NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
The unaudited
condensed consolidated financial statements of Diamond Offshore Drilling, Inc. and subsidiaries, which we refer to as Diamond Offshore, we, us or our, should be read in conjunction with our Annual
Report on Form
10-K
for the year ended December 31, 2017 (File
No. 1-13926).
As of April 26, 2018, Loews Corporation owned approximately 53% of the outstanding shares of our common stock.
Interim Financial Information
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S., or GAAP, for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-X
of the Securities and Exchange Commission. Accordingly, pursuant to such rules and regulations, they do not include all disclosures
required by GAAP for annual financial statements. The condensed consolidated financial information has not been audited but, in the opinion of management, includes all adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of Diamond Offshores condensed consolidated balance sheets, statements of operations, statements of comprehensive income and statements of cash flows at the dates and for the periods indicated. Results of operations for interim
periods are not necessarily indicative of results of operations for the respective full years.
Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could
differ from those estimated.
Changes in Accounting Principles
Revenue Recognition
. In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU,
No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), or ASU
2014-09,
which supersedes the revenue recognition requirements in ASU Topic 605, Revenue
Recognition. Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services and in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.
We adopted ASU
2014-09
and its related amendments, or collectively Topic 606, effective
January 1, 2018 using the modified retrospective implementation method. Accordingly, we have applied the five-step method outlined in Topic 606 for determining when and how revenue is recognized to all contracts that were not completed as of
the date of adoption. Revenues for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported under the previous revenue recognition guidance.
For contracts that were modified before the effective date, we have considered the modification guidance within the new standard and determined that the revenue recognized and contract balances recorded prior to adoption for such contracts were not
impacted. While Topic 606 requires additional disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, its adoption has not had a material impact on the measurement or recognition of
our revenues.
Our adoption of ASU
2014-09
represents a change in accounting principle and
therefore, we have recorded the cumulative effect of adopting Topic 606 as an increase to opening retained earnings on January 1, 2018. This adjustment represents an accrual for the earned portion of demobilization revenue expected to be
received for contracts not completed as of December 31, 2017, which was not recordable under previous revenue recognition guidance until completion of the demobilization activities. See Note 2.
Income Taxes
. In October 2016, the FASB issued ASU
No. 2016-16,
Income Taxes (Topic
740): Intra-Entity Transfers of Assets Other Than Inventory,
or ASU
2016-16.
ASU
2016-16
amends the guidance in Topic 740 with
7
respect to the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. We have evaluated our historical intra-group transactions for impact under the
provisions of ASU
2016-16
and have adopted the guidance thereof effective January 1, 2018 using the modified retrospective approach. We have recorded the $17.4 million cumulative effect of applying
the new standard as a decrease to opening retained earnings with an offset to deferred income tax liability. See Note 9.
The aggregate
impact of the changes in accounting principles, as discussed above, to our unaudited Condensed Consolidated Balance Sheet on January 1, 2018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
Prepaid
Expenses and
Other Current
Assets
|
|
|
Other
Assets
|
|
|
Deferred
Tax
Liability
|
|
Balance as of January 1, 2018 before adoption
|
|
$
|
1,964,497
|
|
|
$
|
157,625
|
|
|
$
|
102,276
|
|
|
$
|
167,299
|
|
Adjustments for adoption of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Topic 606
|
|
|
2,590
|
|
|
|
611
|
|
|
|
2,107
|
|
|
|
128
|
|
ASU
2016-16
|
|
|
(17,401
|
)
|
|
|
|
|
|
|
|
|
|
|
17,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2018 after adoption
|
|
$
|
1,949,686
|
|
|
$
|
158,236
|
|
|
$
|
104,383
|
|
|
$
|
184,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Recently Adopted Accounting Pronouncements
In February 2018, the FASB issued ASU
No. 2018-02,
Income StatementReporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, or ASU
2018-02.
ASU
2018-02
provides for
entities to make a
one-time
election to reclassify the income tax effects of the Tax Cuts and Jobs Act enacted in December 2017, or Tax Reform Act, on items within accumulated other comprehensive income to
retained earnings. The guidance of ASU
2018-02
is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption of ASU
2018-02
is permitted. We have early adopted ASU
2018-02
and have reclassified the effect of the change in the U.S. federal corporate income tax rate on deferred
tax-related
items remaining in accumulated other comprehensive loss. The impact of adoption of ASU
2018-02
was not significant.
In August 2016, the FASB issued ASU
No. 2016-15,
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments
, or ASU
2016-15.
ASU
2016-15
provides specific guidance on eight cash flow classification issues not
specifically addressed by GAAP: debt prepayment or debt extinguishment costs; settlement of
zero-coupon
debt instruments; contingent consideration payments; proceeds from the settlement of insurance claims;
proceeds from the settlement of corporate-owned life insurance policies; distributions from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance
principle. The adoption of ASU
2016-15
did not have a significant impact on the presentation of cash receipts and cash payments within our condensed consolidated statements of cash flows.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic 842)
, or ASU
2016-02,
which requires an entity to separate the lease components from the
non-lease
components in a contract. The lease components are to be accounted for under ASU
2016-02,
which, under the guidance, may require recognition of lease assets and lease liabilities by lessees for most leases and derecognition of the leased asset and recognition of a net investment in the lease by
the lessor. ASU
2016-02
also provides for additional disclosure requirements for both lessees and lessors.
