in part by an increase in cash and cash equivalents balances in
connection with the issuance of the 5% Notes noted above.
Other income totaled $24.2 million for the six months ended June 30, 2003, due
primarily to $22.3 million awarded to the Company in 2003 as a result of the
settlement of claims filed in 1993 with the United Nations Compensation
Commission ("UNCC") for losses suffered as a result of the Iraqi invasion of
Kuwait in 1990. The claims were for the loss of four rigs and associated
equipment, lost revenue and miscellaneous expenditures.
28
INCOME TAXES
The Company's effective income tax rates for financial reporting purposes were
approximately 10.4% and 10.1%, respectively, for the three and six months ended
June 30, 2003, as compared to 11.6% and 10.5%, respectively, for the same
periods in 2002. The rate for the six months ended June 30, 2003, was reduced by
the effect of the $22.3 million UNCC settlements discussed above, and a $1.7
million benefit from adjusting estimated foreign taxes previously accrued to
actual taxes assessed. Based on current anticipated market conditions in the
Company's areas of operations, the Company believes that its effective tax rate
will be approximately 15.6% for the remainder of 2003.
The Company is domiciled in the Cayman Islands, and the Cayman Islands does not
impose a corporate income tax. Consequently, income taxes have been provided
based upon the tax laws and rates in effect in the countries in which operations
are conducted and income is earned. The income taxes imposed in these
jurisdictions vary substantially. The Company's effective tax rate for financial
statement purposes will continue to fluctuate from quarter to quarter and year
to year as the Company's operations are conducted in different taxing
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF LIQUIDITY
The Company's primary sources of liquidity are its cash and cash equivalents,
marketable securities and cash generated from operations. As of June 30, 2003,
the Company had $944.9 million of cash, cash equivalents and marketable
securities, all of which was unrestricted. The Company had $736.5 million in
cash, cash equivalents and marketable securities at December 31, 2002, all of
which was unrestricted. Cash generated from operating activities totaled $178.8
million and $232.0 million for the six months ended June 30, 2003 and 2002,
respectively.
FINANCING AND INVESTING ACTIVITIES
The Company has definitive contracts with PPL Shipyard PTE, Ltd. of Singapore
("PPL") for construction of two ultra-deepwater semisubmersibles and one
high-performance jackup, with options for up to two additional similarly priced
semisubmersibles. The Company does not intend to exercise these options. In June
2003, the Company took delivery of the GSF Constellation I, the first of two
high-performance jackups ordered from PPL, at a total cost of $133 million,
excluding an estimated $19 million of capitalized interest, capital spares,
startup expenses and mobilization costs. Estimated cash outlays in connection
with the construction of the remaining high-performance jackup, the GSF
Constellation II, excluding capitalized interest, startup costs, capital spares
and mobilization costs, are expected to total approximately $133 million. Of the
$133 million, $79 million had been incurred as of June 30, 2003. A total of
approximately $75 million is expected to be incurred in 2003, including
approximately $34 million incurred during the six months ended June 30, 2003,
and an additional $13 million is expected to be incurred in 2004. Estimated cash
outlays in connection with construction of the two ultra-deepwater
semisubmersibles, excluding capitalized interest, startup costs, capital spares
and mobilization costs, are expected to total approximately $570 million, or an
average of $285 million per rig. Of the $570 million, $354 million had been
incurred as of June 30, 2003. A total of approximately $169 million is expected
to be incurred in 2003, including $59 million incurred during the six months
ended June 30, 2003, and an
29
additional $106 million is expected to be incurred in 2004. The GSF
Constellation II and the first of two ultra-deepwater semisubmersibles, the GSF
Development Driller I, are expected to be delivered around the end of the first
quarter of 2004. The second ultra-deepwater semisubmersible, the GSF Development
Driller II, is expected to be delivered in the second quarter of 2005. The
Company expects to fund the construction and startup of these rigs from its
existing cash, cash equivalents and marketable securities balances, and future
cash flow from operations.
None of the three vessels that the Company currently has under construction has
secured a contract for deployment upon completion. While the Company believes
that its newbuild rigs will have substantial advantages in efficiency and
capability over competitive equipment in the industry, it may not be able to
obtain contracts for all of its new rigs or contract terms may not be similar to
those for comparable equipment in current market conditions. The Company is
actively marketing the GSF Development Driller I and the GSF Constellation II.
