1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------------- ------------------ Commission File Number 1-8097 ENSCO INTERNATIONAL INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 76-0232579 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2700 Fountain Place 1445 Ross Avenue, Dallas, Texas 75202 - 2792 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 922-1500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- There were 142,282,699 shares of Common Stock, $.10 par value, of the registrant outstanding as of October 31, 1997.
2 ENSCO INTERNATIONAL INCORPORATED INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Review Report of Independent Accountants 3 Consolidated Statement of Income Three Months Ended September 30, 1997 and 1996 4 Consolidated Statement of Income Nine Months Ended September 30, 1997 and 1996 5 Consolidated Balance Sheet September 30, 1997 and December 31, 1996 6 Consolidated Statement of Cash Flows Nine Months Ended September 30, 1997 and 1996 7 Notes to Consolidated Financial Statements 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21 SIGNATURES 22 2
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REVIEW REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of ENSCO International Incorporated We have reviewed the accompanying consolidated balance sheet of ENSCO International Incorporated as of September 30, 1997 and the related consolidated statements of income and of cash flows for the three and nine month periods ended September 30, 1997 and 1996. This financial information is the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial information for it to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1996, and the related consolidated statements of income and of cash flows for the year then ended (not presented herein), and in our report dated January 28, 1997 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 1996, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Price Waterhouse LLP Price Waterhouse LLP Dallas, Texas October 31, 1997 3
4 ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, ------------------------ 1997 1996 --------- --------- <S> <C> <C> OPERATING REVENUES ............................ $ 223,325 $ 134,588 EXPENSES Operating expenses .......................... 80,391 64,801 Depreciation and amortization ............... 27,012 23,653 General and administrative .................. 3,555 2,768 --------- --------- 110,958 91,222 --------- --------- OPERATING INCOME .............................. 112,367 43,366 OTHER INCOME (EXPENSE) Interest income ............................. 1,460 1,051 Interest expense ............................ (5,006) (6,319) Other, net .................................. (105) 2,803 --------- --------- (3,651) (2,465) --------- --------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST .................................... 108,716 40,901 PROVISION FOR INCOME TAXES Current income taxes ........................ 27,940 1,937 Deferred income taxes ....................... 12,461 11,042 --------- --------- 40,401 12,979 MINORITY INTEREST ............................. 511 710 --------- --------- NET INCOME .................................... $ 67,804 $ 27,212 ========= ========= NET INCOME PER COMMON SHARE ................... $ .48 $ .19 ========= ========= DIVIDENDS PER COMMON SHARE .................... $ .025 $ -- ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .... 142,090 141,558 ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. 4
5 ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1997 1996 --------- --------- <S> <C> <C> OPERATING REVENUES ............................ $ 580,343 $ 316,383 EXPENSES Operating expenses .......................... 227,659 157,552 Depreciation and amortization ............... 76,977 57,907 General and administrative .................. 10,441 7,933 --------- --------- 315,077 223,392 --------- --------- OPERATING INCOME .............................. 265,266 92,991 OTHER INCOME (EXPENSE) Interest income ............................. 4,161 3,385 Interest expense ............................ (15,669) (14,755) Other, net .................................. 55 10,525 --------- --------- (11,453) (845) --------- --------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST .................................... 253,813 92,146 PROVISION FOR INCOME TAXES Current income taxes ........................ 55,533 2,898 Deferred income taxes ....................... 39,684 23,697 --------- --------- 95,217 26,595 MINORITY INTEREST ............................. 2,289 2,068 --------- --------- NET INCOME .................................... $ 156,307 $ 63,483 ========= ========= NET INCOME PER COMMON SHARE ................... $ 1.10 $ .49 ========= ========= DIVIDENDS PER COMMON SHARE .................... $ .025 $ -- ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .... 141,874 129,523 ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. 5
