10-Q 1 rig-20180331x10q.htm 10-Q rig_Current_Folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10‑Q

(Mark one)

☑  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

 


 

Commission file number 000-53533

Picture 1

 

TRANSOCEAN LTD.

(Exact name of registrant as specified in its charter)

 

 

Zug, Switzerland

98-0599916

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

Turmstrasse 30

Steinhausen, Switzerland

6312

(Address of principal executive offices)

(Zip Code)

 

 

 

+41 (41) 749-0500

(Registrant’s telephone number, including area code)

 

 

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☑   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☑   No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer ☑   Accelerated filer ☐   Nonaccelerated filer (do not check if a smaller reporting company) ☐
Smaller reporting company ☐   Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).   Yes ☐   No ☑

 

As of April 24, 2018, 461,715,265 shares were outstanding.

 


 

TRANSOCEAN LTD. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10‑Q

QUARTER ENDED MARCH 31, 2018

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1. 

Financial Statements (Unaudited)

 

 

Condensed Consolidated Statements of Operations

1

 

Condensed Consolidated Statements of Comprehensive Income

2

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Equity

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4. 

Controls and Procedures

33

 

 

 

PART II. 

OTHER INFORMATION

 

Item 1. 

Legal Proceedings

34

Item 1A. 

Risk Factors

34

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 4. 

Mine Safety Disclosures

34

Item 6. 

Exhibits

35

 

 

 

 

 


 

PART I.FINANCIAL INFORMATION

Item I.Financial Statements

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31, 

 

 

 

2018

    

2017

 

 

 

 

 

 

 

 

 

Contract drilling revenues

 

$

664

 

$

738

 

Other revenues

 

 

 —

 

 

47

 

 

 

 

664

 

 

785

 

Costs and expenses

 

 

 

 

 

 

 

Operating and maintenance

 

 

424

 

 

347

 

Depreciation

 

 

202

 

 

232

 

General and administrative

 

 

47

 

 

39

 

 

 

 

673

 

 

618

 

Gain on disposal of assets, net

 

 

 5

 

 

 2

 

Operating income (loss)

 

 

(4)

 

 

169

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

Interest income

 

 

12

 

 

 6

 

Interest expense, net of amounts capitalized

 

 

(147)

 

 

(127)

 

Other, net

 

 

(10)

 

 

 7

 

 

 

 

(145)

 

 

(114)

 

Income (loss) before income tax expense (benefit)

 

 

(149)

 

 

55

 

Income tax expense (benefit)

 

 

63

 

 

(40)

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(212)

 

 

95

 

Net income (loss) attributable to noncontrolling interest

 

 

(2)

 

 

 4

 

Net income (loss) attributable to controlling interest

 

$

(210)

 

$

91

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

 

 

 

 

 

 

 

Basic

 

$

(0.48)

 

$

0.23

 

Diluted

 

$

(0.48)

 

$

0.23

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

 

 

 

 

 

Basic

 

 

438

 

 

390

 

Diluted

 

 

438

 

 

390

 

 

 

 

See accompanying notes.

 

-  1  -


 

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31, 

 

 

 

2018

    

2017

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(212)

 

$

95

 

Net income (loss) attributable to noncontrolling interest

 

 

(2)

 

 

 4

 

Net income (loss) attributable to controlling interest

 

 

(210)

 

 

91

 

 

 

 

 

 

 

 

 

Components of net periodic benefit costs before reclassifications

 

 

(4)

 

 

(2)

 

Components of net periodic benefit costs reclassified to net income

 

 

 2

 

 

 1

 

 

 

 

 

 

 

 

 

Other comprehensive loss before income taxes

 

 

(2)

 

 

(1)

 

Income taxes related to other comprehensive loss

 

 

 —

 

 

 —

 

Other comprehensive loss

 

 

(2)

 

 

(1)

 

Other comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

 —

 

Other comprehensive loss attributable to controlling interest

 

 

(2)

 

 

(1)

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

 

(214)

 

 

94

 

Total comprehensive income (loss) attributable to noncontrolling interest

 

 

(2)

 

 

 4

 

Total comprehensive income (loss) attributable to controlling interest

 

$

(212)

 

$

90

 

 

 

See accompanying notes.