In January 2003, in order to take advantage of an attractive financing
structure, the Company entered into a lease-leaseback arrangement with a
European bank related to the Company's Britannia cantilevered jackup. Pursuant
to this arrangement, the Company leased the Britannia to the bank for a
five-year term for a lump-sum payment of approximately $37 million, net of
origination fees of approximately $1.5 million. The bank then leased the rig
back to the Company for a five-year term with an effective annual interest rate
based on the 3-month British Pound Sterling LIBOR plus a margin of 0.625%, under
which the Company will make annual lease payments of approximately $8.0 million,
payable in advance. The Company has classified this arrangement as a capital
lease.
On February 11, 2003, the Company issued $250 million of 5% Notes due 2013 (the
"5% Notes") and received cash proceeds of approximately $247.4 million after
deduction for discount, underwriting fees and other related expenses. The
Company currently has no specific application for the funds other than for
general corporate purposes, and, pending their use, the net proceeds are
invested in short-term investments. Interest on the 5% Notes is payable on
February 15 and August 15 of each year beginning on August 15, 2003. No
principal payments are required with respect to the 5% Notes prior to their
final maturity date. The Company has filed a registration statement with the
U.S. Securities and Exchange Commission, relating to an offer to exchange the 5%
Notes for registered notes having substantially identical terms.
Other significant financing and investing activities during the six months ended
June 30, 2003, were as follows:
- Paid quarterly dividends of $7.6 million ($0.0325 per ordinary share) in
January 2003 for the fourth quarter of 2002 and $8.7 million ($0.0375
per ordinary share) in April 2003 for the first quarter of 2003.
- Announced in June 2003 that the Company's Board of Directors declared a
regular quarterly cash dividend for the second quarter of 2003 of
$0.0375 per ordinary share. The dividend in the amount of $8.8 million
was paid on July 15, 2003, to shareholders of record as of the close of
business on June 30, 2003.
The Company's debt to capitalization ratio, calculated as the ratio of total
debt, including undefeased capitalized lease obligations, to the sum of total
shareholders' equity and total debt, was 22.2% at June 30, 2003, compared to
18.2% at December 31, 2002. The Company's total debt includes the current
portion of
30
its capitalized lease obligations, which totaled $9.8 million and $1.8 million
at June 30, 2003, and December 31, 2002, respectively.
CASH FLOWS
For the six months ended June 30, 2003, cash flow provided by operating
activities totaled $178.8 million. An additional $249.4 million was provided
from the issuance of the 5% Notes, net of discount, $30.5 million was received
in connection with the lease-leaseback of the Britannia jackup (net of the
initial lease payment), $9.1 million was provided from maturities of marketable
securities (net of purchases), $7.7 million was provided from the issuance of
ordinary shares in connection with the Company's stock-based compensation plans,
and $2.4 million was provided from the sales of properties and equipment. From
the $477.9 million sum of cash inflows, $245.1 million was used for capital
expenditures, $16.3 million was used for dividend payments and $3.4 million was
used to pay financing costs in connection with the 5% Notes and the Britannia
jackup lease-leaseback.
For the six months ended June 30, 2002, cash flow provided by operating
activities totaled $232.0 million. An additional $69.2 million was provided from
the sales of properties and equipment, including $35.0 million of funds received
in the first quarter of 2002 in connection with the sale of the Glomar Beaufort
Sea I in 2001, $24.8 million was provided from the issuance of ordinary shares
in connection with the Company's stock-based compensation plans, and $3.2
million was provided from maturities of marketable securities (net of
purchases). From the $329.2 million sum of cash inflows, $216.0 million was used
for capital expenditures and $15.2 million was used for dividend payments.
FUTURE CASH REQUIREMENTS
As of June 30, 2003, the Company had total long-term debt and capital lease
obligations, including the current portion of its capital lease obligations, of
$1,231.8 million and shareholders' equity of $4,316.3 million. Long-term debt
consisted of $332.8 million (net of discount) Zero Coupon Convertible Debentures
due 2020, $302.8 million (net of discount) 7 1/8% Notes due 2007, $296.8 million
(net of discount) 7% Notes due 2028, $249.4 (net of discount) 5% Notes due 2013
and capital lease obligations, including the current portion, totaling $50.0
million. The Company was in compliance with its debt covenants at June 30, 2003.
Annual interest on the 7 1/8% Notes is $21.4 million, payable semiannually each
March and September. Annual interest on the 7% Notes is $21.0 million, payable
semiannually each June and December. Annual interest on the 5% Notes issued in
February 2003 is $12.5 million, payable semiannually each February and August,
beginning August 15, 2003. No principal payments are due under the three issues
until the maturity date.
