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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ................. to ...................
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0321760
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrant's
telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of July 28, 2004 Common stock, $0.01 par value per share 129,322,455 shares
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED JUNE 30, 2004
PAGE NO.
COVER PAGE................................................................................................ 1
TABLE OF CONTENTS......................................................................................... 2
PART I. FINANCIAL INFORMATION............................................................................. 3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................................... 3
Consolidated Statements of Operations..................................................... 4
Consolidated Statements of Cash Flows..................................................... 5
Notes to Unaudited Consolidated Financial Statements...................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................... 34
ITEM 4. CONTROLS AND PROCEDURES................................................................... 35
PART II.OTHER INFORMATION................................................................................. 36
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 36
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K........................................................... 36
SIGNATURES................................................................................................ 38
EXHIBIT INDEX............................................................................................. 39
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31,
----------- -----------
2004 2003
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 129,327 $ 106,345
Investments and marketable securities ......................... 35,755 503,995
Receivable from sale of marketable securities ................. 448,992 --
Accounts receivable ........................................... 147,047 154,124
Rig inventory and supplies .................................... 48,296 48,035
Prepaid expenses and other .................................... 32,531 22,764
----------- -----------
Total current assets .................................. 841,948 835,263
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION ...................................... 2,220,509 2,257,876
GOODWILL ........................................................ 4,291 11,099
OTHER ASSETS .................................................... 29,920 30,781
----------- -----------
Total assets .......................................... $ 3,096,668 $ 3,135,019
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................. $ 11,969 $ 11,969
Accounts payable .............................................. 21,170 15,653
Accrued liabilities ........................................... 63,289 65,617
Taxes payable ................................................. 2,944 6,761
----------- -----------
Total current liabilities ............................. 99,372 100,000
LONG-TERM DEBT .................................................. 935,996 928,030
DEFERRED TAX LIABILITY .......................................... 377,312 384,505
OTHER LIABILITIES ............................................... 41,146 42,004
----------- -----------
Total liabilities ..................................... 1,453,826 1,454,539
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9) .......................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock (par value $0.01, 25,000,000 shares authorized,
none issued and outstanding) ................................ -- --
Common stock (par value $0.01, 500,000,000 shares authorized,
133,457,055 shares issued and 129,322,455 shares outstanding
at June 30, 2004 and December 31, 2003) ...................... 1,335 1,335
Additional paid-in capital .................................... 1,263,692 1,263,692
Retained earnings ............................................. 478,273 515,906
Accumulated other comprehensive losses ........................ (4,122) (4,117)
Treasury stock, at cost (4,134,600 shares at June 30, 2004 and
December 31, 2003) ........................................... (96,336) (96,336)
----------- -----------
Total stockholders' equity ............................ 1,642,842 1,680,480
----------- -----------
Total liabilities and stockholders' equity ............ $ 3,096,668 $ 3,135,019
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2004 2003 2004 2003
---------- --------- --------- ---------
REVENUES:
Contract drilling...................................... $ 176,685 $ 157,038 $ 353,925 $ 296,897
Revenues related to reimbursable expenses.............. 8,261 6,162 15,219 12,452
---------- --------- --------- ---------
Total revenues.................................... 184,946 163,200 369,144 309,349
---------- --------- --------- ---------
OPERATING EXPENSES:
Contract drilling...................................... 133,483 124,606 268,161 238,276
Reimbursable expenses.................................. 7,519 5,525 13,753 11,263
Depreciation and amortization.......................... 44,554 41,553 89,074 88,830
General and administrative............................. 8,760 8,214 17,549 15,414
Loss (gain) on sale of assets 130 (57) (195) (58)
---------- --------- --------- ---------
Total operating expenses.......................... 194,446 179,841 388,342 353,725
---------- --------- --------- ---------
OPERATING LOSS........................................... (9,500) (16,641) (19,198) (44,376)
OTHER INCOME (EXPENSE):
Interest income........................................ 3,114 3,337 4,682 7,493
Interest expense....................................... (6,373) (5,378) (12,727) (10,953)
Gain (loss) on sale of marketable securities 283 (1,071) 258 (1,132)
Other, net (257) 1,290 (411) 3,032
---------- --------- --------- ---------
LOSS BEFORE INCOME TAX BENEFIT (12,733) (18,463) (27,396) (45,936)
INCOME TAX BENEFIT....................................... 2,238 1,776 5,929 7,683
---------- --------- --------- ---------
NET LOSS................................................. $ (10,495) $ (16,687) $ (21,467) $ (38,253)
========== ========= ========= =========
LOSS PER SHARE:
BASIC $ (0.08) $ (0.13) $ (0.17) $ (0.29)
========== ========= ========= =========
DILUTED $ (0.08) $ (0.13) $ (0.17) $ (0.29)
========== ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Shares of common stock................................. 129,322 130,336 129,322 130,336
Dilutive potential shares of common stock.............. - - - -
---------- --------- --------- ---------
Total weighted average shares outstanding......... 129,322 130,336 129,322 130,336
========== ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2004 2003
------------- -------------
OPERATING ACTIVITIES:
Net loss............................................................ $ (21,467) $ (38,253)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation...................................................... 89,074 88,830
Gain on sale of assets............................................ (195) (58)
(Gain) loss on sale of marketable securities, net................. (258) 1,132
Deferred tax provision............................................ (450) (9,666)
Accretion of discounts on marketable securities................... (1,618) (1,378)
Amortization of debt issuance costs............................... 534 594
Amortization of discount on zero coupon convertible debentures.... 7,966 7,695
Changes in operating assets and liabilities:
Accounts receivable............................................... 7,077 (4,058)
Rig inventory and supplies and other current assets............... (10,028) 1,967
Other assets, non-current......................................... 327 2,944
Accounts payable and accrued liabilities.......................... 3,189 (12,969)
Taxes payable..................................................... (3,817) (3,470)
Other liabilities, non-current.................................... (858) 2,389
Other items, net.................................................. 450 (2,244)
------------- -------------
Net cash provided by operating activities..................... 69,926 33,455
------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (excluding rig acquisitions)................... (52,588) (134,114)
Rig acquisitions.................................................... -- (63,500)
Proceeds from sale of assets........................................ 1,076 388
Proceeds from sale and maturities of marketable securities.......... 1,949,247 1,603,006
Purchases of marketable securities.................................. (1,895,603) (1,374,768)
Purchases of Australian dollar time deposits........................ (42,073) --
Proceeds from maturities of Australian dollar time deposits......... 9,163 --
Proceeds from settlement of forward contracts....................... -- 2,015
------------- -------------
Net cash (used) provided by investing activities.............. (30,778) 33,027
------------- -------------
FINANCING ACTIVITIES:
Payment of dividends................................................ (16,166) (32,584)
------------- -------------
Net cash used in financing activities......................... (16,166) (32,584)
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................... 22,982 33,898
Cash and cash equivalents, beginning of period...................... 106,345 182,453
------------- -------------
Cash and cash equivalents, end of period............................ $ 129,327 $ 216,351
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION
The consolidated financial statements of Diamond Offshore Drilling, Inc.
and subsidiaries (the "Company") should be read in conjunction with the Annual
Report on Form 10-K for the year ended December 31, 2003 (File No. 1-13926).
As of July 28, 2004, Loews Corporation ("Loews") owned 54.2% of the
outstanding shares of common stock of Diamond Offshore Drilling, Inc., which was
a wholly owned subsidiary of Loews prior to its initial public offering in
October 1995.
Interim Financial Information
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
disclosures required by generally accepted accounting principles for complete
financial statements. The consolidated financial information has not been
audited but, in the opinion of management, includes all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
consolidated balance sheets, statements of operations, and statements of cash
flows at the dates and for the periods indicated. Results of operations for
interim periods are not necessarily indicative of results of operations for the
respective full years.
Cash and Cash Equivalents, Marketable Securities and Other Investments
Short-term, highly liquid investments that have an original maturity of
three months or less and deposits in money market mutual funds that are readily
convertible into cash are considered cash equivalents.
The Company's investments in marketable securities are classified as
available for sale and stated at fair value. Accordingly, any unrealized gains
and losses, net of taxes, are reported in the Consolidated Balance Sheets in
"Accumulated other comprehensive losses" until realized. The cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity and such adjustments are included in the Consolidated Statements of
Operations in "Interest income." The sale and purchase of securities are
recorded on the date of the trade. The cost of debt securities sold is based on
the specific identification method. Realized gains or losses and declines in
value judged to be other than temporary, if any, are reported in the
Consolidated Statements of Operations in "Other income (expense)."
Current assets include a receivable of $449.0 million for the June 30,
2004 sale of $448.5 million of marketable securities, the proceeds of which were
received on July 1, 2004, resulting in a gain of $0.5 million that was
recognized on June 30, 2004.
"Investments and marketable securities" in the Consolidated Balance Sheet
at June 30, 2004 also included $31.9 million of time deposits (converted from
45.0 million Australian dollars) which mature over the next nine months. These
securities do not meet the definition of debt securities under Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and are therefore carried at cost
on the balance sheet of a foreign branch of the Company.
Derivative Financial Instruments
Derivative financial instruments of the Company include forward exchange
contracts and a contingent interest provision that is embedded in the 1.5%
convertible senior debentures due 2031 (the "1.5% Debentures") issued on April
11, 2001. See Note 4.
6
Supplementary Cash Flow Information
Cash payments made for interest on long-term debt totaled $3.5 million for
each of the six month periods ended June 30, 2004 and 2003.
Cash refunds received for foreign income taxes, net of foreign tax
payments made, were $0.3 million during the six months ended June 30, 2004. Cash
payments made for foreign income taxes, net of foreign tax refunds, were $5.3
million during the six months ended June 30, 2003. A $0.4 million refund of U.S.
income tax was received in the first half of 2004. There were no payments or
refunds of U.S. income taxes during the first half of 2003.
Capitalized Interest
Interest cost for construction and upgrade of qualifying assets is
capitalized. A reconciliation of the Company's total interest cost to "Interest
expense" as reported in the Consolidated Statements of Operations is as
follows:`
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2004 2003 2004 2003
------ ------- ------- --------
(IN THOUSANDS)
Total interest cost including amortization of
debt issuance costs ....................... $6,373 $ 6,518 $12,727 $ 13,017
Capitalized interest ........................ -- (1,140) -- (2,064)
------ ------- ------- --------
Total interest expense as reported ....... $6,373 $ 5,378 $12,727 $ 10,953
====== ======= ======= ========
Interest on the upgrade cost of the Ocean Rover was capitalized through
July 10, 2003 when its upgrade was completed. Currently, there are no capital
projects for which interest is being capitalized.
Debt Issuance Costs
Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the respective terms of the related debt.
Treasury Stock
Depending on market conditions, the Company may, from time to time,
purchase shares of its common stock in the open market or otherwise. The
purchase of treasury stock is accounted for using the cost method which reports
the cost of the shares acquired in "Treasury stock" as a deduction from
stockholders' equity in the Consolidated Balance Sheets. There were no treasury
stock purchases during the six months ended June 30, 2004 or 2003.
Comprehensive Loss
A reconciliation of net loss to comprehensive loss is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2004 2003 2004 2003
--------- --------- --------- ---------
(IN THOUSANDS)
Net loss........................................... $ (10,495) $ (16,687) $ (21,467) $ (38,253)
Other comprehensive gains (losses), net of tax:
Foreign currency translation loss................ (718) (62) (432) (149)
Unrealized holding (loss) gain on investments.... (8) (1,921) 452 (4,214)
Reclassification adjustment for gain (loss)
included in net income (loss)................... 3 4 (25) (9)
--------- --------- --------- ---------
Comprehensive loss................................. $ (11,218) $ (18,666) $ (21,472) $ (42,625)
========= ========= ========= =========
7
Currency Translation
The Company's primary functional currency is the U.S. dollar. Certain of
the Company's subsidiaries use the local currency in the country where they
conduct operations as their functional currency. These subsidiaries translate
assets and liabilities at period-end exchange rates while income and expense
accounts are translated at average exchange rates. Translation adjustments are
reflected in the Consolidated Balance Sheets in "Accumulated other comprehensive
losses." Currency transaction gains and losses are included in the Consolidated
Statements of Operations in "Other income (expense)." Re-measurement translation
gains and losses of subsidiaries operating in hyperinflationary economies, when
applicable, are included in operating results.
