================================================================================
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, 2002
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 333-75899
----------------------
TRANSOCEAN INC.
(Exact name of registrant as specified in its charter)
----------------------
CAYMAN ISLANDS 66-0582307
(State or other jurisdication (I.R.S. Employer
of incorporation or organization) Identification No.)
4 GREENWAY PLAZA
HOUSTON, TEXAS 77046
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (713) 232-7500
----------------------
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 proceeding 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
------- -------
As of July 31, 2002, 319,219,986 ordinary shares, par value $0.01 per
share, were outstanding.
================================================================================
TRANSOCEAN INC.
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 2002
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2002 and 2001 . . . . . . 2
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 . . . . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements . . . . . . 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 19
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. 39
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 40
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . 40
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . 41
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 42
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Transocean Inc.
(formerly known as "Transocean Sedco Forex Inc.") and its consolidated
subsidiaries (the "Company") included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and notes normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
1
TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ---------------------
2002 2001 2002 2001
------- ------- ---------- ---------
Operating Revenues $646.2 $752.2 $ 1,314.1 $1,302.3
- --------------------------------------------------------------------------------------------------------
Costs and Expenses
Operating and maintenance 365.6 394.3 746.6 745.2
Depreciation 124.3 123.7 249.9 223.1
Goodwill amortization - 41.4 - 71.6
General and administrative 16.0 14.6 35.8 29.4
- --------------------------------------------------------------------------------------------------------
505.9 574.0 1,032.3 1,069.3
- --------------------------------------------------------------------------------------------------------
Impairment Loss on Long-Lived Assets - - (1.1) -
Gain (Loss) from Sale of Assets, net (1.3) - 0.6 19.6
- --------------------------------------------------------------------------------------------------------
Operating Income 139.0 178.2 281.3 252.6
- --------------------------------------------------------------------------------------------------------
Other Income (Expense), net
Equity in earnings of joint ventures 2.5 4.0 4.4 5.7
Interest income 5.7 4.7 9.9 8.3
Interest expense, net of amounts capitalized (52.5) (66.8) (108.4) (104.0)
Other, net (0.4) (1.0) (1.1) (1.5)
- --------------------------------------------------------------------------------------------------------
(44.7) (59.1) (95.2) (91.5)
- --------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Minority Interest, Extraordinary
Item and Cumulative Effect of a Change in Accounting
Principle 94.3 119.1 186.1 161.1
Income Tax Expense 13.9 32.2 27.7 42.3
Minority Interest 0.4 1.1 1.1 2.5
- --------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle 80.0 85.8 157.3 116.3
Loss on Extraordinary Item, net of tax - (17.3) - (17.3)
Cumulative Effect of a Change in Accounting Principle - - (1,363.7) -
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 80.0 $ 68.5 $(1,206.4) $ 99.0
========================================================================================================
Basic Earnings (Loss) Per Share
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 0.25 $ 0.27 $ 0.49 $ 0.39
Loss on Extraordinary Item, net of tax - (0.05) - (0.06)
Cumulative Effect of a Change in Accounting Principle - - (4.27) -
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 0.25 $ 0.22 $ (3.78) $ 0.33
========================================================================================================
Diluted Earnings (Loss) Per Share
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 0.25 $ 0.26 $ 0.49 $ 0.38
Loss on Extraordinary Item, net of tax - (0.05) - (0.06)
Cumulative Effect of a Change in Accounting Principle - - (4.22) -
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 0.25 $ 0.21 $ (3.73) $ 0.32
========================================================================================================
Weighted Average Shares Outstanding
Basic 319.1 318.2 319.1 299.5
- --------------------------------------------------------------------------------------------------------
Diluted 323.9 325.0 323.6 305.3
- --------------------------------------------------------------------------------------------------------
Dividends Paid Per Share $ 0.03 $ 0.03 $ 0.06 $ 0.06
- --------------------------------------------------------------------------------------------------------
See accompanying notes.
2
TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
June 30, December 31,
2002 2001
------------ --------------
(Unaudited)
ASSETS
Cash and Cash Equivalents $ 755.9 $ 853.4
Accounts Receivable, net of allowance for doubtful accounts
of $28.5 and $24.2 at June 30, 2002 and December 31, 2001, respectively 591.5 675.7
Materials and Supplies, net of allowance for obsolescence of $19.6
and $24.1 at June 30, 2002 and December 31, 2001, respectively 169.3 158.8
Deferred Income Taxes 21.3 21.0
Other Current Assets 40.4 27.9
- -----------------------------------------------------------------------------------------------------------
Total Current Assets 1,578.4 1,736.8
- -----------------------------------------------------------------------------------------------------------
Property and Equipment 10,045.4 10,081.4
Less Accumulated Depreciation 1,930.6 1,713.3
- -----------------------------------------------------------------------------------------------------------
Property and Equipment, net 8,114.8 8,368.1
- -----------------------------------------------------------------------------------------------------------
Goodwill, net 5,103.0 6,466.7
Investments in and Advances to Joint Ventures 114.3 107.1
Other Assets 393.6 341.1
- -----------------------------------------------------------------------------------------------------------
Total Assets $ 15,304.1 $ 17,019.8
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable $ 133.3 $ 188.4
Accrued Income Taxes 210.5 188.2
Debt Due Within One Year 924.7 484.4
Other Current Liabilities 236.4 283.4
- -----------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,504.9 1,144.4
- -----------------------------------------------------------------------------------------------------------
Long-Term Debt 3,702.6 4,539.4
Deferred Income Taxes 279.1 317.1
Other Long-Term Liabilities 120.0 108.6
- -----------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 4,101.7 4,965.1
- -----------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Preference Shares, $0.10 par value; 50,000,000 shares authorized,
none issued and outstanding - -
Ordinary Shares, $0.01 par value; 800,000,000 shares authorized,
319,207,590 and 318,816,035 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively 3.2 3.2
Additional Paid-in Capital 10,622.4 10,611.7
Accumulated Other Comprehensive Income (0.2) (2.3)
Retained Earnings (Deficit) (927.9) 297.7
- -----------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 9,697.5 10,910.3
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 15,304.1 $ 17,019.8
===========================================================================================================
See accompanying notes.
3
TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,206.4) $ 99.0
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation 249.9 223.1
Goodwill amortization - 71.6
Cumulative effect of a change in accounting principle - goodwill impairment 1,363.7 -
Deferred income taxes (38.3) (33.8)
Equity in earnings of joint ventures (4.4) (5.7)
Net (gain)/loss from disposal of assets 2.3 (18.4)
Impairment loss on long-lived assets 1.1 -
Loss on sale of securities - 1.8
Amortization of debt-related discounts/premiums, fair value
adjustments and issue costs, net 2.9 (11.3)
Deferred income, net (6.0) (30.0)
Deferred expenses, net 7.0 (27.6)
Extraordinary loss on debt extinguishment, net of tax - 17.3
Other, net 9.7 6.9
Changes in operating assets and liabilities, net of effects from the
R&B Falcon merger
Accounts receivable 84.1 (162.6)
Accounts payable and other current liabilities (84.7) (95.6)
Income taxes receivable/payable, net 22.3 30.3
Other current assets (22.7) (13.8)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 380.5 51.2
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (81.2) (371.8)
Proceeds from disposal of assets, net 65.0 29.2
Proceeds from sale of securities - 16.8
Merger costs paid - (24.5)
Cash acquired in merger, net of cash paid - 264.7
Joint ventures and other investments, net - 2.7
- ------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (16.2) (82.9)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on revolving credit agreements - (180.1)
Net borrowings (repayments) under commercial paper program (326.4) 60.3
Repayments on other debt instruments (119.6) (1,478.2)
Net proceeds from issuance of debt - 1,693.5
Net proceeds from issuance of ordinary shares under stock-based compensation plans 10.3 28.8
Proceeds from issuance of ordinary shares upon exercise of warrants - 10.6
Dividends paid (19.1) (19.1)
Financing costs (8.1) (15.5)
Other, net 1.1 5.6
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (461.8) 105.9
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (97.5) 74.2
- ------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 853.4 34.5
- ------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 755.9 $ 108.7
============================================================================================================
See accompanying notes.
4
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - PRINCIPLES OF CONSOLIDATION
Transocean Inc. (formerly known as "Transocean Sedco Forex Inc.", together
with its subsidiaries and predecessors, unless the context requires otherwise,
the "Company") is a leading international provider of offshore and inland marine
contract drilling services for oil and gas wells. As of June 30, 2002, the
Company owned, had partial ownership interests in or managed more than 150
mobile offshore and barge drilling units. The Company contracts its drilling
rigs, related equipment and work crews primarily on a dayrate basis to drill oil
and gas wells.
On January 31, 2001, the Company completed a merger transaction (the "R&B
Falcon merger") with R&B Falcon Corporation ("R&B Falcon"). As a result of the
merger, R&B Falcon became an indirect wholly owned subsidiary of the Company.
The merger was accounted for as a purchase with the Company as the accounting
acquiror. The condensed consolidated statements of operations and cash flows for
the six months ended June 30, 2001 include five months of operating results and
cash flows for R&B Falcon.
Intercompany transactions and accounts have been eliminated. The equity
method of accounting is used for investments in joint ventures owned 50 percent
or less and for investments in joint ventures owned more than 50 percent where
the Company does not have significant control over the day-to-day operations of
the joint venture.
NOTE 2 - GENERAL
BASIS OF CONSOLIDATION - The accompanying condensed consolidated financial
statements of the Company have been prepared without audit in accordance with
accounting principles generally accepted in the United States ("U.S.") for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X of the Securities and Exchange Commission. Accordingly,
pursuant to such rules and regulations, these financial statements do not
include all disclosures required by accounting principles generally accepted in
the U.S. for complete financial statements. Operating results for the three and
six months ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002 or for any future
period. The accompanying condensed consolidated financial statements and notes
thereto should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its estimates, including
those related to bad debts, materials and supplies obsolescence, investments,
intangible assets and goodwill, income taxes, financing operations, workers'
insurance, pensions and other post-retirement and employment benefits and
contingent liabilities. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from such estimates.
SUPPLEMENTARY CASH FLOW INFORMATION - Cash payments for interest and income
taxes, net, were $109.8 million and $44.2 million, respectively, for the six
months ended June 30, 2002 and $158.7 million and $46.5 million, respectively,
for the six months ended June 30, 2001.
GOODWILL - Prior to the implementation of the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
142, Goodwill and Other Intangible Assets (see "-New Accounting
Pronouncements"), the excess of the purchase price over the estimated fair value
of net assets acquired was accounted for as goodwill and was amortized on a
straight-line basis based on a 40-year life. The amortization period was based
on the nature of the offshore drilling industry, long-lived drilling equipment
and the long-standing relationships with core customers.
5
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
During the first quarter of 2002, the Company performed the initial test of
impairment of goodwill on its two reporting units, "International and U.S.
Floater Contract Drilling Services" and "Gulf of Mexico Shallow and Inland
Water." The test was applied utilizing the fair value of the reporting units as
of January 1, 2002 and was determined based on a combination of each reporting
unit's discounted cash flows and publicly traded company multiples and
acquisition multiples of comparable businesses. There was no goodwill impairment
for the International and U.S. Floater Contract Drilling Services reporting
unit. However, because of continued deterioration in the Gulf of Mexico Shallow
and Inland Water business segment since the completion of the R&B Falcon merger,
a $1,363.7 million impairment of goodwill was recognized as a cumulative effect
of a change in accounting principle in the six months ended June 30, 2002. The
Company's goodwill balance, after giving effect to the goodwill write down, is
$5.1 billion as of June 30, 2002.
The changes in the carrying amount of goodwill are as follows (in
millions):
Balance at Loss on Balance at
January 1, 2002 Impairment June 30, 2002
---------------- ----------- --------------
International and U.S. Floater Contract Drilling Services $ 4,721.1 $ - $ 4,721.1
Gulf of Mexico Shallow and Inland Water 1,745.6 (1,363.7) 381.9
---------------- ----------- --------------
$ 6,466.7 $ (1,363.7) $ 5,103.0
================ =========== ==============
6
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Net income and earnings per share for the three and six months ended June
30, 2002 and 2001 adjusted for goodwill amortization are as follows (in
millions):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2002 2001 2002 2001
---------- ----------- ---------- ----------
Reported net income before extraordinary item and
cumulative effect of a change in
accounting principle $ 80.0 $ 85.8 $ 157.3 $ 116.3
Add back: Goodwill amortization - 41.4 - 71.6
---------- ----------- ---------- ----------
Adjusted reported net income before extraordinary
item and cumulative effect of a change in accounting
principle $ 80.0 $ 127.2 $ 157.3 $ 187.9
Loss on extraordinary item, net of tax - (17.3) - (17.3)
Cumulative effect of a change in accounting principle - - (1,363.7) -
---------- ----------- ---------- ----------
Adjusted net income (loss) $ 80.0 $ 109.9 $(1,206.4) $ 170.6
========== =========== ========== ==========
Basic earnings per share:
Reported net income before extraordinary item and
cumulative effect of a change in accounting
principle $ 0.25 $ 0.27 $ 0.49 $ 0.39
Goodwill amortization - 0.13 - 0.24
---------- ----------- ---------- ----------
Adjusted reported net income before extraordinary
item and cumulative effect of a change in accounting
principle 0.25 0.40 0.49 0.63
Loss on extraordinary item, net of tax - (0.05) - (0.06)
Cumulative effect of a change in accounting principle - - (4.27) -
---------- ----------- ---------- ----------
Adjusted net income (loss) $ 0.25 $ 0.35 $ (3.78) $ 0.57
========== =========== ========== ==========
Diluted earnings per share:
Reported net income before extraordinary item and
cumulative effect of a change in accounting principle $ 0.25 $ 0.26 $ 0.49 $ 0.38
Goodwill amortization - 0.13 - 0.24
---------- ----------- ---------- ----------
Adjusted reported net income before extraordinary item
and cumulative effect of a change in accounting
principle 0.25 0.39 0.49 0.62
Loss on extraordinary item, net of tax - (0.05) - (0.06)
Cumulative effect of a change in accounting principle - - (4.22) -
---------- ----------- ---------- ----------
Adjusted net income (loss) $ 0.25 $ 0.34 $ (3.73) $ 0.56
========== =========== ========== ==========
IMPAIRMENT OF LONG-LIVED ASSETS - The carrying value of long-lived assets,
principally property and equipment, is reviewed for potential impairment when
events or changes in circumstances indicate that the carrying amount of such
assets or group of assets may not be recoverable. For property and equipment
held for use, the determination of recoverability is made based upon the
estimated undiscounted future net cash flows of the related asset. Property and
equipment held for sale are recorded at the lower of net book value or net
realizable value. See "-New Accounting Pronouncements."
