Attached files
file | filename |
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EX-31.2 - CFO SECTION 302 CERT - ROWAN COMPANIES PLC | exhibit31_2.htm |
EX-32.1 - CEO SECTION 906 CERT - ROWAN COMPANIES PLC | exhibit32_1.htm |
EX-31.1 - CEO SECTION 302 CERT - ROWAN COMPANIES PLC | exhibit31_1.htm |
EX-32.2 - CFO SECTION 906 CERT - ROWAN COMPANIES PLC | exhibit32_2.htm |
EXCEL - IDEA: XBRL DOCUMENT - ROWAN COMPANIES PLC | Financial_Report.xls |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
R QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
OR
£ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE
TRANSITION PERIOD FROM_____TO_____
1-5491
Commission
File Number
ROWAN
COMPANIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
75-0759420
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
2800 Post Oak Boulevard, Suite
5450 Houston, Texas
|
77056
|
(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 R No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes R No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. Large accelerated filer R Accelerated
filer £ Non-accelerated
filer £ Smaller
reporting company £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No
R
The
number of shares of common stock, $0.125 par value, outstanding at October 31,
2009, was 113,750,946.
ROWAN
COMPANIES, INC.
|
Page
|
|
1
|
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3
|
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4
|
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5
|
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14
|
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27
|
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28
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28
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28
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28
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28
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29
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30
|
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
(In
thousands, except share amounts)
(Unaudited)
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 681,107 | $ | 222,428 | ||||
Receivables
- trade and other
|
361,167 | 484,962 | ||||||
Inventories
- at cost:
|
||||||||
Raw
materials and supplies
|
318,244 | 337,503 | ||||||
Work-in-progress
|
161,826 | 213,177 | ||||||
Finished
goods
|
715 | 749 | ||||||
Prepaid
expenses and other current assets
|
84,195 | 59,466 | ||||||
Deferred
tax assets - net
|
43,647 | 50,902 | ||||||
Total
current assets
|
1,650,901 | 1,369,187 | ||||||
PROPERTY,
PLANT AND EQUIPMENT - at cost:
|
||||||||
Drilling
equipment
|
3,674,265 | 3,503,590 | ||||||
Manufacturing
plant and equipment
|
250,107 | 249,725 | ||||||
Construction
in progress
|
653,125 | 425,182 | ||||||
Other
property and equipment
|
140,349 | 126,915 | ||||||
Property,
plant and equipment - gross
|
4,717,846 | 4,305,412 | ||||||
Less
accumulated depreciation and amortization
|
1,277,839 | 1,157,884 | ||||||
Property, plant and
equipment - net
|
3,440,007 | 3,147,528 | ||||||
Other
assets
|
91,674 | 32,177 | ||||||
TOTAL
ASSETS
|
$ | 5,182,582 | $ | 4,548,892 | ||||
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
|
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (continued)
(In
thousands, except share amounts)
(Unaudited)
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Current
maturities of long-term debt
|
$ | 64,922 | $ | 64,922 | ||||
Accounts
payable - trade
|
118,275 | 235,048 | ||||||
Deferred
revenues
|
156,753 | 174,086 | ||||||
Billings
in excess of costs and estimated profits on uncompleted
contracts
|
40,684 | 57,119 | ||||||
Accrued
compensation and related employee costs
|
60,613 | 108,060 | ||||||
Accrued
income taxes
|
1,479 | 58,317 | ||||||
Other
current liabilities
|
49,377 | 47,090 | ||||||
Total
current liabilities
|
492,103 | 744,642 | ||||||
Long-term
debt - less current maturities
|
801,162 | 355,560 | ||||||
Other
liabilities
|
427,115 | 362,026 | ||||||
Deferred
income taxes - net
|
490,135 | 426,848 | ||||||
Commitments
and contingent liabilities (Notes 8 and 9)
|
- | - | ||||||
STOCKHOLDERS'
EQUITY:
|
||||||||
Preferred
stock, $1.00 par value, authorized 5,000,000 shares, issuable in
series:
|
||||||||
Series
C Preferred Stock, authorized 9,606 shares, none
outstanding
|
- | - | ||||||
Series
A Junior Preferred Stock, authorized 1,500,000 shares, none
issued
|
- | - | ||||||
Common
stock, $0.125 par value, authorized 150,000,000 shares; issued 113,860,569
shares at September 30, 2009, and 113,115,830 shares at December 31,
2008
|
14,233 | 14,141 | ||||||
Additional
paid-in capital
|
1,069,106 | 1,063,202 | ||||||
Retained
earnings
|
2,108,697 | 1,802,022 | ||||||
Cost
of 109,623 and 79,948 treasury shares, respectively
|
(2,953 | ) | (2,533 | ) | ||||
Accumulated
other comprehensive loss
|
(217,016 | ) | (217,016 | ) | ||||
Total
stockholders' equity
|
2,972,067 | 2,659,816 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 5,182,582 | $ | 4,548,892 | ||||
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
|
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
(In
thousands, except per share amounts)
(Unaudited)
For
The Three Months
|
For
The Nine Months
|
|||||||||||||||
Ended
September 30,
|
Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUES:
|
||||||||||||||||
Drilling
services
|
$ | 258,394 | $ | 357,143 | $ | 959,571 | $ | 1,064,944 | ||||||||
Manufacturing
sales and services
|
135,027 | 169,915 | 410,818 | 534,745 | ||||||||||||
Total
revenues
|
393,421 | 527,058 | 1,370,389 | 1,599,689 | ||||||||||||
COSTS
AND EXPENSES:
|
||||||||||||||||
Drilling
services (excluding items below)
|
121,238 | 163,330 | 403,459 | 483,107 | ||||||||||||
Manufacturing
sales and services (excluding items below)
|
116,949 | 149,174 | 355,145 | 454,755 | ||||||||||||
Depreciation
and amortization
|
43,747 | 36,230 | 126,855 | 102,782 | ||||||||||||
Selling,
general and administrative
|
24,094 | 27,595 | 73,390 | 85,767 | ||||||||||||
Loss
(gain) on disposals of property and equipment
|
305 | (21,447 | ) | (4,336 | ) | (28,329 | ) | |||||||||
Total
costs and expenses
|
306,333 | 354,882 | 954,513 | 1,098,082 | ||||||||||||
INCOME
FROM OPERATIONS
|
87,088 | 172,176 | 415,876 | 501,607 | ||||||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
expense
|
(10,810 | ) | (4,456 | ) | (16,410 | ) | (14,351 | ) | ||||||||
Less
interest capitalized
|
7,348 | 4,456 | 12,455 | 13,624 | ||||||||||||
Interest
income
|
441 | 1,081 | 973 | 5,445 | ||||||||||||
Other
- net
|
2,303 | (1,924 | ) | 6,139 | (680 | ) | ||||||||||
Total
other income (expense) - net
|
(718 | ) | (843 | ) | 3,157 | 4,038 | ||||||||||
INCOME
BEFORE INCOME TAXES
|
86,370 | 171,333 | 419,033 | 505,645 | ||||||||||||
Provision
for income taxes
|
7,978 | 57,219 | 112,358 | 172,298 | ||||||||||||
NET
INCOME
|
$ | 78,392 | $ | 114,114 | $ | 306,675 | $ | 333,347 | ||||||||
PER
SHARE AMOUNTS:
|
||||||||||||||||
Net
income - basic
|
$ | .69 | $ | 1.01 | $ | 2.70 | $ | 2.96 | ||||||||
Net
income - diluted
|
$ | .69 | $ | 1.00 | $ | 2.70 | $ | 2.94 | ||||||||
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
|
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
(In
thousands)
(Unaudited)
For
the Nine Months
|
||||||||
Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
PROVIDED BY (USED IN):
|
||||||||
Operations:
|
||||||||
Net
income
|
$ | 306,675 | $ | 333,347 | ||||
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||
Depreciation
and amortization
|
126,855 | 102,782 | ||||||
Deferred
income taxes
|
70,542 | 38,004 | ||||||
Provision
for pension and postretirement benefits
|
32,148 | 24,321 | ||||||
Stock-based
compensation expense
|
9,571 | 10,330 | ||||||
Postretirement
benefit claims paid
|
(2,689 | ) | (2,084 | ) | ||||
Gain
on disposals of property, plant and equipment
|
(4,336 | ) | (28,329 | ) | ||||
Estimated
net benefits from income tax claims
|
(25,057 | ) | - | |||||
Contributions
to pension plans
|
(34,487 | ) | (23,576 | ) | ||||
Changes
in current assets and liabilities:
|
||||||||
Receivables
- trade and other
|
129,815 | 61,062 | ||||||
Inventories
|
65,578 | (143,848 | ) | |||||
Prepaid
expenses and other current assets
|
(24,729 | ) | (4,503 | ) | ||||
Accounts
payable
|
(130,778 | ) | 72,091 | |||||
Accrued
income taxes
|
(56,838 | ) | (18,369 | ) | ||||
Deferred
revenues
|
(17,333 | ) | 66,625 | |||||
Billings
in excess of costs and estimated profits on uncompleted
contracts
|
(16,435 | ) | (59,701 | ) | ||||
Other
current liabilities
|
(11,348 | ) | 8,988 | |||||
Net
changes in other noncurrent assets and liabilities
|
(8,191 | ) | (3,556 | ) | ||||
Net
cash provided by operations
|
408,963 | 433,584 | ||||||
Investing
activities:
|
||||||||
Capital
expenditures
|
(393,223 | ) | (618,541 | ) | ||||
Proceeds
from disposals of property, plant and equipment
|
5,689 | 53,455 | ||||||
Change
in restricted cash balance
|
- | 50,000 | ||||||
Net
cash used in investing activities
|
(387,534 | ) | (515,086 | ) | ||||
Financing
activities:
|
||||||||
Proceeds
from borrowings, net of issue costs
|
491,729 | 80,000 | ||||||
Repayments
of borrowings
|
(51,168 | ) | (131,168 | ) | ||||
Payment
of cash dividends
|
- | (33,713 | ) | |||||
Excess
tax benefits from stock-based compensation
|
(3,562 | ) | 1,999 | |||||
Proceeds
from stock option and convertible debenture plans and
other
|
251 | 32,646 | ||||||
Net
cash provided by (used in) financing activities
|
437,250 | (50,236 | ) | |||||
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
458,679 | (131,738 | ) | |||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
222,428 | 284,458 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 681,107 | $ | 152,720 | ||||
See
Notes to Unaudited Condensed Consolidated Financial
Statements.
|
4
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
condensed consolidated financial statements of Rowan Companies, Inc. (“Rowan” or
the “Company”) 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. Rowan believes
that the disclosures included herein are adequate, but suggests that these
condensed consolidated financial statements be read in conjunction with the
audited consolidated financial statements and related notes included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
Rowan
believes the accompanying unaudited condensed consolidated financial statements
contain all adjustments, which are of a normal recurring nature unless otherwise
noted, necessary for a fair statement of the results for the interim periods
presented. Rowan’s results of operations and cash flows for the
interim periods are not necessarily indicative of results to be expected for the
full year.
