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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____TO_____
ROWAN COMPANIES, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 1-5491 75-0759420
- ------------------------------ -------------- -------------------
(State or other jurisdiction of Commission File (I.R.S. Employer
incorporation or organization) Number Identification No.)
2800 Post Oak Boulevard, Suite 5450 Houston, Texas 77056-6127
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(713) 621-7800
-------------------------------------------------------
Registrant's telephone number, including area code
Inapplicable
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 X No
----- ----
The number of shares of common stock, $.125 par value, outstanding at
October 31, 2002 was 93,547,203.
ROWAN COMPANIES, INC.
INDEX
Page No.
--------
PART I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheet --
September 30, 2002 and December 31, 2001 2
Consolidated Statement of Operations --
Three and Nine Months Ended September 30, 2002 and 2001 4
Consolidated Statement of Cash Flows --
Nine Months Ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II. Other Information:
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
CERTIFICATIONS 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -------------------------------
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, December 31,
2002 2001
------------ -------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 168,294 $ 236,989
Receivables - trade and other 130,412 120,199
Inventories - at cost:
Raw materials and supplies 118,201 121,609
Work-in-progress 37,752 20,839
Finished goods 2,208 741
Prepaid expenses 6,637 3,188
Deferred tax assets - net 2,089 3,117
------------ -------------
Total current assets 465,593 506,682
------------ -------------
PROPERTY, PLANT AND EQUIPMENT - at cost:
Drilling equipment 1,921,197 1,634,370
Aircraft and related equipment 263,058 255,600
Manufacturing plant and equipment 115,101 104,018
Construction in progress 179,822 327,032
Other property and equipment 153,994 140,706
------------ -------------
Total 2,633,172 2,461,726
Less accumulated depreciation and amortization 1,095,164 1,042,883
------------ -------------
Property, plant and equipment - net 1,538,008 1,418,843
------------ -------------
OTHER ASSETS AND DEFERRED CHARGES 18,418 13,430
------------ -------------
TOTAL $ 2,022,019 $ 1,938,955
============ =============
See Notes to Consolidated Financial Statements.
2
September 30, December 31,
2002 2001
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 42,458 $ 42,458
Accounts payable - trade 27,470 28,903
Other current liabilities 48,964 130,133
------------ ------------
Total current liabilities 118,892 201,494
------------ ------------
LONG-TERM DEBT - less current maturities 494,848 438,484
------------ ------------
OTHER LIABILITIES 61,110 62,938
------------ ------------
DEFERRED INCOME TAXES - net 171,299 127,952
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized 5,000,000 shares issuable in series:
Series III Preferred Stock, authorized 10,300 shares, none outstanding
Series A Preferred Stock, authorized 4,800 shares, none outstanding
Series B Preferred Stock, authorized 4,800 shares, none outstanding
Series C Preferred Stock, authorized 9,606 shares, none outstanding
Series D Preferred Stock, authorized 9,600 shares, none outstanding
Series E Preferred Stock, authorized 1,194 shares, none outstanding
Series A Junior Preferred Stock, authorized 1,500,000 shares,
none issued
Common stock, $.125 par value:
Authorized 150,000,000 shares; issued 95,237,729 shares at
September 30, 2002 and 95,002,430 shares at December 31, 2001 11,905 11,875
Additional paid-in capital 645,693 638,303
Retained earnings 560,347 494,756
Cost of 1,704,440 and 1,435,300 treasury shares, respectively (29,535) (24,307)
Accumulated other comprehensive income (loss) (12,540) (12,540)
------------ ------------
Total stockholders' equity 1,175,870 1,108,087
------------ ------------
TOTAL $ 2,022,019 $ 1,938,955
============ ============
See Notes to Consolidated Financial Statements.