Non-lease
components would be accounted for under ASU
2014-09.
We have determined that under the new standard, our drilling contracts contain a lease component and therefore we will be required to separately recognize revenues associated with the lease and services
components. Additionally, for transactions in which we are considered lessees, we will recognize a lease liability and right of use asset based on our portfolio of leases as of the time of adoption. The guidance of ASU
2016-02
is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption of ASU
2016-02
is permitted. We expect to adopt ASU
2016-02
on January 1, 2019 using the modified retrospective approach. We are currently reviewing the requirements of
the accounting standard with regard to arrangements under which we are either the lessor or lessee, to determine the impact of ASU
2016-02
on our financial position, results of operations, cash flows and
disclosures contained in the notes to our condensed consolidated financial statements.
8
2. Revenue from Contracts with Customers
The activities that primarily drive the revenue earned from our drilling contracts include (i) providing a drilling rig and the crew and
supplies necessary to operate the rig, (ii) mobilizing and demobilizing the rig to and from the drill site, and (iii) performing rig preparation activities and/or modifications required for the contract. Consideration received for
performing these activities may consist of dayrate drilling revenue, mobilization and demobilization revenue, contract preparation revenue and reimbursement revenue. We account for these integrated services provided within our drilling contracts as
a single performance obligation satisfied over time and comprised of a series of distinct time increments in which we provide drilling services.
Consideration for activities that are not distinct within the context of our contracts and do not correspond to a distinct time increment
within the contract term are allocated across the single performance obligation and recognized ratably as time elapses over the initial term of the contract (which is the period we estimate to be benefited from the corresponding activities and
generally ranges from two to 60 months). Consideration for activities that correspond to a distinct time increment within the contract term is recognized in the period when the services are performed. The total transaction price is determined for
each individual contract by estimating both fixed and variable consideration expected to be earned over the term of the contract. See below for further discussion regarding the allocation of the transaction price to the remaining performance
obligations.
The amount estimated for variable consideration may be constrained (reduced) and is only included in the transaction price
to the extent that it is probable that a significant reversal of previously recognized revenue will not occur throughout the term of the contract. When determining if variable consideration should be constrained, management considers whether there
are factors outside of our control that could result in a significant reversal of revenue as well as the likelihood and magnitude of a potential reversal of revenue. These estimates are
re-assessed
each
reporting period as required.
Dayrate Drilling Revenue.
Our drilling contracts generally provide for payment on a dayrate basis,
with higher rates for periods when the drilling unit is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The dayrate invoices billed to the customer are typically determined based on the
varying rates applicable to the specific activities performed on an hourly basis. Such dayrate consideration is allocated to the distinct hourly increment it relates to within the contract term, and therefore, recognized in line with the contractual
rate billed for the services provided for any given hour.
Mobilization/Demobilization Revenue.
We may receive fees (on either a
fixed
lump-sum
or variable dayrate basis) for the mobilization and demobilization of our rigs. These activities are not considered to be distinct within the context of the contract and therefore, the
associated revenue is allocated to the overall performance obligation and recognized ratably over the initial term of the related drilling contract. We record a contract liability for mobilization fees received, which is amortized ratably to
contract drilling revenue as services are rendered over the initial term of the related drilling contract. Demobilization revenue expected to be received upon contract completion is estimated as part of the overall transaction price at contract
inception and recognized in earnings ratably over the initial term of the contract with an offset to an accretive contract asset.
In some
contracts, there is uncertainty as to the likelihood and amount of expected demobilization revenue to be received. For example, contractual provisions may require that a rig demobilize a certain distance before the demobilization revenue is payable
or the amount may vary dependent upon whether or not the rig has additional contracted work within a certain distance from the wellsite. Therefore, the estimate for such revenue may be constrained, as described above, depending on the facts and
circumstances pertaining to the specific contract. We assess the likelihood of receiving such revenue based on past experience and knowledge of the market conditions.
Contract Preparation Revenue.
Some of our drilling contracts require downtime before the start of the contract to prepare the rig to
meet customer requirements. At times, we may be compensated by the customer for such work (on either a fixed
lump-sum
or variable dayrate basis). These activities are not considered to be distinct within the
context of the contract. We record a contract liability for contract preparation fees received, which is amortized ratably to contract drilling revenue over the initial term of the related drilling contract.
Capital Modification Revenue
. From time to time, we may receive fees from our customers for capital improvements or upgrades to our
rigs to meet contractual requirements (on either a fixed
lump-sum
or variable dayrate basis). The activities related to these capital modifications are not considered to be distinct within the context of our
contracts. We record a contract liability for such fees and recognize them ratably as contract drilling revenue over the initial term of the related drilling contract.
