10-Q 1 h10664e10vq.txt PRIDE INTERNATIONAL, INC. - 9/30/2003 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-13289 PRIDE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0069030 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5847 SAN FELIPE, SUITE 3300 HOUSTON, TEXAS 77057 (Address of principal executive offices) (Zip Code) (713) 789-1400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practical date. Outstanding as of November 10, 2003 Common Stock, par value $.01 per share 135,641,222 =============================================================================== PRIDE INTERNATIONAL, INC. INDEX
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet as of September 30, 2003 and December 31, 2002........................ 2 Consolidated Statement of Operations for the three months ended September 30, 2003 and 2002...... 3 Consolidated Statement of Operations for the nine months ended September 30, 2003 and 2002....... 4 Consolidated Statement of Cash Flows for the nine months ended September 30, 2003 and 2002....... 5 Notes to Unaudited Consolidated Financial Statements............................................. 6 Report of Independent Auditors................................................................... 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 23 Item 4. Controls and Procedures.................................................................... 23 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K........................................................... 25 Signatures........................................................................................... 26
1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PRIDE INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PAR VALUES)
SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------ ------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents .................................................... $ 60,489 $ 133,986 Restricted cash............................................................... 39,692 52,700 Trade receivables, net........................................................ 363,184 265,885 Parts and supplies, net....................................................... 77,702 64,920 Deferred income taxes......................................................... 3,171 3,332 Other current assets.......................................................... 187,390 188,277 ------------ ------------- Total current assets...................................................... 731,628 709,100 ------------ ------------- PROPERTY AND EQUIPMENT, net........................................................ 3,401,145 3,395,774 ------------ ------------- OTHER ASSETS Investments in and advances to affiliates..................................... 31,808 29,620 Goodwill ..................................................................... 69,014 72,014 Other assets.................................................................. 106,633 129,852 ------------ ------------- Total other assets........................................................ 207,455 231,486 ------------ ------------- $ 4,340,228 $ 4,336,360 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.............................................................. $ 191,251 $ 186,657 Accrued expenses.............................................................. 245,994 243,190 Deferred income taxes......................................................... 957 985 Short-term borrowings......................................................... 23,564 17,724 Current portion of long-term debt............................................. 190,685 95,610 Current portion of long-term lease obligations................................ 2,612 2,679 ------------ ------------- Total current liabilities................................................. 655,063 546,845 ------------ ------------- OTHER LONG-TERM LIABILITIES........................................................ 48,529 102,510 LONG-TERM DEBT, net of current portion............................................. 1,715,821 1,791,619 LONG-TERM LEASE OBLIGATIONS, net of current portion................................ 10,564 12,511 DEFERRED INCOME TAXES.............................................................. 75,396 100,966 MINORITY INTEREST.................................................................. 97,646 82,204 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 50,000 shares authorized; none issued........ - - Common stock, $.01 par value; 400,000 shares authorized; 135,622 and 134,453 shares issued; 135,253 and 134,084 shares outstanding. 1,356 1,344 Paid-in capital............................................................... 1,256,369 1,237,146 Treasury stock, at cost....................................................... (4,409) (4,409) Accumulated other comprehensive income (loss)................................. 840 (3,598) Retained earnings............................................................. 483,053 469,222 ------------ ------------- Total stockholders' equity................................................ 1,737,209 1,699,705 ------------ ------------- $ 4,340,228 $ 4,336,360 ============ =============
The accompanying notes are an integral part of the consolidated financial statements. 2 PRIDE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2003 2002 ------------- ------------ REVENUES: Services...................................................................... $ 440,180 $ 285,592 Sales......................................................................... 10,654 27,158 ------------- ------------- Total revenues............................................................ 450,834 312,750 ---------- ------------- OPERATING COSTS, excluding depreciation and amortization: Services...................................................................... 265,775 172,113 Sales......................................................................... 14,055 26,533 ------------ ------------- Total operating costs..................................................... 279,830 198,646 ------------ ------------- DEPRECIATION AND AMORTIZATION...................................................... 62,679 56,139 GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization................ 27,609 24,738 ------------ ------------- EARNINGS FROM OPERATIONS........................................................... 80,716 33,227 OTHER INCOME (EXPENSE) Interest expense.............................................................. (30,493) (34,285) Interest income............................................................... 255 993 Other income (expense), net................................................... (5,373) (1,373) ------------- ------------- Total other expense, net.................................................. (35,611) (34,665) ------------- ------------- EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST.......................... 45,105 (1,438) INCOME TAX PROVISION (BENEFIT)..................................................... 10,596 (446) MINORITY INTEREST.................................................................. 6,015 4,731 ------------ ------------- NET EARNINGS (LOSS)................................................................ $ 28,494 $ (5,723) ============ ============= NET EARNINGS (LOSS) PER SHARE Basic..................................................................... $ 0.21 $ (0.04) Diluted................................................................... $ 0.19 $ (0.04) WEIGHTED AVERAGE SHARES OUTSTANDING Basic..................................................................... 135,131 133,212 Diluted................................................................... 155,466 133,212
The accompanying notes are an integral part of the consolidated financial statements. 3 PRIDE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 ------------- ------------ REVENUES: Services...................................................................... $ 1,167,919 $ 848,538 Sales......................................................................... 86,951 72,253 ------------- ------------- Total revenues............................................................ 1,254,870 920,791 ------------- ------------- OPERATING COSTS, excluding depreciation and amortization: Services...................................................................... 718,227 513,350 Sales......................................................................... 133,830 68,259 ------------ ------------- Total operating costs..................................................... 852,057 581,609 ------------ ------------- DEPRECIATION AND AMORTIZATION...................................................... 182,938 167,214 GENERAL AND ADMINISTRATIVE, excluding depreciation and amortization................ 81,319 70,431 ------------ ------------- EARNINGS FROM OPERATIONS........................................................... 138,556 101,537 OTHER INCOME (EXPENSE) Interest expense.............................................................. (95,296) (98,665) Interest income............................................................... 1,328 4,016 Other income (expense), net................................................... (3,743) (1,239) ------------- ------------- Total other expense, net.................................................. (97,711) (95,888) ------------- ------------- EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST................................. 40,845 5,649 INCOME TAX PROVISION .............................................................. 11,572 1,632 MINORITY INTEREST.................................................................. 15,442 13,944 ------------ ------------- NET EARNINGS (LOSS)................................................................ $ 13,831 $ (9,927) ============ ============= NET EARNINGS (LOSS) PER SHARE Basic..................................................................... $ 0.10 $ (0.07) Diluted................................................................... $ 0.10 $ (0.07) WEIGHTED AVERAGE SHARES OUTSTANDING Basic..................................................................... 134,506 133,058 Diluted................................................................... 136,270 133,058
