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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4 GREENWAY PLAZA 77046
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
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 October 31, 2002, 319,219,486 ordinary shares, par value $0.01 per
share, were outstanding.
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TRANSOCEAN INC.
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2002 and 2001. . . . . .2
Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months ended September 30, 2002 and 2001. . . . . .3
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 . . . . . . . . . . . . .4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001. . . . . . . . . . .5
Notes to Condensed Consolidated Financial Statements. . . . . . . . .6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . .21
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. . . .45
ITEM 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . .46
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .47
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . .48
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 Nine Months Ended
September 30, September 30,
----------------- ---------------------
2002 2001 2002 2001
-------- ------- ---------- ---------
Operating Revenues $ 695.2 $770.2 $ 2,009.3 $2,072.5
- ---------------------------------------------------------------------------------------------------------
Costs and Expenses
Operating and maintenance 381.1 418.2 1,127.7 1,163.5
Depreciation 124.2 125.4 374.1 348.3
Goodwill amortization - 41.7 - 113.4
General and administrative 15.8 14.5 51.6 43.9
- ---------------------------------------------------------------------------------------------------------
521.1 599.8 1,553.4 1,669.1
- ---------------------------------------------------------------------------------------------------------
Impairment Loss on Long-Lived Assets (40.9) - (42.0) -
Gain from Sale of Assets, net 2.9 9.4 3.5 29.0
- ---------------------------------------------------------------------------------------------------------
Operating Income 136.1 179.8 417.4 432.4
- ---------------------------------------------------------------------------------------------------------
Other Income (Expense), net
Equity in earnings of joint ventures 0.4 6.3 4.8 12.0
Interest income 6.1 5.5 16.0 13.7
Interest expense, net of amounts capitalized (52.3) (60.8) (160.7) (164.8)
Other, net 1.3 (0.5) 0.2 (2.0)
- ---------------------------------------------------------------------------------------------------------
(44.5) (49.5) (139.7) (141.1)
- ---------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Minority Interest, Extraordinary
Item and Cumulative Effect of a Change in Accounting
Principle 91.6 130.3 277.7 291.3
Income Tax Expense (Benefit) (164.8) 32.6 (137.1) 74.9
Minority Interest 1.2 0.1 2.3 2.5
- ---------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle 255.2 97.6 412.5 213.9
Loss on Extraordinary Item, net of tax - - (17.3)
Cumulative Effect of a Change in Accounting Principle - - (1,363.7) -
- ---------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 255.2 $ 97.6 $ (951.2) $ 196.6
=========================================================================================================
Basic Earnings (Loss) Per Share
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 0.80 $ 0.31 $ 1.29 $ 0.70
Loss on Extraordinary Item, net of tax - - (0.06)
Cumulative Effect of a Change in Accounting Principle - - (4.27) -
- ---------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 0.80 $ 0.31 $ (2.98) $ 0.64
=========================================================================================================
Diluted Earnings (Loss) Per Share
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 0.79 $ 0.30 $ 1.28 $ 0.69
Loss on Extraordinary Item, net of tax - - (0.06)
Cumulative Effect of a Change in Accounting Principle - - (4.22) -
- ---------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 0.79 $ 0.30 $ (2.94) $ 0.63
=========================================================================================================
Weighted Average Shares Outstanding
Basic 319.2 318.7 319.1 305.2
- ---------------------------------------------------------------------------------------------------------
Diluted 328.8 322.7 323.0 310.7
- ---------------------------------------------------------------------------------------------------------
Dividends Paid Per Share $ - $ 0.03 $ 0.06 $ 0.09
- ---------------------------------------------------------------------------------------------------------
See accompanying notes.
2
TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- -----------------
2002 2001 2002 2001
------- ------ -------- -------
Net income (loss) $255.2 $97.6 $(951.2) $196.6
- --------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Gain on terminated interest rate swaps - - - 4.1
Amortization of gain on terminated interest rate swaps (0.1) (0.1) (0.2) (0.2)
Change in unrealized loss on cash flow hedges - 0.5 - -
Change in unrealized loss on securities available for sale (0.2) (0.4) (0.1) (0.8)
Change in share of unrealized loss in unconsolidated joint
venture's interest rate swaps (0.2) - 1.9 -
- --------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (0.5) - 1.6 3.1
- --------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $254.7 $97.6 $(949.6) $199.7
==================================================================================================
See accompanying notes.
3
TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
September 30, December 31,
2002 2001
--------------- --------------
(Unaudited)
ASSETS
Cash and Cash Equivalents $ 1,021.8 $ 853.4
Accounts Receivable, net of allowance for doubtful accounts of
$25.8 and $24.2 at September 30, 2002 and December 31, 2001, respectively 544.3 675.7
Materials and Supplies, net of allowance for obsolescence of $18.6 and
$24.1 at September 30, 2002 and December 31, 2001, respectively 164.0 158.8
Deferred Income Taxes 21.3 21.0
Other Current Assets 32.5 27.9
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 1,783.9 1,736.8
- --------------------------------------------------------------------------------------------------------------
Property and Equipment 10,150.2 10,081.4
Less Accumulated Depreciation 2,053.0 1,713.3
- --------------------------------------------------------------------------------------------------------------
Property and Equipment, net 8,097.2 8,368.1
- --------------------------------------------------------------------------------------------------------------
Goodwill, net 5,099.1 6,466.7
Investments in and Advances to Joint Ventures 107.0 107.1
Other Assets 422.9 341.1
- --------------------------------------------------------------------------------------------------------------
Total Assets $ 15,510.1 $ 17,019.8
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable $ 128.1 $ 188.4
Accrued Income Taxes 61.2 118.3
Debt Due Within One Year 941.6 484.4
Other Current Liabilities 280.9 283.4
- --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,411.8 1,074.5
- --------------------------------------------------------------------------------------------------------------
Long-Term Debt 3,780.8 4,539.4
Deferred Income Taxes 128.1 317.1
Other Long-Term Liabilities 236.9 178.5
- --------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 4,145.8 5,035.0
- --------------------------------------------------------------------------------------------------------------
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,
319,219,486 and 318,816,035 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively 3.2 3.2
Additional Paid-in Capital 10,622.7 10,611.7
Accumulated Other Comprehensive Income (0.7) (2.3)
Retained Earnings (Deficit) (672.7) 297.7
- --------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 9,952.5 10,910.3
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 15,510.1 $ 17,019.8
==============================================================================================================
See accompanying notes.
4
TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2002 2001
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (951.2) $ 196.6
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation 374.1 348.3
Goodwill amortization - 113.4
Cumulative effect of a change in accounting principle - goodwill impairment 1,363.7 -
Deferred income taxes (189.8) (62.0)
Equity in earnings of joint ventures (4.8) (12.0)
Net (gain)/loss from disposal of assets 1.2 (25.9)
Impairment loss on long-lived assets 42.0 -
Loss on sale of securities - 2.0
Amortization of debt-related discounts/premiums, fair value
adjustments and issue costs, net 4.6 (4.2)
Deferred income, net (9.3) (42.8)
Deferred expenses, net (7.7) (38.1)
Extraordinary loss on debt extinguishment, net of tax - 17.3
Other, net 11.9 (10.3)
Changes in operating assets and liabilities, net of effects from the
R&B Falcon merger
Accounts receivable 132.0 (103.5)
Accounts payable and other current liabilities (41.9) (78.7)
Income taxes receivable/payable, net (15.9) 75.4
Other current assets (8.7) (9.2)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 700.2 366.3
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (114.6) (443.1)
Proceeds from disposal of assets, net 73.6 108.4
Proceeds from sale of securities - 17.2
Merger costs paid - (24.4)
Cash acquired in merger, net of cash paid - 264.7
Joint ventures and other investments, net 4.6 13.0
- -------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (36.4) (64.2)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments on revolving credit agreements - (180.1)
Net repayments under commercial paper program (326.4) -
Repayments on other debt instruments (154.3) (1,500.1)
Net proceeds from issuance of debt - 1,693.5
Net proceeds from issuance of ordinary shares under stock-based compensation plans 10.2 29.5
Proceeds from issuance of ordinary shares upon exercise of warrants - 10.6
Dividends paid (19.1) (28.6)
Financing costs (8.1) (15.7)
Other, net 2.3 5.3
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (495.4) 14.4
- -------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 168.4 316.5
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 853.4 34.5
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $1,021.8 $ 351.0
=============================================================================================================
See accompanying notes.
5
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 September 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, comprehensive
income and cash flows for the nine months ended September 30, 2001 include eight
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
nine months ended September 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, property and equipment and other long-lived
assets, 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 $116.3 million and $74.0 million, respectively, for the nine
months ended September 30, 2002 and $168.7 million and $49.9 million,
respectively, for the nine months ended September 30, 2001.
6
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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.