 

-  2  -


 

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,712

 

$

2,519

 

Short-term investments

 

 

150

 

 

450

 

Accounts receivable, net of allowance for doubtful accounts
of less than $1 at March 31, 2018 and December 31, 2017

 

 

576

 

 

596

 

Materials and supplies, net of allowance for obsolescence
of $149 and $141 at March 31, 2018 and December 31, 2017, respectively

 

 

457

 

 

418

 

Restricted cash accounts and investments

 

 

484

 

 

466

 

Other current assets

 

 

164

 

 

157

 

Total current assets

 

 

4,543

 

 

4,606

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

25,165

 

 

22,693

 

Less accumulated depreciation

 

 

(5,494)

 

 

(5,291)

 

Property and equipment, net

 

 

19,671

 

 

17,402

 

Goodwill

 

 

460

 

 

 —

 

Contract intangible assets

 

 

613

 

 

 —

 

Deferred income taxes, net

 

 

54

 

 

47

 

Other assets

 

 

354

 

 

355

 

Total assets

 

$

25,695

 

$

22,410

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Accounts payable

 

$

211

 

$

201

 

Accrued income taxes

 

 

112

 

 

79

 

Debt due within one year

 

 

1,879

 

 

250

 

Other current liabilities

 

 

820

 

 

839

 

Total current liabilities

 

 

3,022

 

 

1,369

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

7,976

 

 

7,146

 

Deferred income taxes, net

 

 

82

 

 

44

 

Other long-term liabilities

 

 

1,131

 

 

1,082

 

Total long-term liabilities

 

 

9,189

 

 

8,272

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

57

 

 

58

 

 

 

 

 

 

 

 

 

Shares, CHF 0.10 par value, 509,382,402 authorized, 143,783,041 conditionally authorized, 462,853,862 issued and 461,628,198  outstanding at March 31, 2018, and 417,060,033 authorized, 143,783,041 conditionally authorized, 394,801,990 issued and 391,237,308 outstanding at December 31, 2017

 

 

44

 

 

37

 

Additional paid-in capital

 

 

11,953

 

 

11,031

 

Retained earnings

 

 

1,719

 

 

1,929

 

Accumulated other comprehensive loss

 

 

(292)

 

 

(290)

 

Total controlling interest shareholders’ equity

 

 

13,424

 

 

12,707

 

Noncontrolling interest

 

 

 3

 

 

 4

 

Total equity

 

 

13,427

 

 

12,711

 

Total liabilities and equity

 

$

25,695

 

$

22,410

 

 

 

See accompanying notes.

 

-  3  -


 

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Three months ended 

 

 

 

March 31, 

 

March 31, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

Quantity

 

Amount

 

Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

391

 

 

389

 

$

37

 

$

36

 

Issuance of shares under share-based compensation plans

 

 

 3

 

 

 2

 

 

 —

 

 

 1

 

Issuance of shares in acquisition transactions

 

 

68

 

 

 —

 

 

 7

 

 

 —

 

Balance, end of period

 

 

462

 

 

391

 

$

44

 

$

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

11,031

 

$

10,993

 

Share-based compensation

 

 

 

 

 

 

 

 

10

 

 

10

 

Issuance of shares under share-based compensation plans

 

 

 

 

 

 

 

 

 —

 

 

(1)

 

Issuance of shares in acquisition transactions

 

 

 

 

 

 

 

 

739

 

 

 —

 

Equity component of convertible debt instruments

 

 

 

 

 

 

 

 

172

 

 

 —

 

Allocated capital for transactions with holders of noncontrolling interest

 

 

 

 

 

 

 

 

 3

 

 

 —

 

Other, net

 

 

 

 

 

 

 

 

(2)

 

 

(2)

 

Balance, end of period

 

 

 

 

 

 

 

$

11,953

 

$

11,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

1,929

 

$

5,056

 

Net income (loss) attributable to controlling interest

 

 

 

 

 

 

 

 

(210)

 

 

91

 

Balance, end of period

 

 

 

 

 

 

 

$

1,719

 

$

5,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

(290)

 

$

(283)

 

Other comprehensive loss attributable to controlling interest

 

 

 

 

 

 

