Attached files
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EX-31.1 - EX-31.1 - DIAMOND OFFSHORE DRILLING, INC. | h84346exv31w1.htm |
EX-32.1 - EX-32.1 - DIAMOND OFFSHORE DRILLING, INC. | h84346exv32w1.htm |
EX-31.2 - EX-31.2 - DIAMOND OFFSHORE DRILLING, INC. | h84346exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - DIAMOND OFFSHORE DRILLING, INC. | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
76-0321760 (I.R.S. Employer Identification No.) |
15415 Katy Freeway
Houston, Texas
77094
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(Zip Code)
(281) 492-5300
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
As of October 20, 2011 | Common stock, $0.01 par value per share | 139,027,209 shares |
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2011
PAGE NO. | ||||||||
COVER PAGE |
1 | |||||||
TABLE OF CONTENTS |
2 | |||||||
3 | ||||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
20 | ||||||||
41 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
44 | ||||||||
45 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
(Unaudited)
(In thousands, except share and per share data)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 348,003 | $ | 464,393 | ||||
Marketable securities |
801,931 | 612,346 | ||||||
Accounts receivable, net of allowance for bad debts |
622,949 | 609,606 | ||||||
Prepaid expenses and other current assets |
157,389 | 177,153 | ||||||
Total current assets |
1,930,272 | 1,863,498 | ||||||
Drilling and other property and equipment, net of accumulated depreciation |
4,605,748 | 4,283,792 | ||||||
Long-term receivable |
| 35,361 | ||||||
Other assets |
303,215 | 544,333 | ||||||
Total assets |
$ | 6,839,235 | $ | 6,726,984 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 59,169 | $ | 99,236 | ||||
Accrued liabilities |
279,209 | 469,190 | ||||||
Taxes payable |
34,583 | 57,862 | ||||||
Total current liabilities |
372,961 | 626,288 | ||||||
Long-term debt |
1,495,765 | 1,495,593 | ||||||
Deferred tax liability |
519,980 | 542,258 | ||||||
Other liabilities |
189,914 | 201,133 | ||||||
Total liabilities |
2,578,620 | 2,865,272 | ||||||
Commitments and contingencies (Note 9) |
| | ||||||
Stockholders equity: |
||||||||
Common stock (par value $0.01, 500,000,000 shares authorized;
143,944,009 shares issued and 139,027,209 shares outstanding
at September 30, 2011; 143,943,624 shares issued and
139,026,824 shares outstanding at December 31, 2010) |
1,439 | 1,439 | ||||||
Additional paid-in capital |
1,976,294 | 1,972,550 | ||||||
Retained earnings |
2,406,188 | 1,998,995 | ||||||
Accumulated other comprehensive gain (loss) |
(8,893 | ) | 3,141 | |||||
Treasury stock, at cost (4,916,800 shares at September 30,
2011 and December 31, 2010) |
(114,413 | ) | (114,413 | ) | ||||
Total stockholders equity |
4,260,615 | 3,861,712 | ||||||
Total liabilities and stockholders equity |
$ | 6,839,235 | $ | 6,726,984 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
3
Table of Contents
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Contract drilling |
$ | 861,511 | $ | 748,998 | $ | 2,520,030 | $ | 2,405,175 | ||||||||
Revenues related to reimbursable expenses |
16,666 | 50,726 | 54,032 | 76,833 | ||||||||||||
Total revenues |
878,177 | 799,724 | 2,574,062 | 2,482,008 | ||||||||||||
Operating expenses: |
||||||||||||||||
Contract drilling, excluding depreciation |
391,369 | 350,555 | 1,141,739 | 1,008,551 | ||||||||||||
Reimbursable expenses |
16,206 | 50,313 | 52,443 | 75,397 | ||||||||||||
Depreciation |
101,175 | 99,117 | 303,523 | 297,265 | ||||||||||||
General and administrative |
14,879 | 16,999 | 48,976 | 50,502 | ||||||||||||
Bad debt expense (recovery) |
4,734 | (2,048 | ) | (5,413 | ) | (5,946 | ) | |||||||||
Gain on disposition of assets |
(463 | ) | (32,392 | ) | (4,344 | ) | (33,425 | ) | ||||||||
Total operating expenses |
527,900 | 482,544 | 1,536,924 | 1,392,344 | ||||||||||||
Operating income |
350,277 | 317,180 | 1,037,138 | 1,089,664 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
2,024 | 395 | 3,565 | 2,154 | ||||||||||||
Interest expense |
(15,874 | ) | (22,567 | ) | (60,144 | ) | (66,221 | ) | ||||||||
Foreign currency transaction gain (loss) |
(1,442 | ) | 3,724 | (4,603 | ) | 194 | ||||||||||
Other, net |
(136 | ) | (166 | ) | (232 | ) | (287 | ) | ||||||||
Income before income tax expense |
334,849 | 298,566 | 975,724 | 1,025,504 | ||||||||||||
Income tax expense |
(77,995 | ) | (100,042 | ) | (201,672 | ) | (311,734 | ) | ||||||||
Net income |
$ | 256,854 | $ | 198,524 | $ | 774,052 | $ | 713,770 | ||||||||
Income per share: |
||||||||||||||||
Basic |
$ | 1.85 | $ | 1.43 | $ | 5.57 | $ | 5.13 | ||||||||
Diluted |
$ | 1.85 | $ | 1.43 | $ | 5.57 | $ | 5.13 | ||||||||
Weighted-average shares outstanding: |
||||||||||||||||
Shares of common stock |
139,027 | 139,027 | 139,027 | 139,026 | ||||||||||||
Dilutive potential shares of common stock |
14 | 10 | 21 | 55 | ||||||||||||
Total weighted-average shares outstanding |
139,041 | 139,037 | 139,048 | 139,081 | ||||||||||||
Cash dividends declared per share of common stock |
$ | 0.875 | $ | 0.875 | $ | 2.625 | $ | 4.375 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
4
Table of Contents
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(Unaudited)
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net income |
$ | 774,052 | $ | 713,770 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
303,523 | 297,265 | ||||||
Gain on disposition of assets |
(4,344 | ) | (33,425 | ) | ||||
(Gain) loss on sale of marketable securities, net |
(780 | ) | 5 | |||||
Gain on foreign currency forward exchange contracts |
(9,593 | ) | (1,924 | ) | ||||
Deferred tax provision |
(15,798 | ) | 14,918 | |||||
Accretion of discounts on marketable securities |
(39 | ) | (421 | ) | ||||
Amortization of debt issuance costs |
659 | 665 | ||||||
Amortization of debt discounts |
172 | 222 | ||||||
Stock-based compensation expense |
3,749 | 4,821 | ||||||
Deferred income, net |
(46,127 | ) | 41,768 | |||||
Deferred expenses, net |
62,836 | (77,372 | ) | |||||
Other assets, noncurrent |
(165 | ) | 7,804 | |||||
Other liabilities, noncurrent |
964 | 10,413 | ||||||
Proceeds from settlement of foreign currency forward exchange contracts
designated as accounting hedges |
9,593 | 1,924 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
20,055 | 141,726 | ||||||
Prepaid expenses and other current assets |
(20,137 | ) | (16,023 | ) | ||||
Accounts payable and accrued liabilities |
(43,845 | ) | 10,146 | |||||
Taxes payable |
44,368 | (166,389 | ) | |||||
Net cash provided by operating activities |
1,079,143 | 949,893 | ||||||
Investing activities: |
||||||||
Capital expenditures (including rig construction) |
(643,305 | ) | (312,995 | ) | ||||
Proceeds from disposition of assets, net of disposal costs |
5,128 | 186,333 | ||||||
Proceeds from sale and maturities of marketable securities |
4,862,108 | 3,700,176 | ||||||
Purchases of marketable securities |
(5,051,538 | ) | (4,099,525 | ) | ||||
Net cash used in investing activities |
(827,607 | ) | (526,011 | ) | ||||
Financing activities: |
||||||||
Redemption of zero coupon debentures |
| (4,238 | ) | |||||
Payment of dividends |
(367,930 | ) | (611,668 | ) | ||||
Other |
4 | 41 | ||||||
Net cash used in financing activities |
(367,926 | ) | (615,865 | ) | ||||
Net change in cash and cash equivalents |
(116,390 | ) | (191,983 | ) | ||||
Cash and cash equivalents, beginning of period |
464,393 | 376,417 | ||||||
Cash and cash equivalents, end of period |
$ | 348,003 | $ | 184,434 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
5
Table of Contents
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
The unaudited consolidated financial statements of Diamond Offshore Drilling, Inc. and
subsidiaries, which we refer to as Diamond Offshore, we, us or our, should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010 (File No.
1-13926).
As of October 20, 2011, Loews Corporation, or Loews, owned 50.4% of the outstanding shares of
our common stock.
Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the U.S., or GAAP, 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, they do
not include all disclosures required by GAAP for complete financial statements. The consolidated
financial information has not been audited but, in the opinion of management, includes all
adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the
consolidated balance sheets, statements of operations and statements of cash flows at the dates and
for the periods indicated. Results of operations for interim periods are not necessarily
indicative of results of operations for the respective full years.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Actual results could differ from
those estimated.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified to conform to the
classifications currently followed. Such reclassifications do not affect earnings.
Cash and Cash Equivalents, Marketable Securities
We consider short-term, highly liquid investments that have an original maturity of three
months or less and deposits in money market mutual funds that are readily convertible into cash to
be cash equivalents. See Note 6.
We classify our investments in marketable securities as available for sale, and they are
stated at fair value in our Consolidated Balance Sheets. Accordingly, any unrealized gains and
losses, net of taxes, are reported in our Consolidated Balance Sheets in Accumulated other
comprehensive gain until realized. The cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity and such adjustments are included in our
Consolidated Statements of Operations in Interest income. The sale and purchase of securities are
recorded on the date of the trade. The cost of debt securities sold is based on the specific
identification method. Realized gains or losses, as well as any declines in value that are judged
to be other than temporary, are reported in our Consolidated Statements of Operations in Other
income (expense) Other, net.
The effect of exchange rate changes on cash balances held in foreign currencies was not
material for the nine months ended September 30, 2011 and 2010.
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Provision for Bad Debts
We record a provision for bad debts on a case-by-case basis when facts and circumstances
indicate that a customer receivable may not be collectible. In establishing these reserves, we
consider historical and other factors that predict collectability, including write-offs, recoveries
and the monitoring of credit quality. Such provision is reported as a component of Operating
expenses in our Consolidated Statements of Operations. See Note 2.
Derivative Financial Instruments
Our derivative financial instruments consist of foreign currency forward exchange, or FOREX,
contracts which we may designate as cash flow hedges. In accordance with GAAP, each derivative
contract is stated in the balance sheet at its fair value with gains and losses reflected in the
income statement except that, to the extent the derivative qualifies for and is designated as an
accounting hedge, the gains and losses are reflected in income in the same period as offsetting
gains and losses on the qualifying hedged positions. We report such realized gains and losses as a
component of Contract drilling, excluding depreciation expense in our Consolidated Statements of
Operations to offset the impact of foreign currency fluctuations in our expenditures in local
foreign currencies in the countries in which we operate.
Realized gains or losses upon settlement of derivative contracts not designated as cash flow
hedges are reported as Foreign currency transaction gain (loss) in our Consolidated Statements of
Operations. For the three-month and nine-month periods ended September 30, 2011 and 2010, we
recognized no foreign currency transaction gain (loss) attributable to FOREX contracts not
designated as cash flow hedges. See Notes 5 and 6.
Capitalized Interest
We capitalize interest cost for the construction and upgrade of qualifying assets. Commencing
in August 2011, we began capitalizing interest on qualifying expenditures related to the
construction of three drillships with expected deliveries in 2013 and 2014. There were no
qualifying expenditures during the nine months ended September 30, 2010. See Note 7.
A reconciliation of our total interest cost to Interest expense as reported in our
Consolidated Statements of Operations is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Total interest cost including amortization of debt issuance costs |
$ | 20,364 | $ | 22,567 | $ | 64,634 | $ | 66,221 | ||||||||
Capitalized interest |
(4,490 | ) | | (4,490 | ) | | ||||||||||
Total interest expense as reported |
$ | 15,874 | $ | 22,567 | $ | 60,144 | $ | 66,221 | ||||||||
Property, Plant and Equipment
We carry our drilling and other property and equipment at cost. Maintenance and routine
repairs are charged to income currently while replacements and betterments, which upgrade or
increase the functionality of our existing equipment and that significantly extend the useful life
of an existing asset, are capitalized. Significant judgments, assumptions and estimates may be
required in determining whether or not such replacements and betterments meet the criteria for
capitalization and in determining useful lives and salvage values of such assets. Changes in these
judgments, assumptions and estimates could produce results that differ from those reported.
Historically, the amount of capital additions requiring significant judgments, assumptions or
estimates has not been significant. Depreciation is amortized up to applicable salvage values by
applying the straight-line method over the remaining estimated useful lives. During the nine
months ended September 30, 2011 and the year ended December 31, 2010, we capitalized $136.3 million
and $379.8 million, respectively, in replacements and betterments of our drilling fleet, resulting
from numerous projects ranging from $25,000 to $50 million per project.
We evaluate our property and equipment for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be recoverable (such as cold stacking a rig
or excess spending over budget on a new-build or major rig upgrade). We utilize a
probability-weighted cash flow analysis in testing an asset for potential impairment. Our
assumptions and estimates underlying this analysis include the following:
| dayrate by rig; |
7
Table of Contents
| utilization rate by rig (expressed as the actual percentage of time per year that the rig would be used); | ||
| the per day operating cost for each rig if active, ready-stacked or cold-stacked; | ||
| the estimated annual cost for rig replacements and/or enhancement programs; | ||
| the estimated maintenance, inspection or other costs associated with a rig returning to work; | ||
| salvage value for each rig; and | ||
| estimated proceeds that may be received on disposition of the rig. |
Based on these assumptions and estimates, we develop a matrix using several different
utilization/dayrate scenarios, to each of which we have assigned a probability of occurrence. The
sum of our utilization scenarios (which include active, warm stacked and cold stacked) and
probability of occurrence scenarios both equal 100% in the aggregate. We reevaluate our
cold-stacked rigs annually, and we update the matrices for each of our cold stacked rigs at each
year end and modify our assumptions giving consideration to the length of time the rig has been
cold stacked, the current and expected market for the type of rig and expectations of future oil
and gas prices. Further, to test sensitivity, we consider the impact of a 5% reduction in assumed
dayrates for the cold-stacked rigs (holding all other assumptions and estimates in the model
constant). We would not necessarily record an impairment if the sensitivity analysis indicated
potential cash flows would be insufficient to recover our carrying value. We would assess other
qualitative factors including industry, regulatory and other relevant conditions to determine
whether an impairment or further disclosure is warranted.
As of September 30, 2011, we had eight cold stacked rigs with an aggregate net book value of
approximately $87.6 million. Of our cold stacked rigs, four were jack-up rigs, consisting of three
mat-supported rigs and one independent-leg, cantilevered rig (all in the U.S. Gulf of Mexico, or
GOM), and four were intermediate semisubmersible rigs (two in the GOM and two in Malaysia),
including the Ocean Epoch, which was cold stacked in the first quarter of 2011. As of December 31,
2010, we had seven cold stacked rigs with an aggregate net book value of approximately $78.0
million. We performed an impairment review for each of these rigs using the methodology described
above. Based on our analyses, we have concluded that these rigs were not subject to impairment at
September 30, 2011 and December 31, 2010, respectively.
Managements assumptions are an inherent part of our asset impairment evaluation and the use
of different assumptions could produce results that differ from those reported.
Comprehensive Income
A reconciliation of net income to comprehensive income is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income |
$ | 256,854 | $ | 198,524 | $ | 774,052 | $ | 713,770 | ||||||||
Other comprehensive gains (losses), net of tax: |
||||||||||||||||
FOREX contracts: |
||||||||||||||||
Unrealized holding (loss) gain |
(11,221 | ) | 3,608 | (3,538 | ) | 348 | ||||||||||
Reclassification adjustment for loss (gain)
included in net income |
(3,115 | ) | (116 | ) | (8,064 | ) | (845 | ) | ||||||||
Investments in marketable securities: |
||||||||||||||||
Unrealized holding (loss) gain |
(55 | ) | (9 | ) | (54 | ) | (31 | ) | ||||||||
Reclassification adjustment for loss (gain)
included in net income |
1 | 13 | (378 | ) | 14 | |||||||||||
Comprehensive income |
$ | 242,464 | $ | 202,020 | $ | 762,018 | $ | 713,256 | ||||||||
Foreign Currency
Our functional currency is the U.S. dollar. Foreign currency transaction gains and losses are
reported as Foreign currency transaction gain (loss) in our Consolidated Statements of
Operations. For the three-month and nine-month periods ended September 30, 2011, we recognized net
foreign currency transaction (losses) of $(1.4) million and $(4.6) million, respectively. For the
three-month and nine-month periods ended September 30, 2010, we recognized net foreign currency
transaction gains of $3.7 million and $0.2 million, respectively. See Note 5.
