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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 JUNE 30, 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 July 31,
2003 was 93,851,386.
ROWAN COMPANIES, INC.
INDEX
Page No.
--------
PART I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheet --
June 30, 2003 and December 31, 2002 ........... 2
Consolidated Statement of Operations --
Three and Six Months Ended
June 30, 2003 and 2002 ........................ 4
Consolidated Statement of Cash Flows --
Six Months Ended June 30, 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 ............................. 15
Item 4. Controls and Procedures ....................... 15
PART II.Other Information:
Item 6. Exhibits and Reports on Form 8-K .............. 15
SIGNATURES ............................................ 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
June 30, December 31,
2003 2002
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 73,651 $ 178,756
Receivables - trade and other ...................... 115,281 109,320
Inventories - at cost:
Raw materials and supplies ...................... 142,901 122,846
Work-in-progress ................................ 37,081 31,348
Finished goods .................................. 8,461 8,766
Prepaid expenses ................................... 9,572 8,011
Deferred tax assets - net .......................... 44,461 10,855
----------- -----------
Total current assets ...................... 431,408 469,902
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - at cost:
Drilling equipment ................................. 1,944,239 1,922,341
Aircraft and related equipment ..................... 260,194 264,212
Manufacturing plant and equipment .................. 132,015 120,705
Construction in progress ........................... 286,038 199,352
Other property and equipment ....................... 159,625 155,815
----------- -----------
Total ..................................... 2,782,111 2,662,425
Less accumulated depreciation and amortization ..... 1,120,770 1,095,281
----------- -----------
Property, plant and equipment - net ..... 1,661,341 1,567,144
----------- -----------
OTHER ASSETS AND DEFERRED CHARGES ...................... 18,057 17,458
----------- -----------
TOTAL ..................................... $ 2,110,806 $ 2,054,504
=========== ===========
See Notes to Consolidated Financial Statements.
-2-
June 30, December 31,
2003 2002
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt ...................................... $ 47,633 $ 42,458
Accounts payable - trade .................................................. 27,774 30,000
Other current liabilities ................................................. 56,099 43,517
------------ ------------
Total current liabilities ........................................... 131,506 115,975
------------ ------------
LONG-TERM DEBT - less current maturities ...................................... 547,591 512,844
------------ ------------
OTHER LIABILITIES ............................................................. 130,954 127,848
------------ ------------
DEFERRED INCOME TAXES - net ................................................... 187,170 166,060
------------ ------------
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 95,578,657 shares at
June 30, 2003 and 95,340,597 shares at December 31, 2002 ............... 11,947 11,918
Additional paid-in capital ................................................ 653,185 647,600
Retained earnings ......................................................... 533,717 557,523
Cost of 1,734,440 treasury shares ......................................... (30,064) (30,064)
Accumulated other comprehensive income (loss) ............................. (55,200) (55,200)
------------ ------------
Total stockholders' equity ........................................ 1,113,585 1,131,777
------------ ------------
TOTAL ............................................................. $ 2,110,806 $ 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 For The Six Months
Ended June 30, Ended June 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited)
REVENUES:
Drilling services ..................................... $ 95,138 $ 79,343 $ 173,024 $ 156,967
Manufacturing sales and services ...................... 30,631 31,951 59,671 63,586
Aviation services ..................................... 32,331 37,204 56,760 65,750
------------ ------------ ------------ ------------
Total ......................................... 158,100 148,498 289,455 286,303
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Drilling services ..................................... 79,121 74,627 156,631 150,071
Manufacturing sales and services ...................... 28,693 30,498 55,319 60,044
Aviation services ..................................... 29,936 29,829 53,370 57,676
Depreciation and amortization ......................... 20,923 18,754 41,233 37,002
General and administrative ............................ 6,789 .6,422 13,294 12,817
------------ ------------ ------------ ------------
Total ......................................... 165,462 160,130 319,847 317,610
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS ............................. (7,362) (11,632) (30,392) (31,307)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Net proceeds from Gorilla V settlement ................ 157,125
Interest expense ...................................... (4,797) (5,243) (9,656) (10,224)
Less interest capitalized ............................. 1,355 .1,516 2,453 3,134
Interest income ....................................... 362 .1,184 884 2,322
Other - net ........................................... 259 283 379 385
------------ ------------ ------------ ------------
Other income (expense) - net .................. (2,821) (2,260) (5,940) 152,742
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ......................... (10,183) (13,892) (36,332) 121,435
Provision (credit) for income taxes ................... (3,559) (5,153) (12,526) 42,497
------------ ------------ ------------ ------------
NET INCOME (LOSS) ......................................... $ (6,624) $ (8,739) $ (23,806) $ 78,938
