ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Our property consists primarily of mobile offshore drilling rigs and ancillary equipment. Six of our rigs (the Atwood Aurora, the Atwood Beacon, the Atwood Eagle, the Atwood Falcon, the Atwood Hunter, and the Atwood Osprey) are pledged under our senior secured revolving credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Revolving Credit Facility” in Item 7 of this Form 10-K.
We lease our office at our corporate headquarters in the United States and own or lease support offices in Australia, Malaysia, Singapore and the United Kingdom.
We incorporate by reference in response to this item the information set forth in Item 1, Item 7 and Note 4 of the Notes to our Consolidated Financial Statements in this Form 10-K.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
We have certain actions, claims and other matters pending as discussed and reported in Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. As of September 30, 2012, we were also involved in a number of lawsuits which have arisen in the ordinary course of business and for which we do not expect the liability, if any, resulting from these lawsuits to have a material adverse effect on our current consolidated financial position, results of operations or cash flows. We cannot predict with certainty the outcome or effect of any of these matters described above or any such other proceeding or threatened litigation or legal proceedings. There can be no assurance that our beliefs or expectations as to the outcome or effect of any lawsuit or other matters will prove correct and the eventual outcome of these matters could materially differ from management’s current estimates.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of November 8, 2012, there were approximately 73 record owners of our common stock. Our common stock is traded on the New York Stock Exchange under the symbol “ATW”.
We did not pay cash dividends in fiscal years 2012 or 2011 and we do not anticipate paying cash dividends in the foreseeable future because of the capital-intensive nature of our business and restrictions in our debt agreements. To enable us to maintain our highly competitive profile in the industry, we expect to utilize cash reserves at the appropriate time to construct additional equipment or to upgrade existing equipment. Our senior secured revolving credit facility prohibits payments of cash dividends on our common stock without lender approval, and the indenture governing our senior notes restricts payments of cash dividends on our common stock without noteholder approval subject to certain exceptions.
STOCK PRICE INFORMATION
The following table sets forth the range of high and low sales prices per share of common stock as reported by the NYSE for the periods indicated.
COMMON STOCK PRICE PERFORMANCE GRAPH
Below is a comparison of five-year cumulative total returns among Atwood Oceanics, Inc. and the center for research in security prices ("CRSP") index for the NYSE/AMEX/NASDAQ stock markets, and our self determined peer group of drilling companies.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN (1)
Constituents of the Self-determined Peer Group (weighted according to market capitalization):
Diamond Offshore Drilling, Inc.
Transocean Ltd.
Rowan Companies, Inc.
Ensco plc
Noble Corporation
Seadrill Limited
(1) Total returns assume (i) that $100 was invested in each on September 30, 2007; (ii) dividends, if any, were reinvested; and (iii) a September 30 fiscal year end.
The performance graph above is furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933 unless specifically identified therein as being incorporated therein by reference. The performance graph is not soliciting material subject to Regulation 14A.
UNREGISTERED SALES OF EQUITY SECURITIES
None.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Selected financial data for each of the last five fiscal years is presented below:
(1)
Excludes any contractual downtime for shipyard projects. Fiscal years 2011 and 2012 also exclude cold-stacked rigs which were not actively marketed.
(2)
We have never paid any cash dividends on our common stock.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding our financial position at September 30, 2012 and 2011, and our results of operations for each of the fiscal years for the three year period ended September 30, 2012, and should be read in conjunction with the accompanying consolidated financial statements and related notes in Item 8 of this Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under Item 1A “Risk Factors” in this Form 10-K. See “Forward-Looking Statements”.
MARKET OUTLOOK
Overview
Our fiscal year 2012 financial and operating results include:
•
Record operating revenues totaling $787 million
•
Record net income of $272 million
•
Diluted earnings per share of $4.14
•
Net cash from operating activities of $256 million
•
Debt to capitalization ratio of 30% at September 30, 2012
Industry Conditions
The offshore drilling market continued to strengthen throughout fiscal year 2012 with all rig classes experiencing improved utilization levels in response to higher than average oil prices. The ultra-deepwater floater market has been the principal beneficiary of the strengthening market as evidenced by the relatively higher increase in day rates and near full utilization for this rig class during the year. Day rates for all other rig classes also experienced improvement, albeit at a slower pace.
The strength of the ultra-deepwater market is also evidenced by an increase of newbuild rig construction orders since the beginning of 2011. The pace of rig orders, however, has recently slowed from the prior year as contract drilling companies navigate between disrupting long term supply and demand dynamics by adding additional newbuild rigs and growing their rig fleet at reasonable construction prices in a strong day rate environment.
The global macro environment, including the sovereign debt issues in Europe and slower economic growth in the U.S., China and several developing countries, coupled with the uncertainty associated with U.S. fiscal policy and economic recovery, create a high level of market volatility and threaten to disrupt favorable offshore drilling market conditions. In addition, capacity constraints in the offshore rig equipment global supply chain and the shortage of skilled personnel are negatively impacting operating costs leading to margin compression in certain operating jurisdictions.
Drilling activity in the U.S. Gulf of Mexico is rebounding to pre-Macondo levels and the drilling permit approval process is now functioning capably. However, we cannot be certain that this level of activity will continue into the future or that additional restrictions or regulations will not be implemented which might negatively impact drilling activity or the drilling permit approval process in the U.S. Gulf of Mexico.
West Africa, East Africa and certain other deepwater and ultra-deepwater frontiers are experiencing exploration success which is driving increased contract tender requests and awards at increasingly higher day rates. Further improvements in ultra-deepwater and deepwater rig utilization and day rates will depend in large part on projected oil prices, the strength of the global economy, and any additional impacts from the Macondo incident and associated new regulatory, legislative and permitting requirements.
Ultra-deepwater and Deepwater Rigs
Industry-wide, deepwater rig utilization increased from 89% at the end of fiscal year 2011 to 98% currently, while ultra-deepwater utilization remains at full utilization. Only eight newbuild floaters are available through the end of 2013. For calendar year 2013, the vast majority of both ultra-deepwater and deepwater available days are contracted for the respective industry-wide fleets.
As of October 1, 2012, there were 69 drillships and 12 semisubmersibles under construction for delivery through January 2020. This includes 28 ultra-deepwater rigs to be constructed in shipyards located in Brazil, all of which are under long-term contracts with Petrobras. Of the remaining 53 ultra-deepwater rigs under construction, 25 are currently contracted, with several others under announced letters of intent.
The Atwood Condor began its 21-month contract with Hess Corporation in the fourth quarter of fiscal year 2012 in the U.S. Gulf of Mexico and is contracted through July 2014. The Atwood Osprey continued its six-year commitment offshore Australia with Chevron Australia and is contracted through the third quarter of fiscal year 2017.
The Atwood Eagle and Atwood Falcon are contracted through the third quarter of fiscal year 2014 and the first quarter of fiscal year 2015, respectively, while the Atwood Hunter is contracted throughout fiscal year 2013.
The Atwood Advantage and Atwood Achiever are DP-3 dynamically-positioned, dual derrick, ultra-deepwater drillships rated to operate in water depths up to 12,000 feet, and are currently under construction at the Daewoo Shipbuilding and Marine Engineering Co., Ltd. (“DSME”) shipyard in South Korea. These drillships will have enhanced technical capabilities, including two seven-ram BOPs, three 100-ton knuckle boom cranes, a 165-ton active heave “tree-running” knuckle boom crane and 200 person accommodations. The Atwood Advantage and Atwood Achiever are expected to be delivered during the fourth quarter of fiscal year 2013 and third quarter of fiscal 2014, respectively, at a total cost, including project management, drilling, handling tools and spares, of approximately $635 million each. Upon delivery from the shipyard, the Atwood Advantage will mobilize to the Eastern Mediterranean Sea to commence a drilling program with Noble which extends through the first quarter of fiscal year 2017.
In September 2012, we entered into a turnkey construction contract with DSME to construct a third ultra-deepwater drillship, the Atwood Admiral, at the DSME yard in South Korea. The Atwood Admiral is expected to be delivered during the second quarter of fiscal year 2015. The design of the Atwood Admiral will be substantially identical to the previously ordered Atwood Advantage and Atwood Achiever.
In addition, we have until June 30, 2013 to exercise our option to build an additional ultra-deepwater drillship with DSME. At this time, we have made no determination as to whether that option will be exercised. In determining whether to exercise the option we will consider several factors, including oil and gas prices, the magnitude of our contract drilling revenue backlog, the current and prospective supply and demand dynamics of the ultra-deepwater drilling segment, current ultra-deepwater contract day rates and newbuild drillship construction prices.
Although we currently do not have drilling contracts for the Atwood Achiever or the Atwood Admiral, we expect that the long-term demand for ultra-deepwater drilling services in established and emerging basins should provide us with opportunities to contract these two rigs prior to their delivery dates.
Jackup Rigs
The bifurcation in day rates and utilization continues to drive contracting activity in the jackup market. Currently, higher specification jackup rigs are achieving marketed utilization levels of approximately 98% as compared to 91% for the remainder of the global jackup fleet. While higher specification rigs represent less than 30% of the global jackup fleet, we expect the bifurcation trend to continue. Despite the expected increase in supply due to the continued delivery of high specification newbuild rigs through the end of next year, we expect that operators will continue to prefer contracting newer, more capable high specification jackups.
