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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 MARCH 31, 2004

[  ] 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 o 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes x    No o 

The number of shares of common stock, $.125 par value, outstanding at April 30, 2004 was 105,795,145.


 
     
 
 

ROWAN COMPANIES, INC.
 
INDEX
 
 
 
Page No.
 
 
PART I.
Financial Information:
 
 
 
 
Item 1.
Financial Statements:
 
 
 
 
 
Consolidated Balance Sheet -- March 31, 2004 and December 31, 2003
2
 
 
 
 
Consolidated Statement of Operations -- Three Months Ended March 31, 2004 and 2003
4
 
 
 
 
Consolidated Statement of Cash Flows -- Three Months Ended March 31, 2004 and 2003
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
13
 
 
 
Item 4.
Controls and Procedures
14
 
 
 
PART II.
Other Information:
 
 
 
 

 Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
14
     
Item 4.
Submission of Matters to a Vote of Security Holders
14
     
Item 6.
Exhibits and Reports on Form 8-K
15
   
SIGNATURES
15

 
 
     
 

PART I. FINANCIAL INFORMATION
           
Item 1. Financial Statements
ROWAN COMPANIES, INC. AND SUBSIDIARIES
             

CONSOLIDATED BALANCE SHEET

(IN THOUSANDS EXCEPT SHARE AMOUNTS)
 
   

March 31,

 

 
December 31,

 

 

 

 
2004

 

 
2003

 

   
 
 
ASSETS
   
(Unaudited)
 
  
 
  
 
    
 
    
 
  
CURRENT ASSETS:
   
 
    
 
  
Cash and cash equivalents
 
$
306,435
  
$
58,227
  
Receivables - trade and other
   
123,817
    
135,538
  
Inventories - at cost:
   
 
    
 
  
Raw materials and supplies
   
138,229
    
140,413
  
Work-in-progress
   
33,351
    
29,421
  
Finished goods
   
11,609
    
11,203
  
Prepaid expenses
   
14,633
    
2,948
  
Deferred tax assets - net
   
10,656
    
66,474
  
   
 
 
Total current assets
   
638,730
    
444,224
  
   
 
 
 
    
 
    
 
  
PROPERTY, PLANT AND EQUIPMENT - at cost:
   
 
    
 
  
Drilling equipment
   
2,132,217
    
2,133,365
  
Aircraft and related equipment
   
263,248
    
265,165
  
Manufacturing plant and equipment
   
140,919
    
138,803
  
Construction in progress
   
173,581
    
135,707
  
Other property and equipment
   
163,928
    
162,010
  
   
 
 
Total
   
2,873,893
    
2,835,050
  
Less accumulated depreciation and amortization
   
1,125,093
    
1,106,831
  
   
 
 
Property, plant and equipment - net
   
1,748,800
    
1,728,219
  
   
 
 
GOODWILL AND OTHER ASSETS
    
18,275
    
18,366
  
   
 
 
TOTAL
  
$
2,405,805
  
$
2,190,809
  
   
 
 
               
See Notes to Consolidated Financial Statements.
   
 
    
 
  
 
 
 
  -2-  
 
 
 
ROWAN COMPANIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)

 
  
March 31,
December 31,
 
    
2004

 

 
2003
 
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
   
(Unaudited)
 
  
 
  
 
    
 
    
 
  
CURRENT LIABILITIES:
   
 
    
 
  
Current maturities of long-term debt
 
$
55,887
  
$
55,267
  
Accounts payable - trade
   
28,209
    
25,898
  
Other current liabilities
   
65,078
    
69,200
  
   
 
 
Total current liabilities
   
149,174
    
150,365
  
   
 
 
LONG-TERM DEBT - less current maturities
   
579,466
    
569,067
  
   
 
 
OTHER LIABILITIES
   
126,686
    
116,268
  
   
 
 
DEFERRED INCOME TAXES - net
   
156,800
    
218,279
  
   
 
