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  • 10-K (Nov 19, 2012)
  • 10-K (Nov 22, 2011)
  • 10-K (Nov 23, 2010)
  • 10-K (Nov 25, 2009)

 
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Atwood Oceanics 10-K 2009
exh13-1.htm
EXHIBIT 13.1

2009 ANNUAL REPORT TO SHAREHOLDERS
 
THE COMPANY
 
This Annual Report is for Atwood Oceanics, Inc. and its subsidiaries, which are collectively referred to herein as “we”, “our”, or the “Company” except where stated otherwise.  We are engaged in the domestic and international offshore drilling and completion of exploratory and developmental oil and gas wells and related services.  Presently, we own and operate a premium, modern fleet of nine mobile offshore drilling units.  Since fiscal year 1997, we have invested approximately $727 million in upgrading seven mobile offshore drilling units and constructing two ultra-premium jack-up units, the ATWOOD BEACON and ATWOOD AURORA.  We are also constructing a conventionally moored semisubmersible unit and a dynamically positioned semisubmersible unit, which will be our tenth and eleventh mobile offshore drilling units upon delivery in 2011 and 2012, respectively.  We support our operations from our Houston headquarters and offices currently located in Australia, Malaysia, Malta, Egypt, Indonesia, Singapore and the United Kingdom.
 
FINANCIAL HIGHLIGHTS
 


             
   
2009
   
2008
 
   
(In Thousands)
 
             
FOR THE YEAR ENDED SEPTEMBER 30:
           
REVENUES
  $ 586,507     $ 526,604  
NET INCOME
    250,745       215,438  
CAPITAL EXPENDITURES
    430,470       328,246  
AT SEPTEMBER 30:
               
NET PROPERTY AND EQUIPMENT
  $ 1,184,300     $ 787,838  
TOTAL ASSETS
    1,509,402       1,096,597  
TOTAL SHAREHOLDERS' EQUITY
    1,102,293       843,690  


 

 
 
1

 

TO OUR SHAREHOLDERS AND EMPLOYEES:
 
Even though fiscal year 2009 was very challenging from a drilling industry viewpoint, we recorded our fourth consecutive year of record financial results with revenues, operating cash flows and net income again being the highest in our history.  Our net income of $251 million, or $ 3.89 per diluted share, for fiscal year 2009, reflected a 17% improvement on our previous year’s record net income of $215 million, or $3.34 per diluted share.  Other significant accomplishments during the fiscal year included the completion of construction and commencement of operations of our new ultra premium jack-up, the ATWOOD AURORA, on a two year contract in Egypt; progress, as planned, on the construction in Singapore of our two new deepwater semisubmersibles, a 6,000 foot water depth unit, the ATWOOD OSPREY, and a to-be-named 10,000 foot water depth dynamically positioned unit; strengthening of our balance sheet by execution of a $280 million credit facility (giving us a combined borrowing capacity of $580 million) during a very difficult period in the financial and banking markets; and securing contract commitments for three of our four idle units in an extremely challenging market environment.
 
During fiscal year 2009, there was a strong focus throughout the Company on execution on all of our activities.  With contracts for four of our drilling units expiring during fiscal year 2009, it was our goal to define and execute a clear strategy for these four units in terms of planning and completing critical maintenance, subsequently reducing direct operating costs to target levels, maintaining key personnel, aggressively bidding any suitable contract opportunities and having all of these units ready to return to work at short notice.  Three of these four units, the VICKSBURG, RICHMOND and ATWOOD BEACON, were contracted and have returned to work.  The fourth unit, the ATWOOD SOUTHERN CROSS, is still idle.  For most of 2009, there has been almost no bidding activity relating to opportunities suitable for the ATWOOD SOUTHERN CROSS.  While we continue to anticipate drilling market challenges in fiscal year 2010, we are currently experiencing some increases in discussions and bidding activities, including possible shorter term opportunities for the ATWOOD SOUTHERN CROSS, and remain confident in the long-term outlook for the worldwide offshore drilling industry, especially for deepwater drilling.
 
Of our nine (9) owned operational drilling units, and two (2) drilling units currently under construction, five (5) have current contract commitments that extend into fiscal year 2011 or later; one (1) has a contract commitment through fiscal year 2010; three (3) have current contract commitments that expire during fiscal year 2010, one (1) is currently idle; and one (1) under construction, scheduled for delivery in mid-2012, is currently without a contract.  At September 30, 2009, we had estimated contract revenue backlog of approximately $1.8 billion compared to approximately $1.0 billion of estimated capital commitments relating primarily to the new semisubmersibles under construction.  Currently, we have approximately 70% of our available rig days contracted for fiscal year 2010.
 
While fiscal year 2009 was rewarding in terms of recording our sixth consecutive year of improving financial results, we are focused on execution and planning for what we believe will be continuing enhancement in shareholder value.  From a longer term perspective, we remain committed to our strategy of consistently meeting our clients’ needs with safe, quality operations, premium equipment and being leveraged to deepwater and international markets.  This strategy has been successful in enabling us to create value in the past and stands us in good stead for the future.  The Company is strong and well positioned in terms of its financial position, talented personnel, rig fleet and track record.  We continue to actively progress efforts to develop our organization, systems, expertise, talent and capability for future growth.  While it is our goal to consider further value enhancing opportunities in the future at the appropriate time, we have no immediate plans for further growth beyond our current two deepwater semisubmersible construction program.
 

 
2

 

Our performance during fiscal year 2009 and current strong position owe much to the talent, dedication and valuable contributions of our employees and management team both in the U.S. and internationally.  To them, we convey our personal thanks and appreciation as we do to our shareholders for their continuing trust and support.  To our clients, reflecting both long-standing and newer relationships, we express our appreciation for the opportunity and privilege to be of service and add value to their activities and also acknowledge the communities around the world in which we have the privilege and good fortune to operate.  We remain focused on the future and are dedicated to building longer term shareholder value from our current strong position.

John R. Irwin



 
3

 

Atwood Oceanics, Inc. and Subsidiaries
FIVE YEAR FINANCIAL REVIEW
 

 
(In thousands, except per share amounts, fleet
At or For the Years Ended September 30,
       
 data and ratios)
 
2009
 
2008
 
2007
 
2006
 
2005
 
STATEMENTS OF OPERATIONS DATA:
                     
     Revenues
$ 586,507   $ 526,604   $ 403,037   $ 276,625     $ 176,156  
     Contract drilling costs
  (221,709 )   (216,395 )   (186,949 )   (144,366 )     (102,849 )
     Depreciation
  (35,119 )   (34,783 )   (33,366 )   (26,401 )     (26,735 )
     General and administrative expenses
  (31,639 )   (30,975 )   (23,929 )   (20,630 )     (14,245 )
     Gain on sale of equipment
  402     155     414     10,548       -  
     OPERATING INCOME
  298,442     244,606     159,207     95,776       32,327  
     Other (expense) income
  (2,011 )   169     752     (3,940 )     (6,719 )
     Tax (provision) benefit
  (45,686 )   (29,337 )   (20,935 )   (5,714 )     403  
 
NET INCOME
$ 250,745   $ 215,438   $ 139,024   $ 86,122     $ 26,011  
                                   
PER SHARE DATA:
                                 
     Earnings per common share:
                               
 
Basic
$ 3.91   $ 3.38   $ 2.22   $ 1.39     $ 0.43  
 
Diluted
$ 3.89   $ 3.34   $ 2.18   $ 1.37     $ 0.42  
     Average common shares outstanding:
                               
 
Basic
  64,167     63,756     62,686     61,872       60,824  
 
Diluted
  64,493     64,556     63,628     62,884       62,440  
                                   
FLEET DATA:
                                 
     Number of rigs owned or managed, at end
                               
 
of period
  9     8     8     10       11  
     Utilization rate for in-service rigs (1)
  85 %   100 %   100 %   100 %     98 %
                                   
BALANCE SHEET DATA:
                                 
     Cash and cash equivalents
$ 100,259   $ 121,092   $ 100,361   $ 32,276     $ 18,982  
     Working capital
    191,686     248,052     158,549     86,308       35,894  
     Net property and equipment
  1,184,300     787,838     493,851     436,166       390,778  
     Total assets
    1,509,402     1,096,597     717,724     593,829       495,694  
     Total long-term debt (including current portion)
  275,000     170,000     18,000     64,000       90,000  
     Shareholders' equity (2) (3)
  1,102,293     843,690     615,855     458,894       362,137  
     Ratio of current assets to current liabilities
  2.70     5.36     3.75     2.41       1.64  
                                   

Notes –
 
 
 (1)
Excludes managed rigs, the SEASCOUT (sold in fiscal year 2006), and contractual downtime on rigs upgraded.
 