7
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
CAPITALIZED INTEREST - Interest costs for the construction and upgrade of
qualifying assets are capitalized. The Company recorded $9.4 million and $30.5
million in capitalized interest costs on construction work in progress for the
three and six months ended June 30, 2001, respectively. No interest cost was
capitalized during the three and six months ended June 30, 2002.
CHANGE IN ESTIMATE - As a result of the R&B Falcon merger, the Company
conformed its policies relating to estimated rig lives and salvage values.
Estimated useful lives of drilling units now range from 18 to 35 years,
reflecting maintenance history and market demand for these drilling units,
buildings and improvements from 10 to 30 years and machinery and equipment from
four to 12 years. Depreciation expense for the three and six months ended June
30, 2001 was reduced by approximately $6.4 million (net $0.02 per diluted share)
and $10.6 million (net $0.03 per diluted share), respectively, as a result of
conforming these policies.
INCOME TAXES - Income taxes have been provided based upon the tax laws and
rates in the countries in which operations are conducted and income is earned.
The income tax rates imposed by these taxing authorities vary substantially.
Taxable income may differ from pre-tax income for financial accounting purposes.
There is no expected relationship between the provision for income taxes and
income before income taxes because the countries have different taxation
regimes, which vary not only with respect to nominal rate, but also in terms of
the availability of deductions, credits and other benefits. Variations also
arise because income earned and taxed in any particular country or countries may
fluctuate from period to period.
COMPREHENSIVE INCOME - The components of total comprehensive income for the
three and six months ended June 30, 2002 and 2001, respectively, are as follows
(in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
Net income (loss) $ 80.0 $ 68.5 $(1,206.4) $ 99.0
Gain on terminated interest rate swaps - - - 4.1
Amortization of gain on terminated interest rate swaps - (0.1) (0.1) (0.1)
Change in unrealized loss on cash flow hedges - 0.9 - (0.5)
Change in unrealized loss on securities available for sale - 0.7 0.1 (0.4)
Change in share of unrealized loss in unconsolidated
joint venture's interest rate swaps (1.0) - 2.1 -
----------- ----------- ---------- -----------
Total comprehensive income (loss) $ 79.0 $ 70.0 $(1,204.3) $ 102.1
=========== =========== ========== ===========
The components of accumulated other comprehensive income as of June 30,
2002 and December 31, 2001 are as follows (in millions):
June 30, December 31,
2002 2001
---------- --------------
Gain on terminated interest rate swaps $ 3.8 $ 3.9
Unrealized loss on securities available for sale (0.5) (0.6)
Share of unrealized loss in unconsolidated joint venture's interest rate swaps (3.5) (5.6)
---------- --------------
Accumulated other comprehensive income $ (0.2) $ (2.3)
========== ==============
8
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
SEGMENTS - The Company's operations are aggregated into two reportable
segments: (i) International and U.S. Floater Contract Drilling Services and (ii)
Gulf of Mexico Shallow and Inland Water. The Company provides services with
different types of drilling equipment in several geographic regions. The
location of the Company's operating assets and the allocation of resources to
build or upgrade drilling units is determined by the activities and needs of
customers. See Note 7.
INTERIM FINANCIAL INFORMATION - The condensed consolidated financial
statements reflect all adjustments, which are, in the opinion of management,
necessary for a fair statement of results of operations for the interim periods.
Such adjustments are considered to be of a normal recurring nature unless
otherwise identified.
NEW ACCOUNTING PRONOUNCEMENTS - In July 2001, the FASB issued SFAS 142,
Goodwill and Other Intangible Assets, which is effective for fiscal years
beginning after December 15, 2001. Under SFAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed at least
annually for impairment. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company
adopted SFAS 142 effective January 1, 2002. In conjunction with the adoption of
this statement, the Company has discontinued the amortization of goodwill.
Application of the non-amortization provisions of SFAS 142 for goodwill is
expected to result in an increase in operating income of approximately $155
million in 2002. See "-Goodwill."
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
the accounting and reporting provisions of Accounting Principles Board Opinion
("APB") 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 retains the fundamental provisions
of SFAS 121 for recognition and measurement of long-lived asset impairment and
for the measurement of long-lived assets to be disposed of by sale and the basic
requirements of APB 30. In addition to these fundamental provisions, SFAS 144
provides guidance for determining whether long-lived assets should be tested for
impairment and specific criteria for classifying assets to be disposed of as
held for sale. The statement is effective for fiscal years beginning after
December 15, 2001. The Company adopted the statement as of January 1, 2002. The
adoption of this statement had no material effect on the Company's consolidated
financial position or results of operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the requirement under SFAS 4 to aggregate and classify
all gains and losses from extinguishment of debt as an extraordinary item, net
of related income tax effect. This statement also amends SFAS 13 to require
certain lease modifications with economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
In addition, SFAS 145 requires reclassification of gains and losses in all prior
periods presented in comparative financial statements related to debt
extinguishment that do not meet the criteria for extraordinary item in APB 30.
The statement is effective for fiscal years beginning after May 15, 2002 with
early adoption encouraged. The Company will adopt SFAS 145 effective January 1,
2003. Management does not expect adoption of this statement to have a material
effect on the Company's consolidated financial position or results of
operations.
In July 2002, the FASB issued SFAS 146, Obligations Associated with
Disposal Activities, which is effective for disposal activities initiated after
December 15, 2002, with early application encouraged. SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Under this statement, a liability
for a cost associated with an exit or disposal activity would be recognized and
measured at its fair value when it is incurred rather than at the date of
commitment to an exit plan. Under SFAS 146, severance pay would be recognized
over time rather than up front provided the benefit arrangement requires
employees to render future service beyond a "minimum retention period", which
would be based on the legal notification period, or if there is no such
requirement, 60 days, thereby allowing a liability to be recorded over the
9
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
employees' future service period. The Company will adopt SFAS 146 effective with
disposal activities initiated after December 15, 2002. Management does not
expect adoption of this statement to have a material effect on the Company's
consolidated financial position or results of operations.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
period amounts to conform with the current period's presentation.
NOTE 3 - BUSINESS COMBINATION
On January 31, 2001, the Company completed a merger transaction with R&B
Falcon, in which an indirect wholly owned subsidiary of the Company merged with
and into R&B Falcon. As a result of the merger, R&B Falcon common shareholders
received 0.5 newly issued ordinary shares of the Company for each R&B Falcon
share. The Company issued approximately 106 million ordinary shares in exchange
for the issued and outstanding shares of R&B Falcon and assumed warrants and
options exercisable for approximately 13 million ordinary shares. The ordinary
shares issued in exchange for the issued and outstanding shares of R&B Falcon
constituted approximately 33 percent of the Company's outstanding ordinary
shares after the merger.
The Company accounted for the merger using the purchase method of
accounting with the Company treated as the accounting acquiror. The purchase
price of $6.7 billion is comprised of the calculated market capitalization of
the Company's ordinary shares issued at the time of merger with R&B Falcon of
$6.1 billion and the estimated fair value of R&B Falcon stock options and
warrants at the time of the merger of $0.6 billion. The market capitalization of
the Company's ordinary shares issued was calculated using the average closing
price of the Company's ordinary shares for a period immediately before and after
August 21, 2000, the date the merger was announced.
The purchase price included, at estimated fair value at January 31, 2001,
current assets of $672 million, drilling and other property and equipment of
$4,010 million, other assets of $160 million and the assumption of current
liabilities of $338 million, other net long-term liabilities of $242 million and
long-term debt of $3,206 million. The excess of the purchase price over the
estimated fair value of net assets acquired was $5,630 million, which was
accounted for as goodwill and is reviewed for impairment annually in accordance
with SFAS 142. See Note 2.
In conjunction with the R&B Falcon merger, the Company established a
liability of $16.5 million for the estimated severance-related costs associated
with the involuntary termination of 569 R&B Falcon employees pursuant to
management's plan to consolidate operations and administrative functions
post-merger. Included in the 569 planned involuntary terminations were 387
employees engaged in the Company's land drilling business in Venezuela. The
Company has suspended active marketing efforts to divest this business and, as a
result, the estimated liability was reduced by $4.3 million in the third quarter
of 2001 with an offset to goodwill. Through June 30, 2002 all required
severance-related costs were paid to 182 employees whose positions were
eliminated as a result of this plan.
Unaudited pro forma combined operating results of the Company and R&B
Falcon assuming the merger was completed as of January 1, 2001 are summarized as
follows (in millions, except per share data):
Six Months Ended
June 30, 2001
----------------
Operating revenues $ 1,428.1
Operating income 252.1
Net income from continuing operations 102.0
Basic earnings per share $ 0.32
Diluted earnings per share 0.31
10
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The pro forma information includes adjustments for additional depreciation
based on the fair market value of the drilling and other property and equipment
acquired, amortization of goodwill arising from the transaction, increased
interest expense for debt assumed in the merger and related adjustments for
income taxes. The pro forma information is not necessarily indicative of the
results of operations had the transaction been effected on the assumed date or
the results of operations for any future periods.
NOTE 4 - DEBT
Debt, net of unamortized discounts, premiums and fair value adjustments, is
comprised of the following (in millions):
June 30, December 31,
2002 2001
--------- -------------
Commercial Paper. $ - $ 326.4
6.5% Senior Notes, due April 2003 240.1 240.5
9.125% Senior Notes, due December 2003 90.7 92.0
Term Loan Agreement - final maturity December 2004 350.0 400.0
6.75% Senior Notes, due April 2005 359.5 354.6
7.31% Nautilus Class A1 Amortizing Notes - final maturity May 2005 124.2 142.9
9.41% Nautilus Class A2 Notes, due May 2005 52.1 52.4
Secured Rig Financing - 50.6
6.95% Senior Notes, due April 2008 259.1 252.3
9.5% Senior Notes, due December 2008 352.2 348.1
6.625% Notes, due April 2011 739.5 711.7
7.375% Senior Notes, due April 2018 250.5 250.5
Zero Coupon Convertible Debentures, due May 2020 (put options exercisable
May 2003, May 2008 and May 2013) 519.6 512.2
1.5% Convertible Debentures, due May 2021 (put options exercisable May 2006,
May 2011 and May 2016) 400.0 400.0
8% Debentures, due April 2027 198.0 197.9
7.45% Notes, due April 2027 (put options exercisable April 2007) 94.5 94.4
7.5% Notes, due April 2031 597.3 597.3
--------- -------------
Total Debt $ 4,627.3 $ 5,023.8
Less Debt Due Within One Year (a) 924.7 484.4
--------- -------------
Total Long-Term Debt $ 3,702.6 $ 4,539.4
========= =============
(a) The Zero Coupon Convertible Debentures are classified as debt due within
one year since the put option can be exercised in May 2003.
11
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The scheduled maturity of the face value of the Company's debt assumes the
put options on the Zero Coupon Convertible Debentures, 1.5% Convertible
Debentures and 7.45% Notes will be exercised in May 2003, May 2006 and April
2007, respectively, and is as follows (in millions):
Twelve
Months
Ending
June 30,
---------
2003 $ 948.2
2004 280.2
2005 517.3
2006 400.0
2007 100.0
Thereafter 2,300.0
---------
Total $ 4,545.7
=========
Commercial Paper Program - The Company's Revolving Credit Agreements, a
$550.0 million five-year revolving credit agreement dated December 29, 2000 and
a $250.0 million 364-day revolving credit agreement dated December 27, 2001,
provide liquidity for commercial paper borrowings. At June 30, 2002, no amounts
were outstanding under the Commercial Paper Program or under the Revolving
Credit Agreements.
Term Loan Agreement - The Company is party to an amortizing unsecured
five-year term loan agreement dated as of December 16, 1999. Amounts outstanding
under the Term Loan Agreement bear interest at the Company's option, at a base
rate or London Interbank Offered Rate ("LIBOR") plus a margin (0.70 percent per
annum at June 30, 2002) that varies depending on the Company's senior unsecured
public debt rating. The debt began to amortize in March 2002, at a rate of $25.0
million per quarter in 2002. In 2003 and 2004, the debt amortizes at a rate of
$37.5 million per quarter. As of June 30, 2002, $350.0 million was outstanding
under this agreement.
Exchange Offer - In March 2002, the Company completed exchange offers and
consent solicitations for the 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% notes
of R&B Falcon. As a result of these exchange offers and consent solicitations,
approximately $234.5 million, $342.3 million, $247.8 million $246.5 million,
$76.9 million, and $289.8 million principal amount of the outstanding 6.5%,
6.75%, 6.95%, 7.375%, 9.125% and 9.5% notes, respectively, of R&B Falcon were
exchanged for newly issued 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% notes of
the Company having the same principal amount, interest rate, redemption terms
and payment and maturity dates (and accruing interest from the last date for
which interest had been paid on the R&B Falcon notes). Because the holders of a
majority in principal amount of each of these series of notes consented to the
proposed amendments to the applicable indenture pursuant to which the notes were
issued, some covenants, restrictions and events of default were eliminated from
the indentures with respect to these series of notes. After the exchange
approximately $5.0 million, $7.7 million, $2.2 million, $3.5 million, $10.2
million and $10.2 million principal amount of the outstanding 6.5%, 6.75%,
6.95%, 7.375%, 9.125% and 9.5% notes, respectively, not exchanged remain the
obligation of R&B Falcon. These notes are combined with the notes of the
corresponding series issued by the Company in the above table. In connection
with the exchange offers, an aggregate of $8.3 million in consent payments was
made by R&B Falcon to holders of R&B Falcon notes whose notes were tendered (and
not validly withdrawn) within the required time period and accepted for
exchange. The consent payments will be amortized as an increase to interest
expense over the remaining term of the respective notes using the interest
method. As a result of this amortization, interest expense for 2002 is expected
to increase approximately $1.3 million.
12
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Secured Rig Financing - In January 2002, the Company exercised its call
option under the financing arrangement to repay the financing on the Trident 16
prior to the expiration of the scheduled term. The aggregate principal amount
outstanding was $32.2 million. The premium paid as a result of the call option
of approximately $2 million was recorded as an increase in the net book value of
the Trident 16.
In March 2002, the Company also exercised its call option to repay the
financing on the Trident IX prior to the expiration of the scheduled term. The
aggregate principal amount outstanding was $14.9 million. The premium paid as a
result of the call option of approximately $0.5 million was recorded as an
increase in the net book value of the Trident IX.
