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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13289
PRIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0069030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 SAN FELIPE, SUITE 3300
HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 789-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practical date.
Outstanding as of November 10, 2003
Common Stock, par value $.01 per share 135,641,222
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PRIDE INTERNATIONAL, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2003 and December 31, 2002........................ 2
Consolidated Statement of Operations for the three months ended September 30, 2003 and 2002...... 3
Consolidated Statement of Operations for the nine months ended September 30, 2003 and 2002....... 4
Consolidated Statement of Cash Flows for the nine months ended September 30, 2003 and 2002....... 5
Notes to Unaudited Consolidated Financial Statements............................................. 6
Report of Independent Auditors................................................................... 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 23
Item 4. Controls and Procedures.................................................................... 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................... 25
Signatures........................................................................................... 26
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUES)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 60,489 $ 133,986
Restricted cash............................................................... 39,692 52,700
Trade receivables, net........................................................ 363,184 265,885
Parts and supplies, net....................................................... 77,702 64,920
Deferred income taxes......................................................... 3,171 3,332
Other current assets.......................................................... 187,390 188,277
------------ -------------
Total current assets...................................................... 731,628 709,100
------------ -------------
PROPERTY AND EQUIPMENT, net........................................................ 3,401,145 3,395,774
------------ -------------
OTHER ASSETS
Investments in and advances to affiliates..................................... 31,808 29,620
Goodwill ..................................................................... 69,014 72,014
Other assets.................................................................. 106,633 129,852
------------ -------------
Total other assets........................................................ 207,455 231,486
------------ -------------
$ 4,340,228 $ 4,336,360
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................................. $ 191,251 $ 186,657
Accrued expenses.............................................................. 245,994 243,190
Deferred income taxes......................................................... 957 985
Short-term borrowings......................................................... 23,564 17,724
Current portion of long-term debt............................................. 190,685 95,610
Current portion of long-term lease obligations................................ 2,612 2,679
------------ -------------
Total current liabilities................................................. 655,063 546,845
------------ -------------
OTHER LONG-TERM LIABILITIES........................................................ 48,529 102,510
LONG-TERM DEBT, net of current portion............................................. 1,715,821 1,791,619
LONG-TERM LEASE OBLIGATIONS, net of current portion................................ 10,564 12,511
DEFERRED INCOME TAXES.............................................................. 75,396 100,966
MINORITY INTEREST.................................................................. 97,646 82,204
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 50,000 shares authorized; none issued........ - -
Common stock, $.01 par value; 400,000 shares authorized;
135,622 and 134,453 shares issued; 135,253 and 134,084 shares outstanding. 1,356 1,344
Paid-in capital............................................................... 1,256,369 1,237,146
Treasury stock, at cost....................................................... (4,409) (4,409)
Accumulated other comprehensive income (loss)................................. 840 (3,598)
Retained earnings............................................................. 483,053 469,222
------------ -------------
Total stockholders' equity................................................ 1,737,209 1,699,705
------------ -------------
$ 4,340,228 $ 4,336,360
============ =============
The accompanying notes are an integral part of the
consolidated financial statements.
2
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------- ------------
REVENUES:
Services...................................................................... $ 440,180 $ 285,592
Sales......................................................................... 10,654 27,158
------------- -------------
Total revenues............................................................ 450,834 312,750
---------- -------------
OPERATING COSTS, excluding depreciation and amortization:
Services...................................................................... 265,775 172,113
Sales......................................................................... 14,055 26,533
------------ -------------
Total operating costs..................................................... 279,830 198,646
------------ -------------
DEPRECIATION AND AMORTIZATION...................................................... 62,679 56,139
GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization................ 27,609 24,738
------------ -------------
EARNINGS FROM OPERATIONS........................................................... 80,716 33,227
OTHER INCOME (EXPENSE)
Interest expense.............................................................. (30,493) (34,285)
Interest income............................................................... 255 993
Other income (expense), net................................................... (5,373) (1,373)
------------- -------------
Total other expense, net.................................................. (35,611) (34,665)
------------- -------------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST.......................... 45,105 (1,438)
INCOME TAX PROVISION (BENEFIT)..................................................... 10,596 (446)
MINORITY INTEREST.................................................................. 6,015 4,731
------------ -------------
NET EARNINGS (LOSS)................................................................ $ 28,494 $ (5,723)
============ =============
NET EARNINGS (LOSS) PER SHARE
Basic..................................................................... $ 0.21 $ (0.04)
Diluted................................................................... $ 0.19 $ (0.04)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic..................................................................... 135,131 133,212
Diluted................................................................... 155,466 133,212
The accompanying notes are an integral part of the
consolidated financial statements.
3
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------- ------------
REVENUES:
Services...................................................................... $ 1,167,919 $ 848,538
Sales......................................................................... 86,951 72,253
------------- -------------
Total revenues............................................................ 1,254,870 920,791
------------- -------------
OPERATING COSTS, excluding depreciation and amortization:
Services...................................................................... 718,227 513,350
Sales......................................................................... 133,830 68,259
------------ -------------
Total operating costs..................................................... 852,057 581,609
------------ -------------
DEPRECIATION AND AMORTIZATION...................................................... 182,938 167,214
GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization................ 81,319 70,431
------------ -------------
EARNINGS FROM OPERATIONS........................................................... 138,556 101,537
OTHER INCOME (EXPENSE)
Interest expense.............................................................. (95,296) (98,665)
Interest income............................................................... 1,328 4,016
Other income (expense), net................................................... (3,743) (1,239)
------------- -------------
Total other expense, net.................................................. (97,711) (95,888)
------------- -------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST................................. 40,845 5,649
INCOME TAX PROVISION .............................................................. 11,572 1,632
MINORITY INTEREST.................................................................. 15,442 13,944
------------ -------------
NET EARNINGS (LOSS)................................................................ $ 13,831 $ (9,927)
============ =============
NET EARNINGS (LOSS) PER SHARE
Basic..................................................................... $ 0.10 $ (0.07)
Diluted................................................................... $ 0.10 $ (0.07)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic..................................................................... 134,506 133,058
Diluted................................................................... 136,270 133,058
The accompanying notes are an integral part of the
consolidated financial statements.
4
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------- ------------
OPERATING ACTIVITIES
Net earnings (loss)........................................................... $ 13,831 $ (9,927)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities -
Depreciation and amortization............................................. 182,938 167,214
Discount amortization on zero coupon convertible debentures............... 1,795 8,676
Amortization of deferred loan costs....................................... 6,579 6,081
(Gain) loss on sale of assets............................................. 57 (163)
Deferred income taxes .................................................... (24,986) (22,628)
Minority interest......................................................... 15,442 13,944
Loss on early extinguishment of debt...................................... - 1,228
Changes in assets and liabilities, net of effects of acquisitions -
Trade receivables.................................................... (104,020) 18,414
Parts and supplies................................................... (12,782) (5,183)
Other current assets................................................. (38,337) (41,284)
Other assets......................................................... 49,649 (9,873)
Accounts payable..................................................... 2,436 (97,281)
Accrued expenses..................................................... 7,622 2,506
Other liabilities.................................................... (41,046) (36,475)
------------ -------------
Net cash provided by (used in) operating activities.............. 59,178 (4,751)
------------ -------------
INVESTING ACTIVITIES
Purchases of property and equipment........................................... (179,303) (122,243)
Proceeds from dispositions of property and equipment.......................... 1,190 590
Investments in and advances to affiliates..................................... (2,188) (902)
------------- -------------
Net cash used in investing activities................................ (180,301) (122,555)
------------- -------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock........................................ 16,265 -
Proceeds from exercise of stock options....................................... 2,519 5,111
Proceeds from issuance of convertible senior debentures, net of issue costs... 294,800 291,781
Proceeds from debt borrowings................................................. 163,599 360,000
Reduction of debt............................................................. (442,565) (515,082)
Decrease in restricted cash................................................... 13,008 15,251
------------ -------------
Net cash provided by financing activities............................ 47,626 157,061
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... (73,497) 29,755
CASH AND CASH EQUIVALENTS, beginning of period..................................... 133,986 58,988
------------ -------------
CASH AND CASH EQUIVALENTS, end of period........................................... $ 60,489 $ 88,743
============ =============
The accompanying notes are an integral part of the
consolidated financial statements.
5
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Principles of Consolidation and Reporting
The unaudited consolidated financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Certain
reclassifications have been made to the prior periods' condensed financial
statements to conform with the current period presentation. Effective January 1,
2003, the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 145, which eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and classified as extraordinary items.
Accordingly, the consolidated statement of operations for the three months and
nine months ended September 30, 2002 reflect reclassifications of the gross
effect of $189,000 and $798,000, respectively, from extraordinary item into
other income (expense), net and income tax provision. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto of Pride International, Inc.
(the "Company" or "Pride") included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
In the opinion of management, the unaudited consolidated financial
information included herein reflects all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for a full year or any other interim period.