6 ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ (Unaudited) ASSETS <S> <C> <C> CURRENT ASSETS Cash and cash equivalents ...................... $ 121,697 $ 80,698 Accounts and notes receivable, net ............. 162,937 111,033 Prepaid expenses and other ..................... 19,210 19,668 ----------- ----------- Total current assets ..................... 303,844 211,399 ----------- ----------- PROPERTY AND EQUIPMENT, AT COST .................. 1,387,727 1,248,873 Less accumulated depreciation .................. 330,708 257,284 ----------- ----------- Property and equipment, net .............. 1,057,019 991,589 ----------- ----------- OTHER ASSETS, NET ................................ 126,059 112,432 ----------- ----------- $ 1,486,922 $ 1,315,420 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable ............................... $ 12,032 $ 11,447 Accrued liabilities ............................ 77,890 57,490 Current maturities of long-term debt ........... 32,778 34,943 ----------- ----------- Total current liabilities ................ 122,700 103,880 ----------- ----------- LONG-TERM DEBT ................................... 209,259 258,635 DEFERRED INCOME TAXES ............................ 113,234 72,963 OTHER LIABILITIES ................................ 41,322 33,991 COMMITMENTS AND CONTINGENCIES .................... -- -- STOCKHOLDERS' EQUITY First preferred stock, $1 par value, 5.0 million shares authorized, none issued ....... -- -- Preferred stock, $1 par value, 15.0 million shares authorized, none issued ............... -- -- Common stock, $.10 par value, 250.0 million shares authorized, 155.1 million and 77.2 million shares issued ........................ 15,509 7,718 Additional paid-in capital ..................... 835,314 835,475 Retained earnings .............................. 224,560 71,802 Restricted stock (unearned compensation) ....... (7,085) (4,929) Cumulative translation adjustment .............. (1,086) (1,086) Treasury stock, at cost, 12.8 million and 6.3 million shares ........................... (66,805) (63,029) ----------- ----------- Total stockholders' equity ............... 1,000,407 845,951 ----------- ----------- $ 1,486,922 $ 1,315,420 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. 6
7 ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1997 1996 --------- --------- <S> <C> <C> OPERATING ACTIVITIES Net income ........................................... $ 156,307 $ 63,483 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................... 76,977 57,907 Deferred income tax provision .................... 39,684 23,697 Amortization of other assets ..................... 4,714 2,729 Other ............................................ (595) (195) Changes in operating assets and liabilities: Increase in accounts receivable ................ (52,409) (12,519) (Increase) decrease in prepaid expenses and other ........................................ (6,794) 9,615 Increase in accounts payable ................... 585 1,546 Increase in accrued liabilities ................ 13,494 1,868 --------- --------- Net cash provided by operating activities ..... 231,963 148,131 --------- --------- INVESTING ACTIVITIES Additions to property and equipment .................. (140,550) (106,288) Proceeds from disposition of assets .................. 1,815 3,590 Sale of short-term investments ....................... -- 5,000 Net cash acquired in Dual acquisition ................ -- 8,529 Other ................................................ 500 2,889 --------- --------- Net cash used by investing activities ............ (138,235) (86,280) --------- --------- FINANCING ACTIVITIES Proceeds from long-term borrowings ................... -- 45,000 Reduction of long-term borrowings .................... (51,036) (77,061) Pre-acquisition purchase of Dual debt ................ -- (18,112) Dividends paid ....................................... (3,549) -- Reduction in restricted cash ......................... 1,631 -- Other ................................................ 225 779 --------- --------- Net cash used by financing activities ............ (52,729) (49,394) --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS .................. 40,999 12,457 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......... 80,698 77,064 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ............... $ 121,697 $ 89,521 ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. 7
8 ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - UNAUDITED FINANCIAL STATEMENTS The accompanying consolidated financial statements of ENSCO International Incorporated and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission included in the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information included herein is unaudited but, in the opinion of management, includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and of cash flows for the interim periods presented. The financial data for the three and nine month periods ended September 30, 1997 included herein have been subjected to a limited review by Price Waterhouse LLP, the registrant's independent accountants. The accompanying review report of independent accountants is not a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the