(2)           We have never paid any cash dividends on our common stock.
 
(3)           In October 2004, we sold 4,700,000 shares (as adjusted for subsequent stock splits) of common stock in a public offering.
 
 
4

 

OFFSHORE DRILLING OPERATIONS
 
RIG NAME
YEAR UPGRADED OR CONSTRUCTION COMPLETED
MAXIMUM WATER DEPTH
PERCENTAGE OF FY 2009 REVENUES
LOCATION AT NOVEMBER 23, 2009
CUSTOMER
CONTRACT STATUS AT
NOVEMBER 23, 2009
 
SEMISUBMERSIBLES -
     
ATWOOD EAGLE
2000/2002
5,000 Ft.
25%
Offshore Australia
WOODSIDE
ENERGY LTD
(“WOODSIDE”)
The rig is currently working under a drilling program with Woodside which is expected to be completed in June 2010.  Following the Woodside contract, the rig will drill one well deferred from a previous program with BHP Billiton Petroleum which is expected to be completed in August 2010.  Following this well, the rig has a commitment with Chevron Australia Pty. Ltd. that will last at least until the expected delivery of the ATWOOD OSPREY in February/March 2011.
 
   
ATWOOD HUNTER
1997/2001
5,000 Ft.
31%
Offshore Ghana
KOSMOS ENERGY GHANA HC (“KOSMOS”)
The rig is currently working under a contract with Kosmos until June 2010.  Following the Kosmos work, the rig will be moved to Equatorial Guinea to work for Noble Energy, Inc.  The combined Noble/Kosmos contract commitment extends to October/November 2012.
 
   
ATWOOD FALCON
1998/2006
5,000 Ft.
14%
Offshore Malaysia
SARAWAK SHELL BERHAD (“SHELL”)
The rig is currently working under a drilling program with Shell which extends to August 2011.
 
   
 ATWOOD SOUTHERN CROSS   1997/2006  2,000 Ft.  4%  West Africa  NONE
 We are pursuing contract opportunities while the rig is currently “ready stacked” in West Africa.
 
   
 ATWOOD OSPREY  Under Construction  6,000 Ft.  0%  N/A CHEVRON AUSTRALIA PTY. LTD.  (“CHEVRON”)
 The rig is under construction in Singapore with expected delivery in early 2011.  Upon delivery, the rig will be moved to offshore Australia where it will commence a three year drilling program for Chevron.
 
   
 To-Be-Named  Under Construction  10,000 Ft.  0%  N/A  NONE
The rig is under construction in Singapore with expected delivery in mid-2012.
 
   

 
5

 
CANTILEVER JACK-UPS –
ATWOOD BEACON
 
Construction Completed  in 2003
400 Ft.
7%
Offshore Equatorial Guinea
HESS EQUATORIAL GUINEA, Inc. (“HESS”)
The rig is currently working under a drilling program for Hess which extends to June 2010.
 
 VICKSBURG
1998/2009
300 Ft.
7%
Offshore Thailand
NUCOASTAL (THAILAND) LIMITED
The rig is currently working under a drilling commitment for NuCoastal which extends to the end of March 2010.
 
ATWOOD AURORA
Construction Completed in 2009
350 Ft.
4%
Offshore Egypt
RWE DEA NILE GMBH (“RWE”)
The rig is currently working under a contract commitment with RWE that extend to April 2011.

SUBMERSIBLE
  RICHMOND
2000/2002/2007
70 Ft.
3%
U.S. Gulf of Mexico
APPLIED DRILLING TECHNOLOGY INC.
 
The rig is currently working under a drilling commitment which extends into December 2009.  Contract opportunities are currently being pursued for additional work for the rig after it completes the drilling of this one-well program.
SEMISUBMERSIBLE TENDER ASSIST UNIT -
  SEAHAWK
1992/1999/2006
600 Ft.
5%
Offshore Equatorial Guinea
AMERADA HESS EQUATORIAL GUINEA, INC. (“HESS”)
The rig is currently working under a contractual commitment with Hess which extends to September 2010.
 
             

 

 
 
6

 

SECURITIES LITIGATION SAFE HARBOR STATEMENT
 
Statements included in this report which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  In addition, we and our representatives may from to time to time make other oral or written statements which are also forward-looking statements.
 
These forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties.  We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
 
Important factors that could cause our actual results of operations or our actual financial conditions to differ include, but are not necessarily limited to:
 
·  
our dependence on the oil and gas industry;
 
·  
the operational risks involved in drilling for oil and gas;
 
·  
risks associated with the current global economic crisis and its impact on capital markets, liquidity, and financing of future drilling activity;
 
·  
changes in rig utilization and dayrates in response to the level of activity in the oil and gas industry, which is significantly affected by indications and expectations regarding the level and volatility of oil and gas prices, which in turn are affected by political, economic and weather conditions affecting or potentially affecting regional or worldwide demand for oil and gas, actions or anticipated actions by OPEC, inventory levels, deliverability constraints, and future market activity;
 
·  
the extent to which customers and potential customers continue to pursue deepwater drilling;
 
·  
exploration success or lack of exploration success by our customers and potential customers;
 
·  
the highly competitive and volatile nature of our business, with periods of low demand and excess rig availability;
 
·  
the impact of possible disruption in operations due to terrorism, acts of piracy, embargoes, war or other military operations;
 
·  
our ability to enter into and the terms of future drilling contracts;
 
·  
the availability of qualified personnel;
 
·  
our failure to retain the business of one or more significant customers;
 
·  
the termination or renegotiation of contracts by customers;
 
·  
the availability of adequate insurance at a reasonable cost;
 
·  
the occurrence of an uninsured loss;
 
·  
the risks of international operations, including possible economic, political, social or monetary instability, and compliance with foreign laws;
 
·  
the effect public health concerns could have on our international operations and financial results;
 
·  
compliance with or breach of environmental laws;
 
·  
the incurrence of secured debt or additional unsecured indebtedness or other obligations by us or our subsidiaries;
 
·  
the adequacy of sources of liquidity for our operations and those of our customers;
 
·  
currently unknown rig repair needs and/or additional opportunities to accelerate planned maintenance expenditures due to presently unanticipated rig downtime;
 
 
7

 
·  
higher than anticipated accruals for performance-based compensation due to better than anticipated performance by us, higher than anticipated severance expenses due to unanticipated employee terminations, higher than anticipated legal and accounting fees due to unanticipated financing or other corporate transactions, and other factors that could increase general and administrative expenses;
 
·  
the actions of our competitors in the offshore drilling industry, which could significantly influence rig dayrates and utilization;
 
·  
changes in the geographic areas in which our customers plan to operate or the tax rate in such jurisdiction, which in turn could change our expected effective tax rate;
 
·  
changes in oil and gas drilling technology or in our competitors’ drilling rig fleets that could make our drilling rigs less competitive or require major capital investments to keep them competitive;
 
·  
rig availability;
 
·  
the effects and uncertainties of legal and administrative proceedings and other contingencies;
 
·  
the impact of governmental laws and regulations and the uncertainties involved in their administration, particularly in some foreign jurisdictions;
 
·  
changes in accepted interpretations of accounting guidelines and other accounting pronouncements and tax laws;
 
·  
risks involved in the construction of a dynamically positioned semisubmersible drilling unit without a contract;
 
·  
although our current long-term contract commitments do not provide for early termination due to market deterioration, the risk that customers could seek to amend some of these contracts due to market decline which could alter the timing and amount of our current contracted cash flows;
 
·  
the risks involved in the construction, upgrade, and repair of our drilling units including project delays affecting our ability to meet contractual commitments, as well as commencement of operations of our drilling units following delivery; and
 
·  
such other factors as may be discussed in this report and our other reports filed with the Securities and Exchange Commission, or SEC.
 