 

 

(2)

 

 

(1)

 

Balance, end of period

 

 

 

 

 

 

 

$

(292)

 

$

(284)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total controlling interest shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

12,707

 

$

15,802

 

Total comprehensive income (loss) attributable to controlling interest

 

 

 

 

 

 

 

 

(212)

 

 

90

 

Share-based compensation

 

 

 

 

 

 

 

 

10

 

 

10

 

Issuance of shares in acquisition transactions

 

 

 

 

 

 

 

 

746

 

 

 —

 

Equity component of convertible debt instruments

 

 

 

 

 

 

 

 

172

 

 

 —

 

Allocated capital for transactions with holders of noncontrolling interest

 

 

 

 

 

 

 

 

 3

 

 

 —

 

Other, net

 

 

 

 

 

 

 

 

(2)

 

 

(2)

 

Balance, end of period

 

 

 

 

 

 

 

$

13,424

 

$

15,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

 4

 

$

 3

 

Total comprehensive loss attributable to noncontrolling interest

 

 

 

 

 

 

 

 

(1)

 

 

(3)

 

Recognition of noncontrolling interest in business combination

 

 

 

 

 

 

 

 

33

 

 

 —

 

Acquisition of noncontrolling interest in compulsory acquisition

 

 

 

 

 

 

 

 

(30)

 

 

 —

 

Allocated capital for transactions with holders of noncontrolling interest

 

 

 

 

 

 

 

 

(3)

 

 

 —

 

Balance, end of period

 

 

 

 

 

 

 

$

 3

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

12,711

 

$

15,805

 

Total comprehensive income (loss)

 

 

 

 

 

 

 

 

(213)

 

 

87

 

Share-based compensation

 

 

 

 

 

 

 

 

10

 

 

10

 

Issuance of shares in acquisition transactions

 

 

 

 

 

 

 

 

746

 

 

 —

 

Equity component of convertible debt instruments

 

 

 

 

 

 

 

 

172

 

 

 —

 

Recognition of noncontrolling interest in business combination

 

 

 

 

 

 

 

 

33

 

 

 —

 

Acquisition of noncontrolling interest acquired in compulsory acquisition

 

 

 

 

 

 

 

 

(30)

 

 

 —

 

Other, net

 

 

 

 

 

 

 

 

(2)

 

 

(2)

 

Balance, end of period

 

 

 

 

 

 

 

$

13,427

 

$

15,900

 

 

See accompanying notes.

 

-  4  -


 

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31, 

 

 

 

2018

    

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

(212)

 

$

95

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

 

 

Contract intangible asset amortization

 

 

19

 

 

 —

 

Depreciation

 

 

202

 

 

232

 

Share-based compensation expense

 

 

10

 

 

10

 

Gain on disposal of assets, net

 

 

(5)

 

 

(2)

 

Deferred income tax benefit

 

 

(3)

 

 

(19)

 

Other, net

 

 

13

 

 

 7

 

Changes in deferred revenues, net

 

 

(20)

 

 

(68)

 

Changes in deferred costs, net

 

 

 1

 

 

16

 

Changes in other operating assets and liabilities, net

 

 

98

 

 

(90)

 

Net cash provided by operating activities

 

 

103

 

 

181

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(53)

 

 

(122)

 

Proceeds from disposal of assets, net

 

 

13

 

 

 4

 

Unrestricted and restricted cash acquired in business combination

 

 

131

 

 

 —

 

Deposits into short-term investments

 

 

(50)

 

 

 —

 

Proceeds from maturities of short-term investments

 

 

350

 

 

 —

 

Other, net

 

 

(15)

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

376

 

 

(118)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Repayments of debt

 

 

(168)

 

 

(72)

 

Proceeds from investments restricted for financing activities

 

 

26

 

 

50

 

Payments to terminate derivative instruments

 

 

(92)

 

 

 —

 

Other, net

 

 

(14)

 

 

(3)

 

Net cash used in financing activities

 

 

(248)

 

 

(25)

 

 

 

 

 

 

 

 

 

Net increase in unrestricted and restricted cash and cash equivalents

 

 

231

 

 

38

 

Unrestricted and restricted cash and cash equivalents at beginning of period

 

 

2,975

 

 

3,433

 

Unrestricted and restricted cash and cash equivalents at end of period

 

$

3,206

 

$

3,471

 

 

 

 

 

See accompanying notes.

