10-Q 1 h86719e10-q.txt DIAMOND OFFSHORE DRILLING INC - MARCH 31, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ................. to ................... Commission file number 1-13926 DIAMOND OFFSHORE DRILLING, INC. (Exact name of registrant as specified in its charter) Delaware 76-0321760 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 15415 Katy Freeway Houston, Texas 77094 (Address of principal executive offices) (Zip Code) (281) 492-5300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of April 30, 2001 Common stock, $0.01 par value per share 133,457,055 shares 2 DIAMOND OFFSHORE DRILLING, INC. TABLE OF CONTENTS FOR FORM 10-Q QUARTER ENDED MARCH 31, 2001
PAGE NO. COVER PAGE.......................................................................................1 TABLE OF CONTENTS................................................................................2 PART I. FINANCIAL INFORMATION...................................................................3 ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets....................................................3 Consolidated Statements of Income..............................................4 Consolidated Statements of Cash Flows..........................................5 Notes to Consolidated Financial Statements.....................................6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................21 PART II. OTHER INFORMATION......................................................................22 ITEM 1. LEGAL PROCEEDINGS..............................................................22 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................22 ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................22 ITEM 5. OTHER INFORMATION..............................................................22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................22 SIGNATURES.......................................................................................23 EXHIBIT INDEX....................................................................................24
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
MARCH 31, DECEMBER 31, ---------- ------------ 2001 2000 ---------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents ................................................. $ 304,563 $ 144,456 Marketable securities ..................................................... 604,050 717,678 Accounts receivable ....................................................... 161,703 153,452 Rig inventory and supplies ................................................ 41,123 40,698 Prepaid expenses and other ................................................ 44,296 44,673 ---------- ---------- Total current assets ..................................... 1,155,735 1,100,957 DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION .................................................. 1,894,957 1,902,415 GOODWILL, NET OF ACCUMULATED AMORTIZATION ................................... 50,901 55,205 OTHER ASSETS ................................................................ 22,200 20,929 ---------- ---------- Total assets ............................................. $3,123,793 $3,079,506 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ......................................... $ 9,732 $ 9,732 Accounts payable .......................................................... 57,180 59,021 Accrued liabilities ....................................................... 53,537 53,923 Taxes payable ............................................................. 3,813 337 ---------- ---------- Total current liabilities ................................ 124,262 123,013 LONG-TERM DEBT .............................................................. 856,804 856,559 DEFERRED TAX LIABILITY ...................................................... 330,083 316,627 OTHER LIABILITIES ........................................................... 13,325 15,454 ---------- ---------- Total liabilities ........................................ 1,324,474 1,311,653 ---------- ---------- COMMITMENTS AND CONTINGENCIES: STOCKHOLDERS' EQUITY: Preferred stock (par value $0.01, 25,000,000 shares authorized, none issued and outstanding) ................................................. -- -- Common stock (par value $0.01, 500,000,000 shares authorized, 133,232,793 and 133,150,447 issued and outstanding at March 31, 2001 and December 31, 2000, respectively) .................................... 1,333 1,332 Additional paid-in capital ................................................ 1,255,066 1,248,665 Retained earnings ......................................................... 537,370 517,186 Accumulated other comprehensive income .................................... 5,550 670 ---------- ---------- Total stockholders' equity ............................... 1,799,319 1,767,853 ---------- ---------- Total liabilities and stockholders' equity ............... $3,123,793 $3,079,506 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 3 4 DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 --------- --------- REVENUES ................................................. $ 205,225 $ 167,828 OPERATING EXPENSES: Contract drilling ................................. 108,697 100,823 Depreciation and amortization ..................... 41,559 36,875 General and administrative ........................ 6,887 6,020 --------- --------- Total operating expenses ..................... 157,143 143,718 --------- --------- OPERATING INCOME ......................................... 48,082 24,110 OTHER INCOME (EXPENSE): Gain on sale of assets ............................ 121 14,017 Interest income ................................... 11,687 8,622 Interest expense .................................. (8,318) (1,234) Other, net ........................................ 3,105 (89) --------- --------- INCOME BEFORE INCOME TAX EXPENSE ......................... 54,677 45,426 INCOME TAX EXPENSE ....................................... (17,849) (15,938) --------- --------- NET INCOME ............................................... $ 36,828 $ 29,488 ========= ========= EARNINGS PER SHARE: Basic ............................................. $ 0.28 $ 0.22 ========= ========= Diluted ........................................... $ 0.27 $ 0.21 ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING: Shares of common stock ............................ 133,165 135,688 Dilutive potential shares of common stock ......... 9,862 9,876 --------- --------- Total weighted average shares outstanding .... 143,027 145,564 ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 4 5 DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES: Net income .......................................................... $ 36,828 $ 29,488 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ..................................... 41,559 36,875 Gain on sale of assets ............................................ (121) (14,017) Gain on sale of investment securities ............................. (6,111) -- Deferred tax provision ............................................ 14,230 7,648 Accretion of discounts on investment securities ................... (2,115) (2,197) Amortization of debt issuance costs ............................... 426 138 Amortization of discount on zero coupon convertible debentures .... 3,579 -- Changes in operating assets and liabilities: Accounts receivable ............................................... (8,251) 13,810 Rig inventory and supplies and other current assets ............... (48) 6,830 Other assets, non-current ......................................... (1,862) (30) Accounts payable and accrued liabilities .......................... (2,062) (27,376) Taxes payable ..................................................... 3,476 (4,032) Other liabilities, non-current .................................... (2,129) (608) Other, net ........................................................ 469 132 --------- --------- Net cash provided by operating activities ..................... 77,868 46,661 --------- --------- INVESTING ACTIVITIES: Capital expenditures ................................................ (33,779) (79,155) Proceeds from sale of assets ........................................ 699 32,177 Net change in marketable securities ................................. 128,895 19,976 --------- --------- Net cash provided by (used in) investing activities ........... 95,815 (27,002) --------- --------- FINANCING ACTIVITIES: Acquisition of treasury stock ....................................... -- (8,489) Proceeds from sale of put options ................................... 3,068 -- Payment of dividends ................................................ (16,644) (16,979) Proceeds from stock options exercised ............................... -- 65 --------- --------- Net cash used in financing activities ......................... (13,576) (25,403) --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS ................................... 160,107 (5,744) Cash and cash equivalents, beginning of period ...................... 144,456 112,316 --------- --------- Cash and cash equivalents, end of period ............................ $ 304,563 $ 106,572 ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 5 6 DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL The consolidated financial statements of Diamond Offshore Drilling, Inc. and subsidiaries (the "Company") should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-13926). Interim Financial Information The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required by generally accepted accounting principles for complete financial statements. The consolidated financial information has not been audited but, in the opinion of management, includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the consolidated balance sheets, statements of income, and statements of cash flows at the dates and for the periods indicated. Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years. Cash and Cash Equivalents Short-term, highly liquid investments that have an original maturity of three months or less and deposits in money market mutual funds that are readily convertible into cash are considered cash equivalents. Marketable Securities The Company's investments are classified as available for sale and stated at fair value. Accordingly, any unrealized gains and losses, net of taxes, are reported in the Consolidated Balance Sheets in "Accumulated other comprehensive income" until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method and the cost of equity securities sold is based on the average cost method. Realized gains or losses and declines in value, if any, judged to be other than temporary are reported in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt totaled $7.5 million during each quarter ended March 31, 2001 and 2000. Cash payments made, net of refunds, for income taxes during the quarters ended March 31, 2001 and 2000 totaled $0.6 million and $13.5 million, respectively. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. The Company incurred interest cost, including amortization of debt issuance costs, of $8.8 million and $3.9 million during the quarters ended March 31, 2001 and 2000, respectively. Interest cost capitalized during the quarters ended March 31, 2001 and 2000 was $0.4 million and $2.7 million, respectively. Goodwill Goodwill is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the quarters ended March 31, 2001 and 2000 totaled $0.9 million and $1.1 million, respectively. 6 7 Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the terms of the related debt. Common Equity Put Options In February 2001, the Company received premiums of $3.1 million for the sale of put options covering 500,000 shares of common stock. The options give the holders the right to require the Company to repurchase shares of its common stock at an exercise price of $40.00 per share at any time prior to their expiration in February 2002. The Company has the option to settle in cash or shares of common stock. Premiums received for these options are recorded in "Additional paid-in capital" in the Consolidated Balance Sheets. All of the put options sold by the Company in August 2000 were unexercised and expired by the end of February 2001. The put options covered 750,000 shares of common stock and gave the holders the right to require the Company to repurchase shares of its common stock at an exercise price of $37.85 per share at any time prior to their expiration in February 2001. The Company had the option to settle in cash or shares of common stock. Premiums of $3.9 million received for these options were recorded in "Additional paid-in capital" in the Consolidated Balance Sheets. Comprehensive Income Comprehensive income is the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances except those from investments by owners and distributions to owners. For the three months ended March 31, 2001 and 2000, comprehensive income totaled $41.7 million and $29.8 million, respectively. Comprehensive income includes net income, foreign currency translation gains and losses, and unrealized holding gains and losses on investments. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated. Reclassifications Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently followed. Such reclassifications do not affect earnings. 7 8 2. EARNINGS PER SHARE A reconciliation of the numerators and the denominators of the basic and diluted per-share computations for net income follows:
THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 -------- -------- NET INCOME - BASIC (NUMERATOR): Net income .................................... $ 36,828 $ 29,488 Effect of dilutive potential shares Convertible notes ........................ 2,401 802 -------- -------- NET INCOME INCLUDING CONVERSIONS .................. $ 39,229 $ 30,290 ======== ======== WEIGHTED AVERAGE SHARES - BASIC (DENOMINATOR): Weighted average shares ....................... 133,165 135,688 Effect of dilutive potential shares Convertible notes ........................ 9,862 9,876 -------- -------- WEIGHTED AVERAGE SHARES INCLUDING CONVERSIONS ..... 143,027 145,564 ======== ======== EARNINGS PER SHARE: Basic ......................................... $ 0.28 $ 0.22 ======== ======== Diluted ....................................... $ 0.27 $ 0.21 ======== ========
The number of shares outstanding for the periods presented were increased to include the weighted average number of shares issuable assuming full conversion of the Company's $396.6 million of 3.75% convertible subordinated notes (the "Notes") issued in February 1997. The Notes were convertible into approximately 9.8 million shares of the Company's common stock at a conversion price of $40.50 per share, subject to adjustment in certain circumstances, prior to their redemption by the Company on April 6, 2001. See "-- Long-Term Debt - Convertible Subordinated Notes." The computation of diluted earnings per share ("EPS") for the quarter ended March 31, 2001 does not assume conversion of the Company's 20-year zero coupon convertible debentures (the "Zero Coupon Debentures"), issued in June 2000, as there would be an antidilutive effect on EPS. The Zero Coupon Debentures were issued at a discount with a yield to maturity of 3.50% per year. The Zero Coupon Debentures are convertible into approximately 6.9 million shares of the Company's common stock at any time prior to June 6, 2020 at a fixed conversion rate of 8.6075 shares per Zero Coupon Debenture, subject to adjustment in certain circumstances. Non-qualified stock options (i) granted in January 2001 to purchase 2,500 shares of common stock at an exercise price of $39.88 per share and (ii) granted in July 2000 to purchase 2,500 shares of common stock at an exercise price of $35.72 per share were included in the computation of diluted EPS for the periods presented because the options' exercise price was less than the average market price of the common stock. However, the incremental shares calculated were immaterial for presentation purposes. In February 2001, the Company sold put options covering 500,000 shares of common stock at an exercise price of $40.00 per share. The options were outstanding through March 31, 2001 but were not included in the computation of diluted EPS for 2001 because the options' exercise price was less than the average market price of the common stock. The number of shares of common stock and dilutive potential shares of common stock outstanding at the end of the first quarter of 2001 would not have changed materially had the redemption of the Notes on April 6, 2001 and the issuance of the 1.5% convertible senior debentures on April 11, 2001 (the "1.5% Debentures") occurred prior to the end of the first quarter of 2001. See "- Long-Term Debt." 8 9 3. MARKETABLE SECURITIES Investments classified as available for sale are summarized as follows:
MARCH 31, 2001 -------------------------------- UNREALIZED MARKET COST GAIN VALUE -------- -------- -------- (IN THOUSANDS) Debt securities issued by the U.S. Treasury: Due within one year ........................ $223,678 $ 56 $223,734 Due after five years through ten years ..... 266,090 10,738 276,828 Collateralized mortgage obligations ............. 102,228 1,260 103,488 -------- -------- -------- Total ...................................... $591,996 $ 12,054 $604,050 ======== ======== ========