As a result of newbuild construction programs initiated during 2005 and continuing through 2010, the jackup supply continues to increase. As of October 1, 2012, there were 88 newbuild jackup rigs under construction, of which 11 are scheduled for delivery during the remainder of 2012, 48 are scheduled for delivery during 2013 and the remainder are scheduled for delivery thereafter. Approximately only 20% of jackup rigs yet to be delivered are currently uncontracted, and approximately 20% are not considered high specification rigs (i.e., less than 350-foot water depth capability) and therefore do not compete with the majority of our jackup fleet. Additionally, approximately 27 rigs are capable of working year-round in the North Sea and offshore Norway, and therefore are not directly competing with our jackup fleet.
The Atwood Mako and Atwood Manta are contracted through fiscal year 2013 and the first quarter of fiscal year 2014, while the Atwood Aurora and Atwood Beacon are contracted for 11 and seven months in fiscal year 2013, respectively. The Vicksburg is contracted through the end of the first fiscal quarter of 2014. Due to market bifurcation for high-specification jackups, we expect the Atwood Aurora and Atwood Beacon to continue to operate with high utilization and increasing day rates while the Vicksburg may encounter greater competition resulting in lower utilization, with day rates remaining under pressure for the foreseeable future.
We currently have two Pacific Class 400 jackup drilling units, the Atwood Manta and the Atwood Orca, similar in design to the Atwood Mako, under construction at the PPL Shipyard Pte. Ltd. (“PPL”) shipyard in Singapore. These new rigs will have a rated water depth of 400 feet, accommodations for 150 personnel and significant offline handling features. The rigs are each expected to cost approximately $190 million, including project management, drilling, handling tools and spares, and are scheduled for delivery during the first and third quarters of fiscal year 2013. We currently do not have a drilling contract for the Atwood Orca, but we expect to contract this high-specification rig prior to its delivery date.
Idled Rigs
During fiscal year 2012, we sold the Richmond. The Atwood Southern Cross and Seahawk remain idle. We anticipate these two units will not return to service during fiscal year 2013 due to the lack of sufficient continuous demand, and thus, we are not actively marketing these rigs at this time.
Contract Backlog
We maintain a backlog of commitments for contract drilling revenues. Our contract backlog at September 30, 2012 was approximately $2.6 billion, representing a 73% increase compared to our contract backlog of $1.5 billion at September 30, 2011. We calculate our contract backlog by multiplying the day rate under our drilling contracts by the number of days remaining under the contract, assuming full utilization. The calculation does not include any revenues related to other fees such as for mobilization, demobilization, contract preparation, customer reimbursables and bonuses. The amount of actual revenues earned and the actual periods during which revenues are earned will be different from amounts disclosed in our backlog calculations due to various factors, including unscheduled repairs, maintenance, weather and other factors. Such factors may result in lower applicable day rates than the full contractual day rate. In addition, under certain circumstances, our customers may seek to terminate or renegotiate our contracts. See Item 1A., “Risk Factors-Our business may experience reduced profitability if our customers terminate or seek to renegotiate our drilling contracts” of this Form 10-K.
The following table sets forth as of September 30, 2012 the amount of our contract drilling revenue backlog and the percent of available operating days committed for our actively marketed drilling units for the periods indicated (dollars in millions):
On October 3, 2012, we announced that one of our subsidiaries was awarded a drilling services contract by CEC International, Ltd. for work in the Gulf of Thailand and offshore Malaysia for the newbuild jackup Atwood Manta. As a result of this contract, our contract backlog increased by approximately $53 million and available operating days committed increased up to 91% in fiscal year 2013.
RESULTS OF OPERATIONS
Fiscal Year 2012 versus Fiscal Year 2011
Operating Revenues-Revenues for fiscal year 2012 increased $142.3 million, or 22%, compared to the prior fiscal year. A comparative analysis of revenues by rig for fiscal years 2012 and 2011 is as follows:
Our newest ultra-deepwater, semisubmersible drilling rig, the Atwood Condor, which commenced operations under its initial contract during the fourth quarter of fiscal year 2012, earned mobilization revenue as it relocated from the shipyard in Singapore to the U.S. Gulf of Mexico.
The increase in revenues for the Atwood Osprey is due to the fact that the rig commenced drilling operations offshore Australia in late May 2011 and thus did not earn a full year of revenue in fiscal year 2011. The rig continued on contract offshore Australia for all of fiscal year 2012.
Revenues for the Atwood Eagle were relatively consistent compared to the prior fiscal year. The rig worked offshore Australia during both fiscal years 2012 and 2011.
The decrease in revenues for the Atwood Falcon is due to the rig working on a long-term contract offshore Malaysia for all of fiscal year 2011. This contract ended during the second quarter of fiscal year 2012. From February 2012 through May 2012, the rig underwent a shipyard project in Singapore for upgrades. Following completion of such upgrades, the rig relocated to work offshore Australia and began operations in late May 2012 that continued through the end of fiscal year 2012.
The increase in revenues for the Atwood Hunter is primarily due to out-of-service time related to a planned regulatory inspection during fiscal year 2011 compared to no out-of-service time during fiscal year 2012. The Atwood Hunter worked offshore West Africa during both fiscal years 2012 and 2011.
Revenues for the Atwood Aurora increased as the rig was fully utilized during fiscal year 2012 working offshore West Africa. In fiscal year 2011, the rig worked offshore Egypt until completion of its contract commitment in May 2011. The contract was followed by a planned shipyard project through June 2011, after which the rig was idle for most of the fourth quarter of fiscal year 2011 until it resumed work under a contract that commenced in September 2011.
Revenues for the Atwood Beacon were relatively consistent compared to the prior fiscal year. The rig continued to work offshore South America until the fourth quarter of fiscal year 2012 when it relocated to the Mediterranean Sea to prepare for drilling operations in Israel.
Our newest active jackup drilling unit, the Atwood Mako, was delivered from the shipyard and commenced drilling operations in September 2012 offshore Thailand, and thus earned no revenue in fiscal year 2011.
Revenues for the Vicksburg were relatively consistent compared to the prior fiscal year. The Vicksburg worked offshore Thailand during both fiscal years 2012 and 2011.
Contract Drilling Costs-Contract drilling costs for fiscal year 2012 increased $123.6 million, or 55%, compared to the prior fiscal year. A comparative analysis of contract drilling costs by rig for fiscal years 2012 and 2011 is as follows:
The Atwood Condor incurred costs as it relocated from the shipyard in Singapore to the U.S. Gulf of Mexico during the fourth quarter of fiscal year 2012 while on contract. No drilling costs were incurred in fiscal year 2011 while the rig was under construction.
The Atwood Osprey commenced drilling operations in May 2011, incurring approximately four months of drilling costs in fiscal year 2011 as compared to a full twelve months of drilling costs in fiscal year 2012 while working offshore Australia.
Contract drilling costs for the Atwood Eagle were relatively consistent as compared to the prior fiscal year. The rig continued to work offshore Australia during both fiscal years 2012 and 2011.
The increase in contract drilling costs for the Atwood Falcon, as compared to the prior fiscal year, is primarily due to increased maintenance activities during the shipyard project from February 2012 to May 2012 and the subsequent commencement of drilling operations offshore Australia which has significantly higher personnel costs than costs for its previous contract offshore Malaysia.
The increase in contract drilling costs for the Atwood Hunter is due primarily to increased equipment-related costs associated with maintenance projects and inspections as compared to the prior fiscal year.
The increase in contract drilling costs for the Atwood Aurora, as compared to the prior fiscal year, is primarily attributable to increased costs for monthly amortization charges for mobilization to offshore West Africa in the current fiscal year as well as lower operating expenses incurred at the end of fiscal year 2011 due to a planned shipyard project and substantial idle time prior to commencing its next contract offshore West Africa.
The increase in contract drilling costs for the Atwood Beacon is primarily due to increased equipment-related costs associated with maintenance projects and inspections incurred while the rig relocated from South America to the Mediterranean Sea during the fourth quarter of fiscal year 2012.
The Atwood Mako was delivered from the shipyard and commenced drilling operations in Thailand in September 2012. No drilling costs were incurred in fiscal year 2011 while the rig was under construction.
The increase in contract drilling costs for the Vicksburg is attributable to increased equipment-related costs associated with maintenance projects when compared to the prior fiscal year.
Other contract drilling costs were relatively consistent with the prior fiscal year.
Depreciation-Depreciation expense for the fiscal year 2012 increased $27.0 million, or 62%, compared to the prior fiscal year. A comparative analysis of depreciation expense by rig for fiscal years 2012 and 2011 is as follows:
The Atwood Condor, which was placed into service at the beginning of July 2012, incurred no depreciation expense in fiscal year 2011.
The Atwood Osprey, which was placed into service in late May 2011, incurred only four months of depreciation expense in fiscal year 2011.