Recently
Adopted Accounting Standards
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards
Codification and Hierarchy of
Generally Accepted Accounting Principles, which establishes the
Accounting Standards Codification (“ASC”) as the authoritative source of U.S.
GAAP to be applied to nongovernmental entities. On the effective
date, the ASC superseded all then-existing non-SEC accounting and reporting
standards, with certain limited exceptions. Concurrently, all
nongrandfathered, non-SEC accounting literature not included in the ASC was
deemed nonauthoritative. The ASC is a topically based model organized
by topic number. In the future, ASC topics will by updated by
Accounting Standards Updates (“ASUs”), which will replace guidance previously
issued as FASB Statements, Interpretations, Staff Positions and other non-SEC
GAAP. Rowan adopted the provisions of SFAS No. 168 (ASC 105 under the
codification) during the third quarter of 2009. Adoption had no
material impact on the Company’s financial statements.
In May
2009, the FASB issued SFAS No. 165, Subsequent
Events. SFAS No. 165 (ASC 855) establishes general standards
of accounting and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued, and is
effective for interim or annual periods ending after June 15,
2009. Rowan adopted the provisions of ASC 855 during the second
quarter of 2009. Adoption had no material impact on the Company’s
financial statements. (See Note 13.)
In April
2009, the FASB issued FASB Staff Position (“FSP”) No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair
Value of Financial Instruments (ASC 820-10-50), which expands the fair
value disclosures required for financial instruments to interim periods for
publicly traded entities. ASC 820-10-50 is effective for interim and
annual periods ending after June 15, 2009. Rowan adopted the
provisions of ASC 820-10-50 during the second quarter of
2009. Adoption had no material impact on the Company’s financial
statements. (See Note 12.)
Note
2 – Segment Information
Rowan has
three principal operating segments – Drilling Services, Drilling Products and
Systems, and Mining, Forestry and Steel Products. The Drilling
Services segment provides onshore and offshore oil and gas contract drilling
services on a daily-rate basis. The Drilling Products and Systems
segment manufactures equipment and parts for the drilling industry featuring
jack-up rigs, rig kits and related components and parts, mud pumps, drawworks,
top drives, rotary tables, other rig equipment, variable-speed motors, drives
and other electrical components. The Mining, Forestry and Steel
Products segment manufactures large-wheeled mining and timber equipment and
related parts, and carbon and alloy steel and steel plate. The
Drilling Products and Systems and Mining, Forestry and Steel Products segments
operate under the Company’s wholly owned subsidiary, LeTourneau Technologies,
Inc (“LTI”).
5
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following table presents certain financial information by operating segment for
the three and nine months ended September 30, 2009 and 2008 (in
millions):
Three
Months
|
Nine
Months
|
|||||||||||||||
Ended
September 30,
|
Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues:
|
||||||||||||||||
Drilling
Services
|
$ | 258.4 | $ | 357.1 | $ | 959.6 | $ | 1,064.9 | ||||||||
Manufacturing:
|
||||||||||||||||
Drilling
Products and Systems
|
177.6 | 189.4 | 464.0 | 618.4 | ||||||||||||
Mining,
Forestry and Steel Products
|
41.5 | 59.0 | 139.5 | 174.5 | ||||||||||||
Eliminations
|
(84.1 | ) | (78.4 | ) | (192.7 | ) | (258.1 | ) | ||||||||
Total
Manufacturing
|
135.0 | 170.0 | 410.8 | 534.8 | ||||||||||||
Total
revenues from external customers
|
$ | 393.4 | $ | 527.1 | $ | 1,370.4 | $ | 1,599.7 | ||||||||
Income
from operations:
|
||||||||||||||||
Drilling
Services
|
$ | 81.1 | $ | 166.9 | $ | 396.1 | $ | 468.5 | ||||||||
Manufacturing:
|
||||||||||||||||
Drilling
Products and Systems
|
29.5 | 12.8 | 59.7 | 66.5 | ||||||||||||
Mining,
Forestry and Steel Products
|
4.9 | 7.3 | 18.9 | 16.1 | ||||||||||||
Eliminations
|
(28.4 | ) | (14.8 | ) | (58.8 | ) | (49.5 | ) | ||||||||
Total
Manufacturing
|
6.0 | 5.3 | 19.8 | 33.1 | ||||||||||||
Total
income from operations
|
$ | 87.1 | $ | 172.2 | $ | 415.9 | $ | 501.6 |
Note
3 – Earnings Per Share
A
reconciliation of basic and diluted income per share for the three and nine
months ended September 30, 2009 and 2008 follows (in thousands, except per share
amounts):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Average
common shares outstanding
|
113,859 | 113,055 | 113,530 | 112,482 | ||||||||||||
Dilutive
securities:
|
||||||||||||||||
Employee
and director stock options
|
74 | 727 | 54 | 847 | ||||||||||||
Convertible
debentures
|
- | 8 | - | 130 | ||||||||||||
Average
shares for diluted calculations
|
113,933 | 113,790 | 113,584 | 113,459 | ||||||||||||
Net
income
|
$ | 78,392 | $ | 114,114 | $ | 306,675 | $ | 333,347 | ||||||||
Net
income per share:
|
||||||||||||||||
Basic
|
$ | .69 | $ | 1.01 | $ | 2.70 | $ | 2.96 | ||||||||
Diluted
|
$ | .69 | $ | 1.00 | $ | 2.70 | $ | 2.94 |
6
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following table sets forth securities excluded from the diluted calculations
because they were antidilutive for the periods indicated. Options and
other potentially dilutive securities are antidilutive when the average stock
market price during the period is less than the exercise price. Such
securities could potentially dilute earnings per share in the future (in
thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Employee
and director stock options
|
1,473 | 63 | 1,792 | 63 | ||||||||||||
Stock
appreciation rights
|
88 | - | 2 | - | ||||||||||||
Convertible
debentures
|
35 | - | 35 | - | ||||||||||||
Total
potentially dilutive securities
|
1,596 | 63 | 1,829 | 63 |
Note
4 – Pension and Other Postretirement Benefits
Rowan
sponsors defined benefit pension plans covering substantially all of its
employees, and provides health care and life insurance benefits upon retirement
for certain employees.
Net
periodic pension cost recognized for the three and nine months ended September
30, 2009 and 2008 included the following components (in thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Service
cost
|
$ | 3,126 | $ | 4,033 | $ | 12,031 | $ | 10,774 | ||||||||
Interest
cost
|
7,562 | 8,356 | 24,280 | 23,656 | ||||||||||||
Expected
return on plan assets
|
(7,297 | ) | (7,681 | ) | (21,684 | ) | (22,243 | ) | ||||||||
Recognized
actuarial loss
|
5,531 | 2,698 | 13,587 | 6,664 | ||||||||||||
Amortization
of prior service cost
|
(2,444 | ) | (64 | ) | (2,569 | ) | (191 | ) | ||||||||
Curtailment
loss
|
71 | - | 71 | - | ||||||||||||
Total
net pension cost
|
$ | 6,549 | $ | 7,342 | $ | 25,716 | $ | 18,660 |
Other
postretirement benefit cost recognized for the three and nine months ended
September 30, 2009 and 2008 included the following components (in
thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Service
cost
|
$ | 637 | $ | 509 | $ | 1,891 | $ | 1,018 | ||||||||
Interest
cost
|
1,258 | 1,105 | 3,732 | 2,209 | ||||||||||||
Recognized
actuarial loss
|
157 | 68 | 467 | 138 | ||||||||||||
Amortization
of transition obligation
|
167 | 164 | 495 | 329 | ||||||||||||
Amortization
of prior service cost
|
(52 | ) | (50 | ) | (153 | ) | (101 | ) | ||||||||
Total
other postretirement benefit cost
|
$ | 2,167 | $ | 1,796 | $ | 6,432 | $ | 3,593 |
7
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Effective
July 1, 2009, the Company amended the benefit formula for its largest pension
plan for active employees who were earning benefits in the plan prior to January
1, 2008. The effect of the change through September 30, 2009, was to
reduce third quarter pension expense by approximately $3.6 million, or $0.02 per
share net of tax. Pension expense for the fourth quarter is expected
to be reduced by a similar amount.
During
the nine months ended September 30, 2009, Rowan contributed $37.2 million to its
pension and other postretirement benefit plans and expects to make additional
contributions to such plans totaling approximately $2.7 million during the
remainder of 2009.
Note
5 – Cash and Cash Equivalents
Certain
of Rowan’s debt securities are government-guaranteed through the Title XI
program of U.S. Department of Transportation’s Maritime Administration
(“MARAD”). At the Company’s request, MARAD waived certain windstorm
insurance coverage requirements under the loan agreements, for which the Company
agreed to maintain a minimum unrestricted cash balance, which is currently $25
million. Rowan remains subject to restrictions on the use of certain
insurance proceeds should the Company experience future windstorm
losses. Each of these security provisions will be released by MARAD
should Rowan be able to obtain windstorm coverage that satisfies the original
terms of its debt agreements.