3
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
------------------------- -----------------------
2002 2001 2002 2001
------------ ----------- --------- ---------
(Unaudited)
REVENUES:
Drilling services $ 108,483 $ 117,694 $ 265,450 $ 405,419
Manufacturing sales and services 28,754 24,490 92,340 76,531
Aviation services 46,916 49,141 112,666 113,283
------------ ----------- --------- ---------
Total 184,153 191,325 470,456 595,233
------------ ----------- --------- ---------
COSTS AND EXPENSES:
Drilling services 79,091 79,759 229,162 227,750
Manufacturing sales and services 26,852 21,146 86,896 70,159
Aviation services 32,005 32,306 89,681 87,821
Depreciation and amortization 20,330 17,276 57,332 50,203
General and administrative 6,434 7,249 19,251 21,432
------------ ---------- --------- ---------
Total 164,712 157,736 482,322 457,365
------------ ---------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 19,441 33,589 (11,866) 137,868
------------ ---------- --------- ---------
OTHER INCOME (EXPENSE):
Net proceeds from Gorilla V
settlement 157,125
Interest expense (5,255) (5,617) (15,479) (18,122)
Less interest capitalized 846 2,687 3,980 7,733
Interest income 945 1,663 3,267 7,021
Other - net 48 87 433 211
------------ ---------- --------- ---------
Other income (expense) - net (3,416) (1,180) 149,326 (3,157)
------------ ----------- --------- ---------
INCOME BEFORE INCOME TAXES 16,025 32,409 137,460 134,711
Provision for income taxes 5,861 11,769 48,358 48,043
------------ ----------- --------- ---------
NET INCOME $ 10,164 $ 20,640 $ 89,102 $ 86,668
============ =========== ========= =========
NET INCOME PER SHARE
OF COMMON STOCK (Note 6):
Basic $ .11 $ .22 $ .95 $ .92
============ =========== ========= =========
Diluted $ .11 $ .22 $ .93 $ .90
============ =========== ========= =========
See Notes to Consolidated Financial Statements.
4
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
For The Nine Months
Ended September 30,
------------------------
2002 2001
------------ ----------
(Unaudited)
CASH PROVIDED BY (USED IN):
Operations:
Net income $ 89,102 $ 86,668
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 57,332 50,203
Deferred income taxes 44,286 38,843
Compensation expense 5,511 5,722
Provision for pension and postretirement benefits 2,204 (10,053)
Gain on disposals of property, plant and equipment (2,374) (1,695)
Changes in current assets and liabilities:
Receivables- trade and other (6,253) 8,449
Inventories (20,279) (10,108)
Other current assets (3,406) (3,228)
Current liabilities (85,391) (9,640)
Net changes in other noncurrent assets and liabilities (218) (1,269)
------------ ----------
Net cash provided by operations 80,514 153,892
------------ ----------
Investing activities:
Property, plant and equipment additions (176,581) (218,069)
Proceeds from disposals of property, plant and equipment 4,387 2,903
------------ ----------
Net cash used in investing activities (172,194) (215,166)
------------ ----------
Financing activities:
Proceeds from borrowings 91,097 73,170
Repayments of borrowings (34,733) (28,008)
Payment of cash dividend (23,511)
Payments to acquire treasury stock (12,056) (18,518)
Proceeds from stock option and convertible debenture plans 2,188 4,143
------------ ----------
Net cash provided by financing activities 22,985 30,787
------------ ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (68,695) (30,487)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 236,989 192,828
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 168,294 $ 162,341
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Acquisition of net manufacturing assets through issuance of
439,560 shares of treasury stock (Note 8) $ 7,925
============
See Notes to Consolidated Financial Statements.
5
ROWAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements of Rowan included in this Form 10-Q
have been prepared without audit in accordance with accounting principles
generally accepted in the United States of America and the rules and
regulations of the Securities and Exchange Commission. Certain information
and notes have been condensed or omitted as permitted by those rules and
regulations. We believe that the disclosures included herein are adequate,
but suggest that you read these consolidated financial statements in
conjunction with the financial statements and related notes included in our
2001 Annual Report to Stockholders, which are incorporated by reference in
our Form 10-K for the year ended December 31, 2001.
2. We believe the accompanying unaudited consolidated financial statements
contain all adjustments, which are of a normal recurring nature, necessary
to prevent fairly Rowan's financial position as of September 30, 2002 and
December 31, 2001, and the results of its operations for the three months
and nine months ended September 30, 2002 and 2001 and its cash flows for
the nine months ended September 30, 2002 and 2001.
3. Rowan's results of operations and cash flows for the nine months ended
September 30, 2002 are not necessarily indicative of results to be expected
for the full year.