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Revenue Recognition
Revenue from our dayrate drilling contracts is recognized as services are performed. In
connection with such drilling contracts, we may receive fees (either lump-sum or dayrate) for the
mobilization of equipment. These fees are earned as services are performed over the initial term
of the related drilling contracts. We defer mobilization fees received, as well as direct and
incremental mobilization costs incurred, and amortize each, on a straight line basis, over the term
of the related drilling contracts (which is the period we estimate to be benefited from the
mobilization activity). Straight line amortization of mobilization revenues and related costs over
the initial term of the related drilling contracts (which generally range from 2 to 60 months) is
consistent with the timing of net cash flows generated from the actual drilling services performed.
Absent a contract, mobilization costs are recognized as incurred.
From time to time, we may receive fees from our customers for capital improvements to our rigs
(either lump-sum or dayrate). We defer such fees received in Accrued liabilities and Other
liabilities in our Consolidated Balance Sheets and recognize these fees into income on a
straight-line basis over the period of the related drilling contract. We capitalize the costs of
such capital improvements and depreciate them over the estimated useful life of the asset.
We record reimbursements received for the purchase of supplies, equipment, personnel services
and other services provided at the request of our customers in accordance with a contract or
agreement, for the gross amount billed to the customer, as Revenues related to reimbursable
expenses in our Consolidated Statements of Operations.
Income Taxes
Certain of our international rigs are owned and operated, directly or indirectly, by Diamond
Offshore International Limited, or DOIL, a Cayman Islands subsidiary which we wholly own. Since
forming this subsidiary in 2002, it has been our intention to indefinitely reinvest the earnings of
the subsidiary to finance foreign activities. Consequently, no U.S. federal income taxes have been
provided on these earnings except to the extent that such earnings were immediately subject to U.S.
federal income taxes and except for the earnings of Diamond East Asia Limited, or DEAL, a
wholly-owned subsidiary of DOIL. It had been our intention to repatriate the earnings of DEAL to
the U.S. and, accordingly, we provided U.S. income taxes on its earnings. However, a tax law
provision that expired at the end of 2009, but was subsequently signed back into law by the
President of the United States on December 17, 2010, in conjunction with our decisions in late 2010
and the first half of 2011 to build three new drillships overseas, caused us to reassess our intent
to repatriate the earnings of DEAL to the U.S. We now plan to reinvest the earnings of DEAL
internationally through another of our foreign companies, and consequently, we are no longer
providing U.S. income taxes on its earnings. During the nine months ended September 30, 2011, we
reversed approximately $15.0 million of U.S. income taxes that had been provided in prior periods
for the earnings of DEAL.
Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards
Update, or ASU, No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive
Income, or ASU 2011-05, which eliminates the option to present components of other comprehensive
income, or OCI, as part of the statement of changes in stockholders equity, requires the
presentation of each component of net income and each component of OCI either in a single
continuous statement or in two separate but consecutive statements and also requires presentation
of reclassification adjustments on the face of the financial statement. ASU 2011-05 is effective
for interim and annual periods beginning after December 15, 2011; however, early adoption is
permitted. The adoption of ASU 2011-05 will not have an effect on our financial position, results
of operations or cash flows.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs, or ASU 2011-04. ASU 2011-04 clarifies existing fair value measurement and disclosure
requirements, amends certain fair value measurement principles and requires additional disclosures
about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning
after December 15, 2011. We will incorporate any additional disclosures in our annual financial
statements for the year ending December 31, 2012.
9
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2. Supplemental Financial Information
Consolidated Balance Sheet Information
Accounts receivable, net of allowance for bad debts, consists of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Trade receivables |
$ | 621,012 | $ | 633,224 | ||||
Value added tax receivables |
6,952 | 5,003 | ||||||
Unbilled third party claims |
445 | 45 | ||||||
Related party receivables |
2,443 | 538 | ||||||
Other |
264 | 2,704 | ||||||
631,116 | 641,514 | |||||||
Allowance for bad debts |
(8,167 | ) | (31,908 | ) | ||||
Total |
$ | 622,949 | $ | 609,606 | ||||
In September 2011, we recorded a $5.7 million provision for bad debts to reserve a
portion of the uncollected balance of receivables from one of our current customers in Egypt.
During the three-month and nine-month periods ended September 30, 2011, we recovered $1.0 million
and $11.1 million, respectively, in previously reserved bad debts. Recoveries during the first
nine months of 2011 included $8.5 million in final payments from a previous customer in the North
Sea and $2.6 million from another customer in Egypt for whom we no longer work. In addition,
during 2011, we offset $18.4 million in previously reserved trade receivables against the allowance
for bad debts as we had exhausted all methods of recovery against the North Sea customer.
During the three-month and nine-month periods ended September 30, 2010, we recovered $2.0
million and $5.9 million, respectively, in previously reserved bad debts. Recoveries during the
first nine months of 2010 included $1.0 million from a previous customer in the North Sea and $4.9
million from a previous customer in Egypt. No allowances were deemed necessary for the three-month
and nine-month periods ended September 30, 2010.
Prepaid expenses and other current assets consist of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Rig spare parts and supplies |
$ | 50,857 | $ | 50,288 | ||||
Deferred mobilization costs |
60,005 | 76,868 | ||||||
Prepaid insurance |
20,409 | 9,587 | ||||||
Deferred tax assets |
9,557 | 9,557 | ||||||
Deposits |
1,574 | 827 | ||||||
Prepaid taxes |
5,515 | 20,347 | ||||||
FOREX contracts |
236 | 4,326 | ||||||
Other |
9,236 | 5,353 | ||||||
Total |
$ | 157,389 | $ | 177,153 | ||||
Accrued liabilities consist of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Accrued capital project/upgrade costs |
$ | 11,905 | $ | 28,947 | ||||
Payroll and benefits |
69,741 | 76,041 | ||||||
Deferred revenue |
47,149 | 69,825 | ||||||
Rig operating expenses |
92,944 | 81,820 | ||||||
Interest payable |
29,617 | 21,219 | ||||||
Personal injury and other claims |
8,955 | 11,758 | ||||||
Accrued drillship construction installment |
| 154,427 | ||||||
Other |
18,898 | 25,153 | ||||||
Total |
$ | 279,209 | $ | 469,190 | ||||
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At December 31, 2010, we had accrued the first installment payable under a turnkey
construction agreement with Hyundai Heavy Industries Co., Ltd., or Hyundai, of $154.4 million and
recorded the related noncurrent asset in an equal amount in Other assets in our Consolidated
Balance Sheets. See Notes 7 and 9.
Consolidated Statement of Cash Flows Information
We paid interest on long-term debt totaling $54.0 million and $54.6 million for the nine-month
periods ended September 30, 2011 and 2010, respectively. During the nine months ended September
30, 2010, we paid $0.9 million in interest on assessments from the Internal Revenue Service.
We made estimated U.S. federal income tax payments of $64.0 million and $362.5 million during
the nine-month periods ended September 30, 2011 and 2010, respectively. We paid $121.9 million
and $88.5 million in foreign income taxes, net of foreign tax refunds, during the nine months ended
September 30, 2011 and 2010, respectively. We paid state income taxes, net of refunds, of $0.2
million and $1.0 million during the nine months ended September 30, 2011 and 2010, respectively.
Capital expenditures for the nine months ended September 30, 2011 included $28.9 million that
was accrued but unpaid at December 31, 2010. Capital expenditures for the nine months ended
September 30, 2010 included $64.9 million that was accrued but unpaid at December 31, 2009.
Capital expenditures that were accrued but not paid as of September 30, 2011 totaled $11.9 million.
We have included this amount in Accrued liabilities in our Consolidated Balance Sheets at
September 30, 2011.
3. Earnings Per Share
A reconciliation of the numerators and the denominators of our basic and diluted per-share
computations follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net income basic (numerator): |
$ | 256,854 | $ | 198,524 | $ | 774,052 | $ | 713,770 | ||||||||
Effect of dilutive potential shares
Convertible debentures |
| | | 56 | ||||||||||||
Net income including conversions
diluted (numerator) |
$ | 256,854 | $ | 198,524 | $ | 774,052 | $ | 713,826 | ||||||||
Weighted average shares basic (denominator): |
139,027 | 139,027 | 139,027 | 139,026 | ||||||||||||
Effect of dilutive potential shares
Convertible debentures |
| | | 28 | ||||||||||||
Stock options and stock appreciation rights. |
14 | 10 | 21 | 27 | ||||||||||||
Weighted average shares including conversions
diluted (denominator) |
139,041 | 139,037 | 139,048 | 139,081 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 1.85 | $ | 1.43 | $ | 5.57 | $ | 5.13 | ||||||||
Diluted |
$ | 1.85 | $ | 1.43 | $ | 5.57 | $ | 5.13 | ||||||||
The following table sets forth the share effects of stock options and the number of stock
appreciation rights excluded from our computations of diluted earnings per share, or EPS, as the
inclusion of such potentially dilutive shares would have been antidilutive for the periods
presented:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Employee and director: |
||||||||||||||||
Stock options |
19 | 19 | 10 | 9 | ||||||||||||
Stock appreciation rights |
815 | 621 | 719 | 579 |
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4. Marketable Securities
We report our investments as current assets in our Consolidated Balance Sheets in Marketable
securities, representing the investment of cash available for current operations. See Note 6.
Our investments in marketable securities are classified as available for sale and are
summarized as follows:
September 30, 2011 | ||||||||||||
Amortized | Unrealized | Market | ||||||||||
Cost | Gain (Loss) | Value | ||||||||||
(In thousands) | ||||||||||||
U.S. Treasury Bills (due within one year) |
$ | 801,543 | $ | (79 | ) | $ | 801,464 | |||||
Mortgage-backed securities |
425 | 42 | 467 | |||||||||
Total |
$ | 801,968 | $ | (37 | ) | $ | 801,931 | |||||
December 31, 2010 | ||||||||||||
Amortized | Unrealized | Market | ||||||||||
Cost | Gain | Value | ||||||||||
(In thousands) | ||||||||||||
U.S. Treasury Bills (due within one year) |
$ | 599,965 | $ | 15 | $ | 599,980 | ||||||
Corporate bonds |
11,200 | 560 | 11,760 | |||||||||
Mortgage-backed securities |
553 | 53 | 606 | |||||||||
Total |
$ | 611,718 | $ | 628 | $ | 612,346 | ||||||
Proceeds from sales and maturities of marketable securities and gross realized gains and
losses are summarized as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Proceeds from sales |
$ | 19 | $ | 88 | $ | 12,108 | $ | 176 | ||||||||
Proceeds from maturities |
1,550,000 | 1,150,000 | 4,850,000 | 3,700,000 | ||||||||||||
Gross realized gains |
| | 784 | | ||||||||||||
Gross realized losses |
(1 | ) | (3 | ) | (3 | ) | (5 | ) |
5. Derivative Financial Instruments
Foreign Currency Forward Exchange Contracts
Our international operations expose us to foreign exchange risk associated with our costs
payable in foreign currencies for employee compensation, foreign income tax payments and purchases
from foreign suppliers. We may utilize FOREX contracts to manage our foreign exchange risk. Our
FOREX contracts may obligate us to exchange predetermined amounts of foreign currencies on
specified dates or to net settle the spread between the contracted foreign currency exchange rate
and the spot rate on the contract settlement date, which, for most of our contracts, is the average
spot rate for the contract period.
We enter into FOREX contracts when we believe market conditions are favorable to purchase
contracts for future settlement with the expectation that such contracts, when settled, will reduce
our exposure to foreign currency gains/losses on foreign currency expenditures in the future. The
amount and duration of such contracts is based on our monthly forecast of expenditures in the
significant currencies in which we do business and for which there is a financial market (i.e.,
Australian dollars, Brazilian reais, British pounds sterling, Mexican pesos and Norwegian kroner).
These forward contracts are derivatives as defined by GAAP.
We have adopted a hedging strategy whereby certain of our qualifying FOREX contracts are
designated as cash flow hedges based on our expected future foreign currency requirements. These
hedges are expected to be highly effective, and therefore, adjustments to record the carrying value
of the effective portion of our derivative financial instruments to their fair value are recorded
as a component of Accumulated other comprehensive gain (loss), or AOCGL, in our Consolidated
Financial Statements. The effective portion of the cash flow hedge will remain in AOCGL until it
is reclassified into earnings in the period or periods during which the hedged transaction affects
earnings or it is determined that the hedged transaction will not occur. Adjustments to record the
carrying value of
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the ineffective portion of our derivative financial instruments to fair value are recorded as
Foreign currency transaction gain (loss) in our Consolidated Statements of Operations.
During the nine months ended September 30, 2011 and 2010, we settled FOREX contracts with an
aggregate notional value of approximately $224.8 million and $251.1 million, respectively, all of
which were designated as accounting hedges. During the nine-month periods ended September 30, 2011
and 2010, we did not enter into or settle any FOREX contracts that were not designated as
accounting hedges.
The following table presents the amounts recognized in our Consolidated Statements of
Operations related to our FOREX contracts designated as accounting hedges for the three-month and
nine-month periods ended September 30, 2011 and 2010.
Amount of Gain (Loss) Recognized in Income | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Location of Gain (Loss) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Recognized in Income | (In thousands) | |||||||||||||||
Contract drilling expense |
$ | 2,362 | $ | 1,467 | $ | 9,593 | $ | 1,924 |
As of September 30, 2011, we had FOREX contracts outstanding in the aggregate notional amount
of $191.0 million, consisting of $30.7 million in Australian dollars, $102.9 million in Brazilian
reais, $33.6 million in British pounds sterling, $10.9 million in Mexican pesos and $12.9 million
in Norwegian kroner. These contracts generally settle monthly through March 2012. As of September
30, 2011, all outstanding derivative contracts had been designated as cash flow hedges. See Note
6.
The following table presents the fair values of our derivative FOREX contracts designated as
hedging instruments at September 30, 2011 and December 31, 2010.
Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||||||||||
Balance Sheet Location | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||
Prepaid
expenses and other
current assets |
$ | 236 | $ | 4,326 | Accrued liabilities | $ | (13,880 | ) | $ | (121 | ) |
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The following table presents the amounts recognized in our Consolidated Balance Sheets
and Consolidated Statements of Operations related to our FOREX contracts designated as cash flow
hedges for the three-month and nine-month periods ended September 30, 2011 and 2010.
For The Three Months Ended | For The Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Amount of gain (loss) recognized in AOCGL on derivative (effective portion) |
$ | (17,263 | ) | $ | 5,550 | $ | (5,443 | ) | $ | 535 | ||||||
Location of gain (loss) reclassified from AOCGL into income (effective portion) |
Contract drilling expense | Contract drilling expense | Contract drilling expense | Contract drilling expense | ||||||||||||
Amount of gain (loss) reclassified from AOCGL into income (effective portion) |
$ | 4,792 | $ | 178 | $ | 12,407 | $ | 1,300 | ||||||||
Location of Gain Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Foreign currency transaction gain (loss) | Foreign currency transaction gain (loss) | Foreign currency transaction gain (loss) | Foreign currency transaction gain (loss) | ||||||||||||
Amount of Gain Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
$ | | $ | | $ | | $ | |
As of September 30, 2011, the estimated amount of net unrealized gains associated with
our FOREX contracts that will be reclassified to earnings during the next twelve months was $13.6
million. The net unrealized gains associated with these derivative financial instruments will be
reclassified to contract drilling expense.
6. Financial Instruments and Fair Value Disclosures
Concentrations of Credit and Market Risk
Financial instruments which potentially subject us to significant concentrations of credit or
market risk consist primarily of periodic temporary investments of excess cash, trade accounts
receivable and investments in debt securities, including residential mortgage-backed securities.
We place our excess cash investments in high quality short-term money market instruments through
several financial institutions. At times, such investments may be in excess of the insurable
limit. We periodically evaluate the relative credit standing of these financial institutions as
part of our investment strategy.
Most of our investments in debt securities are U.S. government securities with minimal credit
risk. However, we are exposed to market risk due to price volatility associated with interest rate
fluctuations.
Concentrations of credit risk with respect to our trade accounts receivable are limited
primarily due to the entities comprising our customer base. Since the market for our services is
the offshore oil and gas industry, this customer base consists primarily of major and independent
oil and gas companies and government-owned oil companies. Our two customers in Brazil, Petróleo
Brasileiro S.A. (a Brazilian multinational energy company that is majority-owned by the Brazilian
government) and OGX Petróleo e Gás Ltda. (a privately owned Brazilian oil and natural gas company),
accounted for $143.6 million and $62.4 million, or 23% and 10%, respectively, of our total
consolidated gross trade accounts receivable balances as of September 30, 2011, and $180.8 million
and $52.4 million, or 29% and 8%, respectively, as of December 31, 2010.