9
Revenues Related to Reimbursable Expenses
. We generally receive reimbursements from our
customers for the purchase of supplies, equipment, personnel services and other services provided at their request in accordance with a drilling contract or other agreement. Such reimbursable revenue is variable and subject to uncertainty, as the
amounts received and timing thereof are highly dependent on factors outside of our influence. Accordingly, reimbursable revenue is fully constrained and not included in the total transaction price until the uncertainty is resolved, which typically
occurs when the related costs are incurred on behalf of a customer. We are generally considered a principal in such transactions and record the associated revenue at the gross amount billed to the customer, as Revenues related to reimbursable
expenses in our unaudited Condensed Consolidated Statements of Operations. Such amounts are recognized ratably over the period within the contract term during which the corresponding goods and services are to be consumed.
Contract Balances
Accounts
receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules. Payment terms on invoiced amounts are typically 30 days. Contract asset balances consist of demobilization revenue that we
expect to receive and is recognized ratably throughout the contract term, but invoiced upon completion of the demobilization activities. Once the demobilization revenue is invoiced, the corresponding contract asset is transferred to accounts
receivable. Contract liabilities include payments received for mobilization as well as rig preparation and upgrade activities which are allocated to the overall performance obligation and recognized ratably over the initial term of the contract.
Contract balances are netted at a contract level, such that deferred revenue for mobilization, contract preparation and capital
modifications (contract liabilities) is netted with any accrued demobilization revenue (contract asset) for each applicable contract.
The
following table provides information about receivables, contract assets and contract liabilities from our contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
|
January 1,
2018
|
|
Trade receivables
|
|
$
|
190,341
|
|
|
$
|
256,730
|
|
Current contract assets
(1)
|
|
|
|
|
|
|
611
|
|
Noncurrent contract assets
(1)
|
|
|
2,107
|
|
|
|
2,107
|
|
Current contract liabilities (deferred revenue)
(1)
|
|
|
(13,032
|
)
|
|
|
(11,371
|
)
|
Noncurrent contract liabilities (deferred revenue)
(1)
|
|
|
(6,811
|
)
|
|
|
(8,972
|
)
|
(1)
|
Contract assets and contract liabilities may reflect balances that have been netted together on a contract basis. Net current contract asset and liability balances
are included in Prepaid expenses and other current assets and Accrued liabilities, respectively, and net noncurrent contract asset and liability balances are included in Other assets and Other
liabilities, respectively, in our unaudited Condensed Consolidated Balance Sheet as of March 31, 2018.
|
Significant changes in the contract assets and the contract liabilities balances during the period are as follows (in thousands):
|
|
|
|
|
|
|
Net Contract
Balances
|
|
Contract assets at January 1, 2018
|
|
$
|
2,718
|
|
Contract liabilities at January 1, 2018
|
|
|
(20,343
|
)
|
|
|
|
|
|
Net balance at January 1, 2018
|
|
|
(17,625
|
)
|
Decrease due to amortization of revenue that was included in the beginning contract liability
balance
|
|
|
4,939
|
|
Increase due to cash received, excluding amounts recognized as revenue during the period
|
|
|
(5,239
|
)
|
Increase due to revenue recognized during the period but contingent on future performance
|
|
|
662
|
|
Decrease due to transfer to receivables during the period
|
|
|
(611
|
)
|
Adjustments
|
|
|
138
|
|
|
|
|
|
|
Net balance at March 31, 2018
|
|
$
|
(17,736
|
)
|
|
|
|
|
|
Contract assets at March 31, 2018
|
|
$
|
2,107
|
|
Contract liabilities at March 31, 2018
|
|
|
(19,843
|
)
|
10
Deferred Contract Costs
Certain direct and incremental costs incurred for upfront preparation, initial mobilization and modifications of contracted rigs represent
costs of fulfilling a contract as they relate directly to a contract, enhance resources that will be used in satisfying our performance obligations in the future and are expected to be recovered. Such costs are deferred and amortized ratably to
contract drilling expense as services are rendered over the initial term of the related drilling contract. Such deferred contract costs in the amount of $53.1 million and $42.0 million are reported in Prepaid expenses and other
current assets and Other assets, respectively in our unaudited Condensed Consolidated Balance Sheet at March 31, 2018. During the three months ended March 31, 2018, the amount of amortization of such costs was
$12.9 million and there was no impairment loss in relation to capitalized costs.
Costs incurred for the demobilization of rigs at
contract completion are recognized as incurred during the demobilization process. Costs incurred for rig modifications or upgrades required for a contract, which are considered to be capital improvements, are capitalized as drilling and other
property and equipment and depreciated over the estimated useful life of the improvement.