The Company may redeem the 7 1/8% Notes, the 7% Notes and the 5% Notes in whole
at any time, or in part from time to time, at a price equal to 100% of the
principal amount thereof plus accrued interest, if any, to the date of
redemption, plus a premium, if any, relating to the then-prevailing Treasury
Yield and the remaining life of the notes. The indentures relating to the 5%
Notes, the Zero Coupon Convertible Debentures, 7 1/8% Notes and 7% Notes contain
limitations on the Company's ability to incur indebtedness for borrowed money
secured by certain liens and on its ability to engage in certain sale/leaseback
transactions. The Zero Coupon Convertible Debentures, 7 1/8% Notes and 7% Notes
continue to be obligations of Global Marine Inc., and GlobalSantaFe Corporation
has not guaranteed any
31
of these obligations. GlobalSantaFe Corporation is the sole obligor under the 5%
Notes.
The Zero Coupon Convertible Debentures were issued at a price of $499.60 per
debenture, which represents a yield to maturity of 3.5% per annum to reach an
accreted value at maturity of $1,000 per debenture. The Company has the right to
redeem the debentures in whole or in part on or after June 23, 2005, at a price
equal to the issuance price plus accrued original issue discount through the
date of redemption. Each debenture is convertible into 8.125103 GlobalSantaFe
Ordinary Shares (4,875,062 total shares) at the option of the holder at any time
prior to maturity, unless previously redeemed. Holders have the right to require
the Company to repurchase the debentures on June 23, 2005, June 23, 2010, and
June 23, 2015, at a price per debenture of $594.25 on June 23, 2005, $706.82 per
debenture on June 23, 2010, and $840.73 per debenture on June 23, 2015. These
prices represent the accreted value through the date of repurchase. The Company
may pay the repurchase price with either cash or stock or a combination thereof.
The Company does not anticipate using stock to satisfy any such future purchase
obligation.
In August 2002, the Company's Board of Directors authorized the Company to
repurchase up to $150 million of its ordinary shares from time to time depending
on market conditions, the share price and other factors. No repurchases were
made in the first half of 2003. At June 30, 2003, $98.6 million of this
authorized amount remained available for future purchases.
Capital expenditures for 2003 are currently estimated to be approximately $556
million, including $274 million in connection with the construction of the four
newbuild marine rigs, $122 million for expenditures required to maintain the
Company's fleet in accordance with its operating standards, $114 million for
major upgrades to the marine fleet, $38 million for capitalized interest and $8
million for other capital expenditures.
The Company has various commitments primarily related to its debt and capital
lease obligations, leases for office space and other property and equipment as
well as commitments for construction of drilling rigs. The Company expects to
fund these commitments from its existing cash and cash equivalents and future
cash flow from operations.
As part of the Company's goal of enhancing long-term shareholder value, the
Company has from time to time considered and actively pursued business
combinations and the acquisition or construction of suitable additional drilling
rigs and other assets. If the Company decides to undertake a business
combination or an acquisition or additional construction projects, the issuance
of additional debt or additional shares could be required.
The Company believes it will be able to meet all of its current obligations,
including working capital requirements, capital expenditures and debt service,
from its existing cash and cash equivalents and future cash flow from
operations.
RISK FACTORS
Severe Acute Respiratory Syndrome.
SARS is a highly communicable disease, outbreaks of which occurred earlier in
2003 in Southeast Asia and other parts of the world in which we operate. Travel
restrictions and quarantines imposed primarily in Southeast Asia posed some
interference with our operations during 2003. Scientists are predicting that
SARS may reappear during the next flu season. The reappearance of SARS could
adversely impact the
32
global economy, the worldwide demand for oil and natural gas and the level of
demand for our services. SARS or other public health threats could also bring
about quarantines of our personnel, the inability to access our offices or rigs,
or restrictions on travel to or through countries in which we operate. These
restrictions could curtail our ability to operate our rigs. The SARS outbreak
earlier in 2003 was most severe in Southeast Asia where we currently operate
seven jackup rigs and maintain offices (in Indonesia, Malaysia, Thailand and
Vietnam). We also have two deepwater semisubmersible rigs and a premium jackup
rig under construction in Singapore. Any quarantine of personnel or inability to
access our offices or rigs could adversely affect us, including delaying the
delivery of the three rigs under construction. Travel restrictions or
operational problems in any part of the world in which we operate, or any
reduction in the demand for drilling services caused by SARS or other public
health threats in the future, may materially impact operations and adversely
affect our financial results.
The Company's business involves numerous operating hazards and it is not fully
insured against all of them; the occurrence of an uninsured or unidentified
event could have an adverse effect on its results and financial position.