independent accountant's liability under Section 11 does not extend to it. Results of operations for the three and nine month periods ended September 30, 1997 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 1997. It is recommended that these financial statements be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 1996 included in the Company's Annual Report filed with the Securities and Exchange Commission on Form 10-K. NOTE 2 - ACQUISITIONS In May 1997, the Company acquired the remaining 51% interest in a jointly owned premium jackup rig located in Southeast Asia. The Company's 49% interest in the rig was previously acquired in the acquisition of DUAL DRILLING COMPANY ("Dual") in June 1996. NOTE 3 - LONG-TERM DEBT On February 27, 1997, the Company amended and restated its $150.0 million revolving credit facility with a group of international banks, increasing availability under the amended and restated revolving credit facility (the "Facility") to $200.0 million and reducing the interest rate margin and the commitment fee. Availability under the Facility will be reduced by $14.0 million on a semi-annual basis beginning April 1998. The final maturity date of the Facility remains October 2001 and the Facility continues to be collateralized by the majority of the Company's jackup rigs. The covenants under the Facility are similar to the covenants that existed under the original revolving credit facility and the interest rate continues to be tied to the London InterBank Offered Rate. As of September 30, 1997, $100.0 million was outstanding and $100.0 million was available for future borrowing under the Facility. On October 20, 1997, the Company repaid $25.0 million of debt outstanding under the Facility that was not due currently. 8
9 NOTE 4 - CAPITAL On March 3, 1997, the Board of Directors of ENSCO amended the Shareholder Rights Plan of the Company to increase the purchase price from $50.00 to $250.00 for each one one-hundredth of a share of preferred stock purchasable upon the exercise of a Right, subject to adjustment. At the Company's annual meeting of stockholders on May 13, 1997, the stockholders approved an increase in the Company's authorized common stock from 125 million shares to 250 million shares. In August 1997, the Company's Board of Directors approved a two-for-one stock split of the Company's common stock and declared a $.025 per share cash dividend, after giving effect to the stock split. The additional shares were issued and the cash dividends were paid on September 15, 1997. Net income per common share amounts for prior periods have been restated to give effect to the two-for-one stock split. NOTE 5 - RELATED PARTY TRANSACTION In January 1997, a director of the Company settled a $675,000 note payable to the Company. The note payable related to the director's purchase of 168,750 shares of restricted common stock of the Company in 1988. The note was settled through the delivery to the Company of restricted shares of the Company's common stock valued at a formula price provided for in the director's 1988 stock purchase agreement. As a result, the director retained 132,998 net shares of common stock and $238,000 cash after repayment of the note. NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which establishes new standards for computing and presenting earnings per share. The statement is effective for financial statements issued for periods ending after December 15, 1997, and earlier adoption is not permitted. For the quarters ended September 30, 1997 and 1996, the calculation of earnings per share in accordance with the provisions of Statement No. 128 would have resulted in basic earnings per share of $.48 and $.19 and diluted earnings per share of $.47 and $.19, for the respective periods. For the nine months ended September 30, 1997 and 1996, the calculation of earnings per share in accordance with Statement No. 128 would have resulted in basic earnings per share of $1.11 and $.49 and diluted earnings per share of $1.09 and $.48, for the respective periods. In June 1997, the Financial Accounting Standards Board released Statement No. 130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both statements become effective for fiscal years beginning after December 15, 1997. These statements require disclosure of certain components of changes in equity and certain information about operating segments and geographic areas of operation. These statements will not have any effect on the results of operations or financial position of the Company. 9
10 NOTE 7 - SUBSEQUENT EVENTS The Company has signed a letter of intent with Smedvig asa to acquire the West Omikron, a Marathon LeTourneau 150-88C Gorilla class jackup drilling rig. The purchase price for the rig is approximately $103.0 million. The West Omikron, which was built in 1987, is currently contracted to Phillips Petroleum Company in Norway for water injection on the Ekofisk field. ENSCO will bareboat charter the rig to Smedvig for the remaining term of the Phillips contract. The closing of the transaction is expected to occur by December 1997. On October 15, 1997, the Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission. The registration statement provides for the issuance of up to $500 million of debt and/or equity securities. The proceeds from any future offering of securities under the shelf registration would be used for general corporate purposes, which may include repayment of existing debt, working capital, acquisitions, capital expenditures, and repurchase of securities of the Company. 10