The accompanying notes are an integral part of the consolidated financial statements. 4 PRIDE INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 ------------- ------------ OPERATING ACTIVITIES Net earnings (loss)........................................................... $ 13,831 $ (9,927) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities - Depreciation and amortization............................................. 182,938 167,214 Discount amortization on zero coupon convertible debentures............... 1,795 8,676 Amortization of deferred loan costs....................................... 6,579 6,081 (Gain) loss on sale of assets............................................. 57 (163) Deferred income taxes .................................................... (24,986) (22,628) Minority interest......................................................... 15,442 13,944 Loss on early extinguishment of debt...................................... - 1,228 Changes in assets and liabilities, net of effects of acquisitions - Trade receivables.................................................... (104,020) 18,414 Parts and supplies................................................... (12,782) (5,183) Other current assets................................................. (38,337) (41,284) Other assets......................................................... 49,649 (9,873) Accounts payable..................................................... 2,436 (97,281) Accrued expenses..................................................... 7,622 2,506 Other liabilities.................................................... (41,046) (36,475) ------------ ------------- Net cash provided by (used in) operating activities.............. 59,178 (4,751) ------------ ------------- INVESTING ACTIVITIES Purchases of property and equipment........................................... (179,303) (122,243) Proceeds from dispositions of property and equipment.......................... 1,190 590 Investments in and advances to affiliates..................................... (2,188) (902) ------------- ------------- Net cash used in investing activities................................ (180,301) (122,555) ------------- ------------- FINANCING ACTIVITIES Proceeds from issuance of common stock........................................ 16,265 - Proceeds from exercise of stock options....................................... 2,519 5,111 Proceeds from issuance of convertible senior debentures, net of issue costs... 294,800 291,781 Proceeds from debt borrowings................................................. 163,599 360,000 Reduction of debt............................................................. (442,565) (515,082) Decrease in restricted cash................................................... 13,008 15,251 ------------ ------------- Net cash provided by financing activities............................ 47,626 157,061 ------------ ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... (73,497) 29,755 CASH AND CASH EQUIVALENTS, beginning of period..................................... 133,986 58,988 ------------ ------------- CASH AND CASH EQUIVALENTS, end of period........................................... $ 60,489 $ 88,743 ============ =============
The accompanying notes are an integral part of the consolidated financial statements. 5 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL Principles of Consolidation and Reporting The unaudited consolidated financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Certain reclassifications have been made to the prior periods' condensed financial statements to conform with the current period presentation. Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 145, which eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and classified as extraordinary items. Accordingly, the consolidated statement of operations for the three months and nine months ended September 30, 2002 reflect reclassifications of the gross effect of $189,000 and $798,000, respectively, from extraordinary item into other income (expense), net and income tax provision. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Pride International, Inc. (the "Company" or "Pride") included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of management, the unaudited consolidated financial information included herein reflects all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for a full year or any other interim period. PricewaterhouseCoopers LLP, the Company's independent auditors, have performed a review of the unaudited consolidated financial statements included herein in accordance with standards established by the American Institute of Certified Public Accountants. Pursuant to Rule 436(c) under the Securities Act of 1933, the report of PricewaterhouseCoopers LLP, included herein, should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of the Securities Act, and the liability provisions of Section 11 of the Securities Act do not apply to such report. Comprehensive Income Comprehensive income is the change in the Company's equity from all transactions except those resulting from investments by or distributions to owners. Comprehensive income (loss) was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2003 2002 2003 2002 --------- -------- -------- --------- (IN THOUSANDS) Net earnings (loss)...................................... $ 28,494 $ (5,723) $ 13,831 $ (9,927) Foreign currency translation gain (loss), net............ 112 (5,256) 4,438 (3,557) --------- -------- -------- ---------- Comprehensive income (loss).............................. $ 28,606 $(10,979) $ 18,269 $ (13,484) ========= ========= ======== =========
Rig Construction Contracts The Company has historically constructed drilling rigs only for its own use. However, at the request of some of its significant customers, the Company has entered into contracts to design, construct and mobilize specialized drilling rigs through the Company's technical services group. The Company also has entered into contracts to operate the rigs on behalf of the customers. Construction contract revenues and related costs are recognized under the percentage-of-completion method of accounting using measurements of progress toward completion appropriate for the work performed, such as man-hours, costs incurred or physical progress. Accordingly, the Company reviews contract price and cost estimates periodically as the work progresses and reflects adjustments in income (i) to recognize income proportionate to the percentage of completion in the case of projects showing an estimated profit at completion and (ii) to recognize the entire amount of the loss in the case of projects showing an estimated loss at completion. To the extent these adjustments result in an increase in previously reported losses or a reduction in or an elimination of previously reported profits with respect to a project, the Company would recognize a charge against current earnings. See Note 2. 6 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Beginning October 1, 2002, the Company's technical services group is reported as a separate business segment. Accordingly, financial information for the first three quarters of 2002 has been adjusted to reflect the change in presentation, which had no effect on consolidated earnings from operations or net earnings (loss). The consolidated statement of operations for the three and nine months ended September 30, 2002 reflects increases in revenues and operating costs of $26.5 million and $68.3 million, respectively, for the change in presentation. Stock-Based Compensation The Company uses the intrinsic value based method of accounting for stock-based compensation prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations. Under this method, the Company records no compensation expense for stock options granted when the exercise price for options granted is equal to the fair market value of the Company's stock on the date of the grant. If the fair value based method of accounting prescribed by SFAS No. 123 "Accounting for Stock-Based Compensation" had been applied, the Company's pro forma net earnings (loss), net earnings (loss) per share and stock-based compensation cost would approximate the amounts indicated below. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 2003 2002 2003 2002 ------------- ------------ ------------ ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings (loss), as reported............................ $ 28,494 $ (5,723) $ 13,831 $ (9,927) Add: Stock-based compensation included in reported net earnings (loss), net of tax............................... - - - - Deduct: Total stock-based employee compensation expense determined under the fair value method, net of tax........ (1,999) (1,932) (8,951) (5,624) ----------- ------------ ------------ ----------- Pro forma net earnings (loss)............................... $ 26,495 $ (7,655) $ 4,880 $ (15,551) =========== ============ =========== =========== Net earnings (loss) per share: Basic-- as reported....................................... $ 0.21 $ (0.04) $ 0.10 $ (0.07) Basic-- pro forma......................................... $ 0.20 $ (0.06) $ 0.04 $ (0.12) Diluted-- as reported..................................... $ 0.19 $ (0.04) $ 0.10 $ (0.07) Diluted-- pro forma....................................... $ 0.18 $ (0.06) $ 0.04 $ (0.12)
Goodwill In March 2003, the Company reduced by $3.0 million the carrying amount of goodwill recorded in its April 2000 acquisition of Servicios Especiales San Antonio S.A. ("San Antonio"). The seller of San Antonio was entitled to four "earn-out" payments of up to $3 million each on the first four anniversary dates of the closing if San Antonio's revenues from services provided to the seller and its affiliates exceeded specified levels during the 12 calendar months ending immediately prior to the relevant anniversary date. The specified revenue level was not achieved for the third anniversary earn-out payment. Supplemental Cash Flow Information Non-cash transactions for the nine months ended September 30, 2003 and 2002 consisted of increases in accounts payable for capital expenditures of $4.6 million and $47.2 million, respectively. 7 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". FIN No. 46 requires a company to consolidate a variable interest entity, as defined, when the company will absorb a majority of the variable interest entity's expected losses, receive a majority of the variable interest entity's expected residual returns, or both. FIN No. 46 also requires certain disclosures relating to consolidated variable interest entities and unconsolidated variable interest entities in which a company has a significant variable interest. The Company has adopted the disclosure provisions of FIN No. 46, as well as the consolidation provisions of FIN No. 46 for variable interest entities created after January 31, 2003, and for variable interest entities in which the Company obtained an interest after January 31, 2003. With respect to variable interest entities in which a company holds a variable interest that was acquired before February 1, 2003, the consolidation provisions are required to be applied no later than the company's first fiscal year or interim period ending after December 15, 2003. The Company is currently evaluating these provisions of FIN No. 46, but does not expect them to have a material impact on the Company's consolidated financial position, results of operations or cash flows when applied. The FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" and SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" during the second quarter of 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including those embedded in other contracts, and for hedging activities and is effective for contracts entered into or modified after June 30, 2003. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with both liability and equity characteristics. The adoption of SFAS Nos. 149 and 150 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. 