DECEMBER 31, 2000 -------------------------------- UNREALIZED MARKET COST GAIN VALUE -------- -------- -------- (IN THOUSANDS) Debt securities issued by the U.S. Treasury: Due within one year ........................ $149,005 $ 60 $149,065 Due after five years through ten years ..... 265,981 1,045 267,026 Collateralized mortgage obligations ............. 297,446 3,757 301,203 Equity securities ............................... 231 153 384 -------- -------- -------- Total ...................................... $712,663 $ 5,015 $717,678 ======== ======== ========
All of the Company's investments are included as current assets in the Consolidated Balance Sheets in "Marketable securities," representing the investment of cash available for current operations. During the three months ended March 31, 2001 and 2000, certain debt securities due within one year matured for $150.0 million and $270.0 million, respectively. During the first quarter of 2001, certain debt securities due after five years through ten years were sold for proceeds of $101.9 million, with a resulting realized after-tax gain of $1.0 million. Also during the quarter ended March 31, 2001, certain collateralized mortgage obligations ("CMO's") were sold for proceeds of $191.5 million, with a resulting realized after-tax gain of $2.9 million. CMO principals were reduced by $8.2 million during the first quarter of 2001. The after-tax realized losses were immaterial. In January 2001, the Company sold all of its remaining equity securities for proceeds of $0.4 million. The resulting after-tax gain was $0.1 million. 4. DRILLING AND OTHER PROPERTY AND EQUIPMENT Cost and accumulated depreciation of drilling and other property and equipment are summarized as follows:
MARCH 31, DECEMBER 31, ----------- ------------ 2001 2000 ----------- ------------ (IN THOUSANDS) Drilling rigs and equipment .................................. $ 2,624,346 $ 2,155,924 Construction work in progress ................................ 38,637 474,154 Land and buildings ........................................... 14,235 14,224 Office equipment and other ................................... 18,762 18,480 ----------- ----------- Cost ............................................... 2,695,980 2,662,782 Less accumulated depreciation ................................ (801,023) (760,367) ----------- ----------- Drilling and other property and equipment, net .... $ 1,894,957 $ 1,902,415 =========== ===========
In January 2001, approximately $450.0 million was reclassified from construction work in progress to drilling rigs and equipment upon completion of the conversion of the Ocean Confidence from an accommodation vessel to a high specification semisubmersible drilling unit. The customer accepted the rig on January 5, 2001 at which time it began a five-year drilling program in the Gulf of Mexico. 9 10 5. GOODWILL Cost and accumulated amortization of goodwill is summarized as follows:
MARCH 31, DECEMBER 31, --------- ------------ 2001 2000 --------- ------------ (IN THOUSANDS) Goodwill .................................... $ 79,227 $ 82,628 Less accumulated amortization ............... (28,326) (27,423) -------- -------- Total ............................. $ 50,901 $ 55,205 ======== ========
During the quarter ended March 31, 2001, an adjustment of $3.4 million was recorded to reduce goodwill before accumulated amortization. The adjustment represents tax benefits not previously recognized for the excess of tax deductible goodwill over the book goodwill amount. 6. ACCRUED LIABILITIES Accrued liabilities consist of the following:
MARCH 31, DECEMBER 31, --------- ------------ 2001 2000 --------- ------------ (IN THOUSANDS) Personal injury and other claims ............ $ 23,213 $ 21,565 Payroll and benefits ........................ 24,132 22,688 Interest payable ............................ 3,115 5,870 Other ....................................... 3,077 3,800 -------- -------- Total ............................. $ 53,537 $ 53,923 ======== ========
7. LONG-TERM DEBT Long-term debt consists of the following:
MARCH 31, DECEMBER 31, --------- ------------ 2001 2000 --------- ------------ (IN THOUSANDS) Convertible subordinated notes-3.75% ........ $396,646 $399,980 Zero coupon convertible debentures-3.50% .... 413,790 410,211 Lease-leaseback agreement ................... 56,100 56,100 -------- -------- 866,536 866,291 Less current maturities ..................... 9,732 9,732 -------- -------- Total ............................. $856,804 $856,559 ======== ========
Convertible Subordinated Notes As of March 31, 2001, $3.4 million principal amount of the Notes, including $0.02 million principal amount converted in 2000, had been converted into 82,809 shares of the Company's common stock. On April 6, 2001, the Company redeemed all of its outstanding Notes in accordance with the indenture under which the Notes were issued. Prior to April 6, 2001, $12.4 million principal amount of the Notes had been converted into 307,071 shares of the Company's common stock at the stated conversion price of $40.50 per share. The remaining $387.6 million principal amount of the Notes was redeemed at 102.08% of the principal amount thereof plus accrued interest for a total cash payment of $397.7 million resulting in an after-tax charge of $7.7 million, which will be reported as an extraordinary loss in the second quarter of 2001. 10 11 Credit Agreement The Company's $20.0 million short-term revolving credit agreement with a U.S. bank expired in April 2001. The credit agreement provided for borrowings at various interest rates and varying commitment fees dependent upon public credit ratings. The credit agreement contained certain financial and other covenants and provisions that had to be maintained by the Company for compliance. As of March 31, 2001, there were no outstanding borrowings under this credit agreement and the Company was in compliance with each of the covenants and provisions. Convertible Senior Subordinated Debentures On April 11, 2001, the Company issued $460.0 million principal amount of 1.5% Debentures due April 15, 2031. The 1.5% Debentures are convertible into shares of the Company's common stock at an initial conversion rate of 20.3978 shares per $1,000 principal amount of debentures, subject to adjustment in certain circumstances. Upon conversion, the Company has the right to deliver cash in lieu of shares of the Company's common stock. The transaction resulted in net proceeds of approximately $449.2 million. Interest on the 1.5% Debentures at the rate of 1.5% per year on the outstanding principal amount is payable semiannually in arrears on April 15 and October 15 of each year, beginning October 15, 2001. The 1.5% Debentures are unsecured obligations of the Company and rank equally with all of the Company's other unsecured senior indebtedness. The Company will pay contingent interest to holders of the 1.5% Debentures during any six-month period commencing after April 15, 2008 if the average market price of a 1.5% Debenture for a measurement period preceding such six-month period equals 120% or more of the principal amount of such 1.5% Debenture and the Company pays a regular cash dividend during such six-month period. The contingent interest payable per $1,000 principal amount of 1.5% Debentures, in respect of any quarterly period will equal 50% of regular cash dividends paid by the Company per share on its common stock during that quarterly period multiplied by the conversion rate. Holders may require the Company to purchase all or a portion of their 1.5% Debentures on April 15, 2008 at a price equal to 100% of the principal amount of the 1.5% Debentures to be purchased plus accrued and unpaid interest. The Company may choose to pay the purchase price in cash or shares of the Company's common stock or a combination of cash and common stock. In addition, holders may require the Company to purchase for cash all or a portion of their 1.5% Debentures upon a change in control (as defined). The Company may redeem all or a portion of the 1.5% Debentures at any time on or after April 15, 2008 at a price equal to 100% of the principal amount. 