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 July 27, 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.
7
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 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 11.
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 the 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 (i) requires lessees to recognize a right of use asset and a lease liability on the balance sheet for virtually all leases, (ii) updates previous accounting standards for lessors to align
certain requirements with the updates to lessee accounting standards and the revenue recognition accounting standards and (iii) requires enhanced disclosure of qualitative and quantitative information about the entitys leasing
arrangements. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. During our evaluation of ASU
2016-02,
we concluded that our drilling
contracts contain a lease component based on the updated definition of a lease. On March 28, 2018, the FASB held a meeting to approve certain additional amendments to ASU
2016-02,
including a revision to
the practical expedient that would allow a lessor to account for the combined lease and
non-lease
components under Topic 606,
Revenue from Contracts with Customers
,
when the
non-lease
component is the predominant element of the combined component. As this content is still pending, we are not yet able to determine what, if any, impact our adoption will have on our revenue recognition
patterns and related disclosures.
With respect to leases whereby we are the lessee, we expect to recognize lease liabilities and
offsetting right of use assets corresponding to, at a minimum, our currently identified, undiscounted future minimum lease commitments of approximately $490 million, primarily related to certain leased subsea equipment. However, we are still
evaluating the overall impact and will continue to refine our estimate prior to adoption of the ASU. We
8
currently expect to elect the transition practical expedient package available in the ASU whereby we will not reassess (i) whether any of our expired or existing contracts contain a lease,
(ii) the classification for any expired or existing leases and (iii) initial direct costs for any existing leases.
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.
9
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.
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 primarily 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):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
January 1,
|
|
|
|
2018
|
|
|
2018
|
|
Trade receivables
|
|
$
|
194,425
|
|
|
$
|
247,453
|
|
Current contract assets
(1)
|
|
|
1,567
|
|
|
|
611
|
|
Noncurrent contract assets
(1)
|
|
|
2,107
|
|
|
|
2,107
|
|
Current contract liabilities (deferred revenue)
(1)
|
|
|
(10,173
|
)
|
|
|
(11,371
|
)
|
Noncurrent contract liabilities (deferred revenue)
(1)
|
|
|
(6,915
|
)
|
|
|
(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 June 30, 2018.
|
10
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
|
|
|
7,048
|
|
Increase due to cash received, excluding amounts recognized as revenue during the period
|
|
|
(4,670
|
)
|
Increase due to revenue recognized during the period but contingent on future performance
|
|
|
2,306
|
|
Decrease due to transfer to receivables during the period
|
|
|
(611
|
)
|
Adjustments
|
|
|
138
|
|
|
|
|
|
|
Net balance at June 30, 2018
|
|
$
|
(13,414
|
)
|
|
|
|
|
|
Contract assets at June 30, 2018
|
|
$
|
3,674
|
|
Contract liabilities at June 30, 2018
|
|
|
(17,088
|
)
|
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 $56.1 million and $25.1 million are reported in Prepaid expenses and other
current assets and Other assets, respectively, in our unaudited Condensed Consolidated Balance Sheet at June 30, 2018. During the three-month and
six-month
periods ended June 30,
2018, the amount of amortization of such costs was $14.3 million and $27.2 million, respectively. 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 to Remaining Performance Obligations
The following table reflects revenue expected to be recognized in the future related to unsatisfied performance obligations as of June 30,
2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31,
|
|
|
|
2018
(1)
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
Mobilization and contract preparation revenue
|
|
$
|
9,115
|
|
|
$
|
9,043
|
|
|
$
|
81
|
|
|
$
|
|
|
|
$
|
18,239
|
|
Capital modification revenue
|
|
|
6,598
|
|
|
|
9,170
|
|
|
|
387
|
|
|
|
|
|
|
|
16,155
|
|
Demobilization revenue
|
|
|
2,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,170
|
|
Other deferred revenue
|
|
|
343
|
|
|
|
681
|
|
|
|
681
|
|
|
|
194
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,226
|
|
|
$
|
18,894
|
|
|
$
|
1,149
|
|
|
$
|
194
|
|
|
$
|
38,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the
six-month
period beginning July 1, 2018.
|
The revenue included above consists primarily 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 June 30, 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.
11
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.