4. Rowan has three principal operating segments: contract drilling of oil and
gas wells, both onshore and offshore ("Drilling"), helicopter and fixed-
wing aircraft services ("Aviation") and the manufacture and sale of heavy
equipment for the mining and transportation industries, alloy steel and
steel plate and drilling products ("Manufacturing"). The following table
presents certain financial information of Rowan by operating segment as of
September 30, 2002 and 2001 and for the nine month periods then ended (in
thousands).
2002 Drilling Manufacturing Aviation Consolidated
-------------------- ------------ ------------- -------- -------------
Total assets $ 1,612,202 $ 242,573 $ 167,244 $ 2,022,019
Unamortized goodwill 1,493 10,863 - 12,356
Revenues 265,450 92,340 112,666 470,456
Operating profit (loss)(1) (3,833) (20) 11,238 7,385
2001 Drilling Manufacturing Aviation Consolidated
-------------------- ------------ ------------- -------- -------------
Total assets $ 1,442,427 $ 211,181 $ 165,040 $ 1,818,648
Unamortized goodwill 1,552 6,235 - 7,787
Revenues 405,419 76,531 113,283 595,233
Operating profit (loss)(1) 143,734 623 14,943 159,300
---------------------------------------------------------------------
(1) Income (loss) from operations before deducting general and
administrative expenses.
Excluded from the preceding table are the effects of transactions between
segments. During the nine months ended September 30, 2002 and 2001, Rowan's
manufacturing division provided approximately $82 million and $83 million,
respectively, of products and services to its drilling division and Rowan's
aviation division provided approximately $1.4 million and $1.1 million,
respectively, of flight services to its drilling division.
5. Rowan had no items of other comprehensive income during the nine months
ended September 30, 2002 and 2001.
6
6. Rowan's computation of basic and diluted income per share is as
follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
2002 2001 2002 2001
------- ------ ------ ------
Weighted average shares of common
stock outstanding 93,724 94,282 93,836 94,349
Dilutive securities:
Stock options 602 403 705 791
Convertible debentures 851 736 892 980
------- ------ ------- -------
Weighted average shares for diluted
calculation 95,177 95,421 95,433 96,120
======= ======= ======= =======
Net income (loss) for basic and
diluted calculation $ 10,164 $ 20,640 $ 89,102 $ 86,668
======= ======= ======= =======
Net income (loss) per share:
Basic $ .11 $ .22 $ .95 $ .92
======= ======= ====== =======
Diluted $ .11 $ .22 $ .93 $ .90
======= ======= ====== =======
7. Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", generally provides that goodwill and other intangible
assets with indefinite useful lives no longer be amortized to expense, but
rather be assessed periodically for impairment losses. Rowan's adoption of
SFAS No. 142, effective January 1, 2002, did not materially impact its
financial position or results of operations. Goodwill amortization during
the nine months ended September 30, 2001 was approximately $427,000, or
less than $.01 per share. At September 30, 2002, Rowan had approximately
$1.7 million of intangible assets subject to amortization.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", superceded existing standards pertaining to accounting and
reporting for long-lived assets, especially those held for disposal.
Rowan's adoption of SFAS No. 144, effective January 1, 2002, did not
materially impact its financial position or results of operations.
8. On January 31, 2002, Rowan completed the purchase of certain assets of
Oilfield-Electric-Marine, Inc.(O-E-M) and Industrial Logic Systems, Inc.,
by issuing from treasury 439,560 shares of common stock valued at
approximately $8 million. The acquisition gave rise to approximately $4.7
million of goodwill. O-E-M manufactures variable speed AC motors and
variable frequency drive systems, DC motors and drive systems, and consoles
for marine boats and lay barges, the oil and gas drilling industry, and the
mining and dredging industries. Additionally, O-E-M manufactures medium
voltage switchgear from 5KV through 38 KV for the industrial and
petrochemical markets.