 
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 105,752,799 shares at March 31, 2004 and 95,845,180 shares at December 31, 2003
   
13,219
    
11,981
  
Additional paid-in capital
   
896,704
    
659,849
  
Retained earnings
   
538,441
    
549,749
  
Cost of 1,734,440 treasury shares at December 31, 2003
    
-
 
  
(30,064
)
Accumulated other comprehensive loss
   
(54,685
)
 
(54,685
)
   
 
 
Total stockholders' equity
   
1,393,679
    
1,136,830
  
   
 
 
TOTAL
 
$
2,405,805
  
$
2,190,809
  
   
 
 
 
    
 
    
 
  
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 
 
    

Ended March 31,    
   
 
 
    
2004

 

 
2003

 

   
 
 
     

(Unaudited) 

  
REVENUES:
   
 
    
 
  
Drilling services
 
$
105,689
  
$
77,886
  
Manufacturing sales and services
   
41,106
    
29,040
  
Aviation services
   
23,686
    
24,429
  
   
 
 
Total
   
170,481
    
131,355
  
   
 
 
 
    
 
    
 
  
COSTS AND EXPENSES:
   
 
    
 
  
Drilling services
   
88,418
    
77,510
  
Manufacturing sales and services
   
39,409
    
26,626
  
Aviation services
   
26,650
    
23,434
  
Depreciation and amortization
   
23,382
    
20,310
  
General and administrative
   
6,215
    
6,505
  
   
 
 
Total
   
184,074
    
154,385
  
   
 
 
INCOME (LOSS) FROM OPERATIONS
   
(13,593
 )   
(23,030
 )
   
 
 
OTHER INCOME (EXPENSE):
   
 
    
 
  
Interest expense
   
(5,065
)
 
(4,859
)
Less interest capitalized
   
797
    
1,098
  
Interest income
   
660
    
522
  
Other - net
   
196
    
120
  
   
 
 
Other income (expense) - net
   
(3,412
)
 
(3,119
)
   
 
 
INCOME (LOSS) BEFORE INCOME TAXES
   
(17,005
)
 
(26,149
 ) 
Provision (credit) for income taxes
   
(5,697
 )   
(8,967
 ) 
   
 
 
               
NET INCOME (LOSS)
 
$
(11,308
 ) 
$
(17,182
) 
   
 
 
               
NET INCOME (LOSS) PER SHARE OF COMMON STOCK (Note 4):
   
 
    
 
  
 
    
 
    
 
  
Basic
 
$
(.11
) 
$
(.18
) 
   
 
 
Diluted
 
$
(.11
) 
$
(.18
 ) 
   
 
 
               
See Notes to Consolidated Financial Statements.
   
 
    
 
  
 
 
 
  -4-  
 

ROWAN COMPANIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

 
    

For the Three Months

 

 

 

 
Ended March 31,
  
   
 
 
    
2004

 

 
2003

 

   
 
 
 
  

 (Unaudited)

  
CASH PROVIDED BY (USED IN):
   
 
    
 
  
Operations:
   
 
    
 
  
Net income (loss)
 
$
(11,308
)
$
(17,182
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
   
 
    
 
  
Depreciation and amortization
   
23,382
    
20,310
  
Deferred income taxes
   
(5,661
)
 
(8,636
)
                  Provision for pension and postretirement benefits    
8,723

 

 
6,614
  
Compensation expense
   
1,903
    
1,678
  
Gain on disposals of property, plant and equipment
   
(640
)
 
(2,833
)
                  Contributions to pension plans    
(137
 )   
(135
)
                  Postretirement benefit claims paid    
(505
 )   
(421
)
Changes in current assets and liabilities:
   
 
    
 
  
Receivables- trade and other
   
11,714
 
  
11,251
 
Inventories
   
(2,152
)
 
(16,750
)
Other current assets
   
(11,685
)
 