2. CONSTRUCTION PROJECTS For the three-month and nine-month periods ended September 30, 2003, the Company recorded loss provisions of $3.4 million and $46.9 million, respectively, relating to the construction of deepwater platform rigs. On three of these projects, costs are expected to substantially exceed revenues. The fourth project is expected to result in a profit upon completion. Increased costs have resulted mainly from difficulties the Company experienced with the initial shipyard constructing the first two rigs. In response to these difficulties, the Company terminated its contract with the shipyard prior to the completion of the first two rigs. As a result, the Company has incurred substantial unplanned costs in completing the construction of the first unit in connection with its installation on the customer's platform. The Company also has engaged another shipyard to complete construction of the second rig. The aggregate costs paid to the initial shipyard and committed to the second shipyard, as well as costs to transfer the rig and components, have greatly exceeded budgeted expenditures for the project. In addition, because of the difficulties with the initial shipyard, the Company is now utilizing shipyards in the Asia Pacific region for the third and fourth deepwater rig projects. As a result, the lump sum contracts and anticipated freight costs for these two projects are higher than originally budgeted. The Company has commenced arbitration proceedings against the initial shipyard claiming damages of approximately $10 million, and the shipyard has asserted counterclaims against the Company for damages of approximately $18 million. The Company does not believe that resolution of the arbitration proceedings with the shipyard will have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company's technical services segment is performing these deepwater platform rig construction projects under lump sum contracts with its customers. In pricing these types of contracts, the Company uses all reasonable efforts to accurately estimate its cost to perform the work and to cover anticipated increases in costs of changes in labor, material and services through estimates of cost increases, which are reflected in the original contract price. Despite these efforts, however, the revenues and costs realized on a lump sum contract may vary from the estimated amounts. There may be further losses resulting from completing these projects. The Company also performed substantial engineering, logistics and construction work to modify, enhance and deploy two of the Company's large land rigs in Kazakhstan in accordance with the customer's specifications. The first of these two rigs commenced operations in April 2003 and the second rig commenced operations in July 2003. The Company received up-front fees that are being recognized over the period of drilling. Of these fees, $23.9 million was recognized in the third quarter of 2003. The unamortized balance of these fees as of September 30, 2003 was $2.5 million, which amount is 8 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS expected to be recognized in the fourth quarter of 2003. 3. LONG-TERM DEBT Long-term debt consisted of the following:
SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------ ------------ (IN THOUSANDS) Senior secured term loan.................................................. $ 197,000 $ 198,500 Senior secured revolving credit facilities................................ 260,000 110,000 93/8% Senior Notes due 2007............................................... 175,000 325,000 10% Senior Notes due 2009................................................. 200,000 200,000 Drillship loans........................................................... 198,011 231,966 Semisubmersible loans..................................................... 178,241 215,371 2 1/2% Convertible Senior Notes due 2007.................................. 300,000 300,000 3 1/4% Convertible Senior Notes due 2033.................................. 300,000 - Zero Coupon Convertible Senior Debentures due 2021........................ 4 98,220 Zero Coupon Convertible Subordinated Debentures due 2018.................. 1,086 111,481 Senior convertible notes payable.......................................... 85,853 85,853 Limited-recourse collateralized term loans................................ 5,311 10,263 Other notes payable....................................................... 6,000 575 ------------ ------------- 1,906,506 1,887,229 Current portion of long-term debt......................................... 190,685 95,610 ------------ ------------- Long-term debt, net of current portion.................................... $ 1,715,821 $ 1,791,619 ============ =============
The Company has a five-year $200.0 million senior secured term loan with a group of banks. Borrowings under the term loan bear interest at variable rates based on LIBOR plus a spread based on the credit rating of the facility or, if unrated, index debt. In 2003, in order to reduce the potential impact of fluctuations in LIBOR, the Company entered into interest rate agreements that effectively cap the interest rate on total outstanding borrowings under the term loan at rates from 3.58% to 5.0% and provide a lower limit on rates from 0.72% to 0.91%, plus the applicable spread, to March 2007. The Company accounts for these interest rate agreements at market value, with changes reflected in current earnings. The Company has a senior secured revolving credit facility with a group of banks that provides aggregate availability of up to $250.0 million. The Company may issue up to $50.0 million of letters of credit under the facility. As of September 30, 2003, $195.0 million of borrowings and an additional $4.3 million of letters of credit were outstanding under the facility. As of September 30, 2003, the Company had a senior secured revolving credit facility with non-U.S. banks that provided aggregate availability of up to $95.0 million, including up to $10.0 million of letters of credit. That credit facility was amended in October 2003. The amended facility provides aggregate availability of up to $180.0 million, including up to $10.0 million of letters of credit, and is collateralized by three semisubmersible rigs, two jackup rigs and a tender-assisted rig. Borrowings under the amended credit facility bear interest at variable rates based on LIBOR plus a spread ranging from 1.2% to 2.1%. As of September 30, 2003, $65.0 million of borrowings and an additional $10.0 million of letters of credit were outstanding under this credit facility. As of September 30, 2003, the Company had $70.7 million in aggregate availability under its senior secured revolving credit facilities. The October amendment described above increased the aggregate availability under the Company's credit facilities by $85 million. In July 2003, the Company redeemed $150 million principal amount of its 93/8% senior notes due 2007 at a redemption price of 103.125% of the principal amount, plus accrued and unpaid interest to the redemption date. The Company paid a total of $157.6 million in connection with the redemption, including $2.9 million of accrued and unpaid interest and a $4.7 million premium. In addition, the Company expensed $1.5 million, before income taxes, of deferred financing costs, which amount is included in other income (expense), net in the consolidated statement of operations. In April and May 2003, the Company issued $300 million aggregate principal amount of 3.25% convertible senior notes due 2033. Substantially all of the net proceeds (after estimated expenses) of approximately $294.8 million were used to repay amounts outstanding under the Company's senior secured revolving credit facilities, which included borrowings used to fund a portion of the purchase price of the zero coupon convertible subordinated debentures due 2018. The notes bear interest at a rate of 3.25% per annum. The Company also will pay contingent interest during any six-month interest period commencing on or after May 1, 2008 for which the trading price of the notes for each of the five trading days immediately preceding such period equals or exceeds 120% of the principal amount of the notes. Beginning May 5, 2008, the Company may redeem any of the notes at a redemption price of 100% of the principal amount redeemed plus accrued and unpaid interest. In addition, noteholders may require the Company to repurchase the notes on May 1 of 2008, 2010, 2013, 2018, 2023 and 2028 at a repurchase price of 100% of the principal amount redeemed plus accrued and unpaid 9 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS interest. The Company may elect to pay all or a portion of the repurchase price in common stock instead of cash, subject to certain conditions. The notes are convertible under specified circumstances into shares of the Company's common stock at a conversion rate of 38.9045 shares per $1,000 principal amount of notes (which is equal to a conversion price of $25.704), subject to adjustment. Upon conversion, the Company will have the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and common stock. In January 2003, the Company repurchased substantially all of the outstanding zero coupon convertible senior debentures due 2021 for $98.2 million. In April 2003, as required by the terms of the Company's zero coupon convertible subordinated debentures due 2018, the Company repurchased $226.5 million face amount of the outstanding debentures for $112.0 million, which was equal to their accreted value on the date of purchase. The purchase price was funded through borrowings under the Company's senior secured revolving credit facilities and available cash. Debentures with a face amount of $2.1 million, and an accreted value of $1.1 million as of September 30, 2003, remain outstanding. As of September 30, 2003, $39.7 million of the Company's cash balances, which amount is included in restricted cash, consists of funds held in trust in connection with the Company's drillship and semisubmersible loans and its limited-recourse collateralized term loans and, accordingly, is not available for use by the Company. 4. INCOME TAXES The Company's consolidated effective income tax rate for the three months ended September 30, 2003 was 23.5% as compared to 31.0% for the corresponding period in 2002. The difference in the effective tax rate resulted primarily from a higher percentage of earnings from foreign jurisdictions with low or zero effective tax rates in the 2003 period as compared to the prior period. For the nine months ended September 30, 2003, the consolidated effective income tax rate was 28.3% compared to 28.9% for the same period in 2002. The lower rate for the 2003 period was principally a result of increased income in foreign jurisdictions with low or zero effective tax rates, partly offset by a true-up of the provision relating to tax returns for prior periods. 5. NET EARNINGS PER SHARE Basic net earnings per share has been computed based on the weighted average number of shares of common stock outstanding during the applicable period. Diluted net earnings per share has been computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period, as if stock options, convertible debentures and other convertible debt were converted into common stock, after giving retroactive effect to the elimination of interest expense, net of income tax effect, applicable to the convertible debentures and other convertible debt. The following table presents information necessary to calculate basic and diluted net earnings (loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2003 2002 2003 2002 --------- -------- -------- --------- (IN THOUSANDS) Net earnings (loss)........................................... $ 28,494 $ (5,723) $ 13,831 $ (9,927) Interest expense on convertible debentures and notes.......... 2,299 - - - Income tax effect............................................. (805) - - - ---------- -------- -------- --------- Adjusted net earnings (loss).................................. $ 29,988 $ (5,723) $ 13,831 $ (9,927) ========= ========= ======== ========= Weighted average shares outstanding .......................... 135,131 133,212 134,506 133,058 Convertible debentures and notes.............................. 18,171 - - - Stock options ................................................ 2,164 - 1,764 - --------- -------- -------- --------- Adjusted weighted average shares outstanding.................. 155,466 133,212 136,270 133,058 ========= ======== ======== =========
