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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______.
COMMISSION FILE NUMBER 333-75899
----------------------
TRANSOCEAN INC.
(Exact name of registrant as specified in its charter)
----------------------
CAYMAN ISLANDS 66-0582307
(State or other jurisdication (I.R.S. Employer
of incorporation or organization) Identification No.)
4 GREENWAY PLAZA
HOUSTON, TEXAS 77046
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (713) 232-7500
TRANSOCEAN SEDCO FOREX INC.
(Former Name)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of April 30, 2002, 319,187,965 ordinary shares, par value $0.01 per
share, were outstanding.
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TRANSOCEAN INC.
INDEX TO FORM 10-Q
QUARTER ENDED MARCH 31, 2002
Page
----
PART I - FINANCIAL INFORMATION
- ---------------------------------
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2001. . . . . . . . . . . 2
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001. . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001. . . . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements. . . . . . . 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk . . 30
PART II - OTHER INFORMATION
- -----------------------------
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 32
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Transocean Inc.
(formerly known as "Transocean Sedco Forex Inc.") and its consolidated
subsidiaries (the "Company") included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and notes normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
1
TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
Three Months Ended March 31,
------------------------------
2002 2001
-------------- --------------
Operating Revenues $ 667.9 $ 550.1
- --------------------------------------------------------------------------------------------------------
Costs and Expenses
Operating and maintenance 381.0 351.0
Depreciation 125.6 99.3
Goodwill amortization - 30.2
General and administrative 19.8 14.7
- --------------------------------------------------------------------------------------------------------
526.4 495.2
- --------------------------------------------------------------------------------------------------------
Impairment loss on Long-Lived Assets (1.1) -
Gain from Sale of Assets, net 1.9 19.6
- --------------------------------------------------------------------------------------------------------
Operating Income 142.3 74.5
- --------------------------------------------------------------------------------------------------------
Other Income (Expense), net
Equity in earnings of joint ventures 1.9 1.7
Interest income 4.2 3.6
Interest expense, net of amounts capitalized (55.9) (37.2)
Other, net (0.7) (0.6)
- --------------------------------------------------------------------------------------------------------
(50.5) (32.5)
- --------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Minority Interest and
Cumulative Effect of a Change in Accounting Principle 91.8 42.0
Income Tax Expense 13.8 10.2
Minority Interest 0.7 1.3
- --------------------------------------------------------------------------------------------------------
Net Income Before Cumulative Effect of a Change in Accounting Principle 77.3 30.5
Cumulative Effect of a Change in Accounting Principle (1,363.7) -
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (1,286.4) $ 30.5
========================================================================================================
Basic Earnings (Loss) Per Share
Income Before Cumulative Effect of a Change in Accounting Principle $ 0.24 $ 0.11
Cumulative Effect of a Change in Accounting Principle (4.27) -
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (4.03) $ 0.11
========================================================================================================
Diluted Earnings (Loss) Per Share
Income Before Cumulative Effect of a Change in Accounting Principle $ 0.24 $ 0.11
Cumulative Effect of a Change in Accounting Principle (4.22) -
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (3.98) $ 0.11
========================================================================================================
Weighted Average Shares Outstanding
Basic 319.1 280.6
- --------------------------------------------------------------------------------------------------------
Diluted 323.1 285.5
- --------------------------------------------------------------------------------------------------------
Dividends Paid per Share $ 0.03 $ 0.03
- --------------------------------------------------------------------------------------------------------
See accompanying notes.
2
TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
March 31, December 31,
2002 2001
------------- --------------
(Unaudited)
ASSETS
Cash and Cash Equivalents $ 588.1 $ 853.4
Accounts Receivable, net of allowance for doubtful accounts
of $32.4 and $24.2 at March 31, 2002 and December 31, 2001, respectively 684.5 675.7
Materials and Supplies, net of allowance for obsolescence of $20.1
and $24.1 at March 31, 2002 and December 31, 2001, respectively 167.3 158.8
Deferred Income Taxes 22.2 21.0
Other Current Assets 48.0 27.9
- ----------------------------------------------------------------------------------------------------------
Total Current Assets 1,510.1 1,736.8
- ----------------------------------------------------------------------------------------------------------
Property and Equipment 10,058.0 10,081.4
Less Accumulated Depreciation 1,817.2 1,713.3
- ----------------------------------------------------------------------------------------------------------
Property and Equipment, net 8,240.8 8,368.1
- ----------------------------------------------------------------------------------------------------------
Goodwill, net 5,103.0 6,466.7
Investments in and Advances to Joint Ventures 116.0 107.1
Other Assets 334.5 341.1
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 15,304.4 $ 17,019.8
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable $ 155.0 $ 188.4
Accrued Income Taxes 203.9 188.2
Debt Due Within One Year 151.8 484.4
Other Current Liabilities 297.3 283.4
- ----------------------------------------------------------------------------------------------------------
Total Current Liabilities 808.0 1,144.4
- ----------------------------------------------------------------------------------------------------------
Long-Term Debt 4,444.9 4,539.4
Deferred Income Taxes 295.0 317.1
Other Long-Term Liabilities 129.8 108.6
- ----------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 4,869.7 4,965.1
- ----------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Preference Shares, $0.10 par value; 50,000,000 shares authorized,
none issued and outstanding - -
Ordinary Shares, $0.01 par value; 800,000,000 shares authorized,
319,140,615 and 318,816,035 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively 3.2 3.2
Additional Paid-in Capital 10,621.0 10,611.7
Accumulated Other Comprehensive Income 0.8 (2.3)
Retained Earnings (Deficit) (998.3) 297.7
- ----------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 9,626.7 10,910.3
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 15,304.4 $ 17,019.8
==========================================================================================================
See accompanying notes.
3
TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended March 31,
------------------------------
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,286.4) $ 30.5
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation 125.6 99.3
Goodwill amortization - 30.2
Cumulative effect of a change in accounting principle - goodwill impairment 1,363.7 -
Deferred income taxes (23.3) (7.2)
Equity in earnings of joint ventures (1.9) (1.7)
Net gain from disposal of assets - (19.5)
Impairment on long-lived assets 1.1 -
Loss on sale of securities - 0.8
Amortization of debt-related discounts/premiums, fair value
adjustments and issue costs, net 1.3 (4.9)
Deferred income, net (5.4) (19.6)
Deferred expenses, net 7.4 (11.3)
Other, net 5.2 11.2
Changes in operating assets and liabilities, net of effects from the
R&B Falcon merger
Accounts receivable (8.9) (26.9)
Accounts payable and other current liabilities (4.6) (32.9)
Income taxes receivable/payable, net 15.8 12.3
Other current assets (27.6) (14.6)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 162.0 45.7
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (47.7) (255.8)
Proceeds from disposal of assets, net 43.4 4.7
Merger costs paid - (24.6)
Cash acquired in merger, net of cash paid - 264.7
Joint ventures and other investments, net (3.6) 1.6
- ------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (7.9) (9.4)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on revolving credit agreements - 180.9
Net borrowings (repayments) under commercial paper program (326.4) 15.0
Repayments on debt obligations (85.0) (12.9)
Net proceeds from issuance of ordinary shares under
stock-based compensation plans 9.1 11.5
Proceeds from issuance of ordinary shares upon exercise of warrants - 8.3
Dividends paid (9.6) (9.5)
Financing costs (8.2) -
Other, net 0.7 1.5
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (419.4) 194.8
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (265.3) 231.1
- ------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 853.4 34.5
- ------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 588.1 $ 265.6
==================================================================================================================
See accompanying notes.
4
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - PRINCIPLES OF CONSOLIDATION
Transocean Inc. (formerly known as "Transocean Sedco Forex Inc.", together
with its subsidiaries and predecessors, unless the context requires otherwise,
the "Company") is a leading international provider of offshore and inland marine
contract drilling services for oil and gas wells. As of March 31, 2002, the
Company owned, had partial ownership interests in or managed more than 150
mobile offshore and barge drilling units. The Company contracts its drilling
rigs, related equipment and work crews primarily on a dayrate basis to drill oil
and gas wells.
On January 31, 2001, the Company completed a merger transaction (the "R&B
Falcon merger") with R&B Falcon Corporation ("R&B Falcon"). As a result of the
merger, R&B Falcon became an indirect wholly owned subsidiary of the Company.
The merger was accounted for as a purchase with the Company as the accounting
acquiror. The condensed consolidated statements of operations and cash flows for
the three months ended March 31, 2001 include two months of operating results
and cash flows for R&B Falcon.
Intercompany transactions and accounts have been eliminated. The equity
method of accounting is used for investments in joint ventures owned 50 percent
or less and for investments in joint ventures owned more than 50 percent where
the Company does not have significant influence or control over the day-to-day
operations of the joint venture.
NOTE 2 - GENERAL
BASIS OF CONSOLIDATION - The accompanying condensed consolidated financial
statements of the Company have been prepared without audit in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, pursuant
to such rules and regulations, these financial statements do not include all
disclosures required by accounting principles generally accepted in the United
States for complete financial statements. Operating results for the three month
period ended March 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002 or for any future period.
The accompanying condensed consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
("U.S.") requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses and disclosure of
contingent assets and liabilities. On an ongoing basis, the Company evaluates
its estimates, including those related to bad debts, materials and supplies
obsolescence, investments, intangible assets and goodwill, income taxes,
financing operations, workers' insurance, pensions and other post-retirement and
employment benefits and contingent liabilities. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from such
estimates.
SUPPLEMENTARY CASH FLOW INFORMATION - Cash payments for interest and income
taxes, net, were $48.4 million and $21.3 million, respectively, for the three
months ended March 31, 2002 and $69.4 million and $4.9 million, respectively,
for the three months ended March 31, 2001.
GOODWILL - Prior to the implementation of the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
142, Goodwill and Other Intangible Assets (see "-New Accounting
Pronouncements"), the excess of the purchase price over the estimated fair value
of net assets acquired was accounted for as goodwill and was amortized on a
straight-line basis over 40 years. The amortization period was based on the
nature of the offshore drilling industry, long-lived drilling equipment and the
long-standing relationships with core customers.
5
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
During the first quarter of 2002, the Company performed the initial test of
impairment of goodwill on its two reporting units, "Gulf of Mexico Shallow and
Inland Water" and "International and U.S. Floater Contract Drilling Services."
The test was applied utilizing the fair value of the reporting units as of
January 1, 2002 as determined based on a combination of each reporting unit's
discounted cash flows and publicly traded company multiples and acquisition
multiples of comparable businesses. Because of continued deterioration in the
Gulf of Mexico Shallow and Inland Water business segment since the completion of
the R&B Falcon merger, a $1,363.7 million impairment of goodwill was recognized
as a cumulative effect of a change in accounting principle in the quarter ended
March 31, 2002. There was no goodwill impairment for the International and U.S.