Stock-Based Compensation
The Company accounts for its 2000 Stock Option Plan in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation expense has been recognized for the
options granted to employees under the plan. Had compensation expense for the
Company's stock options been recognized based on the fair value of the options
at the grant dates, valued using the Binomial Option pricing model, the
Company's net loss and loss per share would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss as reported .............................. $ (10,495) $ (16,687) $ (21,467) $ (38,253)
Add: Stock-based employee compensation expense
included in reported net loss, net of related
tax effects .................................... -- -- -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based
method, net of related tax effects ............. (266) (273) (577) (537)
---------- ---------- ---------- ----------
Pro forma net loss ................................ $ (10,761) $ (16,960) $ (22,044) $ (38,790)
========== ========== ========== ==========
Loss per share of common stock:
As reported ..................................... $ (0.08) $ (0.13) $ (0.17) $ (0.29)
Pro forma ....................................... $ (0.08) $ (0.13) $ (0.17) $ (0.30)
Loss per share of common stock - assuming dilution:
As reported ..................................... $ (0.08) $ (0.13) $ (0.17) $ (0.29)
Pro forma ....................................... $ (0.08) $ (0.13) $ (0.17) $ (0.30)
Revenue Recognition
Income from dayrate drilling contracts is recognized currently. In
connection with such drilling contracts, the Company may receive lump-sum fees
for the mobilization of equipment and personnel. Any excess in these lump-sum
mobilization fees received over the related costs incurred to mobilize an
offshore rig from one market to another is recognized in income over the primary
term of the related drilling contract. Absent a contract, mobilization costs are
recognized currently. Other lump-sum payments received from customers relating
to specific contracts are deferred and amortized to income over the primary term
of the related drilling contract.
Income from offshore turnkey drilling contracts is recognized on the
completed contract method, with revenues accrued to the extent of costs until
the specified turnkey depth and other contract requirements are met. Provisions
for future losses on turnkey drilling contracts are recognized when it becomes
apparent that expenses to be incurred on a specific contract will exceed the
revenue from that contract. It is the Company's intent not to pursue contracts
for integrated services, which includes turnkey contracts, except in very
limited circumstances.
Income from reimbursements received for the purchase of supplies,
equipment, personnel services and other services provided at the request of the
Company's customers in accordance with a contract or agreement is recorded, for
the gross amount billed to the customer, as "Revenues related to reimbursable
expenses" in the Consolidated Statements of Operations.
8
Changes in Accounting Estimates
In April 2003 the Company commissioned a study to evaluate the economic
lives of its drilling rigs. As a result of this study, effective April 1, 2003,
the Company recorded changes in accounting estimates by increasing the estimated
service lives to 25 years for jack-ups and 30 years for semisubmersibles and the
Company's drillship and by increasing salvage values to 5% for most of the
Company's drilling rigs. The change in estimate was made to better reflect the
remaining economic lives and salvage values of the Company's fleet. The effect
of this change in accounting estimates resulted in a reduction to net loss
(after-tax) for the three and six months ended June 30, 2004 of $3.3 million, or
$0.03 per share and $7.3 million, or $0.06 per share, respectively. The effect
of this change in accounting estimates resulted in a reduction to net loss
(after-tax) for the three and six months ended June 30, 2003 of $5.8 million, or
$0.04 per share.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimated.
Reclassifications
Certain amounts applicable to prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.
2. LOSS PER SHARE
A reconciliation of the numerators and the denominators of the basic and
diluted per-share computations follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss - basic (numerator): ................ $ (10,495) $ (16,687) $ (21,467) $ (38,253)
Effect of dilutive potential shares
1.5% Debentures ......................... -- -- -- --
Zero Coupon Debentures .................. -- -- -- --
-------- --------- -------- ---------
Net loss including conversions - diluted
(numerator) ................................. $ (10,495) $ (16,687) $ (21,467) $ (38,253)
======== ========= ======== =========
Weighted average shares - basic (denominator): 129,322 130,336 129,322 130,336
Effect of dilutive potential shares
1.5% Debentures ......................... -- -- -- --
Zero Coupon Debentures .................. -- -- -- --
Stock options ........................... -- -- -- --
-------- --------- -------- ---------
Weighted average shares including conversions
- diluted (denominator) ..................... 129,322 130,336 129,322 130,336
======== ========= ======== =========
Loss per share:
Basic ................................... $ ( 0.08) $ (0.13) $ ( 0.17) $ (0.29)
======== ========= ======== =========
Diluted ................................. $ ( 0.08) $ (0.13) $ ( 0.17) $ (0.29)
======== ========= ======== =========
The computation of diluted earnings per share ("EPS") for both quarters
and six months ended June 30, 2004 and 2003 excludes approximately 6.9 million
potentially dilutive shares issuable upon conversion of the Company's zero
coupon convertible debentures due 2020 ("Zero Coupon Debentures") because the
inclusion of such shares would be antidilutive. The computation of diluted EPS
for both quarters and six months ended June 30, 2004 and
9
2003 also excludes approximately 9.4 million potentially dilutive shares
issuable upon conversion of the Company's 1.5% Debentures because the inclusion
of such shares would be antidilutive. See Note 8 for a description of the
Company's long-term debt.
Certain stock options were excluded from the computation of diluted EPS
because the options' exercise prices were more than the average market price per
share of the common stock. Stock options representing 340,650 shares and 380,025
shares of common stock were excluded from the computation of diluted EPS for the
quarters and six month periods ended June 30, 2004 and 2003, respectively.
Other stock options with average market prices that exceeded their
exercise prices during the period (in-the-money options) were excluded from the
computation of diluted EPS because potential shares of common stock are not
included when a loss from continuing operations exists. Stock options
representing 297,025 shares and 85,250 shares of common stock were excluded from
the computation of diluted EPS for the quarters and six months ended June 30,
2004 and 2003, respectively.
3. INVESTMENTS AND MARKETABLE SECURITIES
Investments classified as available for sale are summarized as follows:
JUNE 30, 2004
----------------------------------------------------------
GROSS UNREALIZED LOSSES
-------------------------
GROSS
AMORTIZED UNREALIZED LESS THAN GREATER THAN MARKET
COST GAINS 12 MONTHS 12 MONTHS VALUE
--------- ---------- --------- ------------ ------
(in thousands)
Debt securities issued by the U.S.
Treasury and other U.S. government
agencies:
Due within one year ............ $ -- $ -- $ -- $ -- $ --
Mortgage-backed securities ...... 3,838 53 -- -- 3,891
------- ----- ---- ----- ------
Total .......................... $ 3,838 $ 53 $ -- $ -- $3,891
======= ===== ==== ===== ======
"Investments and marketable securities" in the Consolidated Balance Sheets
at June 30, 2004 also included $31.9 million of time deposits (converted from
45.0 million Australian dollars) which mature over the next nine months. These
securities do not meet the definition of debt securities under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and are
therefore carried at cost on the balance sheet of a foreign branch of the
Company.
DECEMBER 31, 2003
------------------------------------------------------------
GROSS UNREALIZED LOSSES
-------------------------
GROSS
AMORTIZED UNREALIZED LESS THAN GREATER THAN MARKET
COST GAINS 12 MONTHS 12 MONTHS VALUE
--------- ---------- --------- ------------ --------
(in thousands)
Debt securities issued by the U.S.
Treasury and other U.S. government
agencies:
Due within one year ............ $ 499,784 $ 44 $ -- $ -- $499,828
Mortgage-backed securities ....... 4,812 -- -- (645) 4,167
--------- ---- ---- ----- --------
Total .......................... $ 504,596 $ 44 $ -- $(645) $503,995
========= ==== ==== ===== ========
All of the Company's investments are included as current assets in the
Consolidated Balance Sheets in "Investments and marketable securities,"
representing the investment of cash available for current operations.
Current assets include a receivable of $449.0 million for the June 30,
2004 sale of $448.5 million of marketable securities, the proceeds of which were
received on July 1, 2004, resulting in a gain of $0.5 million that was
recognized on June 30, 2004.
10
Proceeds from sales and maturities of marketable securities and gross
realized gains and losses are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2004 2003 2004 2003
---------- ------------ ----------- -----------
(IN THOUSANDS)
Proceeds from sales ....... $1,198,732 $ 75,045 $ 1,199,247 $ 228,006
Proceeds from maturities .. 125,000 650,000 750,000 1,375,000
Gross realized gains ...... 2,558 -- 2,558 108
Gross realized losses ..... (2,275) (1,071) (2,300) (1,240)
4. DERIVATIVE FINANCIAL INSTRUMENTS
Forward Exchange Contracts
The Company operates internationally, resulting in exposure to foreign
exchange risk. This risk is primarily associated with costs payable in foreign
currencies for employee compensation and for purchases from foreign suppliers. A
technique the Company uses, when possible, for minimizing its foreign exchange
risk involves structuring customer contracts to provide for payment in both the
U.S. dollar and the foreign currency. The payment portion denominated in the
foreign currency is based on anticipated foreign currency requirements over the
contract term. In some instances, when customer contracts cannot be structured
to generate a sufficient amount of foreign currency for operating purposes, a
foreign exchange forward contract may be used to minimize the forward exchange
risk. A forward exchange contract obligates the Company to exchange
predetermined amounts of specified foreign currencies at specified foreign
exchange rates on specified dates.
In June 2002 the Company entered into forward contracts to purchase
approximately 50.0 million Australian dollars, 4.2 million Australian dollars to
be purchased monthly from August 29, 2002 through June 26, 2003 and 3.8 million
to be purchased on July 31, 2003. These forward contracts were derivatives as
defined by SFAS No. 133. SFAS No. 133 requires that each derivative be stated in
the balance sheet at its fair value with gains and losses reflected in the
income statement except that, to the extent the derivative qualifies for hedge
accounting, the gains and losses are reflected in income in the same period as
offsetting losses and gains on the qualifying hedged positions. SFAS No. 133
further provides specific criteria necessary for a derivative to qualify for
hedge accounting. The forward contracts purchased by the Company in 2002 did not
qualify for hedge accounting. At June 30, 2003, an asset of $0.5 million,
reflecting the fair value of the forward contracts, was included with "Prepaid
expenses and other" in the Consolidated Balance Sheets. A pre-tax gain of $1.0
million and $2.3 million was recorded in the Consolidated Statements of
Operations for the quarter and six months ended June 30, 2003 in "Other income
(expense)." The Company had satisfied all obligations under these contracts as
of September 30, 2003 and no new forward exchange contracts have been entered
into since that time.
Contingent Interest
The Company's $460.0 million principal amount of 1.5% Debentures, which
were issued on April 11, 2001 and are due on April 15, 2031, contain a
contingent interest provision. The contingent interest component is an embedded
derivative as defined by SFAS No. 133 and accordingly must be split from the
host instrument and recorded at fair value on the balance sheet. The contingent
interest component had no value at issuance, at December 31, 2003, or at June
30, 2004.
11
5. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
JUNE 30, DECEMBER 31,
-----------------------------
2004 2003
----------- ------------
(IN THOUSANDS)
Drilling rigs and equipment .................... $ 3,525,367 $ 3,453,219
Construction work-in-progress .................. -- 21,274
Land and buildings ............................. 15,703 15,220
Office equipment and other ..................... 22,430 22,080
----------- ------------
Cost ..................................... 3,563,500 3,511,793
Less: accumulated depreciation ................. (1,342,991) (1,253,917)
----------- ------------
Drilling and other property and equipment,
net ..................................... $ 2,220,509 $ 2,257,876
=========== ============
Construction work-in-progress at December 31, 2003 consisted of costs
related to the Ocean Titan cantilever conversion project which was completed in
January 2004.