Transaction Price Allocated Remaining Performance
Obligations
The following table reflects revenue expected to be recognized in the future related to unsatisfied performance
obligations as of March 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31,
|
|
|
|
2018
(1)
|
|
|
2019
|
|
|
2020
|
|
|
Total
|
|
Mobilization and contract preparation revenue
|
|
$
|
11,997
|
|
|
$
|
9,921
|
|
|
$
|
1,433
|
|
|
$
|
23,351
|
|
Capital modification revenue
|
|
|
7,726
|
|
|
|
8,743
|
|
|
|
1,050
|
|
|
|
17,519
|
|
Demobilization revenue
|
|
|
3,122
|
|
|
|
|
|
|
|
|
|
|
|
3,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,845
|
|
|
$
|
18,664
|
|
|
$
|
2,483
|
|
|
$
|
43,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the nine-month period beginning April 1, 2018.
|
The revenue included above consists of expected fixed mobilization, demobilization, and upgrade revenue for both wholly and partially
unsatisfied performance obligations as well as expected variable mobilization, demobilization, and upgrade revenue for partially unsatisfied performance obligations, which has been estimated for purposes of allocating across the entire corresponding
performance obligations. The amounts are derived from the specific terms within drilling contracts that contain such provisions, and the expected timing for recognition of such revenue is based on the estimated start date and duration of each
respective contract based on information known at March 31, 2018. The actual timing of recognition of such amounts may vary due to factors outside of our control. We have applied the disclosure practical expedient in ASC
606-10-50-14A(b)
and have not included estimated variable consideration related to wholly unsatisfied performance obligations or to
distinct future time increments within our contracts, including dayrate revenue.
Impact of Topic 606 on Financial Statement Line Items
Our revenue recognition pattern under Topic 606 is similar to revenue recognition under the previous guidance, except for the recognition of
demobilization revenue. Such revenue, which was recognized upon completion of a contract under the previous guidance, is now estimated at contract inception and recognized ratably as contract drilling revenue over the term of the contract with an
offset to a contract asset under Topic 606.
11
The following tables summarize the impacts of adopting Topic 606 on our selected unaudited
Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows information, as of and for the three months ended March 31, 2018 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Balances
as reported
|
|
|
Adjustments
|
|
|
Balances
without
adoption of
Topic 606
|
|
Unaudited Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
91,405
|
|
|
$
|
(2,107
|
)
|
|
$
|
89,298
|
|
Accrued liabilities
|
|
|
139,118
|
|
|
|
662
|
|
|
|
139,780
|
|
Deferred tax liability
|
|
|
135,745
|
|
|
|
(138
|
)
|
|
|
135,607
|
|
Retained earnings
|
|
|
1,969,006
|
|
|
|
(2,631
|
)
|
|
|
1,966,375
|
|
|
|
|
|
Unaudited Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling revenue
|
|
$
|
287,926
|
|
|
$
|
(51
|
)
|
|
$
|
287,875
|
|
Income tax benefit
|
|
|
44,463
|
|
|
|
10
|
|
|
|
44,473
|
|
Earnings per share, Basic and Diluted
|
|
|
0.14
|
|
|
|
|
|
|
|
0.14
|
|
|
|
|
|
Unaudited Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,321
|
|
|
$
|
(41
|
)
|
|
$
|
19,280
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision
|
|
|
(49,089
|
)
|
|
|
(10
|
)
|
|
|
(49,099
|
)
|
Contract liabilities
|
|
|
(500
|
)
|
|
|
662
|
|
|
|
162
|
|
Contract assets
|
|
|
611
|
|
|
|
(611
|
)
|
|
|
|
|
3. Supplemental Financial Information
Condensed
Consolidated Balance Sheets Information
Accounts receivable, net of allowance for bad debts, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Trade receivables
|
|
$
|
190,341
|
|
|
$
|
247,453
|
|
Value added tax receivables
|
|
|
14,250
|
|
|
|
14,067
|
|
Related party receivables
|
|
|
126
|
|
|
|
205
|
|
Other
|
|
|
357
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205,074
|
|
|
|
262,189
|
|
Allowance for bad debts
|
|
|
(5,459
|
)
|
|
|
(5,459
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
199,615
|
|
|
$
|
256,730
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Rig spare parts and supplies
|
|
$
|
26,070
|
|
|
$
|
28,383
|
|
Deferred contract costs
|
|
|
53,117
|
|
|
|
51,297
|
|
Prepaid BOP lease
|
|
|
3,801
|
|
|
|
3,873
|
|
Prepaid insurance
|
|
|
1,883
|
|
|
|
3,091
|
|
Prepaid taxes
|
|
|
65,591
|
|
|
|
67,212
|
|
Other
|
|
|
5,168
|
|
|
|
3,769
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
155,630
|
|
|
$
|
157,625
|
|
|
|
|
|
|
|
|
|
|
12
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Rig operating expenses
|
|
$
|
27,942
|
|
|
$
|
48,894
|
|
Payroll and benefits
|
|
|
33,507
|
|
|
|
46,560
|
|
Deferred revenue
|
|
|
13,032
|
|
|
|
11,371
|
|
Accrued capital project/upgrade costs
|
|
|
14,104
|
|
|
|
3,698
|
|
Interest payable
|
|
|
36,813
|
|
|
|
28,234
|
|
Personal injury and other claims
|
|
|
5,743
|
|
|
|
5,699
|
|
Other
|
|
|
7,977
|
|
|
|
10,199
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
139,118
|
|
|
$
|
154,655
|
|
|
|
|
|
|
|
|
|
|
Includes $1.9 million and $13.6 million in accrued costs at March 31, 2018 and
December 31, 2017, respectively, related to a restructuring plan that was implemented in late 2017. See Note 8.