Floater Contract Drilling Services reporting unit. The Company's goodwill
balance, after giving effect to the goodwill write down, is $5.1 billion as of
March 31, 2002.
The changes in the carrying amount of goodwill as of March 31, 2002, are as
follows (in millions):
International
and U.S. Gulf of
Floater Mexico
Contract Shallow and
Drilling Inland
Services Water
-------------- --------------
Balance at January 1, 2002 $ 4,721.1 $ 1,745.6
Loss on Impairment - 1,363.7
-------------- --------------
Balance as of March 31, 2002 $ 4,721.1 $ 381.9
============== ==============
Net income and earnings per share for the three months ended March 31, 2002
and 2001 adjusted for goodwill amortization are as follows (in millions):
Three Months Ended
March 31,
------------------------------
2002 2001
-------------- --------------
Reported net income before goodwill impairment $ 77.3 $ 30.5
Add back: Goodwill amortization - 30.2
-------------- --------------
Adjusted net income $ 77.3 $ 60.7
============== ==============
Basic earnings per share:
Reported net income before goodwill impairment $ 0.24 $ 0.11
Goodwill amortization - 0.11
-------------- --------------
Adjusted net income $ 0.24 $ 0.22
============== ==============
Diluted earnings per share:
Reported net income before goodwill impairment $ 0.24 $ 0.11
Goodwill amortization - 0.10
-------------- --------------
Adjusted net income $ 0.24 $ 0.21
============== ==============
6
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
IMPAIRMENT OF LONG-LIVED ASSETS - The carrying value of long-lived assets,
principally property and equipment, is reviewed for potential impairment when
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. For property and equipment held for use, the
determination of recoverability is made based upon the estimated undiscounted
future net cash flows of the related asset. Property and equipment held for sale
are recorded at the lower of net book value or net realizable value. See "- New
Accounting Pronouncements."
CAPITALIZED INTEREST - Interest costs for the construction and upgrade of
qualifying assets are capitalized. The Company recorded $21.1 million in
capitalized interest costs on construction work in progress for the three months
ended March 31, 2001. No capitalized interest cost was recorded for the three
months ended March 31, 2002.
CHANGE IN ESTIMATE - As a result of the R&B Falcon merger, the Company
conformed its policies relating to estimated rig lives and salvage values.
Estimated useful lives of drilling units now range from 18 to 35 years,
reflecting maintenance history and market demand for these drilling units,
buildings and improvements from 10 to 30 years and machinery and equipment from
four to 12 years. Depreciation expense for the three months ended March 31, 2001
was reduced by approximately $2.1 million (net $0.01 per diluted share) as a
result of conforming these policies.
INCOME TAXES - Income taxes have been provided based upon the tax laws and
rates in the countries in which operations are conducted and income is earned.
The income tax rates imposed by these taxing authorities vary substantially.
Taxable income may differ from pre-tax income for financial accounting purposes.
There is no expected relationship between the provision for income taxes and
income before income taxes because the countries have different taxation
regimes, which vary not only with respect to nominal rate, but also in terms of
the availability of deductions, credits and other benefits. Variations also
arise because income earned and taxed in any particular country or countries may
fluctuate from period to period.
COMPREHENSIVE INCOME - The components of total comprehensive income for the
three months ended March 31, 2002 and 2001, respectively, are as follows (in
millions):
Three Months Ended
March 31,
------------------------------
2002 2001
-------------- --------------
Net income (loss) $ (1,286.4) $ 30.5
Gain on terminated interest rate swaps - 4.1
Amortization of gain on terminated interest rate swaps (0.1) -
Change in unrealized loss on cash flow hedges - (1.4)
Change in unrealized loss on securities available for sale 0.1 (1.1)
Change in share of unrealized loss in unconsolidated joint venture's interest rate swaps 3.1 -
-------------- --------------
Total comprehensive income (loss) $ (1,283.3) $ 32.1
============== ==============
The components of accumulated other comprehensive income as of March 31,
2002 and December 31, 2001 are as follows (in millions):
March 31, December 31,
2002 2001
-------------- --------------
Gain on terminated interest rate swaps $ 3.8 $ 3.9
Unrealized loss on securities available for sale (0.5) (0.6)
Share of unrealized loss in unconsolidated joint venture's interest rate swaps (2.5) (5.6)
-------------- --------------
Accumulated other comprehensive income $ 0.8 $ (2.3)
============== ==============
7
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
SEGMENTS - The Company's operations are aggregated into two reportable
segments: (i) International and U.S. Floater Contract Drilling Services and (ii)
Gulf of Mexico Shallow and Inland Water. The Company provides services with
different types of drilling equipment in several geographic regions. The
location of the Company's operating assets and the allocation of resources to
build or upgrade drilling units is determined by the activities and needs of
customers. See Note 7.
INTERIM FINANCIAL INFORMATION - The condensed consolidated financial
statements reflect all adjustments, which are, in the opinion of management,
necessary for a fair statement of results of operations for the interim periods.
Such adjustments are considered to be of a normal recurring nature unless
otherwise identified.
NEW ACCOUNTING PRONOUNCEMENTS - In July 2001, the FASB issued SFAS 142,
Goodwill and Other Intangible Assets, which is effective for fiscal years
beginning after December 15, 2001. Under SFAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed at least
annually for impairment. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company
adopted Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") 142 effective January 1, 2002. In conjunction with
the adoption of this statement, the Company has discontinued the amortization of
goodwill. Application of the non-amortization provisions of SFAS 142 for
goodwill is expected to result in an increase in operating income of
approximately $155 million in 2002. See "-Goodwill."
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
the accounting and reporting provisions of Accounting Principles Board Opinion
("APB") 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 retains the fundamental provisions
of SFAS 121 for recognition and measurement of long-lived asset impairment and
for the measurement of long-lived assets to be disposed of by sale and the basic
requirements of Accounting Principles Board Opinion ("APB") 30. In addition to
these fundamental provisions, SFAS 144 provides guidance for determining whether
long-lived assets should be tested for impairment and specific criteria for
classifying assets to be disposed of as held for sale. The statement is
effective for fiscal years beginning after December 15, 2001. The Company
adopted the statement as of January 1, 2002. The adoption of this statement had
no material effect on the Company's consolidated financial position or results
of operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the requirement under SFAS 4 to aggregate and classify
all gains and losses from extinguishment of debt as an extraordinary item, net
of related income tax effect. This statement also amends SFAS 13 to require that
certain lease modifications with economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
In addition, SFAS 145 requires reclassification of gains and losses in all prior
periods presented in comparative financial statements related to debt
extinguishment that do not meet the criteria for extraordinary item in
Accounting Principles Board Opinion ("APB") 30. The statement is effective for
fiscal years beginning after May 15, 2002 with early adoption encouraged. The
Company will adopt SFAS 145 effective January 1, 2003. Management does not
expect adoption of this statement to have a material effect on the Company's
consolidated financial position or results of operations.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
period amounts to conform with the current period's presentation.
8
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 3 - BUSINESS COMBINATION
On January 31, 2001, the Company completed a merger transaction with R&B
Falcon, in which an indirect wholly owned subsidiary of the Company merged with
and into R&B Falcon. As a result of the merger, R&B Falcon common shareholders
received 0.5 newly issued ordinary shares of the Company for each R&B Falcon
share. The Company issued approximately 106 million ordinary shares in exchange
for the issued and outstanding shares of R&B Falcon and assumed warrants and
options exercisable for approximately 13 million ordinary shares. The ordinary
shares issued in exchange for the issued and outstanding shares of R&B Falcon
constituted approximately 33 percent of the Company's outstanding ordinary
shares after the merger.
The Company accounted for the merger using the purchase method of
accounting with the Company treated as the accounting acquiror. The purchase
price of $6.7 billion is comprised of the calculated market capitalization of
the Company's ordinary shares issued at the time of merger with R&B Falcon of
$6.1 billion and the estimated fair value of R&B Falcon stock options and
warrants at the time of the merger of $0.6 billion. The market capitalization of
the Company's ordinary shares issued was calculated using the average closing
price of the Company's ordinary shares for a period immediately before and after
August 21, 2000, the date the merger was announced.
The purchase price included, at estimated fair value at January 31, 2001,
current assets of $672 million, drilling and other property and equipment of
$4,010 million, other assets of $160 million and the assumption of current
liabilities of $338 million, other net long-term liabilities of $242 million and
long-term debt of $3,206 million. The excess of the purchase price over the
estimated fair value of net assets acquired was $5,630 million, which was
accounted for as goodwill and is reviewed annually in accordance with SFAS 142.
See Note 2.
In conjunction with the R&B Falcon merger, the Company established a
liability of $16.5 million for the estimated severance-related costs associated
with the involuntary termination of 569 R&B Falcon employees pursuant to
management's plan to consolidate operations and administrative functions
post-merger. Included in the 569 planned involuntary terminations were 387
employees engaged in the Company's land drilling business in Venezuela. The
Company has suspended active marketing efforts to divest this business and, as a
result, the estimated liability was reduced by $4.3 million in the third quarter
of 2001 with an offset to goodwill. Through March 31, 2002, approximately $12.0
million in severance-related costs have been paid to 182 employees whose
positions were eliminated as a result of this plan.
Unaudited pro forma combined operating results of the Company and R&B
Falcon assuming the merger was completed as of January 1, 2001 are summarized as
follows (in millions, except per share data):
Three Months Ended
March 31, 2001
------------------
Operating revenues $ 676.0
Operating income 74.0
Net income from continuing operations 16.2
Basic and diluted earnings per share $ 0.05
The pro forma information includes adjustments for additional depreciation
based on the fair market value of the drilling and other property and equipment
acquired, amortization of goodwill arising from the transaction, increased
interest expense for debt assumed in the merger and related adjustments for
income taxes. The pro forma information is not necessarily indicative of the
results of operations had the transaction been effected on the assumed date or
the results of operations for any future periods.