In December 2003 the Company sold two of its early second generation
semisubmersible drilling rigs, the Ocean Century and Ocean Prospector, for a
total of $750,000. These rigs had been cold stacked in the Gulf of Mexico since
July 1998 and October 1998, respectively. In September 2003 they were written
down by $1.6 million to their fair market values of $375,000 each and
subsequently retired from service as offshore drilling units.
In April 2003 the Company commissioned a study to evaluate the economic
lives of its drilling rigs. As a result of this study, effective April 1, 2003,
the Company recorded changes in accounting estimates by increasing the estimated
service lives to 25 years for jack-ups and 30 years for semisubmersibles and the
Company's drillship and by increasing salvage values to 5% for most of the
Company's drilling rigs. The change in estimate was made to better reflect the
remaining economic lives and salvage values of the Company's fleet. The effect
of this change in accounting estimates resulted in a reduction to net loss
(after-tax) for the three and six months ended June 30, 2004 of $3.3 million, or
$0.03 per share and $7.3 million, or $0.06 per share, respectively. The effect
of this change in accounting estimates resulted in a reduction to net loss
(after-tax) for the three and six months ended June 30, 2003 of $5.8 million, or
$0.04 per share.
6. GOODWILL
Goodwill from the merger with Arethusa (Off-Shore) Limited ("Arethusa") in
1996 was generated from an excess of the purchase price over the net assets
acquired. The Company performed the annual goodwill impairment test on December
31, 2003 and determined that the fair value of the reporting unit exceeded its
carrying value, and accordingly, no further steps were required for testing
goodwill impairment at that time. Annual goodwill impairment testing is
performed at each year-end.
There were no recognized intangible assets other than goodwill associated
with the Arethusa merger.
During each of the six-month periods ended June 30, 2004 and 2003, an
adjustment of $6.8 million was recorded to reduce goodwill. The adjustments
represent the tax benefits not previously recognized for the excess of tax
deductible goodwill over book goodwill. The Company will continue to reduce
goodwill in future periods as the tax benefits of excess tax goodwill over book
goodwill are recognized. Goodwill is expected to be reduced to zero in the
fourth quarter of 2004.
12
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JUNE 30, DECEMBER 31,
2004 2003
------- -----------
(IN THOUSANDS)
Payroll and benefits ................ $31,183 $31,058
Personal injury and other claims .... 8,159 7,455
Interest payable .................... 2,317 1,537
Deferred revenue .................... 2,206 3,068
Other ............................... 19,424 22,499
------- -------
Total ......................... $63,289 $65,617
======= =======
8. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
(IN THOUSANDS)
Zero Coupon Debentures ...................... $ 463,178 $ 455,212
1.5% Debentures ............................. 460,000 460,000
Ocean Alliance Lease-leaseback Agreement .... 24,787 24,787
--------- ---------
947,965 939,999
Less: Current maturities .................... (11,969) (11,969)
--------- ---------
Total ................................. $ 935,996 $ 928,030
========= =========
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 2003 are as follows (see discussions following table
for description of the rights that holders of the debentures have to put the
securities to the Company):
(IN THOUSANDS)
--------------
2004 .......................... $ 11,969
2005 .......................... 12,818
2006 .......................... --
2007........................... --
2008........................... --
Thereafter .................... 923,178
---------
947,965
Less: Current maturities....... (11,969)
---------
Total ....................... $ 935,996
=========
1.5% Debentures
The Company's $460.0 million principal amount of 1.5% Debentures that were
issued on April 11, 2001 are due April 15, 2031. The 1.5% Debentures are
convertible into shares of the Company's common stock at an initial conversion
rate of 20.3978 shares per $1,000 principal amount of the 1.5% Debentures,
subject to adjustment in certain circumstances. Upon conversion, the Company has
the right to deliver cash in lieu of shares of the Company's common stock.
Interest of 1.5% per year on the outstanding principal amount is payable
semiannually in arrears on April 15 and October 15 of each year. The 1.5%
Debentures are unsecured obligations of the Company and rank equally with all of
the Company's other unsecured senior indebtedness.
13
The Company will pay contingent interest to holders of the 1.5% Debentures
during any six-month period commencing after April 15, 2008, if the average
market price of a 1.5% Debenture for a measurement period preceding such
six-month period equals 120% or more of the principal amount of such 1.5%
Debenture and the Company pays a regular cash dividend during such six-month
period. The contingent interest payable per $1,000 principal amount of 1.5%
Debentures, in respect of any quarterly period, will equal 50% of regular cash
dividends paid by the Company per share on its common stock during that
quarterly period multiplied by the conversion rate. This contingent interest
component is an embedded derivative, which had no fair value at issuance or on
December 31, 2003 or June 30, 2004.
Holders may require the Company to purchase all or a portion of their 1.5%
Debentures on April 15, 2008, at a price equal to 100% of the principal amount
of the 1.5% Debentures to be purchased plus accrued and unpaid interest. The
Company may choose to pay the purchase price in cash or shares of the Company's
common stock or a combination of cash and common stock. In addition, holders may
require the Company to purchase, for cash, all or a portion of their 1.5%
Debentures upon a change in control (as defined).
The Company may redeem all or a portion of the 1.5% Debentures at any time
on or after April 15, 2008, at a price equal to 100% of the principal amount
plus accrued and unpaid interest.
Zero Coupon Convertible Debentures
The Company's Zero Coupon Debentures issued on June 6, 2000 at a price of
$499.60 per $1,000 debenture are due June 6, 2020, which represents a yield to
maturity of 3.50% per year. The Company will not pay interest prior to maturity
unless it elects to convert the Zero Coupon Debentures to interest-bearing
debentures upon the occurrence of certain tax events. The Zero Coupon Debentures
are convertible at the option of the holder at any time prior to maturity,
unless previously redeemed, into the Company's common stock at a fixed
conversion rate of 8.6075 shares of common stock per Zero Coupon Debenture,
subject to adjustment in certain events. The Zero Coupon Debentures are senior
unsecured obligations of the Company.
The Company has the right to redeem the Zero Coupon Debentures, in whole
or in part, after June 6, 2005, for a price equal to the issuance price plus
accrued original issue discount through the date of redemption. Holders have the
right to require the Company to repurchase the Zero Coupon Debentures on June 6,
2005, June 6, 2010 and June 6, 2015 at the accreted value through the date of
repurchase. The Company may pay such repurchase price with either cash or shares
of the Company's common stock or a combination of cash and shares of common
stock.
The aggregate principal amount at maturity will be $805.0 million assuming
no conversions or redemptions occur prior to the maturity date.
Ocean Alliance Lease-Leaseback
The Company entered into a lease-leaseback agreement with a European bank
in December 2000. The lease-leaseback agreement provides for the Company to
lease the Ocean Alliance, one of the Company's high specification
semisubmersible drilling rigs, to the bank for a lump-sum payment of $55.0
million plus an origination fee of $1.1 million and for the bank to then
sub-lease the rig back to the Company. Under the agreement, which has a
five-year term, the Company is to make five annual payments of $13.7 million.
Three of the five annual payments have been made as of June 30, 2004. This
financing arrangement has an effective interest rate of 7.13% and is an
unsecured subordinated obligation of the Company.
9. COMMITMENTS AND CONTINGENCIES
Various claims have been filed against the Company in the ordinary course
of business, including claims by offshore workers alleging personal injuries.
Management believes that the Company has established adequate reserves for any
liabilities that may reasonably be expected to result from these claims. In the
opinion of management, no pending or threatened claims, actions or proceedings
against the Company are expected to have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash flows.
10. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS
The Company reports its operations as one reportable segment, contract
drilling of offshore oil and gas wells. Although the Company provides contract
drilling services from different types of offshore drilling rigs and provides
14
such services in many geographic locations, these operations have been
aggregated into one reportable segment based on the similarity of economic
characteristics among all divisions and locations, including the nature of
services provided and the type of customers of such services.
Contract Drilling Services
Revenues from customers for contract drilling and similar services by
equipment-type are listed below (eliminations offset dayrate revenues earned
when the Company's rigs are utilized in its integrated services):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS)
High Specification Floaters ..... $ 59,088 $ 72,660 $123,840 $ 136,294
Other Semisubmersibles .......... 75,128 61,265 146,263 112,968
Jack-ups ........................ 42,304 23,116 83,123 46,682
Integrated Services ............. -- -- -- 1,189
Other ........................... 165 (3) 699 (3)
Eliminations .................... -- -- -- (233)
-------- --------- -------- ---------
Total Contract Drilling Revenues 176,685 157,038 353,925 296,897
Revenues Related to Reimbursable
Expenses ....................... 8,261 6,162 15,219 12,452
-------- --------- -------- ---------
Total revenues ............ $184,946 $ 163,200 $369,144 $ 309,349
======== ========= ======== =========
Geographic Areas
At June 30, 2004, the Company had drilling rigs located offshore ten
countries other than the United States. As a result, the Company is exposed to
the risk of changes in social, political, economic and other conditions inherent
in foreign operations and the Company's results of operations and the value of
its foreign assets are affected by fluctuations in foreign currency exchange
rates. Revenues by geographic area are presented by attributing revenues to the
individual country or areas where the services were performed.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS)
United States ............. $ 79,992 $ 83,915 $157,702 $163,674
Foreign:
South America ............ 26,287 40,804 57,767 81,279
Europe/Africa ............ 17,539 15,009 31,438 20,871
Australia/Southeast Asia.. 40,059 22,570 79,795 42,623
Mexico ................... 21,069 902 42,442 902
-------- -------- -------- --------
Total revenues ........ $184,946 $163,200 $369,144 $309,349
======== ======== ======== ========
11. INCOME TAXES
Certain of the Company's rigs that operate internationally are owned and
operated, directly or indirectly, by Diamond Offshore International Limited, a
Cayman Islands corporation and wholly-owned subsidiary of the Company. Effective
January 1, 2003 the Company began to postpone remittance of the earnings from
Diamond Offshore International Limited and indefinitely reinvest these earnings
internationally. Consequently, no U.S. taxes were provided on these earnings and
no U.S. tax benefits were recognized on losses during the three months or six
months ended June 30, 2004 and 2003. The estimated total Company annual
effective tax rate was 24.8% as of June 30, 2004 and 16.7% as of June 30, 2003.
The estimated annual effective tax rate was greater in the 2004 period than in
the 2003 period primarily due to the different mix of domestic and international
earnings and tax rates in each period.
15
Tax expense for the three and six months ended June 30, 2004 also included
a $0.9 million adjustment related to finalizing prior year tax returns in two
foreign jurisdictions. This additional expense is not included in the
calculation of the Company's current year estimated annual effective tax rate of
24.8%.
The Company is under audit or has received an assessment for prior year
income taxes in certain of its international tax jurisdictions which exposes the
Company to approximately $1.0 million of additional income tax. The Company
intends to contest any unfavorable judgment in these jurisdictions and expects
to prevail. Consequently, no income tax expense related to this potential
exposure has been recorded.
12. PENSION PLAN
The defined benefit pension plan established by Arethusa effective October
1, 1992 was frozen on April 30, 1996. At that date all participants were deemed
fully vested in the plan, which covered substantially all U.S. citizens and U.S.
permanent residents who were employed by Arethusa.
As a result of freezing the plan, no service cost has been accrued for the
years presented.
Components of net periodic benefit costs were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS)
Interest cost ..................... $ 255 $ 248 $ 510 $ 497
Expected return on plan assets ... (297) (315) (594) (631)
Amortization of unrecognized loss.. 77 68 154 136
------ ------ ------ -----
Net periodic pension expense ...... $ 35 $ 1 $ 70 $ 2
====== ====== ====== =====
During 2003 the Company made a voluntary contribution to the plan of $0.5
million. The Company does not expect to make a contribution to its pension plan
in 2004.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) included
elsewhere herein. References to the "Company" mean Diamond Offshore Drilling,
Inc., a Delaware corporation, and its subsidiaries.