The calculation of diluted weighted average shares outstanding excludes 18.3 million and 37.1 million common shares for the three months ended September 30, 2003 and 2002, respectively, and 33.6 million and 33.0 million common shares for the nine months ended September 30, 2003 and 2002, respectively, issuable pursuant to convertible debt and 10 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS outstanding options. These shares were excluded as their effect was antidilutive or the exercise price of stock options exceeded the average price of the Company's common stock for the period. 6. SHAREHOLDERS' EQUITY In the second quarter of 2003, the Company sold approximately 830,000 shares of common stock under its Direct Stock Purchase Plan for aggregate net proceeds of $15.0 million. The Company did not sell any shares under the plan in the first and third quarters of 2003 or in 2002. 7. COMMITMENTS AND CONTINGENCIES In April 2002, the Company contributed $14.1 million to the settlement of a wage-related antitrust lawsuit, of which $5.1 million that exceeded the policy limits of the Company's insurance had previously been recognized in 2001. The Company's insurance carrier has not yet agreed to pay the remaining amount, and the Company has commenced litigation against this insurer. The Company believes it will prevail in this matter and collect the approximately $10.2 million receivable, representing the insured settlement amount and legal costs, included in other assets in the accompanying balance sheet. The Company is routinely involved in other litigation, claims and disputes incidental to its business, which at times involves claims for significant monetary amounts, some of which would not be covered by insurance. In the opinion of management, none of the existing litigation will have a material adverse effect on the Company's financial position, results of operations or cash flows. 8. INVESTMENT IN AMETHYST JOINT VENTURE As of September 30, 2003, the Company had a 30.0% equity interest in a joint venture company that is constructing two dynamically-positioned, deepwater semisubmersible drilling rigs, currently referred to as the Amethyst 4 and Amethyst 5. The rigs are being constructed at a shipyard in Maine and are anticipated to be completed in early 2004. The joint venture company has financed 87.5% of the cost of construction of these rigs through credit facilities, with repayment of the borrowings under those facilities guaranteed by the United States Maritime Administration ("MARAD"). Advances under the credit facilities are being provided without recourse to any of the joint venture owners. The remaining 12.5% of the cost of construction is being provided by the joint venture company from equity contributions that have been made by the joint venture partners. In addition, the joint venture partners have agreed to provide equity contributions to finance all of the incremental costs associated with upgrading both rigs to a water depth capability of 1,700 meters from the original design of approximately 1,500 meters. The Company expects that the partners will be required to provide contributions of approximately $4.0 million in connection with these upgrades, of which the Company's 30% share would be approximately $1.2 million. Through September 30, 2003, the Company's equity contributions to the joint venture totaled $31.8 million, including capitalized interest of $7.0 million and an initial contribution of $0.4 million in connection with the upgrades. Based on the availability of funds under performance and payment bonds issued on behalf of a prior construction contractor and draws remaining under the MARAD-guaranteed credit facilities, the Company believes the Amethyst 4 and Amethyst 5 will be completed without requiring additional equity contributions by the joint venture partners other than contributions in connection with the water depth capacity upgrades. 11 PRIDE INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 9. SEGMENT INFORMATION The following table sets forth selected consolidated financial information of the Company by operating segment:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ ------------------------------------- 2003 2002 2003 2002 ---------------- ---------------- ---------------- ---------------- (IN MILLIONS, EXCEPT PERCENTAGES) Revenues: Gulf of Mexico............... $ 75.2 16.7% $ 40.7 13.0% $ 190.4 15.2% $ 111.5 12.1% International offshore....... 181.6 40.3 152.0 48.6 516.9 41.2 469.5 51.0 International land........... 148.7 33.0 74.8 23.9 367.5 29.3 216.6 23.5 E&P services................. 32.9 7.3 18.1 5.8 90.0 7.2 50.9 5.5 Technical services........... 12.4 2.7 27.2 8.7 90.0 7.1 72.3 7.9 -------- ------- -------- ----- -------- ------ -------- ----- Total revenues............. 450.8 100.0 312.8 100.0 1,254.8 100.0 920.8 100.0 -------- ------- -------- ----- -------- ------ -------- ----- Operating Costs: ......... Gulf of Mexico............... 47.8 17.1 34.8 17.5 131.7 15.4 98.9 17.0 International offshore....... 95.5 34.1 75.2 37.9 264.0 31.0 233.0 40.1 International land........... 97.0 34.7 48.9 24.6 249.2 29.2 145.3 25.0 E&P services................. 22.6 8.1 13.2 6.7 64.3 7.6 36.1 6.2 Technical services........... 16.9 6.0 26.6 13.3 142.8 16.8 68.3 11.7 -------- ------- -------- ----- -------- ------ -------- ----- Total operating costs...... 279.8 100.0 198.7 100.0 852.0 100.0 581.6 100.0 -------- ------- -------- ----- -------- ------ -------- ----- Segment Profit (Loss):.... Gulf of Mexico............... 27.4 16.0 5.9 5.2 58.7 14.6 12.6 3.7 International offshore....... 86.1 50.4 76.8 67.3 252.9 62.8 236.5 69.7 International land........... 51.7 30.2 25.9 22.7 118.3 29.3 71.3 21.0 E&P services................. 10.3 6.0 4.9 4.3 25.7 6.4 14.8 4.4 Technical services........... (4.5) (2.6) 0.6 0.5 (52.8) (13.1) 4.0 1.2 -------- ------- -------- ----- -------- ------ -------- ----- Total segment profit....... 171.0 100.0% 114.1 100.0% 402.8 100.0% 339.2 100.0% -------- ------- -------- ----- -------- ------ -------- ----- Depreciation and amortization.. 62.7 56.1 182.9 167.2 General and administrative..... 27.6 24.8 81.3 70.5 -------- -------- -------- -------- Earnings from operations....... $ 80.7 $ 33.2 $ 138.6 $ 101.5 ======== ======== ======== ========
Significant Customers Two customers accounted for approximately $129.9 million and $326.4 million, or 28.8% and 26.0%, respectively, of consolidated revenues for the three and nine months ended September 30, 2003. Two customers accounted for approximately $72.9 million and $205.3 million, or 23.3% and 22.3%, respectively, of consolidated revenues for the three and nine months ended September 30, 2002. 12 REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Pride International, Inc.: We have reviewed the accompanying consolidated balance sheet of Pride International, Inc. as of September 30, 2003, and the related consolidated statements of operations for the three month and nine month periods ended September 30, 2003 and 2002 and consolidated statement of cash flows for the nine month periods ended September 30, 2003 and 2002. These interim financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated March 25, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Houston, Texas November 12, 2003 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with the accompanying unaudited consolidated financial statements as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 included elsewhere herein, and with our Annual Report on Form 10-K for the year ended December 31, 2002. The following information contains forward-looking statements. Please read "Forward-Looking Statements" for a discussion of limitations inherent in such statements. GENERAL We provide contract drilling and related services to oil and gas companies worldwide, operating both offshore and on land. As of November 8, 2003, we operated a global fleet of 328 rigs, including two ultra-deepwater drillships, 11 semisubmersible rigs, 35 jackup rigs, 29 tender-assisted, barge and platform rigs and 251 land-based drilling and workover rigs. We operate in more than 30 countries and marine provinces. We have five principal operating segments: Gulf of Mexico, International Offshore, International Land, E&P Services and Technical Services. BUSINESS ENVIRONMENT AND OUTLOOK General Revenues. Our revenues depend principally upon the number of our available rigs, the number of days these rigs are utilized and the contract day rates received. The number of days our rigs are utilized and the contract day rates received are largely dependent upon the balance of supply and demand for drilling and related services in the different geographic regions in which we operate. The number of available rigs may increase or decrease as a result of the acquisition, relocation or disposal of rigs, the construction of new rigs and the number of rigs being upgraded or repaired at any time. In order to improve utilization or realize higher contract day rates, we may mobilize our rigs from one market to another. Our revenues also depend on the number and scope of construction or engineering projects being undertaken by our technical services group. Revenues for these projects are recognized on a percentage-of-completion basis. Oil and gas companies' exploration and development drilling programs drive the demand for drilling and related services. These drilling programs are affected by their expectations about oil and natural gas prices, anticipated production levels, demand for crude oil and natural gas products, government regulations and many other factors. Oil and gas prices are volatile, which has historically led to significant fluctuations in expenditures for oil and gas drilling and related services. Operating Expenses. Earnings from operations are primarily affected by changes in revenue, but are also a function of changes in operating expenses. Operating expenses are generally influenced by changes in utilization. For instance, if a rig is expected to be idle for an extended period of time, we may reduce the size of the rig's crew and take steps to "cold stack" the rig, which reduces expenses and partially offsets the impact on operating income associated with loss of revenues. We recognize as an operating expense routine overhauls that maintain rather than upgrade the rigs or E&P services equipment. These expenses vary from period to period. Costs of rig enhancements are capitalized and depreciated over the expected useful lives of the enhancements. Depreciation expense decreases earnings from operations in periods subsequent to capital upgrades. Operating expenses in relation to our engineering and construction projects are recognized in proportion to revenues using the percentage-of-completion method. Additionally, operating expenses may include a provision for expected losses if we estimate that a project will be unprofitable in total. Our general and administrative expenses are principally related to our corporate headquarters and our regional offices The following table summarizes average daily revenue and percentage utilization for our Gulf of Mexico and international offshore rig fleets for the three and nine months ended September 30, 2003 and 2002. In this quarterly report, average daily revenue information is based on total revenues for each rig type divided by actual days worked by all rigs of that type. Average daily revenue will differ from average contract day rates for a rig due to billing adjustments for any non-productive time, mobilization fees, performance bonuses and charges to the customer for ancillary services. Percentage utilization is calculated as the total days worked divided by the total days available for work by all rigs of that type. 14