2,194
 
Current liabilities
   
485
    
(5,534
)
Net changes in other noncurrent assets and liabilities
   
65
 
  
(403
)
   
 
 
Net cash provided by (used in) operations
   
14,184
 
  
(9,847
)
   
 
 
 
    
 
    
 
  
Investing activities:
   
 
    
 
  
Capital expenditures
    
(47,777
)
 
(69,975
)
Proceeds from disposals of property, plant and equipment
   
4,487
    
3,576
  
   
 
 
Net cash used in investing activities
   
(43,290
)
 
(66,399
)
   
 
 
 
    
 
    
 
  
Financing activities:
   
 
    
 
  
Proceeds from borrowings
   
29,726
    
25,852
  
Repayments of borrowings
   
(18,707
)
 
(13,504
)
            Proceeds from common stock offering, net of issue costs    
264,993
        
Proceeds from stock option and convertible debenture plans
   
1,302
    
155
  
   
 
 
Net cash provided by financing activities
   
277,314
    
12,503
  
   
 
 
 
    
 
    
 
  
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
248,208
 
  
(63,743
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
58,227
    
178,756
  
   
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
306,435
  
$
115,013
  
   
 
 
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 2003 Annual Report to Stockholders and incorporated by reference in our Form 10-K for the year ended December 31, 2003.

      We believe the accompanying unaudited consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly Rowan’s financial position as of March 31, 2004 and December 31, 2003, and the results of its operations and cash flows for the three months ended March 31, 2004 and 2003.

      Rowan’s results of operations and cash flows for the three months ended March 31, 2004 are not necessarily indicative of results to be expected for the full year.
 
2.   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, timber 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 March 31, 2004 and 2003 and for the three month periods then ended (in thousands).

 
  
Drilling
Manufacturing
Aviation
Consolidated
   
 
 
 
 
2004
   
 
    
 
    
 
    
 
  
Total assets
 
$
1,961,102
  
$
283,490
  
$
161,213
  
$
2,405,805
  
Unamortized goodwill
   
1,493
   
10,863
   
-
   
12,356
 
Revenues
   
105,689
    
41,106
    
23,686
    
170,481
  
Operating profit (loss) (1)
   
659
    
(531
)
 
(7,506
)
 
(7,378
)
 
    
 
    
 
    
 
    
 
  
2003
   
 
    
 
    
 
    
 
  
Total assets
 
$
1,626,840
  
$
272,229
  
$
163,062
  
$
2,062,131
  
Unamortized goodwill
   
1,493
   
10,863
   
-
   
12,356
 
Revenues
   
77,886
    
29,040
    
24,429
    
131,355
  
Operating profit (loss) (1)
   
(13,769
)
 
416
 
  
(3,172
)
 
(16,525
)
  
   		  
 (1) General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arrive at Operating profit (loss), which Rowan believes is a better measure of segment financial performance.    
 

Excluded from the preceding table are the effects of transactions between segments. During the three months ended March 31, 2004 and 2003, Rowan’s manufacturing division provided approximately $28 million and $44 million, respectively, of products and services to its drilling division and Rowan’s aviation division provided approximately $577,000 and $295,000, respectively, of flight services to its drilling division.

  -6-  

3.   Rowan had no items of other comprehensive income during the three months ended March 31, 2004 and 2003.

4.   Rowan’s computations of basic and diluted income (loss) per share for the three months ended March 31, 2004 and 2003 are as follows (in thousands except per share amounts):
 

 
    
2004

 

 
2003
   
 
Weighted average shares of common stock outstanding
   
102,132
    
93,617
Dilutive securities:
   
 
    
 
Stock options
   
-
    
-
Convertible debentures
   
-
    
-
   
 
Weighted average shares for diluted calculation
   
102,132
    
93,617
   
 
Net income (loss) for basic and diluted calculation
 
$
(11,308
 ) 
$
(17,182)
   
 
Net income (loss) per share:
   
 
    
 
Basic
 
$
(.11
)  
$
(.18)
   
 
Diluted
 
$
(.11
)  
$
(.18)
   
 
 
 
Excluded from the computations of diluted income (loss) per share for the three months ended March 31, 2004 and 2003 are incremental shares of 933,000 and 854,000, respectively, related to convertible debentures and incremental shares of 884,000 and 649,000, respectively, related to stock options as their inclusion would have reduced the per share amount of loss for each period.