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 six months ended June 30, 2018 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Balances
as reported
|
|
|
Adjustments
|
|
|
Balances
without
adoption of
Topic 606
|
|
Unaudited Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid and other current assets
|
|
$
|
154,408
|
|
|
$
|
(1,174
|
)
|
|
$
|
153,234
|
|
Other assets
|
|
|
71,389
|
|
|
|
(2,107
|
)
|
|
|
69,282
|
|
Accrued liabilities
|
|
|
130,123
|
|
|
|
739
|
|
|
|
130,862
|
|
Deferred tax liability
|
|
|
124,350
|
|
|
|
(402
|
)
|
|
|
123,948
|
|
Retained earnings
|
|
|
1,899,735
|
|
|
|
(3,619
|
)
|
|
|
1,896,116
|
|
|
|
|
|
Unaudited Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling revenue
|
|
$
|
553,279
|
|
|
$
|
(1,303
|
)
|
|
$
|
551,976
|
|
Income tax benefit
|
|
|
54,475
|
|
|
|
274
|
|
|
|
54,749
|
|
Loss per share, Basic and Diluted
|
|
|
(0.36
|
)
|
|
|
(0.01
|
)
|
|
|
(0.37
|
)
|
|
|
|
|
Unaudited Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(49,953
|
)
|
|
$
|
(1,029
|
)
|
|
$
|
(50,982
|
)
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision
|
|
|
(61,160
|
)
|
|
|
(274
|
)
|
|
|
(61,434
|
)
|
Contract liabilities
|
|
|
(3,255
|
)
|
|
|
739
|
|
|
|
(2,516
|
)
|
Contract assets
|
|
|
(956
|
)
|
|
|
564
|
|
|
|
(392
|
)
|
3. Impairment of Assets
2018 Impairment.
During the second quarter of 2018, we recorded an impairment loss of $27.2 million to recognize a reduction in
fair value of the
Ocean Scepter
, a
jack-up
rig that was reported in Assets held for sale in our unaudited Condensed Consolidated Balance Sheets at June 30, 2018 and December 31,
2017. We estimated the fair value of the impaired
jack-up
rig using a market approach based on a signed agreement to sell the rig, including estimated costs to sell. We consider this valuation approach to be a
Level 3 fair value measurement due to the level of estimation involved as the sale had not yet been completed at the time of our analysis. The
Ocean Scepter
was sold in July 2018.
During the second quarter of 2018, we evaluated four of our drilling rigs with indicators of impairment. Based on our assumptions and analysis
at that time, we determined that the undiscounted probability-weighted cash flow for each rig was in excess of its respective carrying value. As a result, we concluded that no impairment of these rigs had occurred at June 30, 2018.
As of June 30, 2018, there were nine rigs in our drilling fleet, not previously written down to scrap, for which there were no current
indicators that their carrying amounts may not be recoverable and, thus, were not evaluated for impairment. If market fundamentals in the offshore oil and gas industry deteriorate further or a projected market recovery is further delayed, we may be
required to recognize additional impairment losses in future periods.
2017 Impairments.
During the second quarter of 2017, we
evaluated seven of our drilling rigs with indicators of impairment and determined that the carrying values of one ultra-deepwater and one deepwater semisubmersible rig were impaired (we collectively refer to these two rigs as the 2017 Impaired
Rigs).
12
We estimated the fair value of the 2017 Impaired Rigs using an income approach, whereby the fair
value of each rig was estimated based on a calculation of the rigs future net cash flows. These calculations utilized significant unobservable inputs, including estimated proceeds that may be received on ultimate disposition of the rig, and
are representative of Level 3 fair value measurements due to the significant level of estimation involved and lack of transparency as to the inputs used. During the second quarter of 2017, we recorded an impairment loss of $71.3 million
related to our 2017 Impaired Rigs.