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ ------------------------------------- 2003 2002 2003 2002 ---------------- ---------------- ---------------- -------------- GULF OF MEXICO Jackup rigs.................. $ 31,300 72% $ 25,200 47% $ 30,900 65% $ 25,300 41% Platform rigs................ $ 22,300 42% $ 19,900 44% $ 21,000 33% $ 20,200 44% INTERNATIONAL OFFSHORE......... Drillships/Semisubmersible rigs $ 120,300 84% $ 116,900 80% $ 114,700 89% $ 126,100 84% Jackup rigs.................. $ 54,100 98% $ 45,300 86% $ 52,700 92% $ 46,400 88% Tender and Barge rigs........ $ 34,300 86% $ 33,900 95% $ 34,000 85% $ 33,400 96%
Gulf of Mexico Throughout 2002 and the first nine months of 2003, we experienced particularly weak conditions in the U.S. Gulf of Mexico jackup and platform rig markets. High natural gas inventory storage levels at the start of 2002 resulted in reduced demand for rig services. Although natural gas prices have recovered and have been relatively strong during the last 12 months, there has been only a marginal improvement to date in the demand for drilling services in the U.S. Gulf of Mexico. In response to the poor market conditions, we have actively marketed a number of rigs in our U.S. Gulf of Mexico fleet to international markets. Since early 2002, we have obtained long-term contracts for 14 jackup rigs and two platform rigs with Petroleos Mexicanos S.A. ("Pemex") in the Mexican sector of the Gulf of Mexico and for two jackup rigs in other international markets, one in Nigeria and one in India. Additionally, we obtained long-term contracts with Pemex in Mexico for the Pride South Seas, a semisubmersible rig that we mobilized from South Africa, and for the Viking, a newly acquired semisubmersible rig. The first nine jackup rigs, one of the platform rigs and the Pride South Seas were contracted and completed redeployment in 2002 and worked throughout the first nine months of 2003. Three of the jackups and the second platform rig commenced operations in July 2003 and the Viking commenced operations in October 2003. The remaining two jackup rigs are expected to commence operations in mid-November 2003. We continue to market additional rigs into Mexico and other international markets as suitable opportunities arise. There can be no assurance, however, that any additional contracts will result from these efforts. As of November 8, 2003, our 12 jackups working for Pemex and the two others being upgraded to work offshore Mexico had contracts with an average remaining term of 2.4 years and an average contract day rate of $35,500. Six of our jackups were working in the U.S. Gulf of Mexico with an average contract day rate of $25,000, of which four were on short-term contracts. There are five rigs available. Additionally, three of our platform rigs were working offshore Mexico on contracts with an average contract day rate of $20,200 and five were working in the U.S. Gulf of Mexico at an average contract day rate of $15,200. We expect that revenues and gross margins derived from our entire Gulf of Mexico operations will continue to improve during the remainder of 2003 and into the first quarter of 2004 due to the incremental impact of the additional contracts in Mexico. In addition, the contracting of any of our idle jackup rigs could have a significant impact on our future results. International Offshore Our international offshore segment has continued to experience high levels of activity, and we have maintained essentially full utilization of six of our seven high-specification deepwater rigs throughout the first nine months of 2003. The seventh deepwater rig, the Pride South America semisubmersible rig, received its five-year periodic survey and related maintenance in the first quarter of 2003 and was out of service for approximately 70 days. The rig has been working since completion of the survey and related maintenance. Our intermediate water-depth semisubmersibles experienced 87% utilization during the first nine months of 2003. The idle time was due primarily to one of the rigs undergoing its five-year periodic survey during the period and to the Pride Venezuela being stacked for the last two months of the period after it completed its contract with Petroleos de Venezuela, S.A. ("PDVSA") in July. The Pride Venezuela has been demobilized to Trinidad and is being marketed internationally. Additionally, the contract for the Pride South Atlantic, offshore Brazil, expired in October 2003. We have obtained new commitments for the Pride South Atlantic to drill three wells, with possibly additional optional wells, offshore Brazil, commencing in January 2004. 15 Following the transfer of two independent-leg jackup rigs to Nigeria and India under two-year contracts in 2002, we currently have eight jackup rigs working in international waters outside of the Gulf of Mexico. All of these rigs are currently working under long-term contracts, of which four are expected to expire in the first nine months of 2004. These jackup rigs experienced 92% utilization in the first nine months of 2003. The idle time was primarily due to two of these rigs undergoing shipyard repairs in the period. Additionally, we manage two jackup rigs on behalf of PDVSA in Venezuela under contracts that expire in the first six months of 2004. International Land During 2002, our international land segment was adversely affected by the economic and political instability in Argentina. The Argentine peso declined in value against the U.S. dollar following the Argentine government's decision to abandon the country's fixed dollar-to-peso exchange rate, requiring private sector, dollar-denominated loans and contracts to be paid in pesos and placing restrictions on the convertibility of the Argentine peso. The devaluation, coupled with the government's mandated conversion of all dollar-based contracts to pesos, severely pressured our margins. During the first quarter of 2002, we engaged in discussions with all of our Argentine customers regarding recovery of losses sustained from the devaluation of accounts receivable and the basis on which new business would be contracted. We restructured most of our contracts on a basis that we believe limits our exposure to further devaluations. Activity levels have recovered steadily from mid-2002 as high oil prices positively impacted our customers' cash flows. The average rate of utilization of our available rig fleet in Argentina was 87% in the nine months ended September 30, 2003 as compared with 64% in the corresponding period in 2002. As of November 8, 2003, 120 rigs, or 80% of our total fleet of 150 rigs, in Argentina were under contract. Venezuela also has been experiencing political, economic and social instability. A prolonged strike by PDVSA employees that ended in February 2003 led to the dismissal of more than 18,000 employees by the government. The recent turmoil in Venezuela led to a reduction in our level of operations in that country during the first quarter of 2003. Since the conclusion of the strike, our rig activity has recovered and currently exceeds the level that existed before the strike. As of November 8, 2003, we had 25 rigs, or 81% of our total land-based rigs and all four of our offshore rigs in Venezuela under contract as compared with only seven rigs at the end of the strike. Exchange controls, together with employee dismissals and reorganization within PDVSA, initially led to a slower rate of collection of our trade receivables in early 2003, but the rate of collection has recently improved. In Kazakhstan, the first of two of our large land rigs, which had been earning a standby rate since being accepted by the customer in November 2002, commenced operations on an artificial island in the Caspian Sea in April 2003, and the second rig commenced operations in July 2003. The related contracts required substantial engineering, logistics and construction work to modify, enhance and deploy our rigs in accordance with the customer's specifications. We received up-front fees that are being recognized over the period of drilling. Of these fees, $23.9 million was recognized in the third quarter of 2003. The unamortized balance of these fees at September 30, 2003 was $2.5 million, which amount is expected to be recognized in the fourth quarter of 2003. E&P Services Our E&P services activity is generated predominately in South America and was negatively impacted by the crises in Argentina and Venezuela in 2002. Revenues in the first nine months of 2003 increased significantly due to the recovery of activity in Argentina and our commencement of E&P services in Brazil and Mexico. Revenues from E&P services are expected to increase further in subsequent quarters due to improving market conditions in Venezuela and to the recent commencement of new contracts in Argentina. Technical Services The technical services group has four major projects ongoing to design, engineer, manage construction of and commission deepwater platform drilling rigs, which are being constructed on behalf of two major oil company customers for installation on spars and tension-leg platforms. We also are to provide drilling operations management of the rig packages once they have been installed on the platforms. The first platform drilling rig has been mated with the customer's platform and towed to Angola, where it is expected to commence drilling operations in late 2003. The other deepwater platform rigs are expected to enter into service between late 2004 and 2005. During the second quarter of 2003, we recorded loss provisions, included in operating costs, totaling $46.9 million, or $30.5 million net of taxes at the U.S. statutory rate, relating to the construction of deepwater platform rigs. During the third 16 quarter of 2003, we recorded an additional loss provision totaling $3.4 million, or $2.2 million net of taxes, relating to the construction of these deepwater platform rigs. On three of these projects, costs are expected to substantially exceed revenues. The fourth project is expected to result in a profit upon completion. We do not currently anticipate entering into any additional construction contracts for rigs to be owned by others. Increased costs have resulted mainly from difficulties we experienced with the initial shipyard constructing the first two rigs. In response to these difficulties, we terminated our contract with the shipyard prior to the completion of the first two rigs. As a result, we have incurred substantial unplanned costs in completing the construction of the first unit in connection with its installation on the customer's platform. We also have engaged another shipyard to complete construction of the second rig. The aggregate costs paid to the initial shipyard and committed