Rowan uses the intrinsic value method of accounting for stock-based employee compensation, whereby the cost of each option is measured as the difference between the market price per share and the option price per share on the date of grant, in accordance with Accounting Principles Board Opinion No. 25. The following table is provided pursuant to Statement of Financial Accounting Standards No. 148 to illustrate the effect on Rowan’s net income (loss) and net income (loss) per share of measuring stock-based compensation cost based upon estimated fair values in accordance with Statement of Financial Accounting Standards No. 123:


   

 

    

Per Share

  
     

Net Income 

 

 

 

 

 

(Loss) 

 

 

Basic 

 

 

Diluted 

  
   
 
 
 

2004

                    
                     
Net income (loss), as reported
 
$
(11,308
)
$
(.11
)
$
(.11
)
Stock-based compensation, net of related tax effects:
   
 
    
 
    
 
  
As recorded under APB 25
   
1,265
    
 
    
 
  
Pro forma under SFAS 123
   
(2,406
)
 
 
    
 
  
   
     
Pro forma net income (loss)
  
$
(12,449
)
$
(.12
)
$
(.12
)
   
 
 
 
2003
    
 
    
 
    
 
  
                     
Net income (loss), as reported
 
$
(17,182
)
$
(.18
)
$
(.18
)
Stock-based compensation, net of related tax effects:
   
 
    
 
    
 
  
As recorded under APB 25
   
1,102
    
 
    
 
  
Pro forma under SFAS 123
   
(2,027
)
 
 
    
 
  
   
     
Pro forma net income (loss)
  
$
(18,107
)
$
(.19
)
$
(.19
)
   
 
 
 
 
 
  -7-  
 

5.   Since 1952, Rowan has sponsored defined benefit pension plans covering substantially all of its employees. In addition, Rowan provides certain health care and life insurance benefits for retired drilling and aviation employees.

      Net periodic pension cost for the three months ended March 31, 2004 and 2003 included the following components (in thousands):
 
 
 
  
2004
2003
   

Service cost
  
$
3,450
 
$
2,792
 
Interest cost
    
5,199
   
4,408
 
Expected return on plan assets
    
(4,158
)
  
(3,802
)
Recognized actuarial loss
    
2,039
   
1,368
 
Amortization of prior service cost
    
52
   
47
 
   
 
 
Total
 
$
6,582
 
$
4,813
 
   
 
 
 
      Other benefits cost for the three months ended March 31, 2004 and 2003 included the following components (in thousands):
 
 
  
2004
2003
   

Service cost
  
$
679
  
$
596
  
Interest cost
    
1,033
    
954
  
Recognized actuarial loss
    
319
 
  
141
 
Amortization of transition obligation
    
188
    
187
  
Amortization of prior service cost
    
(78
)
  
(77
)
   
 
 
Total
 
$
2,141
  
$
1,801
  
   
 
 
 
      Rowan currently expects to contribute approximately $22 million in 2004 for its pension and other benefit plans, most of which should occur during the third quarter.
 
6.   The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed into law on December 8, 2003, introduced a prescription drug benefit under Medicare (Part D) and a federal subsidy to sponsors of retiree healthcare plans like Rowan that provide benefits at least actuarially equivalent to Part D. We have elected to defer recognizing any effects of the Act on our plan benefit obligations or benefits costs pursuant to Financial Accounting Standards Board Staff Position No. FAS 106-1. Specific authoritative guidance on accounting for the federal subsidy is pending and such guidance, when issued, may require us to change previously reported information.