The increase in depreciation for the Atwood Falcon is due to certain upgrades made to the rig during the shipyard project which was completed in May 2012.
The Atwood Mako, which was placed into service at the beginning of September 2012, incurred no depreciation expense in fiscal year 2011.
Depreciation expense for all other rigs remained relatively consistent during fiscal year 2012 as compared to the prior fiscal year.
General and administrative-General and administrative expenses for fiscal year 2012 increased approximately $5.4 million, or 12%, compared to the prior fiscal year primarily due to higher personnel-related costs resulting from an increase in headcount to support our larger fleet.
Other, net-The decrease in Other expenses is primarily due to a $5.0 million charge related to an impairment of certain of our idled equipment during fiscal year 2011.
Income taxes-Our effective tax rate was 13% for fiscal year 2012, as compared to the prior fiscal year effective tax rate of 16%. The lower effective income tax was primarily due to the favorable resolution of prior period tax examinations.
Fiscal Year 2011 versus Fiscal Year 2010
Operating Revenues-Revenues for fiscal year 2011 decreased $5.5 million, or 1%, compared to fiscal year 2010. A comparative analysis of revenues by rig for fiscal years 2011 and 2010 is as follows:
The Atwood Osprey commenced drilling operations in late May 2011 offshore Australia, and thus, earned no revenue in fiscal year 2010.
Revenues for the Atwood Eagle and Atwood Falcon were relatively consistent compared to fiscal year 2010. The Atwood Eagle continued to work offshore Australia during both fiscal years 2011 and 2010 and the Atwood Falcon continued work on a long- term contract offshore Malaysia during both fiscal years 2011 and 2010.
The decrease in revenues for the Atwood Hunter is due to an increase in downtime related to unplanned repairs and maintenance and a planned regulatory inspection during fiscal year 2011. The Atwood Hunter worked offshore West Africa in fiscal years 2011 and 2010.
The increase in revenues for the Atwood Beacon is due to working on a higher day rate contract offshore South America compared to the fiscal year 2010 when the rig was working at a lower day rate offshore West Africa.
Revenues for the Atwood Aurora decreased during fiscal year 2011 due to the completion of its contract commitment in May 2011, which was followed by a planned shipyard project through June 2011. Following the shipyard project, the rig was idled for most of the fourth quarter of fiscal year 2011. The rig experienced virtually no downtime during the fiscal year 2010. In fiscal year 2011, until the time of the shipyard project, the rig worked offshore Egypt on the same long term contract that it worked under during fiscal year 2010. The Atwood Aurora resumed drilling operations offshore West Africa under a new contract that commenced late September 2011.
Revenues for the Vicksburg were relatively consistent compared to the fiscal year 2010. The Vicksburg worked offshore Thailand during both fiscal years 2011 and 2010.
Decreases in Other operating revenues during fiscal year 2011 are due to the Atwood Southern Cross, Richmond, and Seahawk all completing their respective drilling contracts and subsequently being idled. The idled state of these rigs resulted in the decrease of revenues for fiscal year 2011 compared to fiscal year 2010.
Contract Drilling Costs-Contract drilling costs for fiscal year 2011 decreased $28.8 million, or 11%, compared to fiscal year 2010. A comparative analysis of contract drilling costs by rig for fiscal years 2011 and 2010 is as follows:
The Atwood Osprey, commenced drilling operations in late May 2011, incurring approximately four months of drilling costs in fiscal year 2011 compared to none in fiscal year 2010.
The increase in contract drilling costs for the Atwood Eagle for fiscal year 2011 compared to fiscal year 2010 is attributable to higher local payroll and payroll related costs due to the strengthening of the Australian dollar along with increased equipment-related costs due to contract specific enhancements and additional maintenance projects performed during the extended regulatory inspection period during fiscal year 2011.
Contract drilling costs for the Atwood Falcon, Atwood Hunter, and the Atwood Beacon were relatively consistent when compared to fiscal year 2010.
The decrease in contract drilling costs for the Atwood Aurora for fiscal year 2011 compared to fiscal year 2010 is due to lower operating expenses being incurred during a planned shipyard project in May and June 2011 and the idle time incurred during the remainder of fiscal year 2011.
Contract drilling costs for the Vicksburg were relatively consistent when compared to fiscal year 2010.
Decreases in Other contract drilling costs during fiscal year 2011 are due to reduced operating costs for the Richmond, Atwood Southern Cross and Seahawk as a result of these rigs being idled and not being actively marketed. The decreases are also due to a combination of higher percentage of Other contract drilling costs allocated to rig contract drilling costs in fiscal year 2011 when compared to fiscal year 2010 and recognition of foreign exchange gains in fiscal year 2011 compared to foreign exchange losses in fiscal year 2010.
Depreciation-Depreciation expense for fiscal year 2011 increased $6.6 million, or 18%, as compared to fiscal year 2010. A comparative analysis of depreciation expense by rig for fiscal years 2011 and 2010 is as follows:
The Atwood Osprey, which was placed into service in late May 2011, incurred no depreciation expense in fiscal year 2010.
Depreciation expense for all other rigs remained relatively consistent during fiscal year 2011 as compared to fiscal year 2010.
General and administrative-General and administrative expenses for fiscal year 2011 increased approximately $3.8 million, or 9%, compared to the fiscal year 2010 primarily due to rising personnel costs resulting, in part, from various expenses related to the transition of executive leadership, wage increases and increased annual bonus and share-based compensation costs during fiscal year 2011.
Other, net -The increase in Other expenses is primarily due to a $5.0 million charge related to an impairment of certain of our idled equipment during fiscal year 2011. The Other category amounts for fiscal year 2010 were attributable to the sale of equipment during the year.
Income taxes-Our effective tax rate was 16% for fiscal year 2011, as compared to fiscal year 2010 effective tax rate of 20%. The lower effective income tax was primarily due to lower taxes on foreign earned income.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $785 million for fiscal year 2012. Capital expenditures and working capital needs were funded by cash flows from operations of approximately $256 million, a net increase in our long-term debt of $310 million, and cash on hand from the prior fiscal year end. Although our net income for fiscal year 2012 was relatively consistent with the prior fiscal year, our cash flows from operations of $256 million decreased $84 million as compared to approximately $340 million for the prior fiscal year. The increase of accounts receivable is attributable to higher revenue levels and a higher number of active in-service rigs at the current fiscal year end when compared to the prior fiscal year end.
Although our cash and cash equivalents decreased to $78 million as of September 30, 2012 from $295 million as of September 30, 2011, our working capital only decreased to $234 million from $302 million for the same fiscal year end periods. The decrease in cash and cash equivalents is partially offset by the increase in accounts receivable as mentioned above, an increase in inventory due to more active in-service rigs and a decrease in accounts payable due to a reduction of accrued but unpaid invoices related to our construction projects when compared to prior fiscal year end.
To date, general inflationary trends have not had a material effect on our operating revenues or expenses.
Revolving Credit Facility
As of September 30, 2012, we had $380 million of outstanding borrowings under our five-year $750 million senior secured revolving credit facility. Including the $450 million aggregate principal amount of our senior notes, we had a total debt to capitalization ratio of 30%. Our wholly-owned subsidiary, Atwood Offshore Worldwide Limited (“AOWL”), is the borrower under the credit facility, and we and certain of our other subsidiaries are guarantors under the facility. Borrowings under the credit facility bear interest at the Eurodollar rate plus a margin of 2.50%. Certain borrowings effectively bear interest at a fixed rate due to our interest rate swaps. The average interest rate for borrowings under the credit facility was approximately 3.2% per annum at September 30, 2012, after considering the impact of our interest rate swaps. The credit facility also provides for the issuance, when required, of standby letters of credit. The credit facility has a commitment fee of 1.0% per annum on the unused portion of the underlying commitment. As of September 30, 2012, we had standby letters of credit issued in the aggregate amount of $0.1 million. As of November 1, 2012, an additional $155 million had been borrowed under our facility subsequent to September 30, 2012, leaving $215 million of available borrowing capacity under the facility. Subject to the satisfaction of certain conditions precedent and the agreement by the lenders, the credit facility includes an "accordion" feature which, if exercised, will increase total commitments by up to $550 million, bringing the total commitment to $1.3 billion.
The credit facility contains various financial covenants that impose a maximum leverage ratio of 4.0 to 1.0, a debt to capitalization ratio of 0.5 to 1.0, a minimum interest expense coverage ratio of 3.0 to 1.0 and a minimum collateral maintenance of 150% of the aggregate amount outstanding under the credit facility. In addition, the credit facility contains limitations on our and certain of our subsidiaries' ability to incur liens; merge, consolidate or sell substantially all assets; pay dividends (including restrictions on AOWL's ability to pay dividends to us); incur additional indebtedness; make advances, investments or loans; and transact with affiliates. The credit facility also contains customary events of default, including but not limited to delinquent payments, bankruptcy filings, material adverse judgments, guarantees or security documents not being in full effect, non-compliance with the Employee Retirement Income Security Act of 1974, cross-defaults under other debt agreements, or a change of control. The credit facility is secured primarily by first preferred mortgages on six of our active drilling units (the Atwood Aurora, the Atwood Beacon, the Atwood Eagle, the Atwood Falcon, the Atwood Hunter, and the Atwood Osprey), as well as liens on the equity interests of our subsidiaries that own, directly or indirectly, such drilling units. In addition, if we exercise the accordion feature and increase the total commitments, the credit facility requires that we provide a first preferred mortgage on the Atwood Condor, the Atwood Mako and the Atwood Manta, as well as a lien on the equity interests of our subsidiaries that own, directly or indirectly, such rigs. We were in compliance with all financial covenants under the credit facility at September 30, 2012.