Note
6 – Construction Contracts in Process
The
following table summarizes the status of the Drilling Products and Systems
segment’s long-term construction contracts in process. Payments,
revenues and costs are cumulative from inception of the contract through the
date indicated. Payments include those received for contracts in
progress or not yet begun and completed contracts with outstanding collections
(in millions):
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Total
contract value of long-term contracts in process or not yet
begun
|
$ | 239.4 | $ | 290.7 | ||||
Payments
received
|
147.8 | 168.6 | ||||||
Revenues
recognized
|
108.9 | 119.7 | ||||||
Costs
recognized
|
67.9 | 74.5 | ||||||
Payments
received in excess of revenues recognized
|
38.9 | 48.9 | ||||||
Billings
in excess of costs and estimated profits on
|
||||||||
uncompleted
contracts, included in other current liabilities
|
$ | 40.7 | $ | 57.1 | ||||
Costs
and estimated profits in excess of billings on
|
||||||||
uncompleted
contracts, included in other current assets
|
$ | 1.8 | $ | 8.2 |
During
the three months ended September 30, 2009, Rowan recognized approximately $22.8
million of manufacturing revenues and $14.7 million of manufacturing costs
related to long-term construction contracts on the percentage-of-completion
basis, as compared to $37.0 million of revenues and $25.4 million of costs for
the comparable period of 2008.
During
the nine months ended September 30, 2009, Rowan recognized approximately $73.4
million of manufacturing revenues and $50.2 million of manufacturing costs on
the percentage-of-completion basis, as compared to $117.5 million of revenues
and $78.3 million of costs for the comparable period of 2008.
8
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
7 – Long-Term Debt
On July
21, 2009, Rowan issued $500 million aggregate principal amount of 7.875% Senior
Notes due 2019 (the “Senior Notes”), in an SEC registered offering at a price to
the public of 99.341% of the principal amount. After deduction for
underwriters’ discount and offering expenses, the Company received net proceeds
of approximately $492 million from the sale of these notes, and the Company
expects to use those net proceeds for general corporate purposes. The
Senior Notes will mature on August 1, 2019. Interest on the Senior
Notes is payable semi-annually on February 1 and August 1 of each year,
beginning February 1, 2010, to the holders of record on the immediately
preceding January 15 or July 15, respectively.
The
Senior Notes are general unsecured, senior obligations. Accordingly, they
rank:
• senior
in right of payment to all of the Company’s subordinated indebtedness, if
any;
• pari passu in right of
payment with any of the Company’s existing and future unsecured indebtedness
that is not by its terms subordinated to the Senior Notes, including any
indebtedness under the Company’s senior revolving credit facility (other than
letter of credit reimbursement obligations that are secured by cash
deposits);
•
effectively junior to the Company’s existing and future secured indebtedness
(including indebtedness under its secured notes issued pursuant to the MARAD
Title XI program to finance several offshore drilling rigs), in each case, to
the extent of the value of the Company’s assets constituting collateral securing
that indebtedness; and
•
effectively junior to all existing and future indebtedness and other liabilities
of the Company’s subsidiaries (other than indebtedness and liabilities owed to
the Company).
The
Company may, at its option, redeem any or all of the Senior Notes at any time
for an amount equal to 100% of the principal amount to be redeemed plus a
make-whole premium and accrued and unpaid interest to the redemption
date. The Company may purchase Senior Notes in the open market, or
otherwise, at any time without restriction under the indenture. The
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Senior Notes.
The
indenture governing the Senior Notes contains covenants that, among other
things, limit the ability of the Company to (a) create liens that secure debt,
(b) engage in sale and leaseback transactions and (c) merge or consolidate with
another company.
On August
4, 2009, Rowan fixed the interest rate for the remainder of the term on $65.7
million of MARAD debt collateralized by the offshore rig, Bob Keller, at an annual rate
of 3.525%. Prior to that time, the interest rate floated based on a
short-term commercial paper rate plus 0.15%.
9
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
8 – Commitments
The
following table presents the status of all of the Company’s rigs under
construction as of September 30, 2009, and reflects the Company’s decision in
October 2009 to resume construction of the EXL #4 (see Note
13). Amounts include capitalized interest (in millions):
Total
estimated project costs
|
Total
costs incurred through September 30, 2009
|
Projected
costs for the remainder of 2009 and 2010
|
Projected
costs in 2011 and 2112
|
|||||||||||||
Ralph
Coffman (240C)
|
$ | 245 | $ | 212 | $ | 33 | $ | - | ||||||||
Joe
Douglas (240C)
|
257 | 69 | 116 | 72 | ||||||||||||
EXL
#1
|
190 | 140 | 50 | - | ||||||||||||
EXL
#2
|
191 | 117 | 74 | - | ||||||||||||
EXL
#3
|
192 | 85 | 107 | - | ||||||||||||
EXL
#4
|
192 | 30 | 56 | 106 | ||||||||||||
Total
rigs under construction
|
$ | 1,267 | $ | 653 | $ | 436 | $ | 178 |
Rowan
periodically employs letters of credit or other bank-issued guarantees in the
normal course of its businesses, and had unused letters of credit of
approximately $42.4 million at September 30, 2009.
Note
9 – Legal Proceedings
During
2005, Rowan lost four offshore rigs, including the Rowan-Halifax, and incurred
significant damage on a fifth as a result of Hurricanes Katrina and
Rita. The Company had leased the Rowan-Halifax under a charter
agreement that commenced in 1984 and was scheduled to expire in March
2008. The rig was insured for $43.4 million, a value that Rowan
believes to be more than sufficient to satisfy its obligations under the charter
agreement, and by a margin sufficient to cover the $6.3 million carrying value
of Rowan equipment installed on the rig. However, the parties holding
interests in the rig under the charter claimed that the rig should have been
insured for its fair market value and sought recovery from Rowan for
compensation above the insured value. Thus, Rowan assumed no
insurance proceeds related to the Rowan-Halifax and recorded a
charge during 2005 for the full carrying value of its equipment. On
November 3, 2005, the Company filed a declaratory judgment action styled Rowan Companies, Inc. vs. Textron
Financial Corporation and Wilmington Trust Company as Owner Trustee of the
Rowan-Halifax 116-C Jack-Up Rig in the 215th Judicial District Court of
Harris County, Texas. The owner interests filed a counterclaim for a
variety of relief, claiming a right to payment under the charter based on a
post-casualty rig valuation of approximately $83 million. The
insurance proceeds were placed in escrow. The district court
ultimately granted judgment against Rowan for the difference between (a) what
Rowan had already paid to the Owner Trustee out of the escrowed insurance
proceeds and (b) that rig valuation. On March 31, 2009, the Court of
Appeals for the 14th
District of Texas reversed this judgment, holding that the Company’s
interpretation of the charter was substantially correct, but directing Rowan to
pay additional amounts due under the charter. The Company has since
made this payment out of the escrowed insurance proceeds. In
addition, the Court of Appeals remanded the case for further proceedings in the
district court to resolve additional issues and to determine the parties’
respective rights to the balance of the escrowed insurance proceeds, which is
currently $21.4 million. The owner interests filed a motion for
rehearing of the Court of Appeals’ decision. On October 8, 2009, the Court of
Appeals denied the motion, but issued a substitute opinion to clarify the scope
of the remand. The Court of Appeals again held that the trial court
is to resolve issues concerning the proper disposition of excess insurance
proceeds. The Court of Appeals further held that the owner interests’
claim that Rowan breached the charter agreement by failing to maintain adequate
insurance remains to be decided by the trial court. The owner
interests have filed another motion for rehearing, which motion remains
pending. The Company believes that no further payment is owed to the
opposing parties under the charter and intends to pursue that position
vigorously in all subsequent court proceedings.
10
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During
2004, Rowan learned that the Environmental and Natural Resources Division,
Environmental Crimes Section of the U.S. Department of Justice (“DOJ”) had
begun conducting a criminal investigation of environmental matters involving
several of the Company’s offshore drilling rigs, including a rig known as
the Rowan-Midland,
which at various times operated in the Gulf of Mexico. In
2007, the Company entered into a plea agreement with the DOJ, as amended, under
which the Company paid fines and made community service payments totaling
$9 million and agreed to be subject to unsupervised probation for a period
of three years. During this period the Company must ensure that it
commits no further criminal violations of federal, state, or local laws or
regulations and must also continue to implement its comprehensive Environmental
Management System Plan. Subsequent to the conduct at issue, the
Company sold the
Rowan-Midland to a third party. Concurrent with the plea
agreement, the Environmental Protection Agency approved a compliance agreement
with Rowan which, among other things, contains a certification that the
conditions giving rise to the violations to which the Company entered guilty
pleas have been corrected. The Company believes that if it fully
complies with the terms of the compliance agreement, it will not be suspended or
debarred from entering into or participating in contracts with the U.S.
Government or any of its agencies.
On
January 3, 2008, a civil lawsuit styled State of Louisiana, ex. rel. Charles
C. Foti, Jr., Attorney General vs. Rowan Companies, Inc. was filed in U.S
District Court, Eastern District of Texas, Marshall Division, seeking damages,
civil penalties and costs and expenses for alleged commission of maritime torts
and violations of environmental and other laws and regulations involving the
Rowan-Midland and other
facilities in areas in or near Louisiana. Subsequently, the case was
transferred to U.S. District Court, Southern District of Texas, Houston
Division. The Company intends to vigorously defend its position in
this case but cannot estimate any potential liability at this time.
In June
2007, Rowan received a subpoena for documents from the U.S. District Court,
Eastern District of Louisiana, relating to a grand jury hearing. The
agency requesting the information is the U.S. Department of the Interior, Office
of Inspector General Investigations. The documents requested include
all records relating to use of the Company’s entertainment facilities and
entertainment expenses for a former employee of the Minerals Management Service,
U.S. Department of Interior, and other records relating to items of value
provided to any official or employee of the U.S. Government. The Company
fully cooperated with the subpoena.
The
construction of Rowan’s fourth Tarzan Class jack-up rig, the
J.P. Bussell, was
originally subcontracted to an outside Gulf of Mexico shipyard, Signal
International LLC (“Signal”), and scheduled for delivery in the third quarter of
2007 at a total cost of approximately $145 million. As a result of
various problems encountered on the project, Rowan exercised its right to take
over the rig construction pursuant to the terms of the construction contract,
and Signal turned the rig over to the Company in March 2008. The rig
was later completed by the Company more than one year behind schedule, and its
final cost was approximately 40% over the original
estimate. Accordingly, Rowan has declared Signal in breach of
contract and initiated court proceedings styled Rowan Companies, Inc. and LeTourneau
Technologies, Inc. vs. Signal International LLC in the 269th
Judicial District Court of Harris County, Texas, to recover the cost to
complete the rig over and above the agreed contract price and other damages,
plus interest. Signal filed a separate counterclaim against Rowan
styled Signal International
LLC vs. LeTourneau, Inc., in the U.S. District Court, Southern District
of Texas, Houston Division, alleging breach of contract and claiming unspecified
damages for cost overruns. That case has been administratively stayed
in favor of the State Court proceeding filed by the Company. Signal
reasserted its claimed damages for amounts owed and additional costs incurred,
totaling approximately $63 million, as a counterclaim in the State Court
suit. The Company intends to vigorously defend its rights under the
contract. The Company does not believe that it is probable that
Signal will prevail in its claim and has made no accrual for such at September
30, 2009.