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements.  See also “Risk Factors” in Item 1A in our Form 10-K for the year ended September 30, 2009, to which this Annual Report is an exhibit. Other unknown or unpredictable factors could also have material adverse effects on future results.  The words “believe,” “impact,” “intend,” “estimate,” “anticipate,” “plan” and similar expressions identify forward-looking statements.  These forward-looking statements are found at various places throughout the Management’s Discussion and Analysis in this Annual Report to Shareholders for fiscal year 2009.  When considering any forward-looking statement, you should also keep in mind the risk factors described in other reports or filings we make with the SEC from time to time.  Undue reliance should not be placed on these forward-looking statements, which are applicable only on the date hereof.  Neither we nor our representatives have a general obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof or to reflect the occurrence of unanticipated events.
 

 

 
 
8

 

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MARKET OUTLOOK

Despite fiscal year 2009 being a very challenging year from a drilling market perspective whereby we uncharacteristically incurred some idle time on four of our drilling units, it was still a year marked with several significant accomplishments which included the following:

·  
Completing the construction and commissioning, and start-up of our ultra-premium jack-up, the ATWOOD AURORA;
·  
Completing the life enhancing upgrade of our premium jack-up, the VICKSBURG;
·  
Achieving the most favorable operating results in our history; and
·  
Strengthening our liquidity position  by executing a $280 million credit facility in November 2008 at a time when the world’s financial and banking markets had experienced a significant downturn.

Even though we continue to anticipate drilling market challenges in fiscal year 2010, we are currently experiencing increases in bidding activities and remain confident in the long-term outlook for the worldwide offshore drilling industry, especially for deepwater drilling.  Despite recent improvement in bidding activities, there continues to be an excess of worldwide rig fleet availability, especially for jack-up rigs and semisubmersible drilling units technically similar to the ATWOOD SOUTHERN CROSS.  Dayrates, especially for jack-ups, have declined from levels that existed prior to the commencement of the global financial crisis that continue to negatively impact the availability of capital and liquidity from banks and other providers of credit.  The continuing delivery of newly constructed jack-up rigs is also negatively impacting the worldwide supply related to current market demand.

During fiscal year 2009, we incurred idle days on four of our nine drilling rigs; ATWOOD SOUTHERN CROSS, ATWOOD BEACON, VICKSBURG and RICHMOND.  Currently, the ATWOOD SOUTHERN CROSS is our only uncontracted rig, with the VICKSBURG, RICHMOND and ATWOOD BEACON having short-term contracts that expire in March 2010, December 2009 and June 2010, respectively.  We are continuing to pursue additional contract commitments for these four rigs; however, there is no guarantee that we will not incur idle time on some or all of these units during fiscal year 2010.

We continue to make progress on the construction of two semisubmersible drilling units for deepwater drilling: (1) the ATWOOD OSPREY, a conventionally moored, 6,000 foot water depth unit (scheduled for delivery in early 2011, with an estimated total cost of approximately $625 million), and (2) a to-be-named dynamically positioned, 10,000 foot water depth water unit (scheduled for delivery in mid-2012, with an estimated total cost of approximately $750 million).  Through September 30, 2009, we have invested approximately $605 million toward the construction of these two drilling units.  Funding of the approximate $770 million remaining on the construction of these two units will come from internally generated funds and borrowings under our two credit facilities, which have a combined borrowing capacity of $580 million.  We currently have $275 million borrowed under our credit facilities and will endeavor to keep our maximum borrowing below $500 million during the construction of these two units.

Of our nine (9) owned operational drilling units, and the two (2) drillings units currently under construction, five (5) have current contract commitments that extend into fiscal year 2011 or later; one (1) has a contract commitment through fiscal year 2010; three (3) have current contract commitments that expire during fiscal year 2010, one (1) is currently idle; and one (1) under construction, scheduled for delivery in mid-2012, is currently without a contract.  At September 30, 2009, we had estimated contract revenue backlog of approximately $1.8 billion compared to approximately $1.0 billion of estimated capital expenditures relating primarily to the new semisubmersibles under construction.


 
9

 

Currently, we have approximately 70% of our available rig days contracted for fiscal year 2010.  A comparison of the average per day revenues for fiscal years 2009, 2008 and 2007 for each of our current nine (9) active drilling units is as follows:

Average Per Day Revenues
 
   
Fiscal Year 
   
Fiscal Year
   
Fiscal Year
       
     2007      2008      2009        
ATWOOD HUNTER
  $ 234,000     $ 246,000     $ 500,000        
ATWOOD EAGLE
    160,000       241,000       398,000        
ATWOOD FALCON
    138,000       216,000       223,000        
VICKSBURG
    110,000       155,000       118,000  (1)        
ATWOOD BEACON
    109,000       128,000       105,000          
SEAHAWK
    84,000       88,000       85,000          
ATWOOD SOUTHERN CROSS
    171,000       321,000       70,000  (2)        
ATWOOD AURORA
    ---       ---       56,000  (3)        
RICHMOND
    81,000       44,000 (4)     52,000          
                                 
(1) Rig incurred a life-enhancing upgrade during fiscal year 2009.
         
(2) Rig has been idle since mid-December 2008.
         
(3) Rig commenced operations in April 2009.
         
(4) Rig incurred a life-enhancing upgrade during fiscal year 2008.
         

The ATWOOD HUNTER is currently working under contract commitments that extend to September 2012 at operating dayrates that range from $538,000 to $545,000, subject to adjustment for cost escalations.  The ATWOOD EAGLE is currently working under a contract commitment offshore Australia at a dayrate of $405,000, which extends to June 2010.  Following completion of this commitment, the rig will commence a drilling program that could extend for six months or longer at a dayrate of approximately $430,000 to approximately $450,000, subject to adjustment for cost escalations.  The ATWOOD FALCON is currently working under a contract until August 2011 at a dayrate of $425,000, subject to adjustment for cost escalations.

The VICKSBURG has a current contract commitment offshore Thailand at a dayrate of $90,000 which is currently expected to extend to the end of March 2010.  The ATWOOD BEACON is currently working offshore Equatorial Guinea under a drilling contract that extends into June 2010.  This contract provides for a dayrate of $110,000; however, amortization of mobilization expenses will reduce daily operating income by approximately $25,000.  The SEAHAWK is working offshore West Africa under a drilling contract that currently extends into September 2010.  For 2007 and 2008 fiscal years, the SEAHAWK’s operating costs exceeded or were relatively consistent with revenues; however, for fiscal year 2009, revenue exceeded operating costs.  The ATWOOD SOUTHERN CROSS has been idle since mid-December 2008.  During this idle period, the rig has been undergoing certain equipment repairs and maintenance which has kept its operating costs relatively high at approximately $60,000 per day during the last three quarters of fiscal year 2009.  As long as the rig remains idle, its current level of operating costs is expected to be below $40,000 per day.  The ATWOOD AURORA is currently working offshore Egypt under a drilling contract that extends to April 2011 at a dayrate of $133,000.

Our only rig in the U.S. Gulf of Mexico, the RICHMOND, currently has a one well contract commitment that should extend into December 2009.  The RICHMOND’s current one-well contract provides for a dayrate of $32,500 which is below its per day operating cost of approximately $35,000.  Upon delivery, the ATWOOD OSPREY has a three-year contract that provides for a dayrate of $470,000, with an option to extend this commitment to six years at a dayrate of $450,000.  Both dayrates are subject to adjustments for cost escalations.  We expect this drilling unit will be mobilized to Australia in early calendar year 2011. Upon expected delivery in mid-2012, the to-be-named semisubmersible drilling unit is currently without a contract.