The Company is a leader in deep water drilling with a fleet of 45 offshore
drilling rigs. The fleet consists of 30 semisubmersibles, 14 jack-ups and one
drillship.
OVERVIEW
RESULTS OF OPERATIONS AND INDUSTRY CONDITIONS
Overall demand for offshore contract drilling services improved but
remained volatile during the second quarter of 2004, and the Company reported a
$0.08 per share loss on a diluted basis for the period. The loss was chiefly
attributable to downtime associated with a series of sub-sea and electrical
problems that the Ocean Alliance experienced after returning to work following a
scheduled regulatory survey and sub-sea equipment upgrade. As a result, gross
revenue was negatively impacted by approximately $8.9 million and net income,
including approximately $1.5 million of repair costs on the Ocean Alliance, was
negatively impacted by $7.8 million, or $0.06 per share on a diluted basis. The
Ocean Alliance has continued to operate on term contract for Petrobras in Brazil
since it returned to work on July 2.
Gulf of Mexico. In the U.S. Gulf of Mexico ("U.S. GOM"), our jack-up fleet
continued to experience high utilization and improving dayrates during the
second quarter of 2004 compared with the previous quarter. In late June, the
Company reactivated the Ocean Champion from cold-stack status. The 250-ft. mat
slot jack-up rig is currently in Lake Charles, LA, being prepared for a return
to work expected in mid-August 2004. The Company currently views the jack-up
market in the U.S. GOM as tightly balanced, with effective utilization near 100
percent and demand sporadically exceeding supply. As a result, the Company
believes the market and dayrates for this class of equipment could improve
further in the near term.
Well-to-well contracts remained the norm for both the high-specification
deepwater and other mid-water semisubmersible markets in the U.S. GOM during the
second quarter of 2004. In the deepwater market, the Ocean Star, a fourth
generation conversion that had been idle for most of the year, returned to work
in June with contracts and commitments that could keep the rig employed until
early 2005. Additionally, the 5,500-ft. Ocean America completed approximately
three months' of special survey and upgrade work and returned to work in June
for a drilling program that will occupy the unit until late November 2004. While
the Company views the deepwater market in the U.S. GOM as remaining
over-supplied, the Company believes that utilization and dayrates have
stabilized, and that improvement in this sector is possible in the second half
of this year.
Two of the Company's three mid-water semisubmersibles currently marketed
in the U.S. GOM were fully utilized during the quarter. However, the Ocean
Concord was again idled in June after approximately 80 days of work, and the
Company elected to utilize the current period of weakness in the Gulf to bring
the rig into a Brownsville, Texas shipyard for maintenance and tank repair. That
work is expected to be completed in early October 2004. The Company views the
mid-water market as remaining over-supplied and volatile with flat demand.
In the Mexican GOM, the Company's four semisubmersible rigs that mobilized
to that market in the latter half of 2003 operated throughout the second
quarter of 2004 under long-term contracts. The Company believes that future work
for other of its semisubmersibles and jack-ups in this market is limited. The
Company views the market for the Mexican GOM as in balance and expects it to
remain so this year.
Brazil. In Brazil, the Ocean Alliance, the Ocean Winner and the Ocean
Yatzy completed five-year regulatory surveys during the quarter and returned to
work. However, the Ocean Alliance experienced a series of sub-sea and electrical
problems subsequent to completion of its survey and sub-sea equipment upgrade,
as noted previously. The Company views the Brazilian semisubmersible market as
firm, and all four of the rigs the Company operates in Brazil are working under
long-term contracts, three of which have been recently renewed. The contract for
the Ocean Alliance expires in September 2004, and the Company is pursuing
opportunities for the rig in Brazil and other markets.
17
North Sea. In the U.K. sector of the North Sea, the Company operated two
of its semisubmersibles throughout the first half of the year. A third rig, the
Ocean Vanguard, began operating in the U.K. sector of the North Sea at the end
of the second quarter of 2004 after an extended idle period. The new contract
for the Ocean Vanguard is expected to extend into the fourth quarter of the
year. The Company also has a contract for work that will mobilize the Ocean
Vanguard to Norway in the fourth quarter of 2004. Utilization of marketed
semisubmersible rigs in the U.K. sector of the North Sea reached 100 percent at
the end of June with the advent of the summer drilling season and dayrates have
increased. The Company believes this market will remain firm throughout the
third quarter of 2004. Semisubmersible rig utilization in Norway also continues
near 100 percent with firm demand, and the Company believes this market will
remain firm at least through the end of this year.
Africa. The Ocean Nomad worked in West Africa for the entire second
quarter under a contract that will keep the rig employed until mid-September
2004. Additionally, the semisubmersible Ocean Patriot, a mid-water rig,
completed its contract offshore South Africa and is currently mobilizing to
Australia and New Zealand, where it will work for a group of companies under
contracts that are expected to employ the rig until July 2005. The cost of the
mobilization is being paid for by the customers. The Company views the West
African floater market as remaining oversupplied and as being slower to develop
in 2004 than anticipated; however, the Company believes deepwater demand could
be positively impacted through increasing development work.
Southeast Asia. The Ocean Heritage mobilized from Southeast Asia to
Ecuador earlier this year, where it worked throughout the second quarter. The
300-ft. independent- cantilever jack-up rig is expected to demobilize to Asia or
India following completion of its current contract in mid-August 2004. The cost
of the demobilization from Ecuador will be paid for by our current customer. The
Company's other rigs in the Southeast Asian market all operated throughout the
majority of the second quarter, and the Company believes that its rigs in
Southeast Asia will remain on contract through most of 2004. The Company views
demand in the Southeast Asian market as increasing, and with high utilization,
the Company believes dayrates could continue improving.
GENERAL
Revenues. The Company's revenues vary based upon demand, which affects the
number of days the fleet is utilized and the dayrates earned. When a rig is
idle, no dayrate is earned and revenues will decrease as a result. Revenues can
also increase or decrease as a result of the acquisition or disposal of rigs,
required surveys and shipyard upgrades. In order to improve utilization or
realize higher dayrates, the Company may mobilize its rigs from one market to
another. However, during periods of mobilization, revenues may be adversely
affected. As a response to changes in demand, the Company may withdraw a rig
from the market by stacking it or may reactivate a rig stacked previously, which
may decrease or increase revenues, respectively.
Revenues from dayrate drilling contracts are recognized currently. The
Company may receive lump-sum payments in connection with specific contracts.
Such payments are recognized as revenues over the term of the related drilling
contract. Mobilization revenues, less costs incurred to mobilize an offshore rig
from one market to another, are recognized over the primary term of the related
drilling contract.
Revenues from reimbursements received for the purchase of supplies,
equipment, personnel services and other services provided at the request of the
Company's customers in accordance with a contract or agreement are recorded for
the gross amount billed to the customer, as "Revenues related to reimbursable
expenses" in the Consolidated Statements of Operations.
Revenues from offshore turnkey drilling contracts are accrued to the
extent of costs until the specified turnkey depth and other contract
requirements are met. Income is recognized on the completed contract method.
Provisions for future losses on turnkey contracts are recognized when it becomes
apparent that expenses to be incurred on a specific contract will exceed the
revenue from that contract. The Company has elected not to pursue contracts for
integrated services, which includes turnkey contracts, except in very limited
circumstances.
Operating Income. Operating income is primarily affected by revenue
factors, but is also a function of varying levels of operating expenses.
Operating expenses generally are not affected by changes in dayrates and may not
be significantly affected by fluctuations in utilization. For instance, if a rig
is to be idle for a short period of time, few decreases in operating expenses
may actually occur since the rig is typically maintained in a prepared or "ready
stacked" state with a full crew. In addition, when a rig is idle, the Company is
responsible for certain operating expenses such as rig fuel and supply boat
costs, which are typically costs of the operator when a rig is under contract.
However, if the rig is to be idle for an extended period of time, the Company
may reduce the size of a rig's crew and
18
take steps to "cold stack" the rig, which lowers expenses and partially offsets
the impact on operating income. Four of the Company's rigs were cold stacked at
June 30, 2004. The Company recognizes as operating expenses activities such as
inspections, painting projects and routine overhauls, meeting certain criteria,
which maintain rather than upgrade its rigs. These expenses vary from period to
period. Costs of rig enhancements are capitalized and depreciated over the
expected useful lives of the enhancements. Higher depreciation expense decreases
operating income in periods subsequent to capital upgrades.
Operating income is negatively impacted when the Company performs certain
regulatory inspections that are due every five years ("5-year survey") for all
of the Company's rigs. Operating revenue decreases because these surveys are
performed during scheduled down-time in a shipyard. Operating expenses increase
as a result of these surveys due to the cost to mobilize the rigs to a shipyard,
inspection costs incurred and repair and maintenance costs. Repair and
maintenance costs may be required resulting from the survey or may have been
previously planned to take place during this mandatory down-time. The number of
rigs undergoing a 5-year survey will vary from year to year.
CRITICAL ACCOUNTING ESTIMATES
The Company's significant accounting policies are included in Note 1 of
its Notes to Consolidated Financial Statements in Item 1 of Part I of this
report. Management's judgments, assumptions and estimates are inherent in the
preparation of the Company's financial statements and the application of its
significant accounting policies. The Company believes that its most critical
accounting estimates are as follows:
Property, Plant and Equipment. Drilling and other property and equipment
is carried at cost. Maintenance and routine repairs are charged to income
currently while replacements and betterments, which meet certain criteria, are
capitalized. Depreciation is amortized up to applicable salvage values by
applying the straight-line method over the remaining estimated useful lives.
In April 2003 the Company commissioned a study to evaluate the economic
lives of its drilling rigs. As a result of this study, effective April 1, 2003,
the Company recorded changes in accounting estimates by increasing the estimated
service lives to 25 years for jack-ups and 30 years for semisubmersibles and the
Company's drillship and by increasing salvage values to 5% for most of the
Company's drilling rigs. The change in estimate was made to better reflect the
remaining economic lives and salvage values of the Company's fleet. The effect
of this change in accounting estimates resulted in a reduction to net loss
(after-tax) for the three and six months ended June 30, 2004 of $3.3 million, or
$0.03 per share and $7.3 million, or $0.06 per share, respectively. The effect
of this change in accounting estimates resulted in a reduction to net loss
(after-tax) for the three and six months ended June 30, 2003 of $5.8 million, or
$0.04 per share. Management makes judgments, assumptions and estimates regarding
capitalization, useful lives and salvage values. Changes in these assumptions
could produce results that differ from those reported.
The Company evaluates its property and equipment for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In September 2003 the Company wrote down two of its second
generation semisubmersible drilling rigs, the Ocean Century and the Ocean
Prospector, by $1.6 million to their fair market values subsequent to a decision
to offer the rigs for sale. These rigs were sold in December 2003 for $375,000
each. Management's assumptions are an inherent part of an asset impairment
evaluation and the use of different assumptions could produce results that
differ from those reported.
Personal Injury Claims. The Company's uninsured retention of liability for
personal injury claims, which primarily result from Jones Act liability in the
Gulf of Mexico, is $0.5 million per claim with an additional aggregate annual
deductible of $1.5 million. The Company estimates its liability for personal
injury claims based on the existing facts and circumstances in conjunction with
historical experience regarding past personal injury claims. Eventual settlement
or adjudication of these claims could differ significantly from the estimated
amounts.
Income Taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires the recognition of the amount of taxes payable or
refundable for the current year; and an asset and liability approach in
recognizing the amount of deferred tax liabilities and assets for the future tax
consequences of events that have been currently recognized in its financial
statements or tax returns. The application of this accounting standard requires
that management make judgments regarding future events and related estimations
especially as they pertain to forecasting of the Company's effective tax rate,
the potential realization of deferred tax assets such as utilization of foreign
tax credits, and exposure to the disallowance of items deducted on tax returns
upon audit.