Condensed Consolidated Statements
of Cash Flows Information
Noncash investing activities excluded from the unaudited Condensed Consolidated Statements of Cash Flows and
other supplemental cash flow information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued but unpaid capital expenditures at period end
|
|
$
|
14,104
|
|
|
$
|
13,853
|
|
Common stock withheld for payroll tax obligations
(1)
|
|
|
733
|
|
|
|
131
|
|
Cash interest payments
|
|
|
19,688
|
|
|
|
65
|
|
Cash income taxes paid, net of (refunds):
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
2,033
|
|
|
|
13,973
|
|
State
|
|
|
2
|
|
|
|
(1
|
)
|
(1)
|
Represents the cost of 49,082 shares and 7,922 shares of common stock withheld to satisfy payroll tax obligations incurred as a result of the vesting of
restricted stock units in the three months ended March 31, 2018 and 2017, respectively. These costs are presented as a deduction from stockholders equity in Treasury stock in our unaudited Condensed Consolidated Balance Sheets
at March 31, 2018 and 2017.
|
4. Earnings Per Share
A reconciliation of the numerators and the denominators of our basic and diluted
per-share
computations
is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net income basic and diluted numerator
|
|
$
|
19,321
|
|
|
$
|
23,539
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic (denominator):
|
|
|
137,294
|
|
|
|
137,173
|
|
Dilutive effect of stock-based awards
|
|
|
201
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares including conversions diluted (denominator)
|
|
|
137,495
|
|
|
|
137,250
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
13
The following table sets forth the share effects of stock-based awards excluded from the
computations of diluted earnings per share, as the inclusion of such potentially dilutive shares would have been antidilutive for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Employee and director:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
2
|
|
Stock appreciation rights
|
|
|
1,237
|
|
|
|
1,409
|
|
Restricted stock units
|
|
|
623
|
|
|
|
425
|
|
5. Financial Instruments and Fair Value Disclosures
Financial instruments that potentially subject us to significant concentrations of credit or market risk consist primarily of periodic
temporary investments of excess cash, trade accounts receivable and investments in debt securities. We generally place our excess cash investments in U.S. Treasury bills and notes and U.S. government-backed short-term money market instruments
through several financial institutions. We periodically evaluate the relative credit standing of these financial institutions as part of our investment strategy.
Concentrations of credit risk with respect to our trade accounts receivable are limited primarily due to the entities comprising our customer
base. Since the market for our services is the offshore oil and gas industry, this customer base has consisted primarily of major and independent oil and gas companies and government-owned oil companies. Based on our current customer base and the
geographic areas in which we operate, we do not believe that we have any significant concentrations of credit risk at March 31, 2018.
In general, before working for a customer with whom we have not had a prior business relationship and/or whose financial stability may be
uncertain to us, we perform a credit review on that company. Based on that analysis, we may require that the customer present a letter of credit, prepay or provide other credit enhancements. We record a provision for bad debts on a
case-by-case
basis when facts and circumstances indicate that a customer receivable may not be collectible and, historically, losses on our trade receivables have been
infrequent occurrences.
Fair Values
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by GAAP requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
|
|
|
Level 1
|
|
Quoted prices for identical instruments in active markets. Level 1 assets include short-term investments such as money market funds and U.S. Treasury bills and notes. Our Level 1 assets at March 31, 2018 consisted of
cash held in money market funds of $388.3 million and time deposits of $20.9 million. Our Level 1 assets at December 31, 2017 consisted of cash held in money market funds of $337.1 million and time deposits of
$20.9 million.
|
|
|
Level 2
|
|
Quoted market prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets. We had no Level 2 assets or liabilities as of March 31, 2018 or December 31, 2017.
|
|
|
Level 3
|
|
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 assets and liabilities generally include financial instruments whose value is
determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation or for which there is a lack of
transparency as to the inputs used. Our Level 3 assets at December 31, 2017 consisted of nonrecurring measurements of certain of our drilling rigs for which we recorded impairment losses during 2017. We had no Level 3 assets or
liabilities as of March 31, 2018.
|
Market conditions could cause an instrument to be reclassified among Levels 1, 2 and 3. Our policy regarding
fair value measurements of financial instruments transferred into and out of levels is to reflect the transfers as having occurred at the beginning of the reporting period. There were no transfers between fair value levels during the three-month
period ended March 31, 2018 or the year ended December 31, 2017.
14
Certain of our assets and liabilities are required to be measured at fair value on a recurring
basis in accordance with GAAP. In addition, certain assets and liabilities may be recorded at fair value on a nonrecurring basis. Generally, we record assets at fair value on a nonrecurring basis as a result of impairment charges. We recorded
impairment charges related to certain of our drilling rigs, which were measured at fair value on a nonrecurring basis, during the year ended December 31, 2017 of $99.3 million.