11
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On
December 9, 2008, the Company received a termination letter from a customer
regarding two contracts for the purchase of nine land rigs in the amount of
$90.2 million and nine top drives in the amount of $10.3 million. In
the letter, the customer alleged that the top drive contract had not become
effective because a down payment was never made and further alleged that they
had the right to terminate the land rig contract because of late
deliveries. The Company firmly believes that both allegations are
without merit. Accordingly, the Company initiated court proceedings
styled LeTourneau Technologies
Drilling Systems, Inc. (“LTDSI”) vs. Nomac Drilling, LLC (“Nomac”) in the
U.S. District Court, Southern District of Texas, Houston, on December 13, 2008
requesting a declaratory judgment and alleged anticipatory
repudiation. On January 5, 2009, Nomac filed a Notice of Removal to
Federal Court. The Company does not believe any loss that may result
in the event of an unfavorable resolution of this matter would have a material
adverse effect on its financial position, results of operations or cash
flows.
During
2005, the Company learned that the DOJ was conducting an investigation of
potential antitrust violations among helicopter transportation providers in the
Gulf of Mexico. Rowan's former aviation subsidiary, which was sold
effective December 31, 2004, received a subpoena in connection with the
investigation. The Company has not been contacted by the DOJ, but the
purchaser claimed that Rowan is responsible for any exposure it may
have. The Company has disputed that claim. On August 6, 2009, the
Company received a letter from the purchaser informing the Company that Rowan’s
former aviation subsidiary has been named as a defendant in a purported class
action lawsuit alleging antitrust violations and claiming that Rowan is
responsible for any exposure the purchaser may have under the
lawsuit. The Company disputes that claim, as well.
Rowan is
involved in various other legal proceedings incidental to its businesses and is
vigorously defending its position in all such matters. The Company believes that
there are no other known contingencies, claims or lawsuits that could have a
material adverse effect on its financial position, results of operations or cash
flows.
Note
10 – Stock-Based Compensation
In May
2009, stockholders of the Company approved the adoption of the 2009 Rowan
Companies, Inc. Incentive Plan (the “2009 Plan”), which authorizes the
Compensation Committee of the Company’s Board of Directors to grant employees
and non-employee directors, through May 2019, incentive awards covering up to
4,500,000 shares of Rowan common stock. The awards may be in the form
of stock options, stock appreciation rights (“SARs”), restricted stock awards
(“RSAs”), restricted stock units (“RSUs”), and performance-based awards, in
which the number of shares issued is dependent on the achievement of certain
long-term performance goals over a specified period. The 2009 Plan
replaced the 2005 Rowan Companies, Inc. Long-Term Incentive Plan. All
awards outstanding under the 2005 Plan at the effective date of the 2009 Plan
will remain outstanding. All grants after adoption are made under the
2009 Plan.
On May 5,
2009, the Company granted RSAs, SARs, and RSUs covering a total of 1,216,433
shares, which generally vest over a three-year service period, with a fair value
aggregating approximately $16.7 million. Fair value, net of estimated
forfeitures, was $16.1 million, which will be amortized over a weighted-average
vesting period of 2.9 years from the grant date.
At
September 30, 2009, Rowan had approximately $24.2 million of unrecognized future
stock-based compensation expense, which is expected to be recognized over a
remaining weighted-average period of 2.1 years.
12
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
11 – Income Taxes
In the
second quarter of 2009, the Company recognized an $8 million tax benefit ($0.07
per diluted share) as a result of a recent third-party tax case that provides a
more favorable tax treatment for certain foreign contracts entered into in prior
years, and lowered its estimated full-year 2009 effective tax rate to 31.4% from
33.6%.
During
the third quarter of 2009, the Company completed its assessment of the impact of
the case as to all open tax years and, as a result, recognized an additional $17
million tax benefit ($0.15 per diluted share) in the quarter, which further
lowered the Company’s estimated full-year 2009 effective tax rate to
27.9%. The Company has deferred recognition of a remaining $50
million estimated benefit in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (ASC 740-10). In connection with the above, the
Company has recorded a long-term receivable, which is included in Other Assets
on the Condensed Consolidated Balance Sheet at September 30, 2009, for the gross
claim of approximately $75 million and a long-term liability, which is included
in Other Liabilities, of approximately $50 million.
Note
12 – Other Financial Statement Disclosures
Fair Values of Financial
Instruments – The carrying amounts of the Company’s cash and cash
equivalents, trade receivables and payables and floating-rate debt approximated
their fair values due to their short maturity or variable interest-rate terms,
as applicable. As of September 30, 2009, the fair values of the
Company’s fixed-rate notes, which had an aggregate carrying value of $741.2
million, approximated $784.5 million. As of December 31, 2008,
the fair values of the $216.5 million carrying value of fixed-rate notes
approximated $244 million. Fair values of the Company’s fixed-rate
notes were estimated based on quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities.
Supplemental Cash Flow
Information – Interest payments totaled $10.5 million and $17.5 million
for the nine months ended September 30, 2009 and 2008,
respectively. Interest capitalized totaled $12.5 million and $13.6
million for the same periods of 2009 and 2008, respectively. Tax
payments (net of refunds) were $131.8 million and $150.9 million for the nine
months ended September 30, 2009 and 2008, respectively. Accrued
capital expenditures, which are excluded from capital expenditures in the
Condensed Consolidated Statement of Cash Flows until settlement, were $13.3
million and $13.8 million at September 30, 2009 and 2008,
respectively.
Other Comprehensive Income –
Rowan had no items of other comprehensive income during the three or nine months
ended September 30, 2009 or 2008.
Note
13 – Subsequent Event
On
October 5, 2009, the Company announced that it will resume construction of its
fourth EXL class rig at
the Keppel AmFELS, Inc. shipyard in Brownsville, Texas, with delivery expected
in the first quarter of 2012.
The
Company had suspended construction in early 2009 due to liquidity concerns and a
weakening jack-up drilling market. The decision to resume
construction had no effect on amounts recognized in the Company’s financial
statements.
Rowan
evaluated events and transactions subsequent to September 30, 2009, through
November 6, 2009, the date that these financial statements were
issued. There were no other events or transactions that occurred
during that period requiring recognition or disclosure in the financial
statements.
ROWAN
COMPANIES, INC. AND SUBSIDIARIES
SUMMARY
During
2009, our results of operations have continued to benefit from contracts
executed prior to the downturn that began in mid 2008 in markets for our
offshore drilling services and manufactured products and services. We
are currently receiving day rates on several long-term drilling contracts at
rates higher than current market rates. Absent a rebound in drilling
demand, our future results of operations may be further negatively impacted as
the lower market rates are realized in our reported results. In
response to the profound weakness in the U.S. Gulf of Mexico drilling market, we
are seeking to relocate our Gulf rigs, as they become available, to other more
active and profitable areas. Although our operations are currently
profitable overall, we can provide no assurance that they will continue to be
profitable.
As of
November 6, 2009, the Company had nine offshore rigs in the Middle East, seven
in the U.S. Gulf of Mexico, two in the North Sea, and one each offshore West
Africa, Eastern Canada, Mexico and Egypt.
RESULTS
OF OPERATIONS
The
following table highlights Rowan’s operating results for the three and nine
months ended September 30, 2009 and 2008 (dollars in millions):
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
|||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||
Drilling
|
$ | 258.4 | $ | 357.1 | -28 | % | $ | 959.6 | $ | 1,064.9 | -10 | % | ||||||||||||
Manufacturing:
|
||||||||||||||||||||||||
Drilling
Products and Systems
|
93.5 | 111.0 | -16 | % | 271.3 | 360.3 | -25 | % | ||||||||||||||||
Mining,
Forestry and Steel Products
|
41.5 | 59.0 | -30 | % | 139.5 | 174.5 | -20 | % | ||||||||||||||||
Total
Manufacturing
|
135.0 | 170.0 | -21 | % | 410.8 | 534.8 | -23 | % | ||||||||||||||||
Total
revenues
|
$ | 393.4 | $ | 527.1 | -25 | % | $ | 1,370.4 | $ | 1,599.7 | -14 | % | ||||||||||||
Costs
and expenses:
|
||||||||||||||||||||||||
Drilling
|
$ | 177.3 | $ | 190.2 | -7 | % | $ | 563.5 | $ | 596.4 | -6 | % | ||||||||||||
Manufacturing:
|
||||||||||||||||||||||||
Drilling
Products and Systems
|
92.4 | 113.0 | -18 | % | 270.4 | 343.3 | -21 | % | ||||||||||||||||
Mining,
Forestry and Steel Products
|
36.6 | 51.7 | -29 | % | 120.6 | 158.4 | -24 | % | ||||||||||||||||
Total
Manufacturing
|
129.0 | 164.7 | -22 | % | 391.0 | 501.7 | -22 | % | ||||||||||||||||
Total
costs and expenses
|
$ | 306.3 | $ | 354.9 | -14 | % | $ | 954.5 | $ | 1,098.1 | -13 | % | ||||||||||||
Operating
income (loss):
|
||||||||||||||||||||||||
Drilling
|
$ | 81.1 | $ | 166.9 | -51 | % | $ | 396.1 | $ | 468.5 | -15 | % | ||||||||||||
Manufacturing:
|
||||||||||||||||||||||||
Drilling
Products and Systems
|
1.1 | (2.0 | ) | -155 | % | 0.9 | 17.0 | -95 | % | |||||||||||||||
Mining,
Forestry and Steel Products
|
4.9 | 7.3 | -33 | % | 18.9 | 16.1 | 17 | % | ||||||||||||||||
Total
Manufacturing
|
6.0 | 5.3 | 13 | % | 19.8 | 33.1 | -40 | % | ||||||||||||||||
Total
operating income
|
$ | 87.1 | $ | 172.2 | -49 | % | $ | 415.9 | $ | 501.6 | -17 | % | ||||||||||||
Net
income
|
$ | 78.4 | $ | 114.1 | -31 | % | $ | 306.7 | $ | 333.3 | -8 | % |
For the
third quarter of 2009, our consolidated operating income decreased by $85.1
million or 49%, as compared to the third quarter of 2008, on a $133.7 million or
25% decrease in revenues and a $48.6 million or 14% reduction in
costs. Net income includes income tax expense of $8.0 million (9%
effective rate) and $57.2 million (33% effective rate) for the third quarter of
2009 and 2008, respectively.