PricewaterhouseCoopers LLP, the Company's independent auditors, have
performed a review of the unaudited consolidated financial statements included
herein in accordance with standards established by the American Institute of
Certified Public Accountants. Pursuant to Rule 436(c) under the Securities Act
of 1933, the report of PricewaterhouseCoopers LLP, included herein, should not
be considered a part of any registration statement prepared or certified within
the meanings of Sections 7 and 11 of the Securities Act, and the liability
provisions of Section 11 of the Securities Act do not apply to such report.
Comprehensive Income
Comprehensive income is the change in the Company's equity from all
transactions except those resulting from investments by or distributions to
owners. Comprehensive income (loss) was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- -------- -------- ---------
(IN THOUSANDS)
Net earnings (loss)...................................... $ 28,494 $ (5,723) $ 13,831 $ (9,927)
Foreign currency translation gain (loss), net............ 112 (5,256) 4,438 (3,557)
--------- -------- -------- ----------
Comprehensive income (loss).............................. $ 28,606 $(10,979) $ 18,269 $ (13,484)
========= ========= ======== =========
Rig Construction Contracts
The Company has historically constructed drilling rigs only for its own
use. However, at the request of some of its significant customers, the Company
has entered into contracts to design, construct and mobilize specialized
drilling rigs through the Company's technical services group. The Company also
has entered into contracts to operate the rigs on behalf of the customers.
Construction contract revenues and related costs are recognized under the
percentage-of-completion method of accounting using measurements of progress
toward completion appropriate for the work performed, such as man-hours, costs
incurred or physical progress. Accordingly, the Company reviews contract price
and cost estimates periodically as the work progresses and reflects adjustments
in income (i) to recognize income proportionate to the percentage of completion
in the case of projects showing an estimated profit at completion and (ii) to
recognize the entire amount of the loss in the case of projects showing an
estimated loss at completion. To the extent these adjustments result in an
increase in previously reported losses or a reduction in or an elimination of
previously reported profits with respect to a project, the Company would
recognize a charge against current earnings. See Note 2.
6
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Beginning October 1, 2002, the Company's technical services group is
reported as a separate business segment. Accordingly, financial information for
the first three quarters of 2002 has been adjusted to reflect the change in
presentation, which had no effect on consolidated earnings from operations or
net earnings (loss). The consolidated statement of operations for the three and
nine months ended September 30, 2002 reflects increases in revenues and
operating costs of $26.5 million and $68.3 million, respectively, for the change
in presentation.
Stock-Based Compensation
The Company uses the intrinsic value based method of accounting for
stock-based compensation prescribed by Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" and related interpretations. Under
this method, the Company records no compensation expense for stock options
granted when the exercise price for options granted is equal to the fair market
value of the Company's stock on the date of the grant.
If the fair value based method of accounting prescribed by SFAS No. 123
"Accounting for Stock-Based Compensation" had been applied, the Company's pro
forma net earnings (loss), net earnings (loss) per share and stock-based
compensation cost would approximate the amounts indicated below. The effects of
applying SFAS No. 123 in this pro forma disclosure are not indicative of future
amounts.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2003 2002 2003 2002
------------- ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net earnings (loss), as reported............................ $ 28,494 $ (5,723) $ 13,831 $ (9,927)
Add: Stock-based compensation included in reported net
earnings (loss), net of tax............................... - - - -
Deduct: Total stock-based employee compensation expense
determined under the fair value method, net of tax........ (1,999) (1,932) (8,951) (5,624)
----------- ------------ ------------ -----------
Pro forma net earnings (loss)............................... $ 26,495 $ (7,655) $ 4,880 $ (15,551)
=========== ============ =========== ===========
Net earnings (loss) per share:
Basic-- as reported....................................... $ 0.21 $ (0.04) $ 0.10 $ (0.07)
Basic-- pro forma......................................... $ 0.20 $ (0.06) $ 0.04 $ (0.12)
Diluted-- as reported..................................... $ 0.19 $ (0.04) $ 0.10 $ (0.07)
Diluted-- pro forma....................................... $ 0.18 $ (0.06) $ 0.04 $ (0.12)
Goodwill
In March 2003, the Company reduced by $3.0 million the carrying amount of
goodwill recorded in its April 2000 acquisition of Servicios Especiales San
Antonio S.A. ("San Antonio"). The seller of San Antonio was entitled to four
"earn-out" payments of up to $3 million each on the first four anniversary dates
of the closing if San Antonio's revenues from services provided to the seller
and its affiliates exceeded specified levels during the 12 calendar months
ending immediately prior to the relevant anniversary date. The specified revenue
level was not achieved for the third anniversary earn-out payment.
Supplemental Cash Flow Information
Non-cash transactions for the nine months ended September 30, 2003 and 2002
consisted of increases in accounts payable for capital expenditures of $4.6
million and $47.2 million, respectively.
7
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51". FIN No. 46 requires a company to
consolidate a variable interest entity, as defined, when the company will absorb
a majority of the variable interest entity's expected losses, receive a majority
of the variable interest entity's expected residual returns, or both. FIN No. 46
also requires certain disclosures relating to consolidated variable interest
entities and unconsolidated variable interest entities in which a company has a
significant variable interest. The Company has adopted the disclosure provisions
of FIN No. 46, as well as the consolidation provisions of FIN No. 46 for
variable interest entities created after January 31, 2003, and for variable
interest entities in which the Company obtained an interest after January 31,
2003. With respect to variable interest entities in which a company holds a
variable interest that was acquired before February 1, 2003, the consolidation
provisions are required to be applied no later than the company's first fiscal
year or interim period ending after December 15, 2003. The Company is currently
evaluating these provisions of FIN No. 46, but does not expect them to have a
material impact on the Company's consolidated financial position, results of
operations or cash flows when applied.
The FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" and SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
during the second quarter of 2003. SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments, including those embedded in
other contracts, and for hedging activities and is effective for contracts
entered into or modified after June 30, 2003. SFAS No. 150 establishes standards
for the classification and measurement of certain financial instruments with
both liability and equity characteristics. The adoption of SFAS Nos. 149 and 150
did not have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
2. CONSTRUCTION PROJECTS
For the three-month and nine-month periods ended September 30, 2003, the
Company recorded loss provisions of $3.4 million and $46.9 million,
respectively, relating to the construction of deepwater platform rigs. On three
of these projects, costs are expected to substantially exceed revenues. The
fourth project is expected to result in a profit upon completion.
Increased costs have resulted mainly from difficulties the Company
experienced with the initial shipyard constructing the first two rigs. In
response to these difficulties, the Company terminated its contract with the
shipyard prior to the completion of the first two rigs. As a result, the Company
has incurred substantial unplanned costs in completing the construction of the
first unit in connection with its installation on the customer's platform. The
Company also has engaged another shipyard to complete construction of the second
rig. The aggregate costs paid to the initial shipyard and committed to the
second shipyard, as well as costs to transfer the rig and components, have
greatly exceeded budgeted expenditures for the project. In addition, because of
the difficulties with the initial shipyard, the Company is now utilizing
shipyards in the Asia Pacific region for the third and fourth deepwater rig
projects. As a result, the lump sum contracts and anticipated freight costs for
these two projects are higher than originally budgeted. The Company has
commenced arbitration proceedings against the initial shipyard claiming damages
of approximately $10 million, and the shipyard has asserted counterclaims
against the Company for damages of approximately $18 million. The Company does
not believe that resolution of the arbitration proceedings with the shipyard
will have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
The Company's technical services segment is performing these deepwater
platform rig construction projects under lump sum contracts with its customers.
In pricing these types of contracts, the Company uses all reasonable efforts to
accurately estimate its cost to perform the work and to cover anticipated
increases in costs of changes in labor, material and services through estimates
of cost increases, which are reflected in the original contract price. Despite
these efforts, however, the revenues and costs realized on a lump sum contract
may vary from the estimated amounts. There may be further losses resulting from
completing these projects.
The Company also performed substantial engineering, logistics and
construction work to modify, enhance and deploy two of the Company's large land
rigs in Kazakhstan in accordance with the customer's specifications. The first
of these two rigs commenced operations in April 2003 and the second rig
commenced operations in July 2003. The Company received up-front fees that are
being recognized over the period of drilling. Of these fees, $23.9 million was
recognized in the third quarter of 2003. The unamortized balance of these fees
as of September 30, 2003 was $2.5 million, which amount is
8
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
expected to be recognized in the fourth quarter of 2003.