 
10

 

Total drilling costs for fiscal year 2009 increased approximately 3% when compared to prior fiscal year; however, if the drilling costs for the ATWOOD AURORA (which commenced operations in April 2009) are removed from this comparison, total drilling costs declined by 2%.  
 
During fiscal year 2010, we expect to incur planned zero rate time on the following drilling units:

VICKSBURG
Ten (10) zero rate days during the third or fourth quarter due to required regulatory inspections
 
RICHMOND
Ten (10) zero rate days during the third quarter for required regulatory inspections
 
ATWOOD SOUTHERN CROSS
Ten (10) zero rate days during the fourth quarter for required regulatory inspections

We anticipate incurring capital expenditures during fiscal years 2010, 2011 and 2012 of approximately $300 million, $400 million and $300 million, respectively.  Even with an expected increase in our outstanding debt between $400 million and $450 million by the end of fiscal year 2011, we expect that our debt to total capitalization ratio is unlikely to exceed 25%.  


RESULTS OF OPERATIONS
 
Fiscal Year 2009 Versus Fiscal Year 2008
 
Revenues for fiscal year 2009 increased 11% compared to the prior fiscal year.  A comparative analysis of revenues by rig for fiscal years 2009 and 2008 is as follows:


   
REVENUES
 
   
(In millions)
 
   
Fiscal
   
Fiscal
       
   
Year 2009
   
Year 2008
   
Variance
 
ATWOOD HUNTER
  $ 182.5     $ 89.9     $ 92.6  
ATWOOD EAGLE
    145.1       88.4       56.7  
ATWOOD AURORA
    20.2       -       20.2  
RICHMOND 
    19.1       16.1       3.0  
ATWOOD FALCON
    81.6       79.0       2.6  
SEAHAWK
    31.1       32.1       (1.0 )
ATWOOD BEACON
    38.3       46.8       (8.5 )
VICKSBURG 
    43.0       56.7       (13.7 )
ATWOOD SOUTHERN CROSS
    25.6       117.6       (92.0 )
    $ 586.5     $ 526.6     $ 59.9  

 
11

 

Increases in revenues for the ATWOOD HUNTER and ATWOOD EAGLE were related to each drilling unit working under new contracts with significantly higher dayrates during the current fiscal year compared to the prior fiscal year. Our new drilling rig, the ATWOOD AURORA, commenced drilling operations in April 2009, earning no revenue during fiscal year 2008.  The increase in revenue for the RICHMOND for fiscal year 2009 is due to the rig being in a shipyard undergoing a life-enhancing upgrade during a significant portion of the first and second quarters of fiscal year 2008, earning no revenue during that time, partially offset by the rig incurring idle time during the current fiscal year from June through September.   Revenues for the ATWOOD FALCON and SEAHAWK during the current fiscal year were relatively consistent with the prior fiscal year.  The ATWOOD BEACON became idle at the end of July 2009, earning no revenue for the last two months of the current fiscal year compared to full utilization in the prior fiscal year.  The decrease in revenue for the VICKSBURG is due to the rig being in a shipyard undergoing a life enhancing upgrade during two months of the fourth quarter of fiscal year 2009, earning no revenue during that time compared to full utilization during the prior fiscal year.  Since the ATWOOD SOUTHERN CROSS has been idle and earning no revenue since mid December 2008, revenues have significantly decreased during fiscal year 2009 when compared to fiscal year 2008.

Contract drilling costs for fiscal year 2009 increased 3% compared to the prior fiscal year.  A comparative analysis of contract drilling costs by rig for fiscal years 2009 and 2008 is as follows:


 
   
CONTRACT DRILLING COSTS
 
   
(In millions)
 
   
Fiscal
   
Fiscal
       
   
Year 2009
   
Year 2008
   
Variance
 
ATWOOD AURORA
  $ 9.7     $ -     $ 9.7  
ATWOOD HUNTER
    36.8       28.9       7.9  
ATWOOD EAGLE
    47.0       44.5       2.5  
RICHMOND 
    14.2       12.1       2.1  
ATWOOD FALCON
    25.8       24.6       1.2  
ATWOOD BEACON
    16.7       19.2       (2.5 )
VICKSBURG 
    15.2       18.6       (3.4 )
SEAHAWK
    24.7       30.1       (5.4 )
ATWOOD SOUTHERN CROSS
    23.9       33.1       (9.2 )
OTHER
    7.7       5.3       2.4  
    $ 221.7     $ 216.4     $ 5.3  

Our new drilling rig, the ATWOOD AURORA, commenced drilling operations in April 2009, incurring no contract drilling costs in the prior fiscal year. The increase in contract drilling costs for the ATWOOD HUNTER for the current fiscal year is primarily due to higher agent fees which are based on a percentage of dayrates and higher operations support costs which are allocated to rigs based on revenue.  Contract drilling costs for the ATWOOD EAGLE and ATWOOD FALCON for fiscal year 2009 were relatively consistent with fiscal year 2008 while the increase in contract drilling costs the RICHMOND on a percentage basis for the fiscal year 2009 is due to the rig incurring significantly less operating costs during the first and second quarters of fiscal year 2008 as the rig was in a shipyard undergoing a life enhancing upgrade, partially offset by higher maintenance costs during the upgrade period.  The decrease in contract drilling costs for the ATWOOD BEACON is primarily due to incurring less operating costs during its idle period during the last two months of the current fiscal year while the decrease in contract drilling costs for the VICKSBURG is due to the rig incurring less operating costs during the fourth quarter of fiscal year 2009 as the rig was in a shipyard undergoing a life enhancing upgrade.  The decrease in contract drilling costs for the SEAHAWK for the current fiscal year is due to the amortization of deferred expenses in the prior fiscal year related to certain client requested upgrades which ended during the fourth quarter of fiscal year 2008.  The decrease in drilling costs for the ATWOOD SOUTHERN CROSS for fiscal year 2009 is due to a decrease in agent fees and headcount reduction of non-essential personnel as the rig has been idle since mid-December 2008, partially offset by the rig undergoing certain equipment repairs and maintenance.  The increase of other contract drilling costs for the current fiscal year is due to a larger currency exchange loss during fiscal year 2009 compared  to fiscal year 2008.

 
12

 

Depreciation expense for fiscal year 2009 increased 1% as compared to the prior fiscal year.  A comparative analysis of depreciation expense by rig for fiscal years 2009 and 2008 is as follows:
 

   
DEPRECIATION EXPENSE
 
   
(In millions)
 
   
Fiscal
   
Fiscal
       
   
Year 2009
   
Year 2008
   
Variance
 
ATWOOD AURORA
  $ 3.3     $ -     $ 3.3  
RICHMOND 
    1.7       1.0       0.7  
ATWOOD HUNTER
    6.3       5.9       0.4  
ATWOOD FALCON
    5.5       5.2       0.3  
ATWOOD SOUTHERN CROSS
    3.8       3.7       0.1  
ATWOOD EAGLE
    4.5       4.5       -  
ATWOOD BEACON
    4.8       5.1       (0.3 )
VICKSBURG 
    2.4       2.8       (0.4 )
SEAHAWK
    2.3       6.1       (3.8 )
OTHER
    0.5       0.5       -  
    $ 35.1     $ 34.8     $ 0.3  
                         

Our new drilling rig, the ATWOOD AURORA, was placed into service during April 2009, incurring no depreciation expense prior to the third quarter of fiscal year 2009.  In accordance with our company policy, no depreciation expense was recorded for a significant portion of the first and second quarters of fiscal year 2008 for the RICHMOND, as the rig was undergoing a life enhancing upgrade to extend its remaining depreciable life from one to ten years.  In addition, no depreciation expense was recorded for two months of the fourth quarter of fiscal year 2009 for the VICKSBURG, as the rig was undergoing a life enhancing upgrade to extend its remaining depreciable life from four to ten years.  Effective October 1, 2008, we extended the remaining depreciable life of the SEAHAWK from one year to five years based upon the length of its current contract commitment, coupled with our intent to continue marketing and operating the rig beyond one year as the rig is technically capable of working over this revised five-year period.  Depreciation expense for all other rigs remained relatively consistent with the prior fiscal year.
 