11 12 8. COMMITMENTS AND CONTINGENCIES Raymond Verdin v. R&B Falcon Drilling USA, Inc., et al; No. G-00-488 in the United States District Court for the Southern District of Texas, Galveston Division, filed October 10, 2000. The Company was named as a defendant in a proposed class action suit filed on behalf of offshore oil workers against all of the major offshore drilling companies. The proposed class includes persons hired in the United States by the companies to work in the Gulf of Mexico and around the world. The allegation is that the companies, through trade groups, shared wage information in order to fix and suppress the wages of the workers in violation of the Sherman Antitrust Act and various state laws. Plaintiff Thomas Bryant has replaced the named plaintiff as the proposed class representative. No class has been certified at this time, however, a hearing on class certification is currently scheduled for July 12, 2001. The lawsuit is seeking damages as well as attorney's fees and costs. During the first quarter of 2001, the Company recorded a $10.0 million reserve for this pending litigation in the Company's Consolidated Statements of Income. In August 1999, a customer terminated a contract for use of one of the Company's drilling rigs located offshore Australia. The termination was made in accordance with the terms of the contract and was not the result of performance failures by the Company or its equipment. The Company believed that the contract required the customer to pay approximately $16.5 million in remaining revenue through the end of the contract period, which was previously scheduled to end in early January 2000. However, the customer believed that there was no further obligation under the contract and refused to pay the $16.5 million early termination fee. The Company filed suit in Australia in August 1999 requesting reconstruction of the contract and a declaratory judgment requiring the customer to pay such early termination fee. In January 2001, the Company and the customer entered into an out-of-court settlement of the claim. The Company received $7.3 million from the customer which is included in the Company's Consolidated Statements of Income in the first quarter of 2001. At the same time, the Company entered into contracts with the customer to work two of its previously idle rigs at favorable dayrates, both of which began work during the first quarter of 2001. Various other claims have been filed against the Company in the ordinary course of business, particularly claims alleging personal injuries. Management believes that the Company has established adequate reserves for any liabilities that may reasonably be expected to result from these claims. In the opinion of management, no pending or threatened claims, actions or proceedings against the Company are expected to have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. 9. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS The Company reports its operations as one reportable segment, contract drilling of offshore oil and gas wells. Although the Company provides contract drilling services from different types of offshore drilling rigs and provides such services in many geographic locations, these operations have been aggregated into one reportable segment based on the similarity of economic characteristics among all divisions and locations, including the nature of services provided and the type of customers of such services. Similar Services Revenues from external customers for contract drilling and similar services by equipment-type are listed below (eliminations offset dayrate revenues earned when the Company's rigs are utilized in its integrated services):
THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 --------- --------- (IN THOUSANDS) High Specification Floaters .... $ 76,666 $ 56,862 Other Semisubmersibles ......... 80,969 88,511 Jack-ups ....................... 43,468 21,019 Integrated Services ............ 5,490 2,601 Eliminations ................... (1,368) (1,165) --------- --------- Total revenues ......... $ 205,225 $ 167,828 ========= =========
12 13 Geographic Areas At March 31, 2001, the Company had drilling rigs located offshore seven countries other than the United States. As a result, the Company is exposed to the risk of changes in social, political and economic conditions inherent in foreign operations and the Company's results of operations and the value of its foreign assets are affected by fluctuations in foreign currency exchange rates. Revenues by geographic area are presented by attributing revenues to the individual country or areas where the services were performed.
THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 --------- --------- (IN THOUSANDS) Revenues from unaffiliated customers: United States ............................ $ 127,040 $ 79,620 Foreign: Europe/Africa ............................ 13,081 22,813 Australia/Southeast Asia ................. 13,780 18,432 South America ............................ 51,324 46,963 --------- --------- Total revenues ...................... $ 205,225 $ 167,828 ========= =========
10. OTHER INCOME AND EXPENSE (OTHER, NET) Other, net consists of the following:
THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 --------- --------- (IN THOUSANDS) Realized gain on marketable securities ...... $ 6,111 $ -- Miscellaneous ............................... (3,006) (89) --------- --------- Total other, net .................... $ 3,105 $ (89) ========= =========
Miscellaneous consists primarily of a $10.0 million reserve for pending litigation offset by a $7.3 million receipt from the settlement of past litigation. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the Company's Consolidated Financial Statements (including the Notes thereto) included elsewhere herein. References to the "Company" mean Diamond Offshore Drilling, Inc., a Delaware corporation, and its subsidiaries. The Company is a leader in deep water drilling with a fleet of 45 offshore drilling rigs. The fleet consists of 30 semisubmersibles, 14 jack-ups and one drillship. RESULTS OF OPERATIONS General Revenues. The Company's revenues vary based upon demand, which affects the number of days the fleet is utilized and dayrates earned. Revenues can also increase or decrease as a result of the acquisition or disposal of rigs. In order to improve utilization or realize higher dayrates, the Company may mobilize its rigs from one market to another. During periods of mobilization, however, revenues may be adversely affected. As a response to changes in demand, the Company may withdraw a rig from the market by stacking it or may reactivate a rig previously stacked, which may decrease or increase revenues, respectively. Revenues from dayrate drilling contracts are recognized currently. The Company may receive lump-sum payments in connection with specific contracts. Such payments are recognized as revenues over the term of the related drilling contract. Mobilization revenues, less costs incurred to mobilize an offshore rig from one market to another, are recognized over the term of the related drilling contract. Revenues from offshore turnkey contracts are accrued to the extent of costs until the specified turnkey depth and other contract requirements are met. Income is recognized on the completed contract method. Provisions for future losses on turnkey contracts are recognized when it becomes apparent that expenses to be incurred on a specific contract will exceed the revenue from that contract. Operating Income. Operating income is primarily affected by revenue factors, but is also a function of varying levels of operating expenses. Operating expenses generally are not affected by changes in dayrates and may not be significantly affected by fluctuations in utilization. For instance, if a rig is to be idle for a short period of time, the Company may realize few decreases in operating expenses since the rig is typically maintained in a prepared state with a full crew. In addition, when a rig is idle, the Company is responsible for certain operating expenses such as rig fuel and supply boat costs, which are typically charged to the operator under drilling contracts. However, if the rig is to be idle for an extended period of time, the Company may reduce the size of a rig's crew and take steps to "cold stack" the rig, which lowers expenses and partially offsets the impact on operating income. The Company recognizes as operating expenses activities such as inspections, painting projects and routine overhauls, which meet certain criteria, that maintain rather than upgrade its rigs. These expenses vary from period to period. Costs of rig enhancements are capitalized and depreciated over the expected useful lives of the enhancements. Increased depreciation expense decreases operating income in periods subsequent to capital upgrades. 14 15 THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Comparative data relating to the Company's revenues and operating expenses by equipment type are listed below (eliminations offset dayrate revenues earned when the Company's rigs are utilized in its integrated services). Certain amounts applicable to the prior period have been reclassified to conform to the classifications currently followed. Such reclassifications do not affect earnings.