9
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 4 - DEBT
Debt, net of unamortized discounts, premiums and fair value adjustments, is
comprised of the following (in millions):
March ,31, December 31
2002 2001
------------- ------------
Commercial Paper $ - $ 326.4
6.5% Senior Notes, due April 2003 240.3 240.5
9.125% Senior Notes, due December 2003 91.3 92.0
Term Loan Agreement - Final Maturity December 2004 375.0 400.0
7.31% Nautilus Class A1 Amortizing Notes - Final Maturity May 2005 133.6 142.9
9.41% Nautilus Class A2 Notes, due May 2005 52.3 52.4
6.75% Senior Notes, due April 2005 350.5 354.6
Secured Rig Financing - 50.6
6.95% Senior Notes, due April 2008 248.3 252.3
9.5% Senior Notes, due December 2008 340.9 348.1
6.625% Notes, due April 2011 708.4 711.7
7.375% Senior Notes, due April 2018 250.5 250.5
Zero Coupon Convertible Debentures, due May 2020 515.9 512.2
1.5% Convertible Debentures, due May 2021 400.0 400.0
8% Debentures, due April 2027 198.0 197.9
7.45% Notes, due April 2027 94.4 94.4
7.5% Notes, due April 2031 597.3 597.3
------------- ------------
Total Debt 4,596.7 5,023.8
Less Debt Due Within One Year 151.8 484.4
------------- ------------
Total Long-Term Debt $ 4,444.9 $ 4,539.4
============= ============
The scheduled maturity of the face value of the Company's debt is as
follows (in millions):
Twelve
Months
Ending
March 31,
----------
2003 $ 151.8
2004 518.9
2005 158.0
2006 407.9
2007 -
Thereafter 3,665.0
----------
Total $ 4,901.6
==========
Commercial Paper Program - The Company's Revolving Credit Agreements, a
$550.0 million five-year revolving credit agreement dated December 29, 2000 and
a $250.0 million 364-day revolving credit agreement dated December 27, 2001,
provide liquidity for commercial paper borrowings. At March 31, 2002, no amounts
were outstanding under the Commercial Paper Program.
10
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Term Loan Agreement - The Company is a party to an amortizing unsecured
five-year term loan agreement dated as of December 16, 1999. Amounts outstanding
under the Term Loan Agreement bear interest at the Company's option, at a base
rate or LIBOR plus a margin (0.70 percent per annum at March 31, 2002) that
varies depending on the Company's senior unsecured public debt rating. The debt
began to amortize in March 2002, at a rate of $25.0 million per quarter in 2002.
In 2003 and 2004, the debt amortizes at a rate of $37.5 million per quarter. As
of March 31, 2002, $375.0 million was outstanding under this agreement.
Exchange Offer - In March 2002, the Company completed exchange offers and
consent solicitations for the 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% notes
of R&B Falcon. As a result of these exchange offers and consent solicitations,
approximately $234.5 million, $342.3 million, $247.8 million $246.5 million,
$76.9 million, and $289.8 million principal amount of the outstanding 6.5%,
6.75%, 6.95%, 7.375%, 9.125% and 9.5% notes, respectively, of R&B Falcon were
exchanged for newly issued 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% notes of
the Company having the same principal amount, interest rate, redemption terms
and payment and maturity dates (and accruing interest from the last date for
which interest had been paid on the R&B Falcon notes). Because the holders of a
majority in principal amount of each of these series of notes consented to the
proposed amendments to the applicable indenture pursuant to which the notes were
issued, some covenants, restrictions and events of default were eliminated from
the indentures with respect to these series of notes. The notes not exchanged
remain the obligation of R&B Falcon and are combined with the notes of the
corresponding series issued by the Company in the above table. In connection
with the exchange offers, an aggregate of $8.3 million in consent payments were
made by R&B Falcon to holders of R&B Falcon notes whose notes were tendered (and
not validly withdrawn) within the required time period and accepted for
exchange. The consent payments will be amortized as an increase to interest
expense over the remaining term of the respective notes using the interest
method. As a result of this amortization, interest expense for 2002 is expected
to increase approximately $1.3 million.
Secured Rig Financing - In January 2002, the Company exercised its call
option under the financing arrangement to repay the financing on the Trident 16
prior to the expiration of the scheduled term. The aggregate principal amount
outstanding was $32.2 million. The premium paid as a result of the call option
of approximately $2 million was recorded as an increase in the net book value of
the Trident 16.
In March 2002, the Company also exercised its call option to repay the
financing on the Trident IX prior to the expiration of the scheduled term. The
aggregate principal amount outstanding was $14.9 million. The premium paid as a
result of the call option of approximately $0.5 million was recorded as an
increase in the net book value of the Trident IX.
NOTE 5 - OTHER CURRENT LIABILITIES
Other current liabilities are comprised of the following (in millions):
March 31, December 31,
2002 2001
------------- -------------
Accrued Payroll and Employee Benefits $ 107.2 $ 134.2
Accrued Interest 84.6 38.8
Contract Disputes and Legal Claims 42.6 47.5
Accrued Taxes, Other than Income 21.7 26.6
Deferred Revenue 17.9 18.2
Other 23.3 18.1
------------- -------------
$ 297.3 $ 283.4
============= =============
11
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 6 - INTEREST RATE SWAPS
In February 2002, the Company entered into interest rate swap agreements
with a group of banks in the aggregate notional amount of $900.0 million
relating to the Company's $350.0 million aggregate principal amount of 6.75%
Senior Notes due April 2005, $250 million aggregate principal amount of 6.95%
Senior Notes due April 2008 and $300.0 million aggregate principal amount of
9.5% Senior Notes due December 2008. The objective of each transaction is to
protect the debt against changes in fair value due to changes in the benchmark
interest rate. Under each interest rate swap, the Company receives the fixed
rate equal to the coupon of the hedged item and pays the floating rate (LIBOR)
plus a margin of 246 basis points, 171 basis points and 413 basis points,
respectively, which are designated as the respective benchmark interest rates,
on each of the interest payment dates until maturity of the respective notes.
The hedges are considered perfectly effective against changes in the fair value
of the debt due to changes in the benchmark interest rates over their term. As a
result, the shortcut method applies and there is no need to periodically
reassess the effectiveness of the hedges during the term of the swaps.
At March 31, 2002, the market value of the Company's outstanding interest
rate swaps was a net liability of $1.4 million.
Deepwater Drilling LLC, an unconsolidated subsidiary in which the Company
has a 50% ownership interest, has entered into interest rate swaps with
aggregate market values netting to a liability of $6.1 million at March 31,
2002. The Company's interest in these swaps was included in accumulated other
comprehensive income with a corresponding reduction to investments in and
advances to joint ventures.
NOTE 7 - SEGMENTS
The Company's operations are aggregated into two reportable segments: (i)
International and U.S. Floater Contract Drilling Services and (ii) Gulf of
Mexico Shallow and Inland Water. The International and U.S. Floater Contract
Drilling Services segment consists of high-specification floaters, other
floaters, non-U.S. jackups, other mobile offshore drilling units and other
assets used in support of offshore drilling activities and offshore support
services. The Gulf of Mexico Shallow and Inland Water segment consists of jackup
and submersible drilling rigs and inland drilling barges located in the U. S.
Gulf of Mexico and Trinidad, as well as land drilling units located in
Venezuela. The Company provides services with different types of drilling
equipment in several geographic regions. The location of the Company's rigs and
the allocation of resources to build or upgrade rigs is determined by the
activities and needs of customers.
Effective January 1, 2002, the Company changed the composition of its
reportable segments with the move of the responsibility for its Venezuela land
drilling operations to the Gulf of Mexico Shallow and Inland Water segment.
Prior periods have been restated to reflect the change.
12
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Operating revenues and income before income taxes and minority interest by
segment are as follows (in millions):
Three Months Ended
March 31,
----------------------------
2002 2001
-------------- ------------
Operating Revenues
International and U.S. Floater Contract Drilling Services $ 623.2 $ 466.6
Gulf of Mexico Shallow and Inland Water 44.7 89.4
Elimination of intersegment revenues - (5.9)
-------------- ------------
Total Operating Revenues $ 667.9 $ 550.1
-------------- ------------
Income before Income Taxes, Minority Interest and Cumulative
Effect of a Change in Accounting Principle
International and U.S. Floater Contract Drilling Services $ 192.8 $ 76.0
Gulf of Mexico Shallow and Inland Water (30.7) 13.2
-------------- ------------
162.1 89.2
Unallocated general and administrative expense (19.8) (14.7)
Unallocated other income (expense) (50.5) (32.5)
-------------- ------------
Total Income before Income Taxes, Minority Interest
and Cumulative Effect of a Change in Accounting Principle $ 91.8 $ 42.0
============== ============
Total assets by segment are as follows (in millions):
March 31, December 31,
2002 2001
-------------- ------------
International and U.S. Floater Contract Drilling Services $ 13,886.9 $ 14,181.8
Gulf of Mexico Shallow and Inland Water 1,366.1 2,779.8
Unallocated Corporate 51.4 58.2
-------------- ------------
Total Assets $ 15,304.4 $ 17,019.8
============== ============
NOTE 8 - ASSET DISPOSITIONS AND IMPAIRMENT LOSS
In March 2002, the Company sold two semisubmersible rigs, the Transocean 96
and Transocean 97, for net proceeds of $30.7 million, resulting in an after-tax
gain of $1.3 million.
During the quarter ended March 31, 2002, the Company sold certain other
non-strategic assets acquired in the R&B Falcon merger and certain other assets
held for sale for net proceeds of approximately $12.7 million.
In February 2001, Sea Wolf Drilling Limited ("Sea Wolf"), a joint venture
in which the Company holds a 25 percent interest, sold two semisubmersible rigs,
the Drill Star and Sedco Explorer, to Pride International, Inc. In the first
quarter of 2001, the Company recognized accelerated amortization of the deferred
gain related to the Sedco Explorer of $18.5 million ($0.06 per diluted share),
which is included in gain from sale of assets. The Company continued to operate
the Drill Star, which has been renamed the Pride North Atlantic, under a
bareboat charter agreement until October 2001, at which time the rig was
returned to its owner. The amortization of the Drill Star's deferred gain was
accelerated and produced incremental gains in the quarter ended March 31, 2001
of $9.0 million ($0.03 per diluted share), which is included as a reduction of
operating and maintenance expense.
13
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
During the quarter ended March 31, 2002, the Company recorded a non-cash
impairment charge in the Gulf of Mexico Shallow and Inland Water segment of $1.1
million. The impairment, relating to an asset held for sale, resulted from
deterioration in current market conditions. The impairment was determined and
measured based on an offer from a potential buyer.
