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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, 2003
| | 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 | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |X| No | |
The number of shares of common stock, $.125 par value, outstanding at April 30,
2003 was 93,641,088.
ROWAN COMPANIES, INC.
INDEX
Page No.
PART I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheet --
March 31, 2003 and December 31, 2002 .................. 2
Consolidated Statement of Operations --
Three Months Ended March 31, 2003 and 2002 ............ 4
Consolidated Statement of Cash Flows --
Three Months Ended March 31, 2003 and 2002 ............ 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 4. Submission of Matters to a Vote
of Security Holders ................................... 14
Item 6. Exhibits and Reports on Form 8-K ...................... 14
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)
March 31, December 31,
2003 2002
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 115,013 $ 178,756
Receivables - trade and other ...................... 98,069 109,320
Inventories - at cost:
Raw materials and supplies ....................... 135,907 122,846
Work-in-progress ................................. 35,178 31,348
Finished goods ................................... 8,625 8,766
Prepaid expenses ................................... 5,817 8,011
Deferred tax assets - net .......................... 29,595 10,855
------------ ------------
Total current assets ..................... 428,204 469,902
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - at cost:
Drilling equipment ................................. 1,934,469 1,922,341
Aircraft and related equipment ..................... 265,715 264,212
Manufacturing plant and equipment .................. 126,383 120,705
Construction in progress ........................... 241,589 199,352
Other property and equipment ....................... 159,255 155,815
------------ ------------
Total .................................... 2,727,411 2,662,425
Less accumulated depreciation and amortization ..... 1,111,313 1,095,281
------------ ------------
Property, plant and equipment - net .... 1,616,098 1,567,144
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES .................... 17,829 17,458
------------ ------------
TOTAL .................................... $ 2,062,131 $ 2,054,504
============ ============
See Notes to Consolidated Financial Statements.
-2-
March 31, December 31,
2003 2002
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt .......................................... $ 47,285 $ 42,458
Accounts payable - trade ...................................................... 25,868 30,000
Other current liabilities ..................................................... 47,122 43,517
------------ ------------
Total current liabilities .............................................. 120,275 115,975
------------ ------------
LONG-TERM DEBT - less current maturities .......................................... 520,365 512,844
------------ ------------
OTHER LIABILITIES ................................................................. 129,398 127,848
------------ ------------
DEFERRED INCOME TAXES - net ....................................................... 176,164 166,060
------------ ------------
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 95,363,479 shares at
March 31, 2003 and 95,340,597 shares at December 31, 2002 ................... 11,920 11,918
Additional paid-in capital .................................................... 648,932 647,600
Retained earnings ............................................................. 540,341 557,523
Cost of 1,734,440 treasury shares ............................................. (30,064) (30,064)
Accumulated other comprehensive income (loss) ................................. (55,200) (55,200)
------------ ------------
Total stockholders' equity ............................................. 1,115,929 1,131,777
------------ ------------
TOTAL .................................................................. $ 2,062,131 $ 2,054,504
============ ============
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,
-------------------------
2003 2002
--------- ---------
(Unaudited)
REVENUES:
Drilling services ............................... $ 77,886 $ 77,624
Manufacturing sales and services ................ 29,040 31,635
Aviation services ............................... 24,429 28,546
--------- ---------
Total ..................................... 131,355 137,805
--------- ---------
COSTS AND EXPENSES:
Drilling services ............................... 77,510 75,444
Manufacturing sales and services ................ 26,626 29,546
Aviation services ............................... 23,434 27,847
Depreciation and amortization ................... 20,310 18,248
General and administrative ...................... 6,505 6,395
--------- ---------
Total ..................................... 154,385 157,480
--------- ---------
INCOME (LOSS) FROM OPERATIONS ....................... (23,030) (19,675)
--------- ---------
OTHER INCOME (EXPENSE):
Net proceeds from Gorilla V settlement .......... 157,125
Interest expense ................................ (4,859) (4,981)
Less interest capitalized ....................... 1,098 1,618
Interest income ................................. 522 1,138
Other - net ..................................... 120 102
--------- ---------
Other income (expense) - net .............. (3,119) 155,002
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ................... (26,149) 135,327
Provision (credit) for income taxes ............. (8,967) 47,650
--------- ---------
NET INCOME (LOSS) ................................... $ (17,182) $ 87,677
========= =========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK (Note 6):
Basic ........................................... $ (.18) $ .93
========= =========
Diluted ......................................... $ (.18) $ .92
========= =========
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,
------------------------
2003 2002
--------- ---------
(Unaudited)
CASH PROVIDED BY (USED IN):
Operations:
Net income (loss) ................................................................. $ (17,182) $ 87,677
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations:
Depreciation and amortization .................................................. 20,310 18,248