In general, before working for a customer with whom we have not had a prior business
relationship and/or whose financial stability may be uncertain to us, we perform a credit review on
that company. Based on that analysis, we may require that the customer present a letter of credit,
prepay or provide other credit enhancements. Historically, we have not experienced significant
losses on our trade receivables. We record a provision for bad debts on a case-by-case basis when
facts and circumstances indicate that a customer receivable may not be collectible. Our allowance
for bad debts was $8.2 million and $31.9 million at September 30, 2011 and December 31, 2010,
respectively. See Note 2.
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One of our drilling contracts obligates our customer to pay us, over the term of the drilling
program, an aggregate drilling rate of $560,000 per day, consisting of $75,000 per day payable in
accordance with our normal credit terms (due 30 days after receipt of invoice) and the remainder of
the contractual dayrate, $485,000 per day, payable through the conveyance of a 27% net profits
interest, or NPI, in certain developmental oil-and-gas producing properties.
At September 30, 2011, $102.7 million was payable to us from the NPI. Based on current
production payout estimates, we expect to collect the entire $102.7 million receivable within the
next twelve months and have presented this amount in Accounts receivable, net of allowance for bad
debts in our Consolidated Balance Sheets. At September 30, 2011, we believe that collectability
of the amount owed pursuant to the NPI arrangement was reasonably assured.
At December 31, 2010, $85.0 million was payable to us from the NPI, of which $49.6 million and
$35.4 million are presented as Accounts receivable, net of allowance for bad debts and Long-term
receivable, respectively, in our Consolidated Balance Sheets.
Fair Values
The amounts reported in our Consolidated Balance Sheets for cash and cash equivalents,
marketable securities, accounts receivable, forward exchange contracts and accounts payable
approximate fair value. Fair values and related carrying values of our debt instruments are shown
below.
September 30, 2011 | December 31, 2010 | |||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||
(In millions) | ||||||||||||||||
4.875% Senior Notes |
$ | 276.3 | $ | 249.8 | $ | 270.0 | $ | 249.7 | ||||||||
5.15% Senior Notes |
272.8 | 249.8 | 271.1 | 249.7 | ||||||||||||
5.70% Senior Notes |
540.7 | 496.8 | 493.1 | 496.8 | ||||||||||||
5.875% Senior Notes |
579.2 | 499.4 | 550.9 | 499.4 |
We have estimated the fair value amounts by using appropriate valuation methodologies and
information available to management as of September 30, 2011 and December 31, 2010, respectively.
Considerable judgment is required in developing these estimates, and accordingly, no assurance can
be given that the estimated values are indicative of the amounts that would be realized in a free
market exchange. The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it was practicable to estimate that value:
| Cash and cash equivalents The carrying amounts approximate fair value because of the short maturity of these instruments. | ||
| Marketable securities The fair values of the debt securities, including residential mortgage-backed securities, available for sale were based on the quoted closing market prices on September 30, 2011 and December 31, 2010, respectively. | ||
| Accounts receivable and accounts payable The carrying amounts approximate fair value based on the nature of the instruments. | ||
| Forward exchange contracts The fair value of our FOREX contracts is based on both quoted market prices and valuations derived from pricing models on September 30, 2011 and December 31, 2010, respectively. | ||
| Long-term receivable The carrying amount approximates fair value based on the nature of the instrument. | ||
| Long-term debt The fair value of our 5.70% Senior Notes due 2039, 5.875% Senior Notes due 2019, 4.875% Senior Notes due July 1, 2015, and 5.15% Senior Notes due September 1, 2014 is based on the quoted market prices from brokers of these instruments. |
Certain of our assets and liabilities are required to be measured at fair value in accordance
with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. The
fair value hierarchy prescribed by GAAP requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
There are three levels of inputs that may be used to measure fair value:
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Level 1 | Quoted prices for identical instruments in active markets. Level 1 assets include short-term investments such as money market funds, U.S. Treasury Bills and Treasury notes. Our Level 1 assets at September 30, 2011 consisted of cash held in money market funds of $327.2 million and investments in U.S. Treasury securities of $801.5 million. Our Level 1 assets at December 31, 2010 consisted of cash held in money market funds of $442.2 million and investments in U.S. Treasury Bills of $600.0 million. |
Level 2 | Quoted market prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities include residential mortgage-backed securities and over-the-counter FOREX contracts. Our residential mortgage-backed securities were valued using a model-derived valuation technique based on the quoted closing market prices received from a financial institution. Our FOREX contracts are valued based on quoted market prices, which are derived from observable inputs including current spot and forward rates, less the contract rate multiplied by the notional amount. The inputs used in our valuation are obtained from a Bloomberg curve analysis which uses par coupon swap rates to calculate implied forward rates so that projected floating rate cash flows can be calculated. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment. |
Level 3 | Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 assets and liabilities generally include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation or for which there is a lack of transparency as to the inputs used. |
Market conditions could cause an instrument to be reclassified among Levels 1, 2 and 3. Our
policy regarding fair value measurements of financial instruments transferred into and out of
levels is to reflect the transfers as having occurred at the beginning of the reporting period.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
September 30, 2011 | ||||||||||||||||
Fair Value Measurements Using | Assets at Fair | |||||||||||||||
Level 1 | Level 2 | Level 3 | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Short-term investments |
$ | 1,128,624 | $ | | $ | | $ | 1,128,624 | ||||||||
FOREX contracts |
| 236 | | 236 | ||||||||||||
Mortgage-backed securities |
| 467 | | 467 | ||||||||||||
Total assets |
$ | 1,128,624 | $ | 703 | $ | | $ | 1,129,327 | ||||||||
Liabilities: |
||||||||||||||||
FOREX contracts |
$ | | $ | (13,880 | ) | $ | | $ | (13,880 | ) | ||||||
December 31, 2010 | ||||||||||||||||
Fair Value Measurements Using | Assets at Fair | |||||||||||||||
Level 1 | Level 2 | Level 3 | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Short-term investments |
$ | 1,042,224 | $ | | $ | | $ | 1,042,224 | ||||||||
FOREX contracts |
| 4,327 | | 4,327 | ||||||||||||
Corporate bonds |
| 11,760 | | 11,760 | ||||||||||||
Mortgage-backed securities |
| 606 | | 606 | ||||||||||||
Total assets |
$ | 1,042,224 | $ | 16,693 | $ | | $ | 1,058,917 | ||||||||
Liabilities: |
||||||||||||||||
FOREX contracts |
$ | | $ | (121 | ) | $ | | $ | (121 | ) | ||||||
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7. Drilling and Other Property and Equipment
Cost and accumulated depreciation of drilling and other property and equipment are summarized
as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Drilling rigs and equipment |
$ | 7,298,695 | $ | 7,163,196 | ||||
Construction work-in-progress |
483,046 | | ||||||
Land and buildings |
60,449 | 56,536 | ||||||
Office equipment and other |
47,622 | 44,689 | ||||||
Cost |
7,889,812 | 7,264,421 | ||||||
Less: accumulated depreciation |
(3,284,064 | ) | (2,980,629 | ) | ||||
Drilling and other property and equipment, net |
$ | 4,605,748 | $ | 4,283,792 | ||||
In August 2011, we transferred $478.3 million in deposits related to the construction of
three drillships, of which $154.4 million had been accrued at December 31, 2010, from Other
assets in our Consolidated Balance Sheets into construction work-in-progress and commenced
capitalization of interest on qualifying expenditures. See Notes 1 and 2.
8. Long-Term Debt
Long-term debt consists of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
5.15% Senior Notes (due 2014) |
$ | 249,795 | $ | 249,745 | ||||
4.875% Senior Notes (due 2015) |
249,765 | 249,724 | ||||||
5.875% Senior Notes (due 2019) |
499,398 | 499,351 | ||||||
5.70% Senior Notes (due 2039) |
496,807 | 496,773 | ||||||
Total |
$ | 1,495,765 | $ | 1,495,593 | ||||
The aggregate annual maturities of long-term debt are as follows:
(Dollars in thousands) | ||||
2012 |
$ | | ||
2013 |
| |||
2014 |
249,795 | |||
2015 |
249,765 | |||
2016 |
| |||
Thereafter |
996,205 | |||
Total |
$ | 1,495,765 | ||
On October 12, 2011, we terminated our $285 million syndicated, senior unsecured
revolving credit facility.
9. Commitments and Contingencies
Various claims have been filed against us in the ordinary course of business, including claims
by offshore workers alleging personal injuries. We have assessed each claim or exposure to
determine the likelihood that the resolution of the matter might ultimately result in an adverse
effect on our financial condition, results of operations and cash flows. When we determine that an
unfavorable resolution of a matter is probable and such amount of loss can be determined, we record
a reserve for the estimated loss at the time that both of these criteria are met. Our management
believes that we have established adequate reserves for any liabilities that may reasonably be
expected to result from these claims.
Litigation. We are one of several unrelated defendants in 30 lawsuits filed in Louisiana and
Mississippi state courts alleging that defendants manufactured, distributed or utilized drilling
mud containing asbestos and, in our case, allowed such drilling mud to have been utilized aboard
our offshore drilling rigs. The plaintiffs seek, among other things, an award of unspecified
compensatory and punitive damages. The manufacture and use of asbestos-
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containing drilling mud had already ceased before we acquired any of the drilling rigs addressed in
these lawsuits. We believe that we are not liable for the damages asserted and we expect to
receive complete defense and indemnity with respect to a majority of the lawsuits from Murphy
Exploration & Production Company pursuant to the terms of our 1992 asset purchase agreement with
them. We also believe that we are not liable for the damages asserted in the remaining lawsuits
pursuant to the terms of our 1989 asset purchase agreement with Diamond M Corporation, and we have
filed a declaratory judgment action in Texas state court against NuStar Energy LP, the successor to
Diamond M Corporation, seeking a judicial determination that we did not assume liability for these
claims. We are unable to estimate our potential exposure, if any, to these lawsuits at this time
but do not believe that ultimate liability, if any, resulting from this litigation will have a
material adverse effect on our financial condition, results of operations and cash flows.
Various other claims have been filed against us in the ordinary course of business. In the
opinion of our management, no pending or known threatened claims, actions or proceedings against us
are expected to have a material adverse effect on our consolidated financial position, results of
operations and cash flows.
We intend to defend these matters vigorously; however, we cannot predict with certainty the
outcome or effect of any litigation matters specifically described above or any other pending
litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits.
Personal Injury Claims. Our deductibles for marine liability coverage, including personal
injury claims, which primarily result from Jones Act liability in the Gulf of Mexico, are currently
$10.0 million per the first occurrence, with no aggregate deductible, and vary in amounts ranging
between $5.0 million and, if aggregate claims exceed certain thresholds, up to $100.0 million for
each subsequent occurrence, depending on the nature, severity and frequency of claims which might
arise during the policy year. The Jones Act is a federal law that permits seamen to seek
compensation for certain injuries during the course of their employment on a vessel and governs the
liability of vessel operators and marine employers for the work-related injury or death of an
employee. We engage outside consultants to assist us in estimating our aggregate reserve for
personal injury claims based on our historical losses and utilizing various actuarial models. We
allocate a portion of the aggregate reserve to Accrued liabilities based on an estimate of claims
expected to be paid within the next twelve months with the residual recorded as Other
liabilities. At September 30, 2011, our estimated liability for personal injury claims was $36.2
million, of which $8.4 million and $27.8 million were recorded in Accrued liabilities and Other
liabilities, respectively, in our Consolidated Balance Sheets. At December 31, 2010, our
estimated liability for personal injury claims was $35.0 million, of which $11.1 million and $23.9
million were recorded in Accrued liabilities and Other liabilities, respectively, in our
Consolidated Balance Sheets. The eventual settlement or adjudication of these claims could differ
materially from our estimated amounts due to uncertainties such as:
| the severity of personal injuries claimed; | ||
| significant changes in the volume of personal injury claims; | ||
| the unpredictability of legal jurisdictions where the claims will ultimately be litigated; | ||
| inconsistent court decisions; and | ||
| the risks and lack of predictability inherent in personal injury litigation. |
Purchase Obligations. Since December 2010, we have entered into three separate turnkey
contracts with Hyundai for the construction of three dynamically positioned, ultra-deepwater
drillships, with deliveries scheduled for late in the second and fourth quarters of 2013 and in the
second quarter of 2014. The aggregate cost of the three drillships, including commissioning,
spares and project management, is expected to be approximately $1.8 billion.
The contracted price of each drillship is payable in two installments. The first
installments, aggregating $478.3 million, were paid in the first and second quarters of 2011 and
are reported in Drilling and other property and equipment, net of accumulated depreciation in our
Consolidated Balance Sheets as construction work-in-progress. At September 30, 2011 and December
31, 2010, we had no other purchase obligations for major rig upgrades or any other significant
obligations, except for those related to our direct rig operations, which arise during the normal
course of business.
Letters of Credit and Other. We were contingently liable as of September 30, 2011 in the
amount of $65.1 million under certain performance, bid, supersedeas, tax appeal and custom bonds
and letters of credit. At September 30, 2011, two of our outstanding bonds, totaling $19.6
million, had been purchased from a related party after obtaining competitive quotes. Agreements
relating to approximately $51.6 million of performance bonds can require collateral at any time.
As of September 30, 2011, we had not been required to make any collateral deposits
with respect to these agreements. The remaining agreements cannot require collateral except
in events of default. On our behalf, banks have issued letters of credit securing certain of these
bonds.
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10. Segments and Geographic Area Analysis
Although we provide contract drilling services with different types of offshore drilling rigs
and also provide such services in many geographic locations, we have aggregated these operations
into one reportable segment based on the similarity of economic characteristics among all divisions
and locations, including the nature of services provided and the type of customers of such
services, in accordance with FASB Accounting Standards Codification Topic 280, Segment Reporting.
Revenues from contract drilling services by equipment-type are listed below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
High-Specification Floaters |
$ | 464,512 | $ | 305,335 | $ | 1,277,867 | $ | 1,029,510 | ||||||||
Intermediate Semisubmersibles |
350,409 | 380,438 | 1,086,748 | 1,150,233 | ||||||||||||
Jack-ups |
46,540 | 63,133 | 155,270 | 225,305 | ||||||||||||
Other |
50 | 92 | 145 | 127 | ||||||||||||
Total contract drilling revenues |
861,511 | 748,998 | 2,520,030 | 2,405,175 | ||||||||||||
Revenues related to reimbursable
expenses |
16,666 | 50,726 | 54,032 | 76,833 | ||||||||||||
Total revenues |
$ | 878,177 | $ | 799,724 | $ | 2,574,062 | $ | 2,482,008 | ||||||||
Geographic Areas
Our drilling rigs are highly mobile and may be moved to other markets throughout the world in
response to market conditions or customer needs. At September 30, 2011, our drilling rigs were en
route to or located offshore eleven countries in addition to the United States. Revenues by
geographic area are presented by attributing revenues to the individual country or areas where the
services were performed.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
United States |
$ | 93,870 | $ | 146,229 | $ | 245,365 | $ | 573,796 | ||||||||
International: |
||||||||||||||||
South America |
454,350 | 318,117 | 1,339,674 | 913,440 | ||||||||||||
Australia/Asia/Middle East |
121,450 | 181,550 | 344,572 | 482,942 | ||||||||||||
Europe/Africa/Mediterranean |
198,551 | 120,113 | 597,701 | 396,796 | ||||||||||||
Mexico |
9,956 | 33,715 | 46,750 | 115,034 | ||||||||||||
Total revenues |
$ | 878,177 | $ | 799,724 | $ | 2,574,062 | $ | 2,482,008 | ||||||||
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ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion should be read in conjunction with our unaudited consolidated
financial statements (including the notes thereto) included elsewhere in this report and our
audited consolidated financial statements and the notes thereto, Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations and Item 1A, Risk Factors included
in our Annual Report on Form 10-K for the year ended December 31, 2010. References to Diamond
Offshore, we, us or our mean Diamond Offshore Drilling, Inc., a Delaware corporation, and
its subsidiaries.
We provide contract drilling services to the energy industry around the globe and are a leader
in offshore drilling. Our current fleet of 46 offshore drilling rigs consists of 32
semisubmersibles, 13 jack-ups and one drillship. We currently have three drillships on order. The
Ocean BlackHawk and Ocean BlackHornet are expected to be delivered late in the second and fourth
quarters of 2013, respectively. The third drillship, the Ocean BlackRhino, is expected to be
delivered at the end of the second quarter of 2014.
Of our fleet, eight rigs are currently cold stacked, consisting of four intermediate
semisubmersibles (two in the U.S. Gulf of Mexico, or GOM, and two in Malaysia) and four jack-up
rigs (all in the GOM). We are preparing to stack an additional jack-up rig, the Ocean Sovereign,
in the fourth quarter of 2011.