Redeemed and Repurchased Debt - On April 10, 2001, R&B Falcon acquired
pursuant to a tender offer all of the approximately $400.0 million principal
amount outstanding 11.375% Senior Secured Notes due 2009 of its affiliate, RBF
Finance Co., at 122.51 percent, or $1,225.10 per $1,000 principal amount, plus
accrued and unpaid interest. On April 6, 2001, RBF Finance Co. also redeemed all
of the approximately $400.0 million principal amount outstanding 11% Senior
Secured Notes due 2006 at 125.282 percent, or $1,252.82 per $1,000 principal
amount, plus accrued and unpaid interest, and R&B Falcon redeemed all of the
approximately $200.0 million principal amount outstanding 12.25% Senior Notes
due 2006 at 130.675 percent or $1,306.75 per $1,000 principal amount, plus
accrued and unpaid interest. The Company funded the redemption from the issuance
of the 6.625% Notes and 7.5% Notes in April 2001. In the second quarter of
2001, the Company recognized an extraordinary loss, net of tax, of $18.9 million
($0.06 per diluted share) on the early extinguishment of this debt.
On March 30, 2001, pursuant to an offer made in connection with the
Company's acquisition of R&B Falcon, Cliffs Drilling Company ("Cliffs
Drilling"), a wholly owned subsidiary of R&B Falcon, acquired approximately $0.1
million of the 10.25% Senior Notes due 2003 at an amount equal to 101 percent of
the principal amount. On May 18, 2001, Cliffs Drilling redeemed all of the
approximately $200.0 million principal amount outstanding 10.25% Senior Notes
due 2003, at 102.5 percent, or $1,025.00 per $1,000 principal amount, plus
interest accrued to the redemption date. As a result, the Company recognized an
extraordinary gain, net of tax, of $1.6 million ($0.01 per diluted share) in the
second quarter of 2001 relating to the early extinguishment of this debt.
NOTE 5 - OTHER CURRENT LIABILITIES
Other current liabilities are comprised of the following (in millions):
June 30, December 31,
2002 2001
--------- -------------
Accrued Payroll and Employee Benefits $ 119.8 $ 134.2
Accrued Interest 34.5 38.8
Contract Disputes and Legal Claims 27.6 47.5
Accrued Taxes, Other than Income 22.6 26.6
Deferred Revenue 16.8 18.2
Other 15.1 18.1
--------- -------------
$ 236.4 $ 283.4
========= =============
13
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 6 - INTEREST RATE SWAPS
In February 2002, the Company entered into interest rate swap agreements
with a group of banks in the aggregate notional amount of $900.0 million
relating to the Company's $350.0 million aggregate principal amount of 6.75%
Senior Notes due April 2005, $250.0 million aggregate principal amount of 6.95%
Senior Notes due April 2008 and $300.0 million aggregate principal amount of
9.5% Senior Notes due December 2008. The objective of each transaction is to
protect the debt against changes in fair value due to changes in the benchmark
interest rate. Under each interest rate swap, the Company receives the fixed
rate equal to the coupon of the hedged item and pays the floating rate (LIBOR)
plus a margin of 246 basis points, 171 basis points and 413 basis points,
respectively, which are designated as the respective benchmark interest rates,
on each of the interest payment dates until maturity of the respective notes.
The hedges are considered perfectly effective against changes in the fair value
of the debt due to changes in the benchmark interest rates over their term. As a
result, the shortcut method applies and there is no need to periodically
reassess the effectiveness of the hedges during the term of the swaps.
At June 30, 2002, the market value of the Company's outstanding interest
rate swaps was a net asset of $63.0 million and was included in other assets,
with corresponding increases to long-term debt and debt due within one year, as
appropriate.
Deepwater Drilling L.L.C., an unconsolidated subsidiary in which the
Company has a 50 percent ownership interest, has entered into interest rate
swaps with aggregate market values netting to a liability of $7.9 million at
June 30, 2002. The Company's interest in these swaps has been included in
accumulated other comprehensive income with a corresponding reduction to
investments in and advances to joint ventures.
NOTE 7 - SEGMENTS
The Company's operations are aggregated into two reportable segments: (i)
International and U.S. Floater Contract Drilling Services and (ii) Gulf of
Mexico Shallow and Inland Water. The International and U.S. Floater Contract
Drilling Services segment consists of high-specification floaters, other
floaters, non-U.S. jackups, other mobile offshore drilling units and other
assets used in support of offshore drilling activities and offshore support
services. The Gulf of Mexico Shallow and Inland Water segment consists of jackup
and submersible drilling rigs and inland drilling barges located in the U. S.
Gulf of Mexico and Trinidad, as well as land drilling units located in
Venezuela. The Company provides services with different types of drilling
equipment in several geographic regions. The location of the Company's rigs and
the allocation of resources to build or upgrade rigs is determined by the
activities and needs of customers.
Effective January 1, 2002, the Company changed the composition of its
reportable segments with the move of the responsibility for its Venezuela land
drilling operations to the Gulf of Mexico Shallow and Inland Water segment.
Prior periods have been restated to reflect the change.
14
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Operating revenues and income before income taxes, minority interest,
extraordinary item and cumulative effect of a change in accounting principle by
segment are as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
---------------- --------------------
2002 2001 2002 2001
------- ------- --------- ---------
Operating Revenues
International and U.S. Floater Contract Drilling Services $609.1 $598.6 $1,232.3 $1,065.2
Gulf of Mexico Shallow and Inland Water 37.1 153.9 81.8 243.3
Elimination of intersegment revenues - (0.3) - (6.2)
------- ------- --------- ---------
Total Operating Revenues $646.2 $752.2 $1,314.1 $1,302.3
------- ------- --------- ---------
Income before Income Taxes, Minority Interest, Extraordinary Item
and Cumulative Effect of a Change in Accounting Principle
International and U.S. Floater Contract Drilling Services $185.9 $156.3 $ 380.8 $ 233.5
Gulf of Mexico Shallow and Inland Water (30.9) 36.5 (63.7) 48.5
------- ------- --------- ---------
155.0 192.8 317.1 282.0
Unallocated general and administrative expense (16.0) (14.6) (35.8) (29.4)
Unallocated other income (expense) (44.7) (59.1) (95.2) (91.5)
------- ------- --------- ---------
Total Income before Income Taxes, Minority Interest,
Extraordinary Item and Cumulative Effect of a Change
in accounting Principle $ 94.3 $119.1 $ 186.1 $ 161.1
======= ======= ========= =========
Total assets by segment are as follows (in millions):
June 30, December 31,
2002 2001
--------- -------------
International and U.S. Floater Contract Drilling Services $13,960.1 $ 14,219.3
Gulf of Mexico Shallow and Inland Water 1,344.0 2,800.5
--------- -------------
Total Assets $15,304.1 $ 17,019.8
========= =============
NOTE 8 - ASSET DISPOSITIONS AND IMPAIRMENT LOSS
In June 2002, the Company sold a jackup rig, the RBF 209, and recognized a
net after-tax loss of $1.5 million.
In March 2002, the Company sold two semisubmersible rigs, the Transocean 96
and Transocean 97, for net proceeds of $30.7 million, resulting in a net
after-tax gain of $1.3 million.
During the six months ended June 30, 2002, the Company sold certain other
non-strategic assets acquired in the R&B Falcon merger and certain other assets
held for sale for net proceeds of approximately $14.7 million, resulting in a
net after-tax gain of $0.7 million.
In March 2002, the Company recorded a non-cash impairment charge in the
Gulf of Mexico Shallow and Inland Water segment of $1.1 million. The impairment,
relating to an asset held for sale, resulted from deterioration in current
market conditions. The impairment was determined and measured based on an offer
from a potential buyer.
In February 2001, Sea Wolf Drilling Limited ("Sea Wolf"), a joint venture
in which the Company holds a 25 percent interest, sold two semisubmersible rigs,
the Drill Star and Sedco Explorer, to Pride International, Inc. In the first
quarter of 2001, the Company recognized accelerated amortization of the deferred
gain related to the Sedco Explorer of $18.5 million ($0.06 per diluted share),
which is included in gain from sale of assets. The Company continued to operate
the Drill Star, which has been renamed the Pride North Atlantic, under a
bareboat charter agreement until October 2001, at which time the rig was
returned to its owner. The amortization of the Drill Star's deferred gain was
15
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
accelerated and produced incremental gains in the three and six months ended
June 30, 2001 of $13.7 million ($0.04 per diluted share) and $22.7 million
($0.07 per diluted share), respectively, which is included as a reduction of
operating and maintenance expense.
NOTE 9 - EARNINGS PER SHARE
The reconciliation of the numerator and denominator used for the
computation of basic and diluted earnings per share is as follows (in millions,
except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ----------- ---------- -----------
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 80.0 $ 85.8 $ 157.3 $ 116.3
Loss on Extraordinary Item, net of tax - (17.3) - (17.3)
Cumulative Effect of a Change in Accounting Principle - - (1,363.7) -
---------- ----------- ---------- -----------
Net Income (Loss) $ 80.0 $ 68.5 $(1,206.4) $ 99.0
========== =========== ========== ===========
Weighted-Average Shares Outstanding
Shares for basic earnings per share 319.1 318.2 319.1 299.5
Effect of dilutive securities:
Employee stock options and unvested stock grants 2.7 3.9 2.6 3.4
Warrants to purchase ordinary shares 2.1 2.9 1.9 2.4
---------- ----------- ---------- -----------
Adjusted weighted-average shares and assumed conversions for
diluted earnings per share 323.9 325.0 323.6 305.3
========== =========== ========== ===========
Basic Earnings (Loss) Per Share
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 0.25 $ 0.27 $ 0.49 $ 0.39
Loss on Extraordinary Item, net of tax - (0.05) - (0.06)
Cumulative Effect of a Change in Accounting Principle - - (4.27) -
---------- ----------- ---------- -----------
Net Income (Loss) $ 0.25 $ 0.22 $ (3.78) $ 0.33
========== =========== ========== ===========
Diluted Earnings (Loss) Per Share
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 0.25 $ 0.26 $ 0.49 $ 0.38
Loss on Extraordinary Item, net of tax - (0.05) - (0.06)
Cumulative Effect of a Change in Accounting Principle - - (4.22) -
---------- ----------- ---------- -----------
Net Income (Loss) $ 0.25 $ 0.21 $ (3.73) $ 0.32
========== =========== ========== ===========
Ordinary shares subject to issuance pursuant to the conversion features of
the Company's convertible debentures are not included in the calculation of
adjusted weighted-average shares and assumed conversions for diluted earnings
per share because the effect of including those shares is anti-dilutive.
NOTE 10 - CONTINGENCIES
Legal Proceedings - The Company was a defendant in Bryant, et al. v. R&B
Falcon Drilling USA, Inc., et al. in the U.S. District Court for the Southern
District of Texas, Houston Division. R&B Falcon Drilling USA is a wholly owned
indirect subsidiary of R&B Falcon. In this suit, the plaintiffs alleged that R&B
Falcon Drilling USA, the Company and a number of other offshore drilling
contractors with operations in the U.S. Gulf of Mexico engaged in a conspiracy
to depress wages and benefits paid to certain of their offshore employees. The
plaintiffs contended that this alleged conduct violated federal antitrust law
and constituted unfair trade practices and wrongful employment acts under state
law. The plaintiffs sought treble damages, attorneys' fees and costs on behalf
of themselves and an alleged class of offshore workers, along with an injunction
against exchanging certain wage and benefit information with other offshore
drilling contractors named as defendants. In May 2001, the Company reached an
agreement in principle with the plaintiffs' counsel to settle all claims,
16
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
pending Court approval of the settlement. In July 2001, before the Court had
considered the proposed settlement, the case, along with a number of unrelated
cases also pending in the federal court in Galveston, was transferred to a
federal judge sitting in Houston as a docket equalization measure. The judge
approved the settlement, and the funds were deposited with the court in June
2002. The terms of the settlement have been reflected in the Company's results
of operations for the first quarter of 2001. The settlement did not have a
material adverse effect on its business or consolidated financial position.
In December 1998, Mobil North Sea Limited ("Mobil") purportedly terminated
its contract for use of the Jack Bates based on failure of two mooring lines
while anchor recovery operations at a Mobil well location had been suspended
during heavy weather. The Company did not believe that Mobil had the right to
terminate this contract. The Company later recontracted the Jack Bates to Mobil
at a lower dayrate. The Company filed a request for arbitration with the London
Court of International Arbitration seeking damages for the termination, and
Mobil in turn counterclaimed against the Company seeking damages for the
Company's alleged breaches of the original contract. The case was settled in
July 2002 and the proceedings dismissed. The ultimate outcome of this case did
not have a material adverse effect on the Company's business or consolidated
financial position.
In March 1997, an action was filed by Mobil Exploration and Producing U.S.
Inc. and affiliates, St. Mary Land & Exploration Company and affiliates and
Samuel Geary and Associates, Inc. against Cliffs Drilling, its underwriters and
insurance broker in the 16th Judicial District Court of St. Mary Parish,
Louisiana. The plaintiffs alleged damages amounting to in excess of $50 million
in connection with the drilling of a turnkey well in 1995 and 1996. The case was
tried before a jury in January and February 2000, and the jury returned a
verdict of approximately $30 million in favor of the plaintiffs for excess
drilling costs, loss of insurance proceeds, loss of hydrocarbons and interest.
The Company has appealed such judgment. The Company believes that all but
potentially the portion of the verdict representing excess drilling costs of
approximately $4.7 million is covered by relevant primary and excess liability
insurance policies of Cliffs Drilling; however, the insurers and underwriters
have denied coverage. Cliffs Drilling has instituted litigation against those
insurers and underwriters to enforce its rights under the relevant policies. The
Company does not expect that the ultimate outcome of this case will have a
material adverse effect on its business or consolidated financial position.
The Company has certain other actions or claims pending that have been
previously discussed and reported in the Company's Quarterly Report on Form 10-Q
for the three months ended March 31, 2002, its Annual Report on Form 10-K for
the year ended December 31, 2001 and the Company's other reports filed with the
Securities and Exchange Commission. There have been no material developments in
these previously reported matters. The Company and its subsidiaries are involved
in a number of other lawsuits, all of which have arisen in the ordinary course
of the Company's business. The Company does not believe that ultimate liability,
if any, resulting from any such other pending litigation will have a material
adverse effect on its business or consolidated financial position.
Letters of Credit and Surety Bonds - The Company had letters of credit
outstanding at June 30, 2002 totaling $63.9 million. These letters of credit
outstanding guarantee various contract bidding and insurance activities. In
January 2002, the Company terminated its $70.0 million letter of credit facility
secured by mortgages on five drilling units, the J.W. McLean, J.T. Angel,
Randolph Yost, D.R. Stewart and George H. Galloway.
As is customary in the contract drilling business, the Company also has
various surety bonds totaling $221.9 million in place that secure customs
obligations relating to the importation of rigs as well as certain performance
and other obligations.