For the
first nine months of 2009, our consolidated operating income decreased by $85.7
million or 17%, compared to the comparable 2008 period, on a $229.3 million or
14% decrease in revenues and a $143.6 million or 13% reduction in
costs. Net income includes income tax expense of $112.4 million (27%
effective rate) and $172.3 million (34% effective rate) for the first nine
months of 2009 and 2008, respectively.
In the
second quarter of 2009, we recognized an $8 million tax benefit ($0.07 per
diluted share) as a result of a recent third-party tax case that provides a more
favorable tax treatment for certain foreign contracts entered into in prior
years, and lowered our estimated full-year 2009 effective tax rate to 31.4% from
33.6%.
During
the third quarter of 2009, we completed our assessment of the impact of the case
as to all open tax years and, as a result, recognized an additional $17 million
tax benefit ($0.15 per diluted share) in the quarter, which further lowered our
estimated full-year 2009 effective tax rate to 27.9%. We have
deferred recognition of a remaining $50 million estimated benefit in accordance
with FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (ASC 740-10).
Drilling
operations
Three
months ended September 30, 2009, compared to three months ended September 30,
2008
The
following table highlights the performance of our Drilling Services segment for
the three months ended September 30, 2009 and 2008 (dollars in millions, except
for average day rate):
Three
months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
%
of Revenues
|
Amount
|
%
of Revenues
|
|||||||||||||
Revenues
|
$ | 258.4 | 100 | % | $ | 357.1 | 100 | % | ||||||||
Operating
costs
|
(121.3 | ) | -47 | % | (163.3 | ) | -46 | % | ||||||||
Depreciation
expense
|
(39.8 | ) | -15 | % | (32.2 | ) | -9 | % | ||||||||
Selling,
general and administrative expenses
|
(16.3 | ) | -6 | % | (16.2 | ) | -5 | % | ||||||||
Net
gain on property disposals
|
0.1 | 0 | % | 21.5 | 6 | % | ||||||||||
Operating
income
|
$ | 81.1 | 31 | % | $ | 166.9 | 47 | % | ||||||||
Offshore
fleet:
|
||||||||||||||||
Average
day rate
|
$ | 182,500 | $ | 161,100 | ||||||||||||
Rig
utilization
|
59 | % | 95 | % | ||||||||||||
Revenue-producing
days
|
1,197 | 1,817 | ||||||||||||||
Land
fleet:
|
||||||||||||||||
Average
day rate
|
$ | 22,500 | $ | 20,900 | ||||||||||||
Rig
utilization
|
56 | % | 97 | % | ||||||||||||
Revenue-producing
days
|
1,652 | 2,620 |
Drilling
revenues for the quarter decreased by $98.7 million or 28% compared to the third
quarter of 2008 as a result of the following (in millions):
Increase
|
||||
(Decrease)
|
||||
Lower
offshore rig utilization
|
$ | (112.3 | ) | |
Lower
land rig utilization
|
(25.4 | ) | ||
Reimbursables
and other, net
|
(7.1 | ) | ||
Loss
of the Rowan-Anchorage1
|
(4.4 | ) | ||
Higher
average land day rates
|
1.6 | |||
Addition
of three land rigs2
|
6.4 | |||
Addition
of the J.P.
Bussell and Rowan-Mississippi3
|
18.4 | |||
Higher
average offshore day rates
|
24.1 | |||
Net
decrease
|
$ | (98.7 | ) |
__________________________________
1The
Rowan-Anchorage was
lost in September 2008 during Hurricane Ike.
2The
three land rigs added to the fleet over the period from October 2008 through
June 2009 contributed 251 revenue-producing days in the third quarter of
2009.
3The
J.P. Bussell and Rowan-Mississippi commenced
operations in November 2008 and contributed 134 revenue-producing days in the
third quarter of 2009.
Drilling
operating costs for the third quarter of 2009 decreased by $42.0 million, or
26%, from the third quarter of 2008 due to reductions in primarily labor and
related personnel costs, and lower maintenance and reimbursable
expenses. Additionally, several shipyard upgrade projects absorbed
certain personnel-related costs for many of our idle rigs. Operating
margins before depreciation and selling, general and administrative expenses for
the third quarters of 2009 and 2008 were comparable at 53% and 54%,
respectively. Drilling depreciation expense increased by $7.6 million or 24%
between periods due primarily to the addition of the J.P. Bussell and Rowan-Mississippi in November
2008.
The
following table presents certain key performance measures by geographic area for
our offshore fleet for the quarterly periods indicated. The number of
rigs in each location is based on location for the majority of the period and
includes active and idle rigs. Revenues include
reimbursables. Average day rates are computed by dividing revenues
recognized during the period, excluding reimbursables, by the number of
revenue-producing days. Rig utilization is computed as the number of
revenue-producing days divided by total available rig-days.
Three
months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Gulf
of Mexico:
|
||||||||
Number
of rigs
|
8 | 9 | ||||||
Revenues
|
$ | 43,844,000 | $ | 108,988,000 | ||||
Average
day rate
|
$ | 137,900 | $ | 131,400 | ||||
Utilization
|
43 | % | 100 | % | ||||
Middle
East:
|
||||||||
Number
of rigs
|
9 | 9 | ||||||
Revenues
|
$ | 77,211,000 | $ | 124,545,000 | ||||
Average
day rate
|
$ | 161,400 | $ | 159,200 | ||||
Utilization
|
57 | % | 94 | % | ||||
North
Sea:
|
||||||||
Number
of rigs
|
2 | 2 | ||||||
Revenues
|
$ | 36,244,000 | $ | 33,328,000 | ||||
Average
day rate
|
$ | 209,200 | $ | 238,300 | ||||
Utilization
|
94 | % | 73 | % | ||||
Other
international:
|
||||||||
Number
of rigs
|
3 | 1 | ||||||
Revenues
|
$ | 63,465,000 | $ | 31,990,000 | ||||
Average
day rate
|
$ | 267,300 | $ | 324,600 | ||||
Utilization
|
84 | % | 100 | % |
Nine
months ended September 30, 2009, compared to nine months ended September 30,
2008
The
following table highlights the performance of our Drilling Services segment for
the first nine months of 2009 and 2008 (dollars in millions, except for average
day rate):
Nine
months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
%
of Revenues
|
Amount
|
%
of Revenues
|
|||||||||||||
Revenues
|
$ | 959.6 | 100 | % | $ | 1,064.9 | 100 | % | ||||||||
Operating
costs
|
(403.5 | ) | -42 | % | (483.1 | ) | -45 | % | ||||||||
Depreciation
expense
|
(115.3 | ) | -12 | % | (91.1 | ) | -9 | % | ||||||||
Selling,
general and administrative expenses
|
(49.5 | ) | -5 | % | (50.6 | ) | -5 | % | ||||||||
Net
gain on property disposals
|
4.8 | 1 | % | 28.4 | 3 | % | ||||||||||
Operating
income
|
$ | 396.1 | 41 | % | $ | 468.5 | 44 | % | ||||||||
Offshore
fleet:
|
||||||||||||||||
Average
day rate
|
$ | 177,100 | $ | 160,800 | ||||||||||||
Rig
utilization
|
77 | % | 94 | % | ||||||||||||
Revenue-producing
days
|
4,599 | 5,402 | ||||||||||||||
Land
fleet:
|
||||||||||||||||
Average
day rate
|
$ | 23,600 | $ | 22,200 | ||||||||||||
Rig
utilization
|
63 | % | 95 | % | ||||||||||||
Revenue-producing
days
|
5,428 | 7,582 |
Drilling
revenues for the first nine months of 2009 decreased by $105.3 million, or 10%,
compared to the comparable period of 2008 as a result of the following (in
millions):
Increase
|
||||
(Decrease)
|
||||
Lower
offshore rig utilization
|
$ | (166.3 | ) | |
Lower
land rig utilization
|
(64.5 | ) | ||
Loss
of the Rowan-Anchorage1
|
(15.2 | ) | ||
Reimbursables
and other, net
|
(11.0 | ) | ||
Higher
average land day rates
|
5.5 | |||
Addition
of four land rigs2
|
18.7 | |||
Higher
average offshore day rates
|
51.4 | |||
Addition
of the J.P.
Bussell and Rowan-Mississippi3
|
76.1 | |||
Net
decrease
|
$ | (105.3 | ) |
_______________________________
1The
Rowan-Anchorage was
lost in September 2008 during Hurricane Ike.
2The
four land rigs added to the fleet over the period from May 2008 through June
2009 contributed an additional 748 revenue-producing days in the first nine
months of 2009 as compared to the comparable period of 2008.
3The
J.P. Bussell and Rowan-Mississippi commenced
operations in November 2008 and contributed 456 revenue-producing days in the
first nine months of 2009.
Drilling
operating costs for the first nine months of 2009 decreased by $79.6 million, or
16%, from the comparable prior-year period due to reductions in primarily labor
and related personnel costs, and lower maintenance and reimbursable
expenses. Additionally, several shipyard upgrade projects absorbed
certain personnel-related costs for many of our idle rigs. Operating
margins before depreciation and selling, general and administrative expenses
improved to 58% in the nine-month period ended September 30, 2009 from 55% in
the prior-year period. Drilling depreciation expense increased by
$24.2 million or 27% between periods due primarily to the addition of the J.P. Bussell and Rowan-Mississippi in November
2008.
The
following table presents certain key performance measures by geographic area for
our offshore fleet for the nine months ended September 30, 2009 and
2008. The number of rigs in each location is based on location for
the majority of the period and includes active and idle
rigs. Revenues include reimbursables. Average day rates
are computed by dividing revenues recognized during the period, excluding
reimbursables, by the number of revenue-producing days. Rig
utilization is computed as the number of revenue-producing days divided by total
available rig-days.