 

-  5  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business

Overview—Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells.  We specialize in technically demanding sectors of the offshore drilling business with a particular focus on ultra‑deepwater and harsh environment drilling services.  Our mobile offshore drilling fleet is considered one of the most versatile fleets in the world.  We contract our drilling rigs, related equipment and work crews predominantly on a dayrate basis to drill oil and gas wells.  At March 31, 2018, we owned or had partial ownership interests in and operated 47 mobile offshore drilling units, including 27 ultra‑deepwater floaters, 12 harsh environment floaters, two deepwater floaters and six midwater floaters.  Additionally, at March 31, 2018, we operated two high‑specification jackups that were under contract when we sold the rigs, and we continue to operate such rigs until completion or novation of the respective drilling contracts.  At March 31, 2018, we are constructing two additional ultra‑deepwater drillships.  See Note 7—Drilling Fleet.

Business combination—On January 30, 2018, we acquired an approximate 97.7 percent ownership interest in Songa Offshore SE, a European public company limited by shares, or societas Europaea, existing under the laws of Cyprus (“Songa”).  On March 28, 2018, we acquired the remaining shares not owned by us through a compulsory acquisition under Cyprus law, and as a result, Songa became our wholly owned subsidiary.  In connection with these transactions, we issued an aggregate of 68.0 million shares and $863 million aggregate principal amount of 0.50% exchangeable senior bonds due January 30, 2023 (the “Exchangeable Bonds”).  As a result of the acquisition, we acquired seven mobile offshore drilling units, including five harsh environment floaters and two midwater floaters.  See Note 4—Business Combination.

Note 2—Significant Accounting Policies

Presentation—We have prepared our accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S‑X of the U.S. Securities and Exchange Commission (“SEC”).  Pursuant to such rules and regulations, these financial statements do not include all disclosures required by accounting principles generally accepted in the U.S. for complete financial statements.  The condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods.  Such adjustments are considered to be of a normal recurring nature unless otherwise noted.  Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or for any future period.  The accompanying condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017, included in our annual report on Form 10‑K filed on February 21, 2018.

Accounting estimates—To prepare financial statements in accordance with accounting principles generally accepted in the U.S., we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates and assumptions, including those related to our allowance for doubtful accounts, materials and supplies obsolescence, property and equipment, assets held for sale, goodwill, income taxes, contingencies, share‑based compensation and postemployment benefit plans.  We base our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from such estimates.

Fair value measurements—We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability.  Our valuation techniques require inputs that we categorize using a three‑level hierarchy, from highest to lowest level of observable inputs, as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market data (“Level 3”).  When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.

Business combination—In connection with our acquisition of Songa, we applied the acquisition method of accounting.  Accordingly, we recorded the acquired assets and assumed liabilities at fair value and recognized goodwill to the extent the consideration transferred exceeded the fair value of the net assets acquired.  We estimated the fair values of the acquired assets and assumed liabilities as of the date of the acquisition, and our estimates are subject to adjustment based on our final assessments of the fair values of property and equipment, intangible assets, liabilities and our evaluation of tax positions and contingencies, which are ongoing.  We will complete our final assessments of the fair values of the acquired assets and assumed liabilities and our final evaluations of uncertain tax positions and contingencies within one year of the acquisition date.  See Note 4—Business Combination.

-  6  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Goodwill—We conduct impairment testing for our goodwill annually as of October 1 and more frequently, on an interim basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined below its carrying value.  We test goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management.  We determined that we have a single reporting unit for this purpose.  Before testing goodwill, we consider whether or not to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If, as the result of our qualitative assessment, we determine that an impairment test is required, or, alternatively, if we elect to forgo the qualitative assessment, we record an impairment to goodwill to the extent the carrying amount of the reporting unit, including goodwill, exceeds the fair value of the reporting unit.  At March 31, 2018, the carrying amount of our goodwill was $460 million.  See Note 3—Accounting Standards Updates and Note 4—Business Combination.