Overview
Industry Conditions
U.S. Gulf of Mexico The drilling moratorium in the GOM was lifted
in the fourth quarter of 2010; however, the return of deepwater drilling activity to pre-Macondo
levels has been hampered by the continued slow issuance of oil and gas drilling permits despite
improvements in the permit application process. Absent an increase in permitting activity,
weakness in the GOM market is likely to continue throughout the remainder of 2011 and into 2012,
with the possibility of additional rigs being cold stacked by us and others in the industry, as
well as rigs leaving the GOM for international opportunities. We are unable to predict when or if
the pace of permitting in the GOM will return to pre-Macondo levels.
Since the Macondo well blowout, new rules for oil and gas operations on the Outer Continental
Shelf have been implemented, including new standards for well design, casing and cementing and well
control procedures, as well as rules requiring operators to systematically identify risks and
establish safeguards against those risks through a comprehensive safety and environmental management
system, or SEMS. New regulations continue to be announced, including recently proposed rules
regarding employee training, engaging personnel in safety management and requiring third party
audits of SEMS programs.
Our Fleet
As of the date of this report, we are actively marketing three rigs in the GOM market,
consisting of two semisubmersible rigs and one jack-up rig. Given the ongoing uncertainty with
respect to drilling activity in the GOM, we are continuing to actively seek international
opportunities to employ our rigs outside the GOM. However, we can provide no assurance that we
will be successful in our efforts to employ our remaining impacted rigs in the GOM or elsewhere in
the near term.
As of October 17, 2011, our contract backlog was approximately $8.1
billion, of which our contracts in the GOM and Brazil represented approximately $2.0 billion, or
25%, and $4.6 billion, or 56%, respectively.
Floaters
Our intermediate and high-specification floater rigs, both domestic and international,
accounted for approximately 95% of our contract drilling revenue during the third quarter of 2011.
This market remains stable with industry floater utilization reportedly nearing 90%. Approximately
84% of the time for our intermediate and high-specification floater rigs is committed for the
remainder of 2011. Additionally, 61% of the time on our floating rigs is committed in 2012.
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Jack-ups
As a result of a recent increase in tender activity in the Mexican Gulf of Mexico, we received
new term contracts, totaling 3.8 years and $163.0 million, on two jack-up units previously working
offshore in the GOM and in Brazil, the Ocean Titan and Ocean Scepter, respectively. These rigs are
scheduled to commence operations in the fourth quarter of 2011 and the first quarter of 2012,
respectively. Additional tendering activity is ongoing.
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of October 17, 2011, February 1,
2011 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2010) and
October 18, 2010 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2010). Contract drilling backlog is calculated by multiplying the contracted
operating dayrate by the firm contract period and adding one-half of any potential rig performance
bonuses. Our calculation also assumes full utilization of our drilling equipment for the contract
period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned
and the actual periods during which revenues are earned will be different than the amounts and
periods shown in the tables below due to various factors. Utilization rates, which generally
approach 95-98% during contracted periods, can be adversely impacted by downtime due to various
operating factors including, but not limited to, weather conditions and unscheduled repairs and
maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization,
contract preparation and customer reimbursables. No revenue is generally earned during periods of
downtime for regulatory surveys. Changes in our contract drilling backlog between periods are a
function of the performance of work on term contracts, as well as the extension or modification of
existing term contracts and the execution of additional contracts.
October 17, | February 1, | October 18, | ||||||||||
2011 | 2011 | 2010(4) | ||||||||||
(In thousands) | ||||||||||||
Contract Drilling Backlog |
||||||||||||
High-Specification Floaters (1) |
$ | 5,652,000 | $ | 3,838,000 | $ | 4,371,000 | ||||||
Intermediate Semisubmersibles (2) |
2,195,000 | 2,700,000 | 3,009,000 | |||||||||
Jack-ups (3) |
290,000 | 107,000 | 122,000 | |||||||||
Total |
$ | 8,137,000 | $ | 6,645,000 | $ | 7,502,000 | ||||||
(1) | Contract drilling backlog as of October 17, 2011 for our high-specification floaters includes (i) $3.0 billion attributable to our contracted operations offshore Brazil for the years 2011 to 2016 and (ii) $2.0 billion attributable to our contracted operations in the GOM for the years 2011 to 2019, including $1.8 billion in the aggregate for the years 2013 to 2019 attributable to contracts for two of our drillships under construction. | |
(2) | Contract drilling backlog as of October 17, 2011 for our intermediate semisubmersibles includes $1.6 billion attributable to our contracted operations offshore Brazil for the years 2011 to 2015. | |
(3) | Contract drilling backlog as of October 17, 2011 for our jack-ups includes $5.0 million attributable to our contracted operations in the GOM during 2011. | |
(4) | Contract drilling backlog as of October 18, 2010 included $394.0 million attributable to a contract for the Ocean Monarch that we and the customer mutually agreed to terminate in May 2011. |
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The following table reflects the amount of our contract drilling backlog by year as of October
17, 2011.
For the Years Ending December 31, | ||||||||||||||||||||
Total | 2011(1) | 2012 | 2013 | 2014 - 2019 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract Drilling Backlog |
||||||||||||||||||||
High-Specification Floaters (2) |
$ | 5,652,000 | $ | 400,000 | $ | 1,157,000 | $ | 1,104,000 | $ | 2,991,000 | ||||||||||
Intermediate Semisubmersibles (3) |
2,195,000 | 268,000 | 864,000 | 581,000 | 482,000 | |||||||||||||||
Jack-ups (4) |
290,000 | 29,000 | 137,000 | 97,000 | 27,000 | |||||||||||||||
Total |
$ | 8,137,000 | $ | 697,000 | $ | 2,158,000 | $ | 1,782,000 | $ | 3,500,000 | ||||||||||
(1) | Represents a three-month period beginning October 1, 2011. | |
(2) | Contract drilling backlog as of October 17, 2011 for our high-specification floaters includes (i) $188.0 million, $779.0 million and $863.0 million for the years 2011 to 2013, respectively, and $1.2 billion in the aggregate for the years 2014 to 2016, attributable to our contracted operations offshore Brazil and (ii) $33.0 million, $78.0 million and $138.0 million for the years 2011 to 2013, respectively, and $1.8 billion in the aggregate for the years 2014 to 2019 attributable to our contracted operations in the GOM. | |
(3) | Contract drilling backlog as of October 17, 2011 for our intermediate semisubmersibles includes $172.0 million, $536.0 million and $402.0 million for the years 2011 to 2013, respectively, and $454.0 million in the aggregate for the years 2014 to 2015, attributable to our contracted operations offshore Brazil. | |
(4) | Contract drilling backlog as of October 17, 2011 for our jack-ups includes $5.0 million for 2011 attributable to our contracted operations in the GOM. |
The following table reflects the percentage of rig days committed by year as of October 17,
2011. The percentage of rig days committed is calculated as the ratio of total days committed
under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in our
fleet, to total available days (number of rigs multiplied by the number of days in a particular
year). Total available days have been calculated based on the final commissioning dates for the
Ocean BlackHawk and Ocean BlackHornet and does not include available days for the Ocean BlackRhino.
For the Years Ending December 31, | ||||||||||||||||
2011(1) | 2012 | 2013 | 2014 - 2019 | |||||||||||||
Rig Days Committed (2) |
||||||||||||||||
High-Specification Floaters |
99 | % | 73 | % | 63 | % | 19 | % | ||||||||
Intermediate Semisubmersibles |
72 | % | 52 | % | 33 | % | 4 | % | ||||||||
Jack-ups |
38 | % | 28 | % | 20 | % | 1 | % |
(1) | Represents a three-month period beginning October 1, 2011. | |
(2) | Includes approximately 530 and 780 scheduled shipyard, survey and mobilization days for 2011 and 2012, respectively, and also includes 125 final commissioning and mobilization days for each of the years 2013 and 2014 for the Ocean BlackHawk and Ocean BlackHornet. |
General
The two most significant variables affecting our revenues are dayrates for rigs and rig
utilization rates, each of which is a function of rig supply and demand in the marketplace. Demand
for drilling services is dependent upon the level of expenditures set by oil and gas companies for
offshore exploration and development, as well as a variety of political, regulatory and economic
factors. The availability of rigs in a particular geographical region also affects both dayrates
and utilization rates. These factors are not within our control and are difficult to predict.
Demand affects the number of days our fleet is utilized and the dayrates earned. As
utilization rates increase, dayrates tend to increase as well, reflecting the lower supply of
available rigs. Conversely, as utilization rates decrease, dayrates tend to decrease as well,
reflecting the excess supply of rigs. When a rig is idle, no dayrate is earned and revenues will
decrease as a result. Revenues can also be affected as a result of the acquisition or disposal of
rigs, required surveys and shipyard upgrades. In order to improve utilization or realize higher
dayrates, we may mobilize our rigs from one market to another. However, during periods of
mobilization, revenues may be adversely affected. As a response to changes in demand, we may
withdraw a rig from the market by stacking it or may reactivate a rig stacked previously, which may
decrease or increase revenues, respectively.
Operating Income. Our operating income is primarily affected by revenue factors, but is also
a function of varying levels of operating expenses. Our operating expenses represent all direct
and indirect costs associated with the operation and maintenance of our drilling equipment. The
principal components of our operating costs are,
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among other things, direct and indirect costs of labor and benefits, repairs and maintenance,
freight, regulatory inspections, boat and helicopter rentals and insurance. Labor and repair and
maintenance costs represent the most significant components of our operating expenses. In general,
our labor costs increase primarily due to higher salary levels, rig staffing requirements and costs
associated with labor regulations in the geographic regions in which our rigs operate. Costs to
repair and maintain our equipment fluctuate depending upon the type of activity the drilling unit
is performing, as well as the age and condition of the equipment and the regions in which our rigs
are working.
Our operating income is negatively impacted when we perform certain regulatory inspections,
which we refer to as a 5-year survey, or special survey, that are due every five years for each of
our rigs. Operating revenue decreases because these special surveys are performed during scheduled
downtime in a shipyard. Operating expenses increase as a result of these special surveys due to
the cost to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance
costs. Repair and maintenance activities may result from the special survey or may have been
previously planned to take place during this mandatory downtime. The number of rigs undergoing a
5-year survey will vary from year to year, as well as from quarter to quarter.
In addition, operating income may be negatively impacted by intermediate surveys, which are
performed at interim periods between 5-year surveys. Intermediate surveys are generally less
extensive in duration and scope than a 5-year survey. Although an intermediate survey may require
some downtime for the drilling rig, it normally does not require dry-docking or shipyard time,
except for rigs located in the United Kingdom, or U.K., and Norwegian sectors of the North Sea.
During the remainder of 2011, five of our rigs will require or complete 5-year surveys, and we
expect that they will be out of service for approximately 120 rig days in the aggregate. We also
expect to spend an additional approximately 430 rig days during 2011 for intermediate surveys, the
mobilization of rigs, contract preparation activities and extended maintenance projects. We can
provide no assurance as to the exact timing and/or duration of downtime associated with regulatory
inspections, planned rig mobilizations and other shipyard projects. Fluctuations between periods
in the number of surveys performed and the amount of downtime associated with those surveys could
have a material impact on our results of operations. See Overview Contract Drilling
Backlog.
We renewed our principal insurance policies effective May 1, 2011. Our coverage and policy
limits for both physical damage and marine liability insurance are substantially similar to those
of our previous policies. We believe that our current policy limit for our marine liability
insurance is within the range that is customary for companies of our size in the offshore drilling
industry and at levels appropriate for our business.
Under our protection and indemnity policy, which expires on May 1, 2012, we carry marine
liability insurance covering certain legal liabilities, including coverage for certain personal
injury claims, with no exclusions for pollution and/or environmental risk. Our deductibles for
marine liability coverage, including for personal injury claims, are $10.0 million for the first
occurrence and vary in amounts ranging between $5.0 million and, if aggregate claims exceed certain
thresholds, up to $100.0 million for each subsequent occurrence, depending on the nature, severity
and frequency of claims which might arise during the policy year, which under our current policy
commenced on May 1, 2011.
We are self-insured for physical damage to rigs and equipment caused by named windstorms in
the U.S. Gulf of Mexico. If a named windstorm in the U.S. Gulf of Mexico causes significant damage
to our rigs or equipment, it could have a material adverse effect on our financial position,
results of operations and cash flows. However, under our insurance policy that expires on May 1,
2012, we carry physical damage insurance for certain losses other than those caused by named
windstorms in the U.S. Gulf of Mexico for which our deductible for physical damage is $25.0 million
per occurrence. We do not typically retain loss-of-hire insurance policies to cover our rigs.
Critical Accounting Estimates
Our significant accounting policies are discussed in Note 1 of our notes to unaudited
consolidated financial statements included in Item 1 of Part I of this report and in Note 1 of our
notes to audited consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2010. There were no material changes to these policies during the nine
months ended September 30, 2011 except that we no longer expect to repatriate the earnings of
Diamond East Asia Limited, or DEAL, to the U.S. Accordingly, we are no longer providing U.S.
income taxes on its earnings and have reversed U.S. income taxes on its earnings provided in
previous years. For further discussion, see Note 1 General Information to our Consolidated
Financial Statements in Item 1 of Part I of this report.
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Results of Operations
Although we perform contract drilling services with different types of drilling rigs and in
many geographic locations, there is a similarity of economic characteristics among all our
divisions and locations, including the nature of services provided and the type of customers for
our services. We believe that the combination of our drilling rigs into one reportable segment is
the appropriate aggregation in accordance with applicable accounting standards on segment
reporting. However, for purposes of this discussion and analysis of our results of operations, we
provide greater detail with respect to the types of rigs in our fleet and the geographic regions in
which they operate to enhance the readers understanding of our financial condition, changes in
financial condition and results of operations.
Three and Nine Months Ended September 30, 2011 and 2010
Comparative data relating to our revenue and operating expenses by equipment type are listed
below.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||||||
High-Specification Floaters |
$ | 464,512 | $ | 305,335 | $ | 1,277,867 | $ | 1,029,510 | ||||||||
Intermediate Semisubmersibles |
350,409 | 380,438 | 1,086,748 | 1,150,233 | ||||||||||||
Jack-ups |
46,540 | 63,133 | 155,270 | 225,305 | ||||||||||||
Other |
50 | 92 | 145 | 127 | ||||||||||||
Total Contract Drilling Revenue |
$ | 861,511 | $ | 748,998 | $ | 2,520,030 | $ | 2,405,175 | ||||||||
Revenues Related to Reimbursable Expenses |
$ | 16,666 | $ | 50,726 | $ | 54,032 | $ | 76,833 | ||||||||
CONTRACT DRILLING EXPENSE |
||||||||||||||||
High-Specification Floaters |
$ | 188,071 | $ | 148,503 | $ | 572,568 | $ | 392,158 | ||||||||
Intermediate Semisubmersibles |
153,416 | 154,731 | 430,031 | 450,776 | ||||||||||||
Jack-ups |
43,281 | 43,940 | 123,933 | 149,285 | ||||||||||||
Other |
6,601 | 3,381 | 15,207 | 16,332 | ||||||||||||
Total Contract Drilling Expense |
$ | 391,369 | $ | 350,555 | $ | 1,141,739 | $ | 1,008,551 | ||||||||
Reimbursable Expenses |
$ | 16,206 | $ | 50,313 | $ | 52,443 | $ | 75,397 | ||||||||
OPERATING INCOME |
||||||||||||||||
High-Specification Floaters |
$ | 276,441 | $ | 156,832 | $ | 705,299 | $ | 637,352 | ||||||||
Intermediate Semisubmersibles |
196,993 | 225,707 | 656,717 | 699,457 | ||||||||||||
Jack-ups |
3,259 | 19,193 | 31,337 | 76,020 | ||||||||||||
Other |
(6,551 | ) | (3,289 | ) | (15,062 | ) | (16,205 | ) | ||||||||
Reimbursable expenses, net |
460 | 413 | 1,589 | 1,436 | ||||||||||||
Depreciation |
(101,175 | ) | (99,117 | ) | (303,523 | ) | (297,265 | ) | ||||||||
General and administrative expense |
(14,879 | ) | (16,999 | ) | (48,976 | ) | (50,502 | ) | ||||||||
Bad debt (expense) recovery |
(4,734 | ) | 2,048 | 5,413 | 5,946 | |||||||||||
Gain on disposition of assets |
463 | 32,392 | 4,344 | 33,425 | ||||||||||||
Total Operating Income |
$ | 350,277 | $ | 317,180 | $ | 1,037,138 | $ | 1,089,664 | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
2,024 | 395 | 3,565 | 2,154 | ||||||||||||
Interest expense |
(15,874 | ) | (22,567 | ) | (60,144 | ) | (66,221 | ) | ||||||||
Foreign currency transaction gain (loss) |
(1,442 | ) | 3,724 | (4,603 | ) | 194 | ||||||||||
Other, net |
(136 | ) | (166 | ) | (232 | ) | (287 | ) | ||||||||
Income before income tax expense |
334,849 | 298,566 | 975,724 | 1,025,504 | ||||||||||||
Income tax expense |
(77,995 | ) | (100,042 | ) | (201,672 | ) | (311,734 | ) | ||||||||
NET INCOME |
$ | 256,854 | $ | 198,524 | $ | 774,052 | $ | 713,770 | ||||||||
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Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
Operating Income. Total operating income increased $33.1 million, or 10%, during the third
quarter of 2011, compared to the same period of 2010, due to a $112.5 million, or 15%, increase in
total contract drilling revenue during the third quarter of 2011. The increase in revenue was
primarily the result of an increase in average utilization for our high-specification floaters from
55% during the third quarter of 2010 to 93% during the third quarter of 2011 combined with the
effect of higher average daily revenue earned during the third quarter of 2011 compared to the
prior year quarter. Revenue generated by our domestic and international high-specification floater
rigs increased an aggregate $159.2 million, or 52%, during the third quarter of 2011 compared to
the third quarter of 2010, reflective of the return to service of three of our high specification
floaters after being idled following the Macondo incident in the GOM, as well as revenue generated
by the newest addition to our floater fleet, the Ocean Valor, which began operating under contract
offshore Brazil in the fourth quarter of 2010. In addition, the Ocean Monarch, which was also
idled in the GOM after the Macondo incident, is currently mobilizing to Vietnam where it is
expected to begin working under contract late in the fourth quarter of 2011.