Deferred income taxes .......................................................... (8,636) 10,428
Compensation expense ........................................................... 1,678 1,982
Provision for pension and postretirement benefits .............................. 6,058 2,983
Gain on disposals of property, plant and equipment ............................. (2,833) (66)
Changes in current assets and liabilities:
Receivables- trade and other ................................................... 11,251 16,525
Inventories .................................................................... (16,750) (5,048)
Other current assets ........................................................... 2,194 (63)
Current liabilities ............................................................ (5,534) (59,151)
Net changes in other noncurrent assets and liabilities ............................ (403) (193)
--------- ---------
Net cash provided by (used in) operations ........................................... (9,847) 73,322
--------- ---------
Investing activities:
Capital expenditures .............................................................. (69,975) (62,850)
Proceeds from disposals of property, plant and equipment ......................... 3,576 101
--------- ---------
Net cash used in investing activities ............................................... (66,399) (62,749)
--------- ---------
Financing activities:
Proceeds from borrowings ......................................................... 25,852 28,802
Repayments of borrowings .......................................................... (13,504) (13,504)
Payments to acquire treasury stock ................................................ (2,308)
Proceeds from stock option and convertible debenture plans ........................ 155 135
--------- ---------
Net cash provided by financing activities ........................................... 12,503 13,125
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................................... (63,743) 23,698
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................................... 178,756 236,989
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................... $ 115,013 $ 260,687
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Acquisition of net manufacturing assets through issuance
of 439,560 shares of treasury stock ................................................. $ 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 2002 Annual Report to Stockholders, which are incorporated by
reference in our Form 10-K for the year ended December 31, 2002.
2. 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, 2003 and
December 31, 2002, and the results of its operations and cash flows for
the three months ended March 31, 2003 and 2002.
3. Rowan's results of operations and cash flows for the three months ended
March 31, 2003 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, 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, 2003 and 2002 and for the three month
periods then ended (in thousands).
Drilling Manufacturing Aviation Consolidated
----------- ------------- --------- -------------
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)
2002
--------
Total assets ................... $ 1,618,670 $ 232,999 $ 154,592 $ 2,006,261
Unamortized goodwill ........... 1,493 10,863 -- 12,356
Revenues ....................... 77,624 31,635 28,546 137,805
Operating profit (loss) (1) .... (10,432) 334 (3,182) (13,280)
--------------------------------------------------------------------------
(1) General and administrative expenses, which are allocated across 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, 2003 and 2002, Rowan's
manufacturing division provided approximately $44 million and $24 million,
respectively, of products and services to its drilling division and
Rowan's aviation division provided approximately $295,000 and $447,000,
respectively, of flight services to its drilling division. Additionally,
as of March 31, 2003, Rowan had approximately $1.6 million of intangible
assets subject to amortization.
5. Rowan had no items of other comprehensive income during the three months
ended March 31, 2003 and 2002.
-6-
6. Rowan's computations of basic and diluted income (loss) per share for the
three months ended March 31, 2003 and 2002 are as follows (in thousands
except per share amounts):
2003 2002
-------- --------
Weighted average shares of common stock outstanding .... 93,617 93,787
Dilutive securities:
Stock options ...................................... -- 638
Convertible debentures ............................. -- 825
-------- --------
Weighted average shares for diluted calculation ........ 93,617 95,250
======== ========
Net income (loss) for basic and diluted calculation .... $(17,182) $ 87,677
======== ========
Net income (loss) per share:
Basic .............................................. $ (.18) $ .93
======== ========
Diluted ............................................ $ (.18) $ .92
======== ========
Excluded from the computation of diluted income (loss) per share for the
three months ended March 31, 2003 are incremental shares of 854,000 related
to convertible debentures and 649,000 related to stock options as their
inclusion would have reduced the per share amount of loss for the 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
---------- -------------------
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 ............................ (2,054)
--------
Pro forma net income (loss) .............................. $(18,134) $ (.19) $ (.19)
==================================
2002
--------
Net income, as reported .................................. $ 87,677 $ .93 $ .92
Stock-based compensation, net of related tax effects:
As recorded under APB 25 ............................ 1,284
Pro forma under SFAS 123 ............................ (2,404)
--------
Pro forma net income ..................................... $ 86,557 $ .92 $ .91
==================================
-7-
7. 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 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 whereby all litigation involving
this matter was dropped and Rowan received an additional $84.2 million. In
total, Rowan received $175 million in connection with the Gorilla V
contract dispute and such amount is shown, net of final legal costs and
expenses, as Other Income on the Consolidated Statement of Operations for
the three months ended March 31, 2002.
8. Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations", addresses accounting and reporting for fixed
asset retirement costs and obligations. Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", addresses accounting and reporting for costs and obligations
related to exit or disposal activities initiated on or after January 1,
2003. Rowan's adoption of Statement Nos. 143 and 146, effective January 1,
2003, did not materially impact its financial position or results of
operations.
-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, 2003 Compared to Three Months Ended March 31, 2002
Rowan incurred a net loss of $17.2 million in the first quarter of 2003 compared
to net income of $87.7 million in the same period of 2002. First quarter 2002
results 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, the Company's first quarter 2002
results would have been a net loss of approximately $14 million, or $.15 per
share.
A comparison of the revenues and operating profit (loss) from drilling,
manufacturing, aviation and consolidated operations for the first quarters of
2003 and 2002, respectively, is reflected below (dollars in thousands):
Drilling Manufacturing Aviation Consolidated
---------------------- --------------------- ---------------------- ----------------------
2003 2002 2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- --------- --------- ---------
Revenues $ 77,886 $ 77,624 $ 29,040 $ 31,635 $ 24,429 $ 28,546 $ 131,355 $ 137,805
Percent of Consolidated
Revenues 59% 56% 22% 23% 19% 21% 100% 100%
Operating Profit (Loss) (1) $ (13,769) $ (10,432) $ 416 $ 334 $ (3,172) $ (3,182) $ (16,525) $ (13,280)
- --------------------------------------------------------------------------------
(1) General and administrative expenses, which are allocated across 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 declined by $3.2
million or 24% when comparing the first quarters of 2003 and 2002. Drilling
revenues increased by $.3 million or less than 1% as our offshore fleet of 22
jack-ups and one semi-submersible was 82% utilized during the first quarter of
2003, compared to 80% in the first quarter of 2002, and achieved a 6% increase
in average day rates between periods. Rowan's fleet of 18 land rigs was 66%
utilized during the first quarter of 2003, compared to 58% in the first quarter
of 2002, but suffered an 8% decrease in average day rates between periods.
Drilling expenses increased by $2.1 million between periods, primarily due to
the addition to our offshore fleet, in February 2002, of Rowan Gorilla VII.
The $0.1 million increase shown above in Rowan's manufacturing results between
periods primarily reflects the increased contribution from the division's
drilling products group. Manufacturing operations exclude approximately $44
million of products and services provided to the drilling division during the
first quarter of 2003, most of which was attributable to construction progress
on the Bob Palmer (formerly Gorilla VIII) and the Scooter Yeargain, compared to
about $24 million in the same period of 2002, primarily attributable to the Bob
Palmer. The division's external backlog was approximately $19 million at March
31, 2003.
Rowan's aviation operating results in the first quarter of 2003 reflect a 13%
reduction in energy-related revenues, primarily associated with deepwater
activities in the Gulf of Mexico, which was offset by gains from the sale of
several older aircraft. Both periods reflect the normal seasonal slowdown in
helicopter flying activity in Alaska.
-9-
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 greater
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 61 Normal seasonal improvement
Gulf of Mexico 47 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 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 operations are unprofitable, and 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 deteriorate further.
Though considerably less volatile than our drilling and aviation operations, our
manufacturing operations, especially the equipment group, 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
remain profitable during the remainder of 2003.
-10-
LIQUIDITY AND CAPITAL RESOURCES
A comparison of key balance sheet figures and ratios as of March 31, 2003 and
December 31, 2002 is as follows (dollars in thousands):
March 31, December 31,
2003 2002
---------- ------------
Cash and cash equivalents $ 115,013 $ 178,756
Current assets $ 428,204 $ 469,902
Current liabilities $ 120,275 $ 115,975
Current ratio 3.56 4.05
Long-term debt $ 520,365 $ 512,844
Stockholders' equity $1,115,929 $1,131,777
Long-term debt/total capitalization .32 .31
Reflected in the comparison above are the effects in the first quarter of 2003
of net cash used in operations of $9.8 million, proceeds from borrowings of
$25.9 million, capital expenditures of $70.0 million and debt repayments of
$13.5 million.
Capital expenditures during the first quarter were primarily related to the
construction of the Bob Palmer (formerly Gorilla VIII), the Scooter Yeargain and
the continued upgrade of our existing offshore and land drilling fleet.