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE
OF COMMON STOCK (Note 6):
Basic ................................................. $ (.07) $ (.09) $ (.25) $ .84
============ ============ ============ ============
Diluted ............................................... $ (.07) $ (.09) $ (.25) $ .83
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
-4-
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
For The Six Months
Ended June 30,
--------------------------
2003 2002
---------- ----------
(Unaudited)
CASH PROVIDED BY (USED IN):
Operations:
Net income (loss) ........................................................ $ (23,806) $ 78,938
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation and amortization ......................................... 41,233 37,002
Deferred income taxes ................................................. (12,496) 25,590
Compensation expense .................................................. 3,456 3,824
Provision for pension and postretirement benefits ..................... 12,401 5,815
Gain on disposals of property, plant and equipment .................... (3,687) (2,070)
Changes in current assets and liabilities:
Receivables- trade and other .......................................... (5,961) 11,440
Inventories ........................................................... (25,483) (7,106)
Other current assets .................................................. (1,561) (3,372)
Current liabilities ................................................... 802 (72,136)
Net changes in other noncurrent assets and liabilities ................... (664) (400)
---------- ----------
Net cash provided by (used in) operations ................................... (15,766) 77,525
---------- ----------
Investing activities:
Property, plant and equipment additions .................................. (137,370) (123,364)
Proceeds from disposals of property, plant and equipment ................ 5,692 3,656
---------- ----------
Net cash used in investing activities ....................................... (131,678) (119,708)
---------- ----------
Financing activities:
Proceeds from borrowings ................................................ 61,151 62,609
Repayments of borrowings ................................................. (21,229) (21,229)
Payment of cash dividend .............................................. (23,511)
Payments to acquire treasury stock ....................................... (2,308)
Proceeds from stock option and convertible debenture plans ............... 2,417 2,098
---------- ----------
Net cash provided by financing activities ................................... 42,339 17,659
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... (105,105) (24,524)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 178,756 236,989
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 73,651 $ 212,465
========== ==========
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
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 June 30, 2003 and
December 31, 2002, and the results of its operations for the three and six
months ended June 30, 2003 and 2002 and its cash flows for the six months
ended June 30, 2003 and 2002.
3. Rowan's results of operations and cash flows for the six months ended June
30, 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
June 30, 2003 and 2002 and for the six month periods then ended (in
thousands).
Drilling Manufacturing Aviation Consolidated
-------------- -------------- -------------- --------------
2003
- --------------
Total assets .................................. $ 1,664,246 $ 278,648 $ 167,912 $ 2,110,806
Unamortized goodwill .......................... 1,493 10,863 -- 12,356
Revenues ...................................... 173,024 59,671 56,760 289,455
Operating profit (loss)(1) .................... (12,262) 297 (5,133) (17,098)
2002
- --------------
Total assets .................................. $ 1,612,921 $ 231,906 $ 163,735 $ 2,008,562
Unamortized goodwill .......................... 1,493 10,863 -- 12,356
Revenues ...................................... 156,967 63,586 65,750 286,303
Operating profit (loss)(1) .................... (18,730) (26) 266 (18,490)
- -----------------------------------------------------------------------
(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 six months ended June 30, 2003 and 2002, Rowan's
manufacturing division provided approximately $70 million and $57 million,
respectively, of products and services to its drilling division and Rowan's
aviation division provided approximately $816,000 and $938,000,
respectively, of flight services to its drilling division.
5. Rowan had no items of other comprehensive income during the six months ended
June 30, 2003 and 2002.
-6-
6. Rowan's computation of basic and diluted income (loss) per share is as
follows (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average shares of
common stock outstanding ..... 93,716 93,998 93,667 93,893
Dilutive securities:
Stock options ................ -- -- -- 731
Convertible debentures ....... -- -- -- 911
---------- ---------- ---------- ----------
Weighted average shares
for diluted calculation ...... 93,716 93,998 93,667 95,535
========== ========== ========== ==========
Net income (loss) for basic
and diluted calculation ...... $ (6,624) $ (8,739) $ (23,806) $ 78,938
========== ========== ========== ==========
Net income (loss) per share:
Basic ........................ $ (.07) $ (.09) $ (.25) $ .84
========== ========== ========== ==========
Diluted ...................... $ (.07) $ (.09) $ (.25) $ .83
========== ========== ========== ==========
Incremental shares related to convertible debentures and stock options are
excluded from the computations of diluted income (loss) per share for the
three and six months ended June 30, 2003 and the three months ended June 30,
2002 as their inclusion would have reduced the per share amount of loss for
such periods.
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 for the first six months of 2003 and
2002 of measuring stock-based compensation cost based upon estimated fair
values in accordance with Statement of Financial Accounting Standards No.