General and administrative expenses for the current fiscal year have remained relatively comparable with the prior fiscal year as the general and administrative costs related to payroll costs, travel expenses, professional fees, and rental expenses incurred during fiscal year 2009 are consistent with fiscal year 2008.  Interest expense has increased by 63% for the current fiscal year due to higher debt balances when compared to the prior fiscal year, while interest income has decreased as interest rates have decreased significantly when compared to the prior fiscal year.
 
Virtually all of our tax provision for fiscal year 2009 relates to taxes in foreign jurisdictions.  Accordingly, due to the high level of operating income earned in certain nontaxable and deemed profit tax jurisdictions during fiscal year 2009, our effective tax rate was significantly less than the United States federal statutory rate.  Our effective rate for fiscal year 2009 of 15% is higher than the 12% effective rate in fiscal year 2008 primarily due to a significantly lower level of operating income earned in certain nontaxable and deemed profit tax jurisdictions during the current fiscal year.  Excluding any discrete items that may be incurred, we expect our effective tax rate to be approximately 16%-18% for fiscal year 2010.
 
During July 2007, we were notified by the Malaysian tax authorities regarding a potential proposed adjustment relating to fiscal years 2000 to 2003.  Although we believe we are in compliance with applicable rules and regulations, we have evaluated the merit of the assertions by the Malaysian tax authorities and are currently vigorously contesting these assertions.  While we cannot predict or provide assurance as to the final outcome of these allegations, we do not expect them to have a material adverse effect on our consolidated financial position, results of operations or cash flows.  As of September 30, 2009, there has not been any change in the status of this claim.


 
13

 

The ATWOOD BEACON operated in India from early December 2006 to the end of July 2009. A service tax 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 ATWOOD BEACON 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.  In our opinion, which is supported by our legal and tax advisors, any such service taxes assessed by the Indian tax authorities under either provision of the 2007 or 2008 amendments would be the obligation of our customer. Our customer is disputing this obligation on the basis, in their opinion, that revenues derived from drilling services were taxable under the initial 2004 law, which, based on our contract terms, would provide that the service tax is our obligation.  For more information, see Note 11 to our Consolidated Financial Statements for the year ended September 30, 2009.
 

Fiscal Year 2008 Versus Fiscal Year 2007
 
Revenues for fiscal year 2008 increased 31% compared to the prior fiscal year.  A comparative analysis of revenues by rig for fiscal years 2008 and 2007 is as follows:


   
REVENUES
 
   
(In millions)
 
   
Fiscal
   
Fiscal
       
   
Year 2008
   
Year 2007
   
Variance
 
ATWOOD SOUTHERN CROSS
  $ 117.6     $ 62.3     $ 55.3  
ATWOOD EAGLE
    88.4       58.4       30.0  
ATWOOD FALCON
    79.0       50.5       28.5  
VICKSBURG 
    56.7       40.0       16.7  
ATWOOD BEACON
    46.8       39.8       7.0  
ATWOOD HUNTER
    89.9       85.4       4.5  
SEAHAWK
    32.1       30.6       1.5  
AUSTRALIA MANAGEMENT CONTRACTS
    -       6.5       (6.5 )
RICHMOND 
    16.1       29.5       (13.4 )
    $ 526.6     $ 403.0     $ 123.6  

The increase in fleetwide revenues during fiscal year 2008 is primarily attributable to the increase in average dayrates due to improving market conditions and strong demand for offshore drilling equipment.  Increases in revenues during fiscal year 2008 for the ATWOOD SOUTHERN CROSS, ATWOOD EAGLE, ATWOOD FALCON, VICKSBURG, ATWOOD BEACON, ATWOOD HUNTER and SEAHAWK were related to each of these drilling units working at higher dayrates when compared to fiscal year 2007.   The AUSTRALIA MANAGEMENT CONTRACTS were terminated during fiscal year 2007.  The decrease in revenues for the RICHMOND is due to the fact that for approximately four months of the first two quarters of fiscal year 2008, the rig was in a shipyard undergoing a life-enhancing upgrade and earned no revenue during the shipyard period.
 

 
14

 

Contract drilling costs for fiscal year 2008 increased 16% compared to the prior fiscal year.  A comparative analysis of contract drilling costs by rig for fiscal years 2008 and 2007 is as follows:


   
CONTRACT DRILLING COSTS
 
   
(In millions)
 
   
Fiscal
   
Fiscal
       
   
Year 2008
   
Year 2007
   
Variance
 
ATWOOD SOUTHERN CROSS
  $ 33.1     $ 20.7     $ 12.4  
ATWOOD EAGLE
    44.5       35.0       9.5  
VICKSBURG 
    18.6       14.0       4.6  
ATWOOD BEACON
    19.2       15.5       3.7  
ATWOOD HUNTER
    28.9       25.2       3.7  
SEAHAWK
    30.1       28.2       1.9  
ATWOOD FALCON
    24.6       23.6       1.0  
RICHMOND 
    12.1       13.1       (1.0 )
AUSTRALIA MANAGEMENT CONTRACTS
    -       5.1       (5.1 )
OTHER
    5.3       6.5       (1.2 )
    $ 216.4     $ 186.9     $ 29.5  
                         

 
On a fleetwide basis, wage increases and extra personnel for training and development resulted in higher personnel costs, increases in the number of maintenance projects resulted in higher equipment related costs, and overall cost inflation led to increases in contract drilling costs during fiscal year 2008 for virtually every rig when compared to the fiscal year 2007, including the ATWOOD SOUTHERN CROSS, ATWOOD EAGLE, VICKSBURG, ATWOOD BEACON, ATWOOD HUNTER and SEAHAWK.  While the ATWOOD FALCON also incurred higher costs due to the reasons mentioned above, the increase is partially offset by a significant amount of planned maintenance performed during its water depth upgrade in the first quarter of fiscal year 2007.  Contract drilling costs for the RICHMOND decreased, as the personnel-related costs increased for the reasons mentioned above was more than offset by reduced operating costs while in a shipyard undergoing a life enhancing upgrade for approximately four months of the first two quarters of fiscal year 2008.  The AUSTRALIA MANAGEMENT CONTRACTS were terminated during fiscal year 2007.

Depreciation expense for fiscal year 2008 increased 4% as compared to the prior fiscal year.  A comparative analysis of depreciation expense by rig for fiscal years 2008 and 2007 is as follows:
 

   
DEPRECIATION EXPENSE
 
   
(In millions)
 
   
Fiscal
   
Fiscal
       
   
Year 2008
   
Year 2007
   
Variance
 
ATWOOD FALCON
  $ 5.2     $ 4.4     $ 0.8  
ATWOOD SOUTHERN CROSS
    3.7       3.4       0.3  
ATWOOD HUNTER
    5.9       5.7       0.2  
SEAHAWK
    6.1       6.1       -  
RICHMOND 
    1.0       1.0       -  
ATWOOD EAGLE
    4.5       4.5       -  
ATWOOD BEACON
    5.1       5.1       -  
VICKSBURG 
    2.8       2.9       (0.1 )
OTHER
    0.5       0.3       0.2  
    $ 34.8     $ 33.4     $ 1.4  

 
15

 
Depreciation expense increased for the ATWOOD FALCON due to the completion of its water depth upgrade during fiscal year 2007.  The increase in depreciation expense for the ATWOOD SOUTHERN CROSS when compared to fiscal year 2007 is primarily due to equipment upgrades during the second half of fiscal year 2007.  Depreciation expense for all other rigs remained relatively consistent with fiscal year 2007.  Other depreciation expense has increased due to various corporate office expenditures during fiscal year 2008.