Nine
months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Gulf
of Mexico:
|
||||||||
Number
of rigs
|
9 | 8 | ||||||
Revenues
|
$ | 252,113,000 | $ | 284,470,000 | ||||
Average
day rate
|
$ | 150,400 | $ | 124,500 | ||||
Utilization
|
67 | % | 97 | % | ||||
Middle
East:
|
||||||||
Number
of rigs
|
9 | 9 | ||||||
Revenues
|
$ | 300,030,000 | $ | 351,495,000 | ||||
Average
day rate
|
$ | 150,900 | $ | 154,900 | ||||
Utilization
|
81 | % | 92 | % | ||||
North
Sea:
|
||||||||
Number
of rigs
|
2 | 2 | ||||||
Revenues
|
$ | 138,669,000 | $ | 119,131,000 | ||||
Average
day rate
|
$ | 258,800 | $ | 235,400 | ||||
Utilization
|
98 | % | 91 | % | ||||
Other
international:
|
||||||||
Number
of rigs
|
2 | 2 | ||||||
Revenues
|
$ | 134,943,000 | $ | 128,775,000 | ||||
Average
day rate
|
$ | 293,100 | $ | 296,200 | ||||
Utilization
|
82 | % | 97 | % |
Drilling
Products and Systems
Three
months ended September 30, 2009, compared to three months ended September 30,
2008
The
following table highlights the performance of our Drilling Products and Systems
segment for the quarterly periods (dollars in millions):
Three
months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
%
of Revenues
|
Amount
|
%
of Revenues
|
|||||||||||||
Revenues
|
$ | 93.5 | 100 | % | $ | 111.0 | 100 | % | ||||||||
Operating
costs
|
(86.6 | ) | -93 | % | (104.8 | ) | -94 | % | ||||||||
Depreciation
expense
|
(2.4 | ) | -3 | % | (2.4 | ) | -2 | % | ||||||||
Selling,
general and administrative expenses
|
(3.4 | ) | -4 | % | (5.8 | ) | -5 | % | ||||||||
Operating
income (loss)
|
$ | 1.1 | 1 | % | $ | (2.0 | ) | -2 | % |
Revenues
from Drilling Products and Systems decreased by $17.5 million, or 16%, between
periods due primarily to the following:
·
|
A
decrease of $13.8 million attributable to $35.9 million recognized on
shipments of land rigs and component packages in 2009, down from $49.7
million in 2008;
|
·
|
A
decrease of $10.6 million attributable to $28.7 million of revenues
recognized on four offshore rig kit projects in progress in 2009, as
compared to $39.3 million recognized on six projects in
2008;
|
·
|
An
increase of $5.6 million attributable to $9.8 million recognized on
shipments of 13 mud pumps in 2009, up from $4.2 million on shipments of 9
in 2008.
|
Revenues
from Drilling Products and Systems include revenues recognized under the
percentage-of-completion method of accounting as well as at the time of
shipment. Our product revenues are therefore influenced by progress
on long-term contracts in process and the timing of shipments, and profitability
is highly impacted by the mix of product sales. Original-equipment
sales, for example, have traditionally yielded lower margins than the related
after-market parts sales. Our average margin before depreciation and
selling, general and administrative expenses was 7% of revenues in 2009 and 6%
in 2008.
Selling,
general and administrative costs declined by $2.4 million or 41% between periods
due primarily to lower compensation and related fringe benefit costs associated
with reduced employment levels.
Our
Drilling Products and Systems operating results for the 2009 third quarter
excludes $84.1 million of revenues and $55.7 million of expenses in
connection with sales of products and services to our Drilling Services segment,
most of which was attributable to construction of the newbuild jack-up, Ralph
Coffman. Drilling Products and Systems operating results for
the comparable quarter of 2008 excludes $78.4 million of revenues and $63.6
million of expenses, primarily for construction of the J.P. Bussell,
Rowan-Mississippi and Ralph Coffman.
Nine
months ended September 30, 2009, compared to nine months ended September 30,
2008
The
following table highlights the performance of our Drilling Products and Systems
segment for the first nine months of 2009 and 2008 (dollars in
millions):
Nine
months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
%
of Revenues
|
Amount
|
%
of Revenues
|
|||||||||||||
Revenues
|
$ | 271.3 | 100 | % | $ | 360.3 | 100 | % | ||||||||
Operating
costs
|
(253.1 | ) | -93 | % | (316.9 | ) | -88 | % | ||||||||
Depreciation
expense
|
(6.8 | ) | -3 | % | (7.2 | ) | -2 | % | ||||||||
Selling,
general and administrative expenses
|
(10.5 | ) | -4 | % | (19.2 | ) | -5 | % | ||||||||
Operating
income
|
$ | 0.9 | 0 | % | $ | 17.0 | 5 | % |
Revenues
from Drilling Products and Systems decreased by $89.0 million, or 25%, between
periods due primarily to the following:
·
|
A
decrease of $64.3 million attributable to $82.3 million of revenues
recognized on five offshore rig kit projects in progress in 2009, as
compared to $146.6 million recognized on eight projects in
2008;
|
·
|
A
decrease of $26.7 million attributable to $81.1 million recognized on
shipments of land rigs and component packages in 2009, down from $107.8
million in 2008;
|
·
|
A
decrease of $19.0 million attributable to $1.4 million of revenues
recognized on shipments of top drives in 2009, down from $20.4 million in
2008;
|
·
|
An
increase of $14.7 million attributable to $37.6 million recognized on 42
mud pumps shipped in 2009, up from $22.9 million on 36 pumps in
2008.
|
Our
average margin before depreciation and selling, general and administrative
expenses decreased to 7% of revenues in 2009 from 12% in
2008. Margins in 2009 were negatively affected by sales mix, with a
greater share of revenues from some of our lower-margin products as compared to
the prior year, $4 million in additional warranty costs accrued for necessary
design improvements in the 500-ton top drive line, and $2 million in purchase
cancellation fees.
Selling,
general and administrative costs declined by $8.7 million or 45% between periods
due primarily to lower compensation and related fringe benefit costs associated
with reduced employment levels.
Our
Drilling Products and Systems operating results for the 2009 nine-month period
excludes $192.7 million of revenues and $133.9 million of expenses in
connection with sales of products and services to our Drilling Services segment,
most of which was attributable to construction of the newbuild jack-up, Ralph
Coffman. Drilling Products and Systems operating results for
the comparable period of 2008 excludes $258.1 million of revenues and $208.6
million of expenses, primarily for construction of the J.P. Bussell,
Rowan-Mississippi and Ralph Coffman.
Mining,
Forestry and Steel Products
Three
months ended September 30, 2009, compared to three months ended September 30,
2008
The
following table highlights the performance of our Mining, Forestry and Steel
Products segment for the quarterly periods (dollars in millions):
Three
months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
%
of Revenues
|
Amount
|
%
of Revenues
|
|||||||||||||
Revenues
|
$ | 41.5 | 100 | % | $ | 59.0 | 100 | % | ||||||||
Operating
costs
|
(30.3 | ) | -73 | % | (44.4 | ) | -75 | % | ||||||||
Depreciation
expense
|
(1.7 | ) | -4 | % | (1.6 | ) | -3 | % | ||||||||
Selling,
general and administrative expenses
|
(4.1 | ) | -10 | % | (5.6 | ) | -9 | % | ||||||||
Net
loss on property disposals
|
(0.5 | ) | -1 | % | (0.1 | ) | 0 | % | ||||||||
Operating
income
|
$ | 4.9 | 12 | % | $ | 7.3 | 12 | % |
Our
product revenues are influenced by the timing of shipments, and profitability is
highly impacted by the mix of product sales, with after-market parts providing
higher margins than original equipment. As indicated in the preceding
table, revenues from Mining, Forestry and Steel Products decreased by $17.5
million or 30% between periods. Most of the decrease was attributable
to lower sales of steel plate. Revenues from steel plate sales
totaled $5.8 million in the third quarter of 2009, down by $12.3 million or 68%
between periods. Parts sales decreased by $3.2 million or 16% between
periods to $16.5 million during the third quarter of 2009. Revenues
from sales of new front-end mining loaders and log stackers were flat, despite
shipping three units during the third quarter of 2009 compared to four units in
the third quarter of 2008, due to sales of higher-priced units in the 2009
quarter.
Our
average margin before depreciation and selling, general and administrative
expenses increased to 27% of revenues in the third quarter of 2009 from 25% in
the comparable quarter of 2008. The higher margins were attributable
to primarily product sales mix, particularly a greater proportion of
lower-margin steel plate sales in 2008.
Nine
months ended September 30, 2009, compared to nine months ended September 30,
2008
The
following table highlights the performance of our Mining, Forestry and Steel
Products segment for the first nine months of 2009 and 2008 (dollars in
millions):
Nine
months ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
%
of Revenues
|
Amount
|
%
of Revenues
|
|||||||||||||
Revenues
|
$ | 139.5 | 100 | % | $ | 174.5 | 100 | % | ||||||||
Operating
costs
|
(102.0 | ) | -73 | % | (137.9 | ) | -79 | % | ||||||||
Depreciation
expense
|
(4.8 | ) | -3 | % | (4.5 | ) | -3 | % | ||||||||
Selling,
general and administrative expenses
|
(13.3 | ) | -10 | % | (15.9 | ) | -9 | % | ||||||||
Net
loss on property disposals
|
(0.5 | ) | 0 | % | (0.1 | ) | 0 | % | ||||||||
Operating
income
|
$ | 18.9 | 14 | % | $ | 16.1 | 9 | % |
As
indicated in the preceding table, revenues from Mining, Forestry and Steel
Products decreased by $35.0 million or 20% between periods. Most of
the decrease was attributable to lower sales of steel plate. Revenues
from steel plate sales totaled $23.3 million in the first nine months of 2009,
down by $27.4 million or 54% between periods. Revenues from sales of
new front-end mining loaders and log stackers declined by only $3.0 million, or
6%, despite selling four fewer units in 2009, due to sales of higher-priced
units in 2009. We shipped 12 units in first nine months of 2009
compared to 16 units in the comparable period of 2008. Parts sales
declined by two percent between periods to $52.9 million in the nine months
ended September 30, 2009.