17
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 11 - SUBSEQUENT EVENTS
In July 2002, the Company announced that it plans to pursue a divestiture
of its Gulf of Mexico Shallow and Inland Water business. Under this plan, the
Gulf of Mexico Shallow and Inland Water business would be separated from the
Company and established as a publicly traded company. The Company currently
anticipates that it will establish R&B Falcon as the entity that owns this
business. The Company plans to transfer assets not used in this business from
R&B Falcon, which will be renamed in connection with the transaction, to the
Company's other subsidiaries, and these internal transfers will not affect the
consolidated financial statements of Transocean. The initial public offering of
that company is currently being prepared. The Company anticipates completing the
initial public offering when market conditions warrant, subject to various
factors. Given the current general uncertainty in the equity markets, the
Company is unsure when the transaction could be completed on terms acceptable to
it. The Company expects to sell a portion of its interest in R&B Falcon in the
initial public offering.
In July 2002, the Company received a $4.2 million settlement of a loss of
hire insurance claim for an incident that occurred in 1998 in which the Sedco
710 was damaged from a collision with a supply boat. The settlement will be
recorded in operating revenues in the third quarter of 2002.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
OVERVIEW
Transocean Inc. (formerly known as "Transocean Sedco Forex Inc.", together
with its subsidiaries and predecessors, unless the context requires otherwise,
the "Company," "Transocean," "we," "us" or "our") is a leading international
provider of offshore and inland marine contract drilling services for oil and
gas wells. As of July 31, 2002, we owned, had partial ownership interests in or
managed more than 150 mobile offshore and barge drilling units. As of this date,
our active fleet of core assets consisted of 31 high-specification drillships
and semisubmersibles ("floaters"), 29 other floaters, 52 jackup rigs, 35
drilling barges, four tenders and three submersible drilling rigs. In addition,
the fleet included non-core assets consisting of a platform drilling rig, a
mobile offshore production unit and nine land drilling rigs in Venezuela. We
contract our drilling rigs, related equipment and work crews primarily on a
dayrate basis to drill oil and gas wells. We also provide additional services,
including management of third-party well service activities.
On January 31, 2001, we completed a merger transaction with R&B Falcon
Corporation ("R&B Falcon"). At the time of the merger, R&B Falcon owned, had
partial ownership interests in, operated or had under construction more than 100
mobile offshore drilling units and other units utilized in the support of
offshore drilling activities. As a result of the merger, R&B Falcon became our
indirect wholly owned subsidiary. The merger was accounted for as a purchase and
we were the accounting acquiror. The condensed consolidated statements of
operations and cash flows for the three and six months ended June 30, 2001
include two and five months, respectively, of operating results and cash flows
for R&B Falcon.
On May 9, 2002, we changed our name from Transocean Sedco Forex Inc. to
Transocean Inc.
On May 9, 2002, our Board of Directors voted to discontinue the payment of
a cash dividend after the cash dividend payable on June 13, 2002 to shareholders
of record on May 30, 2002.
Our operations are aggregated into two reportable segments: (i)
International and U.S. Floater Contract Drilling Services and (ii) Gulf of
Mexico Shallow and Inland Water. The International and U.S. Floater Contract
Drilling Services segment consists of high-specification floaters, other
floaters, non-U.S. jackups, other mobile offshore drilling units and other
assets used in support of offshore drilling activities and offshore support
services. The Gulf of Mexico Shallow and Inland Water segment consists of jackup
and submersible drilling rigs and inland drilling barges located in the U. S.
Gulf of Mexico and Trinidad, as well as land drilling units located in
Venezuela. We provide services with different types of drilling equipment in
several geographic regions. The location of our rigs and the allocation of
resources to build or upgrade rigs is determined by the activities and needs of
our customers.
Effective January 1, 2002, we changed the composition of our reportable
segments with the move of the responsibility for our Venezuela land drilling
operations to the Gulf of Mexico Shallow and Inland Water segment. Prior periods
have been restated to reflect the change.
In July 2002, we announced plans to pursue a divestiture of our Gulf of
Mexico Shallow and Inland Water business. Under this plan, our Gulf of Mexico
Shallow and Inland Water business would be separated from Transocean and
established as a publicly traded company. We currently anticipate that we will
establish R&B Falcon as the entity that owns this business. We plan to transfer
assets not used in this business from R&B Falcon, which will be renamed in
connection with the transaction, to our other subsidiaries, and these internal
transfers will not affect the consolidated financial statements of Transocean.
The initial public offering is currently being prepared. We anticipate
completing the initial public offering when market conditions warrant, subject
to various factors. Given the current general uncertainty in the equity markets,
we are unsure when the transaction could be completed on terms acceptable to us.
We expect to sell a portion of our interest in R&B Falcon in the initial public
offering.
19
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
materials and supplies obsolescence, investments, intangible assets and
goodwill, income taxes, financing operations, workers' insurance, pensions and
other post-retirement and employment benefits and contingent liabilities. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following are our most critical accounting policies. These
policies require significant judgments and estimates used in the preparation of
our consolidated financial statements.
Allowance for doubtful accounts - We establish reserves for doubtful
accounts on a case-by-case basis when we believe the required payment of
specific amounts owed to us is unlikely to occur. We derive a majority of our
revenue from services to international oil companies and government-owned or
government-controlled oil companies. Our receivables are concentrated in various
countries. We generally do not require collateral or other security to support
customer receivables. If the financial condition of our customers was to
deteriorate or their access to freely convertible currency was restricted, and
these developments resulted in impairment of their ability to make the required
payments, we may be required to make additional allowances.
Valuation allowance for deferred tax assets - We record a valuation
allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, should we determine that we would be able to realize
our deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the valuation allowance would increase income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, we would be
required to make an adjustment to the valuation allowance. This would reduce
income in the period such determination was made.
Goodwill impairment - Effective January 1, 2002, we adopted the Financial
Accounting Standards Board's ("FASB") Statement of Financial Accounting
Standards ("SFAS") 142, Goodwill and Other Intangibles. As a result of this
statement, we no longer amortize goodwill but will perform an annual test of
impairment. Because our business is cyclical in nature, goodwill could be
significantly impaired depending on when in the business cycle the assessment is
performed.
During the first quarter of 2002, we performed the initial test of
impairment of goodwill on our two reporting units, "International and U.S.
Floater Contract Drilling Services" and "Gulf of Mexico Shallow and Inland
Water." The test was applied utilizing the fair value of the reporting units as
of January 1, 2002 and was determined based on a combination of each reporting
unit's discounted cash flows and publicly traded company multiples and
acquisition multiples of comparable businesses. There was no goodwill impairment
for the International and U.S. Floater Contract Drilling Services reporting
unit. However, because of continued deterioration in the Gulf of Mexico Shallow
and Inland Water business segment since the completion of the R&B Falcon merger,
we recognized a $1,363.7 million impairment of goodwill as a cumulative effect
of a change in accounting principle in the quarter ended March 31, 2002. Our
goodwill balance, after giving effect to the goodwill write down, is $5.1
billion as of June 30, 2002. See Note 2 to our consolidated financial statements
in our Annual Report on Form 10-K.
20
Contingent liabilities - We establish reserves for estimated loss
contingencies when we believe a loss is probable and we can reasonably estimate
the amount of the loss. Revisions to contingent liabilities are reflected in
income in the period in which different facts or information become known or
circumstances change that affect our previous assumptions with respect to the
likelihood or amount of loss. Reserves for contingent liabilities are based upon
our assumptions and estimates regarding the probable outcome of the matter.
Should the outcome differ from our assumptions and estimates, we would be
required to make revisions to the estimated reserves for contingent liabilities.
Contract preparation and mobilization revenues and expenses - Costs we
incur to prepare and mobilize drilling units for new drilling contracts are
deferred from the date we have a firm commitment from the customer and
recognized as operating and maintenance expense over the estimated primary term
of the drilling contract. Revenues we earned during or as a result of the
contract preparation and mobilization periods are also deferred and recognized
over the estimated primary term of the drilling contract. If a customer
prematurely terminates the contract, we would recognize any unamortized deferred
costs and revenues in the period the contract was terminated.
OPERATING RESULTS
QUARTER ENDED JUNE 30, 2002 COMPARED TO QUARTER ENDED JUNE 30, 2001
Our results of operations are aggregated into two segments: (i)
International and U.S. Floater Contract Drilling Services and (ii) Gulf of
Mexico Shallow and Inland Water. Operating income (loss) before general and
administrative expenses for the three months ended June 30, 2002 and 2001 was
$185.9 million and $156.3 million, respectively, in our International and U.S.
Floater Contract Drilling Services segment and $(30.9) million and $36.5
million, respectively, in our Gulf of Mexico Shallow and Inland Water segment.
Three Months Ended
June 30,
---------------------- %
2002 2001 Change Change
---------- ---------- -------- -------
(In millions, except % change)
OPERATING REVENUES
International and U.S. Floater Contract Drilling Services $ 609.1 $ 598.6 $ 10.5 1.8%
Gulf of Mexico Shallow and Inland Water 37.1 153.6 (116.5) (75.8)%
---------- ---------- -------- -------
$ 646.2 $ 752.2 $(106.0) (14.1)%
========== ========== ======== =======
The increase in International and U.S. Floater Contract Drilling Services
operating revenues resulted primarily from $26 million in revenues from two
newbuilds placed into service subsequent to the second quarter of 2001 and $5
million in revenues from two jackup rigs transferred into this segment from the
Gulf of Mexico Shallow and Inland Water segment. These increases were partly
offset by a $12 million decrease in revenues from three rigs transferred to
assets held for sale subsequent to the second quarter of 2001, a $7 million
decrease in revenues from two rigs sold subsequent to the second quarter of
2001, a $13 million decrease in revenues from three leased rigs returned to
their owners and an $11 million decrease in revenues related to the Deepwater
Frontier (See " - Related Party Transactions") following the expiration of our
lease with a related party late in 2001. Revenues for the remaining core assets
in this segment increased $37.3 million. Average dayrates for these core assets
increased from $84,600 for the quarter ended June 30, 2001 to $93,700 for the
quarter ended June 30, 2002 while utilization for these core assets decreased
from 81 percent for the quarter ended June 30, 2001 to 79 percent for the
quarter ended June 30, 2002. Operating revenues for non-core assets in this
segment decreased $14 million and resulted primarily from the sale in the fourth
quarter of 2001 of RBF FPSO L.P., which owned the Seillean, and the winding up
of our turnkey drilling business early in 2001.
The decrease in the Gulf of Mexico Shallow and Inland Water operating
revenues resulted primarily from the continued weakness of the Gulf of Mexico
shallow and inland water market segment, a decline that began in mid-2001, and
the transfer of two jackup rigs from this segment into the International and
U.S. Floater Contract Drilling Services segment, which represented a decrease of
$7 million in revenues. Excluding the two jackup rigs transferred into the
International and U.S. Floater Contract Drilling Services, average dayrates and
21
utilization for core assets in this segment decreased from $31,300 and 71
percent, respectively, for the quarter ended June 30, 2001 to $20,700 and 27
percent, respectively, for the quarter ended June 30, 2002.
Three Months Ended
June 30,
---------------------- %
2002 2001 Change Change
---------- ---------- -------- -------
(In millions, except % change)
OPERATING AND MAINTENANCE
International and U.S. Floater Contract Drilling Services $ 320.1 $ 316.1 $ 4.0 1.3%
Gulf of Mexico Shallow and Inland Water 45.5 78.2 (32.7) (41.8)%
---------- ---------- -------- -------
$ 365.6 $ 394.3 $ (28.7) (7.3)%
========== ========== ======== =======
The increase in International and U.S. Floater Contract Drilling Services
operating expenses resulted primarily from two newbuilds placed into service and
two jackup rigs transferred into this segment from the Gulf of Mexico Shallow
and Inland Water segment subsequent to the second quarter of 2001 and the
accelerated amortization of the Drill Star's deferred gain, which produced
incremental gains in the quarter ended June 30, 2001 of $13.7 million ($.04 per
diluted share), with no equivalent expense reduction in the second quarter of
2002. These increases were partly offset by a decrease in expenses from three
rigs transferred to assets held for sale subsequent to the second quarter in
2001, a decrease in expenses from nine rigs sold subsequent to the second
quarter in 2001, a decrease in expenses from three leased rigs returned to their
owners and a decrease in expenses related to the Deepwater Frontier (See " -
Related Party Transactions) following the expiration of our lease with a related
party late in 2001.
The decrease in Gulf of Mexico Shallow and Inland Water operating expenses
was primarily a result of lower costs in 2002 resulting from stacking idle rigs,
reducing employee count and postponing maintenance projects, coupled with the
transfer of two jackup rigs out of this segment into the International and U.S.
Floater Contract Drilling Services segment subsequent to the second quarter of
2001.
Three Months Ended
June 30,
---------------------- %
2002 2001 Change Change
---------- ---------- -------- -------
(In millions, except % change)
DEPRECIATION
International and U.S. Floater Contract Drilling Services $ 101.4 $ 95.2 $ 6.2 6.5%
Gulf of Mexico Shallow and Inland Water 22.9 28.5 (5.6) (19.6)%
---------- ---------- -------- -------
$ 124.3 $ 123.7 $ 0.6 0.5 %
========== ========== ======== =======
The increase in International and U.S. Floater Contract Drilling Services
depreciation expense resulted primarily from four newbuild drilling units placed
into service during and subsequent to the second quarter of 2001 and the
transfer of two jackup rigs into this segment from the Gulf of Mexico Shallow
and Inland Water segment subsequent to the second quarter of 2001. This increase
was partially offset by lower expense resulting from the suspension of
depreciation on certain rigs transferred to assets held for sale and the sale of
various rigs from our active fleet subsequent to the second quarter of 2001.
The decrease in Gulf of Mexico Shallow and Inland Water depreciation
expense resulted primarily from the movement of two jackup rigs out of this
segment into the International and U.S. Floater Contract Drilling Services
segment subsequent to the second quarter of 2001, the suspension of depreciation
on certain rigs transferred to assets held for sale and the sale of various rigs
from our active fleet subsequent to the second quarter of 2001.
22
Three Months Ended
June 30,
---------------------- %
2002 2001 Change Change
---------- ---------- -------- --------
(In millions, except % change)
GOODWILL AMORTIZATION
International and U.S. Floater Contract Drilling Services $ - $ 30.2 $ (30.2) (100.0)%
Gulf of Mexico Shallow and Inland Water - 11.2 (11.2) (100.0)%
---------- ---------- -------- --------
$ - $ 41.4 $ (41.4) (100.0)%
========== ========== ======== ========
We adopted SFAS 142, Goodwill and Other Intangible Assets, as of January 1,
2002. As a result, goodwill is no longer amortized but is reviewed at least
annually for impairment. See Note 2 to our condensed consolidated financial
statements.