123:
Net Income Per Share
--------------------------
(Loss) Basic Diluted
---------- ---------- ----------
2003
- ----------
Net income (loss), as reported ........................................ $ (23,806) $ (.25) $ (.25)
Stock-based compensation, net of related tax effects:
As recorded under APB 25 ........................................ 2,264
Pro forma under SFAS 123 ........................................ (4,316)
----------
Pro forma net income (loss) ........................................... $ (25,858) $ (.28) $ (.28)
========== ========== ==========
2002
- ----------
Net income, as reported ............................................... $ 78,938 $ .84 $ .83
Stock-based compensation, net of related tax effects:
As recorded under APB 25 ........................................ 2,486
Pro forma under SFAS 123 ........................................ (4,574)
----------
Pro forma net income .................................................. $ 76,850 $ .82 $ .80
========== ========== ==========
-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 six months ended June 30, 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
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Rowan incurred a net loss of $23.8 million, or $.25 per diluted share, in the
first half of 2003 compared to net income of $78.9 million, or $.83 per share,
in the same period of 2002. The prior year 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 first half 2002 results would have been a net loss of
approximately $23 million, or $.25 per share.
A comparison of the revenues and operating profit (loss) from drilling,
manufacturing, aviation and consolidated operations for the first six months of
2003 and 2002, respectively, is reflected below (dollars in thousands):
Drilling Manufacturing Aviation Consolidated
--------------------- ---------------------- ---------------------- ---------------------
2003 2002 2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- --------- --------- ---------
Revenues $ 173,024 $ 156,967 $ 59,671 $ 63,586 $ 56,760 $ 65,750 $ 289,455 $ 286,303
Percent of Consolidated
Revenues 60% 55% 21% 22% 19% 23% 100% 100%
Operating Profit (Loss)(1) $ (12,262) $ (18,730) $ 297 $ (26) $ (5,133) $ 266 $ (17,098) $ (18,490)
- ----------
(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 improved by $1.4
million or 8% when comparing the first six months of 2003 and 2002. Drilling
revenues increased by $16.1 million or 10% as our offshore fleet of 22 jack-ups
and one semi-submersible was 85% utilized during the first half of 2003,
compared to 83% in the first six months of 2002, and achieved an 18% increase in
average day rates between periods. Rowan's fleet of 18 land rigs was 71%
utilized during the first half of 2003, compared to 63% in the first six months
of 2002, and experienced a 2% decrease in average day rates between periods.
Drilling expenses increased by $6.6 million between periods, primarily due to
higher pension and insurance costs and the addition to our offshore fleet, in
February 2002, of Rowan Gorilla VII.
Rowan's manufacturing operating results in the first half of 2003, though
marginally improved over the prior year, reflect the effects of generally weak
market conditions prevailing in the division's equipment and steel groups, which
were largely offset by the contribution from the drilling products group during
the period. Manufacturing operations exclude approximately $70 million of
products and services provided to the drilling division during the first half of
2003, most of which was attributable to construction progress on the Bob Palmer
(formerly Gorilla VIII) and the Scooter Yeargain, compared to about $57 million
in the same period of 2002, primarily due to the Bob Palmer. The division's
external backlog was approximately $17 million at June 30, 2003.
-9-
Rowan's aviation operating results in the first half of 2003 reflect reduced
flying activity, particularly in support of deepwater drilling operations in the
Gulf of Mexico. Both periods reflect the normal seasonal slowdown in helicopter
flying activity in Alaska during the first four months of the year.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Rowan incurred a net loss of $6.6 million in the second quarter of 2003 compared
to $8.7 million in the same period of 2002. The improvement in operating
performance was largely due to an increase in offshore average day rates in the
Gulf of Mexico between periods and the resumption of drilling operations in the
North Sea and offshore eastern Canada.
A comparison of the revenues and operating profit (loss) from drilling,
manufacturing, aviation and consolidated operations for the second 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 $ 95,138 $ 79,343 $ 30,631 $ 31,951 $ 32,331 $ 37,204 $ 158,100 $ 148,498
Percent of Consolidated
Revenues 60% 53% 19% 22% 21% 25% 100% 100%
Operating Profit (Loss)(1) $ 1,507 $ (8,298) $ (119) $ (360) $ (1,961) $ 3,448 $ (573) $ (5,210)
- ----------
(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 improved by $4.6
million or 89% when comparing the second quarters of 2003 and 2002. Drilling
revenues increased by $15.8 million or 20% as our offshore fleet of 22 jack-ups
and one semi-submersible was 88% utilized during the second quarter of 2003,
compared to 87% in the second quarter of 2002, and achieved a 29% increase in
average day rates between periods. Rowan's fleet of 18 land rigs was 76%
utilized during the second quarter of 2003, compared to 68% in the second
quarter of 2002, and achieved a 4% increase in average day rates between
periods. Drilling expenses increased by $4.5 million between periods, primarily
due to higher pension and insurance costs.