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 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 ($4.22 per diluted share) impairment of goodwill was recognized as a
cumulative effect of a change in accounting principle in the nine months ended
September 30, 2002. The Company's goodwill balance, after giving effect to the
goodwill write down, is $5.1 billion as of September 30, 2002 (see Note 13). The
changes in the carrying amount of goodwill are as follows (in millions):
Balance at Balance at
January 1, Loss on September 30,
2002 Impairment Other 2002
----------- ------------ ------- --------------
International and U.S. Floater Contract Drilling Services $ 4,721.1 $ - $ (3.9) $ 4,717.2
Gulf of Mexico Shallow and Inland Water 1,745.6 (1,363.7) - 381.9
----------- ------------ ------- --------------
$ 6,466.7 $ (1,363.7) $ (3.9) $ 5,099.1
=========== ============ ======= ==============
7
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Net income (loss) and earnings (loss) per share for the three and nine
months ended September 30, 2002 and 2001 adjusted for goodwill amortization are
as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Reported net income before extraordinary item and
cumulative effect of a change in accounting principle $ 255.2 $ 97.6 $ 412.5 $ 213.9
Add back: Goodwill amortization - 41.7 - 113.4
--------- --------- ---------- ----------
Adjusted reported net income before extraordinary item
and cumulative effect of a change in accounting principle 255.2 139.3 412.5 327.3
Loss on extraordinary item, net of tax - - - (17.3)
Cumulative effect of a change in accounting principle - - (1,363.7) -
--------- --------- ---------- ----------
Adjusted net income (loss) $ 255.2 $ 139.3 $ (951.2) $ 310.0
========= ========= ========== ==========
Basic earnings (loss) per share:
Reported net income before extraordinary item and
cumulative effect of a change in accounting principle $ 0.80 $ 0.31 $ 1.29 $ 0.70
Goodwill amortization - 0.13 - 0.37
--------- --------- ---------- ----------
Adjusted reported net income before extraordinary item
and cumulative effect of a change in accounting principle 0.80 0.44 1.29 1.07
Loss on extraordinary item, net of tax - - - (0.06)
Cumulative effect of a change in accounting principle - - (4.27) -
--------- --------- ---------- ----------
Adjusted net income (loss) $ 0.80 $ 0.44 $ (2.98) $ 1.01
========= ========= ========== ==========
Diluted earnings (loss) per share:
Reported net income before extraordinary item and
cumulative effect of a change in accounting principle $ 0.79 $ 0.30 $ 1.28 $ 0.69
Goodwill amortization - 0.13 - 0.37
--------- --------- ---------- ----------
Adjusted reported net income before extraordinary item
and cumulative effect of a change in accounting principle 0.79 0.43 1.28 1.06
Loss on extraordinary item, net of tax - - - (0.06)
Cumulative effect of a change in accounting principle - - (4.22) -
--------- --------- ---------- ----------
Adjusted net income (loss) $ 0.79 $ 0.43 $ (2.94) $ 1.00
========= ========= ========== ==========
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 or group of
assets. Property and equipment held for sale are recorded at the lower of net
book value or net realizable value. See "-New Accounting Pronouncements."
CAPITALIZED INTEREST - Interest costs for the construction and upgrade of
qualifying assets are capitalized. The Company recorded $4.4 million and $34.9
million in capitalized interest costs on construction work in progress for the
three and nine months ended September 30, 2001, respectively. No interest cost
was capitalized during the three and nine months ended September 30, 2002.
8
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 nine months ended
September 30, 2001 was reduced by approximately $6 million (net $0.02 per
diluted share) and $17 million (net $0.05 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 accumulated other comprehensive
income as of September 30, 2002 and December 31, 2001 are as follows (in
millions):
September 30, December 31,
2002 2001
--------------- --------------
Gain on terminated interest rate swaps $ 3.7 $ 3.9
Unrealized loss on securities available for sale (0.7) (0.6)
Share of unrealized loss in unconsolidated joint venture's interest rate swaps (3.7) (5.6)
--------------- --------------
Accumulated other comprehensive income $ (0.7) $ (2.3)
=============== ==============
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 8.
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 and will perform a test of impairment
as of October 1 each year. 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 ($0.48 per diluted
share) 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
9
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
("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. See Note 9.
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 Emerging Issues Task Force 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. Also, 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. 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
10
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 September 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):
Nine Months Ended
September 30, 2001
-------------------
Operating revenues $ 2,198.4
Operating income 436.6
Net income from continuing operations 202.7
Basic earnings per share $ 0.64
Diluted earnings per share 0.63
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.
11
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 4 - DEBT
Debt, net of unamortized discounts, premiums and fair value adjustments, is
comprised of the following (in millions):
September 30, December 31,
2002 2001
-------------- -------------
Commercial Paper $ - $ 326.4
6.5% Senior Notes, due April 2003. 239.9 240.5
9.125% Senior Notes, due December 2003 90.1 92.0
Term Loan Agreement - final maturity December 2004 325.0 400.0
6.75% Senior Notes, due April 2005 (a) 372.9 354.6
7.31% Nautilus Class A1 Amortizing Notes - final maturity May 2005 114.5 142.9
9.41% Nautilus Class A2 Notes, due May 2005. 52.0 52.4
Secured Rig Financing - 50.6
6.95% Senior Notes, due April 2008 (a) 278.4 252.3
9.5% Senior Notes, due December 2008 (a) 375.0 348.1
6.625% Notes, due April 2011 (a) 810.9 711.7
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). 523.4 512.2
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. $ 4,722.4 $ 5,023.8
Less Debt Due Within One Year (b) 941.6 484.4
-------------- -------------
Total Long-Term Debt. $ 3,780.8 $ 4,539.4
============== =============
(a) The Company has entered into interest rate swap agreements with respect to
these debt instruments. See Note 7.
(b) The Zero Coupon Convertible Debentures are classified as debt due within
one year since the put option can be exercised in May 2003.
12
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
September 30,
--------------
2003 $ 961.5
2004 280.9
2005 468.6
2006 400.0
2007 100.0
Thereafter 2,300.0
--------------
Total $ 4,511.0
==============
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 September 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 September 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 September 30, 2002, $325.0 million
was outstanding under this agreement.
Exchange Offer - In March 2002, the Company completed exchange offers and
consent solicitations for R&B Falcon's 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and
9.5% notes. 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 R&B Falcon's outstanding
6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% notes, respectively, were exchanged
for the Company's newly issued 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% notes
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 exchanged.
The consent payments will be amortized as an increase to interest expense over
the remaining term of the respective notes using the interest method and such
amortization is expected to be $1.3 million in 2002.
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
13
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 exercised its call option under the financing
arrangement 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, pursuant to a tender
offer, R&B Falcon acquired 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):
September 30, December 31,
2002 2001
-------------- -------------
Accrued Payroll and Employee Benefits $ 133.2 $ 134.2
Accrued Interest 78.2 38.8
Contract Disputes and Legal Claims 20.0 47.5
Accrued Taxes, Other than Income 23.5 26.6
Deferred Revenue 13.0 18.2
Other 13.0 18.1
-------------- -------------
$ 280.9 $ 283.4
============== =============
NOTE 6 - INCOME TAXES
In September 2002, the Company recorded a $176.2 million ($0.55 per diluted
share) foreign tax benefit attributable to the restructuring of certain non-U.S.
operations. As a result of the restructuring, previously unrecognized losses
were offset against deferred gains, resulting in a reduction of non-current
deferred taxes payable.
14
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 7 - 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 September 30, 2002, the Company had outstanding interest rate swaps in
the aggregate notional amount of $1.6 billion. The market value of the Company's
outstanding interest rate swaps was included in other assets with corresponding
increases to long-term debt and debt due within one year, as appropriate, and
was as follows (in millions):
September 30, December 31,
2002 2001
-------------- -------------
6.75% Senior Notes, due April 2005 $ 19.4 $ -
6.95% Senior Notes, due April 2008 26.4 -
9.5% Senior Notes, due December 2008 32.0 -
6.625% Notes, due April 2011 114.0 15.1
-------------- -------------
$ 191.8 $ 15.1
============== =============
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 $8.2 million at
September 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 8 - 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 and lake barge 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
operations to the Gulf of Mexico Shallow and Inland Water segment. Prior periods
have been restated to reflect the change.
15
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 Nine Months Ended
September 30, September 30,
---------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ------------ ------------
Operating Revenues
International and U.S. Floater Contract Drilling Services $ 641.2 $ 641.5 $ 1,873.5 $ 1,706.7
Gulf of Mexico Shallow and Inland Water 54.0 128.7 135.8 372.0
Elimination of intersegment revenues - - - (6.2)
---------- ---------- ------------ ------------
Total Operating Revenues $ 695.2 $ 770.2 $ 2,009.3 $ 2,072.5
---------- ---------- ------------ ------------
Operating income before general and administrative expense
International and U.S. Floater Contract Drilling Services $ 190.0 $ 187.4 $ 570.8 $ 420.9
Gulf of Mexico Shallow and Inland Water (38.1) 6.9 (101.8) 55.4
---------- ---------- ------------ ------------
151.9 194.3 469.0 476.3
Unallocated general and administrative expense (15.8) (14.5) (51.6) (43.9)
Unallocated other income (expense), net (44.5) (49.5) (139.7) (141.1)
---------- ---------- ------------ ------------
Total Income before Income Taxes, Minority Interest,
Extraordinary Item and Cumulative Effect of a Change in
Accounting Principle $ 91.6 $ 130.3 $ 277.7 $ 291.3
========== ========== ============ ============
Total assets by segment are as follows (in millions):
September 30, December 31,
2002 2001
------------ ------------
International and U.S. Floater Contract Drilling Services $ 14,252.1 $ 14,219.3
Gulf of Mexico Shallow and Inland Water 1,258.0 2,800.5
------------ ------------
Total Assets $ 15,510.1 $ 17,019.8
============ ============
NOTE 9 - ASSET DISPOSITIONS AND IMPAIRMENT LOSS
In July 2002, the Company's International and U.S. Floater Contract
Drilling Services segment sold an office building for net proceeds of $3.0
million, resulting in a net after-tax loss of $0.3 million.
In July 2002, the Company's Gulf of Mexico Shallow and Inland Water segment
sold a land rig for net proceeds of $2.1 million. No gain or loss was recognized
on the sale.
In June 2002, the Company's International and U.S. Floater Contract
Drilling Services segment sold a jackup rig, the RBF 209, and recognized a net
after-tax loss of $1.5 million.
In March 2002, the Company's International and U.S. Floater Contract
Drilling Services segment 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 nine months ended September 30, 2002, the Company also settled
an insurance claim and 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 $20.4 million, resulting in net after-tax gains of $2.3 million
($0.01 per diluted share) and $0.5 million in the Company's International and
U.S. Floater Contract Drilling Services and Gulf of Mexico Shallow and Inland
Water segments, respectively.
16
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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
accelerated and produced incremental gains in the three and nine months ended
September 30, 2001 of $13.6 million ($0.04 per diluted share) and $36.3 million
($0.12 per diluted share), respectively, which is included as a reduction of
operating and maintenance expense.