19
In December 2003 a valuation allowance of $10.2 million, which resulted in
a charge against earnings, was established for certain of the Company's foreign
tax credit carryforwards which will begin to expire in 2006. Although the
Company intends to make use of all available tax planning strategies in order to
be able to utilize these carryforwards, under the "more likely than not"
approach of evaluating the associated deferred tax asset the Company deemed that
a valuation allowance was necessary.
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior periods have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.
THREE MONTHS ENDED
JUNE 30,
------------------
FAVORABLE/
2004 2003 (UNFAVORABLE)
---- ---- -------------
(in thousands)
CONTRACT DRILLING REVENUE
High Specification Floaters ............. $ 59,088 $ 72,660 $(13,572)
Other Semisubmersibles .................. 75,128 61,265 13,863
Jack-ups ................................ 42,304 23,116 19,188
Other ................................... 165 (3) 168
---------- ---------- --------
TOTAL CONTRACT DRILLING REVENUE ......... $ 176,685 $ 157,038 $ 19,647
========== ========== ========
REVENUES RELATED TO REIMBURSABLE EXPENSES $ 8,261 $ 6,162 $ 2,099
CONTRACT DRILLING EXPENSE
High Specification Floaters ............. $ 40,668 $ 38,555 $ (2,113)
Other Semisubmersibles .................. 67,960 57,810 (10,150)
Jack-ups ................................ 24,082 27,012 2,930
Integrated Services ..................... -- 841 841
Other ................................... 773 388 (385)
---------- ---------- --------
TOTAL CONTRACT DRILLING EXPENSE ......... $ 133,483 $ 124,606 $ (8,877)
========== ========== ========
REIMBURSABLE EXPENSES ................... $ 7,519 $ 5,525 $ (1,994)
OPERATING INCOME (LOSS)
High Specification Floaters ............. $ 18,420 $ 34,105 $(15,685)
Other Semisubmersibles .................. 7,168 3,455 3,713
Jack-ups ................................ 18,222 (3,896) 22,118
Integrated Services ..................... -- (841) 841
Other ................................... (608) (391) (217)
Reimbursable expenses, net .............. 742 637 105
Depreciation ............................ (44,554) (41,553) (3,001)
General and administrative expense ...... (8,760) (8,214) (546)
(Loss) gain on sale of assets .......... (130) 57 (187)
---------- ---------- --------
TOTAL OPERATING INCOME (LOSS) ........... $ (9,500) $ (16,641) $ 7,141
========== ========== ========
High Specification Floaters.
Revenues. Revenues from high specification floaters decreased $13.6
million during the quarter ended June 30, 2004 compared to the same period in
2003.
A decrease in utilization from 92% during the second quarter of 2003 to
63% (excluding the Ocean Rover) during the second quarter of 2004 negatively
affected revenue by $20.8 million.
20
Utilization declined for:
- The Ocean Alliance, which was off contract for substantially all of
the second quarter of 2004 due to a series of sub-sea and electrical
problems;
- the Ocean America, which spent most of the second quarter 2004 in a
shipyard completing its 5-year survey and upgrade;
- the Ocean Star, which was stacked the first two months of the second
quarter of 2004, before returning to work in June; and
- the Ocean Victory, which was stacked for approximately one-half of
the second quarter of 2004.
All of these rigs operated during all or most of the second quarter of
2003.
The overall average operating dayrate was $96,300 during the second
quarter of 2003 compared to $95,000 (excluding the Ocean Rover) during the
second quarter of 2004. This lower average dayrate contributed $2.9 million to
the overall decrease in high specification revenue.
Partially offsetting the overall lower revenue for high specification
floaters, was $10.1 million earned by the Ocean Rover during the second quarter
of 2004, which was in a Singapore shipyard completing its major upgrade to high
specification capabilities during the second quarter of 2003.
Contract Drilling Expense. Contract drilling expense for high
specification floaters was higher by $2.1 million for the quarter ended June 30,
2004 compared to the same period in 2003 primarily due to:
- operating costs for the Ocean Rover, which worked all of the second
quarter of 2004 but was completing its major upgrade during the
second quarter of 2003; and
- repairs to the Ocean Alliance, due to a series of sub-sea and
electrical problems during the second quarter of 2004.
Partially offsetting higher contract drilling expenses were lower
expenses for:
- the Ocean America, which was stacked in a shipyard during most of
the second quarter of 2004 completing its 5-year survey and upgrade;
and
- the Ocean Quest and Ocean Valiant which experienced higher costs
from maintenance projects during the second quarter of 2003.
Other Semisubmersibles.
Revenues. Revenues from other semisubmersibles for the quarter ended June
30, 2004 increased $13.9 million compared to the same period in 2003.
An improvement in utilization contributed $15.7 million to revenue.
Utilization went up from 56% during the second quarter of 2003 (excluding the
Ocean Century and Ocean Prospector which were sold in December 2003) to 71%
during the second quarter of 2004.
Utilization improved for:
- the Ocean Epoch and the Ocean Whittington, both of which operated
all of the second quarter of 2004 but were stacked most of the
second quarter of 2003;
- the Ocean Ambassador, which worked the entire second quarter of 2004
but spent the entire second quarter of 2003 in a shipyard undergoing
its 5-year survey and preparing for its mobilization to Mexico; and
21
- the Ocean Bounty and the Ocean Nomad, which both operated all of the
second quarter of 2004 but were stacked for approximately one-half
of the second quarter of 2003 undergoing 5-year surveys.
The improvement in utilization was partially offset by the Ocean Yatzy
which was stacked approximately three weeks during the second quarter of 2004
undergoing a 5-year survey but operated throughout the same period in 2003.
Revenue was negatively impacted by $1.8 million due to a decline in the
average operating dayrate, which fell from $56,900 during the second quarter of
2003 to $55,000 during the second quarter of 2004. The Ocean Yatzy, one of the
Company's rigs operating offshore Brazil, experienced the largest change in
dayrate (from $126,400 to $76,900) as its long-term contract expired in late
2003 and was renewed at a lower dayrate. Partially offsetting the overall
decline in the average operating dayrate was an increase in dayrate for the
Ocean Worker (from $39,100 to $69,000) when it began working offshore Mexico
during the third quarter of 2003.
Contract Drilling Expense. Contract drilling expense for other
semisubmersibles increased $10.2 million during the second quarter of 2004
compared to the same period in 2003 primarily due to:
- the Ocean Vanguard, purchased in December 2002, which incurred
higher than normal operating costs during the second quarter of 2004
in preparation for its contract in the North Sea which began during
that quarter compared to minimal costs incurred during the second
quarter of 2003 when this rig was bareboat chartered to its previous
owner for most of the quarter;
- the four rigs now working in the Mexican GOM, which incurred higher
labor, travel and equipment rental expense, as well as expenses
associated with maintaining a Mexican shorebase;
- the Ocean Patriot, which had increased expenditures as it prepared
for operations in New Zealand and Australia and the associated
expenses for mobilization which began late in the second quarter of
2004; and
- the Ocean Epoch, which had normal operating expenses during the
second quarter of 2004 compared to reduced costs during the second
quarter of 2003 while it was stacked.
Partially offsetting the increase in contract drilling expense were lower
comparative expenses during the second quarter of 2004 for:
- the Ocean Nomad and the Ocean Bounty which were undergoing 5-year
surveys during the second quarter 2003; and
- the Ocean Guardian and the Ocean Princess which incurred additional
costs from maintenance projects during the second quarter 2003.
Jack-Ups.
Revenues. Revenues from jack-ups increased $19.2 million during the second
quarter of 2004 compared to the same quarter in 2003.
Improvements in average operating dayrates contributed $9.8 million to the
overall revenue increase as dayrates rose from $26,700 during the second quarter
of 2003 to $35,400 during the same period of 2004. Every rig in this
classification experienced an increase to its average operating dayrate
resulting primarily from a tighter jack-up market in the U.S. GOM.
Utilization which rose from 68% during the second quarter of 2003 to 90%
during the same quarter of 2004 also contributed to the overall increase in
revenue by $9.4 million. This improvement in utilization was primarily due to:
- the Ocean Sovereign, the Ocean Titan, and the Ocean Tower which
worked the entire second quarter of 2004 compared to portions of the
second quarter of 2003 when these rigs were undergoing major
upgrades and other shipyard projects; and
22
- the Ocean Summit and the Ocean Warwick which worked the entire
second quarter of 2004 compared to the second quarter of 2003 when
each rig was stacked for approximately one-half of the quarter, in
the case of the Ocean Warwick for its 5-year survey.
Contract Drilling Expense. Contract drilling expense for jack-ups decreased $2.9
million during the second quarter of 2004 compared to the same period in 2003
primarily due to:
- normal operating costs for the Ocean Tower and the Ocean Sovereign
during the 2004 period compared to increased expenses for shipyard
projects during the second quarter of 2003; and
- normal operating costs for the Ocean Warwick during the 2004 period
compared to expenses for mobilization to the shipyard and costs
related to its 5-year survey during the second quarter of 2003.
Reimbursable expenses, net.
Reimbursable expenses include items that the Company purchases, and/or
services it performs, at the request of its customers. Revenues related to
reimbursable items, offset by the related expenditures for these items, were
$0.7 million and $0.6 million for the quarters ended June 30, 2004 and 2003,
respectively.
Depreciation.
Depreciation expense increased $3.0 million to $44.6 million in the second
quarter of 2004 compared to $41.6 million in the second quarter of 2003
primarily due to:
- the Ocean Rover, which completed its upgrade in July 2003;
- two jack-up rigs which completed upgrades during the second quarter
of 2003 and one jack-up rig which completed its upgrade during the
first quarter of 2004; and
- four rigs operating in Mexico due to an increase in 2003 capital
additions.
General and Administrative Expense.
General and administrative expense for the quarter ended June 30, 2004 of
$8.8 million increased from $8.2 million for the same period in 2003. This
increase was primarily due to legal fees associated with litigation and
engineering technical support fees.
Interest Expense.
Interest expense of $6.4 million during the second quarter of 2004 was
$1.0 million higher than interest expense of $5.4 million in the same period in
2003 primarily due to interest on the upgrade cost of the Ocean Rover
capitalized through July 10, 2003 when its upgrade was completed. See Note 1 "
- -- General Information -- Capitalized Interest" in Item 1 of Part I of this
report.
Gain (Loss) on Sale of Marketable Securities.
A gain on the sale of marketable securities of $0.3 million occurred in
the second quarter of 2004 compared to a $1.1 million loss in the same quarter
of last year. See Note 3 "Marketable Securities" in Item 1 of Part I of this
report.
Income Tax Benefit.
An income tax benefit of $2.2 million was recognized on a pre-tax loss of
$12.7 million in the second quarter of 2004 compared to a tax benefit of $1.8
million which was recognized on a pre-tax loss of $18.5 million in the second
quarter of 2003.
Certain of the Company's rigs that operate internationally are owned and
operated, directly or indirectly, by Diamond Offshore International Limited, a
Cayman Islands corporation and wholly-owned subsidiary of the Company. Effective
January 1, 2003 the Company began to postpone remittance of the earnings from
Diamond
23
Offshore International Limited and indefinitely reinvest these earnings
internationally. Consequently, no U.S. taxes were provided on these earnings and
no U.S. tax benefits were recognized on losses during the quarters ended June
30, 2004 and 2003. The Company's annual estimated effective tax rate was 24.8%
at June 30, 2004 and 16.7% at June 30, 2003. The estimated annual effective tax
rate was greater in the 2004 period than in the 2003 period primarily due to the
different mix of domestic and international earnings and tax rates in each
period.
Tax expense for the three months ended June 30, 2004 also included a $0.9
million adjustment related to finalizing prior year tax returns in two foreign
jurisdictions. This additional expense is not included in the calculation of the
Company's current year estimated annual effective tax rate of 24.8%.