Three Months Ended
June 30,
---------------------- %
2002 2001 Change Change
---------- ---------- ------- -------
(In millions, except % change)
GENERAL AND ADMINISTRATIVE $ 16.0 $ 14.6 $ 1.4 9.6%
========== ========== ======= =======
General and administrative expense for the three months ended June 30, 2001
included a credit of $1.3 million attributable to the favorable settlement of an
unemployment tax assessment.
Three Months Ended
June 30,
------------------------ %
2002 2001 Change Change
----------- ----------- -------- --------
(In millions, except % change)
GAIN (LOSS) FROM SALE OF ASSETS, NET
International and U.S. Floater Contract Drilling Services $ (1.7) $ (0.8) $ (0.9) (112.5)%
Gulf of Mexico Shallow and Inland Water 0.4 0.8 (0.4) (50.0)%
----------- ----------- -------- --------
$ (1.3) $ - $ (1.3) (100.0)%
=========== =========== ======== ========
During the three months ended June 30, 2002, the International and U.S.
Floater Contract Drilling Services segment recognized a pre-tax loss of $2.4
million from the sale of the RBF 209 partially offset by a net pre-tax gain of
$0.7 million related to the sale of certain non-strategic assets. During the
three months ended June 30, 2001, net pre-tax losses of $0.8 million related to
the sale of certain non-strategic assets.
During the three months ended June 30, 2002 and June 30, 2001, the Gulf of
Mexico Shallow and Inland Water segment recognized net pre-tax gains of $0.4
million and $0.8 million, respectively, related to the sale of certain
non-strategic assets.
23
Three Months Ended
June 30,
------------------------ %
2002 2001 Change Change
----------- ----------- -------- -------
(In millions, except % change)
OTHER INCOME (EXPENSE), NET
Equity in earnings of joint ventures $ 2.5 $ 4.0 $ (1.5) (37.5)%
Interest income 5.7 4.7 1.0 21.3%
Interest expense, net of amounts capitalized (52.5) (66.8) 14.3 21.4%
Other, net (0.4) (1.0) 0.6 60.0%
----------- ----------- -------- -------
$ (44.7) $ (59.1) $ 14.4 24.4%
=========== =========== ======== =======
The decrease in equity in earnings of joint ventures was primarily related
to our 60 percent share of earnings from Deepwater Drilling II L.L.C. ("DDII
LLC"), which owns the Deepwater Frontier. The rig experienced decreased
utilization in the second quarter of 2002 compared to the same period in 2001.
The increase in interest income was primarily due to interest earned on higher
average cash balances for the three months ended June 30, 2002 compared to the
same period in 2001. The decrease in interest expense was attributable to
reductions in interest expense of $8.0 million associated with debt refinancing
and retirements during and subsequent to the second quarter of 2001, a decrease
in the London Interbank Offered Rate ("LIBOR") of approximately 260 basis points
that resulted in a $2.8 million reduction in interest expense on floating rate
debt and a decrease of $0.7 million resulting from amortization of debt-related
items. Additionally, we entered into interest rate swaps subsequent to the
second quarter of 2001 that reduced interest expense by $13.5 million. These
decreases were partially offset by an increase of $0.6 million in interest
expense attributable to a full quarter of interest expense on debt incurred
during the second quarter of 2001 and the absence of capitalized interest in the
second quarter of 2002 compared to $9.4 million of capitalized interest for the
same period in 2001 due to the completion of our newbuild projects in 2001.
Three Months Ended
June 30,
--------------------- %
2002 2001 Change Change
---------- ---------- -------- -------
(In millions, except % change)
INCOME TAX EXPENSE $ 13.9 $ 32.2 $ (18.3) (56.8)%
========== ========== ======== =======
We operate internationally and provide for income taxes based on the tax
laws and rates in the countries in which we operate and earn income. There is no
expected relationship between the provision for income taxes and income before
income taxes.
Three Months Ended
June 30,
----------------------- %
2002 2001 Change Change
---------- ----------- ------- -------
(In millions, except % change)
LOSS ON EXTRAORDINARY ITEMS, NET OF TAX $ - $ (17.3) $ 17.3 100.0%
---------- ----------- ------- -------
During the three months ended June 30, 2001, we recognized a $17.3 million
extraordinary loss, net of tax, related to the early extinguishment of debt as
described in Note 4 to our condensed consolidated financial statements.
24
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Our results of operations are aggregated into two segments: (i)
International and U.S. Floater Contract Drilling Services and (ii) Gulf of
Mexico Shallow and Inland Water. Operating income (loss) before general and
administrative expenses for the six months ended June 30, 2002 and 2001 was
$380.8 million and $233.5 million, respectively, in our International and U.S.
Floater Contract Drilling Services segment and $(63.7) million and $48.5
million, respectively, in our Gulf of Mexico Shallow and Inland Water segment.
Six Months Ended
June 30,
-------------------- %
2002 2001 Change Change
-------- ---------- -------- -------
(In millions, except % change)
OPERATING REVENUES
International and U.S. Floater Contract Drilling Services $1,232.3 $ 1,065.2 $ 167.1 15.7%
Gulf of Mexico Shallow and Inland Water 81.8 237.1 (155.3) (65.5)%
-------- ---------- -------- -------
$1,314.1 $ 1,302.3 $ 11.8 0.9%
======== ========== ======== =======
The increase in International and U.S. Floater Contract Drilling Services
operating revenues resulted from a $94 million increase in revenues from R&B
Falcon core assets in this segment representing a full six months of revenues in
2002 compared to five months of operations in 2001 and $77 million in revenues
from four newbuild drilling units placed into service during and subsequent to
the second quarter of 2001. In addition, operating revenues relating to
historical Transocean core assets totaled $739 million for the six months ended
June 30, 2002, representing a $90 million, or 14 percent, increase over the
comparable 2001 period. Average dayrates and utilization for core assets
included in this segment increased from $81,200 and 81 percent, respectively,
for the six months ended June 30, 2001 to $89,300 and 83 percent, respectively,
for the six months ended June 30, 2002. These increases were partly offset by a
$19 million decrease in revenues related to the Deepwater Frontier (See " -
Related Party Transactions") following the expiration of our lease with a
related party late in 2001, a $20 million decrease from three leased rigs
returned to their owners, a $10 million decrease related to a rig transferred to
held for sale and a $6 million decrease in revenues related to rigs sold during
2002. Revenues from non-core assets decreased $55 million for the six months
ended June 30, 2002 compared to the same period in 2001 primarily due to the
sale of the RBF FPSO L.P., which owned the Seillean, and a decrease in turnkey
drilling revenues of $38 million due to the winding up of our turnkey drilling
business early in 2001.
Although the Gulf of Mexico Shallow and Inland Water operating revenues
represent a full six months of operations in 2002 compared to five months of
operations in 2001, revenues decreased mainly due to the further weakening of
the Gulf of Mexico Shallow and Inland Water market segment, a decline that began
in mid-2001. In addition, the transfer of two jackup rigs from this segment
into the International and U.S. Floater Contract Drilling Services segment
resulted in a $12 million decrease in operating revenues. Excluding the two
jackup rigs transferred into the International and U.S. Floater Contract
Drilling Services, average dayrates and utilization for core assets in this
segment decreased from $29,800 and 71 percent, respectively, for the six months
ended June 30, 2001 to $20,500 and 29 percent, respectively, for the six months
ended June 30, 2002.
25
Six Months Ended
June 30,
-------------------- %
2002 2001 Change Change
-------- ---------- -------- -------
(In millions, except % change)
OPERATING AND MAINTENANCE
International and U.S. Floater Contract Drilling Services $ 648.8 $ 623.1 $ 25.7 4.1%
Gulf of Mexico Shallow and Inland Water 97.8 122.1 (24.3) (19.9)%
-------- ---------- -------- -------
$ 746.6 $ 745.2 $ 1.4 0.2%
======== ========== ======== =======
The increase in International and U.S. Floater Contract Drilling Services
operating expenses was primarily a result of five months of R&B Falcon
operations for the six months ended June 30, 2001 compared to a full six months
of activity for the same period in 2002, the activation of four newbuild
drilling units and two jackup rigs transferred into this segment from the Gulf
of Mexico Shallow and Inland Water segment during and subsequent to the second
quarter of 2001 and accelerated amortization of the Drill Star's deferred gain,
which produced incremental gains in the six months ended June 30, 2001 of $22.7
million ($.07 per diluted share) with no equivalent expense reduction in the
second quarter of 2002. These increases were partly offset by a decrease in
expenses resulting from a rig transferred to assets held for sale subsequent to
the second quarter in 2001, a decrease in expenses relating to nine rigs sold
subsequent to the second quarter in 2001, a decrease in expenses related to
three leased rigs returned to their owners, a decrease in expenses related to
the Deepwater Frontier (See " - Related Party Transactions") following the
expiration of our lease with a related party late in 2001 and the winding up of
our turnkey drilling business in 2001.
The decrease in Gulf of Mexico Shallow and Inland Water operating expenses
in the six months ended June 30, 2002 resulted primarily from stacking idle
rigs, reducing employee count and postponing maintenance projects coupled with
the transfer of two jackup rigs out of this segment into the International and
U.S. Floater Contract Drilling Services segment subsequent to the second quarter
of 2001. This decrease was partially offset by a full six months of R&B Falcon
operations in 2002 compared to five months of operations in 2001.
Six Months Ended
June 30,
-------------------- %
2002 2001 Change Change
-------- ---------- -------- -------
(In millions, except % change)
DEPRECIATION
International and U.S. Floater Contract Drilling Services $ 203.7 $ 174.7 $ 29.0 16.6%
Gulf of Mexico Shallow and Inland Water 46.2 48.4 (2.2) (4.5)%
-------- ---------- -------- -------
$ 249.9 $ 223.1 $ 26.8 12.0%
======== ========== ======== =======
The increase in International and U.S. Floater Contract Drilling Services
depreciation expense resulted primarily from a full six months of depreciation
in 2002 on rigs acquired in the R&B Falcon merger compared to five months for
the same period in 2001, depreciation expense for four newbuild drilling units
placed into service during and subsequent to the first six months of 2001 and
the transfer of two jackup rigs into this segment from the Gulf of Mexico
Shallow and Inland Water segment. This increase was partially offset by lower
expense due to the suspension of depreciation on certain rigs transferred to
assets held for sale and the sale of various rigs, classified as assets held and
used subsequent to the second quarter of 2001.
The decrease in Gulf of Mexico Shallow and Inland Water depreciation
expense resulted primarily from the transfer of two jackup rigs out of this
segment into the International and U.S. Floater Contract Drilling Services
segment and the suspension of depreciation on certain rigs transferred to assets
held for sale and the sale of various rigs classified as assets held and used
subsequent to the second quarter of 2001. These decreases were partially offset
by a full six months of depreciation in 2002 on rigs acquired in the R&B Falcon
merger compared to five months for the same period in 2001.
26
Six Months Ended
June 30,
-------------------- %
2002 2001 Change Change
-------- ---------- -------- --------
(In millions, except % change)
GOODWILL AMORTIZATION
International and U.S. Floater Contract Drilling Services $ - $ 53.0 $ (53.0) (100.0)%
Gulf of Mexico Shallow and Inland Water - 18.6 (18.6) (100.0)%
-------- ---------- -------- --------
$ - $ 71.6 $ (71.6) (100.0)%
======== ========== ======== ========
We adopted SFAS 142, Goodwill and Other Intangible Assets, as of January 1,
2002. As a result, goodwill is no longer amortized but is reviewed at least
annually for impairment. See Note 2 to our condensed consolidated financial
statements.
Six Months Ended
June 30,
-------------------- %
2002 2001 Change Change
-------- ---------- ------- -------
(In millions, except % change)
GENERAL AND ADMINISTRATIVE $ 35.8 $ 29.4 $ 6.4 21.8%
======== ========== ======= =======
The increase in general and administrative expense was primarily
attributable to $3.9 million of costs related to the exchange of our debt for
R&B Falcon debt in March 2002. The six months ended June 30, 2001 included a
$1.3 million reduction in expense related to the favorable settlement of an
unemployment tax assessment. In addition, expense increased due to the R&B
Falcon merger and reflects additional costs to manage a larger, more complex
organization for a full six months in 2002 compared to five months in 2001.
Six Months Ended
June 30,
--------------------- %
2002 2001 Change Change
--------- ---------- -------- --------
(In millions, except % change)
IMPAIRMENT LOSS ON LONG-LIVED ASSETS $ (1.1) $ - $ (1.1) (100.0)%
========= ========== ======== ========
During the six months ended June 30, 2002, we recorded a non-cash
impairment charge in the Gulf of Mexico Shallow and Inland Water segment of $1.1
million. The impairment, relating to an asset held for sale, resulted from
deterioration in current market conditions. The impairment was determined and
measured based on an offer from a potential buyer.
27
Six Months Ended
June 30,
--------------------- %
2002 2001 Change Change
--------- ---------- -------- --------
(In millions, except % change)
GAIN FROM SALE OF ASSETS, NET
International and U.S. Floater Contract Drilling Services $ 1.0 $ 19.1 $ (18.1) (94.8)%
Gulf of Mexico Shallow and Inland Water (0.4) 0.5 (0.9) (180.0)%
--------- ---------- -------- --------
$ 0.6 $ 19.6 $ (19.0) (96.9)%
========= ========== ======== ========
During the six months ended June 30, 2002, the International and U.S.
Floater Contract Drilling Services segment recognized net pre-tax gains of $3.4
million related to the sale of the Transocean 96, Transocean 97, a mobile
offshore production unit and the sale of certain non-strategic assets. These net
gains were partially offset by a net pre-tax loss of $2.4 million from the sale
of the RBF 209. During the six months ended June 30, 2001, we recognized net
pre-tax gains of $18.5 million related to the accelerated amortization of the
deferred gain on the sale of the Sedco Explorer and $0.6 million from the sale
of certain non-strategic assets.
During the six months ended June 30, 2002, the Gulf of Mexico Shallow and
Inland Water segment recognized net pre-tax losses of $1.4 million related to
the sale of two mobile offshore production units and a land rig, partially
offset by net pre-tax gains of $1.0 million on the sale of certain non-strategic
assets. During the six months ended June 30, 2001, we recognized net pre-tax
gains of $0.5 million from the sale of certain non-strategic assets.