3. LONG-TERM DEBT
Long-term debt consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
(IN THOUSANDS)
Senior secured term loan.................................................. $ 197,000 $ 198,500
Senior secured revolving credit facilities................................ 260,000 110,000
93/8% Senior Notes due 2007............................................... 175,000 325,000
10% Senior Notes due 2009................................................. 200,000 200,000
Drillship loans........................................................... 198,011 231,966
Semisubmersible loans..................................................... 178,241 215,371
2 1/2% Convertible Senior Notes due 2007.................................. 300,000 300,000
3 1/4% Convertible Senior Notes due 2033.................................. 300,000 -
Zero Coupon Convertible Senior Debentures due 2021........................ 4 98,220
Zero Coupon Convertible Subordinated Debentures due 2018.................. 1,086 111,481
Senior convertible notes payable.......................................... 85,853 85,853
Limited-recourse collateralized term loans................................ 5,311 10,263
Other notes payable....................................................... 6,000 575
------------ -------------
1,906,506 1,887,229
Current portion of long-term debt......................................... 190,685 95,610
------------ -------------
Long-term debt, net of current portion.................................... $ 1,715,821 $ 1,791,619
============ =============
The Company has a five-year $200.0 million senior secured term loan with
a group of banks. Borrowings under the term loan bear interest at variable
rates based on LIBOR plus a spread based on the credit rating of the facility
or, if unrated, index debt. In 2003, in order to reduce the potential impact of
fluctuations in LIBOR, the Company entered into interest rate agreements that
effectively cap the interest rate on total outstanding borrowings under the term
loan at rates from 3.58% to 5.0% and provide a lower limit on rates from 0.72%
to 0.91%, plus the applicable spread, to March 2007. The Company accounts for
these interest rate agreements at market value, with changes reflected in
current earnings.
The Company has a senior secured revolving credit facility with a group of
banks that provides aggregate availability of up to $250.0 million. The Company
may issue up to $50.0 million of letters of credit under the facility. As of
September 30, 2003, $195.0 million of borrowings and an additional $4.3 million
of letters of credit were outstanding under the facility. As of September 30,
2003, the Company had a senior secured revolving credit facility with non-U.S.
banks that provided aggregate availability of up to $95.0 million, including up
to $10.0 million of letters of credit. That credit facility was amended in
October 2003. The amended facility provides aggregate availability of up to
$180.0 million, including up to $10.0 million of letters of credit, and is
collateralized by three semisubmersible rigs, two jackup rigs and a
tender-assisted rig. Borrowings under the amended credit facility bear interest
at variable rates based on LIBOR plus a spread ranging from 1.2% to 2.1%. As of
September 30, 2003, $65.0 million of borrowings and an additional $10.0 million
of letters of credit were outstanding under this credit facility. As of
September 30, 2003, the Company had $70.7 million in aggregate availability
under its senior secured revolving credit facilities. The October amendment
described above increased the aggregate availability under the Company's
credit facilities by $85 million.
In July 2003, the Company redeemed $150 million principal amount of its
93/8% senior notes due 2007 at a redemption price of 103.125% of the principal
amount, plus accrued and unpaid interest to the redemption date. The Company
paid a total of $157.6 million in connection with the redemption, including $2.9
million of accrued and unpaid interest and a $4.7 million premium. In addition,
the Company expensed $1.5 million, before income taxes, of deferred financing
costs, which amount is included in other income (expense), net in the
consolidated statement of operations.
In April and May 2003, the Company issued $300 million aggregate principal
amount of 3.25% convertible senior notes due 2033. Substantially all of the net
proceeds (after estimated expenses) of approximately $294.8 million were used to
repay amounts outstanding under the Company's senior secured revolving credit
facilities, which included borrowings used to fund a portion of the purchase
price of the zero coupon convertible subordinated debentures due 2018. The notes
bear interest at a rate of 3.25% per annum. The Company also will pay contingent
interest during any six-month interest period commencing on or after May 1, 2008
for which the trading price of the notes for each of the five trading days
immediately preceding such period equals or exceeds 120% of the principal amount
of the notes. Beginning May 5, 2008, the Company may redeem any of the notes at
a redemption price of 100% of the principal amount redeemed plus accrued and
unpaid interest. In addition, noteholders may require the Company to repurchase
the notes on May 1 of 2008, 2010, 2013, 2018, 2023 and 2028 at a repurchase
price of 100% of the principal amount redeemed plus accrued and unpaid
9
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
interest. The Company may elect to pay all or a portion of the repurchase price
in common stock instead of cash, subject to certain conditions. The notes are
convertible under specified circumstances into shares of the Company's common
stock at a conversion rate of 38.9045 shares per $1,000 principal amount of
notes (which is equal to a conversion price of $25.704), subject to adjustment.
Upon conversion, the Company will have the right to deliver, in lieu of shares
of its common stock, cash or a combination of cash and common stock.
In January 2003, the Company repurchased substantially all of the
outstanding zero coupon convertible senior debentures due 2021 for $98.2
million. In April 2003, as required by the terms of the Company's zero coupon
convertible subordinated debentures due 2018, the Company repurchased $226.5
million face amount of the outstanding debentures for $112.0 million, which was
equal to their accreted value on the date of purchase. The purchase price was
funded through borrowings under the Company's senior secured revolving credit
facilities and available cash. Debentures with a face amount of $2.1 million,
and an accreted value of $1.1 million as of September 30, 2003, remain
outstanding.
As of September 30, 2003, $39.7 million of the Company's cash balances,
which amount is included in restricted cash, consists of funds held in trust in
connection with the Company's drillship and semisubmersible loans and its
limited-recourse collateralized term loans and, accordingly, is not available
for use by the Company.
4. INCOME TAXES
The Company's consolidated effective income tax rate for the three months
ended September 30, 2003 was 23.5% as compared to 31.0% for the corresponding
period in 2002. The difference in the effective tax rate resulted primarily from
a higher percentage of earnings from foreign jurisdictions with low or zero
effective tax rates in the 2003 period as compared to the prior period. For the
nine months ended September 30, 2003, the consolidated effective income tax rate
was 28.3% compared to 28.9% for the same period in 2002. The lower rate for the
2003 period was principally a result of increased income in foreign
jurisdictions with low or zero effective tax rates, partly offset by a true-up
of the provision relating to tax returns for prior periods.
5. NET EARNINGS PER SHARE
Basic net earnings per share has been computed based on the weighted
average number of shares of common stock outstanding during the applicable
period. Diluted net earnings per share has been computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period, as if stock options, convertible debentures and
other convertible debt were converted into common stock, after giving
retroactive effect to the elimination of interest expense, net of income tax
effect, applicable to the convertible debentures and other convertible debt.
The following table presents information necessary to calculate basic and
diluted net earnings (loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- -------- -------- ---------
(IN THOUSANDS)
Net earnings (loss)........................................... $ 28,494 $ (5,723) $ 13,831 $ (9,927)
Interest expense on convertible debentures and notes.......... 2,299 - - -
Income tax effect............................................. (805) - - -
---------- -------- -------- ---------
Adjusted net earnings (loss).................................. $ 29,988 $ (5,723) $ 13,831 $ (9,927)
========= ========= ======== =========
Weighted average shares outstanding .......................... 135,131 133,212 134,506 133,058
Convertible debentures and notes.............................. 18,171 - - -
Stock options ................................................ 2,164 - 1,764 -
--------- -------- -------- ---------
Adjusted weighted average shares outstanding.................. 155,466 133,212 136,270 133,058
========= ======== ======== =========
The calculation of diluted weighted average shares outstanding excludes
18.3 million and 37.1 million common shares for the three months ended September
30, 2003 and 2002, respectively, and 33.6 million and 33.0 million common shares
for the nine months ended September 30, 2003 and 2002, respectively, issuable
pursuant to convertible debt and
10
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
outstanding options. These shares were excluded as their effect was antidilutive
or the exercise price of stock options exceeded the average price of the
Company's common stock for the period.
6. SHAREHOLDERS' EQUITY
In the second quarter of 2003, the Company sold approximately 830,000
shares of common stock under its Direct Stock Purchase Plan for aggregate net
proceeds of $15.0 million. The Company did not sell any shares under the plan in
the first and third quarters of 2003 or in 2002.
7. COMMITMENTS AND CONTINGENCIES
In April 2002, the Company contributed $14.1 million to the settlement of a
wage-related antitrust lawsuit, of which $5.1 million that exceeded the policy
limits of the Company's insurance had previously been recognized in 2001. The
Company's insurance carrier has not yet agreed to pay the remaining amount, and
the Company has commenced litigation against this insurer. The Company believes
it will prevail in this matter and collect the approximately $10.2 million
receivable, representing the insured settlement amount and legal costs, included
in other assets in the accompanying balance sheet.