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Generally, forward-looking statements include words or phrases such as "management anticipates," "the Company believes," "the Company anticipates" and words and phrases of similar impact, and include but are not limited to statements regarding future operations and business environment. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The factors that could cause actual results to differ materially include, but are not limited to: (i) industry conditions and competition, (ii) the cyclical nature of the industry, (iii) worldwide expenditures for oil and gas drilling, (iv) operational risks and insurance, (v) risks associated with operating in foreign jurisdictions, (vi) environmental liabilities which may arise in the future which are not covered by insurance or indemnity, (vii) the impact of current and future laws and governmental regulation, as well as repeal or modification of the same, affecting the oil and gas industry and the Company's operations in particular, and (viii) the risks described from time to time in the Company's reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 1996. BUSINESS ENVIRONMENT ENSCO International Incorporated is one of the leading international providers of offshore drilling services and marine transportation services to the oil and gas industry. The Company's operations are conducted in the geographic cores of North America, Europe, Asia Pacific and South America. Offshore drilling and marine transportation services are largely affected by the supply and demand for available equipment. Currently, nearly all actively marketed offshore rigs in the world are under contract and the demand for high quality rigs exceeds supply in most areas. Based on current industry conditions and projected capital spending levels of major oil and gas companies, the Company believes the recent trend of increasing day rates and continued high demand for offshore drilling equipment should continue for the near future. Demand for the Company's services is significantly affected by worldwide expenditures for oil and gas drilling. Expenditures for oil and gas drilling activity fluctuate based upon many factors including world economic conditions, the legislative environment in the U.S. and other major countries, production levels and other activities of OPEC and other oil and gas producers and the impact that those and other events have on the current and expected future pricing of oil and natural gas. 11
12 Offshore rig and marine vessel industry utilization for the three and nine months ended September 30, 1997 and 1996 are summarized below: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 1997 1996 1997 1996 -------- -------- ------- ------- <S> <C> <C> <C> <C> INDUSTRY WIDE AVERAGES * - ------------------------ Offshore Rigs U.S. Gulf of Mexico: All Rigs: Rigs Under Contract 168 161 167 155 Total Rigs Available 176 180 179 179 % Utilization 95% 89% 93% 87% Jackup Rigs: Rigs Under Contract 125 124 125 120 Total Rigs Available 130 136 133 137 % Utilization 96% 91% 95% 88% Platform Rigs: Rigs Under Contract 23 19 21 19 Total Rigs Available 28 26 26 26 % Utilization 82% 73% 81% 73% Worldwide: All Rigs: Rigs Under Contract 605 581 596 568 Total Rigs Available 636 640 635 640 % Utilization 95% 91% 94% 89% Jackup Rigs: Rigs Under Contract 364 351 361 344 Total Rigs Available 378 383 378 384 % Utilization 96% 92% 96% 90% Platform Rigs: Rigs Under Contract 114 113 113 110 Total Rigs Available 125 124 123 120 % Utilization 91% 91% 92% 92% Marine Vessels U.S. Gulf of Mexico: Vessels Under Contract 288 258 281 261 Total Vessels Available 306 274 297 278 % Utilization 94% 94% 95% 94% </TABLE> * Industry utilization based on data published by Offshore Data Services, Inc. 12
13 RESULTS OF OPERATIONS The following analysis highlights the Company's operating results for the three and nine months ended September 30, 1997 and 1996 (in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ OPERATING RESULTS 1997 1996 1997 1996 - ----------------- --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues $ 223,325 $ 134,588 $ 580,343 $ 316,383 Operating margin(1) 142,934 69,787 352,684 158,831 Operating income 112,367 43,366 265,266 92,991 Other income (expense) (3,651) (2,465) (11,453) (845) Provision for income taxes 40,401 12,979 95,217 26,595 Minority interest 511 710 2,289 2,068 Net income 67,804 27,212 156,307 63,483 REVENUES Contract drilling Jackup rigs: North America $ 100,652 $ 56,670 $ 255,263 $ 134,002 Europe 48,501 22,428 120,145 63,174 Asia Pacific(2) 22,788 11,828 53,932 13,761 --------- --------- --------- --------- Total jackup