During the nine months ended September 30, 2001, the Company also sold
certain non-strategic assets acquired in the R&B Falcon merger and certain other
assets held for sale. The Company received net proceeds of approximately $108
million. These sales resulted in net after-tax gains of $4.7 million ($0.02 per
diluted share) and $2.8 million ($0.01 per diluted share) in the Company's
International and U.S. Floater Contract Drilling Services and Gulf of Mexico
Shallow and Inland Water segments, respectively, for the nine months ended
September 30, 2001.
In September 2002, the Company recorded non-cash impairment charges in the
International and U.S. Floater Contract Drilling Services segment of $20.2
million ($0.06 per diluted share) and in the Gulf of Mexico Shallow and Inland
Water segment of $15.2 million ($0.05 per diluted share) relating to assets held
for sale reclassified as assets held and used. The impairment of these assets
resulted from management's assessment that these assets no longer met the held
for sale criteria under SFAS 144. In accordance with SFAS 144, the carrying
value of these assets was adjusted to the lower of fair market value or carrying
value adjusted for depreciation from the date the assets were classified as held
for sale. The fair market values were based on third party valuations. In
addition, an impairment of $5.5 million ($0.02 per diluted share), determined
based on an offer from a potential buyer, was recorded in the International and
U.S. Floater Contract Drilling Services segment relating to other assets held
for sale.
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.
17
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 10 - 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 Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
NUMERATOR FOR BASIC EARNINGS (LOSS) PER SHARE
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 255.2 $ 97.6 $ 412.5 $ 213.9
Loss on Extraordinary Item, net of tax - - - (17.3)
Cumulative Effect of a Change in Accounting Principle - - (1,363.7) -
---------- ---------- ----------- -----------
Net Income (Loss) $ 255.2 $ 97.6 $ (951.2) $ 196.6
========== ========== =========== ===========
NUMERATOR FOR DILUTED EARNINGS (LOSS) PER SHARE
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 255.2 $ 97.6 $ 412.5 $ 213.9
Add back effect of dilutive zero coupon convertible debentures 3.8 - - -
---------- ---------- ----------- -----------
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle for diluted earnings per share 259.0 97.6 412.5 213.9
Loss on Extraordinary Item, net of tax - - - (17.3)
Cumulative Effect of a Change in Accounting Principle - - (1,363.7) -
---------- ---------- ----------- -----------
Net Income (Loss) for diluted earnings per share $ 259.0 $ 97.6 $ (951.2) $ 196.6
========== ========== =========== ===========
DENOMINATOR FOR DILUTED EARNINGS (LOSS) PER SHARE
Weighted-average shares outstanding for basic earnings per share 319.2 318.7 319.1 305.2
Effect of dilutive securities:
Employee stock options and unvested stock grants 1.5 2.2 2.3 3.1
Warrants to purchase ordinary shares 1.0 1.8 1.6 2.4
Zero coupon convertible debentures 7.1 - - -
---------- ---------- ----------- -----------
Adjusted weighted-average shares and assumed conversions for
diluted earnings per share 328.8 322.7 323.0 310.7
========== ========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 0.80 $ 0.31 $ 1.29 $ 0.70
Loss on Extraordinary Item, net of tax - - - (0.06)
Cumulative Effect of a Change in Accounting Principle - - (4.27) -
---------- ---------- ----------- -----------
Net Income (Loss) $ 0.80 $ 0.31 $ (2.98) $ 0.64
========== ========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
Income Before Extraordinary Item and Cumulative Effect of a
Change in Accounting Principle $ 0.79 $ 0.30 $ 1.28 $ 0.69
Loss on Extraordinary Item, net of tax - - - (0.06)
Cumulative Effect of a Change in Accounting Principle - - (4.22) -
---------- ---------- ----------- -----------
Net Income (Loss) $ 0.79 $ 0.30 $ (2.94) $ 0.63
========== ========== =========== ===========
Ordinary shares subject to issuance pursuant to the conversion features of
the Company's zero coupon 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 for the nine months ended September 30, 2002 and for the three and
nine months ended September 30, 2001.
18
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 11 - CONTINGENCIES
Legal Proceedings - In November 1988, a lawsuit was filed in the U.S.
District Court for the Southern District of West Virginia against Reading &
Bates Coal Co., a wholly owned subsidiary of R&B Falcon, by SCW Associates, Inc.
claiming breach of an alleged agreement to purchase the stock of Belva Coal
Company, a wholly owned subsidiary of Reading & Bates Coal Co. with coal
properties in West Virginia. When those coal properties were sold in July 1989
as part of the disposition of R&B Falcon's coal operations, the purchasing joint
venture indemnified Reading & Bates Coal Co. and R&B Falcon against any
liability Reading & Bates Coal Co. might incur as a result of this litigation. A
judgment for the plaintiff of $32,000 entered in February 1991 was satisfied and
Reading & Bates Coal Co. was indemnified by the purchasing joint venture. On
October 31, 1990, SCW Associates, Inc., the plaintiff in the above-referenced
action, filed a separate ancillary action in the Circuit Court, Kanawha County,
West Virginia against R&B Falcon, Caymen Coal, Inc. (the former owner of R&B
Falcon's West Virginia coal properties), as well as the joint venture, Mr.
William B. Sturgill (the former President of Reading & Bates Coal Co.)
personally, three other companies in which the Company believes Mr. Sturgill
holds an equity interest, two employees of the joint venture, First National
Bank of Chicago and First Capital Corporation. The lawsuit sought to recover
compensatory damages of $50 million and punitive damages of $50 million for
alleged tortious interference with the contractual rights of the plaintiff and
to impose a constructive trust on the proceeds of the use and/or sale of the
assets of Caymen Coal, Inc. as they existed on October 15, 1988. The lawsuit was
settled in August 2002, and the terms of the settlement have been reflected in
the Company's results of operations for the nine months ended September 30,
2002. The settlement did not have a material adverse effect on its business or
consolidated financial position.
The Company also has certain other actions or claims pending that have been
previously discussed and reported in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 and Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2002 and June 30, 2002. 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 the ultimate liability, if any, resulting from any such other
pending litigation will have a material adverse effect on its business or
consolidated financial position.
The Company cannot predict with certainty the outcome or effect of any of
the litigation matters specifically described above or of any such other pending
litigation. There can be no assurance that the Company's beliefs or
expectations as to the outcome or effect of any lawsuit or other litigation
matter will prove correct and the eventual outcome of these matters could
materially differ from the Company's current estimates.
Letters of Credit and Surety Bonds - The Company had letters of credit
outstanding at September 30, 2002 totaling $53.7 million. These letters of
credit 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 $207.1 million in place that secure customs
obligations relating to the importation of rigs as well as certain performance
and other obligations.
NOTE 12 - RESTRUCTURING CHARGES
In September 2002, the Company committed to a restructuring plan in the
International and U.S. Floater Contract Drilling services segment to close its
engineering office in Montrouge, France. The Company established a liability of
$2.8 million for the estimated severance-related costs associated with the
involuntary termination of 16 employees pursuant to this plan. The charge was
reported as operating and maintenance expense in the Company's condensed
consolidated statements of operations. Through September 30, 2002, no amounts
19
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
had been paid to employees whose positions are being eliminated as a result of
this plan. The Company anticipates that substantially all amounts will be paid
by the end of the first quarter of 2003.
In September 2002, the Company committed to a restructuring plan in the
International and U.S. Floater Contract Drilling services segment for a staff
reduction in Norway as a result of a decline in activity in that region. The
Company established a liability of $1.2 million for the estimated
severance-related costs associated with the involuntary termination of 8
employees pursuant to this plan. The charge was reported as operating and
maintenance expense in the Company's condensed consolidated statements of
operations. Through September 30, 2002, no amounts had been paid to employees
whose positions are being eliminated as a result of this plan. The Company
anticipates that substantially all amounts will be paid by the end of the first
quarter of 2004.
In September 2002, the Company committed to a restructuring plan in the
Gulf of Mexico Shallow and Inland Water segment involving the closure of an
office and warehouse in Louisiana and relocation of most of the operations and
administrative functions previously conducted at that location. The Company
established a liability of $1.2 million for the estimated severance-related
costs associated with the involuntary termination of 57 employees pursuant to
this plan. The charge was reported as operating and maintenance expense in the
Company's condensed consolidated statements of operations. Through September 30,
2002, no amounts had been paid to employees whose employment is being terminated
as a result of this plan. The Company anticipates that substantially all amounts
will be paid by the end of the first quarter of 2003.
NOTE 13 - SUBSEQUENT EVENTS
The Company is continuing to pursue its previously announced plans to
divest 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, which will be renamed in
connection with the transaction, as the entity that owns this business. The
Company plans to transfer assets not used in this business from R&B Falcon to
the Company's other subsidiaries, and these internal transfers will not affect
the consolidated financial statements of Transocean. The Company expects to sell
a portion of its interest in R&B Falcon in an initial public offering. 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 is currently performing its annual test of goodwill impairment
as required by SFAS 142 as of October 1, 2002, the annual test date. As a result
of the decline in the Company's stock price since January 1, 2002, when the
initial test under SFAS 142 was performed, management expects to record a
non-cash impairment of a significant majority of the Company's $5.1 billion
goodwill balance in the fourth quarter of 2002 and that the impairment will
affect both reporting units.
20
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 October 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, 54 jackup rigs,
35 drilling barges, four tenders and three submersible drilling rigs. In
addition, the fleet included non-core assets consisting of two platform drilling
rigs and a mobile offshore production unit, as well as nine land drilling rigs
and three lake barges 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 nine months ended September 30, 2001 include
eight months 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 and lake barges
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 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, which will be renamed in connection with the transaction,
as the entity that owns this business. We plan to transfer assets not used in
this business from R&B Falcon to our other subsidiaries, and these internal
transfers will not affect the consolidated financial statements of Transocean.