In contrast, revenue for our combined domestic and international intermediate semisubmersible
and jack-up fleets decreased $30.0 million and $16.6 million, or 8% and 26%, respectively, during
the third quarter of 2011 compared to the same quarter of 2010. Utilization for our intermediate
semisubmersible and jack-up rigs decreased from 76% and 60%, respectively, in the third quarter of
2010 to 68% and 44%, respectively, during the third quarter of 2011. In response to market
conditions, we have cold stacked four intermediate semisubmersible and four jack-up rigs, inclusive
of two intermediate semisubmersible rigs and one jack-up rig that
were cold stacked during
the third quarter of 2010 and the first quarter of 2011.
Total contract drilling expense increased $40.8 million, or 12%, during the third quarter of
2011, compared to the third quarter of 2010, and included normal operating costs for the Ocean
Valor, as well as increased amortized mobilization costs and higher other operating costs
associated with rigs operating internationally rather than domestically.
Other significant factors that affected the comparability of our operating income for the
three-month periods ended September 30, 2011 and 2010 were as follows:
| Bad Debt (Expense) Recovery. During the three-month period ended September 30, 2011, we recorded a $5.7 million provision for bad debts to reserve a portion of the uncollected balance of receivables related to our operations in Egypt and recovered $1.0 million in previously recorded reserves for bad debts. During the three-month period ended September 30, 2010, we recovered $2.0 million associated with reserves for bad debts recorded in previous years. | ||
| Gain on Disposition of Assets. Net gain on disposition of assets for the three-month period ended September 30, 2010 was primarily related to the sale of the Ocean Shield on July 7, 2010. The rig was sold for net proceeds of $185.3 million and resulted in a net gain on sale of $32.8 million. |
Interest Expense. Interest expense decreased $6.7 million during the three-month period ended
September 30, 2011 compared to the same period in 2010, primarily due to $4.5 million in interest
capitalized on our three drillships under construction.
Income Tax Expense. Our estimated annual effective tax rate for the three months ended
September 30, 2011 was 22.6%, compared to the 29.9% estimated annual effective tax rate for the
same period in 2010. The lower effective tax rate in the current quarter is partially the result
of differences in the mix of our domestic and international pre-tax earnings and losses, as well as
the mix of international tax jurisdictions in which we operate. Also contributing to our lower
effective tax rate in the 2011 quarter, compared to the prior year quarter, was the impact of a tax
law provision that expired at the end of 2009 but was subsequently signed back into law by the
President of the United States on December 17, 2010. This provision allows us to defer recognition
of certain foreign earnings for U.S. income tax purposes. As a consequence of the extension of the
tax law provision in December 2010, we were able to defer the recognition of certain of our foreign
earnings for U.S. income tax purposes in the third quarter of 2011 that we were unable to defer
during the third quarter of 2010.
Return to provision adjustments recorded during the third quarter of 2011 that were associated
with the filing of our 2010 tax returns in various jurisdictions resulted in a $4.3 million
reduction in tax expense. Return to provision adjustments recorded during the third quarter of
2010 that were associated with the filing of our 2009 tax returns in various jurisdictions resulted
in additional tax expense of $2.2 million.
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Table of Contents
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Operating Income. Total operating income decreased $52.5 million, or 5%, during the first
nine months of 2011, compared to the first nine months of 2010, despite a $114.9 million, or 5%,
increase in total contract drilling revenue during the first nine months of 2011. Revenue
generated by our domestic and international high-specification floater rigs during the first nine
months of 2011 increased an aggregate $248.4 million, or 24%. The two newest additions to our
floater fleet, the Ocean Courage and Ocean Valor, which began operating under contract late in the
first quarter and in the fourth quarter of 2010, respectively, contributed incremental revenue of
$132.5 million during the first nine months of 2011. Operating income attributable to our
high-specification floaters increased $67.9 million, or 11%, for the nine months ended September
30, 2011 compared to the nine months ended September 30, 2010.
In contrast, revenue and operating income for our intermediate semisubmersible fleet for the
nine months ended September 30, 2011, compared to the nine months ended September 30, 2010, both
decreased by 6%, and revenue and operating income for our jack-up fleet decreased 31% and 59%,
respectively, comparing the same periods.
Total contract drilling expense increased $133.2 million, or 13%, during the first nine months
of 2011, compared to the same period of 2010, and included a full nine months of contract drilling
expense for the Ocean Courage and Ocean Valor, as well as increased amortized mobilization costs
and higher other operating costs associated with rigs operating internationally rather than
domestically.
Other significant factors that affected the comparability of our operating income for the
nine-month periods ended September 30, 2011 and 2010 were as follows:
| Bad Debt (Expense) Recovery. During the nine-month period ended September 30, 2011, we recorded a $5.7 million provision for bad debts to reserve a portion of the uncollected balance of receivables related to our operations in Egypt and recovered $11.1 million in previously recorded reserves for bad debts. During the nine-month period ended September 30, 2010, we recovered $5.9 million associated with reserves for bad debts recorded in previous years. | ||
| Gain on Disposition of Assets. Net gain on disposition of assets for the nine-month period ended September 30, 2010 was primarily related to the sale of the Ocean Shield on July 7, 2010. The rig was sold for net proceeds of $185.3 million and resulted in a net gain on sale of $32.8 million. |
Interest Expense. Interest expense decreased $6.1 million during the nine-month period ended
September 30, 2011 compared to the same period in 2010, primarily due to $4.5 million in interest
capitalized on our three drillships under construction.
Income Tax Expense. Our estimated annual effective tax rate for the nine months ended
September 30, 2011 was 22.6%, compared to the 29.9% estimated annual effective tax rate for the
same period in 2010. The lower effective tax rate in the current period is partially the result of
differences in the mix of our domestic and international pre-tax earnings and losses, as well as
the mix of international tax jurisdictions in which we operate. Also contributing to our lower
effective tax rate in the 2011 period, compared to the prior year period, was the impact of a tax
law provision that expired at the end of 2009 but was subsequently signed back into law by the
President of the United States on December 17, 2010. This provision allows us to defer recognition
of certain foreign earnings for U.S. income tax purposes. As a consequence of the extension of the
tax law provision in December 2010, we were able to defer the recognition of certain of our foreign
earnings for U.S. income tax purposes in the first nine months of 2011 that we were unable to defer
during the first nine months of 2010.
As a result of the tax law provision enacted in December 2010, during early 2011, we
reassessed our intent to repatriate the earnings of DEAL to the U.S. We no longer intend to
repatriate the earnings of DEAL to a U.S. parent but instead we plan to reinvest its earnings
internationally through another of our foreign companies. Consequently, we are no longer providing
U.S. income taxes on the earnings of DEAL and, during the nine months ended September 30, 2011, we
reversed approximately $15.0 million of U.S. income taxes provided in prior periods for the
earnings of DEAL.
Return to provision adjustments recorded during the third quarter of 2011 that were associated
with the filing of our 2010 tax returns in various jurisdictions resulted in a $4.3 million
reduction in tax expense. Return to provision adjustments recorded during the third quarter of
2010 that were associated with the filing of our 2009 tax returns in various jurisdictions resulted
in additional tax expense of $2.2 million.
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Table of Contents
High-Specification Floaters.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except days, percentages and average daily revenue amounts) | ||||||||||||||||
HIGH-SPECIFICATION FLOATERS: |
||||||||||||||||
REVENUE EARNING DAYS (1) |
||||||||||||||||
GOM |
151 | 86 | 393 | 866 | ||||||||||||
Australia/Asia/Middle East |
181 | 168 | 466 | 360 | ||||||||||||
Europe/Africa/Mediterranean |
276 | 74 | 769 | 254 | ||||||||||||
South America |
585 | 378 | 1,783 | 1,050 | ||||||||||||
UTILIZATION (2) |
||||||||||||||||
GOM |
82 | % | 35 | % | 72 | % | 72 | % | ||||||||
Australia/Asia/Middle East |
98 | % | 91 | % | 85 | % | 77 | % | ||||||||
Europe/Africa/Mediterranean |
99 | % | 35 | % | 94 | % | 64 | % | ||||||||
South America |
91 | % | 59 | % | 93 | % | 63 | % | ||||||||
AVERAGE DAILY REVENUE (3) |
||||||||||||||||
GOM |
$ | 430,300 | $ | 347,500 | $ | 318,700 | $ | 397,100 | ||||||||
Australia/Asia/Middle East |
390,400 | 433,400 | 387,000 | 441,800 | ||||||||||||
Europe/Africa/Mediterranean |
421,000 | 544,400 | 413,400 | 582,600 | ||||||||||||
South America |
345,100 | 312,300 | 343,600 | 303,400 | ||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||||||
GOM |
$ | 64,807 | $ | 61,707 | $ | 125,125 | $ | 376,504 | ||||||||
Australia/Asia/Middle East |
72,877 | 74,385 | 186,973 | 160,644 | ||||||||||||
Europe/Africa/Mediterranean |
120,991 | 45,250 | 341,090 | 157,957 | ||||||||||||
South America |
205,837 | 123,993 | 624,679 | 334,405 | ||||||||||||
Total Contract Drilling Revenue |
$ | 464,512 | $ | 305,335 | $ | 1,277,867 | $ | 1,029,510 | ||||||||
CONTRACT DRILLING EXPENSE |
||||||||||||||||
GOM |
$ | 10,907 | $ | 29,199 | $ | 42,782 | $ | 110,343 | ||||||||
Australia/Asia/Middle East |
27,523 | 21,335 | 79,469 | 42,945 | ||||||||||||
Europe/Africa/Mediterranean |
38,227 | 18,147 | 117,367 | 40,380 | ||||||||||||
South America |
111,414 | 79,822 | 332,950 | 198,490 | ||||||||||||
Total Contract Drilling Expense |
$ | 188,071 | $ | 148,503 | $ | 572,568 | $ | 392,158 | ||||||||
OPERATING INCOME |
$ | 276,441 | $ | 156,832 | $ | 705,299 | $ | 637,352 | ||||||||
(1) | A revenue earning day is defined as a 24-hour period during which a rig earns a dayrate after commencement of operations and excludes mobilization, demobilization and contract preparation days. | |
(2) | Utilization is calculated as the ratio of total revenue-earning days divided by the total calendar days in the period for all of the specified rigs in our fleet (including cold-stacked rigs). | |
(3) | Average daily revenue is defined as contract drilling revenue for all of the specified rigs in our fleet (excluding revenue for mobilization, demobilization and contract preparation) per revenue earning day. |
27
Table of Contents
Rig Relocations:
Rig | Relocation Details | Date | ||
2011: | ||||
Ocean Confidence | Europe/Africa/Mediterranean (Republic of
Congo to Angola)
|
January 2011 | ||
Ocean Monarch | GOM to Vietnam
|
September 2011 | ||
2010: | ||||
Ocean Star | GOM to South America (Brazil)
|
January 2010 | ||
Ocean Valor | Completion of construction and relocation
from Singapore shipyard to South America
(Brazil)
|
March 2010 | ||
Ocean Courage | GOM to South America (Brazil)
|
March 2010 | ||
Ocean Baroness | GOM to South America (Brazil)
|
March 2010 | ||
Ocean America | GOM to Australia/Asia/Middle East (Australia)
|
March 2010 | ||
Ocean Confidence | GOM to Europe/Africa/Mediterranean (Republic
of Congo)
|
August 2010 | ||
Ocean Endeavor | GOM to Europe/Africa/Mediterranean (Egypt)
|
August 2010 | ||
Ocean Rover | Australia/Asia/Middle East (Malaysia to
Indonesia)
|
November 2010 |
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
GOM. Revenue generated by our high-specification floaters operating in the GOM increased $3.1
million during the third quarter of 2011 compared to the third quarter of 2010, primarily as a
result of 65 incremental revenue earning days ($22.6 million) due to the lifting of the moratorium
in the fourth quarter of 2010 and an increase in average daily revenue earned ($12.5 million). The
increase in revenue was partially offset by the absence of a $30.7 million contract termination fee
recognized in the third quarter of 2010. Contract drilling expense for our high-specification
floaters in the GOM decreased $18.3 million during the third quarter of 2011, compared to the third
quarter of 2010, primarily due to a reduction in costs attributable to the rigs that were relocated
out of the GOM near the end of the third quarter of 2010 ($12.5 million), reduced maintenance and
repair costs ($2.7 million) and the absence of amortized mobilization and contract preparation fees
($1.3 million).
At the end of the third quarter of 2011, we had begun mobilizing the Ocean Monarch to Vietnam,
leaving only one of our high specification rigs currently operating in the GOM.
Australia/Asia/Middle East. Revenue generated by our two high-specification rigs operating in
the Australia/Asia/Middle East region decreased $1.5 million during the third quarter of 2011,
compared to the same period of 2010, primarily due to a lower dayrate earned by the Ocean Rover
operating offshore Indonesia during the 2011 quarter compared to the dayrate it earned operating
offshore Malaysia in the prior year quarter ($7.7 million). The negative impact of lower average
daily revenue earned was partially offset by the nearly full utilization of the Ocean America in
the third quarter of 2011, compared to the prior year quarter when the rig had unplanned downtime
for repairs after arriving in Australia ($5.3 million). Contract drilling expense for our
operations in this region increased $6.2 million during the third quarter of 2011, compared to the
same period of 2010, primarily due to higher personnel-related expenses and higher repair,
maintenance and freight costs.
Europe/Africa/Mediterranean. Revenue generated by our high-specification floaters operating
in the Europe/Africa/Mediterranean region increased $75.7 million during the third quarter of 2011.
The Ocean Endeavor and Ocean Confidence mobilized to this region in August 2010 and contributed 173
incremental revenue earning days in the third quarter of 2011, generating incremental revenue of
$54.3 million. The Ocean Valiant, working in this region since 2009, contributed incremental
revenue of $21.4 million due to less downtime in the third quarter of 2011 for repairs and a higher
average daily revenue earned. Contract drilling expense for our operations in this region
increased $20.1 million during the third quarter of 2011, compared to the same period of 2010,
primarily due to the inclusion of normal operating and amortized mobilization costs for the two
additional rigs in the region during the entire third quarter of 2011.
South America. Revenue earned by our high-specification floaters operating offshore Brazil
during the third quarter of 2011 increased $81.8 million compared to the same period of 2010,
primarily due to 207 incremental revenue earning days ($64.7 million) and an increase in average
daily revenue earned ($19.2 million). The increase in revenue earning days during the third
quarter of 2011 was primarily the result of 110 additional revenue earning days for the Ocean Valor
and Ocean Baroness compared to the third quarter of 2010, when the rigs were mobilized from the GOM
and underwent customer acceptance before commencing operations offshore Brazil, and 98 fewer
28
Table of Contents
downtime days associated with shipyard projects and repairs. Contract drilling expense for our
operations in Brazil increased $31.6 million during the third quarter of 2011, compared to the same
period of 2010, primarily due to the inclusion of a full quarter of normal operating costs and
amortized mobilization expense for the rigs relocated into the region in 2010.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
GOM. Revenue generated by our high-specification floaters operating in the GOM decreased
$251.4 million during the first nine months of 2011, compared to the same period of 2010, as a
result of 473 fewer revenue earning days ($188.0 million) and a decrease in average daily revenue
earned ($30.8 million) during the first nine months of 2011. The decrease in revenue earning days
was primarily due to the 2010 relocations of six of our high-specification rigs out of the GOM
(three to Brazil and one each to Australia, the Republic of Congo and Egypt) and unplanned downtime
for the Ocean Monarch due to a force majeure assertion by one of our customers in the GOM, which
has now been resolved. Also in July 2010 we recognized a $30.7 million contract termination fee
from a previous customer of the Ocean Endeavor. Contract drilling expense for our
high-specification floaters in the GOM decreased $67.6 million during the first nine months of
2011, compared to the same period of 2010, reflecting a $65.8 million reduction in expense
attributable to rigs that were relocated to other regions.