Senior Notes
In January 2012, we issued $450 million aggregate principal amount of 6.50% Senior Notes due 2020 (the “Notes”). We received net proceeds, after deducting underwriting discounts and offering expenses, of approximately $440 million. We used the net proceeds to reduce outstanding borrowings under our credit facility.
The Notes are our senior unsecured obligations and are not currently guaranteed by any of our subsidiaries. Interest is payable on the Notes semi-annually in arrears. The indenture governing the Notes contains provisions that limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness or issue preferred stock; pay dividends or make other restricted payments; sell assets; make investments; create liens; enter into agreements that restrict dividends or
other payments from our restricted subsidiaries to us; and consolidate, merge or transfer all or substantially all of our assets. Many of these restrictions will terminate if the Notes become rated investment grade. The indenture governing the Notes also contains customary events of default, including payment defaults; defaults for failure to comply with other covenants in the indenture; cross-acceleration and entry of final judgments in excess of $50.0 million; and certain events of bankruptcy, in certain cases subject to notice and grace periods. We are required to offer to repurchase the Notes in connection with specified change in control events or with excess proceeds of asset sales not applied for permitted purposes.
At any time prior to February 1, 2015, we may, on any one or more occasions, redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price set forth in the indenture governing the Notes. At any time prior to February 1, 2016, we may, on any one or more occasions, redeem the Notes in whole or in part at a redemption price equal to 100% of the principal amount of the Notes redeemed plus a “make whole” premium. On and after February 1, 2016, we may, on any one or more occasions, redeem the Notes in whole or in part at the redemption price set forth in the indenture governing the Notes.
Capital Expenditures
Our capital expenditures, including maintenance capital expenditures, for fiscal year 2012 totaled $785 million. We estimate that our total capital expenditures for fiscal year 2013 will be approximately $615 million, substantially all of which is contractually committed. These capital expenditures are expected to be funded with existing cash balances on hand, cash flows from operations and additional borrowings under our revolving credit facility.
As of September 30, 2012, we had expended approximately $438 million on our five drilling units under construction at such time. The expected remaining costs for our five drilling units under construction are as follows (in millions):
We believe that we will be able to fund all additional construction costs with cash flow from operations and borrowings under our revolving credit facility, which has provisions to increase the total commitment to $1.3 billion as described above.
Other
From time to time, we may seek possible expansion and acquisition opportunities relating to our business, which may include the construction or acquisition of rigs or other businesses in addition to those described in this Form 10-K. Such determinations will depend on market conditions and opportunities existing at that time, including with respect to the market for drilling contracts and day rates and the relative costs associated with such expansions or acquisitions. The timing, success or terms of any such efforts and the associated capital commitments are not currently known. In addition to cash on hand, cash flow from operations and borrowings under our revolving credit facility, we may seek to access the capital markets to fund such opportunities. Our ability to access the capital markets depends on a number of factors, including, among others, our credit rating, industry conditions, general economic conditions, market conditions and market perceptions of us and our industry. In addition, we continually review the possibility of disposing of assets that we do not consider core to our long-term business plan.
In addition, in the future, we may seek to redeploy our assets to more active regions if we have the opportunity to do so on attractive terms. We frequently bid for or negotiate with customers regarding multi-year contracts that could require significant capital expenditures and mobilization costs. We expect to fund these opportunities primarily with cash on hand, cash flow from operations and borrowings under our revolving credit facility.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements as that term is defined in Item 303(a)(4)(ii) of Regulation S-K.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
The following table summarizes our obligations and commitments (in thousands) as of September 30, 2012:
(1)
Amounts include principal payments on the Notes and credit facility, fixed interest payments on the Notes and swaps(assuming September 30, 2012 LIBOR for floating rate), and short-term notes payable.
(2)
Includes commitments related to our five drilling units under construction as of September 30, 2012.
(3)
We enter into operating leases in the normal course of business. Some lease agreements provide us with the option to renew the leases. Our future operating lease payments would change if we exercised these renewal options and if we entered into additional operating lease agreements.
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are included in Note 2 to our Consolidated Financial Statements for the year ended September 30, 2012. These policies, along with the underlying assumptions and judgments made by management in their application, have a significant impact on our consolidated financial statements. We identify our most critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. Our most critical accounting policies are those related to revenue recognition, property and equipment, impairment of assets, income taxes, and employee stock-based compensation.
Revenue Recognition
We account for contract drilling revenue in accordance with the terms of the underlying drilling contract. These contracts generally provide that revenue is earned and recognized on a daily rate (i.e. “day rate”) basis, and day rates are typically earned for a particular level of service over the life of a contract. Day rate contracts can be performed for a specified period of time or the time required to drill a specified well or number of wells. Revenues from day rate drilling operations, which are classified under contract drilling services, are recognized on a per day basis as services are performed assuming collectability is reasonably assured.
Deferred fees and costs
Fees received as compensation for the relocating drilling rigs from one major operating area to another, equipment and upgrade costs reimbursed by the customer, as well as receipt of advance billings of day rates are recognized as earned during the expected term of the related drilling contract, as are the day rates associated with such contracts. However, fees received upon termination of a drilling contract are generally recognized as earned during the period termination occurs as the termination fee is usually conditional based on the occurrence of an event as defined in the drilling contract, such as not obtaining follow on work to the contract in progress or relocation beyond a certain distance when the contract is completed. If receipt of such fees are not conditional, they will be recognized as earned on a straight-line method over the expected term of the related drilling contract.
We defer the mobilization costs relating to moving a drilling rig to a new area, which are incurred prior to the commencement of the drilling operations and customer requested equipment purchases that will revert to the customer at the end of the applicable drilling contract. We amortize such costs on a straight-line basis over the expected term of the applicable drilling contract. Contract revenues and drilling costs are reported in the Consolidated Statements of Operations at their gross amounts.
Property and Equipment
Property and equipment is stated at cost, reduced by provisions to recognize economic impairment in value whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. At September 30, 2012, the carrying value of our property and equipment totaled approximately $2.5 billion, which represents approximately 86% of our total assets. The carrying value reflects the application of our property and equipment accounting policies, which incorporate estimates, assumptions and judgments by management relative to the useful lives and salvage values of our units. Once rigs and related equipment are placed in service, they are depreciated on the straight-line method over their estimated useful lives, with depreciation discontinued only during the period when a drilling unit is out-of-service while undergoing a significant upgrade that extends its useful life. The estimated useful lives of our drilling units and related equipment can range from 3 years to 35 years and our salvage values are generally estimated at 5% of capitalized costs. Any future increases or decreases in our estimates of useful lives or salvage values will have the effect of decreasing or increasing future depreciation expense, respectively.
We periodically evaluate our property and equipment to determine whether their net carrying value is in excess of their net realizable value. In determining an asset's fair value, these evaluations are performed considering a number of factors such as estimated future cash flows, appraisals and current market value analysis. Assets are written down to their fair value if the carrying amount of the asset is not recoverable and exceeds its fair value. Asset impairment evaluations are, by nature, highly subjective. Operations of our drilling equipment are subject to the offshore drilling requirements of oil and gas exploration and production companies and agencies of foreign governments. These requirements are, in turn, subject to fluctuations in government policies, world demand and price for petroleum products, proved reserves in relation to such demand and the extent to which such demand can be met from onshore sources. The critical estimates which result from these dynamics include projected utilization, day rates, and operating expenses, each of which impacts our estimated future cash flows. Over the last ten years, our equipment utilization rate has averaged approximately 95%; however, if a drilling unit incurs significant idle time or receives day rates below operating costs, its carrying value could become impaired.
The estimates, assumptions and judgments used by management in the application of our property and equipment and asset impairment policies reflect both historical experience and expectations regarding future industry conditions and operations. The use of different estimates, assumptions and judgments, especially those involving the useful lives of our rigs and vessels and expectations regarding future industry conditions and operations, would likely result in materially different carrying values of assets and results of operations.
Income Taxes
We conduct operations and earn income in numerous foreign countries and are subject to the laws of taxing jurisdictions within those countries, as well as United States federal and state tax laws. At September 30, 2012, we have an approximate $8.8 million net deferred income tax liability. This balance reflects the application of our income tax accounting policies. Such accounting policies incorporate estimates, assumptions and judgments by management relative to the interpretation of applicable tax laws, the application of accounting standards, and future levels of taxable income. The estimates, assumptions and judgments used by management in connection with accounting for income taxes reflect both historical experience and expectations regarding future industry conditions and operations. Changes in these estimates, assumptions and judgments could result in materially different provisions for deferred and current income taxes.