THREE MONTHS ENDED MARCH 31, ---------------------- INCREASE/ 2001 2000 (DECREASE) --------- --------- --------- (IN THOUSANDS) REVENUES High Specification Floaters ................ $ 76,666 $ 56,862 $ 19,804 Other Semisubmersibles ..................... 80,969 88,511 (7,542) Jack-ups ................................... 43,468 21,019 22,449 Integrated Services ........................ 5,490 2,601 2,889 Other ...................................... -- -- -- Eliminations ............................... (1,368) (1,165) (203) --------- --------- --------- Total Revenues ..................... $ 205,225 $ 167,828 $ 37,397 ========= ========= ========= CONTRACT DRILLING EXPENSE High Specification Floaters ................ $ 28,003 $ 23,350 $ 4,653 Other Semisubmersibles ..................... 50,543 54,892 (4,349) Jack-ups ................................... 25,385 19,845 5,540 Integrated Services ........................ 5,155 3,071 2,084 Other ...................................... 979 830 149 Eliminations ............................... (1,368) (1,165) (203) --------- --------- --------- Total Contract Drilling Expense .... $ 108,697 $ 100,823 $ 7,874 ========= ========= ========= OPERATING INCOME High Specification Floaters ................ $ 48,663 $ 33,512 $ 15,151 Other Semisubmersibles ..................... 30,426 33,619 (3,193) Jack-ups ................................... 18,083 1,174 16,909 Integrated Services ........................ 335 (470) 805 Other ...................................... (979) (830) (149) Depreciation and Amortization Expense ...... (41,559) (36,875) (4,684) General and Administrative Expense ......... (6,887) (6,020) (867) --------- --------- --------- Total Operating Income ............. $ 48,082 $ 24,110 $ 23,972 ========= ========= =========
High Specification Floaters. Revenues. Revenues from high specification floaters during the first quarter of 2001 increased by $19.8 million from the same period in 2000. Approximately $14.1 million of the revenue increase was generated by the Ocean Confidence, which began a five-year drilling program in the Gulf of Mexico on January 5, 2001 after completion of a conversion to a high specification semisubmersible drilling unit. In addition, revenues increased approximately $4.6 million due to an increase in operating dayrates compared to 2000. The average operating dayrate for high specification floaters, excluding the Ocean Confidence, during the first quarter of 2001 was approximately $101,600 per day compared to approximately $95,000 per day during the first quarter of 2000. Contract Drilling Expense. Contract drilling expense for high specification floaters during the first quarter of 2001 increased by $4.7 million from the same period in 2000. This increase resulted primarily from costs incurred by the Ocean Confidence, which began operations in January 2001. Other Semisubmersibles. Revenues. Revenues from other semisubmersibles during the first quarter of 2001 decreased $7.5 million from the same period in 2000. This decrease was primarily the result of a lower average operating dayrate in 2001 for the Ocean Princess that operated, until the second quarter of 2000, under a term contract at dayrates in excess of then current market rates. Revenues in the first quarter of 2001 were also lower when compared to the same period in 15 16 2000 due to the inactivity of the Ocean Nomad, which spent the first quarter of 2001 in a shipyard undergoing stability enhancements and other upgrades. Contract Drilling Expense. Contract drilling expense for other semisubmersibles during the first quarter of 2001 decreased $4.3 million from the same period in 2000. This reduction in expense resulted primarily from higher costs in 2000 for the Ocean Lexington associated with a mandatory inspection and repairs, lower costs in 2001 for the Ocean Rover as a result of cold stacking the rig in the third quarter of 2000, and lower costs in 2001 for the Ocean Nomad as a result of capitalizing the rig's upgrade costs while in the shipyard. Jack-Ups. Revenues. Revenues from jack-ups during the first quarter of 2001 increased $22.4 million from the same period in 2000. Approximately $19.1 million of the increase in revenues resulted from higher operating dayrates in 2001 compared to 2000. The average operating dayrate for jack-ups during the first quarter of 2001 was approximately $40,000 per day compared to approximately $20,000 per day during the first quarter of 2000. In addition, revenues increased approximately $3.7 million due to improvements in utilization compared to the first quarter of 2000. Utilization for the Company's jack-ups during the first quarter of 2001 was 87% compared to 82% during the first quarter of 2000. Contract Drilling Expense. Contract drilling expense for jack-ups during the first quarter of 2001 increased $5.5 million over the same period in 2000. Approximately $2.8 million of the increase is due to operating costs for the Ocean Tower and the Ocean Champion, which operated in 2001 but were stacked during the first quarter of 2000. In addition, costs were higher in 2001 due to the inspection and repair of the Ocean Nugget during the first quarter. Integrated Services. Revenues and contract drilling expense for integrated services increased as a result of the difference in type and magnitude of projects in the first quarter of 2001 compared to the first quarter of 2000. During the first quarter of 2001, integrated services contributed operating income of $0.3 million to the Company's consolidated results of operations primarily due to the completion of one international turnkey project. During the same period in 2000, an operating loss of $0.5 million resulted primarily from the completion of a turnkey project in the Gulf of Mexico and integrated services provided in Aberdeen, Scotland. Depreciation and Amortization Expense. Depreciation and amortization expense of $41.6 million for the first quarter of 2001 increased $4.7 million from $36.9 million for the same period in 2000. This increase resulted primarily from an increase in depreciation for the Ocean Confidence which completed its conversion from an accommodation vessel to a high specification semisubmersible drilling unit and commenced operations in January 2001. General and Administrative Expense. General and administrative expense of $6.9 million for the first quarter of 2001 increased $0.9 million from $6.0 million for the same period in 2000 primarily due to costs associated with the Company's participation in the Subsea Mudlift Drilling Joint Industry Project. Gain on Sale of Assets. Gain on sale of assets for the first quarter of 2001 was $0.1 million compared to $14.0 million for the same period in 2000. Gain on sale of assets in 2000 included the sale of the Company's jack-up drilling rig, Ocean Scotian, for $32.0 million in cash that resulted in a gain of $13.9 million ($9.0 million after-tax). The rig had been cold stacked offshore The Netherlands prior to the sale. 16 17 Interest Income. Interest income of $11.7 million for the first quarter of 2001 increased $3.1 million from $8.6 million for the same period in 2000. This increase resulted primarily from the investment of excess cash generated by the sale of the Company's 20-year zero coupon convertible debentures (the "Zero Coupon Debentures") on June 6, 2000. Interest Expense. Interest expense of $8.3 million for the first quarter of 2001 increased $7.1 million from $1.2 million for 2000 primarily as a result of the issuance of the Zero Coupon Debentures on June 6, 2000, less interest being capitalized due to the completion of the Ocean Confidence conversion and interest expense related to the December 2000 lease-leaseback of the Ocean Alliance. Interest costs in the first quarter of 2001 were $4.9 million higher than the same period in 2000. Interest cost capitalized in the first