NOTE 9 - EARNINGS PER SHARE
The reconciliation of the numerator and denominator used for the
computation of basic and diluted earnings per share is as follows (in millions,
except per share data):
Three Months Ended
March 31,
-------------------------
2002 2001
------------ -----------
Income Before Cumulative Effect of a Change in Accounting Principle $ 77.3 $ 30.5
Cumulative Effect of a Change in Accounting Principle (1,363.7) -
------------ -----------
Net Income (Loss) $ (1,286.4) $ 30.5
============ ===========
Weighted-Average Shares Outstanding
Shares for basic earnings per share 319.1 280.6
Effect of dilutive securities:
Employee stock options and unvested stock grants 2.3 3.0
Warrants to purchase ordinary shares 1.7 1.9
------------ -----------
Adjusted weighted-average shares and assumed conversions for
diluted earnings per share 323.1 285.5
============ ===========
Basic Earnings (Loss) Per Share
Income Before Cumulative Effect of a Change in Accounting Principle $ 0.24 $ 0.11
Cumulative Effect of a Change in Accounting Principle (4.27) -
------------ -----------
Net Income (Loss) $ (4.03) $ 0.11
============ ===========
Diluted Earnings (Loss) Per Share
Income Before Cumulative Effect of a Change in Accounting Principle $ 0.24 $ 0.11
Cumulative Effect of a Change in Accounting Principle (4.22) -
------------ -----------
Net Income (Loss) $ (3.98) $ 0.11
============ ===========
Ordinary shares subject to issuance pursuant to the conversion features of
the Company's convertible debentures are not included in the calculation of
adjusted weighted-average shares and assumed conversions for diluted earnings
per share because the effect of including those shares is anti-dilutive.
14
TRANSOCEAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 10 - CONTINGENCIES
Legal Proceedings - In November 1988, a lawsuit was filed in the U.S.
District Court for the Southern District of West Virginia against Reading &
Bates Coal Co., a wholly owned subsidiary of R&B Falcon, by SCW Associates, Inc.
claiming breach of an alleged agreement to purchase the stock of Belva Coal
Company, a wholly owned subsidiary of Reading & Bates Coal Co. with coal
properties in West Virginia. When those coal properties were sold in July 1989
as part of the disposition of R&B Falcon's coal operations, the purchasing joint
venture indemnified Reading & Bates Coal Co. and R&B Falcon against any
liability Reading & Bates Coal Co. might incur as a result of this litigation. A
judgment for the plaintiff of $32,000 entered in February 1991 was satisfied and
Reading & Bates Coal Co. was indemnified by the purchasing joint venture. On
October 31, 1990, SCW Associates, Inc., the plaintiff in the above-referenced
action, filed a separate ancillary action in the Circuit Court, Kanawha County,
West Virginia against R&B Falcon, Caymen Coal, Inc. (the former owner of R&B
Falcon's West Virginia coal properties), as well as the joint venture, Mr.
William B. Sturgill (the former President of Reading & Bates Coal Co.)
personally, three other companies in which the Company believes Mr. Sturgill
holds an equity interest, two employees of the joint venture, First National
Bank of Chicago and First Capital Corporation. The lawsuit seeks to recover
compensatory damages of $50 million and punitive damages of $50 million for
alleged tortuous interference with the contractual rights of the plaintiff and
to impose a constructive trust on the proceeds of the use and/or sale of the
assets of Caymen Coal, Inc. as they existed on October 15, 1988. Currently,
discovery is proceeding. The Company intends to defend its interests vigorously
and believes that the damages alleged by the plaintiff in this action are highly
exaggerated. In any event, the Company believes that it has valid defenses and
does not expect that the ultimate outcome of this case will have a material
adverse effect on its business or consolidated financial position.
The Company has certain other actions or claims pending that have been
previously discussed and reported in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 and the Company's other reports filed with
the Securities and Exchange Commission. There have been no material developments
in these previously reported matters. The Company and its subsidiaries are
involved in a number of other lawsuits, all of which have arisen in the ordinary
course of the Company's business. The Company does not believe that ultimate
liability, if any, resulting from any such other pending litigation will have a
material adverse effect on its business or consolidated financial position.
Letters of Credit and Surety Bonds - The Company had letters of credit
outstanding at March 31, 2002 totaling $63.6 million. These letters of credit
outstanding guarantee various contract bidding and insurance activities. In
January 2002, the Company terminated its $70.0 million letter of credit facility
secured by mortgages on five drilling units, the J.W. McLean, J.T. Angel,
Randolph Yost, D.R. Stewart and George H. Galloway.
As is customary in the contract drilling business, we also have various
surety bonds totaling $140.9 million in place that secure customs obligations
relating to the importation of our rigs and certain performance and other
obligations.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
OVERVIEW
Transocean Inc. (formerly known as "Transocean Sedco Forex Inc.", together
with its subsidiaries and predecessors, unless the context requires otherwise,
the "Company," "Transocean," "we," "us" or "our") is a leading international
provider of offshore and inland marine contract drilling services for oil and
gas wells. As of April 30, 2002, we owned, had partial ownership interests in or
managed more than 150 mobile offshore and barge drilling units. As of this date,
our active fleet of core assets consisted of 31 high-specification drillships
and semisubmersibles ("floaters"), 29 other floaters, 54 jackup rigs, 35
drilling barges, four tenders and three submersible drilling rigs. In addition,
the fleet included non-core assets consisting of two platform drilling rigs, a
mobile offshore production unit, and 10 land drilling rigs in Venezuela. We
contract our drilling rigs, related equipment and work crews primarily on a
dayrate basis to drill oil and gas wells. We also provide additional services,
including management of third-party well service activities.
On January 31, 2001, we completed a merger transaction with R&B Falcon
Corporation ("R&B Falcon"). At the time of the merger, R&B Falcon owned, had
partial ownership interests in, operated or had under construction more than 100
mobile offshore drilling units and other units utilized in the support of
offshore drilling activities. As a result of the merger, R&B Falcon became our
indirect wholly owned subsidiary. The merger was accounted for as a purchase and
we were the accounting acquiror. The condensed consolidated statements of
operations and cash flows for the three months ended March 31, 2001 include two
months of operating results and cash flows for R&B Falcon.
On May 9, 2002, we changed our name from Transocean Sedco Forex Inc. to
Transocean Inc.
On May 9, 2002, our Board of Directors voted to discontinue the payment of
a cash dividend after the cash dividend payable on June 13, 2002 to shareholders
of a record on May 30, 2002.
Our operations are aggregated into two reportable segments: (i)
International and U.S. Floater Contract Drilling Services and (ii) Gulf of
Mexico Shallow and Inland Water. The International and U.S. Floater Contract
Drilling Services segment consists of high-specification floaters, other
floaters, non-U.S. jackups, other mobile offshore drilling units and other
assets used in support of offshore drilling activities and offshore support
services. The Gulf of Mexico Shallow and Inland Water segment consists of jackup
and submersible drilling rigs and inland drilling barges located in the U. S.
Gulf of Mexico and Trinidad, as well as land drilling units located in
Venezuela. We provide services with different types of drilling equipment in
several geographic regions. The location of our rigs and the allocation of
resources to build or upgrade rigs is determined by the activities and needs of
our customers.
Effective January 1, 2002, we changed the composition of our reportable
segments with the move of the responsibility for our Venezuela land drilling
operations to the Gulf of Mexico Shallow and Inland Water segment. Prior periods
have been restated to reflect the change.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
materials and supplies obsolescence, investments, intangible assets and
goodwill, income taxes, financing operations, workers' insurance, pensions and
other post-retirement and employment benefits and contingent liabilities. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
16
We believe the following are our most critical accounting policies. These
policies require significant judgments and estimates used in the preparation of
our consolidated financial statements.
Allowance for doubtful accounts - We establish reserves for doubtful
accounts on a case-by-case basis when we believe the required payment of
specific amounts owed to us is unlikely to occur. We derive a majority of our
revenue from services to international oil companies and government-owned or
government-controlled oil companies. Our receivables are concentrated in various
countries. We generally do not require collateral or other security to support
customer receivables. If the financial condition of our customers was to
deteriorate or their access to freely convertible currency was restricted,
resulting in impairment of their ability to make the required payments,
additional allowances may be required.
Valuation allowance for deferred tax assets - We record a valuation
allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, should we determine that we would be able to realize
our deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the valuation allowance would increase income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, an
adjustment to the valuation allowance would reduce income in the period such
determination was made.
Goodwill impairment - Effective January 1, 2002, we adopted the Financial
Accounting Standards Board's ("FASB") Statement of Financial Accounting
Standards ("SFAS") 142, Goodwill and Other Intangibles. As a result of this
statement, we no longer amortize goodwill but will perform an annual test of
impairment. Because our business is cyclical in nature, goodwill could be
significantly impaired depending on when in the business cycle the assessment is
performed.
During the first quarter of 2002, we performed the initial test of
impairment of goodwill on our two reporting units, "Gulf of Mexico Shallow and
Inland Water" and "International and U.S. Floater Contract Drilling Services."
The test, applied utilizing the fair value of the reporting units as of January
1, 2002, as determined based on a combination of each reporting unit's
discounted was cash flows and publicly traded company multiples and acquisition
multiples of comparable businesses. Because of continued deterioration in the
Gulf of Mexico Shallow and Inland Water business segment since the completion of
the R&B Falcon merger, a $1,363.7 million impairment of goodwill was recognized
as a cumulative effect of a change in accounting principle in the quarter ended
March 31, 2002. There was no goodwill impairment for the International and U.S.
Floater Contract Drilling Services reporting unit. Our goodwill balance, after
giving effect to the goodwill write down, is $5.1 billion as of March 31, 2002.
See Note 2 to our condensed consolidated financial statements.
Contingent liabilities - We establish reserves for estimated loss
contingencies when we believe a loss is probable and the amount of the loss can
be reasonably estimated. Revisions to contingent liabilities are reflected in
income in the period in which different facts or information become known or
circumstances change that affect our previous assumptions with respect to the
likelihood or amount of loss. Reserves for contingent liabilities are based upon
our assumptions and estimates regarding the probable outcome of the matter.
Should the outcome differ from our assumptions and estimates, revisions to the
estimated reserves for contingent liabilities would be required.
Contract preparation and mobilization revenues and expenses - Costs
incurred in preparing and mobilizing drilling units for new drilling contracts
are deferred from the date we have a firm commitment from the customer and
recognized as operating and maintenance expense over the estimated primary term
of the drilling contract. Revenues earned during or as a result of the contract
preparation and mobilization periods are also deferred and recognized over the
estimated primary term of the drilling contract. If a customer was to
prematurely terminate the contract, any unamortized deferred costs and revenues
would be recognized in the period the contract was terminated.