Contract intangible assets—In connection with our acquisition of Songa, we recognized drilling contract intangible assets related to the acquired drilling contracts for future contract drilling services.  The drilling contract intangible assets represent the amount by which the fixed dayrates of the acquired contracts were above the market dayrates that were available or expected to be available during the term of the contract for similar contracts, measured as of the acquisition date.  We recognize the amortization on a straight‑line basis over the firm contract period as a component of contract drilling revenues.  At March 31, 2018, the carrying amount of our drilling contract intangible assets was $613 million.  See Note 4—Business Combination.

Derivative instruments—We record derivatives on our consolidated balance sheet, measured at fair value.  We recognize the gains and losses associated with changes in the fair value in current period earnings.  See Note 10—Derivative Instruments.

Capitalized interest—We capitalize interest costs for qualifying construction and upgrade projects and only capitalize interest costs during periods in which progress for the construction projects continues to be underway.  As of March 31, 2018, we had ceased capitalization of interest costs on one of our two uncontracted newbuild drillships due to a pause in construction in progress.  In the three months ended March 31, 2018 and 2017, we capitalized interest costs of $13 million and $30 million, respectively, for our construction work in progress.

Reclassifications—We have made certain reclassifications to prior period amounts to conform with the current period’s presentation.  In our condensed consolidated balance sheet as of December 31, 2017, we reclassified certain balances receivable from non‑customers, totaling $45 million, from accounts receivable, net, to other current assets.  Such reclassifications did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.

Note 3—Accounting Standards Updates

Recently adopted accounting standards

Revenue from contracts with customers—Effective January 1, 2018, we adopted the accounting standards update that requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In our evaluation of the requirements, we determined that reimbursement revenues and contract early cancellation and termination fees were part of our single performance obligation, and we determined that reimbursement revenues should be recorded on a gross basis as the service is performed.  Our adoption, using the modified retrospective approach, for which we were not required to make any changes to the prior year presentation, did not have a material effect on our condensed consolidated statements of financial position, operations and cash flows.  See Note 6—Revenues.

Income taxes—Effective January 1, 2018, we adopted the accounting standards update that requires an entity to recognize the income tax consequences of an intra entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring such recognition into future periods.  Our adoption did not have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Statement of cash flows—Effective January 1, 2018, we adopted the accounting standards update that requires amounts generally described as restricted cash or restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning and end of period total amounts presented on the statement of cash flows.  Aside from presenting the restricted cash and restricted cash equivalents as a component of the beginning and ending cash balances on our condensed consolidated statements of cash flows, we removed the effect of proceeds from and deposits to restricted accounts from our cash flows provided by or used in operating and financing activities, as applicable.  For the three months ended March 31, 2018 and 2017, such changes did not have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

-  7  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Retirement benefits—Effective January 1, 2018, we adopted the accounting standards update that requires an employer to disaggregate the service cost component from the other components of net benefit cost related to defined benefit retirement plans and other postemployment benefit plans.  The update requires that the service cost component be presented in the same line item as other compensation costs for employees and the other components of net benefit cost in other income and expense on our condensed consolidated statements of operations.  The update also allows only the service cost component of net benefit cost to be eligible for capitalization.  Our adoption did not have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Goodwill—Effective January 1, 2018, we early adopted the accounting standards update that simplifies the method for measuring the implied value of goodwill when performing a goodwill impairment test by performing a one‑step test, comparing the fair value of the reporting unit with its carrying amount.  The update eliminates the two‑step requirement to perform procedures to determine the fair value of assets and liabilities on the same basis as required in a business combination.  The update, which permits early adoption, is effective for interim and annual periods beginning after December 15, 2019, including interim periods within those annual periods.  Our adoption did not have an effect on our condensed consolidated statements of financial position, operations and cash flows and on the disclosures contained in our notes to condensed consolidated financial statements.