A comprehensive model is used to account for uncertain tax positions, which includes consideration of how we recognize, measure, present and disclose uncertain tax positions taken or to be taken on a tax return. The income tax laws and regulations are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our tax positions that can materially affect amounts recognized in our consolidated balance sheets and statements of income.
Share-based Compensation
Share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU Update 2011-05" (Topic 220) to effectively defer only those changes in ASU Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments in this update supersede changes to those paragraphs in ASU 2011-05 that pertain to how, when, and where reclassification adjustments are presented. The amendments will be temporary to allow the FASB time to deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements. The amendments in this update are effective at the same time as the amendments in ASU 2011-05 so that entities will not be required to comply with the presentation requirements in ASU 2011-05 that this update is deferring. We adopted the amendments in ASU 2011-05 on June 30, 2011 with no material impact on our consolidated financial statements or disclosures in our financial statements.
In December 2011, the FASB issued ASU 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" for an entity to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We will adopt the accounting standards effective January 1, 2013. We do not expect that our adoption will have a material effect on our financial statements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including adverse changes in interest rates and foreign currency exchange rates as discussed below.
Interest Rate Risk
The provisions of our credit facility provide for a variable interest rate cost on our $380 million outstanding as of September 30, 2012. However, we employ an interest rate risk management strategy that utilizes derivative instruments with respect to $250 million of our debt as of September 30, 2012 in order to minimize or eliminate unanticipated fluctuations in earnings and cash flows arising from changes in, and volatility of, interest rates. Effectively, only $130 million of our variable long-term debt outstanding as of September 30, 2012 is subject to changes in interest rates. Thus, a 10% change in the interest rate on the floating rate debt would have an immaterial impact on our annual earnings and cash flows.
Foreign Currency Risk
As a multinational company, we conduct business in numerous foreign countries. Our functional currency is the U.S. dollar. Certain of our subsidiaries have monetary assets and liabilities that are denominated in a currency other than our functional currency. Based on September 30, 2012 amounts, a decrease in the value of 10% in foreign currencies relative to the U.S. dollar would not have a material effect to our annual earnings and cash flows. We did not have any open derivative contracts relating to foreign currencies at September 30, 2012.
Market Risk
Our Notes bear interest at a fixed interest rate whose fair value will fluctuate based on changes in prevailing market interest rates and market perceptions of our credit risk. The fair value of our Notes was approximately $478.0 million at September 30, 2012, compared to the carrying amount of $450.0 million. If prevailing market interest rates had been 10% lower at September 30, 2012, the change in fair value of our Notes, would have been immaterial.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Atwood Oceanics, Inc. (which together with its subsidiaries is identified as the “Company,” “we” or “our,” unless stated otherwise or the context requires otherwise) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting was designed by management, under the supervision of the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, and includes those policies and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.
Based on our evaluation under the criteria in Internal Control-Integrated Framework, management has concluded that the Company maintained effective internal control over financial reporting as of September 30, 2012. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2012, which appears on the following page.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Atwood Oceanics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders’ equity present fairly, in all material respects, the financial position of Atwood Oceanics, Inc. and its subsidiaries at September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
November 19, 2012
Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying notes are an integral part of these consolidated financial statements.
Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1-NATURE OF OPERATIONS
Atwood Oceanics, Inc. and its subsidiaries, which are collectively referred to herein as the “Company,” “we,” “us” or “our” except where stated or the context indicates otherwise, are a global offshore drilling contractor engaged in the drilling and completion of exploratory and developmental oil and gas wells. We currently own a diversified fleet of 11 mobile offshore drilling units located in the U.S. Gulf of Mexico, the Mediterranean Sea, offshore West Africa, offshore Southeast Asia and offshore Australia and are constructing three ultra-deepwater drillships and two high specification jackup rigs for delivery in fiscal year 2013 through 2015. We were founded in 1968 and are headquartered in Houston, Texas with support offices in Australia, Malaysia, Singapore and the United Kingdom.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Atwood Oceanics, Inc. and all of its domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
Cash and cash equivalents consist of cash in banks and highly liquid debt instruments, which mature within three months of the date of purchase.
Foreign exchange
The U.S. Dollar is the functional currency for all areas of our operations. Accordingly, monetary assets and liabilities denominated in foreign currency are re-measured to U.S. Dollars at the rate of exchange in effect at the end of the fiscal year, items of income and expense are re-measured at average monthly rates, and property and equipment and other nonmonetary amounts are re-measured at historical rates. Gains and losses on foreign currency transactions and re-measurements are included in contract drilling costs in our consolidated statements of operations. We recorded foreign exchange gains of $1.5 million during fiscal year 2012 and losses of $0.9 million and $0.1 million, during fiscal years 2011 and 2010, respectively. We did not disclose the effect of exchange rate changes on cash held in foreign currencies on the statement of cash flows due to the immaterial nature of the amounts.
Accounts receivable
We record accounts receivable at the amount we invoice our customers. Our portfolio of accounts receivable is comprised of major international corporate entities and government organizations with stable payment experience. Included within accounts receivable at September 30, 2012, and 2011 are unbilled receivable balances totaling $8.6 million and $1.1 million, respectively, which represent amounts for which services have been performed, revenue has been recognized based on contractual provisions and for which collection is deemed reasonably assured. Such unbilled amounts were billed subsequent to their respective fiscal year end. Historically, our uncollectible accounts receivable have been immaterial, and typically, we do not require collateral for our receivables. We provide an allowance for uncollectible accounts, as necessary, on a specific identification basis. We have allowance no allowance for doubtful accounts at September 30, 2012 and 2011.
Inventories of material and supplies
Inventories consist of spare parts, material and supplies held for consumption and are stated principally at average cost, net of reserves for excess and obsolete inventory of $2.6 million and $2.5 million at September 30, 2012, and 2011, respectively. To the extent the cost of inventory is not recoverable, we recognize a loss.
Income taxes
Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end given the provisions of enacted tax laws in each respective jurisdiction. Deferred tax assets are reduced by a valuation allowance when, based upon management’s estimates, it is more likely than not that a portion of the deferred tax assets will not be realized in a future period. In addition, we accrue for income tax contingencies, or uncertain tax positions, that we believe are more likely than not exposures. See Note 7 for further discussion.
Property and equipment
Property and equipment are recorded at historical cost. Interest costs related to property under construction are capitalized as a component of construction costs. Interest capitalized during fiscal years 2012, 2011 and 2010 was $32.9 million, $8.2 million and $3.9 million, respectively.
Once rigs and related equipment are placed in service, they are depreciated on the straight-line method over their estimated useful lives, with depreciation discontinued only during the period when a drilling unit is out-of-service while undergoing a significant upgrade that extends its useful life. Our estimated useful lives of our various classifications of assets are as follows:
Maintenance, repairs and minor replacements are charged against income as incurred. Major replacements and upgrades are capitalized and depreciated over the remaining useful life of the asset, as determined upon completion of the work. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed are removed from the accounts at the time of disposition, and any resulting gain or loss is reflected in the Consolidated Statements of Operations for the applicable periods.
Impairment of property and equipment
We periodically evaluate our property and equipment to determine whether their net carrying value is in excess of their net realizable value. In determining an asset's fair value, these evaluations are performed considering a number of factors such as estimated future cash flows, appraisals and current market value analysis. Assets are written down to their fair value if the carrying amount of the asset is not recoverable and exceeds its fair value.
Deferred drydocking costs
We defer the costs of scheduled drydocking and charge such costs to contract drilling expense over the period to the next scheduled drydocking (normally 30 months). At September 30, 2012, and 2011, deferred drydocking costs totaling $3.2 million and $2.2 million, respectively, were included in Deferred Costs in the accompanying Consolidated Balance Sheets.
Revenue recognition
We account for contract drilling revenue in accordance with the terms of the underlying drilling contract. These contracts generally provide that revenue is earned and recognized on a daily rate (i.e. “day rate”) basis, and day rates are typically earned for a particular level of service over the life of a contract. Day rate contracts can be performed for a specified period of time or the time required to drill a specified well or number of wells. Revenues from day rate drilling operations, which are classified under contract drilling services, are recognized on a per day basis as services are performed assuming collectability is reasonably assured.
Deferred fees and costs
Fees received as compensation for the relocating drilling rigs from one major operating area to another, equipment and upgrade costs reimbursed by the customer, as well as receipt of advance billings of day rates are recognized as earned during the expected term of the related drilling contract, as are the day rates associated with such contracts. However, fees received upon termination of a drilling contract are generally recognized as earned during the period termination occurs as the termination fee is usually conditional based on the occurrence of an event as defined in the drilling contract, such as not obtaining follow on work to the contract in progress or relocation beyond a certain distance when the contract is completed. If receipt of such fees are not conditional, they will be recognized as earned on a straight-line method over the expected term of the related drilling contract.
We defer the mobilization costs relating to moving a drilling rig to a new area, which are incurred prior to the commencement of the drilling operations and customer requested equipment purchases that will revert to the customer at the end of the applicable drilling contract. We amortize such costs on a straight-line basis over the expected term of the applicable drilling contract. Contract revenues and drilling costs are reported in the Consolidated Statements of Operations at their gross amounts.