Effective March 1, 2008, we extended the remaining depreciable life of the RICHMOND from one year to ten years, based upon completion of a life enhancing upgrade, coupled with our intent to continue marketing and operating the rig beyond one year.

General and administrative expenses for fiscal year 2008 increased compared to fiscal year 2007 primarily due to rising personnel costs which include headcount and wage increases, increased annual bonus compensation costs, increased share-based compensation expense and increased professional fees, which include increased activity regarding future operational and global planning initiatives.  While interest expense has remained relatively consistent compared to fiscal year 2007, interest income has decreased when compared to the fiscal year 2007 due to lower interest rates.

Virtually all of our tax provision for fiscal year 2008 relates to taxes in foreign jurisdictions.  Accordingly, due to the high level of operating income earned in certain nontaxable and deemed profit tax jurisdictions during fiscal year 2008, our effective tax rate was significantly less than the United States federal statutory rate.  



LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2009, and November 24, 2009, we have $200 million borrowed under our 5-year $300 million credit facility executed in October 2007 (the “2007 Credit Agreement”) and $75 million borrowed under our 5-year $280 million credit facility executed in November 2008 (the “2008 Credit Agreement”).  Both credit facilities contain various financial covenants that, among other things, require the maintenance of certain leverage and interest expense coverage ratios.  The collateral for these two credit facilities, collectively, primarily consists of preferred mortgages on six of our drilling units (ATWOOD EAGLE, ATWOOD HUNTER, ATWOOD FALCON, ATWOOD SOUTHERN CROSS, ATWOOD AURORA and ATWOOD BEACON).  These credit facilities will provide funding to complete the construction of our two deepwater semisubmersibles being constructed in Singapore, and funding for general corporate needs.  We were in compliance with all financial covenants under both credit facilities at September 30, 2009, at all times during fiscal year 2009 for the 2008 Credit Facility, and since inception for the 2007 Credit Agreement.  For more information regarding financial covenants, see Note 5 to our Consolidated Financial Statements for the year ended September 30, 2009.

Our newly constructed jack-up unit, the ATWOOD AURORA, commenced operations in April 2009 with a total capitalized cost (after being relocated from its construction site in the United States to its first drilling location offshore Egypt) of approximately $197 million, with $45 million being incurred in fiscal year 2009.  As of September 30, 2009, we had expended approximately $325 million towards the construction of the ATWOOD OSPREY and $280 million towards the construction of our to-be-named dynamically positioned semisubmersible, with expected total construction costs of approximately $625 million and approximately $750 million, respectively, of which $365 million was expended in fiscal year 2009.  In addition to these construction projects, we expended approximately $7 million on the upgrade of VICKSBURG.

Since we operate in a very volatile industry, maintaining high equipment utilization in up, as well as down, cycles is a key factor in generating cash to satisfy current and future obligations.  For fiscal years 2002 through 2008, net cash provided by operating activities ranged from a low of approximately $14 million in fiscal year 2003 to a high of approximately $192 million in fiscal year 2008.  For fiscal year 2009, net cash provided by operating activities totaled approximately $305 million, which was the highest in our history.   Our operating cash flows are primarily driven by our operating income, which reflects dayrates and rig utilization.

We estimate that our total capital expenditures for the fiscal year 2010 will be approximately $300 million, and expect to end fiscal year 2010 with outstanding long-term debt of approximately $300 million.  With our current contract commitments providing for approximately $1.8 billion of future revenues, coupled with our current additional borrowing capacity of approximately $300 million under our credit facilities, we believe that we will be able to fund the remaining construction costs of our two deepwater semisubmersibles and maintain a strong balance sheet without the need for any additional sources of capital.

 
16

 
Our portfolio of accounts receivable is primarily comprised of large independent or multinational corporate entities with stable payment experience.  Historically, we have not encountered significant difficulty in collecting receivables and typically do not require collateral for our receivables.  As discussed in Note 11 to our Consolidated Financial Statements for the year ended September 30, 2009, under “Other Matters”, at September 30, 2009, we have approximately $14 million in outstanding receivables due from a customer in India; as this receivable is currently in dispute, we expect that this collection effort will extend beyond one year and have, therefore, reclassified this receivable as a long-term asset.

Income tax receivable has increased by approximately $5.0 million when compared to September 30, 2008, due to having a higher number of tax jurisdictions whereby we have made estimated income tax payments over and above our estimated income tax liability, usually as a result of local regulations requiring the high estimated tax payments.
 
Inventories of materials and supplies have increased by approximately $12.2 million at September 30, 2009, compared to September 30, 2008, due to the addition of inventory for the ATWOOD AURORA, which commenced operations in April 2009, and due to increased purchasing of high dollar value critical spare parts for our fleet.
 
Prepaid expenses and deferred costs have increased by approximately $9.1 million at September 30, 2009, compared to September 30, 2008, primarily due to the deferred mobilization costs related to the relocation of the ATWOOD BEACON to Equatorial Guinea.

Income tax payable has increased by approximately $13.0 million at September 30, 2009, compared to September 30, 2008, due to increased income tax accruals resulting from higher earnings and the timing of tax payments associated with these accruals in certain tax jurisdictions.

Short-term deferred credits have increased by approximately $35.5 million at September 30, 2009, compared to September 30, 2008, due to prepayments of revenue by a customer during the quarter ended September 30, 2009, which will be recognized as revenue when services are performed during the quarter ended December 31, 2009 related to these prepayments.  No such prepayments were received during the quarter ended September 30, 2008.

Long-term deferred credits have decreased by approximately $5.0 million at September 30, 2009, compared to September 30, 2008, due to the amortization of deferred fees associated with the prior upgrade of the ATWOOD FALCON.  Lump sum fees received for upgrade costs reimbursed by our customers are reported as deferred credits in the accompanying Consolidated Balance Sheets and are recognized as earned on a straight-line method over the term of the related drilling contracts.
 

COMMITMENTS AND CONTRACTUAL OBLIGATIONS>

The following table summarizes our obligations and commitments (in thousands) at September 30, 2009:

 
                           
Fiscal
 
   
Fiscal
   
Fiscal
   
Fiscal
   
Fiscal
   
2014 and
 
   
2010
   
2011
   
2012
   
2013
   
thereafter
 
Credit Facility (1)
  $ -     $ -     $ -     $ 200,000     $ 75,000  
Purchase Commitments (2)
    250,000       305,000       250,000       -       -  
Operating Leases
    1,271       1,098       1,022       1,019       1,019  
    $ 251,271     $ 306,098     $ 251,022     $ 201,019     $ 76,019  

(1)  
Amounts exclude interest on our $300 million and $280 million credit facilities as interest rates are variable.
(2)  
Rig construction commitments for the two new deepwater semisubmersibles.


 
17

 
CRITICAL ACCOUNTING POLICIES

In June 2009, the Financial Accounting Standards Board, or FASB, issued “FASB Accounting Standards Codification,” or FASB ASC, as the source of authoritative GAAP recognized by the FASB for non-governmental entities. All existing accounting standards have been superseded and accounting literature not included in the FASB ASC is considered non-authoritative. Subsequent issuances of new standards will be in the form of Accounting Standards Updates, or ASU, that will be included in the FASB ASC. Generally, the FASB ASC is not expected to change GAAP. Pursuant to the adoption of this guidance, we have adjusted references to authoritative accounting literature in our financial statements. Adoption had no effect on our financial position, operating results or cash flows.
 
Significant accounting policies are included in Note 2 to our Consolidated Financial Statements for the year ended September 30, 2009.  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.

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. “dayrate”) basis, and dayrates are typically earned for a particular level of service over the life of a contract.  Dayrate contracts can be for a specified period of time or the time required to drill a specified well or number of wells.  Revenues from dayrate drilling operations, which are classified under contract drilling services, are recognized on a per day basis as the work progresses.  In addition, lump-sum fees received at commencement of the drilling contract as compensation for the cost of 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 dayrates are recognized as earned on a straight-line method over the term of the related drilling contract, as are the dayrates associated with such contracts.  However, lump-sum fees received upon termination of a drilling contract are recognized as earned during the period termination occurs.  In addition, we defer the mobilization costs relating to moving a drilling rig to a new area 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 life of the applicable drilling contract.