quarter of 2001 was $0.4 million compared to $2.7 million in the first quarter of 2000. Income Tax Expense. Income tax expense of $17.8 million for the first quarter of 2001 increased $1.9 million from $15.9 million for the same period in 2000. This increase resulted from higher income before income taxes of $9.3 million in 2001 which was partially offset by a lower effective income tax rate for the first quarter of 2001 compared to the first quarter of 2000. The lower effective income tax rate in 2001 was primarily due to the Company's decision to permanently reinvest the earnings of its UK subsidiaries. Other Income and Expense (Other, net). Other income of $3.1 million for the first quarter of 2001 increased $3.2 million from other expense of $0.1 million for the same period in 2000. This increase resulted primarily from the $6.1 million gain realized on the sale of marketable securities and a $7.3 million receipt for resolved litigation which was partially offset by a $10.0 million reserve for pending litigation. OUTLOOK During the first quarter of 2001, oil and natural gas prices remained above historical averages. The continuation of higher than average product prices has contributed to improving dayrates and utilization in all of the markets in which the Company competes. Assuming higher than average product prices continue, at least in the short term, the Company expects continued growth for the offshore drilling industry. The Company's domestic jack-up market, which improved in 2000 as independent operators acted quickly to take advantage of high natural gas prices, has remained robust during the first quarter of 2001. The Company believes this market is continuing to strengthen. The Company also believes the outlook for its semisubmersible rig fleet is good. Deepwater capable semisubmersible offshore rigs have experienced higher renewal dayrates throughout the quarter and for work commitments going forward. Intermediate water-depth semisubmersible offshore rigs, which lagged behind the recovery experienced in the jack-up market in 2000, have also achieved higher dayrates and units previously idle have been put to work. The Company currently anticipates the revival of dayrates and utilization in this market to continue in 2001. Historically, the offshore drilling industry has been highly competitive and cyclical, and the Company cannot predict the extent to which the current favorable conditions may continue. Although the Company is optimistic about the near-term future of the offshore drilling industry and its place in it, a decline in oil or gas prices could reduce demand for the Company's drilling services and adversely affect both utilization and dayrates. LIQUIDITY At March 31, 2001, the Company's cash and marketable securities totaled $908.6 million, up from $862.1 million at December 31, 2000. Cash provided by operating activities for the quarter ended March 31, 2001 increased by $31.2 million to $77.9 million, compared to $46.7 million for the same period of the prior year. This increase in cash was primarily attributable to improved results of operations in 2001. Net income improved in 2001 despite higher non-cash expenses such as depreciation, deferred taxes and the amortization of debt issuance costs. 17 18 Net income, after adjustment for non-cash items, resulted in an increase in cash of $30.3 million. Cash usage due to changes in net working capital components was $0.9 million lower in the first quarter of 2001, which also contributed to the 2001 increase in cash provided by operating activities. Investing activities provided $95.8 million of cash during the first quarter of 2001, compared to cash usage of $27.0 million during the same period in 2000. The increase of $122.8 million in cash provided was primarily due to the sale of certain of the Company's investments in collateralized mortgage obligations ("CMO's") and debt securities issued by the U.S. Treasury. In addition, cash usage for capital expenditures in 2001 decreased by $45.4 million primarily due to the completion of the conversion of the Ocean Confidence. A $31.5 million decrease in cash provided by proceeds from the sale of assets was primarily due to the sale of the Ocean Scotian in January 2000. Cash used in financing activities for the first quarter of 2001 decreased $11.8 million to $13.6 million compared to $25.4 million for the same period in 2000. Cash used in financing activities for the quarter ended March 31, 2001 resulted from $16.6 million in dividends paid to stockholders which were partially offset by premiums of $3.1 million received for the February 2001 sale of put options covering 500,000 shares of the Company's common stock. The options give the holders the right to require the Company to repurchase shares of its common stock at an exercise price of $40.00 per share at any time prior to expiration through February 2002. The Company has the option to settle in cash or shares of its common stock. Cash used in financing activities for the first quarter of 2000 resulted primarily from dividends of $17.0 million paid to stockholders and $8.5 million paid for the acquisition of shares of the Company's outstanding common stock, par value $0.01 per share. As of March 31, 2001, $3.4 million principal amount of the Company's 3.75% convertible subordinated notes (the "Notes"), including $0.02 million principal amount converted in 2000, had been converted into 82,809 shares of the Company's common stock. On April 6, 2001, the Company redeemed all of its outstanding Notes in accordance with the indenture under which the Notes were issued. Prior to April 6, 2001, $12.4 million principal amount of the Notes had been converted into 307,071 shares of the Company's common stock at the stated conversion price of $40.50 per share. The remaining $387.6 million principal amount of the Notes was redeemed at 102.08% of the principal amount thereof plus accrued interest for a total cash payment of $397.7 million, resulting in an after-tax charge of $7.7 million, which will be reported as an extraordinary loss in the second quarter of 2001. On April 11, 2001, the Company issued $460.0 million principal amount of 1.5% convertible senior debentures (the "1.5% Debentures") due April 15, 2031. The 1.5% Debentures are convertible into shares of the Company's common stock at an initial conversion rate of 20.3978 shares per $1,000 principal amount of the 1.5% Debentures, subject to adjustment in certain circumstances. Upon conversion, the Company has the right to deliver cash in lieu of shares of the Company's common stock. The transaction resulted in net proceeds of approximately $449.2 million. Interest on the 1.5% Debentures at the rate of 1.5% per year on the outstanding principal amount is payable semiannually in arrears on April 15 and October 15 of each year, beginning October 15, 2001. The 1.5% Debentures are unsecured obligations of the Company and rank equally with all of the Company's other unsecured senior indebtedness. The Company will pay contingent interest to holders of the 1.5% Debentures during any six-month period commencing after April 15, 2008 if the average market price of a 1.5% Debenture for a measurement period preceding such six-month period equals 120% or more of the principal amount of such 1.5% Debenture and the Company pays a regular cash dividend during such six-month period. The contingent interest payable per $1,000 principal amount of 1.5% Debentures in respect of any quarterly period will equal 50% of regular cash dividends paid by the Company per share on its common stock during that quarterly period multiplied by the conversion rate. Holders may require the Company to purchase all or a portion of their 1.5% Debentures on April 15, 2008 at a price equal to 100% of the principal amount of the 1.5% Debentures to be purchased plus accrued and unpaid