rigs 171,941 90,926 429,340 210,937 --------- --------- --------- --------- Barge rigs - South America 22,150 18,145 63,235 53,232 Platform rigs(2) 5,439 9,176 20,255 10,635 --------- --------- --------- --------- Total contract drilling 199,530 118,247 512,830 274,804 --------- --------- --------- --------- Marine transportation AHTS(3) 5,590 4,146 15,675 11,776 Supply 15,326 10,078 43,655 24,484 Mini-supply 2,879 2,117 8,183 5,319 --------- --------- --------- --------- Total marine transportation 23,795 16,341 67,513 41,579 --------- --------- --------- --------- Total $ 223,325 $ 134,588 $ 580,343 $ 316,383 ========= ========= ========= ========= OPERATING MARGIN(1) Contract drilling Jackup rigs: North America $ 70,473 $ 31,411 $ 168,886 $ 67,870 Europe 34,010 9,837 78,899 25,858 Asia Pacific(2) 11,491 4,636 22,210 5,326 --------- --------- --------- --------- Total jackup rigs 115,974 45,884 269,995 99,054 --------- --------- --------- --------- Barge rigs - South America 11,509 11,863 36,619 34,976 Platform rigs(2) 1,681 2,328 5,667 2,837 Land rig(4) -- 798 -- 752 --------- --------- --------- --------- Total contract drilling 129,164 60,873 312,281 137,619 --------- --------- --------- --------- Marine transportation AHTS(3) 3,023 2,096 8,605 6,100 Supply 9,046 5,789 27,179 12,678 Mini-supply 1,701 1,029 4,619 2,434 --------- --------- --------- --------- Total marine transportation 13,770 8,914 40,403 21,212 --------- --------- --------- --------- Total $ 142,934 $ 69,787 $ 352,684 $ 158,831 ========= ========= ========= ========= </TABLE> (1) Defined as revenues less operating expenses, exclusive of depreciation and general and administrative expenses. (2) The 1996 amounts for Asia Pacific and the platform rigs are comprised exclusively of operations acquired in the Dual acquisition on June 12, 1996. (3) Anchor handling tug supply vessels. (4) The Company sold its remaining land rig in July 1996. 13
14 The following is an analysis of certain operating information of the Company for the three and nine months ended September 30, 1997 and 1996: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- --------------------- 1997 1996 1997 1996 ------- ------- ------- ------- <S> <C> <C> <C> <C> CONTRACT DRILLING - ----------------- Utilization: Jackup rigs: North America 97% 95% 96% 92% Europe 100% 83% 100% 85% Asia Pacific 86% 98% 76% 96% ------- ------- ------- ------- Total jackup rigs 95% 94% 93% 91% Barge rigs - South America 100% 99% 100% 88% Platform rigs 56% 78% 60% 77% ------- ------- ------- ------- Total 91% 93% 90% 89% ======= ======= ======= ======= Average day rates: Jackup rigs: North America $51,005 $28,422 $44,194 $26,105 Europe 87,789 46,880 73,737 45,265 Asia Pacific 40,915 25,733 37,658 25,591 ------- ------- ------- ------- Total jackup rigs 55,800 30,988 48,644 29,728 Barge rigs - South America 24,061 19,789 23,149 21,989 Platform rigs 20,954 16,612 18,394 16,375 ------- ------- ------- ------- Total $47,224 $26,906 $40,709 $27,019 ======= ======= ======= ======= MARINE TRANSPORTATION - --------------------- Utilization: AHTS(1) 86% 81% 82% 80% Supply 87% 93% 91% 91% Mini-supply 95% 95% 97% 85% ------- ------- ------- ------- Total 88% 92% 91% 88% ======= ======= ======= ======= Average day rates: AHTS(1) $14,098 $ 9,265 $12,305 $ 8,899 Supply 8,019 5,120 7,502 4,281 Mini-supply 4,101 3,020 3,879 2,838 ------- ------- ------- ------- Total $ 7,905 $ 5,242 $ 7,336 $ 4,663 ======= ======= ======= ======= </TABLE> (1) Anchor handling tug supply vessels. The Company's net income for the quarter ended September 30, 1997 increased to $67.8 million, $.48 per share, from $27.2 million, $.19 per share, in the prior year quarter. For the nine months ended September 30, 1997, net income increased to $156.3 million, $1.10 per share, from $63.5 million, $.49 per share, in the prior year period. These increases are due primarily to higher average day rates for the Company's drilling rigs and marine vessels over 1996 levels and the benefit from the drilling rigs acquired in the Dual acquisition in mid-June 1996. 14
15 CONTRACT DRILLING The following is an analysis of the Company's offshore drilling rigs at September 30, 1997 and 1996: <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Jackup rigs: North America 22 23 Europe 6 6 Asia Pacific 7 5 ---- ---- Total jackup rigs 35 34 Barge rigs - South America 10 10 Platform rigs 8* 8* ---- ---- Total 53 52 ==== ==== </TABLE> * Seven of the Company's platform rigs are located in the Gulf of Mexico and one, which is not owned but operated under a management contract, is located off the coast of China. For the quarter ended September 30, 1997, revenues from the drilling segment were up $81.3 million, or 69%, and operating margin increased $68.3 million, or 112%, from the prior year quarter. For the nine months ended September 30, 1997, revenues were up $238.0 million, or 87%, and operating margin increased $174.7 million, or 127%, from the prior year period. The significantly improved 1997 results are primarily due to increased revenue from higher day rates offset, in part, by higher