The Company's operations are subject to the usual hazards incident to the
drilling of oil and natural gas wells, including blowouts, explosions, oil
spills and fires. The Company's activities are also subject to hazards peculiar
to marine operations, such as collision, grounding, and damage or loss from
severe weather.
All of these hazards can cause personal injury and loss of life, severe damage
to and destruction of property and equipment, pollution or environmental damage
and suspension of operations. The Company insures against, or will have
indemnification from customers for some, but not all, of these risks. The
Company does not generally insure against loss of revenue for rigs that are
damaged or destroyed. The Company's insurance contains various deductibles and
limitations on coverage and deductibles. In light of the current volatility in
the insurance markets and recent significant increases in rates, the Company may
elect to change its insurance coverage, including by increasing deductibles,
retentions and other limitations on coverage. Changes in coverage such as those
would effectively increase the amount of risk against which the Company is not
insured.
As a result of poor underwriting results suffered by the insurance industry over
the past few years and the catastrophic events of September 11, 2001, the
Company has been faced with the prospect of paying significantly higher
insurance premiums and/or significantly increasing its deductibles in order to
offset or mitigate premium increases. As compared with the Company's insurance
obtained in the summer of 2001, its current insurance has a similar annual
premium, but is subject to significantly higher deductibles. Most notably, the
Company's deductible for insurance for rig physical damage increased from less
than $500,000 to $10 million per occurrence, subject to a $20 million aggregate
deductible. The Company may face increases in premiums or deductibles or both in
the future.
The occurrence of a significant event, including terrorist acts, war, civil
disturbances, pollution or environmental damage, not fully insured or
indemnified against or the failure of a customer to meet its indemnification
obligations, could materially and adversely affect the Company's operations and
financial condition. The Company may not be able to maintain adequate insurance
in the future at rates its considers reasonable or be able to obtain insurance
against certain risks, particularly in light of the instability and developments
in the insurance markets following the recent terrorist attacks.
There are additional risk factors inherent in the Company's business and in the
oil and gas industry as a whole, many of which are beyond the Company's control.
For a discussion of these risk factors, see "Risk
33
Factors" under Items 1 and 2 in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides three
alternative methods of transition and disclosure requirements for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The three alternative methods available are: (1) the prospective
method, (2) the modified prospective method, and (3) the retroactive restatement
method. Under the prospective method, which is available only for companies
adopting SFAS No. 123 prior to December 16, 2003, compensation cost is
recognized for awards granted, modified or settled after the beginning of the
year of adoption. The modified prospective method recognizes compensation costs
from the beginning of the year of adoption as if the fair value method had been
used for all grants awarded, modified or settled in fiscal years beginning after
December 15, 1994. The retroactive restatement method provides that all periods
presented are restated to reflect compensation costs as if the fair value method
had been used for all grants awarded, modified or settled in fiscal years
beginning after December 15, 1994. In addition to providing compensation cost
recognition methods, SFAS No. 148 also requires certain disclosures, including
the accounting method used for each period presented, a description of the
method used to report the change in accounting principle and continuing tabular
presentation of proforma net income and earnings per share effects for any
awards outstanding under the intrinsic value method of Accounting Principles
Board Opinion No. 25. SFAS No. 148 is effective for fiscal years ending after
December 15, 2002. The Company has reflected the disclosure provisions of SFAS
No. 148 in Note 1 of Notes to the Condensed Consolidated Financial Statements,
and is currently evaluating the recognition provisions of SFAS No. 148 together
with an overall reconsideration of its stock-based compensation plans.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
interpretation provides guidance on the identification of, and financial
reporting for, entities over which control is achieved through means other than
voting rights, or variable-interest entities ("VIEs"). FIN 46 is effective for
public entities with VIEs created before February 1, 2003, at the beginning of
the first interim or annual reporting period starting after June 15, 2003. For
VIEs created after January 31, 2003, FIN 46 is effective immediately. Upon the
applicable effective date, FIN 46 will become the guidance that determines
whether consolidation is required and whether the variable-interest accounting
model must be used to account for existing and new entities. The Company does
not believe that it currently has any VIEs within the scope of FIN 46.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. This statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. The Company does
not expect the adoption of SFAS No. 149 to have a material effect on its results
of operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Debt and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both debt and equity and is
effective for
34
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. The Company does not currently have any financial instruments
within the scope of SFAS 150.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in circumstances affecting the Company's
exposure to commodity price, interest rate, fair value, foreign currency or
credit risks since December 31, 2002. For a discussion of the Company's exposure
to these risks, see "Item 7A. Quantitative and Qualitative Disclosures About
Market Risk" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures as of June 30, 2003, pursuant to
Rule 13a-15(b) of the Securities Exchange Act of 1934. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
Securities and Exchange Commission filings. There have been no changes in the
Company's internal control over financial reporting that occurred during the
Company's last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and two of its subsidiaries are defendants in a lawsuit filed on
July 28, 2003, by Transocean Inc. ("Transocean") in the United States District
Court for the Southern District of Texas, Houston Division. The lawsuit alleges
that the dual drilling structure and method utilized by the Company's two
ultra-deepwater semisubmersibles under construction in Singapore infringe on
United States patents granted to Transocean. The lawsuit seeks damages,
royalties and attorney's fees, together with an injunction that would prevent
the use of the dual drilling capabilities of the rigs. The Company believes that
the allegations are without merit and intends to vigorously defend the lawsuit.