The Company is routinely involved in other litigation, claims and disputes
incidental to its business, which at times involves claims for significant
monetary amounts, some of which would not be covered by insurance. In the
opinion of management, none of the existing litigation will have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
8. INVESTMENT IN AMETHYST JOINT VENTURE
As of September 30, 2003, the Company had a 30.0% equity interest in a
joint venture company that is constructing two dynamically-positioned, deepwater
semisubmersible drilling rigs, currently referred to as the Amethyst 4 and
Amethyst 5. The rigs are being constructed at a shipyard in Maine and are
anticipated to be completed in early 2004. The joint venture company has
financed 87.5% of the cost of construction of these rigs through credit
facilities, with repayment of the borrowings under those facilities guaranteed
by the United States Maritime Administration ("MARAD"). Advances under the
credit facilities are being provided without recourse to any of the joint
venture owners. The remaining 12.5% of the cost of construction is being
provided by the joint venture company from equity contributions that have been
made by the joint venture partners. In addition, the joint venture partners have
agreed to provide equity contributions to finance all of the incremental costs
associated with upgrading both rigs to a water depth capability of 1,700 meters
from the original design of approximately 1,500 meters. The Company expects that
the partners will be required to provide contributions of approximately $4.0
million in connection with these upgrades, of which the Company's 30% share
would be approximately $1.2 million. Through September 30, 2003, the Company's
equity contributions to the joint venture totaled $31.8 million, including
capitalized interest of $7.0 million and an initial contribution of $0.4 million
in connection with the upgrades. Based on the availability of funds under
performance and payment bonds issued on behalf of a prior construction
contractor and draws remaining under the MARAD-guaranteed credit facilities, the
Company believes the Amethyst 4 and Amethyst 5 will be completed without
requiring additional equity contributions by the joint venture partners other
than contributions in connection with the water depth capacity upgrades.
11
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. SEGMENT INFORMATION
The following table sets forth selected consolidated financial information
of the Company by operating segment:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ -------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenues:
Gulf of Mexico............... $ 75.2 16.7% $ 40.7 13.0% $ 190.4 15.2% $ 111.5 12.1%
International offshore....... 181.6 40.3 152.0 48.6 516.9 41.2 469.5 51.0
International land........... 148.7 33.0 74.8 23.9 367.5 29.3 216.6 23.5
E&P services................. 32.9 7.3 18.1 5.8 90.0 7.2 50.9 5.5
Technical services........... 12.4 2.7 27.2 8.7 90.0 7.1 72.3 7.9
-------- ------- -------- ----- -------- ------ -------- -----
Total revenues............. 450.8 100.0 312.8 100.0 1,254.8 100.0 920.8 100.0
-------- ------- -------- ----- -------- ------ -------- -----
Operating Costs: .........
Gulf of Mexico............... 47.8 17.1 34.8 17.5 131.7 15.4 98.9 17.0
International offshore....... 95.5 34.1 75.2 37.9 264.0 31.0 233.0 40.1
International land........... 97.0 34.7 48.9 24.6 249.2 29.2 145.3 25.0
E&P services................. 22.6 8.1 13.2 6.7 64.3 7.6 36.1 6.2
Technical services........... 16.9 6.0 26.6 13.3 142.8 16.8 68.3 11.7
-------- ------- -------- ----- -------- ------ -------- -----
Total operating costs...... 279.8 100.0 198.7 100.0 852.0 100.0 581.6 100.0
-------- ------- -------- ----- -------- ------ -------- -----
Segment Profit (Loss):....
Gulf of Mexico............... 27.4 16.0 5.9 5.2 58.7 14.6 12.6 3.7
International offshore....... 86.1 50.4 76.8 67.3 252.9 62.8 236.5 69.7
International land........... 51.7 30.2 25.9 22.7 118.3 29.3 71.3 21.0
E&P services................. 10.3 6.0 4.9 4.3 25.7 6.4 14.8 4.4
Technical services........... (4.5) (2.6) 0.6 0.5 (52.8) (13.1) 4.0 1.2
-------- ------- -------- ----- -------- ------ -------- -----
Total segment profit....... 171.0 100.0% 114.1 100.0% 402.8 100.0% 339.2 100.0%
-------- ------- -------- ----- -------- ------ -------- -----
Depreciation and amortization.. 62.7 56.1 182.9 167.2
General and administrative..... 27.6 24.8 81.3 70.5
-------- -------- -------- --------
Earnings from operations....... $ 80.7 $ 33.2 $ 138.6 $ 101.5
======== ======== ======== ========
Significant Customers
Two customers accounted for approximately $129.9 million and $326.4
million, or 28.8% and 26.0%, respectively, of consolidated revenues for the
three and nine months ended September 30, 2003. Two customers accounted for
approximately $72.9 million and $205.3 million, or 23.3% and 22.3%,
respectively, of consolidated revenues for the three and nine months ended
September 30, 2002.
12
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Pride International, Inc.:
We have reviewed the accompanying consolidated balance sheet of Pride
International, Inc. as of September 30, 2003, and the related consolidated
statements of operations for the three month and nine month periods ended
September 30, 2003 and 2002 and consolidated statement of cash flows for the
nine month periods ended September 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 consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated March 25, 2003, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2002 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
November 12, 2003
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the accompanying unaudited consolidated financial statements as of September 30,
2003 and for the three and nine months ended September 30, 2003 and 2002
included elsewhere herein, and with our Annual Report on Form 10-K for the year
ended December 31, 2002. The following information contains forward-looking
statements. Please read "Forward-Looking Statements" for a discussion of
limitations inherent in such statements.
GENERAL
We provide contract drilling and related services to oil and gas companies
worldwide, operating both offshore and on land. As of November 8, 2003, we
operated a global fleet of 328 rigs, including two ultra-deepwater drillships,
11 semisubmersible rigs, 35 jackup rigs, 29 tender-assisted, barge and platform
rigs and 251 land-based drilling and workover rigs. We operate in more than 30
countries and marine provinces. We have five principal operating segments: Gulf
of Mexico, International Offshore, International Land, E&P Services and
Technical Services.
BUSINESS ENVIRONMENT AND OUTLOOK
General
Revenues. Our revenues depend principally upon the number of our available
rigs, the number of days these rigs are utilized and the contract day rates
received. The number of days our rigs are utilized and the contract day rates
received are largely dependent upon the balance of supply and demand for
drilling and related services in the different geographic regions in which we
operate. The number of available rigs may increase or decrease as a result of
the acquisition, relocation or disposal of rigs, the construction of new rigs
and the number of rigs being upgraded or repaired at any time. In order to
improve utilization or realize higher contract day rates, we may mobilize our
rigs from one market to another. Our revenues also depend on the number and
scope of construction or engineering projects being undertaken by our technical
services group. Revenues for these projects are recognized on a
percentage-of-completion basis.
Oil and gas companies' exploration and development drilling programs drive
the demand for drilling and related services. These drilling programs are
affected by their expectations about oil and natural gas prices, anticipated
production levels, demand for crude oil and natural gas products, government
regulations and many other factors. Oil and gas prices are volatile, which has
historically led to significant fluctuations in expenditures for oil and gas
drilling and related services.
Operating Expenses. Earnings from operations are primarily affected by
changes in revenue, but are also a function of changes in operating expenses.
Operating expenses are generally influenced by changes in utilization. For
instance, if a rig is expected to be idle for an extended period of time, we may
reduce the size of the rig's crew and take steps to "cold stack" the rig, which
reduces expenses and partially offsets the impact on operating income associated
with loss of revenues. We recognize as an operating expense routine overhauls
that maintain rather than upgrade the rigs or E&P services equipment. These
expenses vary from period to period. Costs of rig enhancements are capitalized
and depreciated over the expected useful lives of the enhancements. Depreciation
expense decreases earnings from operations in periods subsequent to capital
upgrades. Operating expenses in relation to our engineering and construction
projects are recognized in proportion to revenues using the
percentage-of-completion method. Additionally, operating expenses may include a
provision for expected losses if we estimate that a project will be unprofitable
in total. Our general and administrative expenses are principally related to our
corporate headquarters and our regional offices
The following table summarizes average daily revenue and percentage
utilization for our Gulf of Mexico and international offshore rig fleets for the
three and nine months ended September 30, 2003 and 2002. In this quarterly
report, average daily revenue information is based on total revenues for each
rig type divided by actual days worked by all rigs of that type. Average daily
revenue will differ from average contract day rates for a rig due to billing
adjustments for any non-productive time, mobilization fees, performance bonuses
and charges to the customer for ancillary services. Percentage utilization is
calculated as the total days worked divided by the total days available for work
by all rigs of that type.
14
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ -------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- --------------
GULF OF MEXICO
Jackup rigs.................. $ 31,300 72% $ 25,200 47% $ 30,900 65% $ 25,300 41%
Platform rigs................ $ 22,300 42% $ 19,900 44% $ 21,000 33% $ 20,200 44%
INTERNATIONAL OFFSHORE.........
Drillships/Semisubmersible rigs $ 120,300 84% $ 116,900 80% $ 114,700 89% $ 126,100 84%
Jackup rigs.................. $ 54,100 98% $ 45,300 86% $ 52,700 92% $ 46,400 88%
Tender and Barge rigs........ $ 34,300 86% $ 33,900 95% $ 34,000 85% $ 33,400 96%
Gulf of Mexico
Throughout 2002 and the first nine months of 2003, we experienced
particularly weak conditions in the U.S. Gulf of Mexico jackup and platform rig
markets. High natural gas inventory storage levels at the start of 2002 resulted
in reduced demand for rig services. Although natural gas prices have recovered
and have been relatively strong during the last 12 months, there has been only a
marginal improvement to date in the demand for drilling services in the U.S.
Gulf of Mexico.