to the second shipyard, as well as costs to transfer the rig and components, have greatly exceeded our budgeted expenditures for the project. In addition, because of the difficulties with the initial shipyard, we are now utilizing shipyards in the Asia Pacific region for the third and fourth deepwater rig projects. As a result, the lump sum contracts and anticipated freight costs for these two projects are higher than originally budgeted. We have commenced arbitration proceedings against the initial shipyard claiming damages of approximately $10 million, and the shipyard has asserted counterclaims against us for damages of approximately $18 million. We do not believe that resolution of the arbitration proceedings with the shipyard will have a material impact on our consolidated financial position, results of operations or cash flows. Our technical services segment is performing these deepwater platform rig construction projects under lump sum contracts with our customers. In pricing these types of contracts, we use all reasonable efforts to accurately estimate our cost to perform the work and to cover anticipated increases in costs of changes in labor, material and services through estimates of cost increases, which are reflected in the original contract price. Despite these efforts, however, the revenue, cost and gross profit we realize on a lump sum contract may vary from the estimated amounts because of risks generally inherent in the marine construction industry, including variations in labor and equipment productivity over the term of the contract, unanticipated cost increases, engineering, shipyard or systems problems, shortages of equipment, materials or skilled labor, unscheduled delays in the delivery of ordered materials and equipment, work stoppages and shipyard unavailability or delays. We have experienced cost overruns on these contracts that have adversely impacted our financial results. There may be further losses resulting from completing these projects. We recognize revenues and related costs from our rig construction contracts under the percentage-of-completion basis of accounting using measurements of progress toward completion appropriate for the work performed, such as man-hours, costs incurred or physical progress. Accordingly, we review contract price and cost estimates periodically as the work progresses and reflect adjustments in income (1) to recognize income proportionate to the percentage of completion in the case of projects showing an estimated profit at completion and (2) to recognize the entire amount of the loss in the case of projects showing an estimated loss at completion. To the extent these adjustments result in an increase in previously reported losses or a reduction in or an elimination of previously reported profits with respect to a project, we would recognize a charge against current earnings, which could be material. Although we continually strive to improve our ability to estimate our contract costs and profitability associated with our construction projects, our current estimates may be revised in future periods, and those revisions may be material. 17 RESULTS OF OPERATIONS We have presented in the following table selected consolidated financial and operational information by operating segment:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ ------------------------------------- 2003 2002 2003 2002 ---------------- ---------------- ---------------- ---------------- (IN MILLIONS, EXCEPT PERCENTAGES) Revenues: Gulf of Mexico............... $ 75.2 16.7% $ 40.7 13.0% $ 190.4 15.2% $ 111.5 12.1% International offshore....... 181.6 40.3 152.0 48.6 516.9 41.2 469.5 51.0 International land........... 148.7 33.0 74.8 23.9 367.5 29.3 216.6 23.5 E&P services................. 32.9 7.3 18.1 5.8 90.0 7.2 50.9 5.5 Technical services........... 12.4 2.7 27.2 8.7 90.0 7.1 72.3 7.9 -------- ------- -------- ----- -------- -------- -------- ----- Total revenues............. 450.8 100.0 312.8 100.0 1,254.8 100.0 920.8 100.0 -------- ------- -------- ----- -------- -------- -------- ----- Operating Costs: Gulf of Mexico............... 47.8 17.1 34.8 17.5 131.7 15.4 98.9 17.0 International offshore....... 95.5 34.1 75.2 37.9 264.0 31.0 233.0 40.1 International land........... 97.0 34.7 48.9 24.6 249.2 29.2 145.3 25.0 E&P services................. 22.6 8.1 13.2 6.7 64.3 7.6 36.1 6.2 Technical services........... 16.9 6.0 26.6 13.3 142.8 16.8 68.3 11.7 -------- ------- -------- ----- -------- -------- -------- ----- Total operating costs...... 279.8 100.0 198.7 100.0 852.0 100.0 581.6 100.0 -------- ------- -------- ----- -------- -------- -------- ----- Segment Profit (Loss):.... Gulf of Mexico............... 27.4 16.0 5.9 5.2 58.7 14.6 12.6 3.7 International offshore....... 86.1 50.4 76.8 67.3 252.9 62.8 236.5 69.7 International land........... 51.7 30.2 25.9 22.7 118.3 29.3 71.3 21.0 E&P services................. 10.3 6.0 4.9 4.3 25.7 6.4 14.8 4.4 Technical services........... (4.5) (2.6) 0.6 0.5 (52.8) (13.1) 4.0 1.2 -------- ------- -------- ----- -------- -------- -------- ----- Total segment profit....... $ 171.0 100.0% $ 114.1 100.0% $ 402.8 100.0% $ 339.2 100.0% ======== ======= ======== ======= ======== ======== ======== =====
Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002. Revenues. Revenues for the three months ended September 30, 2003 were $138.0 million, or 44.1%, higher than in the three months ended September 30, 2002, due primarily to increased activity and day rates for our jackup and platform rigs in Mexico, an increase in land drilling and E&P services activity due to the recovery in Argentina, Venezuela and Colombia, recognition of an up-front fee as well as increased land drilling in Kazakhstan and the start-up of E&P services activity in Brazil and Mexico. Additionally, one of our deepwater rigs, the Pride South Pacific, which did not work during the three months ended September 30, 2002, worked throughout the third quarter of 2003. Operating Costs. Operating costs for the quarter ended September 30, 2003 were $81.1 million, or 40.8%, higher than in the corresponding quarter of 2002 due to increased costs associated with rigs that operated during the third quarter of 2003 that were stacked or being upgraded during the third quarter of 2002 and increased activity in Kazakhstan. Additionally, insurance costs increased due to current conditions in the insurance market. Certain operating costs denominated in euros also increased due to the strengthening of that currency as compared with the dollar (from an average of $0.99 per euro in the quarter ending September 30, 2002 to an average of $1.13 per euro in the quarter ending September 30, 2003). These increases in costs were partially offset by the favorable impact of the devaluation in Venezuela on expenses denominated in its local currency. Operating costs for the quarter ended September 30, 2002 were reduced by $3.4 million as a result of changes in estimates of costs accrued in prior periods primarily for contractually required maintenance costs that were not expected to be incurred on two rigs managed by us. Depreciation and Amortization. Depreciation expense increased by $6.5 million, or 11.6%, to $62.7 million in the quarter ended September 30, 2003, from $56.1 million in the corresponding period in 2002. The increase is attributable 18 primarily to depreciation on rig refurbishments and upgrades, principally for rigs working in Mexico, and other capital projects completed after the first nine months of 2002. General and Administrative. General and administrative expenses increased by $2.9 million, or 11.6%, to $27.6 million for the three months ended September 30, 2003, from $24.7 million for the three months ended September 30, 2002, due primarily to increased activity in Argentina and Mexico, the impact of the decline in the value of the dollar relative to the euro on certain expenses denominated in euros and higher professional fees, insurance and staffing costs. Other Income (Expense). Other expense for the three months ended September 30, 2003 increased by $0.9 million, or 2.7%, as compared to the corresponding period in 2002. Interest expense decreased by $3.8 million due principally to a reduction in the weighted average interest rate of our debt as a result of recent debt refinancings. Interest income declined $0.7 million due to a reduction in average cash balances held on deposit and to a reduction in interest rates. Other, net, in the three-month period ended September 30, 2003 was comprised of expenses principally related to the redemption of $150 million principal amount of our 93/8% senior notes due 2007, including a redemption premium of $4.7 million and the recognition of $1.5 million of deferred financing costs. Other, net in the corresponding period in 2002 was comprised mostly of net foreign exchange losses in Argentina and Venezuela. Income Tax Provision. Our consolidated effective income tax rate for the three months ended September 30, 2003 decreased to 23.5% from 31.0% for the corresponding period in 2002, principally as a result of increased income in foreign jurisdictions with low or zero effective tax rates. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002. Revenues. Revenues for the nine months ended September 30, 2003 were $334.0 million, or 36.3%, higher than in the nine months ended September 30, 2002, due primarily to increased activity and day rates for our jackup rigs in Mexico, an increase in land drilling activity due to the recovery in Argentina, Venezuela and Colombia, increased activity in Chad, the start-up of activity in Kazakhstan and an increase in sales related to the design, engineering and construction of deepwater platform rigs by our technical services group. Additionally, one of our deepwater rigs, the Pride South Pacific, which has worked throughout 2003, completed its previous contract in April 2002 and did not work during the remainder of the nine-month period ended September 30, 2002. These increases in revenues were partially offset by a decrease in activity in the U.S. sector of the Gulf of Mexico. Operating Costs. Operating costs for the nine months ended September 30, 2003 were $270.4 million, or 46.5%, higher than in the corresponding period in 2002 due to increased costs associated with rigs that operated during the first nine months of 2003 that were stacked or being upgraded during the corresponding period in 2002, the increase in activity in Chad and the start-up of activity in Kazakhstan, the increased number of technical services projects and to the recording, in the nine months ended September 30, 2003, of a provision in respect of expected losses on several of those contracts. Additionally, certain operating costs denominated in euros increased due to the strengthening of that currency relative to the dollar. These increases in costs were partially offset by the favorable impact of the devaluation in Venezuela on expenses denominated in its local currency. Operating costs for the nine months ended September 30, 2002 were reduced by $1.5 million as a result of changes in estimates of costs accrued in prior periods primarily for contractually required maintenance costs that were not expected to be incurred on two rigs managed by us. Depreciation and Amortization. Depreciation expense increased by $15.7 million, or 9.4%, to $182.9 million in the nine months ended September 30, 2003, from $167.2 million in the corresponding period in 2002, due to incremental