    
  -8-  

ROWAN COMPANIES, INC. AND SUBSIDIARIES


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


RESULTS OF OPERATIONS

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
 
Rowan incurred a net loss of $11.3 million in the first quarter of 2004 compared to a loss of $17.2 million in the same period of 2003.

A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the first quarters of 2004 and 2003, respectively, is reflected below (dollars in thousands):

 
  
Drilling
Manufacturing
Aviation
Consolidated
 
  
2004
2003
2004
2003
2004
2003
2004
2003
                   
Revenues
  
$ 105,689
$    77,886
$    41,106
$   29,040
$    23,686
$    24,429
$   170,481
$ 131,355
 
  
 
 
 
 
 
 
 
 
Percent of Consolidated
  
 
 
 
 
 
 
 
 
Revenues
  
62%
59%
24%
22%
14%
19%
100%
100%
 
  
 
 
 
 
 
 
 
 
Operating Profit (Loss) (1)
  
$        659
$ (13,769)
$      (531)
$        416
$   (7,506)
$   (3,172)
$    (7,378)
$ (16,525)
 
 (1) General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arrive at Operating profit (loss), which Rowan believes is a better measure of segment financial performance.  
 
As reflected above, Rowan’s consolidated operating results improved by $9.1 million or 55% when comparing the first quarters of 2004 and 2003. Drilling revenues increased by $27.8 million or 36% as our offshore fleet of 23 jack-ups and one semi-submersible was 84% utilized during the first quarter of 2004, compared to 82% in the first quarter of 2003, and achieved a 32% increase in average day rates between periods. Rowan’s fleet of 18 land rigs was 73% utilized during the first quarter of 2004, compared to 66% in the first quarter of 2003, and achieved a 12% increase in average day rates between periods. Drilling expenses increased by $10.9 million or 14% between periods, primarily due to the addition to our offshore fleet, in August 2003, of the Bob Palmer, the expansion of our land drilling operations and higher pension costs.

The $.9 million decrease shown above in Rowan’s manufacturing results primarily reflects the reduced contribution from the division’s drilling products group, the effects of which more than offset an $11.8 million or 76% increase in equipment group revenues between periods. Manufacturing operations exclude approximately $28 million of products and services provided to the drilling division during the first quarter of 2004, most of which was attributable to construction progress on the first two Tarzan Class rigs, the Scooter Yeargain and the Bob Keller, compared to about $44 million in the same period of 2003, which was primarily attributable to the Bob Palmer and the Scooter Yeargain. The division’s external backlog was approximately $58 million at March 31, 2004, up from about $19 million one year earlier.

Rowan’s aviation operating results in the first quarter of 2004 reflect a 7% reduction in energy-related revenues, primarily associated with deepwater activities in the Gulf of Mexico, while the prior-year period included $2 million of incremental gains from the sale of several older aircraft. Both periods reflect the normal seasonal slowdown in helicopter flying activity in Alaska.

  -9-  

On March 23, 2004, we lost a Sikorsky S-76 helicopter in the Gulf of Mexico with two crew members and eight passengers onboard. The National Transportation Safety Board is conducting an investigation into the crash with our full cooperation. The S-76 is a proven helicopter with more than 600 units currently in service. No suspension of S-76 operations has been recommended and we have resumed flying our other S-76 units with full confidence. We believe the impact of this incident on our financial statements will not be material due to our prevailing insurance coverage.

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
 
23
 
Moderately improving exploration and development activity, with continued 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
 
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
 
55
 
Normal seasonal improvement
 
 
 
 
 
Gulf of Mexico
 
43
 
Moderately improving 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 existi ng 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 operations are marginally profitable, but there can be no assurance that expected improvements in market conditions, as reflected in the preceding table, will materialize. Our operations will be adversely affected should market conditions begin to deteriorate.