operating expenses. In general, the Company's operating expenses have increased due to rig fleet additions, higher wages, benefits and training costs for offshore rig workers, and increased oilfield equipment and materials costs. As the demand for offshore drilling services has increased, so has the demand for qualified personnel and certain oilfield supply equipment which are fundamental to the Company's operations. The Company places great importance on managing its operations efficiently in order to minimize the effects of these cost increases. North America Jackup Rigs For the quarter ended September 30, 1997, revenues from North America jackup rigs were up $44.0 million, or 78%, and operating margin increased by $39.1 million, or 124%, over the prior year quarter. For the nine months ended September 30, 1997, revenues were up $121.3 million, or 90%, and operating margin increased by $101.0 million, or 149%, from the prior year period. These improvements are due primarily to average day rate increases of 79% and 69% for the quarter and nine months ended September 30, 1997, respectively. The Dual acquisition in mid-June 1996 added four jackup rigs to the North America fleet. One of these jackup rigs was transferred from the Gulf of Mexico to the Asia Pacific fleet in the first quarter of 1997. Europe Jackup Rigs For the quarter ended September 30, 1997,revenues from Europe jackup rigs were up $26.1 million, or 116%, and operating margin increased $24.2 million, or 246%, over the prior year quarter. For the nine months ended September 30, 1997, revenues were up $57.0 million, or 90%, and operating 15
16 margin increased $53.0 million, or 205%, from the prior year. These improvements are due primarily to increased average day rates of 87% and 63% for the quarter and nine months ended September 30, 1997, respectively. Also, utilization increased to 100% in the current year periods from 83% and 85% for the comparable three and nine month periods in the prior year, respectively. In the prior year, three of the Europe jackup rigs were undergoing modification and enhancement for a portion of the first nine months of 1996, including one rig that was in the shipyard for the entire third quarter. Asia Pacific Jackup Rigs The Asia Pacific operations were acquired in the June 1996 Dual acquisition. Subsequent to the Dual acquisition, the Company purchased an additional jackup rig located in Southeast Asia in November 1996, and relocated another jackup rig from the Gulf of Mexico to Southeast Asia in the first quarter of 1997. In May 1997, the Company completed the acquisition of the remaining 51% interest in a jointly owned jackup rig located in Southeast Asia. This rig was undergoing modification and enhancement during most of the second quarter and all of the third quarter of 1997 and is scheduled to return to work in the first part of November. During the second quarter of 1997, two of the Company's Asia Pacific jackup rigs that had previously been in the shipyard since late 1996 undergoing modification and enhancement returned to work. For the quarter ended September 30, 1997, revenues from the Asia Pacific jackup rigs were up $11.0 million, or 93%, and operating margin increased $6.9 million, or 148%, from the prior year quarter. These improvements are primarily attributable to a 59% increase in average day rates from the prior year quarter offset, in part, by a decrease in utilization, from 98% to 86%, due to shipyard downtime. For the nine months ended September 30, 1997, revenues were up $40.2 million, or 292%, and operating margin increased $16.9 million, or 317%, from the prior year period. These increases are primarily due to a full period of operations from the rigs acquired in the Dual acquisition. In the fourth quarter of 1997 the Company plans to begin major modifications to two rigs currently operating off the India coast. It is estimated that these two rigs will be in the shipyard until mid-1998. South America Barge Rigs Revenues from South America barge rigs were up $4.0 million, or 22%, and operating margin decreased by $0.4 million, or 3%, from the prior year quarter. The increase in revenues is mostly due to a 22% increase in average day rates. The increase in day rates results from inflation based increases that effectively reimburse the Company for cost increases, thus, resulting in the nearly level operating margin. For the nine months ended September 30, 1997, revenues were up $10.0 million, or 19%, and operating margin increased $1.6 million, or 5%, from the prior year period. The increase in revenues and operating margin is primarily due to the increase in utilization, to 100% for the nine months ended September 30, 1997 compared to 88% for the prior year period. The increase in utilization is attributable to two barge drilling rigs returning to work in May and June of 1996 that had been under modification since 1995. In addition, revenues were up due to a 5% increase in average day rates over the prior year period, principally related to the recovery of inflationary cost increases. 16