7
9. On November 16, 2001, an English Court ruled in Rowan's favor and dismissed
the plaintiff's claim that it had been entitled, in January 1999, to
terminate its drilling contract with a Rowan subsidiary for the use of the
jack-up rig Rowan Gorilla V. The Court ordered the plaintiff to pay Rowan
for all unpaid day rates, damages, interest and an interim payment for
legal costs, for which Rowan subsequently received $88.6 million. The
matter was under appeal at December 31, 2001 and such amount, along with
investment earnings, less outstanding receivables dating from contract
inception, was deferred at year end. On March 14, 2002, a settlement
agreement was reached among the parties and all litigation involving this
matter was dropped. Pursuant to such agreement, Rowan subsequently received
an additional $84.2 million. Such amounts are shown, net of final legal
costs and expenses, as Other Income on the Consolidated Statement of
Operations for the nine months ended September 30, 2002.
10. On October 4, 2002, we discovered substantial damage to our jack-up rig,
Rowan-Houston, in the aftermath of Hurricane Lili. The rig had been jacked
up in 105 feet of water in Ship Shoal Block 207, offshore Louisiana,
adjacent to a production platform. On October 1, the rig was secured and
evacuated for Hurricane Lili, and the hull was 63 feet above the water. On
October 4, portions of the rig, including the hull, were located
approximately 1,750 feet northwest of the pre-storm location. Underwater
surveys have confirmed that the stern of the rig's hull is resting on the
bottom of the Gulf of Mexico, with the bow elevated at approximately 30
degrees. The port side of the hull near the bow and the bow leg at the
waterline were severely damaged, indicating a collision had occurred. The
legs, which were severed below the hull, remain elevated at the original
location. We are continuing to investigate the accident and develop a plan
for wreckage removal. We believe that the loss of the rig and the costs of
wreckage removal are fully insured under our prevailing coverages.
8
ROWAN COMPANIES, INC. AND SUBSIDIARIES
--------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2002 Compared to
- -------------------------------------------------
Nine Months Ended September 30, 2001
------------------------------------
Rowan generated net income of $89.1 million in the first nine months of 2002
compared to $86.7 million in the same period of 2001. The current period
included net proceeds from the settlement of the Gorilla V contract dispute,
which increased net income by approximately $102 million, or $1.07 per share.
Excluding the effects of the settlement, Rowan's results for the first nine
months of 2002 would have been a net loss of approximately $13 million, or $.14
per share. The decrease in operating performance was caused largely by a decline
in drilling day rates between periods, primarily in the Gulf of Mexico, as a
result of volatile natural gas prices.
A comparison of the revenues and operating profit (loss) from drilling,
manufacturing, aviation and consolidated operations for the first nine months of
2002 and 2001, respectively, is reflected below (dollars in thousands):
Drilling Manufacturing Aviation Consolidated
------------------- ------------------ ----------------- --------------------
2002 2001 2002 2001 2002 2001 2002 2001
--------- -------- -------- -------- -------- ------- --------- ---------
Revenues $265,450 $405,419 $92,340 $76,531 $112,666 $113,283 $470,456 $595,233
Percent of Consolidated
Revenues 56% 68% 20% 13% 24% 19% 100% 100%
Operating Profit (Loss)(1) $ (3,833) $143,734 $ (20) $ 623 $ 11,238 $ 14,943 $ 7,385 $159,300
- --------------------------------------------------------------------------------
(1) Income (loss) from operations before deducting general and
administrative expenses
As reflected above, Rowan's consolidated operating results declined by $151.9
million or 95% when comparing the first nine months of 2002 and 2001. Drilling
revenues decreased by $140.0 million or 35% as our offshore fleet of 23 jack-ups
and one semi-submersible was 87% utilized during the first nine months of 2002,
compared to 85% in the first nine months of 2001, but suffered a 40% decrease in
average day rates between periods. Rowan's fleet of 17 land rigs was 67%
utilized during the first nine months of 2002, compared to 77% in the first nine
months of 2001, and experienced a 26% decrease in average day rates between
periods. Drilling expenses increased by $1.4 million between periods as the
effects of reduced land and boat operations largely offset the impact of the
addition to our offshore fleet, in February 2002, of Rowan Gorilla VII.
The $0.6 million decrease shown above in Rowan's manufacturing results between
periods primarily reflects a reduced contribution from the division's equipment
group which more than offset the increased contributions from the steel and
drilling products groups. Manufacturing operations exclude approximately $82
million of products and services provided to the drilling division during the
first nine months of 2002, most of which was attributable to construction
progress on Rowan Gorilla VIII, compared to about $83 million in the same period
of 2001, primarily due to Gorillas VII and VIII. The division's external backlog
was approximately $19 million at September 30, 2002.
