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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 JUNE 30, 2010

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
 
logo

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
77056-6189
(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 July 31, 2010, was 114,632,793.



ROWAN COMPANIES, INC.


 
 
Page
PART I
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited):
 
     
 
1
     
 
3
     
 
4
     
 
5
     
Item 2.
12
     
Item 3.
26
     
Item 4.
27
     
PART II
OTHER INFORMATION
 
     
Item 1.
27
     
Item 1A.
27
     
Item 2.
28
     
Item 6.
29
     
 
30



PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

ROWAN COMPANIES, INC. AND SUBSIDIARIES
(In thousands, except share amounts)
(Unaudited)


   
June 30,
   
December 31,
 
   
2010
   
2009
 
 ASSETS
   
           
CURRENT ASSETS:
         
Cash and cash equivalents
  $ 610,939     $ 639,681  
Receivables, net - trade and other (Note 10)
    352,988       343,642  
Inventories, net - at cost:
               
Raw materials and supplies
    275,760       309,682  
Work-in-progress
    105,289       141,036  
Finished goods
    460       941  
Prepaid expenses and other current assets
    75,791       76,744  
Deferred tax assets - net
    42,253       38,071  
Total current assets
    1,463,480       1,549,797  
                 
PROPERTY, PLANT AND EQUIPMENT - at cost:
               
Drilling equipment
    4,202,076       3,975,006  
Manufacturing plant and equipment
    250,424       251,882  
Construction in progress
    502,819       528,669  
Other property and equipment
    147,077       144,337  
Property, plant and equipment - gross
    5,102,396       4,899,894  
Less accumulated depreciation and amortization
    1,403,954       1,320,409  
Property,  plant  and equipment - net
    3,698,442       3,579,485  
                 
Other assets
    76,641       81,412  
                 
TOTAL ASSETS
  $ 5,238,563     $ 5,210,694  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
1


ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share amounts)
(Unaudited)


   
June 30,
   
December 31,
 
   
2010
   
2009
 
LIABILITIES AND STOCKHOLDERS' EQUITY
           
             
CURRENT LIABILITIES:
           
Current maturities of long-term debt
  $ 58,563     $ 64,922  
Accounts payable - trade
    109,500       124,562  
Deferred revenues
    116,041       139,398  
Billings in excess of costs and estimated profits on uncompleted contracts
    21,602       25,226  
Accrued compensation and related employee costs
    59,887       110,526  
Accrued income taxes
    11,441       40,990  
Accrued interest
    19,198       20,100  
Other current liabilities
    42,128       42,548  
Total current liabilities
    438,360       568,272  
                 
Long-term debt - less current maturities
    761,552       787,490  
Other liabilities
    289,794       278,862  
Deferred income taxes - net
    476,028       465,700  
Commitments and contingent liabilities (Notes 7 and 8)
    -       -  
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $1.00 par value, 5,000,000 shares authorized, issuable in series:
               
Series A Junior Preferred Stock, 1,500,000 shares authorized, none issued
    -       -  
Common stock, $0.125 par value, 150,000,000 shares authorized;
               
114,518,371 shares and 113,885,661 shares issued at June 30, 2010 and December 31, 2009, respectively
    14,315       14,237  
Additional paid-in capital
    1,087,756       1,078,337  
Retained earnings
    2,325,065       2,169,526  
Cost of 142,066 and 52,342 treasury shares, respectively
    (3,986 )     (1,409 )
Accumulated other comprehensive loss
    (150,321 )     (150,321 )
Total stockholders' equity
    3,272,829       3,110,370  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 5,238,563     $ 5,210,694  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
2


ROWAN COMPANIES, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
(Unaudited)


                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
REVENUES:
                       
Drilling services (Note 10)
  $ 328,277     $ 320,807     $ 659,261     $ 701,177  
Manufacturing sales and services
    161,759       161,353       263,180       275,791  
Total revenues
    490,036       482,160       922,441       976,968  
                                 
COSTS AND EXPENSES:
                               