The Company does not expect that the matter will have an adverse effect on the
Company's business or financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual general meeting of shareholders was held on May 6, 2003. At
the meeting, four directors were elected, the GlobalSantaFe 2003 Long-Term
Incentive Plan and the amendment and restatement of the GlobalSantaFe Employee
Share Purchase Plan were approved, and the appointment of PricewaterhouseCoopers
LLP as independent certified public accountants of the Company and its
subsidiaries for 2003 was ratified by a vote of holders of the Company's
Ordinary Shares, par value of US $.01 per share, as outlined in the Company's
proxy statement relating to the meeting. With respect to the election of
directors, (a) proxies were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934, (b) there was no solicitation in opposition to
management's nominees as listed in the proxy statement, and (c) all of such
nominees were elected. The following numbers of votes were cast as to the
director nominees: Thomas W. Cason, 198,961,913 votes for and 12,723,585 votes
withheld; Jon A. Marshall, 198,612,208 votes for and 13,073,290 votes withheld;
Maha A. R. Razzuqui, 190,360,971 votes for and 21,324,527 votes withheld; and
Carroll W. Suggs, 198,626,582 votes for and 13,058,916 votes withheld. With
respect to the approval of the GlobalSantaFe 2003 Long-Term Incentive Plan,
154,977,111 votes were cast in favor of approval, 20,837,287 votes were cast
against approval and there were 343,017 abstentions. With respect to the
approval of the amendment and restatement of the GlobalSantaFe Employee Share
Purchase Plan, 172,761,716 votes were cast in favor of approval, 3,086,465 votes
were cast against approval and there were 309,142 abstentions. With respect to
the ratification of PricewaterhouseCoopers LLP as independent certified public
accountants of the Company and its subsidiaries for 2003, 210,190,916 votes were
cast in favor of ratification, 1,315,202 votes were cast against ratification
and there were 179,380 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 GlobalSantaFe Employee Share Purchase Plan
10.2 GlobalSantaFe 2003 Long-Term Incentive Plan
12.1 Statement setting forth detail of Computation of Ratios of
Earnings to Fixed Charges.
36
15.1 Letter of Independent Accountants regarding Awareness of
Incorporation by Reference.
31.1 Chief Executive Officer's Certification pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2 Chief Financial Officer's Certification pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
32.1 Chief Executive Officer's Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company submitted the following reports on Form 8-K during the
quarter ended June 30, 2003:
Date of Report Items Reported Financial Statements Filed
- -------------- -------------- --------------------------
April 4, 2003 Item 7, Financial Statements and None
Exhibits; and Item 9, Regulation FD
Disclosure
April 23, 2003 Item 7, Financial Statements and None
Exhibits; and Item 9, Regulation FD
Disclosure
May 2, 2003 Item 5, Other Events and Item 7, None
Financial Statements and Exhibits
May 12, 2003 Item 7, Financial Statements and None
Exhibits; and Item 9, Regulation FD
Disclosure
June 5, 2003 Item 7, Financial Statements and None
Exhibits; and Item 9, Regulation FD
Disclosure
37
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBALSANTAFE CORPORATION
(Registrant)
Dated: August 11, 2003 /s/ W. Matt Ralls
------------------
W. Matt Ralls
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer of the Registrant)
38
INDEX TO EXHIBITS
Exhibits Description
- -------- -----------
10.1 GlobalSantaFe Employee Share Purchase Plan
10.2 GlobalSantaFe 2003 Long-Term Incentive Plan
12.1 Statement setting forth detail of Computation of Ratios of
Earnings to Fixed Charges.
15.1 Letter of Independent Accountants regarding Awareness of
Incorporation by Reference.
31.1 Chief Executive Officer's Certification pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2 Chief Financial Officer's Certification pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
32.1 Chief Executive Officer's Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.