Six Months Ended
June 30,
---------------------- %
2002 2001 Change Change
--------- ----------- -------- -------
(In millions, except % change)
OTHER INCOME (EXPENSE), NET
Equity in earnings of joint ventures $ 4.4 $ 5.7 $ (1.3) (22.8)%
Interest income 9.9 8.3 1.6 19.3%
Interest expense, net of amounts capitalized (108.4) (104.0) (4.4) (4.2)%
Other, net (1.1) (1.5) 0.4 26.7%
--------- ----------- -------- -------
$ (95.2) $ (91.5) $ (3.7) (4.0)%
========= =========== ======== =======
The decrease in equity in earnings of joint ventures was primarily related
to our 60 percent share of the earnings of DDII LLC, which owns the Deepwater
Frontier. The rig experienced shipyard downtime and decreased utilization during
the first six months of 2002. This decrease was partially offset by losses
recorded in February 2001 on the sale of the Drill Star and Sedco Explorer by a
joint venture in which we own a 25% interest. The increase in interest income
was primarily due to interest earned on higher average cash balances for the six
months ended June 30, 2002 compared to the same period in 2001. The increase in
interest expense was attributable to the absence of capitalized interest in the
first six months of 2002 due to the completion of our newbuild projects in 2001
compared to $30.5 million of capitalized interest for the same period in 2001.
Also contributing to the increase were $25.2 million of additional interest
expense on debt issued during the second quarter of 2001 and $8.7 million of
interest expense on debt acquired in the R&B Falcon merger, which represents
additional interest in the full six months ended June 30, 2002 compared to five
months for the comparable period in 2001. Offsetting these increases were
reductions in interest expense of $26.3 million associated with debt refinancing
and retirements during and subsequent to the second quarter of 2001, a decrease
in LIBOR of approximately 335 basis points that resulted in a $7.0 million
reduction in interest expense on floating rate debt and interest rate swaps
entered into during and subsequent to June 2001 that further reduced interest
expense $25.0 million.
28
Six Months Ended
June 30,
-------------------- %
2002 2001 Change Change
-------- ---------- -------- -------
(In millions, except % change)
INCOME TAX EXPENSE $ 27.7 $ 42.3 $ (14.6) (34.5)%
======== ========== ======== =======
We operate internationally and provide for income taxes based on the tax
laws and rates in the countries in which we operate and earn income. There is no
expected relationship between the provision for income taxes and income before
income taxes.
Six Months Ended
June 30,
--------------------- %
2002 2001 Change Change
-------- ----------- ------- -------
(In millions, except % change)
LOSS ON EXTRAORDINARY ITEMS, NET OF TAX $ - $ (17.3) $ 17.3 100.0%
======== =========== ======= =======
During the six months ended June 30, 2001, we recognized a $17.3 million
extraordinary loss, net of tax, related to the early extinguishment of debt as
described in Note 4 to our condensed consolidated financial statements.
Six Months Ended
June 30,
---------------------- %
2002 2001 Change Change
---------- ---------- ---------- --------
(In millions, except % change)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $(1,363.7) $ - $(1,363.7) (100.0)%
========== =========== ========= ========
During the six months ended June 30, 2002, we recognized a $1,363.7 million
cumulative effect of a change in accounting principle related to the
implementation of SFAS 142 as more fully described in Note 2 to our condensed
consolidated financial statements.
FINANCIAL CONDITION
June 30, December 31, %
2002 2001 Change Change
--------- ------------- ---------- -------
TOTAL ASSETS
International and U.S. Floater Contract Drilling Services $13,960.1 $ 14,219.3 $ (259.2) (1.8)%
Gulf of Mexico Shallow and Inland Water 1,344.0 2,800.5 (1,456.5) (52.0)%
--------- ------------- ---------- -------
$15,304.1 $ 17,019.8 $(1,715.7) (10.1)%
========= ============= ========== =======
The decrease in International and U.S. Floater Contract Drilling Services
assets was primarily due to a decrease in temporary investments resulting from
the repayment of commercial paper borrowings of $326 million. The decrease in
Gulf of Mexico Shallow and Inland Water assets was primarily due to the
impairment of goodwill of $1.4 billion as a result of our adoption of SFAS 142
in January 2002.
RESTRUCTURING CHARGES
In conjunction with the R&B Falcon merger, we established a liability of
$16.5 million for the estimated severance-related costs associated with the
involuntary termination of 569 R&B Falcon employees pursuant to management's
plan to consolidate operations and administrative functions post-merger.
Included in the 569 planned involuntary terminations were 387 employees engaged
29
in our land drilling business in Venezuela. We have suspended active marketing
efforts to divest this business and, as a result, the estimated liability was
reduced by $4.3 million in the third quarter of 2001 with an offset to goodwill.
Through June 30, 2002 all required severance-related costs have been paid to 182
employees whose positions were eliminated as a result of this plan.
2001 R&B FALCON PRO FORMA OPERATING RESULTS
Our unaudited pro forma consolidated results for the six months ended June
30, 2001, giving effect to the R&B Falcon merger, reflected net income of $102.0
million, or $0.31 per diluted share, on pro forma operating revenues of $1,428.1
million. The pro forma operating results assume the merger was completed as of
January 1, 2001 (see Note 3 to our condensed consolidated financial statements).
These pro forma results do not reflect the effects of reduced depreciation
expense related to conforming the estimated lives of our drilling rigs. The pro
forma financial data should not be relied on as an indication of operating
results that we would have achieved had the merger taken place earlier or of the
future results that we may achieve.
OUTLOOK
Average dayrates increased moderately within our International and U.S.
Floater Contract Drilling Services business segment, due largely to improved
utilization of our high-specification floaters, while our fleet utilization
within the segment declined during the second quarter of 2002 compared to the
first quarter of this year. The segment's operating results trended slightly
downward in the second quarter of 2002 due principally to a decline in demand
for semisubmersibles and drillships with water depth drilling capabilities of
300 feet up to 3,500 feet. Within our Gulf of Mexico Shallow and Inland Water
business segment, average dayrates increased slightly while fleet utilization
decreased in the second quarter of 2002 compared to the immediately preceding
quarter.
30
Comparative average dayrates and utilization figures for the quarters
ending June 30, 2002 and 2001 and the quarter ending March 31, 2002 are set
forth in the table below.
Three Months Ended
-----------------------------------
June 30, March 31, June 30,
2002 2002 2001
---------- ----------- ----------
AVERAGE DAYRATES
INTERNATIONAL AND U.S. FLOATER CONTRACT DRILLING SERVICES SEGMENT:
High-Specification Floaters $ 150,200 $ 145,500 $ 141,600
Other Floaters 76,800 77,300 62,600
Jackups - Non-U.S. 57,700 58,800 44,100
Other (a) 43,700 43,900 37,000
---------- ----------- ----------
Segment Total (a) 94,600 91,000 82,000
---------- ----------- ----------
GULF OF MEXICO SHALLOW AND INLAND WATER SEGMENT:
Jackups and Submersibles 21,100 22,200 39,800
Inland Barges 20,200 19,200 23,100
---------- ----------- ----------
Segment Total (a) 20,700 20,300 31,800
---------- ----------- ----------
Total Mobile Offshore Drilling Fleet (a) $ 80,700 $ 76,600 $ 62,900
========== =========== ==========
UTILIZATION
INTERNATIONAL AND U.S. FLOATER CONTRACT DRILLING SERVICES SEGMENT:
High-Specification Floaters 85% 82% 86%
Other Floaters 73% 82% 84%
Jackups - Non-U.S. 82% 90% 85%
Other (a) 60% 57% 53%
---------- ----------- ----------
Segment Total (a) 78% 82% 82%
---------- ----------- ----------
GULF OF MEXICO SHALLOW AND INLAND WATER SEGMENT:
Jackups and Submersibles 29% 22% 72%
Inland Barges 24% 41% 71%
---------- ----------- ----------
Segment Total (a) 27% 31% 71%
---------- ----------- ----------
Total Mobile Offshore Drilling Fleet (a) 57% 61% 78%
========== =========== ==========
---------------
(a) Average dayrates and utilization figures do not include non-core
assets, which consist of our platform rigs, mobile offshore production
units and Venezuelan land rigs, as well as for prior periods our
service vessels, which were sold prior to June 30, 2002.
Demand for our drilling rigs is driven largely by our clients' perception
of future commodity prices. World oil prices have been stable so far this year
and U.S. natural gas prices have rebounded compared to the latter part of 2001,
although there has been some recent weakness. We believe that drilling rig
supply and demand are still close to balanced in market sectors around the
world, other than the existing general oversupply of rigs in the Norway and U.K.
sectors of the North Sea and the U.S. Gulf of Mexico. Generally, we do not
expect significant changes in the overall global drilling rig supply and demand
during the remainder of the year.
31
We do not foresee a significant increase in overall demand within our
International and U.S. Floater Contract Drilling Services segment in the near
term. We expect continued general weakness in Norway and the U.K. through the
rest of the year for all classes of rigs. Similarly, we still do not foresee
any significant improvement in the U.S. Gulf of Mexico high-specification sector
until mobilizations to other regions occur or further meaningful development
programs come online. We expect to see some additional U.S. deepwater
development programs during 2003, although market and other factors could affect
timing and the extent of development. We are still monitoring potential
opportunities in India, although the timing of the projects is still uncertain.
We believe the international jackup market sector should be stable to slightly
improved during the rest of this year, buoyed by strong market segments in India
and Asia. We expect the conventional semisubmersible market sector to remain
weak for the foreseeable future.
We continue to see some encouraging signs for gas drilling opportunities in
the U.S. Gulf of Mexico although recent declines in U.S. natural gas prices have
added additional uncertainty to the outlook. While we experienced lower
utilization rates within our Gulf of Mexico Shallow and Inland Water business
segment for the full second quarter of 2002 compared to the first quarter of
this year, we experienced an upward trend in activity during the month of June
and believe this trend is currently continuing, although further deterioration
in natural gas prices could have a negative effect.
The contract drilling market historically has been highly competitive and
cyclical, and we are unable to predict the extent to which current market
conditions will continue. A decline in oil or natural gas prices could reduce
demand for our contract drilling services and adversely affect both utilization
and dayrates.
We conduct our worldwide operations through various subsidiaries and branch
offices. Consequently, we are subject to changes in tax laws and the
interpretations of those tax laws in the jurisdictions in which we operate. This
includes tax laws directed toward companies organized in jurisdictions with low
tax rates. A material change in the tax laws of any country in which we have
operations, including the United States ("U.S."), could result in a higher
effective tax rate on our worldwide earnings.
As a result of our reorganization in May of 1999, we became a Cayman
Islands company in a transaction commonly referred to as an "inversion".
Currently the U.S. House and Senate are considering legislation that would
change the tax law applicable to companies that have completed inversion
transactions. Certain aspects of the leading proposals, S. 2119 Reversing the
Expatriation of Profits Offshore Act passed by the Senate Finance Committee in
July and the American Competitiveness and Corporate Accountability Act currently
under consideration in the House Ways and Means Committee, may make it more
difficult to integrate acquired U.S. businesses with existing operations or to
undertake internal restructuring within the group. We can not provide any
assurance as to what form final legislation will take or the impact that such
legislation will ultimately have.
Following the terrorist attacks on September 11, 2001, insurance
underwriters increased insurance premiums charged for many of the coverages
historically maintained and issued general notices of cancellations to their
customers for war risk, terrorism and political risk insurance with respect to a
wide variety of insurance coverages, including but not limited to, liability and
aviation coverages. Our insurance underwriters renegotiated substantially higher
premium rates for war risk coverage, which can be canceled by the underwriters
on short notice. Our Directors and Officers liability coverage was renewed in
the second quarter of 2002 with a substantial increase in premium. Our current
property insurance program runs through the end of 2002 and the various
insurance programs providing our occupational injury and illness coverages run
through November 2002. We expect a significant increase in premiums during 2003,
but we are investigating alternatives that could mitigate the cost increase.
On July 4, 2002, a strike was called by the Norwegian Oil and Petrochemical
Workers Union (NOPEF) directed at most offshore oilfield service contractors.
Although drilling contractor employees did not strike, their operations were
affected. The goal of NOPEF was to bring the wages and work conditions of the
oilfield services workers up to the same level as other Norwegian offshore
employees. The strike was concluded on August 11, 2002. While two of our rigs,
the Polar Pioneer and Transocean Prospect, were affected by the strike, we do
not currently have an estimate of the impact on our results of operations.
32
In July 2002, we announced plans to pursue a divestiture of our Gulf of
Mexico Shallow and Inland Water business. Under this plan, our Gulf of Mexico
Shallow and Inland Water business would be separated from Transocean and
established as a publicly traded company. We currently anticipate that we will
establish R&B Falcon as the entity that owns this business. We plan to transfer
assets not used in this business from R&B Falcon, which will be renamed in
connection with the transaction, to our other subsidiaries, and these internal
transfers will not affect the consolidated financial statements of Transocean.
The initial public offering is currently being prepared. We anticipate
completing the initial public offering when market conditions warrant, subject
to various factors. Given the current general uncertainty in the equity markets,
we are unsure when the transaction could be completed on terms acceptable to us.
We expect to sell a portion of our interest in R&B Falcon in the initial public
offering.
The consolidated financial statements of R&B Falcon as a separate reporting
entity will be included in the initial public offering prospectus and will
include various items specific to R&B Falcon that are eliminated in Transocean's
consolidated financial statements. The R&B Falcon financial statements will
reflect its separate adoption of SFAS 142, including the implementation of the
initial test for goodwill impairment utilizing the fair value of each reporting
unit as of January 1, 2002 calculated in a manner consistent with the
methodology used for Transocean's initial impairment test. With respect to the
Gulf of Mexico Shallow and Inland Water business segment, R&B Falcon will have
an impairment of goodwill consistent with that reflected in Transocean's
consolidated financial statements for the first quarter of 2002, since the
entire segment is housed within R&B Falcon. Transocean's International and U.S.
Floater Contract Drilling Services segment (the "Floater segment") operates
through a number of its subsidiaries, including R&B Falcon, which results in R&B
Falcon having its own separate Floater segment. Due to significant differences
in the composition of R&B Falcon's Floater segment compared to Transocean's
Floater segment and other factors specific to R&B Falcon, we expect a
substantial goodwill impairment for R&B Falcon's Floater segment even though the
same test did not result in an impairment of goodwill in Transocean's Floater
segment. A preliminary calculation indicates the impairment of R&B Falcon's
Floater segment will be approximately $3 billion. This impairment will have no
effect on Transocean's consolidated financial statements. The impairment
relating to both segments in R&B Falcon will be recorded in its financial
statements as a cumulative effect adjustment.
In July 2002, we received a $4.2 million settlement of a loss of hire
insurance claim for an incident that occurred in 1998 in which the Sedco 710 was
damaged from a collision with a supply boat. The settlement will be recorded in
operating revenues in the third quarter of 2002.
We continue with our previously announced plans to sell a number of assets
(see "-Liquidity and Capital Resources-Acquisitions and Dispositions"). We
received proceeds of $202 million in 2001 and $61 million during the first six
months of 2002 from the sale of such assets.