9
Rowan's aviation operating results in the first nine months of 2002 were
impacted by higher insurance costs, which more than offset the increase in Gulf
of Mexico revenues between periods that followed the average 30% rate increase
implemented in April 2001. An increase in fire control revenues was largely
offset by a reduction in tourism-related flying between periods.
Three Months Ended September 30, 2002 Compared to
- -------------------------------------------------
Three Months Ended September 30, 2001
-------------------------------------
Rowan generated net income of $10.2 million in the third quarter of 2002
compared to $20.6 million in the same period of 2001. The decrease in operating
performance was caused largely by a decline in drilling day rates between
periods, primarily in the Gulf of Mexico, as a result of volatile natural gas
prices.
A comparison of the revenues and operating profit from drilling, manufacturing,
aviation and consolidated operations for the third quarters of 2002 and 2001,
respectively, is reflected below (dollars in thousands):
Drilling Manufacturing Aviation Consolidated
------------------- ------------------ ----------------- --------------------
2002 2001 2002 2001 2002 2001 2002 2001
--------- -------- -------- -------- -------- ------- --------- ---------
Revenues $108,483 $117,694 $ 28,754 $ 24,490 $ 46,916 $ 49,141 $184,153 $191,325
Percent of Consolidated
Revenues 59% 62% 16% 13% 25% 25% 100% 100%
Operating Profit (1) $ 14,897 $ 26,177 $ 6 $ 1,428 $ 10,972 $ 13,233 $ 25,875 $ 40,838
- --------------------------------------------------------------------------------
(1) Income from operations before deducting general and
administrative expenses
As reflected above, Rowan's consolidated operating results declined by $15
million or 37% when comparing the third quarters of 2002 and 2001. Drilling
revenues decreased by $9.2 million or 8% as our offshore fleet of 23 jack-ups
and one semi-submersible was 93% utilized during the third quarter of 2002,
compared to 70% in the third quarter of 2001, but suffered a 28% decrease in
average day rates between periods. Rowan's fleet of 17 land rigs was 76%
utilized during the third quarter of 2002, compared to 71% in the third quarter
of 2001, but experienced a 39% decrease in average day rates between periods.
Drilling expenses decreased by $0.7 million between periods as the effects of
reduced land and boat operations more than offset the impact of the addition to
our offshore fleet, in February 2002, of Rowan Gorilla VII.
Rowan's manufacturing operating results in the third quarter of 2002 primarily
reflect the reduced contribution from the division's equipment group which more
than offset increased contributions from the steel and drilling products groups.
Manufacturing operations exclude approximately $25 million of products and
services provided to the drilling division during the third quarter of 2002,
most of which was attributable to construction progress on Rowan Gorilla VIII,
compared to about $29 million in the same period of 2001, primarily attributable
to Gorillas VII and VIII. The division's external backlog was approximately $19
million at September 30, 2002.
Rowan's aviation operating results in the third quarter of 2002 were impacted by
higher insurance costs and reductions in energy and tourism-related flying that
combined to more than offset an increase in fire control revenues between
periods.
10
Expected near-term conditions in our principal drilling markets, based upon
recent bid inquiries and other indications from our energy company customers,
and the numbers of our rigs in each of those areas are as follows:
AREA RIGS EXPECTED NEAR-TERM CONDITIONS
- ----------------- ---- --------------------------------------------
Gulf of Mexico 21 Moderately improving exploration and development
activity, with increasing emphasis on potential
deep-well natural gas reserves on the Outer
Continental Shelf
North Sea 1 Moderately improving jack-up drilling
activity, fluctuating with oil prices
Eastern Canada 1 Moderately improving demand for harsh
environment equipment, fluctuating with oil
and natural gas prices
The preceding table reflects the loss of our Gulf of Mexico jack-up,
Rowan-Houston, which, as discussed more fully below under LIQUIDITY AND CAPITAL
RESOURCES, capsized and sank during Hurricane Lili.