At September 30, 2012 and 2011, deferred fees associated with mobilization, related equipment purchases and upgrades and receipt of advance billings of day rates totaled $22.7 million and $9.6 million, respectively. At September 30, 2012 and 2011, deferred costs associated with mobilization and related equipment purchases and upgrades totaled $24.4 million and $2.8 million, respectively. Deferred fees and deferred costs are classified as current or long-term deferred credits and deferred costs, respectively, in the accompanying Consolidated Balance Sheets based on the expected term of the applicable drilling contracts.
Share-based compensation
Share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). See Note 3 for additional information regarding share-based compensation.
Earnings per common share
Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the assumed effect of the issuance of additional shares in connection with the exercise of stock options and vesting of restricted stock. We have also included the impact of pro forma deferred tax assets in calculating the potential windfall and shortfall tax benefits to determine the amount of diluted shares using the treasury stock method.
The computation of basic and diluted earnings per share for each of the past three fiscal years is as follows (in thousands, except per share amounts):
The calculation of diluted earnings per share for fiscal years 2012, 2011 and 2010 exclude consideration of shares of common stock which may be issued in connection with outstanding stock options of 656,000, 664,000 and 500,000, respectively, because such options were anti-dilutive. These options could potentially dilute basic EPS in the future.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make extensive use of 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 amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 3-SHARE-BASED COMPENSATION
Share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period, which is generally the vesting period of the equity award.
On December 7, 2006, our board of directors adopted, and our stockholders subsequently approved on February 8, 2007, the Atwood Oceanics, Inc. 2007 Long-Term Incentive Plan (as amended, the “2007 Plan”). The effective date of the 2007 Plan was December 7, 2006, and awards may be made under the 2007 Plan through December 7, 2016. Under our 2007 Plan, up to 4,000,000 shares of common stock were authorized for issuance to eligible participants in the form of restricted stock awards or upon exercise of stock options granted pursuant to the 2007 Plan. We also maintain one other stock incentive plan approved by our shareholders, the Atwood Oceanics, Inc. Amended and Restated 2001 Stock Incentive Plan (as amended, the “2001 Plan”), under which up to 4,000,000 shares of common stock were authorized for issuance to eligible participants in the form of restricted stock awards or upon exercise of stock options granted. No additional options or restricted stock have been available for award under the 2001 Plan since the implementation of the 2007 Plan. All stock incentive plans currently in effect have been approved by our shareholders.
A summary of shares available for issuance and outstanding stock option and restricted stock awards for our two stock incentive plans as of September 30, 2012 is as follows:
Awards of restricted stock and stock options have both been granted under our stock incentive plans as of September 30, 2012. We deliver newly issued shares of common stock for restricted stock awards upon vesting and upon exercise of stock options.
We recognize compensation expense on grants of share-based compensation awards on a straight-line basis over the required service period for each award. Unrecognized compensation cost, net of estimated forfeitures, related to awards of stock options and restricted stock and the related remaining weighted-average service period is as follows (in thousands, except average service periods):
Stock Options
Under our stock incentive plans, the exercise price of each stock option must be equal to or greater than the fair market value of one share of our common stock on the date of grant, with all outstanding options having a maximum term of 10 years. Options vest ratably over a period ranging from the end of the first to the fourth year from the date of grant for stock options. Each option is for the purchase of one share of our common stock.
The total fair value of stock options vested during fiscal years 2012, 2011 and 2010 was $2.5 million, $2.7 million and $3.0 million, respectively. The per share weighted-average grant-date fair value of stock options granted during fiscal years 2012, 2011 and 2010 was $16.90, $15.72 and $14.69, respectively. We estimate the fair value of each stock option on the date of grant using the Black-Scholes pricing model and the following assumptions:
The average risk-free interest rate is based on the five-year U.S. treasury security rate in effect as of the grant date. We determined expected volatility using a six-year historical volatility figure and determined the expected term of the stock options using 10 years of historical data. The expected dividend yield is based on the expected annual dividend as a percentage of the market value of our common stock as of the grant date.
A summary of stock option activity for fiscal year 2012 is as follows:
Restricted Stock
We have awarded restricted stock under the 2007 Plan to certain employees and to our non-employee directors. All current awards of restricted stock to employees are subject to a vesting and restriction period ranging from three to four years, subject to early termination as provided in the 2007 Plan. In addition, certain awards of restricted stock to employees are subject to market-based performance conditions. The number of market-based performance restricted shares that vest will depend on the degree of achievement of specified corporate performance criteria which are strictly market-based. All awards of restricted stock to non-employee directors are subject to a vesting and restriction period of a minimum of 13 months, subject to early termination as provided in the 2007 Plan. We value restricted stock awards based on the fair market value of our common stock on the date of grant and also adjust fair market value for any awards subject to market-based performance conditions, where applicable.
A summary of restricted stock activity for fiscal year 2012 is as follows:
NOTE 4-PROPERTY AND EQUIPMENT
A summary of property and equipment by classification is as follows (in thousands):
New Construction Projects
During fiscal year 2008, we entered into construction contracts with Jurong Shipyard Pte. Ltd. to construct two Friede & Goldman ExD Millennium semisubmersible drilling units (the Atwood Osprey and the Atwood Condor). The Atwood Osprey was delivered in April 2011, and the Atwood Condor was delivered in June 2012.
In October 2010, we entered into turnkey construction agreements with PPL Shipyard PTE LTD in Singapore (“PPL”) to construct two Pacific Class 400 jackup drilling units (the Atwood Mako and the Atwood Manta). The Atwood Mako was delivered in August 2012 and the Atwood Manta is scheduled for delivery in late November 2012.
In January 2011, we exercised an option agreement and entered into a turnkey construction agreement with PPL to construct a third Pacific Class 400 jackup drilling unit (the Atwood Orca). The Atwood Orca is scheduled for delivery in June 2013.
In January 2011, we entered into a turnkey construction contract with Daewoo Shipbuilding and Marine Engineering Co., Ltd (“DSME”) to construct an ultra-deepwater drillship, the Atwood Advantage, at the DSME yard in South Korea. The Atwood Advantage is scheduled for delivery in September 2013.
In October 2011, we entered into a turnkey construction contract with DSME to construct an ultra-deepwater drillship, the Atwood Achiever, at the DSME yard in South Korea. The Atwood Achiever is expected to be delivered in June 2014.
In September 2012, we entered into a turnkey construction contract with DSME to construct a third ultra-deepwater drillship, the Atwood Admiral, at the DSME yard in South Korea. The Atwood Admiral is expected to be delivered in March 2015.
As of September 30, 2012, we had expended approximately $438 million towards the construction of our five drilling units under construction. Total remaining firm commitments for our five drilling units under construction were approximately $1.6 billion at September 30, 2012.
NOTE 5-LONG-TERM DEBT
A summary of long-term debt is as follows (in thousands):
Senior Notes
In January 2012, we issued $450 million aggregate principal amount of our 6.50% Senior Notes due 2020 (the “Notes”). We received net proceeds, after deducting underwriting discounts and offering expenses, of approximately $440 million. We used the net proceeds to reduce outstanding borrowings under our credit facility.
The Notes are our senior unsecured obligations and are not currently guaranteed by any of our subsidiaries. Interest is payable on the Notes semi-annually in arrears. The indenture governing the Notes contains provisions that limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness or issue preferred stock; pay dividends or make other restricted payments; sell assets; make investments; create liens; enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us; and consolidate, merge or transfer all or substantially all of our assets. Many of these restrictions will terminate if the Notes become rated investment grade. The indenture governing the Notes also contains customary events of default, including payment defaults; defaults for failure to comply with other covenants in the indenture; cross-acceleration and entry of final judgments in excess of $50.0 million; and certain events of bankruptcy, in certain cases subject to notice and grace periods. We are required to offer to repurchase the Notes in connection with specified change in control events or with excess proceeds of asset sales not applied for permitted purposes.
At any time prior to February 1, 2015, we may, on any one or more occasions, redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price set forth in the indenture governing the Notes. At any time prior to February 1, 2016, we may, on any one or more occasions, redeem the Notes in whole or in part at a redemption price equal to 100% of the principal amount of the Notes redeemed plus a “make whole” premium. On and after February 1, 2016, we may, on any one or more occasions, redeem the Notes in whole or in part at the redemption price set forth in the indenture governing the Notes.
Revolving Credit Facility
As of September 30, 2012, we had $380 million of outstanding borrowings under our five-year $750 million senior secured revolving credit facility, which was entered into in May 2011. Our wholly-owned subsidiary, Atwood Offshore Worldwide Limited (“AOWL”), is the borrower under the credit facility, and we and certain of our other subsidiaries are guarantors under the facility. Borrowings under the credit facility bear interest at the Eurodollar rate plus a margin of 2.50%. Certain borrowings effectively bear interest at a fixed rate due to our interest rate swaps. See Note 6. The average interest rate for borrowings under the credit facility was approximately 3.2% per annum at September 30, 2012, after considering the impact of our interest rate swaps. The credit facility also provides for the issuance, when required, of standby letters of credit. The credit facility has a commitment fee of 1.0% per annum on the unused portion of the underlying commitment. As of September 30, 2012, we had standby letters of credit issued in the aggregate amount of $0.1 million. As of November 15, 2012, an additional $155 million had been borrowed under our credit facility subsequent to September 30, 2012, leaving $215 million of available borrowing capacity under the facility. Subject to the satisfaction of certain conditions precedent and the agreement by the lenders, the credit facility includes an "accordion" feature which, if exercised, will increase total commitments by up to $550 million, bringing the total commitment to $1.3 billion.