4. Supplemental Financial Information
Condensed
Consolidated Balance Sheets Information
Accounts receivable, net of allowance for bad debts, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Trade receivables
|
|
$
|
194,425
|
|
|
$
|
247,453
|
|
Value added tax receivables
|
|
|
13,645
|
|
|
|
14,067
|
|
Related party receivables
|
|
|
113
|
|
|
|
205
|
|
Other
|
|
|
407
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,590
|
|
|
|
262,189
|
|
Allowance for bad debts
|
|
|
(5,459
|
)
|
|
|
(5,459
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
203,131
|
|
|
$
|
256,730
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Rig spare parts and supplies
|
|
$
|
23,887
|
|
|
$
|
28,383
|
|
Deferred contract costs
|
|
|
56,110
|
|
|
|
51,297
|
|
Prepaid BOP lease
|
|
|
3,873
|
|
|
|
3,873
|
|
Prepaid insurance
|
|
|
4,407
|
|
|
|
3,091
|
|
Prepaid taxes
|
|
|
58,417
|
|
|
|
67,212
|
|
Other
|
|
|
7,714
|
|
|
|
3,769
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,408
|
|
|
$
|
157,625
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Rig operating expenses
|
|
$
|
30,055
|
|
|
$
|
48,894
|
|
Payroll and benefits
|
|
|
32,929
|
|
|
|
46,560
|
|
Deferred revenue
|
|
|
10,173
|
|
|
|
11,371
|
|
Accrued capital project/upgrade costs
|
|
|
12,714
|
|
|
|
3,698
|
|
Interest payable
|
|
|
28,234
|
|
|
|
28,234
|
|
Personal injury and other claims
|
|
|
6,048
|
|
|
|
5,699
|
|
Other
|
|
|
9,970
|
|
|
|
10,199
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,123
|
|
|
$
|
154,655
|
|
|
|
|
|
|
|
|
|
|
Includes $2.2 million and $13.6 million in accrued costs at June 30, 2018 and December 31,
2017, respectively, related to a restructuring plan that was implemented in late 2017. See Note 10.
13
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):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued but unpaid capital expenditures at period end
|
|
$
|
12,714
|
|
|
$
|
3,649
|
|
Common stock withheld for payroll tax obligations
(1)
|
|
|
1,265
|
|
|
|
473
|
|
Cash interest payments
|
|
|
56,531
|
|
|
|
51,603
|
|
Cash income taxes paid, net of (refunds):
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
4,035
|
|
|
|
33,319
|
|
State
|
|
|
2
|
|
|
|
94
|
|
(1)
|
Represents the cost of 85,580 shares and 28,386 shares of common stock withheld to satisfy payroll tax obligations incurred as a result of the vesting of
restricted stock units in the six months ended June 30, 2018 and 2017, respectively. These costs for the six months ended June 30, 2018 are presented as a deduction from stockholders equity in Treasury stock in our
unaudited Condensed Consolidated Balance Sheets at June 30, 2018.
|
5. Earnings (Loss) 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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net (loss) income basic and diluted numerator
|
|
$
|
(69,274
|
)
|
|
$
|
15,949
|
|
|
$
|
(49,953
|
)
|
|
$
|
39,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic (denominator):
|
|
|
137,429
|
|
|
|
137,224
|
|
|
|
137,362
|
|
|
|
137,199
|
|
Dilutive effect of stock-based awards
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares including conversions diluted (denominator)
|
|
|
137,429
|
|
|
|
137,227
|
|
|
|
137,362
|
|
|
|
137,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.50
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.36
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.50
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.36
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the share effects of stock-based awards excluded from the computations of
diluted (loss) earnings per share, as the inclusion of such potentially dilutive shares would have been antidilutive for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Employee and director:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Stock appreciation rights
|
|
|
1,144
|
|
|
|
1,301
|
|
|
|
1,207
|
|
|
|
1,355
|
|
Restricted stock units
|
|
|
1,194
|
|
|
|
1,274
|
|
|
|
1,133
|
|
|
|
933
|
|
6. Marketable Securities
We report our investments as current assets in our unaudited Condensed Balance Sheets in Marketable securities, representing the
investment of cash available for current operations. See Note 7.
14
Our investments in marketable securities are classified as available for sale and are summarized
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Market
Value
|
|
U.S. Treasury bills (due within one year)
|
|
$
|
274,636
|
|
|
$
|
35
|
|
|
$
|
274,671
|
|
Proceeds from maturities of U.S. Treasury bills were $300.0 million during the three-month and
six-month
periods ended June 30, 2018. There were no sales of U.S. Treasury bills during the three-month and
six-month
periods ended June 30, 2018.
7. 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 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 June 30, 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. Our Level 1 assets at June 30, 2018 consisted of cash held
in money market funds of $114.0 million, time deposits of $20.9 million and investments in U.S. Treasury bills of $274.7 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 June 30, 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 June 30, 2018 and December 31, 2017 consisted of nonrecurring measurements of certain of our drilling rigs for which we recorded impairment losses during 2018 and
2017.
|
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
six-month
period ended June 30, 2018 or the year ended December 31, 2017.