Expected near-term conditions in our principal aviation markets and the numbers
of our aircraft based in each of those markets are as follows:
AREA AIRCRAFT EXPECTED NEAR-TERM CONDITIONS
- ----------------- --------- --------------------------------------------
Alaska 65 Normal seasonal decline
Gulf of Mexico 48 Generally stable levels of flight
support activity
The drilling and aviation markets in which Rowan competes frequently experience
significant changes in supply and demand. Drilling utilization and day rates are
primarily a function of the demand for drilling services, as measured by the
level of exploration and development expenditures, and the supply of capable
drilling equipment. These expenditures, in turn, are affected by many factors
such as existing and newly discovered oil and natural gas reserves, political
and regulatory policies, seasonal weather patterns, contractual requirements
under leases or concessions, effects of energy company consolidations, and,
probably most influential, oil and natural gas prices. Our aviation operations
are also affected by such factors, as flying in support of offshore energy
operations remains a major source of business and Alaska operations are hampered
by weather each winter. The volatile nature of such factors prevents us from
being able to accurately predict whether existing market conditions will
continue beyond the near term. In response to fluctuating market conditions, we
can relocate our drilling rigs and aircraft from one geographic area to another,
but only when we believe such moves are economically justified. Currently,
Rowan's drilling and aviation operations are profitable, but there can be no
assurance that current operating conditions will prevail or that expected
improvements in market conditions, as reflected in the preceding tables, will
materialize. Our operations will be adversely affected should market conditions
deteriorate.
Though considerably less volatile than our drilling and aviation operations, our
manufacturing operations have continued to be adversely impacted by a prolonged
period of unfavorable world commodity prices; in particular, prices for copper,
iron ore, coal, gold and diamonds. Rowan's external manufacturing backlog
remains at a depressed level. As a result, we cannot accurately predict whether
or not our manufacturing operations will be profitable during the remainder of
2002.
11
LIQUIDITY AND CAPITAL RESOURCES
A comparison of key balance sheet figures and ratios as of September 30, 2002
and December 31, 2001 is as follows (dollars in thousands):
September 30, December 31,
2002 2001
---------- ----------
Cash and cash equivalents $168,294 $236,989
Current assets $465,593 $506,682
Current liabilities $118,892 $201,494
Current ratio 3.92 2.51
Long-term debt $494,848 $438,484
Stockholders' equity $1,175,870 $1,108,087
Long-term debt/total capitalization .30 .28
Reflected in the comparison above are the effects in the first nine months of
2002 of net cash provided by operations of $80.5 million, proceeds from
borrowings of $91.1 million, capital expenditures of $176.6 million, debt
repayments of $34.7 million and a cash dividend of $23.5 million. Net cash
provided by operations during the period included approximately $73 million net
proceeds from the settlement of the Gorilla V contract dispute, which is
discussed more fully below.
Capital expenditures during the first nine months of 2002 were primarily related
to the construction of Rowan Gorilla VIII and the continued upgrade of our
existing offshore and land drilling fleet.
Rowan Gorilla VIII is an enhanced version of our Super Gorilla class jack-up,
designated a Super Gorilla XL. Gorilla VIII will be outfitted with 708 feet of
leg, 134 feet more than Gorillas V, VI or VII, and have 30% larger spud cans
enabling operation in the Gulf of Mexico in water depths up to 550 feet. Gorilla
VIII will also be able to operate in water depths up to 400 feet in the hostile
environments offshore eastern Canada and in the North Sea. The construction of
Gorilla VIII continues on schedule at Rowan's Vicksburg, Mississippi facility
with delivery expected during the third quarter of 2003. We are financing up to
$187 million of the cost of Gorilla VIII through an 18-year bank loan guaranteed
by the U. S. Department of Transportation's Maritime Administration ("MARAD")
under its Title XI Program. The notes require semiannual interest payments each
January and July, with principal repayments commencing January 15, 2004, and
Gorilla VIII secures the government guarantee. At September 30, 2002, we had
drawn down about $122.2 million under this facility, which bore interest at
floating rates averaging approximately 2.1%.
Rowan Gorilla VII, a Super Gorilla class jack-up like Gorillas V and VI
featuring a combination drilling and production capability, was delivered in
December 2001 and mobilized to the North Sea during the first quarter. We
financed $185 million of the cost of Gorilla VII through a 12-year bank loan
guaranteed by MARAD under its Title XI Program. The notes require semiannual
payments each April and October and Gorilla VII secures the government
guarantee. At September 30, 2002, we had fully drawn down the facility and
outstanding borrowings bore interest at floating rates averaging approximately
2.1%.