Rowan's manufacturing operating results in the second quarter of 2003 reflect
the effects of generally weak market conditions prevailing in the division's
equipment and steel groups, which were largely offset by the contribution from
the drilling products group during the period. Manufacturing operations exclude
approximately $26 million of products and services provided to the drilling
division during the second quarter of 2003, most of which was attributable to
construction progress on the Bob Palmer and the Scooter Yeargain, compared to
about $33 million in the same period of 2002, primarily due to the Bob Palmer.
The division's external backlog was approximately $17 million at June 30, 2003.
Rowan's aviation operating results in the second quarter of 2003 reflect reduced
flying activity, particularly in support of deepwater drilling operations in the
Gulf of Mexico and in connection with forest fire control activities.
-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
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 58 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 the same 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 these 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 existing 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, 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, and a lack
of new rig construction. Rowan's external manufacturing backlog remains
relatively constant at a depressed level. As a result, we cannot accurately
predict whether or not our manufacturing operations will be profitable during
the remainder of 2003.
-11-
LIQUIDITY AND CAPITAL RESOURCES
A comparison of key balance sheet figures and ratios as of June 30, 2003 and
December 31, 2002 is as follows (dollars in thousands):
June 30, December 31,
2003 2002
------------ ------------
Cash and cash equivalents $ 73,651 $ 178,756
Current assets $ 431,408 $ 469,902
Current liabilities $ 131,506 $ 115,975
Current ratio 3.28 4.05
Long-term debt $ 547,591 $ 512,844
Stockholders' equity $ 1,113,585 $ 1,131,777
Long-term debt/total capitalization .33 .31
Reflected in the comparison above are the effects in the first six months of
2003 of capital expenditures of $137.4 million, proceeds from borrowings of
$61.2 million, debt repayments of $21.2 million and net cash used in operations
of $15.8 million.
Capital expenditures during the first half of 2003 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 fleets.
The Bob Palmer is an enhanced version of our Super Gorilla class jack-up,
designated a Super Gorilla XL, that will be outfitted with 713 feet of leg, 139
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 Bob Palmer was
recently relocated to the Company's Sabine Pass facility for final outfitting.
Delivery of the rig is on schedule for the third quarter. 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 on
January 15, 2004, and the Bob Palmer secures the government guarantee. At June
30, 2003, we had borrowed about $186 million under this facility, which bore
interest at an annual rate of 1.45%.
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 are financing up to $181 million of the
cost of the first two Tarzan rigs through 15-year bank loans guaranteed by MARAD
under its Title XI Program. The notes require semiannual interest payments in
each May and November, with principal repayments commencing on November 10,
2004, and the rigs secure the government guarantees. At June 30, 2003, we had
borrowed about $23 million under the Scooter Yeargain facility, which bore
interest at an annual rate of 1.35%. 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.
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We have signed a non-binding letter of intent 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.
Rowan estimates remaining 2003 capital expenditures will be between $100 million
and $110 million, including approximately $65-75 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
June 30, 2003. We currently estimate that our 2003 pension funding will total
approximately $21 million, most of which will occur during the third quarter. We
may be required to make similar or greater contributions in each of 2004, 2005
and 2006.
On June 30, 2003, Rowan completed the refinancing of our $162.2 million of
outstanding floating-rate Gorilla VII debt through the issuance of a 2.8%
fixed-rate note maturing in October 2013. The floating-rate debt was issued
under MARAD's Title XI program to finance the construction of Rowan Gorilla VII,
which was completed in December 2001. The fixed-rate note is U.S.
Government-guaranteed under the Title XI program, and Gorilla VII secures the
government guarantee.
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 six months
ended June 30, 2002.
-13-
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 (increased) reported amounts of
net income (loss) and net income (loss) per share by approximately $2,052,000 or
$.03 per share for the six months ended June 30, 2003 and by approximately
$2,088,000 or $.03 per share for the six months ended June 30, 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 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.
-14-
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
The Company carried out an evaluation, under the supervision and with the
participation of its 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, 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 control over
financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following is a list of Exhibits filed with this Form 10-Q:
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 second quarter
of fiscal year 2003:
April 17, 2003 - pertaining to the Company's press release announcing
its results for the first quarter of 2003.
-15-
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: August 14, 2003 /s/ E. E. THIELE
--------------------------------
E. E. Thiele
Senior Vice President- Finance,
Administration and Treasurer
(Chief Financial Officer)
Date: August 14, 2003 /s/ W. H. WELLS
--------------------------------
W. H. Wells
Controller
(Chief Accounting Officer)
-16-
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- ---------------------------------------------------------------
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)