depreciation on newly acquired and constructed rigs and other rig refurbishments and upgrades. General and Administrative. General and administrative expenses increased by $10.9 million, or 15.5%, to $81.3 million for the nine months ended September 30, 2003, from $70.5 million for the nine months ended September 30, 2002, due primarily to increased overhead related to higher activity in Argentina and Mexico, the impact of the decline in the value of the dollar relative to the euro on certain expenses denominated in euros and higher professional fees, insurance and staffing costs. Other Income (Expense). Other expense for the nine months ended September 30, 2003 increased by $1.8 million, or 1.9%, as compared to the corresponding period in 2002. Interest expense decreased by $3.4 million due principally to a reduction in the weighted average interest rate of our debt as a result of recent debt refinancings, partly offset by an increase in the average amount of outstanding debt. Interest income declined $2.7 million due to a reduction in average cash balances held on deposit and to a reduction in interest rates. Other, net, in the nine-month period ended September 30, 19 2003, was comprised of expenses mostly related to the redemption of $150 million principal amount of our 93/8% senior notes due 2007, including a redemption premium of $4.7 million and the recognition of $1.5 million of deferred financing costs, partially offset by net foreign exchange gains. Other, net, in the nine-month period ended September 30, 2002, was comprised of mostly net foreign exchange losses in Argentina and Venezuela. Income Tax Provision. Our consolidated effective income tax rate for the nine months ended September 30, 2003 was 28.3% as compared to 28.9% for the corresponding period in 2002. The lower rate for the current period was principally a result of increased income in foreign jurisdictions with low or zero effective tax rates, partly offset by a true-up of the provision relating to tax returns for prior periods. LIQUIDITY AND CAPITAL RESOURCES We had net working capital of $76.6 million and $162.3 million as of September 30, 2003 and December 31, 2002, respectively. Our current ratio, the ratio of current assets to current liabilities, was 1.1 as of September 30, 2003 and 1.3 as of December 31, 2002. The decrease in net working capital was attributable primarily to the use of cash to repurchase our remaining outstanding zero coupon convertible senior debentures in January 2003, an increase in the current portion of long-term debt as a result of the reclassification of approximately $86 million of senior convertible notes that mature in March 2004 from long-term to current liabilities and losses incurred on deepwater platform rig construction projects. We have a five-year $200.0 million senior secured term loan with a group of banks. Borrowings under the term loan bear interest at variable rates based on LIBOR plus a spread based on the credit rating of the facility or, if unrated, index debt. In 2003, in order to reduce the potential impact of fluctuations in LIBOR, we entered into interest rate agreements that effectively cap the interest rate on total outstanding borrowings under the term loan at rates from 3.58% to 5.0% and provide a lower limit on rates from 0.72% to 0.91%, plus the applicable spread, to March 2007. We have a senior secured revolving credit facility with a group of banks that provides aggregate availability of up to $250.0 million. Letters of credit of up to $50.0 million may be issued under the facility. As of September 30, 2003, $195.0 million of borrowings and an additional $4.3 million of letters of credit were outstanding under the facility. We amended our $95.0 million senior secured revolving credit facility with non-U.S. banks in October 2003. The amended facility provides aggregate availability of up to $180.0 million, including up to $10.0 million of letters of credit, and is collateralized by three semisubmersible rigs, two jackup rigs and a tender-assisted rig. Borrowings under the amended credit facility bear interest at variable rates based on LIBOR plus a spread ranging from 1.2% to 2.1%. As of September 30, 2003, $65.0 million of borrowings and an additional $10.0 million of letters of credit were outstanding under this credit facility. As of September 30, 2003, we had aggregate availability of $70.7 million under our senior secured revolving credit facilities. The October amendment described above increased the aggregate availability under our credit facilities by $85 million. In July 2003, we redeemed $150.0 million principal amount of our 93/8% senior notes due 2007 at a redemption price of 103.125% of the principal amount, plus accrued and unpaid interest to the redemption date. We paid a total of $157.6 million in connection with the redemption, including $2.9 million of accrued and unpaid interest and a $4.7 million premium. In April and May 2003, we issued $300 million aggregate principal amount of 3.25% convertible senior notes due 2033. Substantially all of the net proceeds of approximately $294.8 million were used to repay amounts outstanding under our senior secured revolving credit facilities, which included borrowings used to fund a portion of the purchase price of our zero coupon convertible subordinated debentures due 2018. The notes bear interest at a rate of 3.25% per annum. We also will pay contingent interest during any six-month interest period commencing on or after May 1, 2008 for which the trading price of the notes for each of the five trading days immediately preceding such period equals or exceeds 120% of the principal amount of the notes. Beginning May 5, 2008, we may redeem any of the notes at a redemption price of 100% of the principal amount redeemed plus accrued and unpaid interest. In addition, noteholders may require us to repurchase the notes on May 1 of 2008, 2010, 2013, 2018, 2023 and 2028 at a repurchase price of 100% of the principal amount redeemed plus accrued and unpaid interest. We may elect to pay all or a portion of the repurchase price in common stock instead of cash, subject to certain conditions. The notes are convertible under specified circumstances into shares of our common stock at a conversion rate of 38.9045 shares per $1,000 principal amount of notes (which is equal to a conversion price of $25.704), subject to adjustment. Upon conversion, we will have the right to deliver, in lieu of shares of common stock, cash or a combination of cash and common stock. In January 2003, we repurchased substantially all of our outstanding zero coupon convertible senior debentures due 2021 for $98.2 million. In April 2003, as required by the terms of our zero coupon convertible subordinated debentures due 2018, we repurchased $226.5 million face amount of the outstanding debentures for $112.0 million, which was equal to their accreted value on the date of purchase. The purchase price was funded through borrowings under our senior secured revolving credit facilities and available cash. Debentures with a face amount of $2.1 million, and an accreted value of $1.1 million as of November 8, 2003, remain outstanding. 20 We have a Direct Stock Purchase Plan, which provides a convenient way for investors to purchase shares of our common stock without paying brokerage commissions or service charges. In the second quarter of 2003, we sold approximately 830,000 shares of common stock under this plan for net proceeds of $15.0 million. No shares were sold under the plan in the first or third quarters of 2003 or in 2002. Additions to property and equipment during the nine months ended September 30, 2003 totaled $175.1 million, including $23.4 million for the upgrade of one large land rig to work in Kazakhstan, $12.2 million for the acquisition of the Viking, a conventionally moored semisubmersible rig, $65.0 million for the upgrading of five jackup rigs, one platform rig and the Viking semisubmersible rig for contracts in Mexico, $10.0 million for other rig upgrades, refurbishments and reactivations, and approximately $64.5 million for sustaining capital projects. Approximately $26.4 million of these expenditures have been reimbursed by our customers. Since early 2002, we have obtained long-term contracts in Mexico for 14 jackup rigs, two platform rigs and two semisubmersible rigs. Most of these rigs came from our U.S. Gulf of Mexico rig fleet and required substantial upgrades to meet international standards and Pemex's specific requirements. The upgrades included expanding the living quarters and adding additional equipment such as extra mud pumps, top-drives and higher load capacity cranes. As of September 30, 2003, we had a 30.0% equity interest in a joint venture company that is constructing two dynamically-positioned, deepwater semisubmersible drilling rigs, currently referred to as the Amethyst 4 and Amethyst 5. The rigs are being constructed at a shipyard in Maine and are anticipated to be completed in early 2004. The joint venture company has financed 87.5% of the cost of construction of these rigs through credit facilities, with repayment of the borrowings under those facilities guaranteed by the United States Maritime Administration ("MARAD"). Advances under the credit facilities are being provided without recourse to any of the joint venture owners. The remaining 12.5% of the cost of construction is being provided by the joint venture company from equity contributions that have been made by the joint venture partners. In addition, the joint venture partners have agreed to provide equity contributions to finance all of the incremental costs associated with upgrading both rigs to a water depth capability of 1,700 meters from the original design of approximately 1,500 meters. We expect that the partners will be required to provide contributions of approximately $4.0 million in connection with these upgrades, of which our 30% share would be approximately $1.2 million. Through September 30, 2003, our equity contributions to the joint venture totaled $31.8 million, including capitalized interest of $7.0 million and an initial contribution of $0.4 million in connection with the upgrades. Based on the availability of funds under performance and payment bonds issued on behalf of a prior construction contractor and draws remaining under the MARAD-guaranteed credit facilities, we believe the Amethyst 4 and Amethyst 5 will be completed without requiring additional equity contributions by the joint venture partners other than contributions in connection with the water depth capacity upgrades. As of September 30, 2003, we had approximately $4.3 billion in total assets and $1.9 billion of long-term debt and capital lease obligations. We do not expect that our level of total indebtedness will have a material adverse impact on our financial position, results of operations or liquidity in future periods. As of September 30, 2003, $39.7 million of our cash balances, which amount is included in restricted cash, consists of funds held in trust in connection with our drillship and semisubmersible loans and our limited-recourse collateralized term loans and, accordingly, is not available for our use. Management believes that the cash and cash equivalents on hand, together with the cash generated from our operations and borrowings under our credit facilities, will be adequate to fund normal ongoing capital expenditures, working capital and debt service requirements for the foreseeable future. We expect to continue to redeploy assets to more active regions and to explore opportunities to expand our operations through rig upgrades and acquisitions from time to time. The timing, size or success of any acquisition effort and the associated potential capital commitments are unpredictable. From time to time, we have one or more bids outstanding for contracts that could require significant capital expenditures and mobilization costs. We expect to fund acquisitions and project opportunities primarily through a combination of working capital, cash flow from operations and full or limited recourse debt or equity financing. In addition, we may consider from time to time opportunities to dispose of non-core assets when we believe the capital could be more effectively deployed to reduce debt or for other purposes, and we continue to discuss with potential buyers the possible sale of certain non-core assets. No assurance can be given that any such sale will be completed. In addition to the matters described in this "--Liquidity and Capital Resources" section, please read "--Business Environment and Outlook" for additional matters that may have a material impact on our liquidity. 