Recently issued accounting standards

Leases—Effective no later than January 1, 2019, we will adopt the accounting standards update that (a) requires lessees to recognize a right to use asset and a lease liability for virtually all leases, and (b) updates previous accounting standards for lessors to align certain requirements with the updates to lessee accounting standards and the revenue recognition accounting standards.  The update, which permits early adoption, is effective for interim and annual periods beginning after December 15, 2018, including interim periods within those annual periods.  Under the updated definition of a lease, we have determined that our drilling contracts could contain a lease component.  In a recent update, targeted improvements were proposed to the accounting standards that provide for (a) an optional new transition method for adoption that results in initial recognition of a cumulative effect adjustment to retained earnings in the year of adoption and (b) a practical expedient for lessors, under certain circumstances, to combine the lease and non‑lease components of revenues for presentation purposes.  Our adoption, and the ultimate effect on our consolidated financial statements, will be based on an evaluation of the contract‑specific facts and circumstances.  Additionally, based on the lease arrangements under which we are the lessee as of March 31, 2018, we expect to recognize an aggregate lease liability and a corresponding right‑to‑use asset of between $75 million and $85 million.  We do not expect our adoption to have a material effect on our condensed consolidated statements of financial position, operations and cash flows.  We continue to evaluate the requirements with regard to arrangements under which we are the lessor, the proposed targeted updates and the effects such requirements may have on the disclosures contained in our notes to condensed consolidated financial statements.

Other comprehensive income—Effective no later than January 1, 2019, we will adopt the accounting standards update that allows for reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).  The update, which permits early adoption is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods.  We continue to evaluate the requirements and do not expect our adoption to have a material effect on our condensed consolidated statements of financial position, operations and cash flows and on the disclosures contained in our notes to condensed consolidated financial statements.

Note 4—Business Combination

Overview—On August 13, 2017, we entered into a transaction agreement with Songa pursuant to which we agreed to offer to acquire all of the issued and outstanding shares of Songa subject to certain conditions, through a voluntary exchange offer (the “Offer”) in exchange for consideration per Songa share consisting of (i) 0.3572  newly issued shares of Transocean Ltd. and (ii) approximately $2.99726  principal amount of Exchangeable Bonds to be issued by Transocean Inc., our wholly owned direct subsidiary and a Cayman Islands exempted company.  Additionally, each Songa shareholder could elect to receive a cash payment of NOK 47.50 per Songa share up to a maximum of NOK 125,000 per shareholder in lieu of some or all of the consideration such shareholder would otherwise be entitled to receive in the Offer.  In connection with the acquisition, shareholders at our extraordinary general meeting, on January 16, 2018, approved: (1) the issuance of up to 68.6 million Transocean Ltd. shares, (2) an amendment of our articles of association to create additional authorized share capital, (3) the election of a new director to our board of directors and (4) the issuance of consideration shares from our authorized share capital and shares issuable upon exchange of the Exchangeable Bonds.

We believe the acquisition of Songa strengthens our position as a leader in harsh environment and ultra‑deepwater drilling services by adding high value assets, including four high‑specification harsh environment floaters, supported by significant contract backlog.  Additionally, the acquisition strengthens our footprint in harsh environment operating areas.  We believe the goodwill resulting from the business combination can be attributed to synergies expected to be realized and intangible assets that do not qualify for separate recognition.  In the three months ended March 31, 2018, we incurred acquisition costs of $7 million, recorded in general and administrative costs and expenses.

-  8  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Consideration—On January 30, 2018, we acquired an approximate 97.7 percent ownership interest in Songa.  In connection with the acquisition, we issued 66.9 million shares with a market value of $10.99 per share, based on the market value of our shares on the acquisition date.  We also issued $854 million aggregate principal amount of Exchangeable Bonds, including $562 million aggregate principal amount as partial consideration to Songa shareholders and $292 million aggregate principal amount as settlement for certain Songa indebtedness.  The aggregate fair value of the consideration transferred in the business combination was as follows (in millions):

 

 

 

 

 

 

    

Total

 

Consideration transferred

 

 

 

 

Aggregate fair value of shares issued as partial consideration for Songa shares

 

$

735

 

Aggregate fair value of Exchangeable Bonds issued as partial consideration for Songa shares

 

 

675

 

Consideration transferred to Songa shareholders

 

 

1,410

 

 

 

 

 

 

Aggregate fair value of Exchangeable Bonds issued for settlement of certain Songa indebtedness

 

 

351

 

Total consideration transferred in business combination

 

$

1,761

 

 