Our
average margin before depreciation and selling, general and administrative
expenses increased to 27% of revenues in the first nine months of 2009 from 21%
in the comparable period of 2008. The higher margins were
attributable to primarily product sales mix, particularly a greater proportion
of lower-margin steel plate sales in 2008.
Outlook
The
market for the Company’s products and services is highly impacted by world
commodities prices. Our contract drilling services business is
closely tied to the spending plans of oil and gas exploration and production
companies, which are highly influenced by oil and gas prices. Our
Drilling Products and Systems segment is closely tied to the condition of the
overall drilling industry and demand for drilling equipment, parts and
services. The prospects for our Mining, Forestry and Steel Products
segment are strongly affected by prices for copper, iron ore, coal and
timber. The volatility of commodity prices and weakness in global
capital markets over the past year have resulted in reduced demand for most of
the products and services that we offer. We cannot predict the
duration of the current weak operating environment or quantify the impact that
current business conditions will have on our future operations.
Drilling
Operations
Our
backlog of drilling contracts as of October 20, 2009, was approximately $1.3
billion, which we estimate will be realized as follows: 2009 – $220 million,
2010 – $810 million, 2011 – $245 million, 2012 and later years – $70
million. About 41% and 11% of our available offshore rig days in 2010
and 2011, respectively, are currently under contract, and most of our drilling
contracts have termination penalties. Facing reduced liquidity,
certain of our customers have sought to modify existing contracts, and we have
experienced slower collections. Some may seek to further delay
payments or cancel drilling commitments. We intend to enforce our
drilling contracts and will vigorously defend our rights
thereunder. Any such disputes may adversely impact our results of
operations and cash flows to the extent that collections are delayed and
administrative costs are increased.
Our
drilling operations are currently benefiting from contracted backlog obtained
during the predominantly favorable market conditions of the past few
years. As our rigs roll off existing contracts, opportunities for new
contracts have been limited, and some of our rigs have become and remain
idle. We can provide no assurance that we can maintain current
utilization levels, spot day rates will remain above breakeven levels, our
drilling operations will remain profitable, or we will be able to significantly
increase our backlog for 2010 and beyond.
As of
November 6, 2009, seven of our offshore rigs had drilling contracts estimated to
complete in 2010, six had contracts estimated to complete in 2011, and six were
available. The remaining three rigs were under contracts expected to
complete in 2009. The Ralph Coffman, currently
under construction and expected to commence operations in the first quarter of
2010, has a two-year contract. The five other rigs currently under
construction, which are expected to be delivered over the period from early 2010
through early 2012, are not yet contracted.
At
September 30, 2009, the six jack-up rigs currently under construction required
an additional $614 million to complete, which we expect to fund with existing
cash balances and operating cash flows during the period.
Hurricanes
(or “windstorms”) have caused tremendous damage to drilling and production
equipment and facilities throughout the Gulf Coast in recent years, and
insurance companies have incurred substantial losses as a
result. Accordingly, insurance companies have substantially reduced
the levels of windstorm coverage available and have dramatically increased the
cost of such coverage. Coverage for potential liabilities to third
parties associated with property damage and personal injuries, as well as
coverage for environmental liabilities and removal of wreckage and debris
associated with hurricane losses has also been limited.
Rowan
suffered a significant loss of prospective revenues and has incurred significant
removal of wreckage claims from the total destruction of six rigs in four
separate storms from 2002 through 2008. Due to the increased cost and
reduced availability of coverage as discussed above, in 2009 we decided to
discontinue windstorm physical damage coverage on four of our older,
lower-specification jack-up rigs, and our removal of wreckage coverage is
subject to a $100 million per occurrence deductible. Our windstorm
physical damage coverage is subject to a $50 million per occurrence deductible
with an annual aggregate limit of $150 million and covers only the Gorilla II, the Bob Palmer and the Rowan-Mississippi.
In each
of the past several years, the onset of hurricane season has coincided with
declines in drilling activity in the Gulf of Mexico. We expect this
pattern to continue in future years.
Manufacturing
Operations
Our
external manufacturing backlog, which consists of executed contracts and
customer commitments, was approximately $440 million at September 30, 2009,
compared to $562 million at December 31, 2008, and was comprised of $247 million
related to offshore rig projects, $107 million related to land rig projects, $21
million of mining and forestry equipment, $29 million of ad-hoc drilling
equipment and $36 million primarily parts and other components. We
expect that about 20 to 25 percent of our external backlog at September 30,
2009, will be realized as revenue in the fourth quarter, with another two-thirds
expected in 2010 and the balance in 2011. We can provide no assurance
we will be able to significantly increase our backlog for 2010 and
beyond.
Facing
reduced liquidity, certain of our customers have sought to modify existing
orders by delaying deliveries and related payments. Others are
attempting to reduce or cancel orders altogether. Though we fully
intend to enforce our contractual rights, such actions by our customers could
adversely impact our results of operations and cash flows to the extent that
collections are delayed, administrative costs are increased, and we are
otherwise unable to fully recover the in-process cost attributable to such
orders. We estimate that approximately $51 million or 12% of our
September 30, 2009 manufacturing backlog is at risk of being delayed or
canceled. Should market conditions worsen, these actions may
intensify, though we cannot assess that likelihood or the resulting impact on
our results of operations or cash flows.
LIQUIDITY
AND CAPITAL RESOURCES
On July
21, 2009, the Company completed the issuance and sale of $500 million aggregate
principal amount of 7.875% Senior Notes due August 1, 2019 (the “Senior
Notes”). Net proceeds to the Company, after underwriting discount and
offering expenses, were $492 million. The Company intends to use the
net proceeds from the offering for general corporate
purposes. Interest on the Senior Notes is payable semi-annually on
February 1 and August 1 of each year, commencing February 1, 2010.
A
comparison of key balance sheet amounts and ratios as of September 30, 2009, and
December 31, 2008 follows (dollars in millions):
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Cash
and cash equivalents
|
$ | 681.1 | $ | 222.4 | ||||
Current
assets
|
$ | 1,650.9 | $ | 1,369.2 | ||||
Current
liabilities
|
$ | 492.1 | $ | 744.6 | ||||
Current
ratio
|
3.35 | 1.84 | ||||||
Current
maturities of long-term debt
|
$ | 64.9 | $ | 64.9 | ||||
Long-term
debt
|
$ | 801.2 | $ | 355.6 | ||||
Stockholders'
equity
|
$ | 2,972.1 | $ | 2,659.8 | ||||
Long-term
debt/total capitalization
|
0.21 | 0.12 |
Reflected
in the comparison above are the effects of the following sources and uses of
cash and cash equivalents during the periods indicated (in
millions):
Nine
months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
operating cash flows
|
$ | 409.0 | $ | 433.6 | ||||
Borrowings,
net of issue costs
|
491.7 | 80.0 | ||||||
Net
proceeds from asset disposals
|
5.7 | 53.5 | ||||||
Excess
tax benefits from stock-based compensation
|
(3.6 | ) | 2.0 | |||||
Proceeds
from equity compensation and debenture plans and other
|
0.3 | 32.6 | ||||||
Capital
expenditures
|
(393.2 | ) | (618.5 | ) | ||||
Debt
repayments
|
(51.2 | ) | (131.2 | ) | ||||
Net
change in restricted cash balance
|
- | 50.0 | ||||||
Cash
dividend payments
|
- | (33.7 | ) | |||||
Total
sources (uses)
|
$ | 458.7 | $ | (131.7 | ) |
Operating
Cash Flows
Operating
cash flows approximated $409.0 million for the nine months ended September 30,
2009, as compared to $433.6 million for the comparable period of
2008. Our cash flows from operations have benefited and will continue
to benefit from long-term drilling contracts entered into when rates were
significantly higher than current market rates. As noted, seven of
our offshore rigs have drilling contracts estimated to complete in 2010, six
have contracts estimated to complete in 2011, and most of those rigs are
operating under contracts at above-market rates negotiated in periods of
stronger demand. As a result, operating cash flows may be negatively
affected in the future as these higher day-rate contracts are
completed. Despite the current weakness in drilling markets, we
anticipate that our cash flows from operations will cover a substantial amount
of our anticipated cash requirements over the next twelve months, and cash flows
from operations plus available cash balances will be sufficient to meet our cash
requirements over this period.
Capital
Expenditures
Reference
should be made to Note 8 of Notes to Unaudited Condensed Consolidated Financial
Statements in this Quarterly Report on Form 10-Q for a discussion of the status
of our newbuild projects.
Capital
expenditures for the first nine months of 2009 included the
following:
·
|
$176.5
million towards construction of the four EXL class
rigs;
|
·
|
$82.9
million towards construction of our second and third 240C class rigs,
the Ralph Coffman
and Joe
Douglas;
|
·
|
$96.6
million for improvements to the existing offshore
fleet;
|
·
|
$5.3
million related to construction of two land rigs, one of which was
completed in the first quarter of 2009 with the other delivered in June
2009.
|
For the
remainder of 2009, we expect our capital expenditures to approximate $215
million, including $129 million for the four EXL class rigs, $52 million
for the two 240C class
rigs, and $22 million for existing rigs. The latter category includes
amounts necessary to complete upgrades to our available Gulf of Mexico and
Middle East rigs begun during the third quarter to take advantage of the low
opportunity cost while they are idle. We expect to fund our capital
expenditures from available cash and cash flows from operations. We
will periodically review and adjust the capital budget as necessary based upon
current and forecasted cash flows and liquidity, anticipated market conditions
in our drilling and manufacturing businesses and alternative uses of capital to
enhance shareholder value.
Long-Term
Debt
As noted
above, in July 2009, the Company issued $500 million aggregate principal amount
of 7.875% Senior Notes due 2019. The Company may, at its option,
redeem all or part of the Senior Notes at any time at a make-whole
price. The Senior Notes are general unsecured, senior obligations.