The credit facility contains various financial covenants that impose a maximum leverage ratio of 4.0 to 1.0, a debt to capitalization ratio of 0.5 to 1.0, a minimum interest expense coverage ratio of 3.0 to 1.0 and a minimum collateral maintenance of 150% of the aggregate amount outstanding under the credit facility. In addition, the credit facility contains limitations on our and certain of our subsidiaries' ability to incur liens; merge, consolidate or sell substantially all assets; pay dividends (including
restrictions on AOWL's ability to pay dividends to us); incur additional indebtedness; make advances, investments or loans; and transact with affiliates. The credit facility also contains customary events of default, including but not limited to delinquent payments, bankruptcy filings, material adverse judgments, guarantees or security documents not being in full effect, non-compliance with the Employee Retirement Income Security Act of 1974, cross-defaults under other debt agreements, or a change of control. The credit facility is secured primarily by first preferred mortgages on six of our active drilling units (the Atwood Aurora, the Atwood Beacon, the Atwood Eagle, the Atwood Falcon, the Atwood Hunter, and the Atwood Osprey), as well as liens on the equity interests of our subsidiaries that own, directly or indirectly, such drilling units. In addition, if we exercise the accordion feature and increase the total commitments, the credit facility requires that we provide a first preferred mortgage on the Atwood Condor, the Atwood Mako and the Atwood Manta, as well as a lien on the equity interests of our subsidiaries that own, directly or indirectly, such rigs. We were in compliance with all financial covenants under the credit facility at September 30, 2012.
As of September 30, 2012, five $50.0 million notional interest rate swap agreements were in effect to fix the interest rate on $250 million of our borrowings under the credit facility at approximately 3.4% through September 2014.
NOTE 6-INTEREST RATE SWAPS
Our credit facility exposes us to short-term changes in market interest rates as our interest obligations on these instruments are periodically re-determined based on the prevailing Eurodollar rate. We enter into interest rate swaps to limit our exposure to fluctuations and volatility in interest rates. We do not engage in derivative transactions for speculative or trading purposes and we are not a party to leveraged derivatives.
At September 30, 2012, we had five $50.0 million notional interest rate swaps in effect. These interest rate swaps fix the interest on $250 million in borrowings at 3.4% through September 2014.
Fair Value of Derivatives
The following table presents the carrying amount of our cash flow hedge derivative contracts included in the Consolidated Balance Sheets as of September 30, 2012 and 2011 (in thousands):
We record the interest rate derivative contracts at fair value on our consolidated balance sheets (See Note 10). Hedging effectiveness is evaluated each quarter end using the “Dollar Off-Set Method”. Each quarter, changes in the fair values will adjust the balance sheet asset or liability, with an offset to Other Comprehensive Income (“OCI”) for the effective portion of the hedge.
We recognized a loss of approximately $1.5 million in OCI as a result of changes in fair value of our interest rate derivatives during the fiscal year ended September 30, 2012, net of loss realized from hedge ineffectiveness and net of $1.2 million of realized losses associated with effective portion and classified as interest expense, net of capitalized interest on our Consolidated Statement of Operations. A $1.5 million loss was also recognized in OCI during the fiscal year ended September 30, 2011, net of $0.4 million of realized losses associated with effective portion and classified as interest expense, net of capitalized interest on our Consolidated Statement of Operations.
For interest rate swaps, we evaluate all material terms between the swap and the underlying debt obligation. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. For the fiscal year ended September 30, 2012, we recognized a $0.4 million loss on our condensed consolidated statement of operations due to hedge ineffectiveness and no loss due to hedge ineffectiveness for the fiscal year ended September 30, 2011.
NOTE 7-INCOME TAXES
Domestic and foreign income before income taxes for the three-year period ended September 30, 2012, is as follows (in thousands):
The provision (benefit) for domestic and foreign taxes on income consists of the following (in thousands):
Deferred Taxes
The components of the deferred income tax assets (liabilities) as of September 30, 2012 and 2011 are as follows (in thousands):
For fiscal year 2012, we recorded a valuation allowance of $12.9 million on net deferred tax assets primarily related to our United States net operating loss carry forward. The gross amount of federal net operating loss carry forwards as of September 30, 2012 is estimated to be $116.7 million, which will begin to expire in 2025. Management does not expect that our tax credit carry forward of $1.2 million will be utilized to offset future tax obligations before the credits begin to expire in 2013. Thus, a corresponding valuation allowance of $1.2 million is recorded as of September 30, 2012.
We have approximately $14.6 million of windfall tax benefits from previous stock option exercises that have not been recognized as of September 30, 2012. This amount will not be recognized until the deduction would reduce our United States
income taxes payable. At such time, the amount will be recorded as an increase to paid-in-capital. We apply the “with-and-without” approach when utilizing certain tax attributes whereby windfall tax benefits are used last to offset taxable income.
We do not record federal income taxes on the undistributed earnings of our foreign subsidiaries that we consider to be permanently reinvested in foreign operations. The cumulative amount of such undistributed earnings was approximately $1.6 billion at September 30, 2012. If these earnings were distributed, we estimate approximately $270 million in additional taxes would be incurred. These earnings could also become subject to additional taxes under the anti-deferral provisions within the U.S. Internal Revenue Code. However, we believe this is highly unlikely given our current structure and have not provided deferred income taxes on these foreign earnings as we consider them to be permanently invested abroad.
We record estimated accrued interest and penalties related to uncertain tax positions in income tax expense. At September 30, 2012, we had approximately $8.2 million of reserves for uncertain tax positions, including estimated accrued interest and penalties of $2.5 million, which are included in Other Long Term Liabilities in the Consolidated Balance Sheet. All $8.2 million of the net uncertain tax liabilities would affect the effective tax rate if recognized. A summary of activity related to the net uncertain tax positions including penalties and interest for fiscal year 2012 is as follows:
Our United States tax returns for fiscal year 2009 and subsequent years remain subject to examination by tax authorities. As we conduct business globally, we have various tax years remaining open to examination in our international tax jurisdictions, including tax returns in Australia for fiscal years 2007 through 2012, as well as returns in Equatorial Guinea for calendar years 2008 through 2011. Although we cannot predict the outcome of ongoing or future tax examinations, we do not anticipate that the ultimate resolution of these examinations will have a material impact on our consolidated financial position, results of operations or cash flows.
As a result of working in foreign jurisdictions, we earned a high level of operating income in certain nontaxable and deemed profit tax jurisdictions, which significantly reduced our effective tax rate for fiscal years 2012, 2011 and 2010 when compared to the United States statutory rate. There were no significant transactions that materially impacted our effective tax for fiscal years 2012, 2011 or 2010. The differences between the United States statutory and our effective income tax rate are as follows:
NOTE 8-CAPITAL STOCK
Preferred Stock
We are authorized to issue 1.0 million shares of preferred stock with no par value. In October 2002, we designated Series A Junior Participating Preferred Stock in connection with the Rights Agreement described below. No preferred shares have been issued.
Rights Agreement
In September 2002, we authorized and declared a dividend of one Right (as defined in the Rights Agreement dated effective October 18, 2002 between us and Continental Stock Transfer & Trust Company, as rights agent, which governs the Rights) for each outstanding share of common stock as of November 5, 2012, subject to lender approval and consent, which was obtained. Effective as of the close of business on November 5, 2012, the rights agreement expired in accordance with its terms. As a result, the stock purchase rights under the rights agreement have been terminated and are no longer effective.
NOTE 9-RETIREMENT PLANS
We have two defined contribution retirement plans (the “Retirement Plans”) under which qualified participants may make contributions, which together with our contributions, can be up to 100% of their compensation, as defined, to a maximum of $49,000. In the first month following the date of hire, an employee can elect to become a participant in a Retirement Plan. Under the Plans, participant contributions of 1% to 5% are matched on a 2 to 1 basis. Our contributions vest 100% to each participant after three years of service with us including any period of ineligibility mandated by the Plans. If a participant terminates employment before becoming fully vested, the unvested portion is credited to our account and can be used only to offset our future contribution requirements.
During fiscal years 2012, 2011 and 2010, forfeitures of $0.2 million, $0.3 million, and $0.3 million, respectively, were used to reduce our cash contribution requirements. In fiscal years 2012, 2011 and 2010, our actual cash contributions totaled approximately $4.6 million, $4.3 million and $5.2 million, respectively. As of September 30, 2012, there were approximately $0.2 million of contribution forfeitures, which can be used to reduce our future cash contribution requirements.