The Bob Palmer is an enhanced version of our Super Gorilla class jack-up,
designated a Super Gorilla XL, that 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. The rig 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
the Bob Palmer continues on schedule for delivery during the third quarter of
2003. The rig was recently relocated to the Company's Sabine Pass facility for
final outfitting. We are financing up to $187 million of the cost of the Bob
Palmer 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 in each January and July, with
principal repayments commencing January 15, 2004, and the Bob Palmer secures the
government guarantee. At March 31, 2003, we had drawn down about $174 million
under this facility, which bore interest of 1.5%.
The Scooter Yeargain is the first of as many as four of a new Tarzan class of
jack-up rig, designed specifically for deep drilling in water depths up to 250
feet on the outer continental shelf in the Gulf of Mexico. The Tarzan class 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 Scooter Yeargain is being 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 be around $400 million. We have received a commitment for Title XI
government-guaranteed financing for up to 87.5% of the cost of the first two
Tarzan rigs on terms and conditions similar to those in effect for the Bob
Palmer. We intend to pursue outside financing for Tarzans III and IV, if
necessary. However, there can be no assurance that such financing will be
obtainable.
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 2004
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 working capital will be adequate or outside financing will be
available.
-11-
Rowan estimates remaining 2003 capital expenditures will be between $150 million
and $160 million, including approximately $100-110 million towards the
construction of the Bob Palmer and the Tarzan rigs. We may also spend amounts to
acquire additional aircraft as market conditions justify and to upgrade existing
rigs and manufacturing facilities.
During the 2000-2002 period, Rowan contributed $28.6 million to our defined
benefit pension plans. Such contributions 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 comprehensive
loss resulting from minimum pension liability adjustments of $55.2 million at
March 31, 2003. We believe that our 2003 funding could exceed the average level
of the past three years.
Based upon current and anticipated near-term operating levels, we believe that
2003 operations, together with existing working capital and available financial
resources, will generate sufficient cash flow to sustain planned capital
expenditures and debt service and other requirements at least through the
remainder of 2003.
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 we
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 whereby all litigation
involving this matter was dropped and we received an additional $84.2 million.
In total, Rowan received $175 million in connection with the Gorilla V contract
dispute and such amount is shown, net of final legal costs and expenses, as
Other Income on the Consolidated Statement of Operations for the three months
ended March 31, 2002.
-12-
Critical Accounting Policies and Management Estimates. Rowan's significant
accounting policies are outlined in Note 1 to our financial statements included
in our 2002 Annual Report to Stockholders, which is incorporated by reference in
our Form 10-K for the year ended December 31, 2002. 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.
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
(loss) and net income (loss) per share by approximately $952,000 or $.01 per
share for the three months ended March 31, 2003 and by approximately $1,120,000
or $.01 per share for the three months ended March 31, 2002.
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations", addresses accounting and reporting for fixed asset
retirement costs and obligations. Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities",
addresses accounting and reporting for costs and obligations related to exit or
disposal activities initiated on or after January 1, 2003. Rowan's adoption of
Statement Nos. 143 and 146, effective January 1, 2003, did not materially impact
our financial position or results of operations.
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.
-13-
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. 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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on April 25, 2003, stockholders elected
the three nominees for Class III 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
93,617,175 shares of record, 85,253,105 were voted at the meeting by proxy. The
following numbers of votes were cast as to the Class III Director nominees:
Henry O. Boswell, 71,320,365 votes for and 13,932,740 votes withheld; Frederick
R. Lausen, 71,298,954 votes for and 13,954,151 votes withheld; and C. R. Palmer,
71,317,615 votes for and 13,935,490 votes withheld.
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 May 1, 2003
4.1 Specimen Common Stock certificate
99 Certifications pursuant to 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 2003:
March 21, 2003 - pertaining to the Company's Restated First
Amendment dated March 17, 2003 to the Amended and Restated Rights
Agreement dated January 24, 2002, between the Company and
Computershare Trust Co., Inc. as Rights Agent.
-14-
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 15, 2003 /s/ E. E. Thiele
----------------------------------
E. E. Thiele
Senior Vice President - Finance,
Administration and Treasurer
(Chief Financial Officer)
Date: May 15, 2003 /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, D. F. McNease, 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
quarterly 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 any 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: May 15, 2003 /s/ D. F. McNease
-------------------------------------
D. F. McNease
President 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
quarterly 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 any 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: May 15, 2003 /s/ E. E. THIELE
-------------------------------------
E. E. Thiele
Senior Vice President - Finance,
Administration and Treasurer
(Chief Financial Officer)
-17-
Exhibit Index
Exhibit
Number Description
- ------- -----------
3.1 Bylaws of the Company, as Amended, as of May 1, 2003
4.1 Specimen Common Stock Certificate
99 Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002