We currently operate nine active offshore drilling units.  These assets are premium equipment and should provide many years of quality service.  At September 30, 2009, the carrying value of our property and equipment totaled $1,184.3 million, which represents 78% of our total assets.  This 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 range from 3 years to 35 years and our salvage values are generally based on 5% of capitalized costs.  Any future increases in our estimates of useful lives or salvage values will have the effect of decreasing future depreciation expense in future years and spreading the expense to later years.  Any future decreases in our useful lives or salvage values will have the effect of accelerating future depreciation expense.
 
 
18

 

We evaluate the carrying value of our property and equipment when events or changes in circumstances indicate that the carrying value of such assets may be impaired.  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, dayrates, and operating expenses, each of which impact our estimated future cash flows.  Over the last ten years, our equipment utilization rate has averaged approximately 91%; however, if a drilling unit incurs significant idle time or receives dayrates 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.

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, 2009, we have a $6.0 million net deferred income tax liability. This balance reflects the application of our income tax accounting policies in accordance with ASC 740 “Income Taxes”, formerly Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”.  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.

We began accounting for uncertain tax positions in accordance with ASC 740 at October 1, 2007.  ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements 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.

We account for share-based compensation in accordance with ASC 718 “Compensation – Stock Compensation”, formerly SFAS No. 123(R), “Share-Based Payment.  Under ASC 718, 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).  In addition, share-based compensation cost recognized includes compensation cost for unvested share-based awards as of October 1, 2005.


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
        In June 2009, the FASB issued guidance which revises how an entity evaluates variable interest entities.  This guidance is effective for annual and interim reporting periods beginning after November 15, 2009, with earlier application prohibited.  We do not expect our adoption of this new accounting pronouncement will have a material impact on our financial condition or results of operations.
 
In May 2009, the FASB issued ASC 855, "Subsequent Events", formerly SFAS No. 165, “Subsequent Events”. ASC 855 establishes general standards of accounting for, and disclosure of events that occur, after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 is effective for interim or annual periods ending after June 15, 2009.  We adopted ASC 855 during the quarter ended June 30, 2009, with no significant changes to subsequent events that we are required to recognize or disclose in our financial statements.  We have performed an evaluation of subsequent events through November 25, 2009, which is the date the financial statements were issued.
 

 
19

 

In April 2009, the FASB issued ASC 820-10-65-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, formerly Staff Position FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly".  ASC 820-10-65-4 provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. ASC 820-10-65-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. ASC 820-10-65-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. We adopted ASC 820-10-65-4 during the quarter ended June 30, 2009, with no material impact to our financial position, operating results or cash flows.
 
Also in April 2009, the FASB issued ASC 825-10-50-28, "Required Disclosures as of Each Date for Which an Interim or Annual Statement of Financial Position Is Presented", formerly Staff Position FAS 107-1 and APB 28-1 "Interim Disclosures about Fair Value of Financial Instruments".  ASC 825-10-50-28 requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies in addition to annual financial statements.  ASC 825-10-50-28 is effective for interim periods ending after June 15, 2009. We adopted ASC 825-10-50-28 during the quarter ended June 30, 2009, with no significant changes to the disclosures in our financial statements.
 
In December 2007, the FASB issued ASC 805, “Business Combinations”, formerly SFAS No. 141(R), “Business Combinations (revised 2007)”.  ASC 805 retains the fundamental requirement that the acquisition method be used for all business combinations and expands the same method of accounting to all transactions and other events in which one entity obtains control over one of more other businesses or assets at the acquisition date and in subsequent periods.  ASC 805 requires measurement at the acquisition date of the fair value of assets acquired, liabilities assumed and noncontrolling interest.  Additionally, ASC 805 requires that acquisition-related costs, including restructuring costs, be recognized separately from the acquisition.  ASC 805 applies prospectively to business combinations for fiscal years beginning after December 15, 2008.   The future impact of ASC 805 on us will depend on the nature and extent of any future acquisitions.
 
Also in December 2007, the FASB issued ASC 810-10-65, “Transition Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”, formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”.  ASC 810-10-65 establishes the accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  ASC 810-10-65clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  ASC 810-10-65 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests and applies prospectively to business combinations for fiscal years beginning after December 15, 2008.  We are currently analyzing the provisions of ASC 810-10-65 to determine how it will affect accounting policies and procedures, but we have not yet made a determination of the impact the adoption will have on our consolidated financial position, results of operations and cash flows.
 
In February 2007, the FASB issued ASC 825-10-25, “The Fair Value Option”, formerly SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”.  ASC 825-10-25 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. GAAP has required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. The objective of ASC 825-10-25 is to help mitigate this type of volatility in the earnings by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with complex hedge accounting provisions. ASC 825-10-25 is effective for fiscal years beginning after November 15, 2007. ASC 825-10-25 has not had a material impact on our consolidated financial position, results of operations and cash flows.
 

 
20

 

In September 2005, the FASB issued ASC 820, “Fair Value Measurements and Disclosure”, formerly SFAS No. 157, “Fair Value Measurements”. ASC 820 defines fair value, establishes methods used to measure fair value and expands disclosure requirements about fair value measurements.  ASC 820 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal periods.  In February 2008, the FASB issued ASC 820-10-65, “Transition and Open Effective Date Information”, formerly FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”.  ASC 820-10-65 delays the effective date of ASC 820 by one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  In October 2008, the FASB issued ASC 820-10-35-51A through 35-51B, formerly FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”.  ASC 820-10-35-51A through 35-51B clarifies the application of ASC 820 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. ASC 820-10-35-51A through 35-51B was effective upon issuance.  We adopted ASC 820, ASC 820-10-65 and ASC 820-10-35-51A through 35-51B, during fiscal year 2009 with no material impact to our financial position, operating results or cash flows.

 
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

All of our $275 million of long-term debt outstanding at September 30, 2009, was floating rate debt.  As a result, our annual interest costs in fiscal year 2010 will fluctuate based on interest rate changes.  Because the interest rate on our long-term debt is a floating rate, the fair value of our long-term debt approximated carrying value as of September 30, 2009.  The impact on annual cash flow of a 10% change in the floating rate (approximately 20 basis points) would be approximately $0.6 million, which we believe to be immaterial.  We did not have any open derivative contracts relating to our floating rate debt at September 30, 2009.

Foreign Currency Risk

Certain of our subsidiaries have monetary assets and liabilities that are denominated in a currency other than their functional currencies.  Based on September 30, 2009, amounts, a decrease in the value of 10% in the foreign currencies relative to the U.S. Dollar from the fiscal year-end exchange rates would result in a foreign currency transaction gain of approximately $2.9 million.  We consider our current risk exposure to foreign currency exchange rate movements, based on net cash flows, to be immaterial.  We did not have any open derivative contracts relating to foreign currencies at September 30, 2009.

 
21

 


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 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, 2009.  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, 2009.  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, 2009, which appears on the following page.