17
OPERATING RESULTS
Three Months Ended
March 31,
------------------
%
2002 2001 Change Change
-------- -------- ---------- ---------
(In millions, except % change)
OPERATING REVENUES
International and U.S. Floater Contract Drilling Services $ 623.2 $ 466.6 $ 156.6 33.6 %
Gulf of Mexico Shallow and Inland Water 44.7 83.5 (38.8) (46.5)%
-------- -------- ---------- ---------
$ 667.9 $ 550.1 $ 117.8 21.4 %
======== ======== ========== =========
The increase in International and U.S. Floater Contract Drilling Services
operating revenues resulted primarily from an increase in R&B Falcon operations
of $80.4 million representing a full quarter of revenues in 2002 compared to two
months of operations in 2001 and $39.5 million in revenues from four newbuild
drilling units placed into service subsequent to March 31, 2001. Operating
revenues relating to historical Transocean core assets totaled $374.5 million
for the quarter ended March 31, 2002, representing a $68.7 million, or 22
percent, increase over the comparable 2001 period. Average dayrates and
utilization for core assets increased from $75,800 for the quarter ended March
31, 2001 to $91,000 for the quarter ended March 31, 2002 and from 73 percent for
the quarter ended March 31, 2001 to 82 percent for the quarter ended March 31,
2002, respectively. Revenues from non-core assets increased $8.0 million for the
quarter ended March 31, 2002 from the same period in 2001, respectively. These
increases were partly offset by a decrease in turnkey drilling revenues of $35.5
million due to the winding up of our turnkey drilling business in 2001.
Although the Gulf of Mexico Shallow and Inland Water operating revenues
represent a full quarter of operations in 2002 compared to two months of
operations in 2001, revenues decreased mainly due to the further weakening of
the Gulf of Mexico shallow and inland water market segment, a decline that began
in mid-2001.
Three Months Ended
March 31,
-------------------
%
2002 2001 Change Change
--------- -------- --------- ---------
(In millions, except % change)
OPERATING AND MAINTENANCE
International and U.S. Floater Contract Drilling Services $ 328.7 $ 301.2 $ 27.5 9.1%
Gulf of Mexico Shallow and Inland Water 52.3 49.8 2.5 5.0%
--------- -------- --------- ---------
$ 381.0 $ 351.0 $ 30.0 8.5%
========= ======== ========= =========
The increase in International and U.S. Floater Contract Drilling Services
operating expenses was primarily a result of only two months of R&B Falcon
operations for the quarter ended March 31, 2001, compared to a full quarter of
activity for the same period in 2002, the activation of four newbuild drilling
units placed into service subsequent to the first quarter of 2001 and
amortization of the Drill Star's deferred gain, which was accelerated and
produced incremental gains in the quarter ended March 31, 2001 of $9.0 million
($0.03 per diluted share) with no comparable activity in the quarter ended March
31, 2002.
The increase in Gulf of Mexico Shallow and Inland Water operating expenses
was primarily a result of only two months of operations for the quarter ended
March 31, 2001, compared to a full quarter of activity for the same period in
2002, partially offset by lower costs in 2002 resulting from stacking idle rigs,
reducing employee count and postponing maintenance projects.
18
Three Months Ended
March 31,
------------------
%
2002 2001 Change Change
-------- -------- --------- ---------
(In millions, except % change)
DEPRECIATION
International and U.S. Floater Contract Drilling Services $ 102.3 $ 79.4 $ 22.9 28.8%
Gulf of Mexico Shallow and Inland Water 23.3 19.9 3.4 17.1%
-------- -------- --------- ---------
$ 125.6 $ 99.3 $ 26.3 26.5%
======== ======== ========= =========
International and U.S. Floater Contract Drilling Services depreciation
expense increased primarily as a result of only two months of depreciation on
rigs acquired in the R&B Falcon merger for the quarter ended March 31, 2001
compared to a full quarter for the same period in 2002 and depreciation expense
for four newbuild drilling units placed into service subsequent to the first
quarter of 2001. This increase was partially offset by lower expense due to the
suspension of depreciation on certain rigs reclassified as assets held for sale
and the sale of various rigs, which were classified as held and used, subsequent
to the first quarter of 2001.
The increase in Gulf of Mexico Shallow and Inland Water depreciation
expense resulted primarily from only two months of depreciation for the quarter
ended March 31, 2001 compared to a full quarter for the same period in 2002
partially offset by the movement of two rigs out of the Gulf of Mexico Shallow
and Inland Water Segment and into the International and U.S. Floater Contract
Drilling Services segment subsequent to the first quarter of 2001.
Three Months Ended
March 31,
------------------
%
2002 2001 Change Change
-------- -------- ---------- ---------
(In millions, except % change)
GOODWILL AMORTIZATION
International and U.S. Floater Contract Drilling Services $ - $ 22.8 $ (22.8) (100.0)%
Gulf of Mexico Shallow and Inland Water - 7.4 (7.4) (100.0)%
-------- -------- ---------- ---------
$ - $ 30.2 $ (30.2) (100.0)%
======== ======== ========== =========
We adopted the Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible
Assets, as of January 1, 2002. As a result, goodwill is no longer amortized but
is reviewed at least annually for impairment. See Note 2 to our condensed
consolidated financial statements.
Three Months Ended
March 31,
------------------
%
2002 2001 Change Change
-------- -------- --------- ---------
(In millions, except % change)
GENERAL AND ADMINISTRATIVE $ 19.8 $ 14.7 $ 5.1 34.7%
======== ======== ========= =========
The increase in general and administrative expense was primarily
attributable to $3.9 million of costs related to the exchange by us of
Transocean Inc. debt for R&B Falcon debt in March 2002. In addition, expense
increased due to the R&B Falcon merger and reflects additional costs to manage a
larger, more complex organization for a full quarter in 2002 compared to two
months in 2001.
19
Three Months Ended
March 31,
-------------------
%
2002 2001 Change Change
--------- -------- ---------- ---------
(In millions, except % change)
IMPAIRMENT LOSS ON LONG-LIVED ASSETS $ (1.1) $ - $ (1.1) (100.0)%
========= ======== ========== =========
During the three months ended March 31, 2002, we recorded a non-cash
impairment charge in the Gulf of Mexico Shallow and Inland Water segment of $1.1
million. The impairment, relating to an asset held for sale, resulted from
deterioration in current market conditions. The impairment was determined and
measured based on an offer from a potential buyer.
Three Months Ended
March 31,
------------------
%
2002 2001 Change Change
-------- -------- ---------- ---------
(In millions, except % change)
GAIN FROM SALE OF ASSETS, NET $ 1.9 $ 19.6 $ (17.7) (90.3)%
======== ======== ========== =========
During the three months ended March 31, 2002, we recognized a pre-tax gain
of $2.0 million from the sale of the Transocean 96 and Transocean 97 as compared
to the pre-tax gain of $18.5 million related to accelerated amortization of the
deferred gain on the sale of the Sedco Explorer during the three months ended
March 31, 2001.
Three Months Ended
March 31,
--------------------
%
2002 2001 Change Change
--------- --------- ---------- ---------
(In millions, except % change)
OTHER INCOME (EXPENSE), NET
Equity in earnings of joint ventures $ 1.9 $ 1.7 $ 0.2 11.8%
Interest income 4.2 3.6 0.6 16.7%
Interest expense, net of amounts capitalized (55.9) (37.2) (18.7) (50.3)%
Other, net (0.7) (0.6) (0.1) (16.7)%
--------- --------- ---------- ---------
$ (50.5) $ (32.5) $ (18.0) (55.4)%
========= ========= ========== =========
The increase in interest income was primarily due to interest earned on
secured contingent notes from a related party acquired in the R&B Falcon merger,
Delta Towing LLC. The increase in interest expense was attributable to no
capitalized interest in the first quarter of 2002 due to the completion of our
newbuild projects in 2001 compared to $21.1 million of capitalized interest for
the same period in 2001. Also contributing to the increase were $17.5 million of
additional interest expense on debt issued subsequent to March 31, 2001 and $8.8
million of interest expense on debt acquired in the R&B Falcon merger, which
represents additional interest in the full quarter ended March 31, 2002 compared
to two months for the comparable period in 2001. Offsetting this increase were
reductions in interest expense of $20.0 million associated with debt retirements
subsequent to March 31, 2001, and a decrease in LIBOR on floating rate debt of
approximately four percent, which resulted in a $4.2 million reduction in
interest expense. We also entered into $900 million in swaps in February 2002,
which further reduced interest expense by $4.2 million.
20
Three Months Ended
March 31,
------------------
%
2002 2001 Change Change
-------- -------- --------- ---------
(In millions, except % change)
INCOME TAX EXPENSE $ 13.8 $ 10.2 $ 3.6 35.3%
======== ======== ========= =========
We operate internationally and provide for income taxes based on the tax
laws and rates in the countries in which we operate and earn income. There is no
expected relationship between the provision for income taxes and income before
income taxes.
Three Months Ended
March 31,
--------------------
%
2002 2001 Change Change
---------- -------- ----------- ----------
(In millions, except % change)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $(1,363.7) $ - $ (1,363.7) (100.0)%
========== ======== =========== ==========
During the three months ended March 31, 2002, we recognized a $1,363.7
million cumulative effect of a change in accounting principle related to the
implementation of SFAS 142 as more fully described in Note 2 to our condensed
consolidated financial statements.
FINANCIAL CONDITION
March 31, December 31
2002 2001
-------------- ------------
(In millions)
TOTAL ASSETS
International and U.S. Floater Contract Drilling Services $ 13,886.9 $ 14,181.8
Gulf of Mexico Shallow and Inland Water 1,366.1 2,779.8
Unallocated Corporate 51.4 58.2
-------------- ------------
$ 15,304.4 $ 17,019.8
============== ============
The decrease in International and U.S. Floater Contract Drilling Services
assets was due to a decrease in temporary investments primarily resulting from
the repayment of commercial paper borrowings of $326.4 million. The decrease in
Gulf of Mexico Shallow and Inland Water assets was due to the impairment of
goodwill of $1.4 billion, which resulted from our adoption of SFAS 142.
RESTRUCTURING CHARGES
In conjunction with the R&B Falcon merger, we established a liability of
$16.5 million for the estimated severance-related costs associated with the
involuntary termination of 569 R&B Falcon employees pursuant to management's
plan to consolidate operations and administrative functions post-merger.
Included in the 569 planned involuntary terminations were 387 employees engaged
in our land drilling business in Venezuela. We have suspended active marketing
efforts to divest this business and, as a result, the estimated liability was
reduced by $4.3 million in the third quarter of 2001 with an offset to goodwill.
Through March 31, 2002, approximately $12.0 million in severance-related costs
have been paid to 182 employees whose positions were eliminated as a result of
this plan.