We expect to sell a portion of our interest in R&B Falcon in an initial public
offering. We anticipate completing the initial
21
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.
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, property and equipment and other long-lived assets, 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 a test of impairment
as of October 1 each year. Goodwill could be significantly impaired depending on
prevailing market conditions and when in the business cycle the assessment is
performed (see "-Outlook").
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 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
September 30, 2002. See Note 2 to our consolidated financial statements in our
Annual Report on Form 10-K.
22
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 SEPTEMBER 30, 2002 COMPARED TO QUARTER ENDED SEPTEMBER 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 September 30, 2002 and 2001
was $190.0 million and $187.4 million, respectively, in our International and
U.S. Floater Contract Drilling Services segment and $(38.1) million and $6.9
million, respectively, in our Gulf of Mexico Shallow and Inland Water segment.
Three Months Ended
September 30,
-------------- %
2002 2001 Change Change
------ ------ -------- -------
(In millions, except % change)
OPERATING REVENUES
International and U.S. Floater Contract Drilling Services $641.2 $641.5 $ (0.3) - %
Gulf of Mexico Shallow and Inland Water 54.0 128.7 (74.7) (58.0)%
------ ------ -------- -------
$695.2 $770.2 $ (75.0) (9.7)%
====== ====== ======== =======
Operating revenues in the International and U.S. Floater Contract Drilling
Services segment were essentially unchanged for the three months ended September
30, 2002 compared to the same period in 2001. The slight decrease in this
segment was primarily due to a $9 million decrease from two rigs transferred to
assets held for sale subsequent to the third quarter of 2001, a $5 million
decrease from two rigs sold subsequent to the third quarter of 2001, a $9
million decrease from three leased rigs returned to their owners and an $11
million decrease related to the Deepwater Frontier following the expiration of
our lease with a related party late in 2001. These decreases were partially
offset by a $16 million increase from a newbuild placed into service late in the
third quarter of 2001 and $8 million from two rigs transferred into this segment
from the Gulf of Mexico Shallow and Inland Water segment. Revenues from the
remaining core assets in this segment increased $20 million. Average dayrates
for these core assets increased from $89,000 for the quarter ended September 30,
2001 to $95,100 for the quarter ended September 30, 2002 while utilization for
these core assets decreased from 81 percent for the quarter ended September 30,
2001 to 78 percent for the quarter ended September 30, 2002. Operating revenues
for non-core assets in this segment decreased $10 million and resulted primarily
from the sale in the fourth quarter of 2001 of RBF FPSO L.P., which owned the
Seillean, the sale of a platform rig in early 2002 and loss of hire proceeds for
the Jack Bates in the third quarter of 2001 with no comparable activity in the
third quarter of 2002 partially offset by the settlement of a contract dispute
in the third quarter of 2002.
23
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 three jackup rigs from this segment into the International and
U.S. Floater Contract Drilling Services segment, which represented a decrease of
$6 million in revenues. Excluding the three jackup rigs transferred into the
International and U.S. Floater Contract Drilling Services segment, average
dayrates and utilization for core assets in this segment decreased from $29,500
and 63 percent, respectively, for the quarter ended September 30, 2001 to
$21,600 and 41 percent, respectively, for the quarter ended September 30, 2002.
Revenues from non-core assets in this segment decreased $11 million and related
primarily to Venezuela where average dayrates and utilization decreased from
$19,700 and 83 percent, respectively, for the three months ended September 30,
2001 to $17,000 and 16 percent, respectively, for the comparable period in 2002.
Three Months Ended
September 30,
-------------- %
2002 2001 Change Change
------ ------ -------- -------
(In millions, except % change)
OPERATING AND MAINTENANCE
International and U.S. Floater Contract Drilling Services $325.7 $330.5 $ (4.8) (1.5)%
Gulf of Mexico Shallow and Inland Water 55.4 87.7 (32.3) (36.8)%
------ ------ -------- -------
$381.1 $418.2 $ (37.1) (8.9)%
====== ====== ======== =======
The decrease in International and U.S. Floater Contract Drilling Services
operating expenses resulted primarily from the stacking of rigs, two rigs
transferred to assets held for sale subsequent to the third quarter in 2001, two
rigs sold subsequent to the third quarter in 2001, three leased rigs returned to
their owners and a decrease related to the Deepwater Frontier following the
expiration of our lease with a related party late in 2001. In addition, the sale
of the RBF FPSO L.P., which owned the Seillean, subsequent to the third quarter
in 2001 further contributed to the decrease. These decreases were partially
offset by an increase from a newbuild unit placed into service and two jackup
rigs transferred into this segment from the Gulf of Mexico Shallow and Inland
Water segment during and subsequent to the third quarter of 2001, the
accelerated amortization of the Pride North Atlantic's (formerly the Drill Star)
deferred gain, which produced incremental gains in the quarter ended September
30, 2001 of $13.6 million with no equivalent expense reduction in the third
quarter of 2002 and $6.5 million related to restructuring charges and a
litigation provision with no comparable activity in the third quarter of 2001.
The decrease in Gulf of Mexico Shallow and Inland Water operating expenses
was primarily due to lower costs in 2002 resulting from the stacking and
scrapping of idle rigs and reducing employee count coupled with the transfer of
three jackup rigs out of this segment into the International and U.S. Floater
Contract Drilling Services segment during and subsequent to the third quarter of
2001. These decreases were partially offset by an increase in expenses of $4.4
million resulting from severance-related costs and other restructuring charges
related to our decision to close an administrative office and warehouse in
Louisiana and relocate most of the operations and administrative functions
previously conducted at that location, as well as compensation-related expenses
due to executive management changes in the third quarter of 2002.
24
Three Months Ended
September 30,
-------------- %
2002 2001 Change Change
------ ------ -------- -------
(In millions, except % change)
DEPRECIATION
International and U.S. Floater Contract Drilling Services. $101.6 $ 98.1 $ 3.5 3.6%
Gulf of Mexico Shallow and Inland Water 22.6 27.3 (4.7) (17.2)%
------ ------ -------- -------
$124.2 $125.4 $ (1.2) (0.1)%
====== ====== ======== =======
The increase in International and U.S. Floater Contract Drilling Services
depreciation expense resulted primarily from a newbuild drilling unit placed
into service during the third quarter of 2001, the transfer of three jackup rigs
into this segment from the Gulf of Mexico Shallow and Inland Water segment
during and subsequent to the third quarter of 2001 and certain purchase price
adjustments related to the R&B Falcon merger recorded in the third 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 during and subsequent to the
third quarter of 2001.
The decrease in Gulf of Mexico Shallow and Inland Water depreciation
expense resulted primarily from the movement of three jackup rigs out of this
segment into the International and U.S. Floater Contract Drilling Services
segment and the sale of various rigs from our active fleet during and subsequent
to the third quarter of 2001.
Three Months Ended
September 30,
------------ %
2002 2001 Change Change
----- ----- -------- ------
(In millions, except % change)
GOODWILL AMORTIZATION
International and U.S. Floater Contract Drilling Services. $ - $30.5 $ (30.5) N/A
Gulf of Mexico Shallow and Inland Water - 11.2 (11.2) N/A
----- ----- -------- ------
$ - $41.7 $ (41.7) N/A
===== ===== ======== ======
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 for
impairment at least annually on October 1. See Note 2 to our condensed
consolidated financial statements.
Three Months Ended
September 30,
------------ %
2002 2001 Change Change
----- ----- ------- ------
(In millions, except % change)
GENERAL AND ADMINISTRATIVE $15.8 $14.5 $ 1.3 9.0%
===== ===== ======= =======
General and administrative expense for the three months ended September 30,
2002 increased primarily as a result of higher pension expense.
25
Three Months Ended
September 30,
------------ %
2002 2001 Change Change
----- ----- ------- ------
(In millions, except % change)
IMPAIRMENT LOSS ON LONG-LIVED ASSETS
International and U.S. Floater Contract Drilling Services $25.7 $ - $ 25.7 N/A
Gulf of Mexico Shallow and Inland Water 15.2 - 15.2 N/A
----- ----- ------- ------
$40.9 $ - $ 40.9 N/A
===== ===== ======= ======
During the three months ended September 30, 2002, we recorded non-cash
impairment charges in the International and U.S. Floater Contract Drilling
Services segment of $20.2 million and in the Gulf of Mexico Shallow and Inland
Water segment of $15.2 million relating to assets held for sale reclassified as
assets held and used. The impairment of these assets resulted from our
assessment that these assets no longer met the held for sale criteria under SFAS
144. In accordance with SFAS 144 the carrying value of these assets was adjusted
to the lower of fair market value or carrying value adjusted for depreciation
from the date the assets were classified as held for sale. The fair market
values were based on third party valuations. In addition, an impairment of $5.5
million, determined based on an offer from a potential buyer, was recorded in
the International and U.S. Floater Contract Drilling Services segment relating
to other assets held for sale.
Three Months Ended
September 30,
------------ %
2002 2001 Change Change
----- ----- -------- ------
(In millions, except % change)
GAIN (LOSS) FROM SALE OF ASSETS, NET
International and U.S. Floater Contract Drilling Services $ 1.8 $ 5.0 $ (3.2) (64.0)%
Gulf of Mexico Shallow and Inland Water 1.1 4.4 (3.3) (75.0)%
----- ----- -------- -------
$ 2.9 $ 9.4 $ (6.5) (69.1)%
===== ===== ======== =======
During the three months ended September 30, 2002, the International and
U.S. Floater Contract Drilling Services segment recognized net pre-tax gains of
$2.2 million resulting from the partial settlement of an insurance claim and the
sale of certain non-strategic assets partially offset by a net pre-tax loss of
$0.4 million from the sale of an office building. During the three months ended
September 30, 2001, this segment recognized a pre-tax gain of $3.7 million
related to the sale of two Nigerian-based land rigs and net pre-tax gains of
$1.3 million related to the sale of certain non-strategic assets.