In response to the poor market conditions, we have actively marketed a
number of rigs in our U.S. Gulf of Mexico fleet to international markets. Since
early 2002, we have obtained long-term contracts for 14 jackup rigs and two
platform rigs with Petroleos Mexicanos S.A. ("Pemex") in the Mexican sector of
the Gulf of Mexico and for two jackup rigs in other international markets, one
in Nigeria and one in India. Additionally, we obtained long-term contracts with
Pemex in Mexico for the Pride South Seas, a semisubmersible rig that we
mobilized from South Africa, and for the Viking, a newly acquired
semisubmersible rig. The first nine jackup rigs, one of the platform rigs and
the Pride South Seas were contracted and completed redeployment in 2002 and
worked throughout the first nine months of 2003. Three of the jackups and the
second platform rig commenced operations in July 2003 and the Viking commenced
operations in October 2003. The remaining two jackup rigs are expected to
commence operations in mid-November 2003. We continue to market additional rigs
into Mexico and other international markets as suitable opportunities arise.
There can be no assurance, however, that any additional contracts will result
from these efforts.
As of November 8, 2003, our 12 jackups working for Pemex and the two others
being upgraded to work offshore Mexico had contracts with an average remaining
term of 2.4 years and an average contract day rate of $35,500. Six of our
jackups were working in the U.S. Gulf of Mexico with an average contract day
rate of $25,000, of which four were on short-term contracts. There are five rigs
available. Additionally, three of our platform rigs were working offshore Mexico
on contracts with an average contract day rate of $20,200 and five were working
in the U.S. Gulf of Mexico at an average contract day rate of $15,200.
We expect that revenues and gross margins derived from our entire Gulf of
Mexico operations will continue to improve during the remainder of 2003 and into
the first quarter of 2004 due to the incremental impact of the additional
contracts in Mexico. In addition, the contracting of any of our idle jackup rigs
could have a significant impact on our future results.
International Offshore
Our international offshore segment has continued to experience high levels
of activity, and we have maintained essentially full utilization of six of our
seven high-specification deepwater rigs throughout the first nine months of
2003. The seventh deepwater rig, the Pride South America semisubmersible rig,
received its five-year periodic survey and related maintenance in the first
quarter of 2003 and was out of service for approximately 70 days. The rig has
been working since completion of the survey and related maintenance.
Our intermediate water-depth semisubmersibles experienced 87% utilization
during the first nine months of 2003. The idle time was due primarily to one of
the rigs undergoing its five-year periodic survey during the period and to the
Pride Venezuela being stacked for the last two months of the period after it
completed its contract with Petroleos de Venezuela, S.A. ("PDVSA") in July. The
Pride Venezuela has been demobilized to Trinidad and is being marketed
internationally. Additionally, the contract for the Pride South Atlantic,
offshore Brazil, expired in October 2003. We have obtained new commitments for
the Pride South Atlantic to drill three wells, with possibly additional optional
wells, offshore Brazil, commencing in January 2004.
15
Following the transfer of two independent-leg jackup rigs to Nigeria and
India under two-year contracts in 2002, we currently have eight jackup rigs
working in international waters outside of the Gulf of Mexico. All of these rigs
are currently working under long-term contracts, of which four are expected to
expire in the first nine months of 2004. These jackup rigs experienced 92%
utilization in the first nine months of 2003. The idle time was primarily due to
two of these rigs undergoing shipyard repairs in the period. Additionally, we
manage two jackup rigs on behalf of PDVSA in Venezuela under contracts that
expire in the first six months of 2004.
International Land
During 2002, our international land segment was adversely affected by the
economic and political instability in Argentina. The Argentine peso declined in
value against the U.S. dollar following the Argentine government's decision to
abandon the country's fixed dollar-to-peso exchange rate, requiring private
sector, dollar-denominated loans and contracts to be paid in pesos and placing
restrictions on the convertibility of the Argentine peso. The devaluation,
coupled with the government's mandated conversion of all dollar-based contracts
to pesos, severely pressured our margins. During the first quarter of 2002, we
engaged in discussions with all of our Argentine customers regarding recovery of
losses sustained from the devaluation of accounts receivable and the basis on
which new business would be contracted. We restructured most of our contracts on
a basis that we believe limits our exposure to further devaluations. Activity
levels have recovered steadily from mid-2002 as high oil prices positively
impacted our customers' cash flows. The average rate of utilization of our
available rig fleet in Argentina was 87% in the nine months ended September 30,
2003 as compared with 64% in the corresponding period in 2002. As of November 8,
2003, 120 rigs, or 80% of our total fleet of 150 rigs, in Argentina were under
contract.
Venezuela also has been experiencing political, economic and social
instability. A prolonged strike by PDVSA employees that ended in February 2003
led to the dismissal of more than 18,000 employees by the government. The recent
turmoil in Venezuela led to a reduction in our level of operations in that
country during the first quarter of 2003. Since the conclusion of the strike,
our rig activity has recovered and currently exceeds the level that existed
before the strike. As of November 8, 2003, we had 25 rigs, or 81% of our total
land-based rigs and all four of our offshore rigs in Venezuela under contract as
compared with only seven rigs at the end of the strike. Exchange controls,
together with employee dismissals and reorganization within PDVSA, initially led
to a slower rate of collection of our trade receivables in early 2003, but the
rate of collection has recently improved.
In Kazakhstan, the first of two of our large land rigs, which had been
earning a standby rate since being accepted by the customer in November 2002,
commenced operations on an artificial island in the Caspian Sea in April 2003,
and the second rig commenced operations in July 2003. The related contracts
required substantial engineering, logistics and construction work to modify,
enhance and deploy our rigs in accordance with the customer's specifications. We
received up-front fees that are being recognized over the period of drilling. Of
these fees, $23.9 million was recognized in the third quarter of 2003. The
unamortized balance of these fees at September 30, 2003 was $2.5 million, which
amount is expected to be recognized in the fourth quarter of 2003.
E&P Services
Our E&P services activity is generated predominately in South America and
was negatively impacted by the crises in Argentina and Venezuela in 2002.
Revenues in the first nine months of 2003 increased significantly due to the
recovery of activity in Argentina and our commencement of E&P services in Brazil
and Mexico. Revenues from E&P services are expected to increase further in
subsequent quarters due to improving market conditions in Venezuela and to the
recent commencement of new contracts in Argentina.
Technical Services
The technical services group has four major projects ongoing to design,
engineer, manage construction of and commission deepwater platform drilling
rigs, which are being constructed on behalf of two major oil company customers
for installation on spars and tension-leg platforms. We also are to provide
drilling operations management of the rig packages once they have been installed
on the platforms. The first platform drilling rig has been mated with the
customer's platform and towed to Angola, where it is expected to commence
drilling operations in late 2003. The other deepwater platform rigs are expected
to enter into service between late 2004 and 2005.
During the second quarter of 2003, we recorded loss provisions, included in
operating costs, totaling $46.9 million, or $30.5 million net of taxes at the
U.S. statutory rate, relating to the construction of deepwater platform rigs.
During the third
16
quarter of 2003, we recorded an additional loss provision totaling $3.4 million,
or $2.2 million net of taxes, relating to the construction of these deepwater
platform rigs. On three of these projects, costs are expected to substantially
exceed revenues. The fourth project is expected to result in a profit upon
completion. We do not currently anticipate entering into any additional
construction contracts for rigs to be owned by others.
Increased costs have resulted mainly from difficulties we experienced with
the initial shipyard constructing the first two rigs. In response to these
difficulties, we terminated our contract with the shipyard prior to the
completion of the first two rigs. As a result, we have incurred substantial
unplanned costs in completing the construction of the first unit in connection
with its installation on the customer's platform. We also have engaged another
shipyard to complete construction of the second rig. The aggregate costs paid to
the initial shipyard and committed to the second shipyard, as well as costs to
transfer the rig and components, have greatly exceeded our budgeted expenditures
for the project. In addition, because of the difficulties with the initial
shipyard, we are now utilizing shipyards in the Asia Pacific region for the
third and fourth deepwater rig projects. As a result, the lump sum contracts and
anticipated freight costs for these two projects are higher than originally
budgeted. We have commenced arbitration proceedings against the initial shipyard
claiming damages of approximately $10 million, and the shipyard has asserted
counterclaims against us for damages of approximately $18 million. We do not
believe that resolution of the arbitration proceedings with the shipyard will
have a material impact on our consolidated financial position, results of
operations or cash flows.
Our technical services segment is performing these deepwater platform rig
construction projects under lump sum contracts with our customers. In pricing
these types of contracts, we use all reasonable efforts to accurately estimate
our cost to perform the work and to cover anticipated increases in costs of
changes in labor, material and services through estimates of cost increases,
which are reflected in the original contract price. Despite these efforts,
however, the revenue, cost and gross profit we realize on a lump sum contract
may vary from the estimated amounts because of risks generally inherent in the
marine construction industry, including variations in labor and equipment
productivity over the term of the contract, unanticipated cost increases,
engineering, shipyard or systems problems, shortages of equipment, materials or
skilled labor, unscheduled delays in the delivery of ordered materials and
equipment, work stoppages and shipyard unavailability or delays. We have
experienced cost overruns on these contracts that have adversely impacted our
financial results. There may be further losses resulting from completing these
projects.