21
2001 R&B FALCON PRO FORMA OPERATING RESULTS
Our unaudited pro forma consolidated results for the period ended March 31,
2001, giving effect to the R&B Falcon merger, reflected net income of $16.2
million, or $0.05 per diluted share, on pro forma operating revenues of $676.0
million. The pro forma operating results assume the merger was completed as of
January 1, 2001 (see Note 3 to our condensed consolidated financial statements).
These pro forma results do not reflect the effects of reduced depreciation
expense related to conforming the estimated lives of our drilling rigs. The pro
forma financial data should not be relied on as an indication of operating
results that we would have achieved had the merger taken place earlier or of the
future results that we may achieve.
OUTLOOK
Within our International and U.S. Floater Contract Drilling Services
business segment, average dayrates improved while our fleet utilization declined
during the first quarter of 2002 compared with the fourth quarter of 2001. The
segment's operating results trended slightly downward in the first quarter of
2002 due principally to weakness in Norway and the U.S. Gulf of Mexico and rig
mobilizations, which primarily affected our high-specification and other
floaters. Both average dayrates and fleet utilization within our Gulf of Mexico
Shallow and Inland Water business segment decreased in the first quarter of 2002
compared to the immediately preceding quarter. Demand for jackups in this
segment continued to be weak and our barge drilling business softened as well
during the quarter.
22
Comparative average dayrates and utilization figures for the first quarter
of 2002 are set forth in the table below.
Three Months Ended
----------------------------------------------
March 31, December 31, March 31,
2002 2001 2001 (a)
-------------- -------------- --------------
AVERAGE DAYRATES
INTERNATIONAL AND U.S. FLOATER CONTRACT DRILLING SERVICES SEGMENT:
High-Specification Floaters $ 145,500 $ 145,000 $ 134,000
Other Floaters $ 77,300 $ 71,100 $ 59,000
Jackups - Non-U.S. $ 58,800 $ 52,800 $ 38,400
Other (b) $ 43,900 $ 41,300 $ 38,700
-------------- -------------- --------------
Segment Total (b) $ 91,000 $ 88,200 $ 76,300
-------------- -------------- --------------
GULF OF MEXICO SHALLOW AND INLAND WATER SEGMENT:
Jackups and Submersibles $ 22,200 $ 30,600 $ 35,400
Inland Barges $ 19,200 $ 22,800 $ 19,100
-------------- -------------- --------------
Segment Total (b) $ 20,300 $ 25,600 $ 27,700
-------------- -------------- --------------
Total Mobile Offshore Drilling Fleet (b) $ 76,600 $ 74,000 $ 56,300
============== ============== ==============
UTILIZATION
INTERNATIONAL AND U.S. FLOATER CONTRACT DRILLING SERVICES SEGMENT:
High-Specification Floaters 82% 90% 83%
Other Floaters 82% 89% 70%
Jackups - Non-U.S. 90% 89% 79%
Other (b) 57% 54% 51%
-------------- -------------- --------------
Segment Total (b) 82% 86% 74%
-------------- -------------- --------------
GULF OF MEXICO SHALLOW AND INLAND WATER SEGMENT:
Jackups and Submersibles 22% 27% 74%
Inland Barges 41% 49% 67%
-------------- -------------- --------------
Segment Total (b) 31% 38% 71%
-------------- -------------- --------------
Total Mobile Offshore Drilling Fleet (b) 61% 67% 73%
============== ============== ==============
---------------------------------
(a) We completed a merger transaction with R&B Falcon on January 31, 2001.
Therefore, average dayrates and utilization for the three months ended
March 31, 2001 are stated as pro forma results based on the combined
fleet of Transocean and R&B Falcon.
(b) Average dayrates and utilization figures do not include non-core
assets, which consist of our platform rigs, mobile offshore production
units and Venezuelan land rigs, as well as for prior periods our
service vessels, which were sold prior to March 31, 2002.
While the outlook for the remainder of 2002 remains uncertain, we believe
that supply and demand are currently close to balanced in most market sectors
around the world. Some of the more notable exceptions with an oversupply of rigs
are Norway, the U.S. Gulf of Mexico and the conventional semisubmersible market
sector in West Africa. Although world oil prices have generally remained at
levels well above $20 per barrel so far this year and U.S. natural gas prices
have rebounded compared to the latter part of 2001, demand for our drilling rigs
is driven largely by our clients' perception of future commodity prices.
23
We do not foresee a significant increase in overall demand within our
International and U.S. Floater Contract Drilling Services segment in the near
term. We expect continued general weakness in Norway through the rest of the
year and do not foresee any meaningful improvement in the U.S. Gulf of Mexico
high-specification sector until mobilizations to other regions occur and further
development programs come online. There are potential opportunities for
high-specification rigs in India, although the timing of the projects remains
uncertain. Otherwise, we do not anticipate much change in this market sector.
The international jackup market sector remains relatively stable at present,
although pressure from jackup rigs being mobilized out of the U.S. continues to
be a concern.
We are seeing some encouraging signs for gas drilling opportunities in the
U.S. Gulf of Mexico although we have not yet seen an appreciable change in
utilization or dayrates within our Gulf of Mexico Shallow and Inland Water
business segment. We have experienced a modest improvement in customer interest
in this segment's jackup fleet. We expect to see an improvement in customer
interest in the segment's barge rigs during the second and third quarters of
2002, although the extent of such interest remains unclear.
The contract drilling market historically has been highly competitive and
cyclical, and we are unable to predict the extent to which current market
conditions will continue. A decline in oil or natural gas prices could reduce
demand for our contract drilling services and adversely affect both utilization
and dayrates.
We continue with our previously announced plans to sell a number of assets
(see "-Liquidity and Capital Resources-Acquisitions and Dispositions"). We
received $202 million of proceeds in 2001 and $42 million of proceeds during the
first quarter of 2002 from the sale of such assets.
We do not view our Gulf of Mexico Shallow and Inland Water segment as a
long-term integral part of our business. Accordingly, we plan to review the
future of this business from time to time.
As of April 30, 2002, approximately 63 percent and 25 percent of our
International and U.S. Floater Contract Drilling Services segment fleet days
were committed for the remainder of 2002 and for the year 2003, respectively.
For our Gulf of Mexico Shallow and Inland Water segment, which has traditionally
operated under short-term contracts, committed fleet days were approximately 5
percent for the remainder of 2002 and none are currently committed for the year
2003.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Three Months Ended
March 31,
---------------------
2002 2001 Change
---------- --------- ----------
(IN MILLIONS)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $(1,286.4) $ 30.5 $(1,316.9)
Depreciation and amortization 125.6 129.5 (3.9)
Non-cash items 1,348.1 (52.2) 1,400.3
Working capital (25.3) (62.1) 36.8
---------- --------- ----------
$ 162.0 $ 45.7 $ 116.3
========== ========= ==========
Cash generated from net income items adjusted for non-cash activity
increased $79.5 million and cash used for working capital items decreased $36.8
million for the three months ended March 31, 2002 compared to the same period in
2001 primarily as a result of the R&B Falcon merger.
24
Three Months Ended
March 31,
--------------------
2002 2001 Change
--------- --------- ----------
(IN MILLIONS)
NET CASH USED IN INVESTING ACTIVITIES
Capital expenditures $ (47.7) $ (255.8) $ 208.1
Proceeds from disposal of assets 43.4 4.7 38.7
Merger costs paid - (24.6) 24.6
R&B Falcon cash at acquisition - 264.7 (264.7)
Other, net (3.6) 1.6 (5.2)
--------- --------- ----------
$ (7.9) $ (9.4) $ 1.5
========= ========= ==========
Net cash used in investing activities decreased for the three months ended
March 31, 2002 as compared to the same period in the previous year as a result
of higher proceeds from asset sales for the quarter ended March 31, 2002 and
lower capital expenditures due to the completion of our newbuild program in
2001, partially offset by cash received in connection with the R&B Falcon merger
during the quarter ended March 31, 2001.
Three Months Ended
March 31,
--------------------
2002 2001 Change
--------- --------- ----------
(IN MILLIONS)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net borrowings (repayments) under commercial paper program $ (326.4) $ 15.0 $ (341.4)
Net borrowings on revolving credit agreements - 180.9 (180.9)
Repayments of debt obligations (85.0) (12.9) (72.1)
Other, net (8.0) 11.8 (19.8)
--------- --------- ----------
$ (419.4) $ 194.8 $ (614.2)
========= ========= ==========
During the quarter ended March 31, 2002, we had no borrowings under our
revolving credit agreements, and we repaid $326.4 million under our commercial
paper program. The increase in repayments of debt obligations of $72.1 million
was primarily due to early repayment of secured rig financing on the Trident IX
and Trident 16 of $47.1 million. We also made scheduled debt payments amounting
to $34.4 million. The increase in cash used in other, net is mainly due to $8.3
million in consent payments related to the exchange of our notes for R&B Falcon
notes and no exercise of warrants in 2002.
CAPITAL EXPENDITURES
Capital expenditures, totaled $48 million during the three months ended
March 31, 2002. During 2002, we expect to spend between $200 million and $220
million on our existing fleet, corporate infrastructure and major upgrades to
the Discoverer Seven Seas and Deepwater Expedition. A substantial majority of
our capital expenditures relates to the International and U.S. Floater Contract
Drilling Services segment.
We intend to fund the cash requirements relating to our capital
expenditures through available cash balances, cash generated from operations and
asset sales. We also have available borrowings under our revolving credit
agreements and commercial paper program (see "-Sources of Liquidity") and may
engage in other commercial bank or capital market financings.
25
ACQUISITIONS AND DISPOSITIONS
From time to time, we review possible acquisitions of businesses and
drilling units and may in the future make significant capital commitments for
such purposes. Any such acquisition could involve the payment by us of a
substantial amount of cash or the issuance of a substantial number of additional
ordinary shares or other securities. We would likely fund the cash portion of
any such acquisition through cash balances on hand, the incurrence of additional
debt, sales of assets, ordinary shares or other securities or a combination
thereof. In addition, from time to time, we review possible dispositions. See
"-Outlook."
In March 2002, we sold two semisubmersible rigs, the Transocean 96 and
Transocean 97, for net proceeds of $30.7 million, resulting in a after-tax gain
of $1.3 million.
During the quarter ended March 31, 2002, the Company sold certain other
non-strategic assets acquired in the R&B Falcon merger and certain other assets
held for sale for net proceeds of approximately $12.7 million.
SOURCES OF LIQUIDITY
Our primary sources of liquidity in the first quarter of 2002 were our cash
flows from operations and asset sales. Primary uses of cash were capital
expenditures and debt repayments. At March 31, 2002, we had $588 million in cash
and cash equivalents.