During the three months ended September 30, 2002, the Gulf of Mexico
Shallow and Inland Water segment recognized net pre-tax gains of $1.1 million
related to the sale of a land rig and certain non-strategic assets. During the
three months ended September 30, 2001, this segment recognized net pre-tax gains
of $2.1 million related to the disposal of an inland drilling barge and $2.3
million related to the sale of certain non-strategic assets.
26
Three Months Ended
September 30,
---------------- %
2002 2001 Change Change
------- ------- -------- ------
(In millions, except % change)
OTHER INCOME (EXPENSE), NET
Equity in earnings of joint ventures $ 0.4 $ 6.3 $ (5.9) (93.7)%
Interest income 6.1 5.5 0.6 10.9%
Interest expense, net of amounts capitalized (52.3) (60.8) 8.5 14.0%
Other, net 1.3 (0.5) 1.8 360.0%
------- ------- -------- ------
$(44.5) $(49.5) $ 5.0 10.1%
======= ======= ======== ======
The decrease in equity in earnings of joint ventures was primarily related
to our 25 percent share of losses from Delta Towing L.L.C. and a reduction of
earnings from our 50 percent interest in Deepwater Drilling L.L.C. ("DD LLC"),
which owns the Deepwater Pathfinder. The increase in interest income was
primarily due to interest earned on higher average cash balances for the three
months ended September 30, 2002 compared to the same period in 2001 partially
offset by lower interest rates on those balances. The decrease in interest
expense was attributable to a $2.2 million reduction associated with debt
refinancing and retirements during and subsequent to the third quarter of 2001
and a decrease in the London Interbank Offered Rate ("LIBOR") of approximately
181 basis points that resulted in a $2.0 million reduction on floating rate bank
debt. Additionally, our fixed to floating interest rate swaps resulted in lower
interest expense of $8.1 million. These decreases were partially offset by the
absence of capitalized interest in the third quarter of 2002, due to the
completion of our newbuild projects in 2001, compared to $4 million of
capitalized interest in the third quarter of 2001.
Three Months Ended
September 30,
--------------- %
2002 2001 Change Change
-------- ----- -------- --------
(In millions, except % change)
INCOME TAX EXPENSE (BENEFIT) $(164.8) $32.6 $(197.4) (605.5)%
======== ===== ======== ========
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. The three months ended September 30, 2002 included a tax benefit
of $176.2 million attributable to the restructuring of certain non-U.S.
operations.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 30, 2002 and 2001
was $570.8 million and $420.9 million, respectively, in our International and U.
S. Floater Contract Drilling Services segment and $(101.8) million and $55.4
million, respectively, in our Gulf of Mexico Shallow and Inland Water segment.
27
Nine Months Ended
September 30,
----------------- %
2002 2001 Change Change
-------- ------- --------- -------
(In millions, except % change)
OPERATING REVENUES
International and U.S. Floater Contract Drilling Services $1,873.5 $1,706.7 $ 166.8 9.8%
Gulf of Mexico Shallow and Inland Water 135.8 365.8 (230.0) (62.9)%
-------- ------- --------- -------
$2,009.3 $2,072.5 $ (63.2) (3.0)%
======== ======= ========= =======
The increase in International and U.S. Floater Contract Drilling Services
operating revenues resulted from an $87 million increase from R&B Falcon core
assets in this segment representing a full nine months of revenues in 2002
compared to eight months of operations in 2001, a $108 million increase from
four newbuild drilling units placed into service during and subsequent to the
first nine months of 2001 and a $26 million increase from three rigs transferred
into this segment from the Gulf of Mexico Shallow and Inland Water segment
during and subsequent to the third quarter of 2001. In addition, operating
revenues relating to historical Transocean core assets totaled $1.2 billion for
the nine months ended September 30, 2002, representing a $109 million, or 10
percent, increase over the comparable 2001 period. Average dayrates and
utilization for these historical Transocean core assets increased from $80,100
and 77 percent, respectively, for the nine months ended September 30, 2001 to
$87,000 and 79 percent, respectively, for the nine months ended September 30,
2002. These increases were partially offset by a $30 million decrease related to
the Deepwater Frontier following the expiration of our lease with a related
party late in 2001, a $29 million decrease from three leased rigs returned to
their owners, a $19 million decrease related to two rigs transferred to held for
sale and an $11 million decrease related to rigs sold during 2001 and 2002.
Revenues from non-core assets decreased $67 million for the nine months ended
September 30, 2002 compared to the same period in 2001 primarily due to the sale
of the RBF FPSO L.P., which owned the Seillean, a decrease of $38 million due to
the winding up of our turnkey drilling business early in 2001 and loss of hire
proceeds in 2001 for the Jack Bates partially offset by a settlement of a
contract dispute in 2002.
Although the Gulf of Mexico Shallow and Inland Water operating revenues
represent a full nine months of operations in 2002 compared to eight 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 three jackup rigs from this segment
into the International and U.S. Floater Contract Drilling Services segment
resulted in a $24 million decrease. Excluding the three jackup rigs transferred
into the International and U.S. Floater Contract Drilling Services segment,
average dayrates and utilization for core assets in this segment decreased from
$29,400 and 67 percent, respectively, for the nine months ended September 30,
2001 to $21,000 and 32 percent, respectively, for the nine months ended
September 30, 2002. Revenues from non-core assets in this segment decreased $22
million and related primarily to Venezuela where average dayrates and
utilization decreased from $20,000 and 83 percent, respectively, for the nine
months ended September 30, 2001 to $19,000 and 28 percent, respectively, for the
comparable period in 2002.
28
Nine Months Ended
September 30,
------------------ %
2002 2001 Change Change
-------- -------- -------- ------
(In millions, except % change)
OPERATING AND MAINTENANCE
International and U.S. Floater Contract Drilling Services $ 974.5 $ 953.7 $ 20.8 2.2%
Gulf of Mexico Shallow and Inland Water 153.2 209.8 (56.6) (27.0)%
-------- -------- -------- -------
$1,127.7 $1,163.5 $ (35.8) (3.1)%
======== ======== ======== =======
The increase in International and U.S. Floater Contract Drilling Services
operating expenses was primarily a result of eight months of R&B Falcon
operations for the period ended September 30, 2001 compared to a full nine
months of activity for the same period in 2002, the activation of three newbuild
drilling units and three jackup rigs transferred into this segment from the Gulf
of Mexico Shallow and Inland Water segment during and subsequent to the third
quarter of 2001 and accelerated amortization of the Pride North Atlantic's
deferred gain, which produced incremental gains in the nine months ended
September 30, 2001 of $36.3 million with no equivalent expense reduction in the
first nine months of 2002. These increases were partially offset by decreases in
expenses resulting from a rig transferred to assets held for sale subsequent to
the third quarter of 2001, nine rigs sold during and subsequent to 2001, three
leased rigs returned to their owners, a decrease related to the Deepwater
Frontier 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 nine months ended September 30, 2002 resulted primarily from the stacking
and scrapping of rigs, the sale of an inland drilling barge during the third
quarter of 2001, reducing employee count and lower maintenance costs, as well as
the transfer of three jackup rigs out of this segment into the International and
U.S. Floater Contract Drilling Services segment during and subsequent to the
third quarter of 2001. These decreases were partially offset by a full nine
months of R&B Falcon operations in 2002 compared to eight months of operations
in 2001, an increase in expenses of $4.4 million resulting from
severance-related costs and other restructuring charges related to our decision
to close an administrative office and warehouse in Louisiana and relocate most
of the operations and administrative functions previously conducted at that
location, as well as compensation-related expenses resulting from executive
management changes in the third quarter of 2002.
Nine Months Ended
September 30,
-------------- %
2002 2001 Change Change
------ ------ -------- -------
(In millions, except % change)
DEPRECIATION
International and U.S. Floater Contract Drilling Services $305.3 $272.6 $ 32.7 12.0%
Gulf of Mexico Shallow and Inland Water 68.8 75.7 (6.9) (9.1)%
------ ------ -------- -------
$374.1 $348.3 $ 25.8 7.4%
====== ====== ======== =======
The increase in International and U.S. Floater Contract Drilling Services
depreciation expense resulted primarily from a full nine months of depreciation
in 2002 on rigs acquired in the R&B Falcon merger compared to eight months for
the same period in 2001, four newbuild drilling units placed into service during
and subsequent to the first nine months of 2001 and the transfer of three jackup
rigs into this segment from the Gulf of Mexico Shallow and Inland Water segment.
This increase was partially offset by lower depreciation expense following 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 during and
subsequent to 2001.
29
The decrease in Gulf of Mexico Shallow and Inland Water depreciation
expense resulted primarily from the transfer of three jackup rigs out of this
segment into the International and U.S. Floater Contract Drilling Services
segment, the suspension of depreciation on a rig transferred to assets held for
sale and the sale of various rigs classified as assets held and used during and
subsequent to 2001. These decreases were partially offset by a full nine months
of depreciation in 2002 on rigs acquired in the R&B Falcon merger compared to
eight months for the same period in 2001.
Nine Months Ended
September 30,
------------- %
2002 2001 Change Change
----- ------ -------- ------
(In millions, except % change)
GOODWILL AMORTIZATION
International and U.S. Floater Contract Drilling Services. $ - $ 83.6 $ (83.6) N/A
Gulf of Mexico Shallow and Inland Water - 29.8 (29.8) N/A
----- ------ -------- ------
$ - $113.4 $(113.4) N/A
===== ====== ======== ======
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 for
impairment at least annually on October 1. See Note 2 to our condensed
consolidated financial statements.
Nine Months Ended
September 30,
------------ %
2002 2001 Change Change
----- ----- ------- -------
(In millions, except % change)
GENERAL AND ADMINISTRATIVE $51.6 $43.9 $ 7.7 17.5%
===== ===== ======= =======
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 nine months ended September 30, 2001 included
a $1.3 million reduction in expense related to the favorable settlement of an
unemployment tax assessment with no corresponding reduction in the nine months
ended September 30, 2002. 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 nine months in 2002 compared to eight months in 2001.