Assets and liabilities—As of January 30, 2018, we estimated the fair value of assets acquired, liabilities assumed and noncontrolling interest as follows (in millions):

 

 

 

 

 

 

    

Total

 

Assets acquired

 

 

 

 

Cash and cash equivalents

 

$

113

 

Accounts receivable

 

 

115

 

Other current assets

 

 

80

 

Property and equipment

 

 

2,415

 

Goodwill

 

 

460

 

Contract intangible assets

 

 

632

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

Accounts payable and other current liabilities

 

 

177

 

Debt

 

 

1,768

 

Other long-term liabilities

 

 

76

 

Net assets acquired

 

 

1,794

 

 

 

 

 

 

Noncontrolling interest in business combination

 

 

33

 

Controlling interest acquired in business combination

 

$

1,761

 

 

We estimated the fair value of the rigs and related equipment by applying a combination of income and market approaches, using projected discounted cash flows and estimates of the exchange price that would be received for the assets in the principal or most advantageous markets for the assets in an orderly transaction between participants as of the acquisition date.  Additionally, we estimated the fair value of the drilling contracts by comparing the contractual dayrates over the remaining firm contract term and option periods relative to the projected market dayrates as of the acquisition date.  Our estimates of fair value for these assets required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of our contract drilling services reporting unit, such as future commodity prices, projected demand for our services, rig availability and dayrates.  We estimated the fair value of the debt using significant other observable inputs, representative of a Level 2 fair value measurement, including the terms and credit spreads for the instruments.

We have not completed our estimates of the fair values of assets acquired and liabilities assumed.  We continue to review the estimated fair values of property and equipment, intangible assets, and other assets and liabilities, and to evaluate the assumed tax positions and contingencies.  Estimating fair value for such assets and liabilities requires significant assumptions and judgment, which increases the likelihood that the estimates may require adjustment, and such adjustments could be material.

Noncontrolling interest—On March 28, 2018, we acquired the remaining Songa shares not owned by us through a compulsory acquisition under Cyprus law, and as a result, Songa became our wholly owned subsidiary.  As consideration for the remaining Songa shares, we issued 1.1 million shares and $9 million aggregate principal amount of Exchangeable Bonds and we made an aggregate cash payment of $8 million to Songa shareholders that elected to receive a cash payment or failed to make an election, for an aggregate fair value of $30 million.

Contract intangible assets—In the three months ended March 31, 2018, we recognized contract intangible amortization of $19 million, recorded as a reduction of contract drilling revenues.  At March 31, 2018, the aggregate carrying amount of contract intangible assets was $613 million, which we expect to amortize over the remaining contract periods, through March 2024.  As of March 31, 2018, the estimated future amortization of contract intangible assets was as follows (in millions):

-  9  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

 

 

 

 

 

 

    

Total

 

Twelve months ending March 31,

 

 

 

 

2019

 

$

118

 

2020

 

 

117

 

2021

 

 

117

 

2022

 

 

117

 

2023

 

 

106

 

Thereafter

 

 

38

 

Total carrying amount of contract intangible assets

 

$

613

 

 

Pro forma combined operating results—We have included the operating results of Songa in our condensed consolidated results of operations, commencing on the acquisition date, January 30, 2018.  In the three months ended March 31, 2018, our condensed consolidated statement of operations includes revenues and net loss of $84 million and $3 million, respectively, associated with the operations of Songa.  Pro forma combined operating results, assuming the acquisition was completed as of January 1, 2017, were as follows (in millions, except per share data):

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Contract drilling revenues

 

$

713

 

$

904

 

Net income (loss)

 

 

(205)

 

 

100

 

Per share earnings (loss) - basic and diluted

 

 

(0.44)

 

 

0.21

 

 

The pro forma financial information includes various adjustments, primarily related to additional depreciation resulting from the fair value adjustments to the acquired property and equipment and amortization resulting from the contract intangible assets.  The pro forma information is not necessarily indicative of the results of operations had the acquisition of Songa been completed on the assumed dates or the results of operations for any future periods.