15
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
six-month
period ended June 30, 2018 and the year ended December 31,
2017 of $27.2 million and $99.3 million, respectively.
Assets and liabilities measured at fair value are summarized below (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets at
Fair Value
|
|
|
Total
Losses
for Period
Ended
(1)
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
409,616
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
409,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired assets
(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
67,815
|
|
|
$
|
67,815
|
|
|
$
|
27,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents impairment loss of $27.2 million recognized during the second quarter of 2018 related to a
jack-up
drilling
rig whose carrying value was impaired. See Note 3.
|
(2)
|
Represents the total book value as of June 30, 2018 of a
jack-up
rig that was written down to its estimated fair value during the second quarter of 2018 and which is reported
as Assets held for sale in our unaudited Condensed Consolidated Balance Sheet at June 30, 2018. See Note 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. See
Note 3.
|
(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 unaudited Condensed Consolidated Balance Sheet at December 31, 2017. See Note 3.
|
16
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 June 30, 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
3.45% Senior Notes due 2023
|
|
$
|
221.9
|
|
|
$
|
249.4
|
|
|
$
|
223.1
|
|
|
$
|
249.4
|
|
7.875% Senior Notes due 2025
|
|
|
518.1
|
|
|
|
496.6
|
|
|
|
523.1
|
|
|
|
496.5
|
|
5.70% Senior Notes due 2039
|
|
|
400.0
|
|
|
|
497.2
|
|
|
|
405.0
|
|
|
|
497.2
|
|
4.875% Senior Notes due 2043
|
|
|
540.0
|
|
|
|
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.
8. Drilling and Other Property and Equipment
Cost and accumulated depreciation of drilling and other property and equipment are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Drilling rigs and equipment
|
|
$
|
8,064,663
|
|
|
$
|
7,971,406
|
|
Land and buildings
|
|
|
63,554
|
|
|
|
63,309
|
|
Office equipment and other
|
|
|
87,702
|
|
|
|
82,691
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
8,215,919
|
|
|
|
8,117,406
|
|
Less: accumulated depreciation
|
|
|
(3,018,722
|
)
|
|
|
(2,855,765
|
)
|
|
|
|
|
|
|
|
|
|
Drilling and other property and equipment, net
|
|
$
|
5,197,197
|
|
|
$
|
5,261,641
|
|
|
|
|
|
|
|
|
|
|
9. Commitments and Contingencies
Various claims have been filed against us in the ordinary course of business, including claims by offshore workers alleging personal injuries.
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. On June 1, 2018, we filed petitions with the Patent Trial and Appeal Board to challenge the validity of each of the Transocean
patents through an administrative process referred to as an Inter Partes Review. 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.
17
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.
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 renewed effective 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 June 30, 2018 our estimated liability for personal injury claims
was $29.0 million, of which $5.3 million and $23.7 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 June 30, 2018 in the amount of $11.2 million under certain performance, tax, bid and customs bonds and letters of credit. Agreements relating to approximately $5.5 million of tax
and customs bonds can require collateral at any time. As of June 30, 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.
18
10. Restructuring and Separation Costs
In late 2017, our management approved and initiated a plan to restructure our worldwide operations, which included a reduction in workforce at
our corporate facilities and onshore bases that we refer to as the 2017 Reduction Plan. During the three-month and
six-month
periods ended June 30, 2018, we incurred an additional $1.3 million and
$4.3 million, respectively, in severance and related costs for redundant employees identified in 2018. As of June 30, 2018, accrued costs related to severance payments to former employees were $2.2 million, of which $0.7 million
is payable during the remainder of 2018 and $1.5 million is payable in 2019.
11. 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.
12. 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 June 30, 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.