ATWOOD OCEANICS, INC.

by

 
 /s/ John R. Irwin
John R. Irwin 
Director, President  
and Chief Executive Officer
 
s/ James M. Holland
James M. Holland
Senior Vice President, Chief
Financial Officer and Secretary
 
       
 November 25, 2009      
 

 
22

 

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, of cash flows and of changes in shareholders' equity present fairly, in all material respects, the financial position of Atwood Oceanics, Inc. and its subsidiaries at September 30, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2009  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, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  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, which appears on the preceding page.  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 25, 2009

 
23

 

Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 

             
September 30,                
 
(In thousands)
2009
2008
 
             
ASSETS
           
             
CURRENT ASSETS:
           
    Cash and cash equivalents
  $ 100,259     $ 121,092  
    Accounts receivable, net of an allowance
               
        of $65 and $114 at September 30, 2009
               
        and 2008, respectively
    124,053       132,367  
    Income tax receivable
    8,306       3,292  
    Insurance receivable
    2,518       -  
    Inventories of materials and supplies
    50,136       37,906  
    Deferred tax assets
    35       21  
    Prepaid expenses and deferred costs
    19,297       10,225  
      Total Current Assets
    304,604       304,903  
                 
NET PROPERTY AND EQUIPMENT
    1,184,300       787,838  
      1,184,300       787,838  
                 
LONG TERM ASSETS:
               
     Other receivables
    14,331       -  
     Deferred costs and other assets
    6,167       3,856  
      20,498       3,856  
    $ 1,509,402     $ 1,096,597  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
   Accounts payable
  $ 19,066     $ 16,987  
   Accrued liabilities
    28,960       23,551  
   Income tax payable
    29,067       16,009  
   Deferred credits
    35,825       304  
       Total Current Liabilities
    112,918       56,851  
                 
 
               
 LONG-TERM DEBT
    275,000       170,000  
      275,000       170,000  
LONG TERM LIABILITIES:
               
     Deferred income taxes
    6,082       10,595  
     Deferred credits
    2,921       7,942  
     Other
    10,188       7,519  
      19,191       26,056  
                 
COMMITMENTS AND CONTENGENCIES (SEE NOTE 11)
         
                 
SHAREHOLDERS' EQUITY (NOTE 7):
               
    Preferred stock, no par value;
               
         1,000 shares authorized,  none outstanding
    -       -  
    Common stock, $1 par value, 90,000 shares
               
          authorized with 64,236 and 64,031 issued
               
          and outstanding at September 30, 2009
               
          and 2008, respectively
    64,236       64,031  
    Paid-in capital
    122,457       114,804  
    Retained earnings
    915,600       664,855  
        Total Shareholders' Equity
    1,102,293       843,690  
    $ 1,509,402     $ 1,096,597  
                 
The accompanying notes are an integral part of these consolidated financial statements.

 
24

 

Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
 

 
For Years Ended September 30,
 
(In thousands, except per share amounts)
2009
2008
2007
 
                   
REVENUES:
                 
 Contract drilling
  $ 586,507     $ 526,604     $ 400,479  
 Business interruption proceeds
    -       -       2,558  
      586,507       526,604       403,037  
 COSTS AND EXPENSES:
                       
 Contract drilling
    221,709       216,395       186,949  
 Depreciation
    35,119       34,783       33,366  
 General and administrative
    31,639       30,975       23,929  
 Gain on sale of equipment
    (402 )     (155 )     (414 )
      288,065       281,998       243,830  
 OPERATING INCOME
    298,442       244,606       159,207  
 OTHER INCOME (EXPENSE):
                       
 Interest expense, net of capitalized interest
    (2,293 )     (1,410 )     (1,689 )
 Interest income
    282       1,579       2,441  
      (2,011 )     169       752  
 INCOME BEFORE INCOME TAXES
    296,431       244,775       159,959  
 PROVISION FOR INCOME TAXES
    45,686       29,337       20,935  
 NET INCOME
  $ 250,745     $ 215,438     $ 139,024  
 EARNINGS PER COMMON SHARE (NOTE 2):
                       
 Basic
  $ 3.91     $ 3.38     $ 2.22  
 Diluted
    3.89       3.34       2.18  
 AVERAGE COMMON SHARES OUTSTANDING (NOTE 2):
                       
 Basic
    64,167       63,756       62,686  
 Diluted
    64,493       64,556       63,628  

The accompanying notes are an integral part of these consolidated financial statements.
 

 
25

 
 


Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
For Years Ended September 30,
 
(In thousands)
2009
2008
2007
 
CASH FLOW FROM OPERATING ACTIVITIES:
                 
  Net income  
  $ 250,745     $ 215,438     $ 139,024  
Adjustments to reconcile net income to net cash provided by
                       
operating activities:
                       
Depreciation
    35,119       34,783       33,366  
Amortization of debt issuance costs
    717       657       804  
Amortization of deferred items
    (15,902 )     (10,305 )     (25,729 )
Provision for doubtful accounts
    1,002       764       127  
Provision for inventory obsolescence
    680       290       240  
Deferred federal income tax benefit
    (4,527 )     (3,765 )     (2,169 )
Share-based compensation expense
    7,664       7,901       5,005  
Gain on sale of assets
    (402 )     (155 )     (414 )
Changes in assets and liabilities:
                       
(Increase) decrease in accounts receivable
    (4,819 )     (59,895 )     3,498  
Increase in income tax receivable
    (5,014 )     (1,422 )     (1,805 )
Increase in inventory
    (12,910 )     (11,475 )     (4,837 )
(Increase) decrease in prepaid expenses
    (1,892 )     15       (1,454 )
Increase in deferred costs and other assets
    (9,825 )     (1,350 )     (4,506 )
Increase (decrease) in accounts payable
    (11 )     5,218       9  
Increase (decrease) in accrued liabilities
    (43 )     6,965       6,113  
Increase in income tax payable
    13,058       7,349       6,011  
Increase in deferred credits and other liabilities
    51,262       887       34,941  
      54,157       (23,538 )     49,200  
Net Cash Provided by Operating Activities
    304,902       191,900       188,224  
CASH FLOW FROM INVESTING ACTIVITIES:
                       
Capital expenditures
    (430,470 )     (328,246 )     (88,770 )
Collection of insurance receivable
    1,822       -       550  
Proceeds from sale of assets
    330       378       669  
Net Cash Used by Investing Activities
    (428,318 )     (327,868 )     (87,551 )
CASH FLOW FROM FINANCING ACTIVITIES:
                       
Proceeds from debt
    155,000       170,000       -  
Principal payments on debt
    (50,000 )     (18,000 )     (46,000 )
Debt issuance costs paid
    (2,611 )     (1,336 )     -  
Tax benefit from the exercise of stock options
    -       -       3,432  
Proceeds from exercise of stock options
    194       6,035       9,980  
Net Cash Provided (Used) by Financing Activities
    102,583       156,699       (32,588 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
  $ (20,833 )   $ 20,731     $ 68,085  
CASH AND CASH EQUIVALENTS, at beginning of period
  $ 121,092     $ 100,361     $ 32,276  
CASH AND CASH EQUIVALENTS, at end of period
  $ 100,259     $ 121,092     $ 100,361  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid during the year for domestic and foreign income taxes
  $ 40,713     $ 27,421     $ 13,095  
Cash paid during the year for interest, net of amounts capitalized
  $ 2,144     $ 1,342     $ 1,822  
                         
Non-cash activities:
                       
Increase in insurance receivable related to capital expenditures and inventory
  $ 2,518     $ 0     $ 0  
Increase in accrued liabilities related to capital expenditures
  $ 7,579     $ 746     $ 745  
                         
                         
The accompanying notes are an integral part of these consolidated financial statements.

 

 
 
26

 

Atwood Oceanics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
 

             
                          Total  
   
Common Stock
  Paid-in
Retained
  Stockholders’  
(In thousands)
Shares
Amount
Capital
Earnings
Equity
 
                               
September 30, 2006
    62,092     $ 62,092     $ 84,870     $ 311,932     $ 458,894  
Net income
    -       -       -       139,024       139,024  
Restricted stock awards
    14       14       (14 )     -       -  
Exercise of employee stock options
    1,244       1,244       8,736       -       9,980  
Stock option and restricted stock
                                       
    award compensation expense
                    5,005               5,005  
Tax benefit from exercise of employee stock options
    -       -       2,952       -       2,952  
September 30, 2007
    63,350       63,350       101,549       450,956       615,855  
FIN 48 adoption
    -       -       -       (1,539 )     (1,539 )
Net income
    -       -       -       215,438       215,438  
Exercise of employee stock options
    681       681       5,354       -       6,035  
Stock option and restricted stock
                                       
    award compensation expense