Assets and liabilities measured at fair value are summarized below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets at
Fair Value
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
409,215
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
409,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets at
Fair Value
|
|
|
Total Losses
for Year
Ended
(1)
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
358,019
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
358,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired assets
(2
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
97,261
|
|
|
$
|
97,261
|
|
|
$
|
99,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents impairment losses of $71.3 million and $28.0 million recognized during the second and fourth quarters of 2017, respectively, related to three drilling rigs whose carrying values were impaired.
|
(2)
|
Represents the total book value as of December 31, 2017 of two floaters, which were written down to their estimated fair values during the second quarter of 2017, and one
jack-up
rig, which was written down to its estimated fair value during the fourth quarter of 2017. Of the total fair value, $96.3 million and $1.0 million were reported as Assets held for
sale and Drilling and other property and equipment, net of accumulated depreciation, respectively, in our Consolidated Balance Sheet at December 31, 2017.
|
We believe that the carrying amounts of our other financial assets and liabilities (excluding long-term debt), which are not measured at fair
value in our unaudited Condensed Consolidated Balance Sheets, approximate fair value based on the following assumptions:
|
|
|
Cash and cash equivalents
The carrying amounts approximate fair value because of the short maturity of these instruments.
|
|
|
|
Accounts receivable and accounts payable
The carrying amounts approximate fair value based on the nature of the instruments.
|
We consider our senior notes to be Level 2 liabilities under the GAAP fair value hierarchy and, accordingly, the fair value of our senior
notes was derived using a third-party pricing service at March 31, 2018 and December 31, 2017. We perform control procedures over information we obtain from pricing services and brokers to test whether prices received represent a
reasonable estimate of fair value. These procedures include the review of pricing service or broker pricing methodologies and comparing fair value estimates to actual trade activity executed in the market for these instruments occurring generally
within a
10-day
period of the report date. Fair values and related carrying values of our senior notes are shown below (in millions).
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
3.45% Senior Notes due 2023
|
|
$
|
222.5
|
|
|
$
|
249.4
|
|
|
$
|
223.1
|
|
|
$
|
249.4
|
|
7.875% Senior Notes due 2025
|
|
|
501.3
|
|
|
|
496.5
|
|
|
|
523.1
|
|
|
|
496.5
|
|
5.70% Senior Notes due 2039
|
|
|
395.0
|
|
|
|
497.2
|
|
|
|
405.0
|
|
|
|
497.2
|
|
4.875% Senior Notes due 2043
|
|
|
536.3
|
|
|
|
748.9
|
|
|
|
547.5
|
|
|
|
748.9
|
|
We have estimated the fair value amounts by using appropriate valuation methodologies and information
available to management. Considerable judgment is required in developing these estimates, and accordingly, no assurance can be given that the estimated values are indicative of the amounts that would be realized in a free market exchange.
6. Drilling and Other Property and Equipment
Cost and accumulated depreciation of drilling and other property and equipment are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Drilling rigs and equipment
|
|
$
|
8,010,072
|
|
|
$
|
7,971,406
|
|
Land and buildings
|
|
|
63,379
|
|
|
|
63,309
|
|
Office equipment and other
|
|
|
85,599
|
|
|
|
82,691
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
8,159,050
|
|
|
|
8,117,406
|
|
Less: accumulated depreciation
|
|
|
(2,937,341
|
)
|
|
|
(2,855,765
|
)
|
|
|
|
|
|
|
|
|
|
Drilling and other property and equipment, net
|
|
$
|
5,221,709
|
|
|
$
|
5,261,641
|
|
|
|
|
|
|
|
|
|
|
7. Commitments and Contingencies
Various claims have been filed against us in the ordinary course of business, including claims by offshore workers alleging personal injuries.
With respect to each claim or exposure, we have made an assessment, in accordance with GAAP, of the probability that the resolution of the matter would ultimately result in a loss. When we determine that an unfavorable resolution of a matter is
probable and such amount of loss can be reasonably estimated, we record a liability for the amount of the reasonably estimated loss at the time that both of these criteria are met. Our management believes that we have recorded adequate accruals for
any liabilities that may reasonably be expected to result from these claims.
Patent Litigation
. On August 30, 2017, an
affiliate of Transocean Ltd., or Transocean, an offshore drilling contractor, filed a lawsuit against us and one of our subsidiaries in the United States District Court for the Southern District of Texas, alleging that we infringed certain United
States patents previously owned by Transocean or its affiliates or employees pertaining to certain dual-activity drilling operations. The lawsuit alleges that we infringed the patents by the unauthorized sale, offer for sale, and importation and use
of four of our drilling rigs (
Ocean BlackHawk
,
Ocean BlackHornet
,
Ocean BlackRhino
and
Ocean BlackLion
) and is seeking unspecified monetary damages. The Transocean patents, which expired in May 2016, do not apply to
drilling activities outside the United States or to activities that occurred after the expiration of the patents. We are unable to estimate our potential exposure, if any, to the Transocean lawsuit at this time but do not believe that our ultimate
liability, if any, resulting from this litigation will have a material effect on our consolidated financial condition, results of operations or cash flows.