We anticipate that we will rely primarily upon existing cash balances and
internally generated cash flows to maintain liquidity in 2002, as cash flows
from operations are expected to be positive and adequate to fulfill anticipated
obligations. From time to time, we may also use bank lines of credit and
commercial paper to maintain liquidity for short-term cash needs.
We intend to use cash from operations primarily to fund capital
expenditures and to pay debt as it comes due. If we seek to reduce our debt
other than scheduled maturities, we could do so through repurchases or
redemptions of, or tender offers for, debt securities. We expect to
significantly reduce capital expenditures going forward due to the completion of
our newbuild program in 2001.
Our internally generated cash flow is directly related to our business and
the market segments in which we operate. Should the drilling market deteriorate
further, or should we experience poor results in our operations, cash flow from
operations may be reduced. While we have continued to generate positive cash
flow from operations and expect to do so in the foreseeable future, some of the
market segments in which we operate are, at present, weakening and may continue
to weaken in the near and medium term.
We have access to $800 million in bank lines of credit under two revolving
credit agreements. These credit lines are used primarily to back our $800
million commercial paper program and may also be drawn on directly. As of March
31, 2002, none of the credit line capacity was utilized, leaving $800 million of
availability under the bank lines of credit for commercial paper issuance or
drawdowns.
The bank credit lines require compliance with various covenants and
provisions customary for agreements of this nature, including an interest
coverage ratio of not less than 3 to 1, a leverage ratio of not greater than 40
percent and limitations on mergers and sale of substantially all assets,
creating liens, incurring debt, transactions with affiliates and sale/leaseback
transactions. Should we fail to comply with these covenants, we would be in
default and may lose access to these facilities. A loss of the bank facilities
would also cause us to lose access to the commercial paper markets. We are also
subject to various covenants under the indentures pursuant to which our public
debt was issued, including restrictions on creating liens, engaging in
sale/leaseback transactions and engaging in merger, consolidation or
reorganization transactions. A default under our public debt could trigger a
default under our credit lines and cause us to lose access to these facilities.
See Note 8 to our consolidated financial statements in our 2001 Annual Report on
Form 10-K for a description of our credit agreements and debt securities.
26
In April 2001, the Securities and Exchange Commission ("SEC") declared
effective our shelf registration statement on Form S-3 for the proposed offering
from time to time of up to $2.0 billion in gross proceeds of senior or
subordinated debt securities, preference shares, ordinary shares and warrants to
purchase debt securities, preference shares, ordinary shares or other
securities. In May 2001, we issued $400.0 million aggregate principal amount of
1.5% Convertible Debentures due May 15, 2021 under the shelf registration
statement. At April 30, 2002, $1.6 billion in gross proceeds of securities
remained unissued under the shelf registration statement.
Our access to commercial paper, debt and equity markets may be reduced or
closed to us due to a variety of events, including, among others, downgrades of
ratings of our debt and commercial paper, industry conditions, general economic
conditions, market conditions and market perceptions of us and our industry.
Our contractual obligations in the table below include our debt obligations
at face value.
As of March 31, 2002
------------------------------------------------
Less Than 1 to 3 4 - 5 After
Total 1 Year Years Years 5 Years
-------- ---------- -------- ------ --------
(In millions)
CONTRACTUAL OBLIGATIONS
Debt $4,580.6 $ 151.8 $1,628.8 $500.0 $2,300.0
======== ========== ======== ====== ========
We are required to repurchase the Zero Coupon Convertible Debentures due
2020 and the 1.5% Convertible Debentures due 2021 at the option of the holder on
specified dates. We have the option to pay the repurchase price in cash,
ordinary shares or any combination of cash and ordinary shares. The chart above
assumes that the holders of these debentures exercise this option at the first
available date.
We have certain operating leases that have been previously discussed and
reported in our Annual Report on Form 10-K for the year ended December 31, 2001.
There have been no material changes in these previously reported leases.
At March 31, 2002, we had other commitments that we are contractually
obligated to fulfill with cash should the obligations be called. These
obligations included standby letters of credit and surety bonds, which guarantee
our performance as it relates to our drilling contracts, insurance, tax and
other obligations in various jurisdictions. Letters of credit are issued under a
number of facilities provided by several banks. The obligations that are the
subject of these surety bonds are geographically concentrated in Brazil and
Nigeria. These letters of credit and surety bond obligations are not normally
called as we typically comply with the underlying performance requirements. The
table below includes a summary of these obligations in U.S. dollar equivalents
and their time to expiration. It should be noted that these obligations could be
called at any time prior to the expiration dates.
As of March 31, 2002
---------------------------------------------
Less Than 1 to 3 4 - 5 After
Total 1 Year Years Years 5 Years
------ ---------- ------- ------ --------
(In millions)
OTHER COMMERCIAL COMMITMENTS
Standby Letters of Credit $ 63.5 $ 58.9 $ 4.6 $ - $ -
Surety Bonds 140.9 76.1 64.8 - -
Purchase Option Guarantees -
Joint Ventures (a) 207.3 - 207.3 - -
------ ---------- ------- ------ --------
Total $411.7 $ 135.0 $ 276.7 $ - $ -
====== ========== ======= ====== ========
----------------
(a) See "-Special Purpose Entities".
27
In March 2002, we completed an exchange offer pursuant to which the 6.5%
Notes due April 15, 2003, 6.75% Notes due April 15, 2005, 6.95% Notes due April
15, 2008, 7.375% Notes due April 15, 2018, 9.125% Notes due December 15, 2003
and 9.5% Notes due December 15, 2008 of R&B Falcon whose holders accepted the
offer were exchanged for newly issued Transocean notes. The new notes were
issued in six series corresponding to the six series of R&B Falcon notes and
have the same principal amount, interest rate, redemption terms and payment and
maturity dates as the corresponding series of R&B Falcon notes. The aggregate
principal amount of the new notes issued was approximately $1.4 billion. Because
the holders of a majority in principal amount of each of these series of notes
consented to the proposed amendments to the applicable indenture pursuant to
which the notes were issued, some covenants, restrictions and events of default
were eliminated from the indentures with respect to these series of notes. The
notes not exchanged remain the obligation of R&B Falcon. In connection with the
exchange offers, an aggregate of $8.3 million in consent payments were made by
R&B Falcon to holders of R&B Falcon notes whose notes were tendered (and not
validly withdrawn) within the required time periods and accepted for exchange.
DERIVATIVE INSTRUMENTS
We have established policies and procedures for derivative instruments that
have been approved by our Board of Directors. These policies and procedures
provide for the prior approval of derivative instruments by our Chief Financial
Officer. From time to time, we may enter into a variety of derivative financial
instruments in connection with the management of our exposure to fluctuations in
foreign exchange rates and interest rates. We do not enter into derivative
transactions for speculative purposes; however, for accounting purposes, certain
transactions may not meet the criteria for hedge accounting.
In February 2002, we entered into $900 million aggregate notional amount of
interest rate swaps as a hedge against certain fixed rate debt. The effect of
the swaps was to convert the fixed interest rates into a floating rate of LIBOR
plus a margin as more fully described in Note 6 to our condensed consolidated
financial statements.
At March 31, 2002, the value of our outstanding derivatives was a net
liability of $1.4 million.
Deepwater Drilling LLC, an unconsolidated subsidiary in which we have a 50%
ownership interest, has entered into interest rate swaps with aggregate market
values netting to a liability of $6.1 million at March 31, 2002. Our interest in
these swaps was included in accumulated other comprehensive income with a
corresponding reduction to investments in and advances to joint ventures.
SPECIAL PURPOSE ENTITIES, SALE/LEASEBACK TRANSACTION AND RELATED PARTY
TRANSACTIONS
We have transactions with certain special purpose entities and related
parties and we are a party to a sale/leaseback transaction. These transactions
have all been previously discussed and reported in our Annual Report on Form
10-K for the year ended December 31, 2001. There have been no material
developments in these previously reported transactions.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets, which is effective for fiscal years beginning after December 15, 2001.
Under SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed at least annually for impairment. The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, we adopted SFAS 142 effective January 1, 2002.
In conjunction with the adoption of this statement, we discontinued the
amortization of goodwill. Application of the non-amortization provisions of SFAS
142 for goodwill is expected to result in an increase in operating income of
approximately $155 million in 2002.
28
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of Accounting Principles Board Opinion
("APB") 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 retains the fundamental provisions
of SFAS 121 for recognition and measurement of long-lived asset impairment and
for the measurement of long-lived assets to be disposed of by sale and the basic
requirements of APB 30. In addition to these fundamental provisions, SFAS 144
provides guidance for determining whether long-lived assets should be tested for
impairment and specific criteria for classifying assets to be disposed of as
held for sale. The statement is effective for fiscal years beginning after
December 15, 2001. We adopted the statement as of January 1, 2002. The adoption
of this statement had no material effect on our consolidated financial position
or results of operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the requirement under SFAS Statement 4 to aggregate
and classify all gains and losses from extinguishment of debt as an
extraordinary item, net of related income tax effect. This statement also amends
SFAS 13 to require that certain lease modifications with economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS 145 requires reclassification of
gains and losses in all prior periods presented in comparative financial
statements related to debt extinguishment that do not meet the criteria for
extraordinary item in APB 30. The statement is effective for fiscal years
beginning after May 15, 2002 with early adoption encouraged. We will adopt SFAS
145 effective January 1, 2003. We do not expect adoption of this statement to
have a material effect on our consolidated financial position or results of
operations.