Design work is virtually complete and construction efforts have begun on a new
class of jack-up rig, specifically targeted for deep drilling in water depths up
to 250 feet on the Outer Continental Shelf in the Gulf of Mexico. The Tarzan
class rig will offer drilling capabilities similar to our Gorilla class
jack-ups, enabling more efficient drilling beyond 15,000 feet, but with reduced
environmental criteria (wind, wave and current). The first of four rigs, to be
named Scooter Yeargain, will be constructed at Vicksburg, Mississippi with
delivery expected by mid-year 2004. The three additional Tarzan class jack-ups
are expected to be delivered in six- to nine-month intervals in 2005 and 2006.
The aggregate cost of the four Tarzan rigs will approach $400 million. We have
applied for Title XI government-guaranteed financing for up to 87.5% of the cost
of the Tarzan rigs on terms and conditions similar to those in effect for
Gorilla VIII. However, there can be no assurance that such financing will be
obtainable.
12
During 2001, we committed to purchase three Sikorsky S-92 helicopters for the
deepwater drilling market, subject to our obtaining long-term operating
contracts. The S-92 design features a 19-passenger capacity and a range of 475
nautical miles. We currently expect the helicopters to be delivered in the
second half of 2004 and that their total cost, estimated to approach $50
million, will be funded from existing working capital. However, there can be no
assurance that working capital will be adequate.
On January 31, 2002, we completed the purchase of certain assets of
Oilfield-Electric-Marine, Inc. and Industrial Logic Systems, Inc., issuing from
treasury 439,560 shares of Rowan common stock valued at approximately $8
million. Oilfield-Electric-Marine manufactures variable speed AC motors and
variable frequency drive systems, DC motors and drive systems, and consoles for
marine boats and lay barges, the oil and gas drilling industry, and the mining
and dredging industries. Additionally, Oilfield-Electric-Marine manufactures
medium voltage switchgear from 5KV through 38KV for the industrial and
petrochemical markets.
Rowan estimates remaining 2002 capital expenditures will be between $50 million
and $60 million, including approximately $25-35 million for Gorilla VIII and
Scooter Yeargain. We may also spend amounts to acquire additional aircraft as
market conditions justify and to upgrade existing rigs and manufacturing
facilities.
Based upon current and anticipated near-term operating levels, we believe that
our operations, together with existing working capital and available financial
resources, will generate sufficient cash flow to sustain planned capital
expenditures and debt service requirements at least through the remainder of
2002.
On November 16, 2001, an English Court ruled in Rowan's favor and dismissed the
plaintiff's claim that it had been entitled, in January 1999, to terminate its
drilling contract with a Rowan subsidiary for the use of the jack-up rig Rowan
Gorilla V. The Court ordered the plaintiff to pay Rowan for all unpaid day
rates, damages, interest and an interim payment for legal costs, for which Rowan
subsequently received $88.6 million. The matter was under appeal at December 31,
2001 and such amount, along with investment earnings, less outstanding
receivables dating from contract inception, was deferred at year end. On March
14, 2002, a settlement agreement was reached among the parties and all
litigation involving this matter was dropped. Pursuant to such agreement, Rowan
subsequently received an additional $84.2 million. Such amounts are shown, net
of final legal costs and expenses, as Other Income on the Consolidated Statement
of Operations for the nine months ended September 30, 2002.
During the first nine months of 2002, we repurchased in the open market
approximately 709,000 shares of our common stock, at an average price of $17.88
per share. On April 26, 2002, our Board of Directors declared a special cash
dividend of $.25 per share of Common Stock that was paid on June 6, 2002 to
shareholders of record on May 16, 2002.