17 MARINE TRANSPORTATION The following is an analysis of the Company's marine transportation vessels as of September 30, 1997 and 1996: <TABLE> <CAPTION> 1997 1996 ----- ----- <S> <C> <C> AHTS * 5 6 Supply 24 23 Mini-Supply 8 8 ----- ----- Total 37 37 ===== ===== </TABLE> * Anchor handling tug supply vessels. For the quarter ended September 30, 1997, revenues for the marine transportation segment were up $7.5 million, or 46%, and operating margin increased $4.9 million, or 54%, from the prior year quarter. For the nine months ended September 30, 1997, revenues were up $25.9 million, or 62%, and operating margin increased $19.2 million, or 90%, from the prior year period. The 1997 results improved significantly over the prior year periods due primarily to increased average day rates of approximately 51% and 57% for the comparable three and nine month periods, respectively. In the third quarter of 1997, one of the Company's anchor handling tug supply vessels was converted to a straight supply vessel, decreasing the number of vessels with anchor handling tug capabilities to five. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense increased for the quarter and nine months ended September 30, 1997 as compared to the prior year periods due primarily to personnel added in connection with the Dual acquisition and higher performance based benefit costs. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for the quarter ended September 30, 1997 increased by $3.4 million, or 14%, and for the nine months ended September 30, 1997 increased by $19.1 million, or 33%, from the prior year periods. These increases are due primarily to depreciation and amortization from the drilling rigs acquired and goodwill recorded in the June 1996 Dual acquisition, additional drilling rigs acquired in November 1996 and May 1997, and major modifications and enhancements to the Company's fleet in 1996 and the first part of 1997. 17
18 OTHER INCOME (EXPENSE) Other income (expense) for the three and nine months ended September 30, 1997 and 1996 was as follows (in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- ---------------------- 1997 1996 1997 1996 ------- -------- -------- -------- <S> <C> <C> <C> <C> Interest income $ 1,460 $ 1,051 $ 4,161 $ 3,385 Interest expense (5,006) (6,319) (15,669) (14,755) Other, net (105) 2,803 55 10,525 ------- -------- -------- -------- $(3,651) $ (2,465) $(11,453) $ (845) ======= ======== ======== ======== </TABLE> The Company's interest income increased for the quarter and nine month periods ended September 30, 1997 over the comparable prior year periods due primarily to higher average cash balances in the current year. Interest expense decreased for the quarter ended September 30, 1997 as compared to the prior year quarter primarily due to lower average debt balances as a result of debt repayments. Interest expense increased for the nine month period ended September 30, 1997 over the comparable prior year period due primarily to the debt that was added in June 1996 in connection with the Dual acquisition. "Other, net" decreased for the quarter ended September 30, 1997 as compared to the prior year quarter due primarily to a $2.9 million gain recorded in the third quarter of 1996 from the sale of securities that the Company had received in the September 1995 disposition of assets of a discontinued operation. For the nine months ended September 30, 1997, "Other, net" decreased primarily due to a $6.4 million gain on a settlement with TransAmerican Natural Gas Corporation recorded in the second quarter of 1996 and the $2.9 million gain recorded in the third quarter of 1996. PROVISION FOR INCOME TAXES The Company's provisions for income taxes increased significantly for the three and nine months ended September 30, 1997 as compared to the prior year periods due primarily to the increased profitability of the Company and the recognition of the remaining net operating losses for financial reporting purposes in 1996. 18
19 LIQUIDITY AND CAPITAL RESOURCES CASH FLOW AND CAPITAL EXPENDITURES The Company's cash flow from operations and capital expenditures for the nine months ended September 30, 1997 and 1996 were as follows (in thousands): <TABLE> <CAPTION> 1997 1996 -------- -------- <S> <C> <C> Cash flow from operations $231,963 $148,131 ======== ======== Capital expenditures Sustaining $ 22,664 $ 10,755 Enhancements 96,210 82,262 Acquisitions 21,676 13,271 -------- -------- $140,550 $106,288 ======== ======== </TABLE> Cash flow from operations increased by $83.8 million for the nine months ended September 30, 1997 as compared to the same period in the prior year. The increase in cash flow from operations is primarily a result of increased operating margin for the first nine months of 1997 offset, in part, by cash used in the net change in working capital accounts. Management anticipates that capital expenditures for the full year 1997, excluding acquisitions, will be approximately $165.0 million to $185.0 million, represented by approximately $30.0 million to $35.0 million for existing operations and $135.0 million to $150.0 million for modifications and enhancements of rigs