Asbestos Litigation
.
We are one of several unrelated defendants in lawsuits filed in Louisiana state courts alleging that
defendants manufactured, distributed or utilized drilling mud containing asbestos and, in our case, allowed such drilling mud to have been utilized aboard our drilling rigs. The plaintiffs seek, among other things, an award of unspecified
compensatory and punitive damages. The manufacture and use of asbestos-containing drilling mud had already ceased before we acquired any of the drilling rigs addressed in these lawsuits. We believe that we are not liable for the damages asserted in
the lawsuits pursuant to the terms of our 1989 asset purchase agreement with Diamond M Corporation. We are unable to estimate our potential exposure, if any, to these lawsuits at this time but do not believe that our ultimate liability, if any,
resulting from this litigation will have a material effect on our consolidated financial condition, results of operations or cash flows.
16
Other Litigation.
We have been named in various other claims, lawsuits or threatened
actions that are incidental to the ordinary course of our business, including a claim by one of our customers in Brazil, Petróleo Brasileiro S.A., or Petrobras, that it will seek to recover from its contractors, including us, any taxes,
penalties, interest and fees that it must pay to the Brazilian tax authorities for our applicable portion of withholding taxes related to Petrobras charter agreements with its contractors. We intend to defend these matters vigorously; however,
litigation is inherently unpredictable, and the ultimate outcome or effect of any claim, lawsuit or action cannot be predicted with certainty. As a result, there can be no assurance as to the ultimate outcome of any litigation matter. Any claims
against us, whether meritorious or not, could cause us to incur significant costs and expenses and require significant amounts of management and operational time and resources. In the opinion of our management, no pending or known threatened claims,
actions or proceedings against us are expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Personal Injury Claims
. Under our current insurance policies, which will renew on May
1, 2018, our deductibles for marine
liability insurance coverage with respect to personal injury claims not related to named windstorms in the U.S. Gulf of Mexico, which primarily result from Jones Act liability in the U.S. Gulf of Mexico, are $10.0
million for the first
occurrence, with no aggregate deductible, and vary in amounts ranging between $5.0
million and, if aggregate claims exceed certain thresholds, up to $100.0
million for each subsequent occurrence, depending on the nature,
severity and frequency of claims that might arise during the policy year. Our deductibles for personal injury claims arising due to named windstorms in the U.S. Gulf of Mexico are $25.0
million for the first occurrence, with no aggregate
deductible, and vary in amounts ranging between $25.0
million and, if aggregate claims exceed certain thresholds, up to $100.0
million for each subsequent occurrence, depending on the nature, severity and frequency of claims
that might arise during the policy year.
The Jones Act is a federal law that permits seamen to seek compensation for certain injuries
during the course of their employment on a vessel and governs the liability of vessel operators and marine employers for the work-related injury or death of an employee. We engage outside consultants to assist us in estimating our aggregate
liability for personal injury claims based on our historical losses and utilizing various actuarial models. We allocate a portion of the aggregate liability to Accrued liabilities based on an estimate of claims expected to be paid within
the next twelve months with the residual recorded as Other liabilities. At March 31, 2018 our estimated liability for personal injury claims was $29.4 million, of which $5.1 million and $24.3 million were recorded in
Accrued liabilities and Other liabilities, respectively, in our unaudited Condensed Consolidated Balance Sheets. At December 31, 2017 our estimated liability for personal injury claims was $30.9 million, of which
$5.2 million and $25.7 million were recorded in Accrued liabilities and Other liabilities, respectively, in our Consolidated Balance Sheets. The eventual settlement or adjudication of these claims could differ
materially from our estimated amounts due to uncertainties such as:
|
|
|
the severity of personal injuries claimed;
|
|
|
|
significant changes in the volume of personal injury claims;
|
|
|
|
the unpredictability of legal jurisdictions where the claims will ultimately be litigated;
|
|
|
|
inconsistent court decisions; and
|
|
|
|
the risks and lack of predictability inherent in personal injury litigation.
|
Letters of
Credit and Other.
We were contingently liable as of March 31, 2018 in the amount of $20.9 million under certain performance, tax, supersedeas, bid and customs bonds and letters of credit. Agreements relating to approximately
$15.2 million of tax, supersedeas, and customs bonds can require collateral at any time. As of March 31, 2018, we had not been required to make any collateral deposits with respect to these agreements. The remaining agreements cannot
require collateral except in events of default. Banks have issued letters of credit on our behalf securing certain of these bonds.
8. Restructuring
and Separation Costs
In late 2017, our management approved and initiated a plan to restructure our worldwide operations, which also
included a reduction in workforce at our corporate facilities and onshore bases, which we refer to as the 2017 Reduction Plan. During the three months ended March 31, 2018, we incurred and paid an additional $3.0 million in severance and
related costs to redundant employees identified in early 2018. As of March 31, 2018, accrued costs associated with the 2017 Reduction Plan were $1.9 million, primarily related to severance payments to former employees, which are payable
over a
two-year
period.