On October 4, 2002, we discovered substantial damage to our jack-up rig,
Rowan-Houston, in the aftermath of Hurricane Lili. The rig had been jacked up in
105 feet of water in Ship Shoal Block 207, offshore Louisiana, adjacent to a
production platform. On October 1, the rig was secured and evacuated for
Hurricane Lili, and the hull was 63 feet above the water. On October 4, portions
of the rig, including the hull, were located approximately 1,750 feet northwest
of the pre-storm location. Underwater surveys have confirmed that the stern of
the rig's hull is resting on the bottom of the Gulf of Mexico, with the bow
elevated at approximately 30 degrees. The port side of the hull near the bow and
the bow leg at the waterline were severely damaged, indicating a collision had
occurred. The legs, which were severed below the hull, remain elevated at the
original location. We are continuing to investigate the accident and develop a
plan for wreckage removal. We believe that the loss of the rig and the costs of
wreckage removal are fully insured under our prevailing coverages.
13
Critical Accounting Policies and Management Estimates.
- ------------------------------------------------------
Rowan's significant accounting policies are outlined in Note 1 to our financial
statements included in our 2001 Annual Report to Stockholders, which is
incorporated by reference in our Form 10-K for the year ended December 31, 2001.
Such policies, and management judgments, assumptions and estimates made in their
application, underlie reported amounts of assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. We believe our most critical accounting policies and
management estimates involve property and depreciation, specifically
capitalizable costs, useful lives and salvage values, as changes in such
policies and/or estimates would produce significantly different amounts from
those reported herein.
This report contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements as to the expectations, beliefs and future expected financial
performance of the Company that are based on current expectations and are
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected by the Company. Among the
factors that could cause actual results to differ materially are the following:
oil, natural gas and other commodity prices; the level of offshore expenditures
by energy companies; energy demand; the general economy, including inflation;
weather conditions in the Company's principal operating areas; and environmental
and other laws and regulations. Other relevant factors have been disclosed in
the Company's filings with the U. S. Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Rowan believes that its exposure to risk of earnings loss due to changes in
market interest rates is not significant and that the carrying values of its
debt and other financial instruments approximate their fair values. In addition,
virtually all of the Company's transactions are carried out in U. S. dollars,
thus Rowan's foreign currency exposure is not material. Fluctuating commodity
prices affect Rowan's future earnings only to the extent that they influence
demand for the Company's products and services. Rowan does not hold or issue
derivative financial instruments.
Item 4. Controls and Procedures
- -----------------------------------
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chief Executive Officer, along with the
Company's Chief Financial Officer, concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic Exchange Act reports. There
have been no significant changes in the Company's internal controls or in other
factors which could significantly affect internal controls subsequent to the
date the Company carried out its evaluation.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the fifth paragraph on page 13 within PART I. Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Form 10-Q for a discussion of material developments in the
Gorilla V contract dispute.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) No Exhibits are filed with this Form 10-Q.
(b) No reports on Form 8-K were filed by the Registrant during the third
quarter of fiscal year 2002.
SIGNATURES
-------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROWAN COMPANIES, INC.
(Registrant)
Date: November 14, 2002 /s/ E. E. THIELE
-------------------------------
E. E. Thiele
Senior Vice President- Finance,
Administration and Treasurer
(Chief Financial Officer)
Date: November 14, 2002 /s/ W. H. WELLS
-------------------------------
W. H. Wells
Controller
(Chief Accounting Officer)
15
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, C. R. Palmer, Chief Executive Officer of Rowan Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rowan Companies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other information
included in this quarterly report, fairly present in all material respects,
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this periodic report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based upon our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors all material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ C. R. PALMER
-------------------------------
C. R. Palmer
Chairman and Chief Executive Officer
16
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, E. E. Thiele, Chief Financial Officer of Rowan Companies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rowan Companies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other information
included in this quarterly report, fairly present in all material respects,
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this periodic report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based upon our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors all material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ E. E. THIELE
-------------------------------
E. E. Thiele
Senior Vice President- Finance,
Administration and Treasurer
(Chief Financial Officer)
17
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Rowan Companies, Inc. (the "Company")
on Form 10-Q for the period ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, C. R.
Palmer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company for the periods presented.
Date: November 14, 2002 /s/ C. R. PALMER
-------------------------------
C. R. Palmer
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Rowan Companies, Inc. (the "Company")
on Form 10-Q for the period ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, E. E.
Thiele, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company for the periods presented.
Date: November 14, 2002 /s/ E. E. THIELE
-------------------------------
E. E. Thiele
Senior Vice President- Finance,
Administration and Treasurer
(Chief Financial Officer)
18