The Company is under audit or has received an assessment for prior year
income taxes in certain of its international tax jurisdictions which exposes the
Company to approximately $1.0 million of additional income tax. The Company
intends to contest any unfavorable judgment in these jurisdictions and expects
to prevail. Consequently, no income tax expense related to this potential
exposure has been recorded.
24
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior periods have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.
SIX MONTHS ENDED
JUNE 30,
----------------
FAVORABLE/
2004 2003 (UNFAVORABLE)
---- ---- -------------
(in thousands)
CONTRACT DRILLING REVENUE
High Specification Floaters ............. $ 123,840 $ 136,294 $(12,454)
Other Semisubmersibles .................. 146,263 112,968 33,295
Jack-ups ................................ 83,123 46,682 36,441
Integrated Services ..................... -- 1,189 (1,189)
Other ................................... 699 (3) 702
Eliminations ............................ -- (233) 233
--------- --------- --------
TOTAL CONTRACT DRILLING REVENUE ......... $ 353,925 $ 296,897 $ 57,028
========= ========= ========
REVENUES RELATED TO REIMBURSABLE EXPENSES $ 15,219 $ 12,452 $ 2,767
CONTRACT DRILLING EXPENSE
High Specification Floaters ............. $ 83,138 $ 76,831 $ (6,307)
Other Semisubmersibles .................. 130,952 107,527 (23,425)
Jack-ups ................................ 52,019 51,263 (756)
Integrated Services ..................... -- 2,090 2,090
Other ................................... 2,052 798 (1,254)
Eliminations ............................ -- (233) (233)
--------- --------- --------
TOTAL CONTRACT DRILLING EXPENSE ......... $ 268,161 $ 238,276 $(29,885)
========= ========= ========
REIMBURSABLE EXPENSES ................... $ 13,753 $ 11,263 $ (2,490)
OPERATING INCOME (LOSS)
High Specification Floaters ............. $ 40,702 $ 59,463 $(18,761)
Other Semisubmersibles .................. 15,311 5,441 9,870
Jack-ups ................................ 31,104 (4,581) 35,685
Integrated Services ..................... -- (901) 901
Other ................................... (1,353) (801) (552)
Reimbursable expenses, net .............. 1,466 1,189 277
Depreciation ............................ (89,074) (88,830) (244)
General and administrative expense ...... (17,549) (15,414) (2,135)
Gain on sale and disposition of assets .. 195 58 137
--------- --------- --------
TOTAL OPERATING INCOME (LOSS) ........... $ (19,198) $ (44,376) $ 25,178
========= ========= ========
High Specification Floaters.
Revenues. Revenues from high specification floaters decreased $12.5
million during the six months ended June 30, 2004 compared to the same period in
2003.
Revenue was negatively impacted by $28.6 million as utilization (excluding
the Ocean Rover) fell from 88% during the first half of 2003 to 69% during the
first half of 2004.
Utilization declined for:
- the Ocean Star, which was stacked a majority of the first half of
2004;
25
- the Ocean Alliance, which was off contract during the first half of
2004 for approximately two and one-half months due to a series of
sub-sea and electrical problems following approximately one month in
a shipyard for a 5-year survey and sub-sea equipment upgrade;
- the Ocean America, which spent approximately three of the first six
months of 2004 in a shipyard undergoing a 5-year survey and upgrade
which were completed late in the second quarter of 2004; and
- the Ocean Confidence, which had approximately three weeks of unpaid
downtime for repairs during the first half of 2004.
All of these rigs operated during all or most of the first half of 2003.
Partially offsetting the overall decline in utilization was an improvement
in utilization for the Ocean Valiant, which worked all of the first half of 2004
but was stacked for most of the first half of 2003 for a 5-year survey and while
waiting for a contract.
Lower overall average operating dayrates during the first six months of
2004, excluding the Ocean Rover, of $91,700 compared to $95,300 during the same
period in 2003, reduced revenue by $4.6 million. The lower average dayrates were
primarily a consequence of soft market conditions in the U.S. GOM as several of
these high specification floaters accepted jobs in the mid-water depth market.
The Ocean Rover contributed $20.7 million to revenue during the first half
of 2004 as it continued its drilling program offshore Malaysia. During the first
half of 2003 this rig was undergoing an upgrade to high specification
capabilities which was completed in July 2003.
Contract Drilling Expense. Contract drilling expense for high
specification floaters increased by $6.3 million for the six months ended June
30, 2004 compared to the same period in 2003 primarily due to:
- operating costs for the Ocean Rover, which worked all of the first
half of 2004 but was undergoing a major upgrade during the first
half of 2003;
- repairs to the Ocean Alliance due to a series of sub-sea and
electrical problems and costs related to a 5-year survey and sub-sea
equipment upgrade, all occurring during the first half of 2004; and
- costs incurred for mobilization to a shipyard and a 5-year survey
for the Ocean America during the first half of 2004.
Partially offsetting the overall higher contract drilling expense during
the first half of 2004 were lower expenses for:
- the Ocean America, which capitalized a majority of its expenditures
during its 2004 upgrade;
- the Ocean Valiant which incurred higher costs during the first six
months of 2003 for a 5-year survey and maintenance repairs; and
- the Ocean Baroness which incurred higher costs during the first half
of 2003 for its mobilization to Indonesia.
Other Semisubmersibles.
Revenues. Revenues from other semisubmersibles for the six months ended
June 30, 2004 increased $33.3 million compared to the same period in 2003.
Utilization improvements contributed $35.9 million to the higher revenues.
Utilization rose to 69% during the first half of 2004 from 51% during the same
period of 2003 (excluding the Ocean Century and Ocean Prospector, which were
sold in December 2003). Utilization improved for:
26
- the Ocean Whittington, Ocean Epoch and Ocean Princess, all of which
worked a majority of the first half of 2004 but were ready-stacked
during most of the same period in 2003;
- the Ocean Ambassador, which worked the entire first half of 2004 but
spent the majority of the first half of 2003 in a shipyard
undergoing a 5-year survey and preparing for its contract in Mexico;
and
- the Ocean Guardian and Ocean Bounty which worked most of the first
half of 2004 compared to the first half of 2003 when the Ocean
Guardian spent three months in a shipyard undergoing repairs and an
inspection and the Ocean Bounty spent two months in a shipyard
undergoing a 5-year survey.
Partially offsetting these utilization improvements was the Ocean Concord
which spent approximately three of the first six months of 2004 in a shipyard
for life enhancement maintenance and 5-year survey compared to the first half of
2003 when this rig worked most of the period.
The average operating dayrate for other semisubmersibles fell from $58,800
during the first six months of 2003 to $55,700 during the first six months of
2004 which reduced revenues by $2.6 million. The most significant reductions in
average dayrates were to:
- the Ocean Yatzy (from $124,300 to $83,300) which renewed its
contract to operate offshore Brazil during the latter part of 2003
at a lower dayrate reflective of the current market; and
- the Ocean Yorktown (from $75,500 to $48,300) which worked offshore
Brazil during the first half of 2003 but operated in the Mexican GOM
during the first half of 2004.
Partially offsetting the overall lower average operating dayrates were
improvements in dayrates for the Ocean Worker ($39,000 to $68,700) and Ocean
Ambassador ($40,100 to $57,000). Both rigs operated in the Mexican GOM during
the first half of 2004 and the U.S. GOM during the same period in 2003.
Contract Drilling Expense. Contract drilling expense for other
semisubmersibles increased $23.4 million during the first six months of 2004
compared to the same period in 2003 primarily due to:
- the four rigs now working in the Mexican GOM, which incurred higher
labor, travel, and equipment rental expense, as well as expenses
associated with maintaining a Mexican shorebase;
- the Ocean Vanguard and Ocean Patriot each incurred higher than
normal operating expenses during the first half of 2004 due to
preparations for work in the North Sea, New Zealand and Australia,
respectively, compared to minimal costs during the same period in
2003 when the Ocean Vanguard operated under a bareboat charter for
its previous owner for most of the 2003 period and the Ocean Patriot
began operations following its March 2003 purchase;
- the Ocean Winner and Ocean Concord, both of which incurred costs to
mobilize to a shipyard for their 5-year surveys (the Ocean Concord
was also undergoing life enhancement maintenance) during a portion
of the first half of 2004 compared to normal operations during the
first half of 2003; and
- the Ocean Epoch, which incurred normal operating costs as it worked
most of the first six months of 2004 compared to reduced costs while
it was ready-stacked during most of the first six months of 2003.
Partially offsetting the increase in contract drilling expense were lower
costs for:
- the Ocean Guardian, which incurred normal operating costs during the
first half of 2004 compared to costs for mobilization to a shipyard
and an inspection during the same period in 2003; and
- the Ocean Saratoga, which incurred normal operating costs during the
first half of 2004 compared to operating costs for the same period
in 2003 which included engine and annular overhaul costs and anchor
handling crews required to move the rig to a different location.
27
Jack-Ups.
Revenues. Revenues from jack-ups increased $36.4 million during the first
six months of 2004 compared to the same period of 2003.
The average operating dayrate for jack-ups rose to $37,400 in the first
half of 2004 from $27,200 in the same period of 2003 resulting in a $19.6
million revenue improvement. All of the Company's jack-ups in the GOM
experienced an increase in average dayrate primarily due to a tighter market for
this class of equipment in the U.S. GOM.
Utilization rose to 88% in the first half of 2004 from 68% in the same
period of 2003, resulting in a $16.8 million revenue improvement. Three of the
Company's jack-ups, the Ocean Tower and Ocean Titan in the U.S. GOM, and the
Ocean Sovereign in Southeast Asia, were in shipyards undergoing major upgrades
during part of the first half of 2003 but were operating during most of the same
period in 2004.
Contract Drilling Expense. Contract drilling expense for jack-ups during
the first half of 2004 increased $0.8 million compared to the same period in
2003 primarily due to:
- costs incurred for the 2004 mobilization of the Ocean Heritage from
Singapore to Ecuador; and
- operating costs during 2004 for the Ocean Tower and Ocean Sovereign,
which capitalized a majority of their 2003 expenditures to their
upgrades.
Partially offsetting were lower contract drilling expenses for the Ocean
Sovereign in 2004, which consisted of normal operating costs compared to the
first half of 2003, which included non-upgrade shipyard projects in addition to
its upgrade.
Reimbursable expenses, net.
Reimbursable expenses include items that the Company purchases, and/or
services it performs, at the request of its customers. Revenues related to
reimbursable items, offset by the related expenditures for these items, were
$1.5 million and $1.2 million for the six months ended June 30, 2004 and 2003,
respectively.
Depreciation.
Depreciation expense increased to $89.1 million in the first half of 2004
compared to $88.8 million in the first half of 2003 primarily due to:
- the Ocean Rover, which completed its upgrade in July 2003;
- the Ocean Patriot, acquired in March 2003;
- three jack-up rigs, two of which completed upgrades during the
second quarter of 2003 and one in early 2004; and
- four rigs operating in Mexico due to an increase in capital
additions.
Partially offsetting the increase was a $5.3 million reduction in
depreciation expense for the first quarter of 2004 which resulted from
increasing the estimated service lives and salvage values for most of the
Company's drilling rigs, effective April 1, 2003, to better reflect their
remaining economic lives and salvage values.
General and Administrative Expense.
General and administrative expense for the six months ended June 30, 2004
of $17.5 million increased $2.1 million over $15.4 million for the same period
in 2003. This increase was primarily due to legal fees associated with
litigation and engineering technical support fees.
28
Interest Income.
Interest income of $4.7 million earned during the six months ended June
30, 2004 declined $2.8 million, from $7.5 million earned during the same period
in 2003, primarily due to the lower interest rates earned on cash and marketable
securities compared to the same period in 2003.
Interest Expense.
Interest expense of $12.7 million during the six months ended June 30,
2004 was $1.7 million higher than interest expense of $11.0 million in same
period in 2003 primarily due to interest on the upgrade cost of the Ocean Rover
capitalized through July 10, 2003 when its upgrade was complete. See Note 1 " --
General Information -- Capitalized Interest" in Item 1 of Part I of this report.