We recognize revenues and related costs from our rig construction contracts
under the percentage-of-completion basis of accounting using measurements of
progress toward completion appropriate for the work performed, such as
man-hours, costs incurred or physical progress. Accordingly, we review contract
price and cost estimates periodically as the work progresses and reflect
adjustments in income (1) to recognize income proportionate to the percentage of
completion in the case of projects showing an estimated profit at completion and
(2) to recognize the entire amount of the loss in the case of projects showing
an estimated loss at completion. To the extent these adjustments result in an
increase in previously reported losses or a reduction in or an elimination of
previously reported profits with respect to a project, we would recognize a
charge against current earnings, which could be material. Although we
continually strive to improve our ability to estimate our contract costs and
profitability associated with our construction projects, our current estimates
may be revised in future periods, and those revisions may be material.
17
RESULTS OF OPERATIONS
We have presented in the following table selected consolidated financial
and operational information by operating segment:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ -------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenues:
Gulf of Mexico............... $ 75.2 16.7% $ 40.7 13.0% $ 190.4 15.2% $ 111.5 12.1%
International offshore....... 181.6 40.3 152.0 48.6 516.9 41.2 469.5 51.0
International land........... 148.7 33.0 74.8 23.9 367.5 29.3 216.6 23.5
E&P services................. 32.9 7.3 18.1 5.8 90.0 7.2 50.9 5.5
Technical services........... 12.4 2.7 27.2 8.7 90.0 7.1 72.3 7.9
-------- ------- -------- ----- -------- -------- -------- -----
Total revenues............. 450.8 100.0 312.8 100.0 1,254.8 100.0 920.8 100.0
-------- ------- -------- ----- -------- -------- -------- -----
Operating Costs:
Gulf of Mexico............... 47.8 17.1 34.8 17.5 131.7 15.4 98.9 17.0
International offshore....... 95.5 34.1 75.2 37.9 264.0 31.0 233.0 40.1
International land........... 97.0 34.7 48.9 24.6 249.2 29.2 145.3 25.0
E&P services................. 22.6 8.1 13.2 6.7 64.3 7.6 36.1 6.2
Technical services........... 16.9 6.0 26.6 13.3 142.8 16.8 68.3 11.7
-------- ------- -------- ----- -------- -------- -------- -----
Total operating costs...... 279.8 100.0 198.7 100.0 852.0 100.0 581.6 100.0
-------- ------- -------- ----- -------- -------- -------- -----
Segment Profit (Loss):....
Gulf of Mexico............... 27.4 16.0 5.9 5.2 58.7 14.6 12.6 3.7
International offshore....... 86.1 50.4 76.8 67.3 252.9 62.8 236.5 69.7
International land........... 51.7 30.2 25.9 22.7 118.3 29.3 71.3 21.0
E&P services................. 10.3 6.0 4.9 4.3 25.7 6.4 14.8 4.4
Technical services........... (4.5) (2.6) 0.6 0.5 (52.8) (13.1) 4.0 1.2
-------- ------- -------- ----- -------- -------- -------- -----
Total segment profit....... $ 171.0 100.0% $ 114.1 100.0% $ 402.8 100.0% $ 339.2 100.0%
======== ======= ======== ======= ======== ======== ======== =====
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002.
Revenues. Revenues for the three months ended September 30, 2003 were
$138.0 million, or 44.1%, higher than in the three months ended September 30,
2002, due primarily to increased activity and day rates for our jackup and
platform rigs in Mexico, an increase in land drilling and E&P services activity
due to the recovery in Argentina, Venezuela and Colombia, recognition of an
up-front fee as well as increased land drilling in Kazakhstan and the start-up
of E&P services activity in Brazil and Mexico. Additionally, one of our
deepwater rigs, the Pride South Pacific, which did not work during the three
months ended September 30, 2002, worked throughout the third quarter of 2003.
Operating Costs. Operating costs for the quarter ended September 30, 2003
were $81.1 million, or 40.8%, higher than in the corresponding quarter of 2002
due to increased costs associated with rigs that operated during the third
quarter of 2003 that were stacked or being upgraded during the third quarter of
2002 and increased activity in Kazakhstan. Additionally, insurance costs
increased due to current conditions in the insurance market. Certain operating
costs denominated in euros also increased due to the strengthening of that
currency as compared with the dollar (from an average of $0.99 per euro in the
quarter ending September 30, 2002 to an average of $1.13 per euro in the quarter
ending September 30, 2003). These increases in costs were partially offset by
the favorable impact of the devaluation in Venezuela on expenses denominated in
its local currency. Operating costs for the quarter ended September 30, 2002
were reduced by $3.4 million as a result of changes in estimates of costs
accrued in prior periods primarily for contractually required maintenance costs
that were not expected to be incurred on two rigs managed by us.
Depreciation and Amortization. Depreciation expense increased by $6.5
million, or 11.6%, to $62.7 million in the quarter ended September 30, 2003,
from $56.1 million in the corresponding period in 2002. The increase is
attributable
18
primarily to depreciation on rig refurbishments and upgrades, principally for
rigs working in Mexico, and other capital projects completed after the first
nine months of 2002.
General and Administrative. General and administrative expenses increased
by $2.9 million, or 11.6%, to $27.6 million for the three months ended September
30, 2003, from $24.7 million for the three months ended September 30, 2002, due
primarily to increased activity in Argentina and Mexico, the impact of the
decline in the value of the dollar relative to the euro on certain expenses
denominated in euros and higher professional fees, insurance and staffing costs.
Other Income (Expense). Other expense for the three months ended September
30, 2003 increased by $0.9 million, or 2.7%, as compared to the corresponding
period in 2002. Interest expense decreased by $3.8 million due principally to a
reduction in the weighted average interest rate of our debt as a result of
recent debt refinancings. Interest income declined $0.7 million due to a
reduction in average cash balances held on deposit and to a reduction in
interest rates. Other, net, in the three-month period ended September 30, 2003
was comprised of expenses principally related to the redemption of $150 million
principal amount of our 93/8% senior notes due 2007, including a redemption
premium of $4.7 million and the recognition of $1.5 million of deferred
financing costs. Other, net in the corresponding period in 2002 was comprised
mostly of net foreign exchange losses in Argentina and Venezuela.
Income Tax Provision. Our consolidated effective income tax rate for the
three months ended September 30, 2003 decreased to 23.5% from 31.0% for the
corresponding period in 2002, principally as a result of increased income in
foreign jurisdictions with low or zero effective tax rates.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002.
Revenues. Revenues for the nine months ended September 30, 2003 were $334.0
million, or 36.3%, higher than in the nine months ended September 30, 2002, due
primarily to increased activity and day rates for our jackup rigs in Mexico, an
increase in land drilling activity due to the recovery in Argentina, Venezuela
and Colombia, increased activity in Chad, the start-up of activity in Kazakhstan
and an increase in sales related to the design, engineering and construction of
deepwater platform rigs by our technical services group. Additionally, one of
our deepwater rigs, the Pride South Pacific, which has worked throughout 2003,
completed its previous contract in April 2002 and did not work during the
remainder of the nine-month period ended September 30, 2002. These increases in
revenues were partially offset by a decrease in activity in the U.S. sector of
the Gulf of Mexico.
Operating Costs. Operating costs for the nine months ended September 30,
2003 were $270.4 million, or 46.5%, higher than in the corresponding period in
2002 due to increased costs associated with rigs that operated during the first
nine months of 2003 that were stacked or being upgraded during the corresponding
period in 2002, the increase in activity in Chad and the start-up of activity in
Kazakhstan, the increased number of technical services projects and to the
recording, in the nine months ended September 30, 2003, of a provision in
respect of expected losses on several of those contracts. Additionally, certain
operating costs denominated in euros increased due to the strengthening of that
currency relative to the dollar. These increases in costs were partially offset
by the favorable impact of the devaluation in Venezuela on expenses denominated
in its local currency. Operating costs for the nine months ended September 30,
2002 were reduced by $1.5 million as a result of changes in estimates of costs
accrued in prior periods primarily for contractually required maintenance costs
that were not expected to be incurred on two rigs managed by us.
Depreciation and Amortization. Depreciation expense increased by $15.7
million, or 9.4%, to $182.9 million in the nine months ended September 30, 2003,
from $167.2 million in the corresponding period in 2002, due to incremental
depreciation on newly acquired and constructed rigs and other rig refurbishments
and upgrades.
General and Administrative. General and administrative expenses increased
by $10.9 million, or 15.5%, to $81.3 million for the nine months ended September
30, 2003, from $70.5 million for the nine months ended September 30, 2002, due
primarily to increased overhead related to higher activity in Argentina and
Mexico, the impact of the decline in the value of the dollar relative to the
euro on certain expenses denominated in euros and higher professional fees,
insurance and staffing costs.