NOTE 10-FAIR VALUE OF FINANCIAL INSTRUMENTS
We have certain assets and liabilities that are required to be measured and disclosed at fair value in accordance with generally accepted accounting principles (“GAAP”). 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 established GAAP fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into three levels. Priority is given to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Assets and liabilities measured at fair value are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, stated below, takes into account the market for our financial assets and liabilities, the associated credit risk and other considerations.
We have classified and disclosed fair value measurements using the following levels of the fair value hierarchy:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Measurement based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable for objective sources (i.e., supported by little or no market activity).
Fair value of Certain Assets and Liabilities
The fair value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short term maturities.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by using quoted market prices when available. When quoted prices are not available, independent third party services may be used to determine the fair value with reference to observable inputs used. When independent third party services are used, we obtain an understanding of how the fair values are derived and selectively corroborate fair values by reviewing other readily available market based sources of information. Valuation policies
and procedures are determined and monitored by our treasury department, which reports to our Senior Vice-President and Chief Financial Officer.
The following table sets forth the estimated fair value of certain financial instruments at September 30, 2012, which are measured and recorded at fair value on a recurring basis:
Interest rate swaps - The fair values of our interest rate swaps are based upon valuations calculated by an independent third party. The derivatives were valued according to the "Market approach" where possible, and the "Income approach" otherwise. A third party independently valued each instrument using forward price data supplied by dealers and the Chicago Mercantile Exchange (the exchange on which similar derivatives trade) indexed to one month USD LIBOR as of September 28, 2012, and broker quotes for credit default swaps or related credit instruments. It was determined that the contribution of the credit valuation adjustment to total fair value is less than 3.0% for all derivatives and is therefore not significant. Based on valuation inputs for fair value measurement and independent review performed by third party consultants, we have classified our derivative contracts as Level 2.
Long-term Debt - Our long-term debt consists of both our Notes and our credit facility.
Credit Facility - The carrying amounts of our variable-rate debt approximates fair value because such debt bears short-term, market-based interest rates. We have classified this instrument as Level 2 as valuation inputs for purposes of determining our fair value disclosure are readily available published Eurodollar rates.
Notes - The carrying value of our Notes is $450 million while the fair value of those Notes is $478.0 million, based upon a valuation calculated by an independent third party. The third party conducted independent research concerning interest rates and credit risk and relied on market sources to assess the LIBOR swap curve data as well as information provided in the debt purchase agreement. We have classified this instrument as Level 2 as valuation inputs for fair value measurements are quoted market prices that can only be obtained from independent third party sources on September 30, 2012. The fair value amount has been calculated using these quoted prices. However, no assurance can be given that the fair value would be the amount realized in an active market exchange.
NOTE 11-CONCENTRATION OF MARKET AND CREDIT RISK
All of our customers are in the oil and gas offshore exploration and production industry. This industry concentration has the potential to impact our overall exposure to market and credit risks, either positively or negatively, in that our customers could be affected by similar changes in economic, industry or other conditions. However, we believe that the credit risk posed by this industry concentration is offset by the creditworthiness of our customer base.
Revenues from significant customers are as follows (in thousands):
NOTE 12-COMMITMENTS AND CONTINGENCIES
Operating Leases
Future minimum lease payments for operating leases for fiscal years ending September 30 are as follows (in thousands):
Total rent expense under operating leases was approximately $5.5 million, $4.4 million and $4.8 million for fiscal years ended September 30, 2012, 2011, and 2010, respectively.
Purchase Commitments
At September 30, 2012, our purchase commitments, relating to our five drilling units under construction, were as follows (in thousands):
Litigation
We are party to a number of lawsuits which are ordinary, routine litigation incidental to our business, the outcome of which is not expected to have, either individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows.
Other Matters
The Atwood Beacon operated in India from early December 2006 to the end of July 2008. A service tax in India was enacted in 2004 on revenues derived from seismic and exploration activities. This service tax law was subsequently amended in June 2007 and again in May 2008 to state that revenues derived from mining services and drilling services were specifically
subject to this service tax. The contract terms with our customer in India provided that any liability incurred by us related to any taxes pursuant to laws not in effect at the time the contract was executed in 2005 was to be reimbursed by our customer. We believe any service taxes assessed by the Indian tax authorities under the 2007 or 2008 amendments are an obligation of our customer. Our customer is disputing this obligation on the basis that revenues derived from drilling services were taxable under the initial 2004 law and are, therefore, our obligation.
After reviewing the status of the drilling service we provided to our customer, the Indian tax authorities assessed service tax obligations on revenues derived from the Atwood Beacon commencing on June 1, 2007. The relevant Indian tax authority issued an extensive written ruling setting forth the application of the June 1, 2007 service tax regulation and confirming the position that drilling services, including the services performed under our contract with our customer prior to June 1, 2007, were not covered by the 2004 service tax law. In August 2012, the Indian Custom Excise and Service Tax Appellate Tribunal issued an Order in our favor confirming our position that service tax did not apply to drilling services performed prior to June 1, 2007. This ruling is subject to appeal to the Indian Supreme Court.
As of September 30, 2012, we had paid to the Indian government $10.1 million in service taxes and have accrued $1.8 million of additional service tax obligations in accrued liabilities on our consolidated balance sheets, for a total of $11.9 million relating to service taxes. We recorded a corresponding $11.9 million long-term other receivable due from our customer relating to service taxes due under the contract. We continue to pursue collection of such amounts from our customer.
NOTE 13-SUPPLEMENTAL CASH FLOW INFORMATION
NOTE 14-RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU Update 2011-05" (Topic 220) to effectively defer only those changes in ASU Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments in this update supersede changes to those paragraphs in ASU 2011-05 that pertain to how, when, and where reclassification adjustments are presented. The amendments will be temporary to allow the FASB time to deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements. The amendments in this update are effective at the same time as the amendments in ASU 2011-05 so that entities will not be required to comply with the presentation requirements in ASU 2011-05 that this update is deferring. We adopted the amendments in ASU 2011-05 on June 30, 2011 with no material impact on our consolidated financial statements or disclosures in our financial statements.
In December 2011, the FASB issued ASU 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" for an entity to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We will adopt the accounting standards effective January 1, 2013. We do not expect that our adoption will have a material effect on our financial statements.
NOTE 15-OPERATIONS BY GEOGRAPHIC AREAS
We report our offshore contract drilling operation as a single reportable segment: Offshore Contract Drilling Services. The consolidation of our offshore contract drilling operations into one reportable segment is attributable to how we manage our business, including the nature of services provided and the type of customers of such services and the fact that all of our drilling fleet are dependent upon and able to service the worldwide oil industry. The mobile offshore drilling units and related equipment comprising our offshore rig fleet operate in a single, global market for contract drilling services and are often redeployed globally due to changing demands of our customers, which consist largely of major integrated oil and natural gas companies and independent oil and natural gas companies. Our offshore contract drilling services segment currently conducts offshore contract drilling operations located in the U.S. Gulf of Mexico, the Mediterranean Sea, offshore West Africa, offshore Southeast Asia and offshore Australia.
The accounting policies of our reportable segment are the same as those described in the summary of significant accounting policies (see Note 2). We evaluate the performance of our operating segment based on revenues from external customers and segment profit. A summary of revenues for the fiscal years ended September 30, 2012, 2011 and 2010 and long-lived assets by geographic areas as of September 30, 2012, 2011 and 2010 is as follows (in thousands):
NOTE 16-QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results for fiscal years 2012 and 2011 are as follows (in thousands, except per share amounts):
(1)
The sum of the individual quarterly net income per common share amounts may not agree with year-to-date net income per common share as each quarterly computation is based on the weighted average number of common shares outstanding during that period.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report have been designed and are effective at the reasonable assurance level so that the information required to be disclosed by us in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specific in the SEC’s rules, regulations, and forms and is communicated to management. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Management’s Annual Report on Internal Control over Financial Reporting
A copy of our Management’s Report on Internal Control over Financial Reporting is included in Item 8 of this Form 10-K.
(c) Attestation Report of the Independent Registered Public Accounting Firm.
A copy of the report of PricewaterhouseCoopers LLP, our independent registered public accounting firm, is included in Item 8 of this Form 10-K
(d) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This information is incorporated by reference from our definitive Proxy Statement for the 2013 Annual Meeting of Shareholders, to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Form 10-K.
This information is incorporated by reference from our definitive Proxy Statement for the 2013 Annual Meeting of Shareholders, to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This information is incorporated by reference from our definitive Proxy Statement for the 2013 Annual Meeting of Shareholders, to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This information is incorporated by reference from our definitive Proxy Statement for the 2013 Annual Meeting of Shareholders, to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information is incorporated by reference from our definitive Proxy Statement for the 2013 Annual Meeting of Shareholders, to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
(1)
Financial Statements.
Our Consolidated Financial Statements, together with the notes thereto and the report of PricewaterhouseCoopers LLP dated November 19, 2012, are included in Item 8 of this Form 10-K.
(2)
Financial Statement Schedules.
All financial statement schedules have been omitted because they are not applicable or not required, the information is not significant, or the information is presented elsewhere in the financial statements.
(3)
Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.