Gain (Loss) on Sale of Marketable Securities.
A gain on the sale of marketable securities of $0.3 million occurred
during the six months ended June 30, 2004 compared to a $1.1 million loss during
the same period of last year. See Note 3 "Marketable Securities" in Item 1 of
Part 1 of this report.
Income Tax Benefit.
An income tax benefit of $5.9 million was recognized on a pre-tax loss of
$27.4 million in the first half of 2004 compared to a tax benefit of $7.7
million which was recognized on a pre-tax loss of $45.9 million in the first
half of 2003.
Certain of the Company's rigs that operate internationally are owned and
operated, directly or indirectly, by Diamond Offshore International Limited, a
Cayman Islands corporation and wholly-owned subsidiary of the Company. Effective
January 1, 2003 the Company began to postpone remittance of the earnings from
Diamond Offshore International Limited and indefinitely reinvest these earnings
internationally. Consequently, no U.S. taxes were provided on these earnings and
no U.S. tax benefits were recognized on losses during the six months ended June
30, 2004 and 2003. The Company's estimated annual effective tax rate was 24.8%
as of June 30, 2004 and 16.7% as of June 30, 2003. The estimated annual
effective tax rate was greater in the 2004 period than in the 2003 period
primarily due to the different mix of domestic and international earnings and
tax rates in each period.
Tax expense for the six months ended June 30, 2004 also included a $0.9
million adjustment related to finalizing prior year tax returns in two foreign
jurisdictions. This additional expense is not included in the calculation of the
Company's current year estimated annual effective tax rate of 24.8%.
The Company is under audit or has received an assessment for prior year
income taxes in certain of its international tax jurisdictions which exposes the
Company to approximately $1.0 million of additional income tax. The Company
intends to contest any unfavorable judgment in these jurisdictions and expects
to prevail. Consequently, no income tax expense related to this potential
exposure has been recorded.
OPERATIONS OUTSIDE THE UNITED STATES
The Company's non-U.S. operations are subject to certain political,
economic and other uncertainties not normally encountered in U.S. operations,
including risks of war and civil disturbances (or other risks that may limit or
disrupt markets), expropriation and the general hazards associated with the
assertion of national sovereignty over certain areas in which operations are
conducted. No prediction can be made as to what governmental regulations may be
enacted in the future that could adversely affect the Company's non-U.S.
operations or the international offshore contract drilling industry. The
Company's operations outside the United States may also face the additional risk
of fluctuating currency values, hard currency shortages, controls of currency
exchange and repatriation of income or capital.
During 2003, the Company entered into contracts to operate four of its
semisubmersible rigs offshore Mexico for Pemex-Exploracion y Produccion, the
national oil company of Mexico. The terms of these contracts expose the Company
to greater risks than it normally assumes, such as exposure to greater
environmental liability. While the Company believes that the financial terms of
the contracts and the Company's operating safeguards in place mitigate
29
these risks, there can be no assurance that the Company's increased risk
exposure will not have a negative impact on the Company's future operations or
financial results.
LIQUIDITY
A discussion of the sources and uses of cash for the six months ended June
30, 2004 compared to the same period in 2003 follows.
SIX MONTHS ENDED
JUNE 30,
-----------------------
2004 2003 CHANGE
---- ---- ------
(IN THOUSANDS)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net loss .............................. $(21,467) $(38,253) $ 16,786
Depreciation .......................... 89,074 88,830 244
Deferred tax provision ................ (450) (9,666) 9,216
Other non-cash items, net ............. 6,429 7,985 (1,556)
Net changes in operating assets and
liabilities .......................... (3,660) (15,441) 11,781
-------- -------- --------
$ 69,926 $ 33,455 $ 36,471
======== ======== ========
Cash of $69.9 million was generated from operations during the six months
ended June 30, 2004 compared to cash of $33.5 million generated during the same
period of 2003 primarily due to an improvement in results of operations in the
first half of 2004.
SIX MONTHS ENDED
JUNE 30,
---------------------------
2004 2003 CHANGE
---- ---- ------
(IN THOUSANDS)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
Capital expenditures (excluding rig acquisition)............ $ (52,588) $ (134,114) $ 81,526
Rig acquisition............................................. -- (63,500) 63,500
Proceeds from sale of assets................................ 1,076 388 688
Proceeds from sale and maturities of marketable 1,949,247
securities................................................. 1,603,006 346,241
Purchases of marketable securities.......................... (1,895,603) (1,374,768) (520,835)
Purchase of Australian dollar time deposits................. (42,073) -- (42,073)
Proceeds from maturities of Australian dollar time
deposits................................................... 9,163 -- 9,163
Proceeds from settlement of forward contracts............... -- 2,015 (2,015)
----------- ------------ ----------
$ (30,778) $ 33,027 $ (63,805)
=========== ============ ==========
During the six months ended June 30, 2004, the Company used $30.8 million
for investing activities compared to $33.0 million provided from investing
activities during the comparable period in 2003. In the first half of 2004,
capital expenditures used $52.6 million of the Company's cash. In addition, the
Company invested $42.1 million (equivalent to Australian dollars of 58.0
million) in Australian dollar time deposits with expirations ranging from May 5,
2004 to March 9, 2005; $9.2 million (13.0 million Australian dollars) of which
matured during the period. These cash expenditures more than offset cash
proceeds of $53.6 million provided by the net sale and maturity of certain of
the Company's investments in marketable securities and the $1.1 million of cash
provided from the sale of miscellaneous equipment.
During the six months ended June 30, 2003, the Company spent $65.0 million
($1.5 million of which is included with inventory) for the purchase of the
semisubmersible rig, the Ocean Patriot, and used $134.1 million for capital
expenditures, primarily for the completion of the Ocean Rover upgrade and the
upgrade of three of the Company's jack-up rigs. Cash provided from investing
activities in the first half of 2003 included cash proceeds of $228.2 million
from the net sale and maturity of certain of the Company's investments in
marketable securities, $2.0 million provided from the settlement of forward
contracts at favorable exchange rates and $0.4 million provided from the sale of
miscellaneous equipment.
30
SIX MONTHS ENDED
JUNE 30,
-------------------------
2004 2003 CHANGE
---- ---- ------
(IN THOUSANDS)
NET CASH USED IN FINANCING ACTIVITIES
Payment of dividends....................... $ (16,166) $ (32,584) $ 16,418
--------- --------- ---------
$ (16,166) $ (32,584) $ 16,418
========= ========= =========
The Company paid cash dividends of $16.2 million to stockholders in the
first half of 2004 compared to $32.6 million in the same period of 2003. Cash
dividends paid in the first half of 2004 were lower primarily due to a lower
quarterly dividend rate ($0.0625 per share of common stock) than the quarterly
dividend rate used for cash dividends paid in the first half of 2003 ($0.125 per
share of common stock).
Credit Ratings.
As of the date of this report, the Company's current credit rating is Baa2
for Moody's Investors Services ("Moody's") and A- for Standard & Poor's ("S&P").
In 2003 Moody's lowered its ratings of the Company's long-term debt to Baa1 from
A3 and on April 27, 2004 lowered its rating from Baa1 to Baa2 and changed the
rating outlook to stable from negative. On July 27, 2004, S&P lowered the
Company's debt rating from A to A- and rated its outlook as stable. Although
the Company's long-term ratings continue at investment grade levels, lower
ratings could result in higher interest rates on future debt issuances.
Letters of Credit and Other.
The Company is contingently liable as of June 30, 2004 in the amount of
$72.5 million under certain performance, bid, supersedeas and custom bonds, and
letters of credit. Agreements related to approximately $34.0 million of
multi-year performance bonds can require cash collateral for the full line at
any time for any reason. Holders of agreements related to another $23.2 million
currently have the option to require cash collateral due to Moody's lowering the
Company's credit rating on April 27, 2004. The remaining agreements cannot
require cash collateral except in events of default.
Other.
At June 30, 2004 and December 31, 2003, the Company had no off-balance
sheet debt.
The Company has an effective shelf registration statement where an
aggregate of approximately $117.5 million in debt, equity and other securities
may be issued. In addition, the Company has an acquisition shelf registration
statement where it may issue, from time to time, up to eight million shares of
common stock, (upon effectiveness of an amendment thereto reflecting the effect
of the two-for-one stock split declared in July 1997) in connection with one or
more acquisitions by the Company of securities or assets of other businesses.
The Company believes it has the financial resources needed to meet its
business requirements in the foreseeable future, including capital expenditures
for rig upgrades and continuing rig enhancements, and working capital
requirements.
CAPITAL RESOURCES
Cash required to meet the Company's capital commitments is determined by
evaluating the need to upgrade rigs to meet specific customer requirements and
by evaluating the Company's ongoing rig equipment replacement and enhancement
programs, including water depth and drilling capability upgrades. It is
management's opinion that operating cash flows and the Company's cash reserves
will be sufficient to meet these capital commitments; however, the Company will
continue to make periodic assessments based on industry conditions. In addition,
the Company may, from time to time, issue debt or equity securities, or a
combination thereof, to finance capital expenditures, the acquisition of assets
and businesses or for general corporate purposes. The Company's ability to
effect any such issuance will be dependent on the Company's results of
operations, its current financial condition, current market conditions and other
factors beyond its control.
31
The Company had budgeted approximately $15 million during 2004 to upgrade
one of the Company's high specification semisubmersible units, the Ocean
America, with capabilities making it more suitable for developmental drilling.
The upgrade began near the end of the first quarter of 2004 and was completed
during the latter part of the second quarter of 2004. The upgrade was completed
under budget for approximately $13 million.
The Company's two-year program to expand the capabilities of its jack-up
fleet by significantly upgrading six of its 14 jack-up rigs is now complete.
Three of these upgrades were completed in 2002, two were completed in 2003 and
one was completed early in 2004. The installation of a cantilever package on the
Ocean Titan began in May 2003 and was completed in January 2004 for
approximately $22 million.
The Company expects to spend approximately $79 million in 2004 for capital
expenditures. These expenditures include approximately $65 million associated
with its continuing rig enhancement program (other than rig upgrades),
approximately $9 million related to customer contract requirements and
approximately $5 million for other corporate requirements including life
enhancement maintenance of one of the Company's semisubmersibles, the Ocean
Concord. During the six months ended June 30, 2004, the Company spent $39.2
million on its continuing rig enhancement program and to meet other corporate
capital expenditure requirements.
INTEGRATED SERVICES
The Company from time to time selectively engages in drilling services
pursuant to turnkey or modified-turnkey contracts under which it agrees to drill
a well to a specified depth for a fixed price. The Company had no such activity
during the six months ended June 30, 2004. During the six months ended June 30,
2003, the Company had project income of $0.4 million from the completion of one
turnkey plug and abandonment project in the Gulf of Mexico which was more than
offset by operating overhead costs and insurance premiums. It is the Company's
intent not to pursue contracts for integrated services, which includes turnkey
contracts, except in very limited circumstances.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference from
time to time by the Company or its representatives are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical fact are, or may be deemed to be, forward-looking statements.