Though considerably less volatile than our drilling and aviation operations, our manufacturing operations, especially the equipment group, had, for a number of years, been adversely impacted by a prolonged period of unfavorable world commodity prices, especially those for copper, iron ore, coal and gold. Over the past year, prices for many commodities have increased due to growing worldwide industrial demand. Rowan’s external manufacturing backlog has grown in recent months, and we are optimistic that a recovery in the demand for mining equipment may be underway. We cannot, however, accurately predict whether or not any such recovery will be sustained beyond the near term.

  -10-  
 
As part of Rowan’s ongoing review of its lines of businesses, the Board of Directors has requested that management determine the value of our aviation operations in the open market. We are going through that process currently and the Board of Directors has not made any determination as to whether or not our aviation operations will be retained or sold.
 
 
LIQUIDITY AND CAPITAL RESOURCES

A comparison of key balance sheet figures and ratios as of March 31, 2004 and December 31, 2003 is as follows (dollars in thousands):

 
  

  March 31, 2004

  

 December 31, 2003

   
 
 
Cash and cash equivalents
 
$
306,435
  
$
58,227
  
Current assets
 
$
638,730
  
$
444,224
  
Current liabilities
 
$
149,174
  
$
150,365
  
Current ratio
   
4.28
    
2.95
  
Long-term debt - less current current maturities
  
$
579,466
  
$
569,067
  
Stockholders' equity
 
$
1,393,679
  
$
1,136,830
  
Long-term debt/total capitalization
   
.29
    
.33
 


Reflected in the comparison above are the effects in the first quarter of 2004 of net cash provided by operations of $14.2 million, net proceeds from the issuance of 11.5 million shares of common stock of $265 million, proceeds from borrowings of $29.7 million, capital expenditures of $47.8 million and debt repayments of $18.7 million.

Capital expenditures during the first quarter were primarily related to the construction of the first two Tarzan Class jack-up rigs, the Scooter Yeargain and the Bob Keller. The Tarzan Class was designed specifically for deep drilling in water depths up to 300 feet on the outer continental shelf in the Gulf of Mexico, offering drilling capabilities similar to our Super Gorilla class jack-ups, but with reduced environmental criteria ( wind, wave and current) and at less than one-half the construction cost.

The Scooter Yeargain was delivered on April 29, 2004. We financed $91.2 million of the cost of the Scooter Yeargain through a 15-year bank loan guaranteed by the U. S. Department of Transportation’s Maritime Administration (“MARAD”) under its Title XI Program. The loan requires semiannual interest payments in each May and November, with semiannual principal repayments commencing on November 10, 2004, and the Scooter Yeargain secures the government guarantee. At March 31, 2004, we had borrowed about $90.7 million under this loan, which bore interest at an annual rate of about 1.22%.

The Bob Keller is being constructed at Vicksburg, Mississippi with delivery expected during the third quarter of 2005. We are financing up to $89.7 million of the cost of the Bob Keller through a 15-year bank loan guaranteed by MARAD under its Title XI Program. The loan requires semiannual interest payments in each May and November, with semiannual principal repayments commencing on May 10, 2005, and the Bob Keller secures the government guarantee. At March 31, 2004, we had borrowed about $11.1 million under this loan, which bore interest at an annual rate of about 1.22%.

Construction of two additional Tarzan Class jack-ups is tentatively planned, subject to current and anticipated market conditions, at an aggregate cost of around $200 million. We have applied for Title XI government-guaranteed financing for up to $176 million of the cost of Tarzans III and IV on terms and conditions similar to those in effect for the first two Tarzan Class rigs. However, there can be no assurance that we will obtain such financing or that other outside financing or working capital will be available.

  -11-  

We have 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 available in the first half of 2005 and that their total cost, estimated to approach $50 million, will be funded from existing working capital or outside financing. However, there can be no assurance that we will obtain suitable operating contracts, that working capital will be adequate or outside financing will be available.
 