17
9. Income Taxes
Effective January 1, 2018, we adopted ASU
2016-16,
which required us to record the income tax
consequences of two historical intra-entity transfers of rigs, for which previous accounting guidance precluded us from recognizing such income tax effects. We adopted the new accounting guidance using the modified retrospective approach, whereby we
recorded the $17.4 million cumulative effect of applying the new standard as an adjustment to opening retained earnings with an offset to a deferred income tax liability. See Note 1.
Additionally, in response to our interpretation of the Tax Reform Act, which was signed into law in late December 2017, we recorded a
provisional net tax expense of $1.1 million during the fourth quarter of 2017, which included a charge relating to the
one-time
mandatory repatriation of previously deferred earnings of certain
non-US
subsidiaries that are owned either wholly or partially by our U.S. subsidiaries, inclusive of the utilization of certain tax attributes offset by a provisional liability for uncertain tax positions related to
such attributes. Due to the timing of the enactment of the Tax Reform Act, there has been and continues to be a significant amount of uncertainty as to the appropriate application of a number of the underlying provisions, pending further guidance
and clarification from the relevant authorities. In 2018, the U.S. Department of the Treasury and Internal Revenue Service issued additional guidance which we believe clarified certain of our tax positions taken in 2017 and, consequently, we
reversed a $43.3 million liability for an uncertain tax position related to the toll charge in accordance with the Securities and Exchange Commissions Staff Accounting Bulletin No. 118, or SAB 118. SAB 118 allowed companies to report
the income tax effects of the Tax Reform Act as a provisional amount based on a reasonable estimate, subject to adjustment during a reasonable measurement period, not to exceed twelve months, until the accounting and analysis under Topic 740 is
complete.
We are still in the process of evaluating our estimate as it relates to the tax effect of (i) the mandatory, deemed
repatriation aspect of the Tax Reform Act, (ii) the amount of deferred tax assets and liabilities subject to the income tax rate change from 35% to 21% and (iii) the ability to more likely than not realize the benefit of deferred tax
assets, including net operating losses and foreign tax credits. We will continue to monitor developments in these areas and adjust our estimates throughout 2018, as and if necessary, as additional guidance and clarification becomes available.
10. Segments and Geographic Area Analysis
Although we provide contract drilling services with different types of offshore drilling rigs and also provide such services in many geographic
locations, we have aggregated these operations into one reportable segment based on the similarity of economic characteristics due to the nature of the revenue-earning process as it relates to the offshore drilling industry over the operating lives
of our drilling rigs.
Our drilling rigs are highly mobile and may be moved to other markets throughout the world in response to market
conditions or customer needs. At March 31, 2018, our active drilling rigs were located offshore four countries in addition to the United States. Revenues by geographic area are presented by attributing revenues to the individual country or
areas where the services were performed.
The following table provides information about disaggregated revenue by equipment-type and
primary geographical market (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
Floater
Rigs
|
|
|
Jack-up
Rigs
(1)
|
|
|
Total
Contract
Drilling
Revenues
|
|
|
Revenues
Related to
Reimbursable
Expenses
|
|
|
Total
|
|
United States
|
|
$
|
159,674
|
|
|
$
|
4,765
|
|
|
$
|
164,439
|
|
|
$
|
2,137
|
|
|
$
|
166,576
|
|
South America
|
|
|
54,268
|
|
|
|
|
|
|
|
54,268
|
|
|
|
1
|
|
|
|
54,269
|
|
Europe
|
|
|
11,392
|
|
|
|
|
|
|
|
11,392
|
|
|
|
1,378
|
|
|
|
12,770
|
|
Australia/Asia
|
|
|
57,827
|
|
|
|
|
|
|
|
57,827
|
|
|
|
4,068
|
|
|
|
61,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,161
|
|
|
$
|
4,765
|
|
|
$
|
287,926
|
|
|
$
|
7,584
|
|
|
$
|
295,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loss of hire insurance proceeds related to early contract terminations for two
jack-up
rigs that previously worked in
Mexico.
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
Floater
Rigs
|
|
|
Jack-up
Rigs
|
|
|
Total
Contract
Drilling
Revenues
|
|
|
Revenues
Related to
Reimbursable
Expenses
|
|
|
Total
|
|
United States
|
|
$
|
135,600
|
|
|
$
|
|
|
|
$
|
135,600
|
|
|
$
|
2,271
|
|
|
$
|
137,871
|
|
South America
|
|
|
102,681
|
|
|
|
|
|
|
|
102,681
|
|
|
|
18
|
|
|
|
102,699
|
|
Europe
|
|
|
55,735
|
|
|
|
|
|
|
|
55,735
|
|
|
|
1,965
|
|
|
|
57,700
|
|
Australia/Asia
|
|
|
65,677
|
|
|
|
|
|
|
|
65,677
|
|
|
|
6,415
|
|
|
|
72,092
|
|
Mexico
|
|
|
|
|
|
|
3,864
|
|
|
|
3,864
|
|
|
|
|
|
|
|
3,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
359,693
|
|
|
$
|
3,864
|
|
|
$
|
363,557
|
|
|
$
|
10,669
|
|
|
$
|
374,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|