Australia/Asia/Middle East. Revenue generated by our two high-specification rigs operating in
the Australia/Asia/Middle East region increased $26.3 million during the first nine months of 2011,
compared to the same period of 2010, and reflected 106 incremental revenue earning days, primarily
due to the relocation of the Ocean America to Australia in March 2010 ($44.5 million). However,
the favorable impact of the incremental revenue earning days during the first nine months of 2011
was partially offset by the impact of a decrease in average daily revenue earned during the same
period. Revenue earned by the Ocean Rover decreased $18.2 million during the first nine months of
2011, compared to the same period of the prior year, primarily as a result of the rig operating
offshore Indonesia during 2011 at a lower dayrate than it had earned operating offshore Malaysia
during the first nine months of 2010. Contract drilling expense for our operations in this region
increased $36.5 million during the first nine months of 2011, compared to the same period of 2010,
primarily due to the inclusion of an entire nine months of normal operating and amortized
mobilization costs for the Ocean America ($31.0 million).
Europe/Africa/Mediterranean. Revenue and contract drilling expense generated by our
high-specification floaters operating in the Europe/Africa/Mediterranean region increased $183.1
million and $77.6 million, respectively, during the first nine months of 2011, compared to the same
period of 2010, primarily due to incremental revenue and expense attributable to our two additional
rigs operating in the region. The Ocean Confidence and Ocean Endeavor mobilized to this region in
August 2010 and generated incremental revenue and incurred contract drilling expense of $157.5
million and $77.6 million, respectively, during the first nine months of 2011 compared to the first
nine months of 2010. Our third rig operating in the region, the Ocean Valiant, generated
incremental revenue of $25.6 million during the first nine months of 2011, compared to the same
period of 2010, due to less downtime in 2011 for repairs and higher average daily revenue earned.
South America. Revenue earned by our high-specification floaters operating offshore Brazil
during the first nine months of 2011 increased $290.3 million, compared to the first nine months of
2010, primarily due to 733 additional revenue earning days ($222.0 million) and higher average
daily revenue earned ($71.7 million). The increase in revenue earning days during the first nine
months of 2011 was the result of the relocation of the four additional rigs relocated to this
region during 2010 and 145 fewer shipyard days for Ocean Alliance during the first nine months of
2011. Contract drilling expense for our operations in Brazil increased $134.5 million during the
first nine months of 2011, compared to the same period of 2010, primarily due to the inclusion of
normal operating costs and amortized mobilization costs for the relocated rigs for the entire first
nine months of 2011, as well as higher overall contract drilling expenses for the remainder of our
Brazil fleet, including personnel and related costs, repair and maintenance costs and revenue-based
fees and taxes.
29
Table of Contents
Intermediate Semisubmersibles.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except days, percentages and average daily revenue | ||||||||||||||||
amounts) | ||||||||||||||||
INTERMEDIATE SEMISUBMERSIBLES: |
||||||||||||||||
REVENUE EARNING DAYS (1) |
||||||||||||||||
GOM |
32 | 92 | 212 | 358 | ||||||||||||
Mexico |
| 45 | | 210 | ||||||||||||
Australia/Asia/Middle East |
184 | 273 | 582 | 772 | ||||||||||||
Europe/Africa/Mediterranean |
226 | 216 | 759 | 614 | ||||||||||||
South America |
749 | 701 | 2,325 | 2,123 | ||||||||||||
UTILIZATION (2) |
||||||||||||||||
GOM |
10 | % | 42 | % | 25 | % | 69 | % | ||||||||
Mexico |
| 81 | % | | 71 | % | ||||||||||
Australia/Asia/Middle East |
50 | % | 74 | % | 53 | % | 71 | % | ||||||||
Europe/Africa/Mediterranean |
82 | % | 78 | % | 93 | % | 75 | % | ||||||||
South America |
90 | % | 85 | % | 96 | % | 87 | % | ||||||||
AVERAGE DAILY REVENUE (3) |
||||||||||||||||
GOM |
$ | 209,400 | $ | 218,700 | $ | 202,700 | $ | 201,300 | ||||||||
Mexico |
| 159,600 | | 194,100 | ||||||||||||
Australia/Asia/Middle East |
230,300 | 339,700 | 243,300 | 330,000 | ||||||||||||
Europe/Africa/Mediterranean |
294,400 | 297,800 | 296,500 | 321,700 | ||||||||||||
South America |
272,300 | 267,800 | 272,400 | 262,200 | ||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||||||
GOM |
$ | 7,348 | $ | 20,125 | $ | 43,699 | $ | 72,141 | ||||||||
Mexico |
| 9,151 | | 47,282 | ||||||||||||
Australia/Asia/Middle East |
42,369 | 92,691 | 141,545 | 254,783 | ||||||||||||
Europe/Africa/Mediterranean |
66,616 | 64,347 | 224,893 | 197,432 | ||||||||||||
South America |
234,076 | 194,124 | 676,611 | 578,595 | ||||||||||||
Total Contract Drilling Revenue |
$ | 350,409 | $ | 380,438 | $ | 1,086,748 | $ | 1,150,233 | ||||||||
CONTRACT DRILLING EXPENSE |
||||||||||||||||
GOM |
$ | 18,001 | $ | 9,036 | $ | 26,771 | $ | 30,867 | ||||||||
Mexico |
28 | 2,949 | 193 | 19,515 | ||||||||||||
Australia/Asia/Middle East |
18,153 | 29,058 | 60,122 | 78,634 | ||||||||||||
Europe/Africa/Mediterranean |
28,946 | 30,563 | 74,600 | 81,773 | ||||||||||||
South America |
88,288 | 83,125 | 268,345 | 239,987 | ||||||||||||
Total Contract Drilling Expense |
$ | 153,416 | $ | 154,731 | $ | 430,031 | $ | 450,776 | ||||||||
OPERATING INCOME |
$ | 196,993 | $ | 225,707 | $ | 656,717 | $ | 699,457 | ||||||||
(1) | A revenue earning day is defined as a 24-hour period during which a rig earns a dayrate after commencement of operations and excludes mobilization, demobilization and contract preparation days. | |
(2) | Utilization is calculated as the ratio of total revenue-earning days divided by the total calendar days in the period for all of the specified rigs in our fleet (including cold-stacked rigs). | |
(3) | Average daily revenue is defined as contract drilling revenue for all of the specified rigs in our fleet (excluding revenue for mobilization, demobilization and contract preparation) per revenue earning day. |
30
Table of Contents
Rig Relocations:
Rig | Relocation Details | Date | ||
2011: |
||||
Ocean Epoch
|
Australia/Asia/Middle East (cold stacked Malaysia) |
February 2011 | ||
Ocean Yorktown
|
Brazil to GOM (survey and contract preparation) | August 2011 | ||
2010: |
||||
Ocean Voyager
|
Mexico to GOM (cold stacked June 2010) | March 2010 | ||
Ocean New Era
|
Mexico to GOM (cold stacked September 2010) | August 2010 |
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
GOM. Revenue for our intermediate semisubmersible rigs working in the GOM decreased $12.8
million during the third quarter of 2011, compared to the same quarter of 2010, primarily due to a
decrease in utilization of our GOM fleet from 42% in the third quarter of 2010 to 10% in the third
quarter of 2011. We currently have only one intermediate semisubmersible unit actively marketed in
the GOM; two other intermediate semisubmersible rigs were cold stacked during 2010 after their
return from Mexico. Contract drilling expense increased $9.0 million during the third quarter of
2011, compared to the prior year quarter, primarily due to costs associated with the mobilization
of the Ocean Yorktown from Brazil to the GOM for a five-year survey and contract preparation work
before commencing a contract offshore Mexico.
Mexico. The Ocean New Era operated offshore Mexico during the third quarter of 2010 and
generated revenue and incurred contract drilling expense of $9.2 million and $2.9 million,
respectively. The rig was relocated to the GOM and subsequently cold stacked after completing its
contract during the third quarter of 2010.
Australia/Asia/Middle East. Revenue generated by our intermediate semisubmersibles working in
the Australia/Asia/Middle East region decreased $50.3 million during the third quarter of 2011,
compared to the same period of 2010, as a result of 89 fewer revenue earning days combined with a
decrease in average daily revenue earned. Both revenue earning days and average daily revenue
earned during the third quarter of 2011 were negatively impacted by the cold stacking of the Ocean
Epoch after completion of its contract in early 2011 ($29.5 million). The decrease in average
daily revenue earned was further impacted by a decrease in the contracted dayrate earned by the
Ocean Patriot as a result of a contract extension and subsequent farm-out to another customer at
lower dayrates than previously earned ($18.2 million). Contract drilling expense decreased $10.9
million during the third quarter of 2011, compared to the same period of 2010, primarily due to
reduced costs for the cold-stacked Ocean Epoch.
Europe/Africa/Mediterranean. Revenue earned by our intermediate semisubmersibles working in
the Europe/Africa/Mediterranean region increased $2.3 million during the third quarter of 2011,
compared to the same period of 2010, primarily due to 10 additional revenue earning days ($3.0
million) partially offset by a reduction in average daily revenue earned ($0.8 million) during the
third quarter of 2011.
South America. Both revenue earning days and average daily revenue earned by our intermediate
semisubmersible fleet working in the South America region increased during the third quarter of
2011, compared to the third quarter of 2010, and resulted in the generation of incremental revenue
of $12.8 million and $3.4 million, respectively. The increase in revenue earning days was
primarily attributable to the nearly full utilization of the Ocean Winner (Brazil) during the third
quarter of 2011 compared to the rig undergoing a shipyard project during the entire third quarter
of 2010, partially offset by fewer revenue earning days for the Ocean Yorktown (Brazil) which is
currently mobilizing to the GOM. In connection with the mutually agreed upon termination of the
Ocean Yorktown contract, we recognized a $24.0 million mobilization fee in the third quarter of
2011. Contract drilling expense increased $5.2 million during the third quarter of 2011, compared
to the prior year quarter, due to higher overall operating costs in the region, including labor and
personnel-related costs, freight and revenue-based fees and taxes, partially offset by lower repair
and maintenance costs.
31
Table of Contents
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
GOM. Revenue and contract drilling expense for our intermediate semisubmersible rigs working
in the GOM decreased $28.4 million and $4.1 million, respectively, during the first nine months of
2011, compared to the same period of 2010, primarily due to a decrease in utilization of our GOM
fleet from 69% in the first nine months of 2010 to 25% during the same period of 2011. As a result
of the cold stacking of two intermediate semisubmersible rigs in the GOM during 2010, we have only
one intermediate semisubmersible unit actively marketed in the GOM. The reduction in contract
drilling expense for the first nine months of 2011, compared to the same period of the prior year,
was attributable to the effects of cold stacking rigs, partially offset by costs associated with
the mobilization of the Ocean Yorktown from Brazil.
Mexico. Our two intermediate semisubmersible rigs operating offshore Mexico during the first
nine months of 2010 generated revenue and incurred contract drilling expense of $47.3 million and
$19.5 million, respectively, prior to being relocated to the GOM after the completion of their
contracts offshore Mexico during 2010.
Australia/Asia/Middle East. Revenue generated by our intermediate semisubmersibles working in
the Australia/Asia/Middle East region decreased $113.2 million during the first nine months of
2011, compared to the same period of 2010, primarily due to cold stacking the Ocean Epoch in early
2011, as well as the effect of a lower dayrate earned by the Ocean Patriot in 2011 due to a
contract extension at a lower dayrate than previously earned. Revenue earning days for our
intermediate semisubmersible rigs in this region during the first nine months of 2011 decreased by
190 days ($62.8 million) and average daily revenue earned decreased from $330,000 for the first
nine months of 2010 to $243,300 during the same period of 2011 ($50.4 million). Contract drilling
expense decreased $18.5 million during the first nine months of 2011 compared to the same period of
the prior year. Reduced costs for the cold stacked Ocean Bounty and Ocean Epoch were partially
offset by increased contract drilling expense for the Ocean Patriot, primarily for
personnel-related expenditures, freight, repairs and maintenance and equipment rental.
Europe/Africa/Mediterranean. Revenue earned by our intermediate semisubmersibles working in
the Europe/Africa/Mediterranean region increased $27.5 million during the first nine months of
2011, compared to the same period of 2010, primarily due to 145 incremental revenue earning days
($46.6 million), partially offset by a reduction in average daily revenue earned ($19.1 million).
The increase in revenue earning days during the first nine months of 2011 was primarily
attributable to 90 incremental revenue earning days for the Ocean Nomad, which was ready stacked
during the first quarter of 2010, and 54 incremental revenue earning days attributable to a net
decrease in shipyard days for surveys and projects. Average daily revenue declined to $296,500 for
the first nine months of 2011, primarily due to a lower dayrate earned by two of our three rigs
operating in this region, compared to $321,700 in the prior year period. Contract drilling expense
for our rigs in the Europe/Africa/Mediterranean region decreased $7.2 million for the nine months
ended September 30, 2011 compared to the same period in 2010, primarily due to the absence of costs
associated with the survey of the Ocean Vanguard in 2010.
South America. Revenue earned by our intermediate semisubmersible fleet working in the South
America region increased $98.1 million during the first nine months of 2011, compared to the first
nine months of 2010, due to an increase in both revenue earning days ($52.7 million) and average
daily revenue earned ($23.6 million), as well as the inclusion of $24.0 million in revenue related
to the mobilization of the Ocean Yorktown from Brazil to the GOM. The increase in revenue earning
days was attributable to the nearly full utilization of both the Ocean Guardian (Falkland Islands)
and the Ocean Lexington (Brazil) during the first nine months of 2011, compared to the prior year
period when the rigs were participating in customer acceptance activities at the beginning of 2010.
In addition, utilization for the Ocean Winner increased during the first nine months of 2011,
compared to the same period of 2010, due to the completion of a shipyard project in late 2010.
The increase in average daily revenue earned is primarily related to a contract extension for the
Ocean Winner after completion of its 2010 survey and shipyard project at a higher dayrate than its
previous contract. Contract drilling expense increased $28.4 million during the first nine months
of 2011, compared to the prior year period, due to higher operating costs in the region, including
labor and other personnel-related costs, repair costs, freight and revenue-based fees and taxes.