FORWARD-LOOKING INFORMATION
The statements included in this quarterly report regarding future financial
performance and results of operations and other statements that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Statements to the effect that the Company or management "anticipates,"
"believes," "budgets," "estimates," "expects," "forecasts," "intends," "plans,"
"predicts," or "projects" a particular result or course of events, or that such
result or course of events "could," "might," "may," "scheduled" or "should"
occur, and similar expressions, are also intended to identify forward-looking
statements. Forward-looking statements in this quarterly report include, but are
not limited to, statements involving potential revenues, increased expenses,
customer drilling programs, supply and demand, utilization rates, dayrates,
planned shipyard projects, expected downtime, the Norway sector, the U.S. Gulf
of Mexico high-specification sector, the India sector, customer interest in the
Gulf of Mexico Shallow and Inland Water barge rigs, future activity in the
International and U.S. Floater Contract Drilling Services and Gulf of Mexico
Shallow and Inland Water segments, the U.S. gas drilling market, planned asset
sales, the Company's other expectations with regard to market outlook, expected
capital expenditures, results and effects of legal proceedings, liabilities for
tax issues, liquidity, positive cash flow from operations, the exercise of the
option of holders of Zero Coupon Convertible Debentures or the 1.5% Convertible
Debentures to require the Company to repurchase the debentures, adequacy of cash
flow for 2002 obligations, effects of accounting changes, and the timing and
cost of completion of capital projects. Such statements are subject to numerous
risks, uncertainties and assumptions, including, but not limited to, worldwide
demand for oil and gas, uncertainties relating to the level of activity in
offshore oil and gas exploration and development, exploration success by
producers, oil and gas prices (including U.S. natural gas prices), demand for
offshore and inland water rigs, competition and market conditions in the
contract drilling industry, our ability to successfully integrate the operations
of acquired businesses, delays or terminations of drilling contracts due to a
number of events, delays or cost overruns on construction and shipyard projects
and possible cancellation of drilling contracts as a result of delays or
performance, our ability to enter into and the terms of future contracts, the
availability of qualified personnel, labor relations and the outcome of
negotiations with unions representing workers, operating hazards, political and
other uncertainties inherent in non-U.S. operations (including exchange and
currency fluctuations), risks of war, terrorism and cancellation or
unavailability of certain insurance coverage, the impact of governmental laws
and regulations, the adequacy of sources of liquidity, the effect of litigation
and contingencies and other factors discussed in our Annual Report on Form 10-K
for the year ended December 31, 2001
29
and in the Company's other filings with the SEC, which are available free of
charge on the SEC's website at www.sec.gov. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those indicated. You should not place
undue reliance on forward-looking statements. Each forward-looking statement
speaks only as of the date of the particular statement, and we undertake no
obligation to publicly update or revise any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our long-term and short-term debt obligations. The table below presents
expected cash flows and related weighted-average interest rates for each of the
twelve month periods ending March 31 presented by scheduled maturity dates
relating to debt obligations as of March 31, 2002. Weighted-average variable
rates are based on estimated LIBOR rates as of March 31, 2002, plus applicable
margins. The fair value of fixed rate debt is based on the estimated yield to
maturity for each debt issue.
As of March 31, 2002 (in millions, except interest rate percentages):
Scheduled Maturity Date Fair Value
----------------------------------------------------------------------------- -----------
2003 2004 2005 2006 2007 Thereafter Total 3/31/02
--------- --------- --------- --------- ------- ------------ ---------- -----------
Total debt
Fixed Rate(a) $ 39.3 $ 368.9 $ 45.5 $ 57.9 - $ 2,415.0 $ 2,926.6 $ 2,551.5
Average interest rate 7.3% 7.2% 7.3% 9.1% - 4.8% 5.3%
Variable Rate $ 112.5 $ 150.0 $ 112.5 - - - $ 375.0 $ 375.0
Average interest rate 2.6% 2.6% 2.6% - - - 2.6%
Receive Fixed/Pay Variable - - - $ 350.0 - $ 1,250.0 $ 1,600.0 $ 1,626.0
Swaps(b)
Average interest rate - - - 4.5% - 3.6% 3.8%
- -----------------
(a) Expected maturity amounts are based on the face value of debt and do not
reflect fair market value of debt.
(b) The 6.625%, 6.75%, 6.95% and 9.5% Notes are considered variable as a result
of the interest rate swaps. See Note 6 to our condensed consolidated
financial statements.
At March 31, 2002, we had approximately $2.0 billion of variable rate debt
at net book value (43 percent of total debt at net book value). Of that variable
rate debt, $1.6 billion resulted from interest rate swaps with the remainder
representing term bank debt. Given outstanding amounts as of that date, a one
percent rise in interest rates would result in an additional $20 million in
interest expense per year. Offsetting this, a large part of our investments
would earn commensurate higher rates of return. Using March 31, 2002 investment
levels, a one percent increase in interest rates would result in approximately
$5 million of additional interest income per year.
FOREIGN EXCHANGE RISK
The Company's exposure to foreign exchange risk has not materially changed
since December 31, 2001.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1988, a lawsuit was filed in the U.S. District Court for the
Southern District of West Virginia against Reading & Bates Coal Co., a wholly
owned subsidiary of R&B Falcon, by SCW Associates, Inc. claiming breach of an
alleged agreement to purchase the stock of Belva Coal Company, a wholly owned
subsidiary of Reading & Bates Coal Co. with coal properties in West Virginia.
When those coal properties were sold in July 1989 as part of the disposition of
R&B Falcon's coal operations, the purchasing joint venture indemnified Reading &
Bates Coal Co. and R&B Falcon against any liability Reading & Bates Coal Co.
might incur as a result of this litigation. A judgment for the plaintiff of
$32,000 entered in February 1991 was satisfied and Reading & Bates Coal Co. was
indemnified by the purchasing joint venture. On October 31, 1990, SCW
Associates, Inc., the plaintiff in the above-referenced action, filed a separate
ancillary action in the Circuit Court, Kanawha County, West Virginia against R&B
Falcon, Caymen Coal, Inc. (the former owner of R&B Falcon's West Virginia coal
properties), as well as the joint venture, Mr. William B. Sturgill (the former
President of Reading & Bates Coal Co.) personally, three other companies in
which we believe Mr. Sturgill holds an equity interest, two employees of the
joint venture, First National Bank of Chicago and First Capital Corporation.
The lawsuit seeks to recover compensatory damages of $50 million and punitive
damages of $50 million for alleged tortuous interference with the contractual
rights of the plaintiff and to impose a constructive trust on the proceeds of
the use and/or sale of the assets of Caymen Coal, Inc. as they existed on
October 15, 1988. Currently, discovery is proceeding. We intend to defend our
interests vigorously and believe that the damages alleged by the plaintiff in
this action are highly exaggerated. In any event, we believe that we have valid
defenses and do not expect that the ultimate outcome of this case will have a
material adverse effect on our business or consolidated financial position.
We have certain other actions or claims pending that have been previously
discussed and reported in our Annual Report on Form 10-K for the year ended
December 31, 2001 and our other reports filed with the Securities and Exchange
Commission. There have been no material developments in these previously
reported matters. We are involved in a number of other lawsuits, all of which
have arisen in the ordinary course of our business. We do not believe that
ultimate liability, if any, resulting from any such other pending litigation
will have a material adverse effect on our business or consolidated financial
position.
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed in connection with this Report:
NUMBER DESCRIPTION
- ------ -----------
*2.1 Agreement and Plan of Merger dated as of August 19, 2000 by and among
Transocean Inc., Transocean Holdings Inc., TSF Delaware Inc. and R&B
Falcon Corporation (incorporated by reference to Annex A to the Joint
Proxy Statement/Prospectus dated October 30, 2000 included in a
424(b)(3) prospectus filed by the Company on November 1, 2000)
*3.1 Memorandum of Association of Transocean Inc., as amended (incorporated
by reference to Annex E to the Joint Proxy Statement/Prospectus dated
October 30, 2000 included in a 424(b)(3) prospectus filed by the
Company on November 1, 2000)
*3.2 Articles of Association of Transocean Inc., as amended (incorporated
by reference to Annex F to the Joint Proxy Statement/Prospectus dated
October 30, 2000 included in a 424(b)(3) prospectus filed by the
Company on November 1, 2000)
*4.1 First Supplemental Indenture dated as of February 14, 2002 between R&B
Falcon Corporation and The Bank of New York to the Indenture dated as
of April 14, 1998, between R&B Falcon Corporation, as issuer, and
Chase Bank of Texas, National Association, as trustee, with respect to
Series A and Series B of each of $250,000,000 6.5% Senior Notes due
2003, $350,000,000 6.75% Senior Notes due 2005, $250,000,000 6.95%
Senior Notes due 2008, and $250,000,000 7.375% Senior Notes due 2018
(incorporated by reference to Exhibit 4.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001)
*4.2 Second Supplemental Indenture dated as of March 13, 2002 between R&B
Falcon Corporation and The Bank of New York to the Indenture dated as
of April 14, 1998, between R&B Falcon Corporation, as issuer, and
Chase Bank of Texas, National Association, as trustee, with respect to
Series A and Series B of each of $250,000,000 6.5% Senior Notes due
2003, $350,000,000 6.75% Senior Notes due 2005, $250,000,000 6.95%
Senior Notes due 2008, and $250,000,000 7.375% Senior Notes due 2018
(incorporated by reference to Exhibit 4.17 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001)
*4.3 First Supplemental Indenture dated as of February 14, 2002 between R&B
Falcon Corporation and The Bank of New York to the Indenture dated as
of December 22, 1998, between R&B Falcon Corporation, as issuer, and
Chase Bank of Texas, National Association, as trustee, with respect to
$400,000,000 Series A and Series B 9.125% Senior Notes due 2003, and
9.5% Senior Notes due 2008 (incorporated by reference to Exhibit 4.19
to R&B Falcon's Annual Report on Form 10-K for the Company's Annual
Report on Form 10-K for the year ended December 31, 2001)
- --------------------------------
* Incorporated by reference as indicated.
32
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on January 2, 2002
announcing that the updated "Monthly Fleet Report" as of January 2, 2002 was
available on the Company's website, a Current Report on Form 8-K on January 8,
2002 announcing the Company's operating results for the eleven months ended
November 30, 2001, the fourth quarter of 2001, and the outlook for 2002, a
Current Report on Form 8-K/A on January 8, 2002 amending the Form 8-K filed on
January 8, 2002, a Current Report on Form 8-K on January 31, 2002 announcing
that the updated "Monthly Fleet Report" as of January 31, 2002 was available on
the Company's website, a Current Report on Form 8-K on February 6, 2002
announcing fourth quarter and full year 2001 results, a Current Report on Form
8-K on February 15, 2002 announcing the expiration of the consent payment
deadline for the exchange offers and consent solicitations, a Current Report on
Form 8- K on February 22, 2002 announcing the waiver of a consent condition with
respect to the exchange offers and consent solicitations, a Current Report on
Form 8-K on February 28, 2002 announcing that the updated fleet report as of
February 28, 2002 was available on the Company's website, a Current Report on
Form 8-K on March 4, 2002 announcing that the Company had accepted notes
tendered in the exchange offers, and a Current Report on Form 8-K on March 28,
2002 announcing that the updated "Monthly Fleet Report" as of March 28, 2002 was
available on the Company's website.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized, on May 13, 2002.
TRANSOCEAN INC.
By: /s/ Gregory L. Cauthen
-----------------------
Gregory L. Cauthen
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
By: /s/ Ricardo H. Rosa
---------------------------------------
Ricardo H. Rosa
Vice President and Controller
(Principal Accounting Officer)
34