19
The following tables provide information about disaggregated revenue by equipment-type and
primary geographical market (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
Floater
Rigs
|
|
|
Jack-up
Rigs
(1)
|
|
|
Total
Contract
Drilling
Revenues
|
|
|
Revenues
Related to
Reimbursable
Expenses
|
|
|
Total
|
|
United States
|
|
$
|
158,554
|
|
|
$
|
3,648
|
|
|
$
|
162,202
|
|
|
$
|
1,172
|
|
|
$
|
163,374
|
|
South America
|
|
|
26,288
|
|
|
|
|
|
|
|
26,288
|
|
|
|
|
|
|
|
26,288
|
|
Europe
|
|
|
18,738
|
|
|
|
|
|
|
|
18,738
|
|
|
|
1,742
|
|
|
|
20,480
|
|
Australia/Asia
|
|
|
58,125
|
|
|
|
|
|
|
|
58,125
|
|
|
|
594
|
|
|
|
58,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
261,705
|
|
|
$
|
3,648
|
|
|
$
|
265,353
|
|
|
$
|
3,508
|
|
|
$
|
268,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loss-of-hire
insurance proceeds related to early contract terminations for two
jack-up
rigs that previously worked in Mexico.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
Floater
Rigs
|
|
|
Jack-up
Rigs
(1)
|
|
|
Total
Contract
Drilling
Revenues
|
|
|
Revenues
Related to
Reimbursable
Expenses
|
|
|
Total
|
|
United States
|
|
$
|
318,228
|
|
|
$
|
8,413
|
|
|
$
|
326,641
|
|
|
$
|
3,309
|
|
|
$
|
329,950
|
|
South America
|
|
|
80,556
|
|
|
|
|
|
|
|
80,556
|
|
|
|
1
|
|
|
|
80,557
|
|
Europe
|
|
|
30,130
|
|
|
|
|
|
|
|
30,130
|
|
|
|
3,120
|
|
|
|
33,250
|
|
Australia/Asia
|
|
|
115,952
|
|
|
|
|
|
|
|
115,952
|
|
|
|
4,662
|
|
|
|
120,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
544,866
|
|
|
$
|
8,413
|
|
|
$
|
553,279
|
|
|
$
|
11,092
|
|
|
$
|
564,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loss-of-hire
insurance proceeds related to early contract terminations for two
jack-up
rigs that previously worked in Mexico.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
Floater
Rigs
|
|
|
Jack-up
Rigs
|
|
|
Total
Contract
Drilling
Revenues
|
|
|
Revenues
Related to
Reimbursable
Expenses
|
|
|
Total
|
|
United States
|
|
$
|
157,069
|
|
|
$
|
|
|
|
$
|
157,069
|
|
|
$
|
2,335
|
|
|
$
|
159,404
|
|
South America
|
|
|
111,498
|
|
|
|
|
|
|
|
111,498
|
|
|
|
(240
|
)
|
|
|
111,258
|
|
Europe
|
|
|
44,533
|
|
|
|
|
|
|
|
44,533
|
|
|
|
1,194
|
|
|
|
45,727
|
|
Australia/Asia
|
|
|
72,883
|
|
|
|
|
|
|
|
72,883
|
|
|
|
3,593
|
|
|
|
76,476
|
|
Mexico
|
|
|
|
|
|
|
6,187
|
|
|
|
6,187
|
|
|
|
237
|
|
|
|
6,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
385,983
|
|
|
$
|
6,187
|
|
|
$
|
392,170
|
|
|
$
|
7,119
|
|
|
$
|
399,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
Floater
Rigs
|
|
|
Jack-up
Rigs
|
|
|
Total
Contract
Drilling
Revenues
|
|
|
Revenues
Related to
Reimbursable
Expenses
|
|
|
Total
|
|
United States
|
|
$
|
292,668
|
|
|
$
|
|
|
|
$
|
292,668
|
|
|
$
|
4,456
|
|
|
$
|
297,124
|
|
South America
|
|
|
214,179
|
|
|
|
|
|
|
|
214,179
|
|
|
|
(222
|
)
|
|
|
213,957
|
|
Europe
|
|
|
100,268
|
|
|
|
|
|
|
|
100,268
|
|
|
|
3,159
|
|
|
|
103,427
|
|
Australia/Asia
|
|
|
138,561
|
|
|
|
|
|
|
|
138,561
|
|
|
|
10,009
|
|
|
|
148,570
|
|
Mexico
|
|
|
|
|
|
|
10,051
|
|
|
|
10,051
|
|
|
|
386
|
|
|
|
10,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
745,676
|
|
|
$
|
10,051
|
|
|
$
|
755,727
|
|
|
$
|
17,788
|
|
|
$
|
773,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20