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Jack-Ups.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except days, percentages and average daily revenue | ||||||||||||||||
amounts) | ||||||||||||||||
JACK-UPS: |
||||||||||||||||
REVENUE EARNING DAYS (1) |
||||||||||||||||
GOM |
60 | 237 | 334 | 819 | ||||||||||||
Mexico |
99 | 179 | 439 | 492 | ||||||||||||
Australia/Asia/Middle East |
90 | 143 | 233 | 505 | ||||||||||||
Europe/Africa/Mediterranean |
183 | 193 | 545 | 693 | ||||||||||||
South America |
92 | | 242 | | ||||||||||||
UTILIZATION (2) |
||||||||||||||||
GOM |
11 | % | 39 | % | 20 | % | 44 | % | ||||||||
Mexico |
54 | % | 97 | % | 81 | % | 90 | % | ||||||||
Australia/Asia/Middle East |
98 | % | 100 | % | 85 | % | 100 | % | ||||||||
Europe/Africa/Mediterranean |
66 | % | 70 | % | 67 | % | 85 | % | ||||||||
South America |
100 | % | | 89 | % | | ||||||||||
AVERAGE DAILY REVENUE (3) |
||||||||||||||||
GOM |
$ | 77,100 | $ | 54,200 | $ | 65,900 | $ | 58,000 | ||||||||
Mexico |
100,300 | 134,500 | 106,400 | 134,900 | ||||||||||||
Australia/Asia/Middle East |
69,100 | 101,200 | 62,500 | 133,700 | ||||||||||||
Europe/Africa/Mediterranean |
59,800 | 54,600 | 58,200 | 59,700 | ||||||||||||
South America |
135,000 | | 136,500 | | ||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||||||
GOM |
$ | 4,998 | $ | 13,579 | $ | 22,364 | $ | 48,191 | ||||||||
Mexico |
9,956 | 24,564 | 46,750 | 67,752 | ||||||||||||
Australia/Asia/Middle East |
6,205 | 14,474 | 16,054 | 67,515 | ||||||||||||
Europe/Africa/Mediterranean |
10,944 | 10,516 | 31,718 | 41,407 | ||||||||||||
South America |
14,437 | | 38,384 | 440 | ||||||||||||
Total Contract Drilling Revenue |
$ | 46,540 | $ | 63,133 | $ | 155,270 | $ | 225,305 | ||||||||
CONTRACT DRILLING EXPENSE |
||||||||||||||||
GOM |
$ | 7,657 | $ | 14,974 | $ | 20,192 | $ | 56,153 | ||||||||
Mexico |
12,013 | 9,776 | 30,410 | 29,822 | ||||||||||||
Australia/Asia/Middle East |
4,010 | 7,795 | 13,281 | 31,531 | ||||||||||||
Europe/Africa/Mediterranean |
9,388 | 10,062 | 29,694 | 28,986 | ||||||||||||
South America |
10,213 | 1,333 | 30,356 | 2,793 | ||||||||||||
Total Contract Drilling Expense |
$ | 43,281 | $ | 43,940 | $ | 123,933 | $ | 149,285 | ||||||||
OPERATING INCOME |
$ | 3,259 | $ | 19,193 | $ | 31,337 | $ | 76,020 | ||||||||
(1) | A revenue earning day is defined as a 24-hour period during which a rig earns a dayrate after commencement of operations and excludes mobilization, demobilization and contract preparation days. | |
(2) | Utilization is calculated as the ratio of total revenue-earning days divided by the total calendar days in the period for all of the specified rigs in our fleet (including cold-stacked rigs). | |
(3) | Average daily revenue is defined as contract drilling revenue for all of the specified rigs in our fleet (excluding revenue for mobilization, demobilization and contract preparation) per revenue earning day. |
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Rig Relocations:
Rig | Relocation Details | Date | ||
2010: |
||||
Ocean Shield
|
Sold | July 2010 | ||
Ocean Scepter
|
GOM to South America (Brazil) | August 2010 | ||
Ocean Spartan
|
Cold stacked (GOM) | September 2010 |
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
GOM. Revenue generated by our jack-up rigs operating in the GOM decreased $8.6 million during
the third quarter of 2011, compared to the third quarter of 2010, primarily due to 177 fewer
revenue earning days ($9.6 million), partially offset by an increase in average daily revenue
earned ($1.4 million). During the third quarter of 2010, the Ocean Scepter was relocated to Brazil
and the Ocean Spartan was cold stacked in the GOM. At the end of the third quarter of 2011, the
Ocean Titan, which worked for only a portion of the 2011 quarter, was in a shipyard for contract
preparation work before mobilizing for a contract offshore Mexico. We currently have one jack-up
rig actively marketed in the GOM (Ocean Columbia); however the rig was ready-stacked for most of
the third quarter of 2011. Contract drilling expense for our jack-ups in the GOM decreased $7.3
million during the third quarter of 2011, compared to the same period of 2010, consistent with the
reduction in revenue.
Mexico. Revenue earned by our jack-up fleet operating offshore Mexico during the third quarter
of 2011 decreased $14.6 million, compared to same quarter of 2010, primarily due to a decrease in
utilization for both of our rigs operating in this region as a result of an aggregate 68 days of
downtime for regulatory inspections during the third quarter of 2011. In addition, average daily
revenue earned by these two rigs decreased in the third quarter of 2011, compared to the prior year
quarter, due to a contract extension (Ocean Summit) and renewal (Ocean Nugget) at current dayrates
lower than dayrates previously earned by the rigs. Contract drilling expense increased $2.2
million during the third quarter of 2011, compared to the third quarter of 2010, primarily due to
costs associated with the regulatory inspections of both of these rigs during the 2011 quarter.
Australia/Asia/Middle East. Revenue generated and contract expenses incurred by our two
jack-up rigs operating in the Australia/Asia/Middle East region decreased $8.3 million and $3.8
million, respectively, during the third quarter of 2011 compared to the same period of 2010. The
Ocean Shield, which was sold in the third quarter of 2010, earned $7.6 million in revenue and
incurred $4.0 million in contract drilling expense prior to the completion of its contract and
bareboat charter from the successor rig owner in August 2010. The Ocean Sovereign, our other
jack-up rig operating in the region during the third quarters of 2011 and 2010, completed its
contract and is currently demobilizing to a location in Malaysia.
Europe/Africa/Mediterranean. Contract drilling revenue and expense for our jack-up rigs
operating in the Europe/Africa/Mediterranean region were relatively unchanged for the third quarter
of 2011 compared to the prior year quarter. We currently have two jack-up rigs contracted offshore
Egypt and the Ocean King ready stacked in Montenegro.
South America. The Ocean Scepter, which was relocated to Brazil in the third quarter of 2010,
began operating under contract in early 2011 and generated contract drilling revenue and incurred
contract drilling expense of $14.4 million and $10.2 million, respectively, during the third
quarter of 2011. The rig is currently mobilizing to the GOM for contract preparation work before
commencing a contract offshore Mexico.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
GOM. Revenue generated by our jack-up rigs operating in the GOM decreased $25.8 million during
the first nine months of 2011, compared to the same period of 2010, primarily due to 485 fewer
revenue earning days ($28.1 million), partially offset by an increase in average daily revenue
earned ($2.7 million). The decrease in revenue earning days between periods resulted from the
relocation of the Ocean Scepter to Brazil and the cold stacking of the Ocean Spartan in the GOM
during the third quarter 2010, as well as an increase in downtime between jobs for the Ocean
Columbia. Contract drilling expense for our jack-ups in the GOM decreased $36.0 million during the
first nine months of 2011, compared to the same period of 2010, consistent with the reduction in
revenue.
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Mexico. During the first nine months of 2011, revenue earned by our jack-up fleet operating
offshore Mexico decreased $21.0 million, compared to same period of 2010, primarily due to a
decrease in both average daily revenue earned ($12.5 million) and revenue earning days ($7.1
million). Revenue for the Ocean Summit decreased $19.2 million during the first nine months of
2011, compared to the same period in 2010, due to 38 days of downtime for regulatory inspections
and a contract extension at a dayrate lower than the dayrate it earned under its previous contract.
Australia/Asia/Middle East. Revenue generated by our two jack-up rigs operating in the
Australia/Asia/Middle East region decreased $51.5 million during the first nine months of 2011,
compared to the same period of 2010, primarily due to the sale of the Ocean Shield in 2010 ($37.9
million). Revenue generated by the Ocean Sovereign decreased $13.6 million during the first nine
months of 2011, compared to the prior year period, due to a lower contracted dayrate beginning in
May 2010 combined with 40 days of unpaid downtime, primarily related to weather conditions, during
2011. Contract drilling expense decreased $18.3 million during the first nine months of 2011,
compared to the same period of 2010, primarily due to an absence of costs for the Ocean Shield
($19.3 million).
Europe/Africa/Mediterranean. Revenue earned by our jack-up rigs operating in the
Europe/Africa/Mediterranean region decreased $9.7 million during the first nine months of 2011
compared to the same period in 2010. The Ocean King, which completed its bareboat charter in
Croatia at the end of July 2010, earned contract drilling revenue of $9.1 million during the first
nine months of 2010.
South America. The Ocean Scepter generated contract drilling revenue and incurred contract
drilling expense of $37.9 million and $27.6 million, respectively, during the first nine months of
2011.
Sources of Liquidity and Capital Resources
Our principal sources of liquidity and capital resources are cash flows from our operations
and our cash reserves. At September 30, 2011, we had $348.0 million in Cash and cash equivalents
and $801.9 million in Investments and marketable securities, representing our investment of cash
available for current operations.
On October 12, 2011, we terminated our $285 million syndicated, senior unsecured revolving
credit facility.
Liquidity and Capital Requirements
Our liquidity and capital requirements are primarily a function of our working capital needs,
capital expenditures and debt service requirements. We determine the amount of cash required to
meet our capital commitments by evaluating the need to upgrade rigs to meet specific customer
requirements, our ongoing rig equipment replacement and enhancement programs, and our obligations
relating to the construction of our three new drillships. As a result of our intention to
indefinitely reinvest the earnings of our wholly owned subsidiary, Diamond Offshore International
Limited, or DOIL, to finance our foreign activities, we do not expect such earnings to be available
for distribution to our stockholders or to finance our domestic activities. However, we believe
that the operating cash flows generated by and cash reserves of DOIL, and the operating cash flows
available to and cash reserves of Diamond Offshore Drilling, Inc., will be sufficient to meet their
respective working capital requirements and capital commitments over the next twelve months. We
will, however, continue to make periodic assessments based on industry conditions and will adjust
capital spending programs if required.
In addition, we may, from time to time, issue debt or equity securities, or a combination
thereof, to finance capital expenditures, the acquisition of assets and businesses or for general
corporate purposes. Our ability to access the capital markets by issuing debt or equity securities
will be dependent on our results of operations, our current financial condition, current market
conditions and other factors beyond our control.
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Contractual Cash Obligations.
The following table sets forth our contractual cash obligations at September 30, 2011.
Payments Due By Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1 - 3 years | 4 - 5 years | After 5 years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Long-term debt (principal and interest) (1) |
$ | 2,634,627 | $ | 28,938 | $ | 165,876 | $ | 653,000 | $ | 1,786,813 | ||||||||||
Construction contracts |
1,116,079 | | 720,660 | 395,419 | | |||||||||||||||
Operating leases |
3,300 | 1,900 | 1,400 | | | |||||||||||||||
Total obligations |
$ | 3,754,006 | $ | 30,838 | $ | 887,936 | $ | 1,048,419 | $ | 1,786,813 | ||||||||||
(1) | See Note 8 Long-Term Debt to our Consolidated Financial Statements in Item 1of Part I of this report. |
In December 2010 and during the first and second quarters of 2011, we entered into three
separate turnkey contracts with Hyundai Heavy Industries Co., Ltd., or Hyundai, for the
construction of three dynamically positioned, ultra-deepwater drillships with delivery of the first
two drillships scheduled for late in the second and fourth quarters of 2013 and the third drillship
in the second quarter of 2014. See Note 9 Commitments and Contingencies Purchase Obligations
to our Consolidated Financial Statements in Item 1 of Part I of this report.
At September 30, 2011, we had foreign currency forward exchange, or FOREX, contracts in the
aggregate notional amount of $191.0 million outstanding. See further information regarding these
contracts in Item 3, Quantitative and Qualitative Disclosures About Market Risk Foreign
Exchange Risk and Note 5 Derivative Financial Instruments to our Consolidated Financial
Statements in Item 1 of Part I of this report.
As of September 30, 2011, the total unrecognized tax benefit related to uncertain tax
positions was $50.7 million. In addition, we have recorded a liability, as of September 30, 2011,
for potential penalties and interest of $28.8 million and $9.8 million, respectively, related to
the tax benefit related to uncertain tax positions. Due to the high degree of uncertainty
regarding the timing of future cash outflows associated with the liabilities recognized in this
balance, we are unable to make reasonably reliable estimates of the period of cash settlement with
the respective taxing authorities.
We had no other purchase obligations for major rig upgrades or any other significant
obligations at September 30, 2011, except for those related to our direct rig operations, which
arise during the normal course of business.
Other Commercial Commitments Letters of Credit.
We were contingently liable as of September 30, 2011 in the amount of $65.1 million under
certain performance, bid, supersedeas, tax appeal and custom bonds and letters of credit. We
purchased two of these bonds totaling $19.6 million from a related party after obtaining
competitive quotes. Agreements relating to approximately $51.6 million of performance bonds can
require collateral at any time. As of September 30, 2011, we had not been required to make any
collateral deposits with respect to these agreements. The remaining agreements cannot require
collateral except in events of default. Banks have issued letters of credit on our behalf securing
certain of these bonds. The table below provides a list of these obligations in U.S. dollar
equivalents and their time to expiration.
For the Years Ending December 31, | ||||||||||||||||
Total | 2011 | 2012 | Thereafter | |||||||||||||
(In thousands) | ||||||||||||||||
Other Commercial
Commitments |
||||||||||||||||
Customs bonds |
$ | 1,442 | $ | 542 | $ | 900 | $ | | ||||||||
Performance bonds |
37,339 | 10,609 | 22,863 | 3,867 | ||||||||||||
Other |
26,298 | | 26,298 | | ||||||||||||
Total obligations |
$ | 65,079 | $ | 11,151 | $ | 50,061 | $ | 3,867 | ||||||||
Credit Ratings.
Our current credit rating is Baa1 for Moodys Investors Services and A- for Standard & Poors.
Although our long-term ratings continue at investment grade levels, lower ratings could result in
higher interest rates on future debt issuances.
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Capital Expenditures.
We expect to spend approximately $300 million during 2011 on capital expenditures associated
with our ongoing rig equipment replacement and enhancement programs and other corporate
requirements. During the first nine months of 2011, we spent approximately $160.3 million toward
these programs.
In addition, in the first nine months of 2011, we paid $478.3 million to Hyundai as the first
of two installment payments for the construction of our three new, ultra-deepwater drillships.
The final installments of the contracted price are payable to Hyundai upon delivery of each
respective vessel. The total cost of the three drillships, including commissioning, spares and
project management, is expected to be approximately $1.8 billion in the aggregate. We had a
fixed-price option from Hyundai for the construction of a fourth drillship that expired on October
24, 2011.
We expect to finance our 2011 capital expenditures through the use of our existing cash
balances or internally generated funds.
Off-Balance Sheet Arrangements.
At September 30, 2011 and December 31, 2010, we had no off-balance sheet debt or other
arrangements.
Historical Cash Flows
The following is a discussion of our historical cash flows from operating, investing and
financing activities for the nine months ended September 30, 2011 compared to the nine months ended
September 30, 2010.
Net Cash Provided by Operating Activities.
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(In thousands) | ||||||||||||
Net income |
$ | 774,052 | $ | 713,770 | $ | 60,282 | ||||||
Net changes in operating assets and
liabilities |
441 | (30,540 | ) | 30,981 | ||||||||
Proceeds from settlement of FOREX
contracts designated as accounting
hedges |
9,593 | 1,924 | 7,669 | |||||||||
Gain on sale and disposition of assets |
(4,344 | ) | (33,425 | ) | 29,081 | |||||||
Loss (gain) on sale of marketable
securities |
(780 | ) | 5 | (785 | ) | |||||||
Gain on FOREX contracts |
(9,593 | ) | (1,924 | ) | (7,669 | ) | ||||||
Deferred tax (benefit) provision |
(15,798 | ) | 14,918 | (30,716 | ) | |||||||
Depreciation and other non-cash items,
net |
325,572 | 285,165 | 40,407 | |||||||||
$ | 1,079,143 | $ | 949,893 | $ | 129,250 | |||||||
Our cash flows from operations during the first nine months of 2011 increased $129.3 million
compared to the same period in 2010. This increase was primarily due to a decrease in net cash
required to satisfy working capital requirements during the first nine months of 2011 compared to
the same period in 2010.
We used $31.0 million less cash to satisfy our working capital requirements during the first
nine months of 2011 compared to the first nine months of 2010, primarily due to lower estimated
income taxes paid in the U.S. federal jurisdiction. During the first nine months of 2011, we made
U.S. federal income tax payments and paid foreign income taxes, net of refunds, of $64.0 million
and $121.9 million, respectively. During the first nine months of 2010, we made U.S. federal
income tax payments and paid foreign income taxes, net of refunds, of $362.5 million and $88.5
million, respectively. Trade and other receivables generated cash of $20.1 million during the
first nine months of 2011 compared to $141.7 million during the same period of 2010. We used $54.0
million more cash during the first nine months of 2011 to satisfy accounts payable and accrued
liability needs compared to the first nine months of 2010.
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Net Cash Used in Investing Activities.
Nine Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(In thousands) | ||||||||||||
Purchase of marketable securities |
$ | (5,051,538 | ) | $ | (4,099,525 | ) | $ | (952,013 | ) | |||
Proceeds from sale and maturities
of marketable securities |
4,862,108 | 3,700,176 | 1,161,932 | |||||||||
Capital expenditures |
(643,305 | ) | (312,995 | ) | (330,310 | ) | ||||||
Proceeds from disposition of assets |
5,128 | 186,333 | (181,205 | ) | ||||||||
$ | (827,607 | ) | $ | (526,011 | ) | $ | (301,596 | ) | ||||
Our investing activities used $827.6 million during the first nine months of 2011 compared to
$526.0 million during the same period in 2010. During the first nine months of 2011 we purchased
marketable securities, net of sales, of $189.4 million compared to net purchases of $399.3 million
during the same period in 2010. Our level of investment activity is dependent on our working
capital and other capital requirements during the year, as well as a response to actual or
anticipated events or conditions in the securities markets.