As of July 30, 2002, approximately 70 percent and 34 percent of our
International and U.S. Floater Contract Drilling Services segment fleet days
were committed for the remainder of 2002 and for the year 2003, respectively.
For our Gulf of Mexico Shallow and Inland Water segment, which has traditionally
operated under short-term contracts, committed fleet days were approximately 11
percent for the remainder of 2002 and none are currently committed for the year
2003.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Six Months Ended
June 30,
--------------------
2002 2001 Change
---------- -------- ----------
(In millions)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $(1,206.4) $ 99.0 $(1,305.4)
Depreciation and amortization 249.9 294.7 (44.8)
Non-cash items 1,338.0 (100.8) 1,438.8
Working capital (1.0) (241.7) 240.7
---------- -------- ----------
$ 380.5 $ 51.2 $ 329.3
========== ======== ==========
Cash generated from net income items adjusted for non-cash activity
increased $88.6 million. Cash used for working capital items decreased $240.7
million for the six months ended June 30, 2002 compared to the same period in
2001 primarily due to a reduction in accounts receivable resulting from
increased collections.
Six Months Ended
June 30,
----------------------
2002 2001 Change
--------- ----------- --------
(In millions)
NET CASH USED IN INVESTING ACTIVITIES
Capital expenditures $ (81.2) $ (371.8) $ 290.6
Proceeds from disposal of assets 65.0 29.2 35.8
Merger costs paid - (24.5) 24.5
Proceeds from sale of securities - 16.8 (16.8)
R&B Falcon cash at acquisition - 264.7 (264.7)
Other, net - 2.7 (2.7)
--------- ----------- --------
$ (16.2) $ (82.9) $ 66.7
========= =========== ========
Net cash used in investing activities decreased for the six months ended
June 30, 2002 as compared to the same period in the previous year as a result of
lower capital expenditures due to the completion of our newbuild program in 2001
and higher proceeds from asset sales for the six months ended June 30, 2002,
partially offset by cash received in connection with the R&B Falcon merger
during the six months ended June 30, 2001.
33
Six Months Ended
June 30,
----------------------
2002 2001 Change
--------- ----------- ----------
(In millions)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net borrowings (repayments) on revolving credit agreements $ - $ (180.1) $ 180.1
Net borrowings (repayments) under commercial paper program (326.4) 60.3 (386.7)
Repayments on other debt instruments (119.6) (1,478.2) 1,358.6
Net proceeds from issuance of debt - 1,693.5 (1,693.5)
Other, net (15.8) 10.4 (26.2)
--------- ----------- ----------
$ (461.8) $ 105.9 $ (567.7)
========= =========== ==========
During the six months ended June 30, 2002, we had no borrowings under our
revolving credit agreements and we repaid $326.4 million under our commercial
paper program. The decrease in repayments of debt instruments of $1,358.6
million was primarily due to repayments of R&B Falcon debt instruments totaling
$1,457.9 million in the second quarter of 2001 as more fully described in Note 4
to our condensed consolidated financial statements. In the six months ended June
30, 2002, we made early repayments of secured rig financing on the Trident IX
and Trident 16 of $50.6 million and scheduled debt payments amounting to $68.9
million. The increase in cash used in other, net mainly reflects $8.3 million in
consent payments related to the exchange of our notes for R&B Falcon notes and
no exercise of warrants in 2002. In the second quarter of 2001, we received net
proceeds of $1,693.5 million primarily due to the issuance of the 6.625% Notes,
7.5% Notes and 1.5% Convertible Debentures.
CAPITAL EXPENDITURES
Capital expenditures totaled $81.2 million during the six months ended June
30, 2002. During 2002, we expect to spend between $160 million and $200 million
on our existing fleet, corporate infrastructure and major upgrades to the
Deepwater Expedition. A substantial majority of our capital expenditures relates
to the International and U.S. Floater Contract Drilling Services segment.
We intend to fund the cash requirements relating to our capital
expenditures through available cash balances, cash generated from operations and
asset sales. We also have available borrowings under our revolving credit
agreements and commercial paper program (see "-Sources of Liquidity") and may
engage in other commercial bank or capital market financings.
ACQUISITIONS AND DISPOSITIONS
From time to time, we review possible acquisitions of businesses and
drilling units and may in the future make significant capital commitments for
such purposes. Any such acquisition could involve the payment by us of a
substantial amount of cash or the issuance of a substantial number of additional
ordinary shares or other securities. We would likely fund the cash portion of
any such acquisition through cash balances on hand, the incurrence of additional
debt, sales of assets, ordinary shares or other securities or a combination
thereof. In addition, from time to time, we review possible dispositions. See
"Outlook."
In June 2002, we sold a jackup rig, the RBF 209, and recognized a net
after-tax loss of $1.5 million.
In March 2002, we sold two semisubmersible rigs, the Transocean 96 and
Transocean 97, for net proceeds of $30.7 million, resulting in net after-tax
gains of $1.3 million.
During the six months ended June 30, 2002, we sold certain other
non-strategic assets acquired in the R&B Falcon merger and certain other assets
held for sale for net proceeds of approximately $14.7 million, resulting in net
after-tax gains of $0.7 million.
34
SOURCES OF LIQUIDITY
Our primary sources of liquidity in the second quarter of 2002 were our
cash flows from operations and asset sales. Primary uses of cash were capital
expenditures and debt repayments. At June 30, 2002, we had $756 million in cash
and cash equivalents.
We anticipate that we will rely primarily upon existing cash balances and
internally generated cash flows to maintain liquidity in 2002, as cash flows
from operations are expected to be positive and adequate to fulfill anticipated
obligations. From time to time, we may also use bank lines of credit and
commercial paper to maintain liquidity for short-term cash needs.
We intend to use cash from operations primarily to pay debt as it comes due
and to fund capital expenditures. If we seek to reduce our debt through other
than scheduled maturities, we could do so through repurchases or redemptions of,
or tender offers for, debt securities. We expect to significantly reduce capital
expenditures compared to prior years due to the completion of our newbuild
program in 2001. During the first six months of 2002, we have reduced net debt,
defined as total debt less cash and cash equivalents, by $300 million.
Our internally generated cash flow is directly related to our business and
the market segments in which we operate. Should the drilling market deteriorate
further, or should we experience poor results in our operations, cash flow from
operations may be reduced. However, we have continued to generate positive cash
flow from operations.
We have access to $800 million in bank lines of credit under two revolving
credit agreements. One revolving credit agreement provides for $250 million in
borrowings and will expire in December 2002 and the other revolving credit
agreement provides for $550 million in borrowings and will expire in December
2005. These credit lines are used primarily to back our $800 million commercial
paper program and may also be drawn on directly. As of June 30, 2002, none of
the credit line capacity was utilized, leaving $800 million of availability
under the bank lines of credit for commercial paper issuance or drawdowns.
The bank credit lines require compliance with various covenants and
provisions customary for agreements of this nature, including an interest
coverage ratio of not less than 3 to 1, a leverage ratio of not greater than 40
percent and limitations on mergers and sale of substantially all assets,
creating liens, incurring debt, transactions with affiliates and sale/leaseback
transactions. Should we fail to comply with these covenants, we would be in
default and may lose access to these facilities. A loss of the bank facilities
would also cause us to lose access to the commercial paper markets. We are also
subject to various covenants under the indentures pursuant to which our public
debt was issued, including restrictions on creating liens, engaging in
sale/leaseback transactions and engaging in merger, consolidation or
reorganization transactions. A default under our public debt could trigger a
default under our credit lines and cause us to lose access to these facilities.
See Note 8 to our consolidated financial statements in our Annual Report on Form
10-K for the year ended December 31, 2001 for a description of our credit
agreements and debt securities.
We intend to use the proceeds from the initial public offering of our Gulf
of Mexico Shallow and Inland Water business as well as any proceeds from our
previously announced plans to sell a number of assets (See "-Outlook") to
further reduce our debt balances.
In April 2001, the Securities and Exchange Commission ("SEC") declared
effective our shelf registration statement on Form S-3 for the proposed offering
from time to time of up to $2.0 billion in gross proceeds of senior or
subordinated debt securities, preference shares, ordinary shares and warrants to
purchase debt securities, preference shares, ordinary shares or other
securities. In May 2001, we issued $400.0 million aggregate principal amount of
1.5% Convertible Debentures due May 15, 2021 under the shelf registration
statement. At July 31, 2002, $1.6 billion in gross proceeds of securities
remained unissued under the shelf registration statement.
Our access to commercial paper, debt and equity markets may be reduced or
closed to us due to a variety of events, including, among others, downgrades of
ratings of our debt and commercial paper, industry conditions, general economic
conditions, market conditions and market perceptions of us and our industry.
35
Our contractual obligations in the table below include our debt obligations
at face value.
As of June 30, 2002
------------------------------------------------
Less Than 1 to 3 4 - 5 After
Total 1 Year Years Years 5 Years
-------- ---------- -------- ------ --------
(In millions)
CONTRACTUAL OBLIGATIONS
Debt $4,545.7 $ 948.2 $1,197.5 $100.0 $2,300.0
======== ========== ======== ====== ========
We are required to repurchase the Zero Coupon Convertible Debentures due
2020, the 1.5% Convertible Debentures due 2021 and the 7.45% Notes due 2027 at
the option of the holder in May 2003, May 2006 and April 2007, respectively.
With regard to both series of the Convertible Debentures, we have the option to
pay the repurchase price in cash, ordinary shares or any combination of cash and
ordinary shares. The chart above assumes that the holders of these debentures
and notes exercise the options at the first available date. We are also required
to repurchase the convertible debentures at the option of the holder at other
later dates as more fully described in Note 8 to our consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2001.
We have certain operating leases that have been previously discussed and
reported in our Annual Report on Form 10-K for the year ended December 31, 2001.
There have been no material changes in these previously reported leases.
At June 30, 2002, we had other commitments that we are contractually
obligated to fulfill with cash should the obligations be called. These
obligations included standby letters of credit and surety bonds, which guarantee
our performance as it relates to our drilling contracts, insurance, tax and
other obligations in various jurisdictions. Letters of credit are issued under a
number of facilities provided by several banks. The obligations that are the
subject of these surety bonds are geographically concentrated in Brazil and
Nigeria. These letters of credit and surety bond obligations are not normally
called as we typically comply with the underlying performance requirements. The
table below includes a summary of these obligations in U.S. dollar equivalents
and their time to expiration. It should be noted that these obligations could be
called at any time prior to the expiration dates.
As of June 30, 2002
---------------------------------------------
Less Than 1 to 3 4 - 5 After
Total 1 Year Years Years 5 Years
------ ---------- ------- ------ --------
(In millions)
OTHER COMMERCIAL COMMITMENTS
Standby Letters of Credit $ 63.9 $ 56.2 $ 7.5 $ - $ 0.2
Surety Bonds 221.9 119.5 102.4 - -
Purchase Option Guarantees
Joint Ventures (a) 191.3 - 191.3 - -
------ ---------- ------- ------ --------
Total $477.1 $ 175.7 $ 301.2 $ - $ 0.2
====== ========== ======= ====== ========
---------------------------
(a) See "-Special Purpose Entities".
In March 2002, we completed an exchange offer pursuant to which the 6.5%
Notes due April 15, 2003, 6.75% Notes due April 15, 2005, 6.95% Notes due April
15, 2008, 7.375% Notes due April 15, 2018, 9.125% Notes due December 15, 2003
and 9.5% Notes due December 15, 2008 of R&B Falcon whose holders accepted the
offer were exchanged for newly issued Transocean notes. The new notes were
issued in six series corresponding to the six series of R&B Falcon notes and
have the same principal amount, interest rate, redemption terms and payment and
maturity dates as the corresponding series of R&B Falcon notes. The aggregate
principal amount of the new notes issued was approximately $1.4 billion. Because
the holders of a majority in principal amount of each of these series of notes
consented to the proposed amendments to the applicable indenture pursuant to
which the notes were issued, some covenants, restrictions and events of default
were eliminated from the indentures with respect to these series of notes. The
notes not exchanged remain an obligation of R&B Falcon. In connection with the
exchange offers, an aggregate of $8.3 million in consent payments was made by
R&B Falcon to holders of R&B Falcon notes whose notes were tendered (and not
validly withdrawn) within the required time periods and accepted for exchange.
36
DERIVATIVE INSTRUMENTS
We have established policies and procedures for derivative instruments that
have been approved by our Board of Directors. These policies and procedures
provide for the prior approval of derivative instruments by our Chief Financial
Officer. From time to time, we may enter into a variety of derivative financial
instruments in connection with the management of our exposure to fluctuations in
foreign exchange rates and interest rates. We do not enter into derivative
transactions for speculative purposes; however, for accounting purposes, certain
transactions may not meet the criteria for hedge accounting.
As more fully described in Note 6 to our condensed consolidated financial
statements, we are a party to interest rate swap agreements with an aggregate
notional amount of $1.6 billion. At June 30, 2002, the value of our outstanding
derivatives was a net asset of $63.0 million.
Deepwater Drilling L.L.C., an unconsolidated subsidiary in which we have a
50 percent ownership interest, has entered into interest rate swaps with
aggregate market values netting to a liability of $7.9 million at June 30, 2002.
Our interest in these swaps was included in accumulated other comprehensive
income with a corresponding reduction to investments in and advances to joint
ventures.
SPECIAL PURPOSE ENTITIES, SALE/LEASEBACK TRANSACTION AND RELATED PARTY
TRANSACTIONS
We have transactions with certain special purpose entities and related
parties and we are party to a sale/leaseback transaction. These transactions
have all been previously discussed and reported in our Annual Report on Form
10-K for the year ended December 31, 2001. There have been no material
developments in these previously reported transactions.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets, which is effective for fiscal years beginning after December 15, 2001.
Under SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed at least annually for impairment. The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, we adopted SFAS 142 effective January 1, 2002.
In conjunction with the adoption of this statement, we discontinued the
amortization of goodwill. Application of the non-amortization provisions of SFAS
142 for goodwill is expected to result in an increase in operating income of
approximately $155 million in 2002. See Note 2 to our condensed consolidated
financial statements.
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of Accounting Principles Board Opinion
("APB") 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 retains the fundamental provisions
of SFAS 121 for recognition and measurement of long-lived asset impairment and
for the measurement of long-lived assets to be disposed of by sale and the basic
requirements of APB 30. In addition to these fundamental provisions, SFAS 144
provides guidance for determining whether long-lived assets should be tested for
impairment and specific criteria for classifying assets to be disposed of as
held for sale. The statement is effective for fiscal years beginning after
December 15, 2001. We adopted the statement as of January 1, 2002. The adoption
of this statement had no material effect on our consolidated financial position
or results of operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the requirement under SFAS Statement 4 to aggregate
and classify all gains and losses from extinguishment of debt as an
extraordinary item, net of related income tax effect. This statement also amends
37
SFAS 13 to require certain lease modifications with economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS 145 requires reclassification of
gains and losses in all prior periods presented in comparative financial
statements related to debt extinguishment that do not meet the criteria for
extraordinary item in APB 30. The statement is effective for fiscal years
beginning after May 15, 2002 with early adoption encouraged. We will adopt SFAS
145 effective January 1, 2003. We do not expect adoption of this statement to
have a material effect on our consolidated financial position or results of
operations.