Nine Months Ended
September 30,
------------ %
2002 2001 Change Change
----- ----- ------- ------
(In millions, except % change)
IMPAIRMENT LOSS ON LONG-LIVED ASSETS
International and U.S. Floater Contract Drilling Services $25.7 $ - $ 25.7 N/A
Gulf of Mexico Shallow and Inland Water 16.3 - 16.3 N/A
----- ----- ------- ------
$42.0 $ - $ 42.0 N/A
===== ===== ======= ======
During the nine months ended September 30, 2002, we recorded non-cash
impairment charges in the International and U.S. Floater Contract Drilling
Services segment of $20.2 million and in the Gulf of Mexico Shallow and Inland
Water segment of $15.2 million relating to assets held for sale reclassified as
assets held and used. The impairment of these assets resulted from our
assessment that these assets no longer met the held for sale criteria under SFAS
144. In accordance with SFAS 144, the carrying value of these assets was
30
adjusted to the lower of fair market value or carrying value adjusted for
depreciation from the date the assets were classified as held for sale. The fair
market values were based on third party valuations. In addition, an impairment
of $5.5 million, determined based on an offer from a potential buyer, was
recorded in the International and U.S. Floater Contract Drilling Services
segment relating to other assets held for sale. We also recorded a non-cash
impairment charge in the Gulf of Mexico Shallow and Inland Water segment of $1.1
million relating to an asset held for sale. The impairment resulted from
deterioration in current market conditions and was determined and measured based
on an offer from a potential buyer.
Nine Months Ended
September 30,
------------ %
2002 2001 Change Change
----- ----- -------- -------
(In millions, except % change)
GAIN FROM SALE OF ASSETS, NET
International and U.S. Floater Contract Drilling Services $ 2.8 $24.1 $ (21.3) (88.4)%
Gulf of Mexico Shallow and Inland Water 0.7 4.9 (4.2) (85.7)%
----- ----- -------- -------
$ 3.5 $29.0 $ (25.5) (87.9)%
===== ===== ======== =======
During the nine months ended September 30, 2002, the International and U.S.
Floater Contract Drilling Services segment recognized net pre-tax gains of $5.6
million related to the sale of the Transocean 96, Transocean 97, a mobile
offshore production unit, the partial settlement of an insurance claim and the
sale of certain non-strategic assets. These net gains were partially offset by
net pre-tax losses of $2.8 million from the sale of the RBF 209 and an office
building. During the nine months ended September 30, 2001, this segment
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, $3.7
million related to the sale of two Nigerian-based land rigs and $1.9 million
from the sale of certain non-strategic assets.
During the nine months ended September 30, 2002, the Gulf of Mexico Shallow
and Inland Water segment recognized net pre-tax gains of $2.1 million on the
sale of a land rig and certain non-strategic assets partially offset by net
pre-tax losses of $1.4 million related to the sale of two mobile offshore
production units and a land rig. During the nine months ended September 30,
2001, this segment recognized net pre-tax gains of $2.1 million related to the
disposal of an inland drilling barge and $2.8 million related to the sale of
certain non-strategic assets.
Nine Months Ended
September 30,
------------------ %
2002 2001 Change Change
-------- -------- -------- -------
(In millions, except % change)
OTHER INCOME (EXPENSE), NET
Equity in earnings of joint ventures $ 4.8 $ 12.0 $ (7.2) (60.0)%
Interest income 16.0 13.7 2.3 16.8%
Interest expense, net of amounts capitalized (160.7) (164.8) 4.1 2.5%
Other, net 0.2 (2.0) 2.2 110.0%
-------- -------- -------- -------
$(139.7) $(141.1) $ 1.4 1.0%
======== ======== ======== =======
The decrease in equity in earnings of joint ventures was primarily related
to our 25 percent share of losses from Delta Towing L.L.C. and to the reduced
earnings attributable to our 60 percent share of the earnings of Deepwater
Drilling II L.L.C. ("DDII LLC"), which owns the Deepwater Frontier, and our 50
percent share of DD LLC, which owns the Deepwater Pathfinder. Both rigs
experienced downtime and decreased utilization during the first nine months of
2002. These decreases were 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 percent interest. The increase in interest income was primarily due to
interest earned on higher average cash balances for the nine months ended
September 30, 2002 compared to the same period in 2001. The decrease in interest
expense was attributable to reductions in interest expense of $30.8 million
associated with debt refinancing and retirements during and subsequent to the
31
nine months ended September 30, 2001 and a decrease in LIBOR of approximately
283 basis points that resulted in a $9.0 million reduction on floating rate bank
debt. Additionally, our fixed to floating interest rate swaps resulted in
reduced interest expense of $33.1 million. Offsetting these decreases were
$24.6 million of additional interest expense on debt issued during the second
quarter of 2001, $8.5 million of interest expense on debt acquired in the R&B
Falcon merger, which represents additional interest in the full nine months
ended September 30, 2002 compared to eight months for the comparable period in
2001 and the absence of capitalized interest in the nine months ended September
30, 2002, due to the completion of our newbuild projects in 2001, compared to
$34.9 million of capitalized interest for the comparable period in 2001. The
increase in other, net was due primarily to a loss on sale of securities during
the nine months ended September 30, 2001. No securities were sold during the
same period in 2002.
Nine Months Ended
September 30,
--------------- %
2002 2001 Change Change
-------- ----- -------- --------
(In millions, except % change)
INCOME TAX EXPENSE (BENEFIT) $(137.1) $74.9 $(212.0) (283.0)%
======== ===== ======== ========
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. The nine months ended September 30, 2002 included a tax benefit of
$175.7 million attributable to the restructuring of certain non-U.S. operations.
Nine Months Ended
September 30,
-------------- %
2002 2001 Change Change
----- ------- ------- ------
(In millions, except % change)
LOSS ON EXTRAORDINARY ITEMS, NET OF TAX. $ - $(17.3) $ 17.3 N/A
===== ======= ======= ======
During the nine months ended September 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.
Nine Months Ended
September 30,
----------------- %
2002 2001 Change Change
---------- ----- ---------- ------
(In millions, except % change)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. $(1,363.7) $ - $(1,363.7) N/A
========== ===== ========== ======
During the nine months ended September 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.
32
FINANCIAL CONDITION
September 30, December 31, %
2002 2001 Change Change
-------------- ------------- ---------- -------
TOTAL ASSETS
International and U.S. Floater Contract Drilling Services $ 14,252.1 $ 14,219.3 $ 32.8 0.2%
Gulf of Mexico Shallow and Inland Water 1,258.0 2,800.5 (1,542.5) (55.1)%
-------------- ------------- ---------- -------
$ 15,510.1 $ 17,019.8 $(1,509.7) (8.9)%
============== ============= ========== =======
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
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 September 30, 2002 all required severance-related costs have been paid
to 182 employees whose positions were eliminated as a result of this plan.
In September 2002, we committed to a restructuring plan in the
International and U.S. Floater Contract Drilling services segment to close its
engineering office in Montrouge, France. We established a liability of $2.8
million for the estimated severance-related costs associated with the
involuntary termination of 16 employees pursuant to this plan. The charge was
reported as operating and maintenance expense in our condensed consolidated
statements of operations. Through September 30, 2002, no amounts had been paid
to employees whose positions are being eliminated as a result of this plan. We
anticipate that substantially all amounts will be paid by the end of the first
quarter of 2003.
In September 2002, we committed to a restructuring plan in the
International and U.S. Floater Contract Drilling services segment for a staff
reduction in Norway as a result of a decline in activity in that region. We
established a liability of $1.2 million for the estimated severance-related
costs associated with the involuntary termination of 8 employees pursuant to
this plan. The charge was reported as operating and maintenance expense in our
condensed consolidated statements of operations. Through September 30, 2002, no
amounts had been paid to employees whose positions are being eliminated as a
result of this plan. We anticipate that substantially all amounts will be paid
by the end of the first quarter of 2004.
In September 2002, we committed to a restructuring plan in the Gulf of
Mexico Shallow and Inland Water segment involving closure of an office and
warehouse in Louisiana and relocation of most of the operations and
administrative functions previously conducted at that location. We established a
liability of $1.2 million for the estimated severance-related costs associated
with the involuntary termination of 57 employees pursuant to this plan. The
charge was reported as operating and maintenance expense in our condensed
consolidated statements of operations. Through September 30, 2002, no amounts
had been paid to employees whose employment is being terminated as a result of
this plan. We anticipate that substantially all amounts will be paid by the end
of the first quarter of 2003.
2001 R&B FALCON PRO FORMA OPERATING RESULTS
Our unaudited pro forma consolidated results for the nine months ended
September 30, 2001, giving effect to the R&B Falcon merger, reflected net income
of $202.7 million, or $0.63 per diluted share, on pro forma operating revenues
of $2,198.4 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
33
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
Within our International and U.S. Floater Contract Drilling Services
business segment, average dayrates during the third quarter of 2002 increased
slightly compared to the second quarter of 2002 despite a decrease in average
dayrates for our high-specification floaters. Similarly, utilization within the
segment increased modestly during the third quarter of 2002 compared to the
previous quarter. Within our Gulf of Mexico Shallow and Inland Water business
segment, average dayrates and fleet utilization increased in the third quarter
of 2002 compared to the previous quarter.
34
Comparative average dayrates and utilization figures for the quarters
ending September 30, 2002 and 2001 and the quarter ending June 30, 2002 are set
forth in the table below.