interest. The Company may choose to pay the purchase price in cash or shares of the Company's common stock or a combination of cash and common stock. In addition, holders may require the Company to purchase for cash all or a portion of their 1.5% Debentures upon a change in control (as defined). The Company may redeem all or a portion of the 1.5% Debentures at any time on or after April 15, 2008 at a price equal to 100% of the principal amount. The Company has the ability to issue an aggregate of approximately $117.5 million in debt, equity and other securities under a shelf registration statement. In addition, the Company may issue, from time to time, up to eight million shares of common stock, which shares are registered under an acquisition shelf registration statement (upon 18 19 effectiveness of an amendment thereto reflecting the effect of the two-for-one stock split declared in July 1997), in connection with one or more acquisitions by the Company of securities or assets of other businesses. The Company believes it has the financial resources needed to meet its business requirements in the foreseeable future, including capital expenditures for rig upgrades and continuing rig enhancements, and working capital requirements. CAPITAL RESOURCES Cash required to meet the Company's capital commitments is determined by evaluating rig upgrades to meet specific customer requirements and by evaluating the Company's continuing rig enhancement program, including water depth and drilling capability upgrades. It is management's opinion that operating cash flows and the Company's cash reserves will be sufficient to meet these capital commitments; however, periodic assessments will be made based on industry conditions. In addition, the Company may, from time to time, issue debt or equity securities, or a combination thereof, to finance capital expenditures, the acquisition of assets and businesses, or for general corporate purposes. The Company's ability to effect any such issuance will be dependent on the Company's results of operations, its current financial condition, current market conditions, and other factors, many of which are beyond its control. During the first quarter of 2001, the Company expended $19.8 million, including capitalized interest expense, primarily for the Ocean Baroness and Ocean Nomad rig upgrades. During 2001, the Company expects to spend approximately $145.0 million for rig upgrade capital expenditures with $125.0 million projected for the deepwater upgrade of the Ocean Baroness and approximately $20.0 million for accommodations and stability enhancement upgrades on the Ocean Nomad. The significant upgrade of the Company's semisubmersible rig, the Ocean Baroness, to high specification capabilities is expected to result in an enhanced version of the Company's previous Victory-class upgrades. The upgrade includes the following enhancements: capability for operation in 6,500 foot water depths; approximately 5,590 metric tons variable deckload; a 15,000 psi blow-out prevention system; and riser with a multiplex control system. Additional features including a high capacity deck crane, significantly enlarged cellar deck area and a 25 foot by 90 foot moon pool will provide enhanced subsea completion and development capabilities. Water depths in excess of 6,500 feet should be achievable utilizing preset taut-leg mooring systems on a case by case basis. The initial estimated cost for the deepwater upgrade of the Ocean Baroness is approximately $180.0 million with an expected delivery date in the first quarter of 2002. During the first quarter of 2001, the Company expended $8.2 million for the deepwater upgrade of the Ocean Baroness. During the first quarter of 2001, the Company expended $14.0 million in association with its continuing rig enhancement program and to meet other corporate requirements. These expenditures included the upgrade of pre-load tanks and jacking systems, purchases of king-post cranes, anchor chain, riser, and other drilling equipment. The Company has budgeted $106.0 million for 2001 capital expenditures associated with its continuing rig enhancement program and other corporate requirements. The Company continues to consider transactions which include, but are not limited to, the purchase of existing rigs, construction of new rigs and the acquisition of other companies engaged in contract drilling or related businesses. Certain of these potential transactions reviewed by the Company would, if completed, result in its entering new lines of business. In general, however, these opportunities have been related in some manner to the Company's existing operations. Although the Company does not, as of the date hereof, have any commitment with respect to a material acquisition, it could enter into such an agreement in the future and such acquisition could result in a material expansion of its existing operations or result in the Company entering a new line of business. Some of the potential acquisitions considered by the Company could, if completed, result in the expenditure of a material amount of funds or the issuance of a material amount of debt or equity securities. INTEGRATED SERVICES The Company's wholly owned subsidiary, Diamond Offshore Team Solutions, Inc. ("DOTS"), from time to time, selectively engages in drilling services pursuant to turnkey or modified-turnkey contracts under which DOTS agrees to drill a well to a specified depth for a fixed price. In such cases, DOTS generally is not entitled to payment unless the well is drilled to the specified depth and other contract requirements are met. Profitability of the contract is dependent 19 20 upon its ability to keep expenses within the estimates used in determining the contract price. Drilling a well under a turnkey contract therefore typically requires a greater cash commitment by the Company and exposes the Company to risks of potential financial losses that generally are substantially greater than those that would ordinarily exist when drilling under a conventional dayrate contract. DOTS also offers a portfolio of drilling services including overall project management, extended well tests, and completion operations. During the first quarter of 2001, DOTS contributed operating income of $0.3 million to the Company's consolidated results of operations primarily from the completion of one international turnkey project. During the same period in 2000, DOTS generated an operating loss of $0.5 million to the Company's consolidated results of operations primarily from the completion of a turnkey project in the Gulf of Mexico and integrated services provided in Aberdeen, Scotland. ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS No. 133 to clarify four areas causing difficulties in implementation. The amendment included expanding the normal purchase and sale exemption for supply contracts, permitting the offsetting of certain intercompany foreign currency derivatives and thus reducing the number of third party derivatives, permitting hedge accounting for foreign currency denominated assets and liabilities, and redefining interest rate risk to reduce sources of ineffectiveness. The Company adopted SFAS No. 133 and the corresponding amendments under SFAS No. 138 on January 1, 2001. Adoption of SFAS No. 133, as amended by SFAS No. 138, has not had nor is it expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. FORWARD-LOOKING STATEMENTS Certain written and oral statements made or incorporated by reference from time to time by the Company or its representatives are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, performance or achievements, and may contain the words "expect," "intend," "plan," "anticipate," "estimate," "believe," "will be," "will continue," "will likely result," and similar expressions. Statements by the Company in this report that contain forward-looking statements include, but are not limited to, discussions regarding future market conditions and the effect of such conditions on the Company's future results of operations (see "-- Outlook"), future uses of and requirements for financial resources, including but not limited to, expenditures related to the deepwater upgrade of the Ocean Baroness (see "-- Liquidity" and "-- Capital Resources"). Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, general economic and business conditions, casualty losses, industry fleet capacity, changes in foreign and domestic oil and gas exploration and production activity, competition, changes in foreign, political, social and economic conditions, regulatory initiatives and compliance with governmental regulations, customer preferences and various other matters, many of which are beyond the Company's control. The risks included here are not exhaustive. Other sections of this report and the Company's other filings with the Securities and Exchange Commission include additional factors that could adversely impact the Company's business and financial performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based. 20 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information included in this Item is considered to constitute "forward-looking statements" for purposes of the statutory safe harbor provided in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Statements" in Item 2 of Part I of this report. The Company's financial instruments include the Notes, the Zero Coupon Debentures, the Ocean Alliance lease-leaseback agreement, and investments in debt securities, including U.S. Treasury securities, treasury inflation-indexed protective bonds ("TIP's"), and CMO's. The Company's Notes, which were due February 15, 2007, had a stated interest rate of 3.75% and an effective interest rate of 3.93%. At March 31, 2001, the fair value of the Notes, based on quoted market prices, was approximately $403.3 million, compared to a carrying amount of $396.6 million. On April 6, 2001, the Company redeemed all of its outstanding Notes in accordance with the indenture under which the Notes were issued. Prior to April 6, 2001, $12.4 million principal amount of the Notes were converted into 307,071 shares of the Company's common stock at the stated conversion price of $40.50 per share. The remaining $387.6 million principal amount of the Notes was redeemed at 102.08% of the principal amount thereof plus accrued interest for a total cash payment of $397.7 million, resulting in an after-tax charge of $7.7 million, which will be reported as an extraordinary loss in the second quarter of 2001. At March 31, 2001, the fair value of the Company's Zero Coupon Debentures, based on quoted market prices, was approximately $412.6 million, compared to a carrying amount of $413.8 million. At March 31, 2001, the fair value of the Company's Ocean Alliance lease-leaseback agreement, based on the present value of estimated future cash flows using a discount rate of 8.00%, was approximately $54.8 million, compared to a carrying amount of $56.1 million. At March 31, 2001, the fair market value of the Company's investment in debt securities issued by the U.S. Treasury, excluding TIP's and CMO's, was approximately $223.7 million, which includes an unrealized holding gain of $56,000. These securities bear interest at rates ranging from 4.8% to 5.2%. These securities are U.S. government-backed, generally short-term and readily marketable. The fair market value of the Company's investment in TIP's at March 31, 2001 was approximately $276.8 million, which includes an unrealized holding gain of $10.7 million. These securities bear a fixed interest rate of 3.625% and have an inflation-adjusted principal. The amount of each semiannual interest payment is based on the securities' inflation-adjusted principal amount on an interest payment date and, at maturity, the securities will be redeemed at the greater of their inflation-adjusted principal or par amount at original issue. The TIP's are short-term and readily marketable. The fair market value of the Company's investment in CMO's at March 31, 2001 was approximately $103.5 million, which includes an unrealized holding gain of $1.3 million. The CMO's are also short-term and readily marketable with an implied AAA rating backed by U.S. government guaranteed mortgages. Other than trade accounts receivable and trade accounts payable, the Company does not currently have financial instruments that are sensitive to foreign currency exchange rates. 21 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Raymond Verdin v. R&B Falcon Drilling USA, Inc., et al; No. G-00-488 in the United States District Court for the Southern District of Texas, Galveston Division, filed October 10, 2000. The Company was named as a defendant in a proposed class action suit filed on behalf of offshore oil workers against all of the major offshore drilling companies. The proposed class includes persons hired in the United States by the companies to work in the Gulf of Mexico and around the world. The allegation is that the companies, through trade groups, shared wage information in order to fix and suppress the wages of the workers in violation of the Sherman Antitrust Act and various state laws. Plaintiff Thomas Bryant has replaced the named plaintiff as the proposed class representative. No class has been certified at this time, however, a hearing on class certification is currently scheduled for July 12, 2001. The lawsuit is seeking damages as well as attorney's fees and costs. During the first quarter of 2001, the Company recorded a $10.0 million reserve for this pending litigation in the Company's Consolidated Statements of Income in contemplation of a potential settlement. The Company and its subsidiaries are named defendants in various lawsuits and are involved from time to time as parties to governmental proceedings, all arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving the Company and its subsidiaries cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not expect these matters to have a material adverse effect on the financial position, results of operations, or cash flows of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits See the Exhibit Index for a list of those exhibits filed herewith. (b) The Company filed the following reports on Form 8-K during the first quarter of 2001:
Date of Report Description of Report -------------- --------------------- January 23, 2001 Item 9 Regulation FD disclosure (Informational only) February 12, 2001 Item 9 Regulation FD disclosure (Informational only) February 27, 2001 Item 9 Regulation FD disclosure (Informational only) March 7, 2001 Plan to redeem, on April 6, 2001, all outstanding Notes March 21, 2001 Item 9 Regulation FD disclosure (Informational only)
22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIAMOND OFFSHORE DRILLING, INC. (Registrant) Date 04-May-2001 By: \s\ Gary T. Krenek ----------- ------------------------------------------ Gary T. Krenek Vice President and Chief Financial Officer Date 04-May-2001 \s\ Beth G. Gordon ------------ ------------------------------------------- Beth G. Gordon Controller (Chief Accounting Officer) 23 24 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998). 3.2* Amended and Restated By-laws of the Company. 4.1 Indenture, dated as of February 4, 1997, between the Company and The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed February 11, 1997). 4.2* Third Supplemental Indenture, dated as of April 11, 2001, between the Company and The Chase Manhattan Bank, as Trustee. 10.1* Purchase Agreement, dated April 6, 2001, between the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated. 10.2* Registration Rights Agreement, dated April 11, 2001, between the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated.
--------- * Filed herewith. 24