During the first nine months of 2011, we spent $483.0 million towards the construction of our
three drillships. See Liquidity and Capital Requirements Contractual Cash Obligations and
Liquidity and Capital Requirements Capital Expenditures.
We spent approximately $160.3 million during the first nine months of 2011 related to our
ongoing capital maintenance programs, including rig modifications to meet contractual requirements,
compared to $313.0 million during the same period in 2010. Capital expenditures during the first
nine months of 2010 included commissioning and initial outfitting costs of the Ocean Courage and
Ocean Valor.
On July 7, 2010, we completed the sale of the Ocean Shield for a net sale price of $184.1
million.
Net Cash Used in Financing Activities.
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(In thousands) | ||||||||||||
Payment of dividends |
$ | (367,930 | ) | $ | (611,668 | ) | $ | 243,738 | ||||
Redemption of zero coupon debentures |
| (4,238 | ) | 4,238 | ||||||||
Other |
4 | 41 | (37 | ) | ||||||||
$ | (367,926 | ) | $ | (615,865 | ) | $ | 247,939 | |||||
During the first nine months of 2011, we paid cash dividends totaling $367.9 million,
consisting of regular and special cash dividends of $52.1 million and $315.8 million, respectively.
During the first nine months of 2010, we paid cash dividends totaling $611.7 million, consisting
of regular and special cash dividends of $52.1 million and $559.5 million, respectively.
On October 19, 2011, we declared a regular quarterly cash dividend and a special cash dividend
of $0.125 and $0.75, respectively, per share of our common stock. Both the quarterly and special
cash dividends are payable on December 1, 2011 to stockholders of record on November 1, 2011.
Our Board of Directors has adopted a policy to consider paying special cash dividends, in
amounts to be determined, on a quarterly basis. Our Board of Directors may, in subsequent
quarters, consider paying additional special cash dividends, in amounts to be determined, if it
believes that our financial position, earnings, earnings outlook, capital spending plans and other
relevant factors warrant such action at that time.
Depending on market conditions, we may, from time to time, purchase shares of our common stock
in the open market or otherwise. We did not repurchase any shares of our outstanding common stock
during the nine-month periods ended September 30, 2011 and 2010.
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Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards
Update, or ASU, No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive
Income, or ASU 2011-05, which eliminates the option to present components of other comprehensive
income, or OCI, as part of the statement of changes in stockholders equity, requires the
presentation of each component of net income and each component of OCI either in a single
continuous statement or in two separate but consecutive statements and also requires presentation
of reclassification adjustments on the face of the financial statement. ASU 2011-05 is effective
for interim and annual periods beginning after December 15, 2011; however, early adoption is
permitted. The adoption of ASU 2011-05 will not have an effect on our financial position, results
of operations and cash flows.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, or
ASU 2011-04. ASU 2011-04 clarifies existing fair value measurement and disclosure requirements,
amends certain fair value measurement principles and requires additional disclosures about fair
value measurements. ASU 2011-04 is effective for interim and annual periods beginning after
December 15, 2011. We will incorporate any additional disclosures in our annual financial
statements for the year ending December 31, 2012.
Forward-Looking Statements
We or our representatives may, from time to time, either in this report, in periodic press
releases or otherwise, make or incorporate by reference certain written or oral statements that are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended,
or the Exchange Act. All statements other than statements of historical fact are, or may be deemed
to be, forward-looking statements. Forward-looking statements include, without limitation, any
statement that may project, indicate or imply future results, events, performance or achievements,
and may contain or be identified by the words expect, intend, plan, predict, anticipate,
estimate, believe, should, could, may, might, will, will be, will continue, will
likely result, project, forecast, budget and similar expressions. In addition, any
statement concerning future financial performance (including future revenues, earnings or growth
rates), ongoing business strategies or prospects, and possible actions taken by or against us,
which may be provided by management, are also forward-looking statements as so defined. Statements
made by us in this report that contain forward-looking statements include, but are not limited to,
information concerning our possible or assumed future results of operations and statements about
the following subjects:
| future market conditions and the effect of such conditions on our future results of operations; | ||
| future uses of and requirements for financial resources; | ||
| interest rate and foreign exchange risk; | ||
| future contractual obligations; | ||
| future operations outside the United States including, without limitation, our operations in Mexico, Egypt and Brazil; | ||
| effects of the Macondo well blowout, including, without limitation, the impact of the moratorium and its aftermath on drilling in the U.S. Gulf of Mexico, related delays in permitting activities and related regulations and market developments; | ||
| business strategy; | ||
| growth opportunities; | ||
| competitive position; | ||
| expected financial position; | ||
| future cash flows and contract backlog; | ||
| future regular or special dividends; | ||
| financing plans; | ||
| market outlook; | ||
| tax planning; | ||
| debt levels, including impacts of the recent financial crisis and restrictions in the credit market; | ||
| budgets for capital and other expenditures; | ||
| timing and duration of required regulatory inspections for our drilling rigs; | ||
| timing and cost of completion of rig upgrades, construction projects (including, without limitation, our three drillships under construction) and other capital projects; | ||
| delivery dates and drilling contracts related to rig conversion or upgrade projects, construction projects or rig acquisitions; |
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| plans and objectives of management; | ||
| idling drilling rigs or reactivating stacked rigs; | ||
| asset impairment evaluations; | ||
| performance of contracts; | ||
| outcomes of legal proceedings; | ||
| compliance with applicable laws; and | ||
| availability, limits and adequacy of insurance or indemnification. |
These types of statements are based on current expectations about future events and inherently
are subject to a variety of assumptions, risks and uncertainties, many of which are beyond our
control, that could cause actual results to differ materially from those expected, projected or
expressed in forward-looking statements. These risks and uncertainties include, among others, the
following:
| those described under Risk Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010; | ||
| general economic and business conditions, including the extent and duration of the recent financial crisis and restrictions in the credit market, the worldwide economic downturn and recession; | ||
| worldwide demand for oil and natural gas; | ||
| changes in foreign and domestic oil and gas exploration, development and production activity; | ||
| oil and natural gas price fluctuations and related market expectations; | ||
| the ability of the Organization of Petroleum Exporting Countries, commonly called OPEC, to set and maintain production levels and pricing, and the level of production in non-OPEC countries; | ||
| policies of various governments regarding exploration and development of oil and gas reserves; | ||
| our inability to obtain contracts for our rigs that do not have contracts; | ||
| the cancellation of contracts included in our reported contract backlog; | ||
| advances in exploration and development technology; | ||
| the worldwide political and military environment, including in oil-producing regions; | ||
| casualty losses; | ||
| operating hazards inherent in drilling for oil and gas offshore; | ||
| the risk of physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico; | ||
| industry fleet capacity; | ||
| market conditions in the offshore contract drilling industry, including dayrates and utilization levels; | ||
| competition; | ||
| changes in foreign, political, social and economic conditions; | ||
| risks of international operations, compliance with foreign laws and taxation policies and expropriation or nationalization of equipment and assets; | ||
| risks of potential contractual liabilities pursuant to our various drilling contracts in effect from time to time; | ||
| the ability of customers and suppliers to meet their obligations to us and our subsidiaries; | ||
| the risk that a letter of intent may not result in a definitive agreement; | ||
| foreign exchange and currency fluctuations and regulations, and the inability to repatriate income or capital; | ||
| risks of war, military operations, other armed hostilities, terrorist acts and embargoes; | ||
| changes in offshore drilling technology, which could require significant capital expenditures in order to maintain competitiveness; | ||
| regulatory initiatives and compliance with governmental regulations including, without limitation, regulations pertaining to climate change, carbon emissions or energy use; | ||
| compliance with environmental laws and regulations; | ||
| potential changes in accounting policies by the Financial Accounting Standards Board, the Securities and Exchange Commission, or SEC, or regulatory agencies for our industry which may cause us to revise our financial accounting and/or disclosures in the future, and which may change the way analysts measure our business or financial performance; | ||
| development and exploitation of alternative fuels; | ||
| customer preferences; | ||
| effects of litigation, tax audits and contingencies and the impact of compliance with judicial rulings and jury verdicts; | ||
| cost, availability, limits and adequacy of insurance; | ||
| invalidity of assumptions used in the design of our controls and procedures; |
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| the results of financing efforts; | ||
| the risk that future regular or special dividends may not be declared; | ||
| adequacy of our sources of liquidity; | ||
| risks resulting from our indebtedness; | ||
| public health threats; | ||
| negative publicity; | ||
| impairments of assets; | ||
| the availability of qualified personnel to operate and service our drilling rigs; and | ||
| various other matters, many of which are beyond our control. |
The risks and uncertainties included here are not exhaustive. Other sections of this report
and our other filings with the SEC include additional factors that could adversely affect our
business, results of operations and financial performance. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements. Forward-looking
statements included in this report speak only as of the date of this report. We expressly disclaim
any obligation or undertaking to release publicly any updates or revisions to any forward-looking
statement to reflect any change in our expectations or beliefs with regard to the statement or any
change in events, conditions or circumstances on which any forward-looking statement is based.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The information included in this Item 3 is considered to constitute forward-looking
statements for purposes of the statutory safe harbor provided in Section 27A of the Securities Act
and Section 21E of the Exchange Act. See Managements Discussion and Analysis of Financial
Condition and Results of Operations Forward-Looking Statements in Item 2 of Part I of this
report.
Our measure of market risk exposure represents an estimate of the change in fair value of our
financial instruments. Market risk exposure is presented for each class of financial instrument
held by us at September 30, 2011 and December 31, 2010, assuming immediate adverse market movements
of the magnitude described below. We believe that the various rates of adverse market movements
represent a measure of exposure to loss under hypothetically assumed adverse conditions. The
estimated market risk exposure represents the hypothetical loss to future earnings and does not
represent the maximum possible loss or any expected actual loss, even under adverse conditions,
because actual adverse fluctuations would likely differ. In addition, since our investment
portfolio is subject to change based on our portfolio management strategy as well as in response to
changes in the market, these estimates are not necessarily indicative of the actual results that
may occur.
Exposure to market risk is managed and monitored by our senior management. Senior management
approves the overall investment strategy that we employ and has responsibility to ensure that the
investment positions are consistent with that strategy and the level of risk acceptable to us. We
may manage risk by buying or selling instruments or entering into offsetting positions.
Interest Rate Risk
We have exposure to interest rate risk arising from changes in the level or volatility of
interest rates. Our investments in marketable securities are primarily in fixed maturity
securities. We monitor our sensitivity to interest rate risk by evaluating the change in the value
of our financial assets and liabilities due to fluctuations in interest rates. The evaluation is
performed by applying an instantaneous change in interest rates by varying magnitudes on a static
balance sheet to determine the effect such a change in rates would have on the recorded market
value of our investments and the resulting effect on stockholders equity. The analysis presents
the sensitivity of the market value of our financial instruments to selected changes in market
rates and prices which we believe are reasonably possible over a one-year period.
The sensitivity analysis estimates the change in the market value of our interest sensitive
assets and liabilities that were held on September 30, 2011 and December 31, 2010, due to
instantaneous parallel shifts in the yield curve of 100 basis points, with all other variables held
constant.
The interest rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag behind changes in
market rates. Accordingly, the analysis may not be indicative of, is not intended to provide, and
does not provide a precise forecast of the effect of changes in market interest rates on our
earnings or stockholders equity. Further, the computations do not contemplate any actions we could
undertake in response to changes in interest rates.
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Our long-term debt, as of September 30, 2011 and December 31, 2010, was denominated in U.S.
dollars. Our existing debt has been issued at fixed rates, and as such, interest expense would not
be impacted by interest rate shifts. The impact of a 100-basis point increase in interest rates on
fixed rate debt would result in a decrease in market value of $122.0 million and $117.0 million as
of September 30, 2011 and December 31, 2010, respectively. A 100-basis point decrease would result
in an increase in market value of $142.0 million and $135.5 million as of September 30, 2011 and
December 31, 2010, respectively.
Foreign Exchange Risk
Foreign exchange rate risk arises from the possibility that changes in foreign currency
exchange rates will impact the value of financial instruments. It is customary for us to enter
into foreign currency forward exchange, or FOREX, contracts in the normal course of business.
These contracts generally require us to net settle the spread between the contracted foreign
currency exchange rate and the spot rate on the contract settlement date, which for certain
contracts is the average spot rate for the contract period. As of September 30, 2011, we had FOREX
contracts outstanding in the aggregate notional amount of $191.0 million, consisting of $30.7
million in Australian dollars, $102.9 million in Brazilian reais, $33.6 million in British pounds
sterling, $10.9 million in Mexican pesos and $12.9 million in Norwegian kroner. These contracts
generally settle monthly through March 2012.
At September 30, 2011, we have presented the fair value of our outstanding FOREX contracts as
a current asset of $0.2 million in Prepaid expenses and other current assets and a current
liability of $(13.9) million in Accrued liabilities in our Consolidated Balance Sheets. At
December 31, 2010, we have presented the fair value of our outstanding FOREX contracts as a current
asset of $4.3 million in Prepaid expenses and other current assets and a current liability of
$(0.1) million in Accrued liabilities in our Consolidated Balance Sheets.
The following table presents our exposure to market risk by category (interest rates and
foreign currency exchange rates):
Fair Value Asset (Liability) | Market Risk | |||||||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Interest rate: |
||||||||||||||||
Marketable securities |
$ | 801,900 | (a) | $ | 612,300 | (a) | $ | (5,200 | ) (b) | $ | (1,100 | ) (b) | ||||
Foreign Exchange: |
||||||||||||||||
FOREX contracts
receivable positions |
200 | (c) | 4,300 | (c) | (3,700 | ) (d) | (23,500 | ) (d) | ||||||||
FOREX contracts
liability positions |
13,900 | (c) | (100 | ) (c) | (28,000 | ) (d) | (2,100 | ) (d) | ||||||||
(a) | The fair market value of our investment in marketable securities, excluding repurchase agreements, is based on the quoted closing market prices on September 30, 2011 and December 31, 2010. | |
(b) | The calculation of estimated market risk exposure is based on assumed adverse changes in the underlying reference price or index of an increase in interest rates of 100 basis points at September 30, 2011 and December 31, 2010. | |
(c) | The fair value of our FOREX contracts is based on both quoted market prices and valuations derived from pricing models on September 30, 2011 and December 31, 2010. | |
(d) | The calculation of estimated foreign exchange risk assumes an instantaneous 20% decrease in the foreign currency exchange rates versus the U.S. dollar from their values at September 30, 2011 and December 31, 2010, with all other variables held constant. |
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ITEM 4. | Controls and Procedures. |
We maintain a system of disclosure controls and procedures which are designed to ensure that
information required to be disclosed by us in reports that we file or submit under the federal
securities laws, including this report, is recorded, processed, summarized and reported on a timely
basis. These disclosure controls and procedures include controls and procedures designed to ensure
that information required to be disclosed by us under the federal securities laws is accumulated
and communicated to our management on a timely basis to allow decisions regarding required
disclosure.
Our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, participated in an
evaluation by our management of the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2011. Based on their
participation in that evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were effective as of September 30, 2011.
There were no changes in our internal control over financial reporting identified in
connection with the foregoing evaluation that occurred during our third fiscal quarter of 2011 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 6. | Exhibits. |
See the Exhibit Index for a list of those exhibits filed or furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DIAMOND OFFSHORE DRILLING, INC. (Registrant) |
||||
Date October 27, 2011 | By: | \s\ Gary T. Krenek | ||
Gary T. Krenek | ||||
Senior Vice President and Chief Financial Officer | ||||
Date October 27, 2011 | \s\ Beth G. Gordon | |||
Beth G. Gordon | ||||
Controller (Chief Accounting Officer) | ||||
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EXHIBIT INDEX
Exhibit No. | Description | |
3.1
|
Amended and Restated Certificate of Incorporation of Diamond Offshore Drilling, Inc. (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003) (SEC File No. 1-13926). | |
3.2
|
Amended and Restated By-laws (as amended through March 15, 2011) of Diamond Offshore Drilling, Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed March 16, 2011). | |
31.1*
|
Rule 13a-14(a) Certification of the Chief Executive Officer. | |
31.2*
|
Rule 13a-14(a) Certification of the Chief Financial Officer. | |
32.1*
|
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. | |
101.INS**
|
XBRL Instance Document. | |
101.SCH**
|
XBRL Taxonomy Extension Schema Document. | |
101.CAL**
|
XBRL Taxonomy Calculation Linkbase Document. | |
101.LAB**
|
XBRL Taxonomy Label Linkbase Document. | |
101.PRE**
|
XBRL Presentation Linkbase Document. | |
101.DEF**
|
XBRL Definition Linkbase Document. |
*
|
Filed or furnished herewith. | |
**
|
The documents formatted in XBRL (Extensible Business Reporting Language) and attached as Exhibit 101 to this report are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for purposes of section 18 of the Exchange Act, and otherwise, not subject to liability under these sections. |
45