Three Months Ended
--------------------------------------------
September 30, June 30, September 30,
2002 2002 2001
--------------- ---------- ---------------
AVERAGE DAYRATES
INTERNATIONAL AND U.S. FLOATER CONTRACT DRILLING SERVICES SEGMENT:
High-Specification Floaters $ 144,600 $ 150,200 $ 144,800
Other Floaters 81,300 76,800 66,600
Jackups - Non-U.S. 60,400 57,400 49,200
Other (a) 55,100 43,700 42,500
--------------- ---------- ---------------
Segment Total (a) 95,500 94,500 86,700
--------------- ---------- ---------------
GULF OF MEXICO SHALLOW AND INLAND WATER SEGMENT:
Jackups and Submersibles 23,000 21,000 37,700
Inland Barges 20,700 20,200 24,400
--------------- ---------- ---------------
Segment Total (a) 21,600 20,700 30,000
--------------- ---------- ---------------
Total (a) $ 76,400 $ 80,500 $ 66,900
=============== ========== ===============
UTILIZATION
INTERNATIONAL AND U.S. FLOATER CONTRACT DRILLING SERVICES SEGMENT:
High-Specification Floaters 85% 85% 87%
Other Floaters 76% 73% 82%
Jackups - Non-U.S. 84% 82% 84%
Other (a) 51% 60% 48%
--------------- ---------- ---------------
Segment Total (a) 79% 78% 81%
--------------- ---------- ---------------
GULF OF MEXICO SHALLOW AND INLAND WATER SEGMENT:
Jackups and Submersibles 34% 29% 52%
Inland Barges 47% 24% 75%
--------------- ---------- ---------------
Segment Total (a) 40% 27% 63%
--------------- ---------- ---------------
Total (a) 63% 57% 73%
=============== ========== ===============
-----------------------
(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 and lake barges, as well as for prior
periods our service vessels, which were sold prior to September 30,
2002.
World oil and U.S. natural gas prices have remained fairly stable this
year. However, the pricing environment has not translated into a meaningful
increase in the overall demand for our drilling rigs. Despite the relatively
strong commodity prices present so far during 2002, we believe our customers
still see too much political and commercial uncertainty to materially increase
demand for drilling rigs in the near future. Consequently, on a global basis, we
do not foresee substantive changes in the overall drilling rig demand through
the first quarter of 2003.
35
The outlook for our ultra deepwater capable rigs continues to be good. All
of these rigs are currently on contract and dayrates on recently awarded
contracts have been in the $165,000 to $180,000 range.
Rigs with water depth capability of between 4,000 to 6,000 feet have
significantly more competition and a large number of rigs are generally
available to be bid on any contract opportunity. These rigs are generally being
contracted at dayrates in the $75,000 to $135,000 range depending on location
and water depth capability.
The market for floaters with water depth capability below 4,000 feet
remains significantly oversupplied. The largest market for these rigs has
traditionally been the North Sea and Norway sectors of the North Sea, both of
which have experienced substantial reductions in activity. We presently have
seven semisubmersibles idle in the North Sea and see few prospects for them to
go back to work in the next year. It will be difficult to keep all of our other
similar units in the North Sea fully utilized through the winter months and we
expect to see some idle time on additional rigs during this period.
The international jackup market continues to be very good with most such
rigs fully utilized. India and Mexico are both areas where we expect to see
continuing demand growth for jackups which should keep the market for
international jackups strong.
The Shallow and Inland Water barge and jackup market segment activity
increased somewhat during the third quarter of 2002. While the improvement was
not significant, we believe there are certain favorable conditions developing
within this sector, particularly the U.S. natural gas price fundamentals seen so
far during this year, the depletion rates of existing wells and the mobilization
of a number of jackups to other market sectors.
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.
As of October 31, 2002, approximately 78 percent and 44 percent of our
International and U.S. Floater Contract Drilling Services segment fleet days
were committed to 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 20
percent for the remainder of 2002 and none are currently committed for the year
2003.
We continue to proceed with our previously announced plans to pursue an
initial public offering of our Gulf of Mexico Shallow and Inland Water business.
We anticipate completing the initial public offering when market conditions
warrant, subject to various factors. While we believe we should be able to
complete the initial public offering during 2003, given the current general
uncertainty in the equity markets, we are unsure when the transaction could be
completed on terms acceptable to us. See "-Overview."
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 our
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 our initial impairment test. With respect to the Gulf of
Mexico Shallow and Inland Water business segment, R&B Falcon will have an
initial impairment of goodwill consistent with that reflected in our
consolidated financial statements for the first quarter of 2002, since the
entire segment is housed within R&B Falcon. Our 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 our Floater segment and
36
other factors specific to R&B Falcon, there will be a $3.1 billion initial
goodwill impairment for R&B Falcon's Floater segment even though the same test
did not result in an initial impairment of goodwill in our Floater segment. This
initial impairment will have no effect on our consolidated financial statements.
The initial impairment relating to both segments in R&B Falcon will be recorded
in its financial statements as a cumulative effect adjustment.
As of September 30, 2002, the Company had goodwill of approximately $5.1
billion. As required by SFAS 142 (See "-New Accounting Pronouncements"), we are
in the process of conducting our annual test of goodwill impairment as of
October 1 of this year. As a result of the decline in our stock price since
January 1, 2002, when the initial test under SFAS 142 was performed, we expect a
non-cash impairment to goodwill in the fourth quarter of 2002 representing a
significant majority of our current goodwill balance. The impairment is expected
to affect both our International and U.S. Floater Contract Drilling Services and
Gulf of Mexico Shallow and Inland Water business segments. Any such impairment
will have no impact on our bank covenants.
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 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 of 2002 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 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 by the Company, and the underwriters issued general
notices of cancellations to their customers for war risk, terrorism and
political risk coverages with respect to a wide variety of insurance products,
including but not limited to, property damage, 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 principal insurance programs
providing our occupational injury and illness coverages run through November
2002. Our total insurance expense is expected to be approximately $66 million in
2002. We expect that our insurance expense could increase by 50 percent or more
in 2003. We are investigating alternatives that could mitigate these expected
cost increases, including increasing our self-insured retentions.
We continue with our previously announced plans to sell a number of assets.
We received $202 million of proceeds in 2001 and $66 million of proceeds during
the first nine months of 2002 from the sale of such assets.
37
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Nine Months Ended
September 30,
-------------------
2002 2001 Change
--------- -------- ----------
(In millions)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ (951.2) $ 196.6 $(1,147.8)
Depreciation and amortization 374.1 461.7 (87.6)
Non-cash items 1,211.8 (176.0) 1,387.8
Working capital 65.5 (116.0) 181.5
--------- -------- ----------
$ 700.2 $ 366.3 $ 333.9
========= ======== ==========
Cash generated from net income items adjusted for non-cash activity
increased $152.4 million. Cash provided by working capital items increased
$181.5 million for the nine months ended September 30, 2002 compared to the same
period in 2001 primarily due to a reduction in accounts receivable resulting
from improved collections.
Nine Months Ended
September 30,
------------------
2002 2001 Change
-------- -------- --------
(In millions)
NET CASH USED IN INVESTING ACTIVITIES
Capital expenditures $(114.6) $(443.1) $ 328.5
Proceeds from disposal of assets 73.6 108.4 (34.8)
Merger costs paid - (24.4) 24.4
Proceeds from sale of securities - 17.2 (17.2)
R&B Falcon cash at acquisition - 264.7 (264.7)
Other, net 4.6 13.0 (8.4)
-------- -------- --------
$ (36.4) $ (64.2) $ 27.8
======== ======== ========
Net cash used in investing activities decreased for the nine months ended
September 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, partially offset by lower proceeds from asset sales for the
nine months ended September 30, 2002 and cash received in connection with the
R&B Falcon merger during the nine months ended September 30, 2001.
Nine Months Ended
September 30,
--------------------
2002 2001 Change
-------- ---------- ----------
(In millions)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net repayments on revolving credit agreements $ - $ (180.1) $ 180.1
Net repayments under commercial paper program (326.4) - (326.4)
Repayments on other debt instruments (154.3) (1,500.1) 1,345.8
Net proceeds from issuance of debt - 1,693.5 (1,693.5)
Other, net (14.7) 1.1 (15.8)
-------- ---------- ----------
$(495.4) $ 14.4 $ (509.8)
======== ========== ==========
38
During the nine months ended September 30, 2002, we had no borrowings under
our revolving credit agreements and we repaid the $326.4 million outstanding
under our commercial paper program. The decrease in repayments of debt
instruments of $1,345.8 million was primarily due to repayments of R&B Falcon
debt instruments totaling $1,458.0 million in the second quarter of 2001 as more
fully described in Note 4 to our condensed consolidated financial statements. In
the nine months ended September 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 of $103.7 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, no exercise of warrants in 2002 and lower proceeds from
stock option exercises in 2002, partially offset by the discontinuance of cash
dividend payments after the second quarter of 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 $114.6 million during the nine months ended
September 30, 2002. In both 2002 and 2003, we expect to spend approximately $150
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 July 2002, our International and U.S. Floater Contract Drilling Services
segment sold an office building for net proceeds of $3.0 million, resulting in a
net after-tax loss of $0.3 million.
In July 2002, our Gulf of Mexico Shallow and Inland Water segment sold a
land rig for net proceeds of $2.1 million. No gain or loss was recognized on the
sale.
In June 2002, our International and U.S. Floater Contract Drilling Services
segment sold a jackup rig, the RBF 209, and recognized a net after-tax loss of
$1.5 million.
In March 2002, our International and U.S. Floater Contract Drilling
Services segment 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 nine months ended September 30, 2002, we also settled an
insurance claim and 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 $20.4 million, resulting in net after-tax gains of $2.3 million
and $0.5 million in our International and U.S. Floater Contract Drilling
Services and Gulf of Mexico Shallow and Inland Water segments, respectively.