and vessels. In addition, the Company has signed a letter of intent with Smedvig asa to acquire the West Omikron, a Marathon LeTourneau 150-88C Gorilla class jackup drilling rig. The purchase price for the rig is approximately $103.0 million and the transaction is expected to close by December 1997. The Company may spend additional funds to acquire rigs or vessels in 1997, depending on market conditions and opportunities. FINANCING AND CAPITAL RESOURCES The Company's long-term debt, total capital and debt to capital ratios at September 30, 1997 and December 31, 1996 are summarized below (in thousands, except percentages): <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------- <S> <C> <C> Long-term debt $ 209,259 $ 258,635 Total capital 1,209,666 1,104,586 Long-term debt to total capital 17.3% 23.4% </TABLE> The decrease in long-term debt is due to $51.0 million of debt repayments in the first nine months of 1997. The total capital of the Company increased due primarily to the profitability of the Company in the first nine months of 1997 offset, in part, by the $51.0 million of debt repayments in the first nine months of 1997 and dividend payments of approximately $3.5 million in the third quarter. 19
20 In September 1997, the Company paid a cash dividend on its common stock of $.025 per share, after adjustment for a two-for-one stock split which was also effected in September. This dividend was the first cash dividend ever paid on the Company's common stock. The Company currently intends to continue to pay such dividends in the foreseeable future. However, the final determination of the timing, amount and payment of dividends on the common stock is at the discretion of the Board of Directors and will depend on, among other things, the Company's profitability, liquidity, financial condition, and capital requirements. On February 27, 1997, the Company amended and restated its $150.0 million revolving credit facility with a group of international banks, increasing availability under the amended and restated revolving credit facility (the "Facility") to $200.0 million and reducing the interest rate margin and the commitment fee. Availability under the Facility will be reduced by $14.0 million on a semi-annual basis beginning April 1998. The final maturity date of the Facility remains October 2001 and the Facility continues to be collateralized by the majority of the Company's jackup rigs. The covenants under the Facility are similar to the covenants that existed under the original revolving credit facility and the interest rate continues to be tied to the London InterBank Offered Rate. As of September 30, 1997, $100.0 million was outstanding and $100.0 million was available for future borrowing under the Facility. On October 20, 1997, the Company repaid $25.0 million of debt outstanding under the Facility that was not due currently, increasing the amount available for future borrowing to $125.0 million. The Company's liquidity position at September 30, 1997 and December 31, 1996 is summarized in the table below (in thousands, except ratios): <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ <S> <C> <C> Cash and cash equivalents $121,697 $ 80,698 Working capital 181,144 107,519 Current ratio 2.5 2.0 </TABLE> Based on current energy industry conditions, management believes cash flow from operations, the Company's existing credit facility and the Company's working capital should be sufficient to fund the Company's short and long-term liquidity needs. On October 15, 1997, the Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission. The registration statement provides for the issuance of up to $500 million of debt and/or equity securities. The proceeds from any future offering of securities under the shelf registration would be used for general corporate purposes, which may include repayment of existing debt, working capital, acquisitions, capital expenditures, and repurchase of securities of the Company. The Company is continuing to assess market conditions and its financing options in connection with a possible offering of debt securities under the shelf registration statement. 20
21 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed with this Report Exhibit No. 15.1 Letter regarding unaudited interim financial information. 27.1 Financial Data Schedule. (Exhibit 27.1 is being submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q submitted to the Securities and Exchange Commission.) (b) Reports on Form 8-K None 21
22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENSCO INTERNATIONAL INCORPORATED Date: October 31, 1997 /s/ C. Christopher Gaut ----------------------------------- C. Christopher Gaut Chief Financial Officer /s/ H. E. Malone ----------------------------------- H. E. Malone, Corporate Controller and Chief Accounting Officer 22
23 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 15.1 Letter regarding unaudited interim financial information. 27.1 Financial Data Schedule. (Exhibit 27.1 is being submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q submitted to the Securities and Exchange Commission.)