In July 2002, the FASB issued SFAS 146, Obligations Associated with
Disposal Activities, which is effective for disposal activities initiated after
December 15, 2002, with early application encouraged. SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Under this statement, a liability
for a cost associated with an exit or disposal activity would be recognized and
measured at its fair value when it is incurred rather than at the date of
commitment to an exit plan. Under SFAS 146, severance pay would be recognized
over time rather than up front provided the benefit arrangement requires
employees to render future service beyond a "minimum retention period", which
would be based on the legal notification period, or if there is no such
requirement, 60 days, thereby allowing a liability to be recorded over the
employees' future service period. We will adopt SFAS 146 effective with disposal
activities initiated after December 15, 2002. We do not expect adoption of this
statement to have a material effect on our consolidated financial position or
results of operations.
FORWARD-LOOKING INFORMATION
The statements included in this quarterly report regarding future financial
performance and results of operations and other statements that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Statements to the effect that the Company or management "anticipates,"
"believes," "budgets," "estimates," "expects," "forecasts," "intends," "plans,"
"predicts," or "projects" a particular result or course of events, or that such
result or course of events "could," "might," "may," "scheduled" or "should"
occur, and similar expressions, are also intended to identify forward-looking
statements. Forward-looking statements in this quarterly report include, but are
not limited to, statements involving potential revenues, increased expenses,
customer drilling programs, supply and demand, utilization rates, dayrates, the
conventional semisubmersible sector, the Norway sector, the U.K. sector, the
U.S. Gulf of Mexico high-specification sector, the India and Asia sectors, the
disposition of the Company's Gulf of Mexico Shallow and Inland Water business
(including the timing of the offering and portion sold), impairment of goodwill
and related accounting matters of R & B Falcon, expectations of offshore and
inland water drilling market conditions, planned asset sales, the Company's
other expectations with regard to market outlook, expected capital expenditures,
results and effects of legal proceedings, liabilities for tax issues, increases
in insurance premiums, liquidity, positive cash flow from operations, the
exercise of the option of holders of Zero Coupon Convertible Debentures, the
1.5% Convertible Debentures and the 7.45% Notes to require the Company to
repurchase the instruments, adequacy of cash flow for 2002 obligations, effects
of accounting changes, the effect of proposed legislation and the timing and
cost of completion of capital projects. Such statements are subject to numerous
risks, uncertainties and assumptions, including, but not limited to, worldwide
demand for oil and gas, uncertainties relating to the level of activity in
offshore oil and gas exploration and development, exploration success by
producers, oil and gas prices (including U.S. natural gas prices), demand for
offshore and inland water rigs, competition and market conditions in the
contract drilling industry, our ability to successfully integrate the operations
of acquired businesses, delays or terminations of drilling contracts due to a
number of events, delays or cost overruns on construction and shipyard projects
and possible cancellation of drilling contracts as a result of delays or
performance, our ability to enter into and the terms of future contracts, the
availability of qualified personnel, labor relations and the outcome of
negotiations with unions representing workers, operating hazards, political and
other uncertainties inherent in non-U.S. operations (including exchange and
currency fluctuations), risks of war, terrorism and cancellation or
unavailability of certain insurance coverage, securities market conditions,
application of accounting rules, the impact of governmental laws and
regulations, the final provisions of any inversion and other legislation (if
any), the adequacy of sources of liquidity, the effect of litigation and
contingencies and other factors discussed in our Annual Report on Form 10-K for
the year ended December 31, 2001 and in the Company's other filings with the
SEC, which are available free of charge on the SEC's website at www.sec.gov.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results
38
may vary materially from those indicated. You should not place undue reliance on
forward-looking statements. Each forward-looking statement speaks only as of the
date of the particular statement, and we undertake no obligation to publicly
update or revise any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our long-term and short-term debt obligations. The table below presents
scheduled debt maturities and related weighted-average interest rates for each
of the twelve month periods ending June 30, relating to debt obligations as of
June 30, 2002. Weighted-average variable rates are based on estimated LIBOR
rates as of June 30, 2002, plus applicable margins.
As of June 30, 2002 (in millions, except interest rate percentages):
Scheduled Maturity Date (a) (b) Fair Value
------------------------------------------------------------------ ----------
2003 2004 2005 2006 2007 Thereafter Total 6/30/02
------- ------- ------- ------- ------- ---------------------- ---------
Total debt
Fixed Rate $823.2 $130.2 $ 92.3 $400.0 $100.0 $ 1,050.0 $2,595.7 $2,444.7
Average interest rate 4.1% 8.5% 8.4% 1.5% 7.5% 7.6% 5.6%
Variable Rate $125.0 $150.0 $ 75.0 - - - $ 350.0 $ 350.0
Average interest rate 2.6% 2.6% 2.6% - - - 2.6%
Receive Fixed/Pay Variable
Swaps (c) - - $350.0 - - $ 1,250.0 $1,600.0 $1,726.9
Average interest rate - - 4.7% - - 3.6% 3.8%
- --------------------------------
(a) Maturity dates of the face value of the Company's debt assume the put
options on the Zero Coupon Convertible Debentures, 1.5% Convertible
Debentures and 7.45% Notes will be exercised in May 2003, May 2006 and
April 2007, respectively.
(b) Expected maturity amounts are based on the face value of debt and do not
reflect fair market value of debt.
(c) The 6.625%, 6.75%, 6.95% and 9.5% Notes are considered variable as a result
of the interest rate swaps. See Note 6 to our condensed consolidated
financial statements.
At June 30, 2002, we had approximately $2.0 billion of variable rate debt
at face value (43 percent of total debt at face value). Of that variable rate
debt, $1.6 billion resulted from interest rate swaps with the remainder
representing term bank debt. Given outstanding amounts as of that date, a one
percent rise in interest rates would result in an additional $16 million in
interest expense per year. Offsetting this, a large part of our investments
would earn commensurate higher rates of return. Using June 30, 2002 investment
levels, a one percent increase in interest rates would result in approximately
$7 million of additional interest income per year. Based on June 30, 2002
balances, our net variable debt balance at face value, defined as variable rate
debt less cash and cash equivalents, totaled $1.2 billion (32 percent of net
total debt at face value).
FOREIGN EXCHANGE RISK
The Company's exposure to foreign exchange risk has not materially changed
since December 31, 2001.
39
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We were a defendant in Bryant, et al. v. R&B Falcon Drilling USA, Inc., et
al. in the United States District Court for the Southern District of Texas,
Houston Division. R&B Falcon Drilling USA is a wholly owned indirect subsidiary
of R&B Falcon. In this suit, the plaintiffs alleged that R&B Falcon Drilling
USA, us and a number of other offshore drilling contractors with operations in
the U.S. Gulf of Mexico engaged in a conspiracy to depress wages and benefits
paid to certain of their offshore employees. The plaintiffs contended that this
alleged conduct violated federal antitrust law and constituted unfair trade
practices and wrongful employment acts under state law. The plaintiffs sought
treble damages, attorneys' fees and costs on behalf of themselves and an alleged
class of offshore workers, along with an injunction against exchanging certain
wage and benefit information with other offshore drilling contractors named as
defendants. In May 2001, we reached an agreement in principle with the
plaintiffs' counsel to settle all claims, pending Court approval of the
settlement. In July 2001, before the Court had considered the proposed
settlement, the case, along with a number of unrelated cases also pending in the
federal court in Galveston, was transferred to a federal judge sitting in
Houston as a docket equalization measure. The judge approved the settlement, and
the funds were deposited with the court in June 2002. The terms of the
settlement have been reflected in our results of operations for the first
quarter of 2001. The settlement did not have a material adverse effect on our
business or consolidated financial position.
In December 1998, Mobil North Sea Limited ("Mobil") purportedly terminated
its contract for use of the Jack Bates based on failure of two mooring lines
while anchor recovery operations at a Mobil well location had been suspended
during heavy weather. We did not believe that Mobil had the right to terminate
this contract. We later recontracted the Jack Bates to Mobil at a lower dayrate.
We filed a request for arbitration with the London Court of International
Arbitration seeking damages for the termination, and Mobil in turn
counterclaimed against us seeking damages for our alleged breaches of the
original contract. The case was settled in July 2002 and the proceedings
dismissed. The ultimate outcome of this case did not have a material adverse
effect on the Company's business or consolidated financial position.
In March 1997, an action was filed by Mobil Exploration and Producing U.S.
Inc. and affiliates, St. Mary Land & Exploration Company and affiliates and
Samuel Geary and Associates, Inc. against Cliffs Drilling, its underwriters and
insurance broker in the 16th Judicial District Court of St. Mary Parish,
Louisiana. The plaintiffs alleged damages amounting to in excess of $50 million
in connection with the drilling of a turnkey well in 1995 and 1996. The case was
tried before a jury in January and February 2000, and the jury returned a
verdict of approximately $30 million in favor of the plaintiffs for excess
drilling costs, loss of insurance proceeds, loss of hydrocarbons and interest.
We have appealed such judgment. We believe that all but potentially the portion
of the verdict representing excess drilling costs of approximately $4.7 million
is covered by relevant primary and excess liability insurance policies of Cliffs
Drilling; however, the insurers and underwriters have denied coverage. Cliffs
Drilling has instituted litigation against those insurers and underwriters to
enforce its rights under the relevant policies. We do not expect that the
ultimate outcome of this case will have a material adverse effect on our
business or consolidated financial position.
We have certain other actions or claims pending that have been previously
discussed and reported in our Quarterly Report on Form 10-Q for the three months
ended March 31, 2002, our Annual Report on Form 10-K for the year ended December
31, 2001 and our other reports filed with the Securities and Exchange
Commission. There have been no material developments in these previously
reported matters. We are involved in a number of other lawsuits, all of which
have arisen in the ordinary course of our business. We do not believe that
ultimate liability, if any, resulting from any such other pending litigation
will have a material adverse effect on our business or consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual General Meeting of Transocean Inc. held on May 9, 2002,
271,130,702 shares were represented in person or by proxy out of 319,136,365
shares entitled to vote as of the record date, constituting a quorum.
40
The matters submitted to a vote of shareholders were (i) the election of
Class III Directors as set forth in the Company's Proxy Statement relating to
the meeting; (ii) the approval of appointment of Ernst & Young LLP as
independent auditors for 2002 and (iii) the change of name of Transocean Sedco
Forex Inc. by special resolution to Transocean Inc. With respect to the election
of directors, the following number of votes were cast as to the Class III
Director nominees: Ronald L. Kuehn, Jr., 268,457,162 votes for and 2,673,540
votes withheld; Paul B. Loyd, Jr., 264,984,050 votes for and 6,146,652 votes
withheld; Roberto Monti, 268,463,195 votes for and 2,667,507 votes withheld; and
Ian C. Strachan, 266,818,204 votes for and 4,312,498 votes withheld. With
respect to the Company's appointment of independent auditors, there were
259,303,765 votes for and 10,805,455 votes withheld. There were 1,020,884
abstentions and no broker non-votes in the appointment of independent auditors.
With respect to the Company's change of name, 269,899,612 votes were cast for
the proposal and 228,216 votes were cast against the proposal. There were
1,002,873 abstentions and no broker non-votes in the vote on the proposal.
ITEM 5. OTHER INFORMATION
Jon C. Cole resigned from his position as Executive Vice President, Shallow
Water and Inland Water Operations effective July 31, 2002.
The Company hired Jan Rask effective as of July 16, 2002 to be President
and Chief Executive Officer of the separate company to be established as a
publicly traded company consisting of our Gulf of Mexico Shallow and Inland
Water business. (See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Outlook")
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed in connection with this Report:
NUMBER DESCRIPTION
- ------ -----------
*2.1 Agreement and Plan of Merger dated as of August 19, 2000 by and among
Transocean Inc., Transocean Holdings Inc., TSF Delaware Inc. and R&B
Falcon Corporation (incorporated by reference to Annex A to the Joint
Proxy Statement/Prospectus dated October 30, 2000 included in a
424(b)(3) prospectus filed by the Company on November 1, 2000)
*3.1 Memorandum of Association of Transocean Inc., as amended
(incorporated by reference to Annex E to the Joint Proxy
Statement/Prospectus dated October 30, 2000 included in a 424(b)(3)
prospectus filed by the Company on November 1, 2000)
*3.2 Articles of Association of Transocean Inc., as amended
(incorporated by reference to Annex F to the Joint Proxy
Statement/Prospectus dated October 30, 2000 included in a 424(b)(3)
prospectus filed by the Company on November 1, 2000)
+3.3 Certificate of Incorporation on Change of Name to Transocean Inc.
+10.1 Employment Agreement dated July 15, 2002 by and among R&B Falcon
Corporation, R&B Falcon Management Services, Inc., and Jan Rask
+10.2 Separation Agreement dated as of July 23, 2002 by and between
Transocean Offshore Deepwater Drilling Inc. and Jon C. Cole
- --------------------
* Incorporated by reference as indicated.
+ Filed herewith.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on April 8, 2002
(information furnished not filed) announcing financial information pertaining to
revenues by asset type and geographic location for the twelve months ended
December 31, 2001, the Company's view of supply/demand, committed fleet days as
of March 28, 2002 and proceeds from asset sales, a Current Report on Form 8-K on
April 30, 2002 (information furnished not filed) announcing that the updated
"Monthly Fleet Report" was available on the Company's website, a Current Report
on Form 8-K on May 13, 2002 announcing that shareholders approved the proposal
to change the name of the Company to Transocean Inc., a Current Report on Form
8-K on May 15, 2002 (information furnished not filed) announcing the Company's
view of supply/demand and the effect of a change in dayrate assumption on
earnings per share, a Current Report on Form 8-K on May 31, 2002 (information
furnished not filed) announcing that the updated "Monthly Fleet Report" was
available on the Company's website and a Current Report on Form 8-K on June 28,
2002 (information furnished not filed) announcing that the updated "Monthly
Fleet Report" was available on the Company's website.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized, on August 13, 2002.
TRANSOCEAN INC.
By: /s/ Gregory L. Cauthen
--------------------------
Gregory L. Cauthen
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
By: /s/ Ricardo H. Rosa
-----------------------
Ricardo H. Rosa
Vice President and Controller
(Principal Accounting Officer)
43