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, events, performance or achievements,
and may contain or be identified by the words "expect," "intend," "plan,"
"predict," "anticipate," "estimate," "believe," "should," "could," "may,"
"might," "will," "will be," "will continue," "will likely result," "project,"
"forecast," "budget" and similar expressions. Statements by the Company in this
report that contain forward-looking statements include, but are not limited to,
information concerning possible or assumed future results of operations of the
Company and statements about the following subjects:
- future market conditions and the effect of such conditions on the
Company's future results of operations (see " - Overview-Results of
Operations and Industry Conditions");
- future uses of and requirements for financial resources (see " -
Liquidity" and " - Capital Resources");
- interest rate and foreign exchange risk (see " -- Liquidity-Credit
Ratings" and "Quantitative and Qualitative Disclosures About Market
Risk");
- future contractual obligations (see " -- Overview -- Results of
Operations and Industry Conditions," "--Operations Outside the
United States" and " - Liquidity");
- future operations outside the United States including, without
limitation, the Company's operations in Mexico (see " -- Overview --
Results of Operations and Industry Conditions" and " -- Operations
Outside the United States");
- business strategy;
- growth opportunities;
- competitive position;
- expected financial position;
- future cash flows;
- future dividends;
- financing plans;
32
- tax planning (See " -- Critical Accounting Estimates -- Income
Taxes," " -- Three Months Ended June 30, 2004 and 2003 -- Income Tax
Benefit" and " -- Six Months Ended June 30, 2004 and 2003 -- Income
Tax Benefit");
- budgets for capital and other expenditures (see "--Capital
Resources");
- timing and cost of completion of rig upgrades and other capital
projects (see "--Capital Resources");
- delivery dates and drilling contracts related to rig conversion and
upgrade projects (see " -- Overview -- Results of Operations and
Industry Conditions" and "--Capital Resources");
- plans and objectives of management;
- performance of contracts (see " -- Overview -- Results of Operations
and Industry Conditions," " -- Operations Outside the United States"
and " -- Integrated Services");
- outcomes of legal proceedings;
- compliance with applicable laws; and
- adequacy of insurance or indemnification.
Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
expected, projected or expressed in forward-looking statements. Such risks and
uncertainties include, among others, the following:
- general economic and business conditions;
- worldwide demand for oil and natural gas;
- changes in foreign and domestic oil and gas exploration, development
and production activity;
- oil and natural gas price fluctuations and related market
expectations;
- the ability of the Organization of Petroleum Exporting Countries,
commonly called OPEC, to set and maintain production levels and
pricing, and the level of production in non-OPEC countries;
- policies of the various governments regarding exploration and
development of oil and gas reserves;
- advances in exploration and development technology;
- the political environment of oil-producing regions;
- casualty losses;
- operating hazards inherent in drilling for oil and gas offshore;
- industry fleet capacity;
- market conditions in the offshore contract drilling industry,
including dayrates and utilization levels;
- competition;
- changes in foreign, political, social and economic conditions;
- risks of international operations, compliance with foreign laws and
taxation policies and expropriation or nationalization of equipment
and assets;
- risks of potential contractual liabilities pursuant to the Company's
various drilling contracts in effect from time to time;
- foreign exchange and currency fluctuations and regulations, and the
inability to repatriate income or capital;
- risks of war, military operations, other armed hostilities,
terrorist acts and embargoes;
- changes in offshore drilling technology, which could require
significant capital expenditures in order to maintain
competitiveness;
- regulatory initiatives and compliance with governmental regulations;
- compliance with environmental laws and regulations;
- customer preferences;
- effects of litigation;
- cost, availability and adequacy of insurance;
- adequacy of the Company's sources of liquidity;
- risks inherent in turnkey operations, including the risk of failure
to complete a well and cost overruns;
- the availability of qualified personnel to operate and service the
Company's drilling rigs; and
- various other matters, many of which are beyond the Company's
control.
The risks included here are not exhaustive. Other sections of this report
and the Company's other filings with the Securities and Exchange Commission
include additional factors that could adversely affect the Company's business,
results of operations and financial performance. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements. Forward-looking statements included in this report speak only as of
the date of this report. The Company expressly disclaims any obligation or
undertaking to release publicly any
33
updates or revisions to any forward-looking statement to reflect any change in
the Company's expectations with regard thereto or any change in events,
conditions or circumstances on which any forward-looking statement is based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information included in this Item 3 is considered to constitute
"forward-looking statements" for purposes of the statutory safe harbor provided
in Section 27A of the Securities Act and Section 21E of the Exchange Act. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements" in Item 2 of Part I of this report.
The Company's measure of market risk exposure represents an estimate of
the change in fair value of its financial instruments. Market risk exposure is
presented for each class of financial instrument held by the Company at June 30,
2004 and December 31, 2003 assuming immediate adverse market movements of the
magnitude described below. The Company believes that the various rates of
adverse market movements represent a measure of exposure to loss under
hypothetically assumed adverse conditions. The estimated market risk exposure
represents the hypothetical loss to future earnings and does not represent the
maximum possible loss or any expected actual loss, even under adverse
conditions, because actual adverse fluctuations would likely differ. In
addition, since the Company's investment portfolio is subject to change based on
its portfolio management strategy as well as in response to changes in the
market, these estimates are not necessarily indicative of the actual results
which may occur.
Exposure to market risk is managed and monitored by senior management.
Senior management approves the overall investment strategy employed by the
Company and has responsibility to ensure that the investment positions are
consistent with that strategy and the level of risk acceptable to it. The
Company may manage risk by buying or selling instruments or entering into
offsetting positions.
Interest Rate Risk
The Company has exposure to interest rate risk arising from changes in the
level or volatility of interest rates. The Company's investments in marketable
securities are primarily in fixed maturity securities. The Company monitors its
sensitivity to interest rate risk by evaluating the change in the value of its
financial assets and liabilities due to fluctuations in interest rates. The
evaluation is performed by applying an instantaneous change in interest rates by
varying magnitudes on a static balance sheet to determine the effect such a
change in rates would have on the recorded market value of the Company's
investments and the resulting effect on stockholders' equity. The analysis
presents the sensitivity of the market value of the Company's financial
instruments to selected changes in market rates and prices which the Company
believes are reasonably possible over a one-year period.
The sensitivity analysis estimates the change in the market value of the
Company's interest sensitive assets and liabilities that were held on June 30,
2004 and December 31, 2003 due to instantaneous parallel shifts in the yield
curve of 100 basis points, with all other variables held constant.
The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Accordingly the analysis
may not be indicative of, is not intended to provide, and does not provide a
precise forecast of the effect of changes of market interest rates on the
Company's earnings or stockholders' equity. Further, the computations do not
contemplate any actions the Company could undertake in response to changes in
interest rates.
The Company's long-term debt as of June 30, 2004 and December 31, 2003 is
denominated in U.S. dollars. The Company's debt has been primarily issued at
fixed rates, and as such, interest expense would not be impacted by interest
rate shifts. The impact of a 100 basis point increase in interest rates on fixed
rate debt would result in a decrease in market value of $149.2 million and
$150.5 million, respectively. A 100 basis point decrease would result in an
increase in market value of $184.4 million and $186.8 million, respectively.
Foreign Exchange Risk
Foreign exchange risk arises from the possibility that changes in foreign
currency exchange rates will impact the value of financial instruments. During
the quarter ended June 30, 2004 the Company invested in Australian dollar time
deposits and at June 30, 2004 45.0 million Australian dollars (equivalent to
$31.9 million) of time
34
deposits were included in "Investments and marketable securities" in the
Consolidated Balance Sheet. The sensitivity analysis assumes an instantaneous
20% change in foreign currency exchange rates versus the U.S. dollar from their
levels at June 30, 2004.
The following table presents the Company's market risk by category
(interest rates and foreign currency exchange rates):
FAIR VALUE ASSET (LIABILITY) MARKET RISK
------------------------------------ --------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
CATEGORY OF RISK EXPOSURE: 2004 2003 2004 2003
-------------------------- -------- ------------ ------- ------------
(IN THOUSANDS)
Interest rate:
Marketable securities ............ $ 3,891 (a) $ 503,995 (a) $ 400 (c) $ 700 (c)
Long-term debt .................. (917,182) (b) (909,100) (b) -- --
Foreign Exchange:
Australian dollar time deposits.. 31,864 (d) -- 6,400 (d) --
- -------------
(a) The fair market value of the Company's investment in marketable
securities is based on the quoted closing market prices on June 30, 2004 and
December 31, 2003.
(b) The fair values of the Company's 1.5% convertible senior debentures
due 2031 and zero coupon convertible debentures due 2020 are based on the quoted
closing market prices on June 30, 2004 and December 31, 2003. The fair value of
the Company's Ocean Alliance lease-leaseback agreement is based on the present
value of estimated future cash flows using a discount rate of 3.98% for June 30,
2004 and 2.08% for December 31, 2003.
(c) The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of an increase in
interest rates of 100 basis points at June 30, 2004 and December 31, 2003.
(d) The calculation of estimated foreign exchange risk is based on assumed
adverse changes in the underlying reference price or index of a decrease in
foreign exchange rates of 20% at June 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management formed a disclosure controls and procedures
committee (the "Disclosure Committee") in 2002. The purpose and responsibility
of the Disclosure Committee is to coordinate and review the process by which
information is recorded, processed, summarized and reported on a timely basis as
required to be disclosed by the Company in its reports filed, furnished or
submitted under the Exchange Act. In addition, the Disclosure Committee is
responsible for ensuring that this information is accumulated and communicated
to the Company's management, including its principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
Evaluation of Disclosure Controls and Procedures
Based upon their evaluation, as of the end of the period covered by this
report, of the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)), the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are adequate to ensure that information the Company is
required to disclose in reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
Changes in Internal Controls
In connection with such evaluation, no change was identified in the
Company's internal control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
35
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders (the "Annual Meeting") of Diamond
Offshore Drilling, Inc. was held on May 18, 2004 in New York, New York. At the
Annual Meeting, the holders of 124,916,044 shares of common stock out of
129,322,455 shares entitled to vote as of the record date were represented in
person or by proxy, constituting a quorum. The following matters were voted on
and adopted by the margins indicated:
a. To elect seven directors, each to serve until the next annual
meeting of stockholders and until their respective successors are
elected and qualified or until their earlier resignation or removal.
NUMBER OF SHARES
-------------------------------------
BROKER
FOR WITHHELD NON-VOTE
--- -------- --------
James S. Tisch 106,083,282 18,832,762 0
Lawrence R. Dickerson 105,098,971 19,817,073 0
Alan R. Batkin 123,799,196 1,116,848 0
Charles L. Fabrikant 123,803,168 1,112,876 0
Herbert C. Hofmann 105,132,532 19,783,512 0
Arthur L. Rebell 106,228,566 18,687,478 0
Raymond S. Troubh 122,774,130 2,141,914 0
b. To approve the Amended and Restated Diamond Offshore Drilling, Inc.
2000 Stock Option Plan.
For 107,710,315
Against 8,563,035
Abstain 8,642,694
Broker Non-Vote 0
c. To ratify the appointment of Deloitte & Touche LLP as independent
certified public accountants for the Company and its subsidiaries
for fiscal year 2004.
For 124,501,231
Against 345,885
Abstain 68,928
Broker Non-Vote 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See the Exhibit Index for a list of those exhibits filed or furnished
herewith.
(b) The Company made the following reports on Form 8-K during the second
quarter of 2004:
Date of Report Description of Report
- -------------- ---------------------
April 12, 2004 Item 9 Regulation FD disclosure (Furnished, not filed)
April 20, 2004 Item 12 Results of Operations and Financial Condition
for the quarter ended March 31, 2004 (Furnished, not filed)
April 26, 2004 Item 9 Regulation FD disclosure (Furnished, not filed)
May 10, 2004 Item 9 Regulation FD disclosure (Furnished, not filed)
36
May 25, 2004 Item 9 Regulation FD disclosure (Furnished, not filed)
June 8, 2004 Item 9 Regulation FD disclosure (Furnished, not filed)
June 21, 2004 Item 9 Regulation FD disclosure (Furnished, not filed)
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAMOND OFFSHORE DRILLING, INC.
(Registrant)
Date 02-August-2004 By: \s\ Gary T. Krenek
----------------------------------
Gary T. Krenek
Vice President and Chief
Financial Officer
Date 02-August-2004 \s\ Beth G. Gordon
-----------------------------------
Beth G. Gordon
Controller (Chief Accounting
Officer)
38
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2003).
3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2001).
10.1 Amended and Restated Diamond Offshore Drilling, Inc. 2000 Stock
Option Plan (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement No. 333-117512 on Form S-8).
31.1* Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2* Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1* Section 1350 Certification of the Chief Executive Officer.
32.2* Section 1350 Certification of the Chief Financial Officer.
* Filed or furnished herewith.
39