Other Income (Expense). Other expense for the nine months ended September
30, 2003 increased by $1.8 million, or 1.9%, as compared to the corresponding
period in 2002. Interest expense decreased by $3.4 million due principally to a
reduction in the weighted average interest rate of our debt as a result of
recent debt refinancings, partly offset by an increase in the average amount of
outstanding debt. Interest income declined $2.7 million due to a reduction in
average cash balances held on deposit and to a reduction in interest rates.
Other, net, in the nine-month period ended September 30,
19
2003, was comprised of expenses mostly related to the redemption of $150 million
principal amount of our 93/8% senior notes due 2007, including a redemption
premium of $4.7 million and the recognition of $1.5 million of deferred
financing costs, partially offset by net foreign exchange gains. Other, net, in
the nine-month period ended September 30, 2002, was comprised of mostly net
foreign exchange losses in Argentina and Venezuela.
Income Tax Provision. Our consolidated effective income tax rate for the
nine months ended September 30, 2003 was 28.3% as compared to 28.9% for the
corresponding period in 2002. The lower rate for the current period was
principally a result of increased income in foreign jurisdictions with low or
zero effective tax rates, partly offset by a true-up of the provision relating
to tax returns for prior periods.
LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $76.6 million and $162.3 million as of
September 30, 2003 and December 31, 2002, respectively. Our current ratio, the
ratio of current assets to current liabilities, was 1.1 as of September 30, 2003
and 1.3 as of December 31, 2002. The decrease in net working capital was
attributable primarily to the use of cash to repurchase our remaining
outstanding zero coupon convertible senior debentures in January 2003, an
increase in the current portion of long-term debt as a result of the
reclassification of approximately $86 million of senior convertible notes that
mature in March 2004 from long-term to current liabilities and losses incurred
on deepwater platform rig construction projects.
We have a five-year $200.0 million senior secured term loan with a
group of banks. Borrowings under the term loan bear interest at variable rates
based on LIBOR plus a spread based on the credit rating of the facility or, if
unrated, index debt. In 2003, in order to reduce the potential impact of
fluctuations in LIBOR, we entered into interest rate agreements that effectively
cap the interest rate on total outstanding borrowings under the term loan at
rates from 3.58% to 5.0% and provide a lower limit on rates from 0.72% to 0.91%,
plus the applicable spread, to March 2007.
We have a senior secured revolving credit facility with a group of banks
that provides aggregate availability of up to $250.0 million. Letters of credit
of up to $50.0 million may be issued under the facility. As of September 30,
2003, $195.0 million of borrowings and an additional $4.3 million of letters of
credit were outstanding under the facility. We amended our $95.0 million senior
secured revolving credit facility with non-U.S. banks in October 2003. The
amended facility provides aggregate availability of up to $180.0 million,
including up to $10.0 million of letters of credit, and is collateralized by
three semisubmersible rigs, two jackup rigs and a tender-assisted rig.
Borrowings under the amended credit facility bear interest at variable rates
based on LIBOR plus a spread ranging from 1.2% to 2.1%. As of September 30,
2003, $65.0 million of borrowings and an additional $10.0 million of letters of
credit were outstanding under this credit facility. As of September 30, 2003,
we had aggregate availability of $70.7 million under our senior secured
revolving credit facilities. The October amendment described above increased
the aggregate availability under our credit facilities by $85 million.
In July 2003, we redeemed $150.0 million principal amount of our 93/8%
senior notes due 2007 at a redemption price of 103.125% of the principal amount,
plus accrued and unpaid interest to the redemption date. We paid a total of
$157.6 million in connection with the redemption, including $2.9 million of
accrued and unpaid interest and a $4.7 million premium.
In April and May 2003, we issued $300 million aggregate principal amount of
3.25% convertible senior notes due 2033. Substantially all of the net proceeds
of approximately $294.8 million were used to repay amounts outstanding under our
senior secured revolving credit facilities, which included borrowings used to
fund a portion of the purchase price of our zero coupon convertible subordinated
debentures due 2018. The notes bear interest at a rate of 3.25% per annum. We
also will pay contingent interest during any six-month interest period
commencing on or after May 1, 2008 for which the trading price of the notes for
each of the five trading days immediately preceding such period equals or
exceeds 120% of the principal amount of the notes. Beginning May 5, 2008, we may
redeem any of the notes at a redemption price of 100% of the principal amount
redeemed plus accrued and unpaid interest. In addition, noteholders may require
us to repurchase the notes on May 1 of 2008, 2010, 2013, 2018, 2023 and 2028 at
a repurchase price of 100% of the principal amount redeemed plus accrued and
unpaid interest. We may elect to pay all or a portion of the repurchase price in
common stock instead of cash, subject to certain conditions. The notes are
convertible under specified circumstances into shares of our common stock at a
conversion rate of 38.9045 shares per $1,000 principal amount of notes (which is
equal to a conversion price of $25.704), subject to adjustment. Upon conversion,
we will have the right to deliver, in lieu of shares of common stock, cash or a
combination of cash and common stock.
In January 2003, we repurchased substantially all of our outstanding zero
coupon convertible senior debentures due 2021 for $98.2 million. In April 2003,
as required by the terms of our zero coupon convertible subordinated debentures
due 2018, we repurchased $226.5 million face amount of the outstanding
debentures for $112.0 million, which was equal to their accreted value on the
date of purchase. The purchase price was funded through borrowings under our
senior secured revolving credit facilities and available cash. Debentures with a
face amount of $2.1 million, and an accreted value of $1.1 million as of
November 8, 2003, remain outstanding.
20
We have a Direct Stock Purchase Plan, which provides a convenient way for
investors to purchase shares of our common stock without paying brokerage
commissions or service charges. In the second quarter of 2003, we sold
approximately 830,000 shares of common stock under this plan for net proceeds of
$15.0 million. No shares were sold under the plan in the first or third quarters
of 2003 or in 2002.
Additions to property and equipment during the nine months ended September
30, 2003 totaled $175.1 million, including $23.4 million for the upgrade of one
large land rig to work in Kazakhstan, $12.2 million for the acquisition of the
Viking, a conventionally moored semisubmersible rig, $65.0 million for the
upgrading of five jackup rigs, one platform rig and the Viking semisubmersible
rig for contracts in Mexico, $10.0 million for other rig upgrades,
refurbishments and reactivations, and approximately $64.5 million for sustaining
capital projects. Approximately $26.4 million of these expenditures have been
reimbursed by our customers. Since early 2002, we have obtained long-term
contracts in Mexico for 14 jackup rigs, two platform rigs and two
semisubmersible rigs. Most of these rigs came from our U.S. Gulf of Mexico rig
fleet and required substantial upgrades to meet international standards and
Pemex's specific requirements. The upgrades included expanding the living
quarters and adding additional equipment such as extra mud pumps, top-drives and
higher load capacity cranes.
As of September 30, 2003, we had a 30.0% equity interest in a joint venture
company that is constructing two dynamically-positioned, deepwater
semisubmersible drilling rigs, currently referred to as the Amethyst 4 and
Amethyst 5. The rigs are being constructed at a shipyard in Maine and are
anticipated to be completed in early 2004. The joint venture company has
financed 87.5% of the cost of construction of these rigs through credit
facilities, with repayment of the borrowings under those facilities guaranteed
by the United States Maritime Administration ("MARAD"). Advances under the
credit facilities are being provided without recourse to any of the joint
venture owners. The remaining 12.5% of the cost of construction is being
provided by the joint venture company from equity contributions that have been
made by the joint venture partners. In addition, the joint venture partners have
agreed to provide equity contributions to finance all of the incremental costs
associated with upgrading both rigs to a water depth capability of 1,700 meters
from the original design of approximately 1,500 meters. We expect that the
partners will be required to provide contributions of approximately $4.0 million
in connection with these upgrades, of which our 30% share would be approximately
$1.2 million. Through September 30, 2003, our equity contributions to the joint
venture totaled $31.8 million, including capitalized interest of $7.0 million
and an initial contribution of $0.4 million in connection with the upgrades.
Based on the availability of funds under performance and payment bonds issued on
behalf of a prior construction contractor and draws remaining under the
MARAD-guaranteed credit facilities, we believe the Amethyst 4 and Amethyst 5
will be completed without requiring additional equity contributions by the joint
venture partners other than contributions in connection with the water depth
capacity upgrades.
As of September 30, 2003, we had approximately $4.3 billion in total assets
and $1.9 billion of long-term debt and capital lease obligations. We do not
expect that our level of total indebtedness will have a material adverse impact
on our financial position, results of operations or liquidity in future periods.
As of September 30, 2003, $39.7 million of our cash balances, which amount
is included in restricted cash, consists of funds held in trust in connection
with our drillship and semisubmersible loans and our limited-recourse
collateralized term loans and, accordingly, is not available for our use.
Management believes that the cash and cash equivalents on hand, together
with the cash generated from our operations and borrowings under our credit
facilities, will be adequate to fund normal ongoing capital expenditures,
working capital and debt service requirements for the foreseeable future.