39
SOURCES OF LIQUIDITY
Our primary sources of liquidity in the third quarter of 2002 were our cash
flows from operations and asset sales. Primary uses of cash were debt repayments
and capital expenditures. At September 30, 2002, we had $1.0 billion 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 and 2003, as cash
flows from operations are expected to be positive and, together with existing
cash balances, 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 have significantly reduced capital
expenditures compared to prior years due to the completion of our newbuild
program in 2001. During the first nine months of 2002, we have reduced net debt,
defined as total debt less swap receivables and cash and cash equivalents, by
$647 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. To date, 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. A 364-day revolving credit agreement provides for $250
million in borrowings and will expire in December 2002 and a five-year revolving
credit agreement provides for $550 million in borrowings and will expire in
December 2005. We expect to renew the $250 million, 364-day revolving credit
agreement in December 2002. These credit lines are used primarily to back our
$800 million commercial paper program and may also be drawn on directly. As of
September 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 (excluding the impact of SFAS 142 goodwill impairments) 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 October 31, 2002, $1.6 billion in gross proceeds of securities
remained unissued under the shelf registration statement.
40
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.
Our contractual obligations in the table below include our debt obligations
at face value.
For the twelve months ending September 30,
--------------------------------------------------------
Total 2003 2004 - 2005 2006 - 2007 Thereafter
-------- ------ ------------ ------------ ----------
(In millions)
CONTRACTUAL OBLIGATIONS
Debt $4,511.0 $961.5 $ 749.5 $ 500.0 $ 2,300.0
======== ====== ============ ============ ==========
The bondholders may put back to the Company, at their option, the Zero
Coupon Convertible Debentures due 2020, the 1.5% Convertible Debentures due 2021
and the 7.45% Notes due 2027 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. Should all of the
bondholders of the Zero Coupon Convertible Debentures exercise their put option
in May 2003 we would recognize additional expense of approximately $11 million
to fully amortize the remaining debt issue costs related to these debentures. 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 September 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.
For the twelve months ending September 30,
-----------------------------------------------------
Total 2003 2004 - 2005 2006 - 2007 Thereafter
------ ------ ------------ ----------- ----------
(In millions)
OTHER COMMERCIAL COMMITMENTS
Standby Letters of Credit $ 53.7 $ 47.2 $ 6.5 - -
Surety Bonds 207.1 143.7 63.4 - -
Purchase Option Guarantees - Joint Ventures 191.3 - 191.3 - -
Other Commitments 1.5 - 1.5 - -
------ ------ ------------ ----------- ----------
Total $453.6 $190.9 $ 262.7 - -
====== ====== ============ =========== ==========
In March 2002, we completed an exchange offer pursuant to which R&B
Falcon's 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 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
41
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 exchanged.
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 7 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 September 30, 2002, the value of our
outstanding derivatives was a net asset of $191.8 million and was included in
other assets in the condensed consolidated balance sheets.
DD LLC, 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 $8.2 million at September 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
and will perform a test of impairment as of October 1 each year. 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. See Note 9 to our condensed consolidated financial
statements.
42
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. 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 Emerging Issues Task Force 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 the costs and timing of restructuring
plans, potential revenues, expenses, customer drilling programs, supply and
demand, utilization rates, dayrates, market outlooks for our various
geographical operating sectors, rig classes and business segments, 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, planned asset sales, 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 future
obligations, effects of accounting changes and the effect of proposed
legislation. 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), fair market value of assets, 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
43
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 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.
44
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 September 30 relating to debt obligations as
of September 30, 2002. Weighted-average variable rates are based on estimated
LIBOR rates as of September 30, 2002, plus applicable margins.
As of September 30, 2002 (in millions, except interest rate percentages):
Scheduled Maturity Date (a) (b) Fair Value
-------------------------------------------------------------------- --------
2003 2004 2005 2006 2007 Thereafter Total 9/30/02
------- ------- ------- ------- ------- ------------ --------- --------
Total debt
Fixed Rate $824.0 $130.9 $ 81.1 $400.0 $100.0 $1,050.0 $2,586.0 $2,692.6
Average interest rate 4.1% 8.5% 8.6% 1.5% 7.5% 7.6% 5.6%
Variable Rate $137.5 $150.0 $ 37.5 - - - $ 325.0 $ 325.0
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 $1,794.8
Average interest rate - - 4.7% - - 3.6% 3.8%
- --------------------------
(a) Maturity dates 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.
(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 7 to our condensed consolidated financial statements.
At September 30, 2002, we had approximately $1.9 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 $18 million in
interest expense per year. Offsetting this, a large part of our investments
would earn commensurately higher rates of return. Using September 30, 2002
investment levels, a one percent increase in interest rates would result in
approximately $10 million of additional interest income per year. Based on
September 30, 2002 balances, our net variable debt balance at face value,
defined as variable rate debt less swap receivables and cash and cash
equivalents, totaled $711 million (22 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.
45
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings. Subsequent to the date of their evaluation, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect the internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
46
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1988, a lawsuit was filed in the U.S. District Court for the
Southern District of West Virginia against Reading & Bates Coal Co., a wholly
owned subsidiary of R&B Falcon, by SCW Associates, Inc. claiming breach of an
alleged agreement to purchase the stock of Belva Coal Company, a wholly owned
subsidiary of Reading & Bates Coal Co. with coal properties in West Virginia.
When those coal properties were sold in July 1989 as part of the disposition of
R&B Falcon's coal operations, the purchasing joint venture indemnified Reading &
Bates Coal Co. and R&B Falcon against any liability Reading & Bates Coal Co.
might incur as a result of this litigation. A judgment for the plaintiff of
$32,000 entered in February 1991 was satisfied and Reading & Bates Coal Co. was
indemnified by the purchasing joint venture. On October 31, 1990, SCW
Associates, Inc., the plaintiff in the above-referenced action, filed a separate
ancillary action in the Circuit Court, Kanawha County, West Virginia against R&B
Falcon, Caymen Coal, Inc. (the former owner of R&B Falcon's West Virginia coal
properties), as well as the joint venture, Mr. William B. Sturgill (the former
President of Reading & Bates Coal Co.) personally, three other companies in
which we believe Mr. Sturgill holds an equity interest, two employees of the
joint venture, First National Bank of Chicago and First Capital Corporation.
The lawsuit sought to recover compensatory damages of $50 million and punitive
damages of $50 million for alleged tortuous interference with the contractual
rights of the plaintiff and to impose a constructive trust on the proceeds of
the use and/or sale of the assets of Caymen Coal, Inc. as they existed on
October 15, 1988. The lawsuit was settled in August 2002, and the terms of the
settlement have been reflected in our results of operations for the nine months
ended September 30, 2002. The settlement did not have a material adverse effect
on our business or consolidated financial position.
We also have certain other actions or claims pending that have been
previously discussed and reported in our Annual Report on Form 10-K for the year
ended December 31, 2001 and Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2002 and June 30, 2002. 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 the ultimate liability, if any, resulting from
any such other pending litigation will have a material adverse effect on our
business or consolidated financial position.
We cannot predict with certainty the outcome or effect of any of the
litigation matters specifically described above or of any such other pending
litigation. There can be no assurance that our beliefs or expectations as to
the outcome or effect of any lawsuit or other litigation matter will prove
correct and the eventual outcome of these matters could materially differ from
management's current estimates.
47
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.
(incorporated by reference to Exhibit 3.3 to the Company's Quarterly
Report filed on Form 10-Q for the quarter ended June 30, 2002)
*10.1 Employment Agreement dated July 15, 2002 by and among R&B Falcon
Corporation, R&B Falcon Management Services, Inc., and Jan Rask
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report filed on Form 10-Q for the quarter ended June 30, 2002)
*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 to Exhibit 10.2 to the Company's Quarterly
Report filed on Form 10-Q for the quarter ended June 30, 2002)
*10.3 Agreement dated October 10, 2002 by and among Transocean Inc.,
Transocean Offshore Deepwater Drilling Inc. and J. Michael Talbert
(incorporated by reference to Exhibit 99.2 to the Company's Current
Report dated October 10, 2002 on Form 8-K)
*10.4 Amendment to Consulting Agreement between Transocean Offshore Inc.
(now known as Transocean Inc.) and Victor E. Grijalva dated October
10, 2002 (incorporated by reference to Exhibit 99.3 to the Company's
Current Report dated October 10, 2002 on Form 8-K)
*10.5 Agreement dated May 9, 2002 by and among Transocean Offshore
Deepwater Drilling Inc. and Robert L. Long (incorporated by reference
to Exhibit 99.4 to the Company's Current Report dated October 10, 2002
on Form 8-K)
- ---------------------------
* Incorporated by reference as indicated.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 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
August 13, 2002 (information furnished not filed) announcing that certifications
48
by the Company's chief executive officer and chief financial officer had been
submitted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 in
correspondence to the Securities and Exchange Commission accompanying the
Company's quarterly report on Form 10-Q, a Current Report on Form 8-K on August
14, 2002 (information furnished not filed) announcing that sworn statements by
the Company's chief executive officer and chief financial officer had been
submitted in compliance with Order No. 4-460 of the Securities and Exchange
Commission, a Current Report on Form 8-K on August 16, 2002 (information
furnished not filed) announcing the Company's view of supply/demand, committed
fleet days, the effect of a change in dayrate assumption on earnings per share,
unaudited operating results for the first six months of 2002, and estimated
capital expenditures for 2002 through 2004, a Current Report on Form 8-K on
August 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 September 3, 2002 (information furnished not filed) announcing
the Company's view of supply/demand, committed fleet days and the effect of a
change in dayrate assumption on earnings per share, and a Current Report on Form
8-K on September 30, 2002 (information furnished not filed) announcing that the
updated "Monthly Fleet Report" was available on the Company's website.
49
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 November 12, 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)
50
CERTIFICATIONS
Principal Executive Officer
---------------------------
I, Robert L. Long, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Transocean, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Robert L. Long
------------------------------------
Robert L. Long
President and Chief Executive Officer
51
Principal Financial Officer
---------------------------
I, Gregory L. Cauthen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Transocean, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
d) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Gregory L. Cauthen
------------------------------------
Gregory L. Cauthen
Senior Vice President, Chief
Financial Officer and Treasurer
52