21 RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". FIN No. 46 requires a company to consolidate a variable interest entity, as defined, when the company will absorb a majority of the variable interest entity's expected losses, receive a majority of the variable interest entity's expected residual returns, or both. FIN No. 46 also requires certain disclosures relating to consolidated variable interest entities and unconsolidated variable interest entities in which a company has a significant variable interest. We have adopted the disclosure provisions of FIN No. 46, as well as the consolidation provisions of FIN No. 46 for variable interest entities created after January 31, 2003, and for variable interest entities in which we have obtained an interest after January 31, 2003. With respect to variable interest entities in which a company holds a variable interest that was acquired before February 1, 2003, the consolidation provisions are required to be applied no later than the company's first fiscal year or interim period ending after December 15, 2003. We are currently evaluating these provisions of FIN No. 46, but do not expect them to have a material impact on our consolidated financial position, results of operations or cash flows when applied. The FASB issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" and SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" during the second quarter of 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including those embedded in other contracts, and for hedging activities and is effective for contracts entered into or modified after June 30, 2003. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with both liability and equity characteristics and is effective at the beginning of the third quarter of 2003. The adoption of SFAS Nos. 149 and 150 did not to have a material impact on our consolidated financial position, results of operations or cash flows. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q that address activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These include such matters as: o market conditions, expansion and other development trends in the contract drilling industry o utilization rates and contract rates for rigs o future capital expenditures and investments in the construction, acquisition and refurbishment of rigs (including the amount and nature thereof and the timing of completion thereof) o estimates of profit or loss from performance of rig construction contracts o future asset sales o completion and employment of rigs under construction o repayment of debt o business strategies o expansion and growth of operations o future exposure to currency devaluations o expected outcomes of legal and administrative proceedings and their expected effects on our financial position, results of operations and cash flows o future operating results and financial condition and 22 o the effectiveness of our disclosure controls and procedures We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, including the following: o general economic business conditions o prices of oil and gas and industry expectations about future prices o cost overruns in our lump sum construction and other turnkey contracts o adjustments in estimates affecting our revenue recognition under percentage-of-completion accounting o foreign exchange controls and currency fluctuations o political stability in the countries in which we operate o the business opportunities (or lack thereof) that may be presented to and pursued by us o changes in laws or regulations and o the validity of the assumptions used in the design of our disclosure controls and procedures Most of these factors are beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in these statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding our exposure to certain market risks, see "Quantitative and Qualitative Disclosures about Market Risk" in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2002. There have been no material changes to the disclosure regarding our exposure to certain market risks made in the annual report, except as discussed in the paragraph below. For additional information regarding our long-term debt, see Note 3 of the Notes to Unaudited Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. Interest Rate Risk. During 2003, we entered into agreements that effectively capped the interest rate on $197.0 of outstanding borrowings under our senior secured term loan at rates from 3.58% to 5.0%, plus the applicable spread, to March 2007. ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this quarterly report. In the course of this evaluation, management considered certain internal control areas, including those enumerated below, in which we have made and are continuing to make changes to improve and enhance controls. Based upon that evaluation, our President and Chief Executive Officer and our Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC's rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act. Beginning with the year ending December 31, 2004, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management with our annual report on Form 10-K. The internal control report must contain (1) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for our company, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management's assessment of the 23 effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal control over financial reporting is effective, and (4) a statement that our independent auditors have issued an attestation report on management's assessment of our internal control over financial reporting. In order to achieve compliance with Section 404 within the prescribed period, management has formed an internal control steering committee, engaged outside consultants and adopted a detailed project work plan to assess the adequacy of our internal control over financial reporting, remediate any control weaknesses that may be identified, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. As a result of this initiative, we may make changes in our internal control over financial reporting from time to time during the period prior to December 31, 2004. There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter, other than those enumerated below, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As disclosed in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2003, in connection with the completion of their review of our financial statements for the three-month and six-month periods ended June 30, 2003 included in that report and, in particular, their analysis of our loss provision related to our rig construction contracts, our independent auditors, PricewaterhouseCoopers LLP, issued a letter to our audit committee dated August 13, 2003 noting certain matters in our technical services division that it considered to be a material weakness in internal control. The matters listed in the letter were the misapplication of generally accepted accounting principles and the lack of procedures and policies to properly process change orders with customers on a timely basis. The evaluation of internal controls is subjective and involves judgment, and although we believe there were areas in our internal controls with respect to the processing of change orders that could have been improved, we do not believe these matters constituted a material weakness in our internal control over financial reporting. We have, however, made changes in policies and procedures to improve and enhance internal controls with regard to the processing of change orders and in the technical services division generally and believe these improvements and enhancements have appropriately addressed the matters referred to in the letter. These changes include the following: o Established procedures for the centralized review and monitoring of change orders; o Enhanced procedures for the periodic review and assessment for income recognition of each change order in accordance with generally accepted accounting principles; o Strengthened the accounting function within the technical services segment and enhanced formal reporting procedures to the corporate accounting group; and o Initiated monthly meetings among project managers and corporate accounting personnel to review change order analysis, estimates to complete and supporting documentation for each project in connection with the monthly close of accounts. 24 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits* 12 Computation of Ratio of Earnings to Fixed Charges 15 Letter on unaudited interim financial information of PricewaterhouseCoopers LLP 31.1 Certification of Chief Executive Officer of Pride pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Pride pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of the Chief Executive Officer and the Chief Financial Officer of Pride pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ----------------------- * Pride and its subsidiaries are parties to several debt instruments that have not been filed with the SEC under which the total amount of securities authorized does not exceed 10% of the total assets of Pride and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii) (A) of Item 601(b) of Regulation S-K, Pride agrees to furnish a copy of such instruments to the SEC upon request. (b) Reports on Form 8-K In a Current Report on Form 8-K submitted to the SEC on July 25, 2003, we filed pursuant to Item 5 of Form 8-K information regarding the recording of loss provisions in our 2003 second quarter relating to the construction of deepwater platform rigs. 25 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. PRIDE INTERNATIONAL, INC. By: /s/ Earl W. McNiel --------------------------- (EARL W. MCNIEL) VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Date: November 14, 2003 26 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 12 Computation of Ratio of Earnings to Fixed Charges 15 Letter on unaudited interim financial information of PricewaterhouseCoopers LLP 31.1 Certification of Chief Executive Officer of Pride pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Pride pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of the Chief Executive Officer and the Chief Financial Officer of Pride pursuant to Section 906 of the Sarbanes-Oxley Act of 2002