Accordingly, the Senior Notes rank (a) pari passu in right of
payment with any of the Company’s existing and future unsecured indebtedness
that is not by its terms subordinated to the Senior Notes, including any
indebtedness under the Company’s senior revolving credit facility (other than
letter of credit reimbursement obligations that are secured by cash deposits),
(b) effectively junior to the Company’s existing and future secured indebtedness
(including indebtedness under its secured notes issued pursuant to the MARAD
Title XI program to finance several offshore drilling rigs), in each case, to
the extent of the value of the Company’s assets constituting collateral securing
that indebtedness and (c) effectively junior to all existing and future
indebtedness and other liabilities of the Company’s subsidiaries (other than
indebtedness and liabilities owed to the Company).
On August
4, 2009, Rowan fixed the interest rate for the remainder of the term on $65.7
million of MARAD debt outstanding at September 30, 2009, collateralized by the
offshore rig, Bob
Keller, at an annual rate of 3.525%. Prior to that time, the
rate floated based on a short-term commercial-paper rate plus
0.15%.
Some of
our debt agreements contain provisions that require minimum levels of cash,
working capital and stockholders’ equity, and 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 were
in compliance with each of our debt covenants at September 30, 2009, and we do
not expect to encounter difficulty complying in the following twelve-month
period. We had no borrowings outstanding under our $155 million
credit facility at September 30, 2009, and we believe that funding under the
facility continues to be available, if necessary.
Pension
Obligations
Minimum
contributions to our defined benefit pension plans are determined based upon
actuarial calculations of pension assets and liabilities that involve, among
other things, assumptions about long-term asset returns and interest
rates. Similar calculations were used to estimate pension costs and
obligations as reflected in our condensed consolidated financial
statements. As of December 31, 2008, our financial statements
reflected an aggregate unfunded pension liability of $298 million, most of which
relates to our drilling employees’ plan. As previously reported, we
amended the benefit formula for new drilling plan entrants effective January 1,
2008 in order to reduce the rate at which the plan’s liabilities were
growing. Effective July 1, 2009, we amended the plan’s benefit
formula for active employees who were earning benefits in the plan prior to
January 1, 2008. The plan changes that became effective July 1 will
result in an annualized reduction in pension expense of approximately $15
million. Despite the recent changes to the drilling plan, we will
need to make significant pension contributions over the next several years; and
additional funding would be required if asset values decline. During
the first nine months of 2009, Rowan contributed $34.5 million to its pension
plans and expects to make additional contributions totaling $1.8 million during
the remainder of 2009.
Cash
Dividends
At
September 30, 2009, we had approximately $656 million of retained earnings
available for distribution to stockholders under the most restrictive provisions
of our debt agreements. We do not expect to pay dividends in the
foreseeable future.
Contingent
Liabilities
Reference
should be made to Note 9 of Notes to Unaudited Condensed Consolidated Financial
Statements in this Quarterly Report on Form 10-Q for a discussion of the status
of significant legal proceedings.
Critical
Accounting Policies and Management Estimates
Rowan’s
significant accounting policies are outlined in Note 1 of Notes to
Consolidated Financial Statements included in our Form 10-K for the year
ended December 31, 2008. These 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 that our most critical accounting policies and management estimates
involve revenue recognition (primarily upfront service fees for equipment moves
and modifications and longer-term manufacturing contracts), inventory (primarily
valuation allowances for excess and obsolete inventories), property and
depreciation (particularly capitalizable costs, useful lives and salvage
values), carrying values of long-lived assets, and pension and other
postretirement benefit liabilities and costs (specifically, assumptions used in
actuarial calculations).
As
discussed above and in Note 11 to the financial statements, during the second
and third quarters of 2009, we recognized tax benefits of $8 million and $17
million, respectively, as a result of a recent third-party tax case that
provides a more favorable tax treatment for certain foreign contracts entered
into in prior years. In accordance with FASB Interpretation No.
48, Accounting for Uncertainty
in Income Taxes (ASC 740-10), we evaluate a tax position to determine if
it is more likely than not that the tax position will be sustained upon
examination, based on its merits. A tax position that meets the
more-likely-than-not recognition threshold is subject to a measurement
assessment to determine the amount of benefit to recognize in income for the
period, and a reserve, if any. Our income tax returns are subject to
audit by U.S. federal, state, and foreign tax
authorities. Determinations by such taxing authorities that differ
materially from our recorded estimates, either favorably or unfavorably, may
have a material impact on our results of operations, financial position and cash
flows. We believe our reserve for uncertain tax positions totaling
$55.1 million at September 30, 2009, is properly recorded in accordance with ASC
740-10.
Changes
in judgments, assumptions or policies would produce significantly different
amounts from those reported herein. During the nine months ended
September 30, 2009, there have been no material changes to the judgments,
assumptions or policies upon which our critical accounting estimates are
based.
Recent
Accounting Standards
In
October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605),
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging
Issues Task Force. ASU No. 2009-13 addresses accounting by
vendors who provide multiple products or services to customers at different
points in time or over different time periods. Specifically, ASU No.
2009-13 eliminates the residual method of allocating revenues to each activity
and requires that revenue be allocated at inception of the arrangement to all
deliverables using a relative selling price method. ASU No. 2009-13
is effective for fiscal years beginning on or after June 15, 2010 and may be
applied prospectively for arrangements entered into after the effective date or
retrospectively for all periods presented. The Company is currently
studying what impact, if any, adoption may have on its financial
statements.
FORWARD-LOOKING
STATEMENTS
This
report contains “forward-looking statements” as defined by the United States
Securities and Exchange Commission (“SEC”), 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 include oil and
natural gas 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. Please see the risk factors and forward-looking
statement disclosure contained in our Annual Report on Form 10-K for the year
ended December 31, 2008, and our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009.
Rowan’s
outstanding debt at September 30, 2009, was comprised of $744.5 million of
fixed-rate notes bearing a weighted-average annual interest rate of 6.6%, and a
$124.9 million floating-rate note collateralized by the Bob Palmer bearing interest
at a short-term commercial-paper rate plus 0.25%, or 0.63% at September 30,
2009. Rowan may fix the interest rate on the Bob Palmer at any time and
must fix it by July 15, 2011. Rowan believes that its exposure to
risk of earnings loss due to changes in market interest rates is
limited.
Rowan has
a $155 million revolving credit facility expiring in June 2011. There
were no borrowings outstanding under the facility at September 30,
2009. The Company believes that funding under the credit facility
continues to be available, if necessary.
The
majority of Rowan’s transactions are denominated in United States dollars; thus,
the Company’s foreign currency exposure is not material. Fluctuating
commodity prices affect Rowan’s future earnings materially to the extent that
they influence demand for the Company’s products and services. As a
general practice, Rowan does not hold or issue derivative financial instruments
and had no derivatives outstanding during the periods covered by this
report.
Under the
supervision and with the participation of our principal executive officer and
principal financial officer, management has evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the
end of the period covered by this report. Based on that evaluation, our
principal executive officer and our principal financial officer have concluded
that our disclosure controls and procedures were effective as of September 30,
2009.
There has
been no change to our internal control over financial reporting during the
quarter ended September 30, 2009, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Reference
should be made to Note 9 of Notes to Unaudited Condensed Consolidated Financial
Statements in this Quarterly Report on Form 10-Q for the status of significant
legal proceedings.
You
should carefully consider the risk factors set forth in Part 1, Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2008, as updated in
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, before
deciding to invest in Rowan Common Stock.
Issuer
Purchases of Equity Securities:
The
Company did not acquire any shares of its stock in the three months ended
September 30, 2009.
In 1998,
we announced that our Board of Directors authorized us to purchase up to eight
million shares of our common stock. We last purchased shares under
this program in 2002 and have no plans to purchase additional shares at the
present time.
At
September 30, 2009, Rowan had approximately $656 million of retained earnings
available for distribution to stockholders under the most restrictive provisions
of our debt agreements.
There
were no matters submitted to a vote of security holders during the quarter ended
September 30, 2009.
The
following is a list of exhibits filed with this Form 10-Q. Each of
the following exhibits is filed herewith, unless otherwise indicated below as
being incorporated by reference to another filing of the Company:
3.1
|
Amended
and Restated Bylaws of Rowan Companies, Inc., effective as of
October 29, 2009 (incorporated by reference to Exhibit 3.1 of the
Company’s Current Report on Form 8-K dated November 2,
2009).
|
4.1
|
Indenture
for Senior Debt Securities dated as of July 21, 2009, between Rowan
Companies, Inc. and U.S. Bank National Association, as trustee
(incorporated by reference to Exhibit 4.1 of the Company’s Current Report
on Form 8-K dated July 21, 2009).
|
4.2
|
First
Supplemental Indenture dated as of July 21, 2009, between Rowan Companies,
Inc. and U.S. Bank National Association, as trustee (incorporated by
reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K dated
July 21, 2009).
|
4.3
|
Amendment,
dated as of October 30, 2009, to the Amended and Restated Rights
Agreement, dated as of January 24, 2002, as amended, between Rowan
Companies, Inc. and Wells Fargo Bank, National Association, as rights
agent (incorporated by reference to Exhibit 4.1 of the Company’s Current
Report on Form 8-K dated November 2, 2009).
|
10.1
|
Amendment
No. 1 dated August 4, 2009, to the Commitment to Guarantee Obligations
between Rowan and the Maritime Administration of the U.S. Department of
Transportation (relating to the Bob Keller, formerly
Tarzan II)
(incorporated by reference to Exhibit 10.5 of the Company’s Quarterly
Report on Form 10-Q filed August 10, 2009).
|
10.2
|
Supplement
No. 2 dated August 4, 2009, to Trust Indenture between Rowan and Citibank,
N.A. (relating to the Bob Keller, formerly
Tarzan II)
(incorporated by reference to Exhibit 10.6 of the Company’s Quarterly
Report on Form 10-Q filed August 10, 2009).
|
10.3
|
Form
of Indemnification Agreement between Rowan Companies, Inc. and each of its
directors and certain officers (incorporated by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K dated November 2,
2009).
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
32.2
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
101.INS
|
XBRL
Instance Document.
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document.
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document.
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document.
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document.
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase
Document.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ROWAN
COMPANIES, INC.
|
||
(Registrant)
|
||
Date: November
6, 2009
|
/s/
W. H. WELLS
|
|
W.
H. Wells
|
||
Vice
President – Finance and
|
||
Chief
Financial Officer
|
||
Date: November
6, 2009
|
/s/
GREGORY M. HATFIELD
|
|
Gregory
M. Hatfield
|
||
Controller
|
||
(Chief
Accounting Officer)
|
30