Rowan currently estimates that remaining 2004 capital expenditures will be between $75 million and $80 million, including approximately $45-50 million towards the construction of the second Tarzan Class rig.

Rowan’s debt agreements contain provisions that require minimum levels of working capital and stockholders’ equity, limit the amount of long-term debt and, in the event of noncompliance, restrict investment activities, asset purchases and sales, lease obligations, borrowings and mergers or acquisitions. We believe that the Company was in compliance with each of its debt covenants at March 31, 2004.

During the 2001-2003 period, Rowan contributed about $47 million to our defined benefit pension plans. Such contribution amounts are determined based upon actuarial calculations of pension assets and liabilities that involve, among other things, assumptions about long-term asset returns and discount rates. Similar calculations were used to estimate pension costs and obligations as reflected in our consolidated financial statements, which showed an accumulated other comprehensive loss resulting from unfunded pension liabilities of $54.7 million at March 31, 2004. We currently estimate that our 2004 pension costs will increase by about $4.7 million or 21% over 2003, and expect to contribute approximately $20 million to our pension plans in 2004, most of which should occur during the third quarter.

In December 2003, Rowan filed a $500 million universal shelf registration statement. In early 2004, we sold 11.5 million shares of common stock, consisting of approximately 1.7 million shares of treasury stock and 9.8 million newly issued shares. The net proceeds of approximately $265 million were retained for general corporate purposes, including working capital and capital expenditures.

Based upon current and anticipated near-term operating levels, we believe that 2004 operations, together with existing working capital and available financial resources, will be adequate to sustain planned capital expenditures and debt service and other requirements at least through the remainder of 2004. We currently have no other available credit facilities, but believe financing could be obtained if deemed necessary.

Critical Accounting Policies and Management Estimates
Rowan’s significant accounting policies are outlined in Note 1 to our financial statements included in our 2003 Annual Report to Stockholders, which is incorporated by reference in our Form 10-K for the year ended December 31, 2003. 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, and pension liabilities and costs, specifically assumptions used in actuarial calculations, as changes in such policies and/or estimates would produce significantly different amounts from those reported herein.

  -12-  

Rowan provides depreciation under the straight-line method from the date an asset is placed into service until it is sold or becomes fully depreciated based upon estimated lives and salvage values. Such estimates of lives and salvage values include 25 years and 20%, respectively, for each of our Super Gorilla and Tarzan Class rigs, which collectively comprise more than 80% of our offshore drilling equipment carrying value. Expenditures for new property or enhancements to existing property are capitalized and expenditures for routine maintenance and major repairs are charged to operations as incurred. On construction projects, Rowan capitalizes a portion of interest cost incurred during the period required to complete the asset. Long-lived assets are reviewed for impairment whenever circumstances indicate their carrying amounts may not be recoverable.

Rowan uses the intrinsic value method of accounting for stock-based employee compensation pursuant to Accounting Principles Board Opinion No. 25. We estimate that use of the fair value method outlined by Statement of Financial Accounting Standards Nos. 123 and 148 would have reduced reported amounts of net income and net income per share by approximately $1,140,000 or $.01 per share for the three months ended March 31, 2004 and by approximately $925,000 or $.01 per share for the three months ended March 31, 2003.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed into law on December 8, 2003, introduced a prescription drug benefit under Medicare (Part D) and a federal subsidy to sponsors of retiree healthcare plans like Rowan that provide benefits at least actuarially equivalent to Part D. We have elected to defer recognizing any effects of the Act on our plan benefit obligations or benefits costs pursuant to Financial Accounting Standards Board Staff Position No. FAS 106-1. Specific authoritative guidance on accounting for the federal subsidy is pending and such guidance, when issued, may require us to change previously reported information.