We expect to continue to redeploy assets to more active regions and to
explore opportunities to expand our operations through rig upgrades and
acquisitions from time to time. The timing, size or success of any acquisition
effort and the associated potential capital commitments are unpredictable. From
time to time, we have one or more bids outstanding for contracts that could
require significant capital expenditures and mobilization costs. We expect to
fund acquisitions and project opportunities primarily through a combination of
working capital, cash flow from operations and full or limited recourse debt or
equity financing. In addition, we may consider from time to time opportunities
to dispose of non-core assets when we believe the capital could be more
effectively deployed to reduce debt or for other purposes, and we continue to
discuss with potential buyers the possible sale of certain non-core assets. No
assurance can be given that any such sale will be completed.
In addition to the matters described in this "--Liquidity and Capital
Resources" section, please read "--Business Environment and Outlook" for
additional matters that may have a material impact on our liquidity.
21
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51". FIN No. 46 requires a company to
consolidate a variable interest entity, as defined, when the company will absorb
a majority of the variable interest entity's expected losses, receive a majority
of the variable interest entity's expected residual returns, or both. FIN No. 46
also requires certain disclosures relating to consolidated variable interest
entities and unconsolidated variable interest entities in which a company has a
significant variable interest. We have adopted the disclosure provisions of FIN
No. 46, as well as the consolidation provisions of FIN No. 46 for variable
interest entities created after January 31, 2003, and for variable interest
entities in which we have obtained an interest after January 31, 2003. With
respect to variable interest entities in which a company holds a variable
interest that was acquired before February 1, 2003, the consolidation provisions
are required to be applied no later than the company's first fiscal year or
interim period ending after December 15, 2003. We are currently evaluating these
provisions of FIN No. 46, but do not expect them to have a material impact on
our consolidated financial position, results of operations or cash flows when
applied.
The FASB issued Statement of Financial Accounting Standards ("SFAS") No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" and SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" during the second quarter of
2003. SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments, including those embedded in other contracts, and for
hedging activities and is effective for contracts entered into or modified after
June 30, 2003. SFAS No. 150 establishes standards for the classification and
measurement of certain financial instruments with both liability and equity
characteristics and is effective at the beginning of the third quarter of 2003.
The adoption of SFAS Nos. 149 and 150 did not to have a material impact on our
consolidated financial position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included in this Quarterly Report on Form 10-Q that address
activities, events or developments that we expect, project, believe or
anticipate will or may occur in the future are forward-looking statements. These
include such matters as:
o market conditions, expansion and other development trends in the
contract drilling industry
o utilization rates and contract rates for rigs
o future capital expenditures and investments in the construction,
acquisition and refurbishment of rigs (including the amount and nature
thereof and the timing of completion thereof)
o estimates of profit or loss from performance of rig construction
contracts
o future asset sales
o completion and employment of rigs under construction
o repayment of debt
o business strategies
o expansion and growth of operations
o future exposure to currency devaluations
o expected outcomes of legal and administrative proceedings and their
expected effects on our financial position, results of operations and
cash flows
o future operating results and financial condition and
22
o the effectiveness of our disclosure controls and procedures
We have based these statements on our assumptions and analyses in light of
our experience and perception of historical trends, current conditions, expected
future developments and other factors we believe are appropriate in the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including the following:
o general economic business conditions
o prices of oil and gas and industry expectations about future prices
o cost overruns in our lump sum construction and other turnkey contracts
o adjustments in estimates affecting our revenue recognition under
percentage-of-completion accounting
o foreign exchange controls and currency fluctuations
o political stability in the countries in which we operate
o the business opportunities (or lack thereof) that may be presented to
and pursued by us
o changes in laws or regulations and
o the validity of the assumptions used in the design of our disclosure
controls and procedures
Most of these factors are beyond our control. We caution you that
forward-looking statements are not guarantees of future performance and that
actual results or developments may differ materially from those projected in
these statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see
"Quantitative and Qualitative Disclosures about Market Risk" in Item 7A of our
Annual Report on Form 10-K for the year ended December 31, 2002. There have been
no material changes to the disclosure regarding our exposure to certain market
risks made in the annual report, except as discussed in the paragraph below. For
additional information regarding our long-term debt, see Note 3 of the Notes to
Unaudited Consolidated Financial Statements in Item 1 of Part I of this
Quarterly Report on Form 10-Q.
Interest Rate Risk. During 2003, we entered into agreements that
effectively capped the interest rate on $197.0 of outstanding borrowings under
our senior secured term loan at rates from 3.58% to 5.0%, plus the applicable
spread, to March 2007.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our President and Chief Executive
Officer and our Vice President and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934 as of the end of the period covered by this
quarterly report. In the course of this evaluation, management considered
certain internal control areas, including those enumerated below, in which we
have made and are continuing to make changes to improve and enhance controls.
Based upon that evaluation, our President and Chief Executive Officer and our
Vice President and Chief Financial Officer concluded that our disclosure
controls and procedures are effective, in all material respects, with respect to
the recording, processing, summarizing and reporting, within the time periods
specified in the SEC's rules and forms, of information required to be disclosed
by us in the reports that we file or submit under the Exchange Act.
Beginning with the year ending December 31, 2004, Section 404 of the
Sarbanes-Oxley Act of 2002 will require us to include an internal control report
of management with our annual report on Form 10-K. The internal control report
must contain (1) a statement of management's responsibility for establishing and
maintaining adequate internal control over financial reporting for our company,
(2) a statement identifying the framework used by management to conduct the
required evaluation of the effectiveness of our internal control over financial
reporting, (3) management's assessment of the
23
effectiveness of our internal control over financial reporting as of the end of
our most recent fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective, and (4) a statement that
our independent auditors have issued an attestation report on management's
assessment of our internal control over financial reporting. In order to achieve
compliance with Section 404 within the prescribed period, management has formed
an internal control steering committee, engaged outside consultants and adopted
a detailed project work plan to assess the adequacy of our internal control over
financial reporting, remediate any control weaknesses that may be identified,
validate through testing that controls are functioning as documented and
implement a continuous reporting and improvement process for internal control
over financial reporting. As a result of this initiative, we may make changes in
our internal control over financial reporting from time to time during the
period prior to December 31, 2004. There were no changes in our internal control
over financial reporting that occurred during the most recent fiscal quarter,
other than those enumerated below, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
As disclosed in our quarterly report on Form 10-Q for the quarterly period
ended June 30, 2003, in connection with the completion of their review of our
financial statements for the three-month and six-month periods ended June 30,
2003 included in that report and, in particular, their analysis of our loss
provision related to our rig construction contracts, our independent auditors,
PricewaterhouseCoopers LLP, issued a letter to our audit committee dated August
13, 2003 noting certain matters in our technical services division that it
considered to be a material weakness in internal control. The matters listed in
the letter were the misapplication of generally accepted accounting principles
and the lack of procedures and policies to properly process change orders with
customers on a timely basis. The evaluation of internal controls is subjective
and involves judgment, and although we believe there were areas in our internal
controls with respect to the processing of change orders that could have been
improved, we do not believe these matters constituted a material weakness in our
internal control over financial reporting. We have, however, made changes in
policies and procedures to improve and enhance internal controls with regard to
the processing of change orders and in the technical services division generally
and believe these improvements and enhancements have appropriately addressed the
matters referred to in the letter. These changes include the following:
o Established procedures for the centralized review and
monitoring of change orders;
o Enhanced procedures for the periodic review and assessment for
income recognition of each change order in accordance with
generally accepted accounting principles;
o Strengthened the accounting function within the technical
services segment and enhanced formal reporting procedures to
the corporate accounting group; and
o Initiated monthly meetings among project managers and
corporate accounting personnel to review change order
analysis, estimates to complete and supporting documentation
for each project in connection with the monthly close of
accounts.
24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits*
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter on unaudited interim financial information of
PricewaterhouseCoopers LLP
31.1 Certification of Chief Executive Officer of Pride pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer of Pride pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of the Chief Executive Officer and the Chief
Financial Officer of Pride pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- -----------------------
* Pride and its subsidiaries are parties to several debt instruments that
have not been filed with the SEC under which the total amount of
securities authorized does not exceed 10% of the total assets of Pride
and its subsidiaries on a consolidated basis. Pursuant to paragraph
4(iii) (A) of Item 601(b) of Regulation S-K, Pride agrees to furnish a
copy of such instruments to the SEC upon request.
(b) Reports on Form 8-K
In a Current Report on Form 8-K submitted to the SEC on July 25, 2003, we
filed pursuant to Item 5 of Form 8-K information regarding the recording of loss
provisions in our 2003 second quarter relating to the construction of deepwater
platform rigs.
25
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PRIDE INTERNATIONAL, INC.
By: /s/ Earl W. McNiel
---------------------------
(EARL W. MCNIEL)
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: November 14, 2003
26
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter on unaudited interim financial information of
PricewaterhouseCoopers LLP
31.1 Certification of Chief Executive Officer of Pride pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer of Pride pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of the Chief Executive Officer and the Chief
Financial Officer of Pride pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002