Note 5—Variable Interest Entity

Angola Deepwater Drilling Company Limited (“ADDCL”), a consolidated Cayman Islands company, is a variable interest entity for which we are the primary beneficiary.  The carrying amount of ADDCL, after eliminating the effect of intercompany transactions, was as follows (in millions):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

Assets

 

$

710

 

$

716

 

Liabilities

 

 

 5

 

 

 7

 

Net carrying amount

 

$

705

 

$

709

 

 

Note 6—Revenues

Overview—The services we perform represent a single performance obligation under our drilling contracts with customers that is satisfied over time.  We earn revenues primarily by performing the following activities: (i) providing our drilling rig, work crews, related equipment and services necessary to operate the rig (ii) delivering the drilling rig by mobilizing to and demobilizing from the drill location, and (iii) performing certain pre‑operating activities, including rig preparation activities or equipment modifications required for the contract.

We recognize revenues earned under our drilling contracts based on variable dayrates, which range from a full operating dayrate to lower rates or zero rates for periods when drilling operations are interrupted or restricted, based on the specific activities we perform during the contract on an hourly, or more frequent, basis.  Such dayrate consideration is attributed to the distinct time period to which it relates within the contract term, and therefore, recognized as we perform the services.  We recognize reimbursement revenues and the corresponding costs as we provide the customer‑requested goods and services, when such reimbursable costs are incurred while performing drilling operations.  Prior to performing drilling operations, we may receive pre‑operating revenues, on either a fixed lump‑sum or variable dayrate basis, for mobilization, contract preparation, customer‑requested goods and services or capital upgrades, which we recognize on a straight‑line basis over the estimated firm contract period.  We recognize losses for loss contracts as such losses are incurred.  We recognize revenues for demobilization or from contract terminations as we fulfill our obligations and all contingencies have been resolved.

The duration of our performance obligation varies by contract.  At March 31, 2018, the expected remaining duration of our drilling contracts extends through February 2028, excluding unexercised options.  In the three months ended March 31, 2018, we recognized

-  10  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

revenues of $48 million from performance obligations satisfied in previous periods, primarily related to our customer’s termination of the contract for Discoverer Clear Leader, effective November 2017, and certain revenues recognized on a cash basis.

We have taken the optional exemption that permits us to exclude disclosure of the estimated transaction price related to the variable portion of unsatisfied performance obligations at the end of the reporting period, as our transaction price is based on a single performance obligation consisting of a series of distinct hourly, or more frequent, periods, the variability of which will be resolved at the time of the future services.

To obtain contracts with our customers, we incur costs to prepare a rig for contract and deliver, or mobilize a rig to the drilling location.  We defer pre‑operating costs, such as contract preparation and mobilization costs, and recognize such costs on a straight‑line basis, consistent with the general pace of activity, in operating and maintenance costs over the estimated firm period of drilling.  In the three months ended March 31, 2018 and 2017, we recognized costs of $12 million and $13 million, respectively, associated with pre‑operating costs for contracts with customers.  At March 31, 2018 and December 31, 2017, the unrecognized pre‑operating costs to obtain contracts was $22 million and $18 million, respectively, recorded in other assets.

Revenue disaggregation—In the three months ended March 31, 2018 and 2017, we recognized revenues as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 2018

 

 

    

U.S.

 

U.K.

 

Norway

 

Brazil

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ultra-deepwater floaters

 

$

349

 

$

 —

 

$

 —

 

$

 —

 

$

29

 

$

378

 

Harsh environment floaters

 

 

 —

 

 

22

 

 

122

 

 

 —

 

 

60

 

 

204

 

Deepwater floaters

 

 

 —

 

 

 —

 

 

 —

 

 

24

 

 

11

 

 

35

 

Midwater floaters

 

 

 —

 

 

11

 

 

 —

 

 

 —

 

 

 9

 

 

20

 

High-specification jackups

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27

 

 

27

 

Total revenues

 

$

349

 

$

33

 

$

122

 

$

24

 

$

136

 

$

664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 2017

 

 

    

U.S.

 

U.K.

 

Norway

 

Brazil

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ultra-deepwater floaters

 

$

404

 

$

 —

 

$

 —

 

$

83

 

$

58

 

$

545

 

Harsh environment floaters

 

 

 —

 

 

80

 

 

16

 

 

 —

 

 

28

 

 

124

 

Deepwater floaters