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 Rowan 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 us. 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 our principal operating areas; and environmental and other laws and regulations. Other relevant factors have been disclosed in Rowan’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. The Company’s outstanding debt at March 31, 2004 was comprised as follows: $351.4 million of fixed-rate notes bearing a weighted average annual interest rate of 4.67% and $283.9 million of floating-rate notes bearing a weighted average annual interest rate of 1.28%. 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 materially only to the extent that they influence demand for the Company’s products and services. Rowan does not hold or issue derivative financial instruments.

 
  -13-  

Item 4. Controls and Procedures

The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. 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 changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control o ver financial reporting.



PART II. OTHER INFORMATION
 
 

Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
 
In December 2003, Rowan filed a $500 million universal shelf registration statement. In early 2004, we sold 11.5 million shares of common stock at $23.05 per share. The sale, which included 1.7 million shares of treasury stock and 9.8 million newly issued shares, was solely underwritten by Lehman Brothers Inc. The underwriting agreement provided that Lehman’s commission depended upon the proceeds it received upon its sale of Rowan’s common stock, and such proceeds and, therefore, such commission are not known by the Company. These transactions were negotiated by the Company and approved by the Board of Directors. The net proceeds to Rowan of approximately $265 million were retained for working capital.

The Company did not repurchase any shares of its outstanding common stock during the first quarters of 2004 or 2003. Under the terms of a Share Repurchase Program begun in June 1998, the Company was authorized, at March 31, 2004, to buyback up to approximately 1.5 million shares of its common stock.

Rowan did not pay any dividends during the first quarters of 2004 or 2003 and, at March 31, 2004, had approximately $471 million of retained earnings available for distribution to stockholders under the most restrictive provisions of our debt agreements. Future dividends, if any, will only be paid at the discretion of the Board of Directors.


Item 4.   Submission of Matters to a Vote of Security Holders
 
At the Annual Meeting of Stockholders on April 23, 2004, stockholders elected the four nominees for Class I Director as set forth in Rowan’s Proxy Statement relating to the meeting. With respect to such election, proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934 and there was no solicitation in opposition to such nominees. Of Rowan’s 105,724,036 shares of record, 91,818,575 were voted at the meeting by proxy. The following numbers of votes were cast as to the Class I Director nominees: William T. Fox III, 87,029,151 votes for and 4,789,424 votes withheld; Sir Graham Hearne, 89,762,158 votes for and 2,056,417 votes withheld; H. E. Lentz, 83,370,316 votes for and 8,448,259 votes withheld; and P. Dexter Peacock, 87,077,860 votes for and 4,740,715 votes withheld.
 
 
 
  -14-  
 
 
Item 6. Exhibits and Reports on Form 8-K

 
(a)
The following is a list of Exhibits filed with this Form 10-Q:
 
 
3.1
Bylaws of the Company, as Amended, as of April 23, 2004
     
 
31
Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002)
 
 
32
Section 1350 Certifications (Section 906 of the Sarbanes-Oxley Act of 2002)
 
(b)
Reports on Form 8-K filed by the Registrant during the first quarter of fiscal year 2004:
   
 
January 15, 2004 – pertaining to the Company’s press release announcing its results for the fourth quarter of 2003
   
 
January 30, 2004 – pertaining to the Company’s execution of an underwriting agreement dated January 27, 2004 for the public offering of up to 11.5 million shares of common stock under the Company’s $500 million shelf registration statement
   
 
February 19, 2004 – pertaining to the Company’s Offshore Rig Utilization for January 2004
   
 
March 15, 2004 – pertaining to the Company’s Offshore Rig Utilization for February 2004
 

 
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: May 3, 2004
/s/ E. E. THIELE
 
E. E. Thiele
 
Senior Vice President- Finance,
 
Administration and Treasurer
 
(Chief Financial Officer)
 
 
 
 
Date: May 3, 2004
/s/ W. H. WELLS
 
W. H. Wells
 
Controller
 
(Chief Accounting Officer)

  -15-