Drilling services (excluding items below)
    139,008       136,840       275,555       282,221  
Manufacturing sales and services (excluding items below)
    138,102       147,388       222,672       238,196  
Depreciation and amortization
    46,458       42,609       91,950       83,108  
Selling, general and administrative
    36,077       24,720       61,874       49,296  
Loss (gain) on disposals of  property and equipment
    34       60       (95 )     (4,641 )
Material charge - manufacturing inventories (Note 10)
    -       -       42,024       -  
Total costs and expenses
    359,679       351,617       693,980       648,180  
                                 
INCOME FROM OPERATIONS
    130,357       130,543       228,461       328,788  
                                 
OTHER INCOME (EXPENSE):
                               
Interest expense
    (12,903 )     (2,457 )     (25,873 )     (5,600 )
Interest capitalized
    7,652       2,343       14,943       5,107  
Interest income
    253       201       434       532  
Other - net
    (1,443 )     2,422       102       3,836  
Total other income (expense) - net
    (6,441 )     2,509       (10,394 )     3,875  
                                 
INCOME BEFORE INCOME TAXES
    123,916       133,052       218,067       332,663  
Provision for income taxes
    33,000       36,469       62,528       104,380  
                                 
NET INCOME
  $ 90,916     $ 96,583     $ 155,539     $ 228,283  
                                 
PER SHARE AMOUNTS:
                               
Net income - basic
  $ .80     $ .85     $ 1.38     $ 2.01  
Net income - diluted
  $ .79     $ .85     $ 1.36     $ 2.01  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
3


ROWAN COMPANIES, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)


             
   
Six Months Ended June 30,
 
   
2010
   
2009
 
             
CASH PROVIDED BY OPERATIONS:
           
Net income
  $ 155,539     $ 228,283  
Adjustments to reconcile net income to net cash provided by operations:
               
Depreciation and amortization
    91,950       83,108  
Deferred income taxes
    6,146       42,225  
Stock-based compensation expense
    7,049       6,004  
Provision for pension and postretirement benefits
    19,329       23,431  
Contributions to pension plans
    (42,110 )     (16,685 )
Postretirement benefit claims paid
    (1,713 )     (1,740 )
Gain on disposals of property, plant and equipment
    (95 )     (4,641 )
Changes in current assets and liabilities:
               
Receivables - trade and other
    (9,346 )     107,881  
Inventories
    70,597       24,397  
Prepaid expenses and other current assets
    953       (37,182 )
Accounts payable
    (17,242 )     (156,294 )
Accrued income taxes
    (29,549 )     (53,410 )
Deferred revenues
    (23,357 )     15,344  
Billings in excess of costs and estimated profits on uncompleted contracts
    (3,624 )     (9,194 )
Other current liabilities
    (12,873 )     (24,648 )
Net changes in other noncurrent assets and liabilities
    (1,369 )     (1,949 )
Net cash provided by operations
    210,285       224,930  
                 
CASH USED IN INVESTING ACTIVITIES:
               
Capital expenditures
    (210,383 )     (210,265 )
Proceeds from disposals of property, plant and equipment
    878       5,472  
Net cash used in investing activities
    (209,505 )     (204,793 )
                 
CASH USED IN FINANCING ACTIVITIES:
               
Repayments of borrowings
    (32,461 )     (32,461 )
Proceeds from stock option and convertible debenture plans and other
    2,939       3,757  
Net cash used in financing activities
    (29,522 )     (28,704 )
                 
DECREASE IN CASH AND CASH EQUIVALENTS
    (28,742 )     (8,567 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    639,681       222,428  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 610,939     $ 213,861  

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 (“GAAP”) 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.  The unaudited condensed consolidated financial statements should 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, 2009.

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.  (See discussion under “Material Charge” in Note 10.)

Note 2 – Segment Information

Rowan has three principal operating segments – Drilling Services, Drilling Products and Systems, and Mining, Forestry and Steel Products.  The largest of these is the Drilling Services segment, which 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 plate.  The Drilling Products and Systems and Mining, Forestry and Steel Products segments operate under the Company’s wholly owned subsidiary, LeTourneau Technologies, Inc (“LeTourneau”).

The following table presents certain financial information by operating segment for the three and six months ended June 30, 2010 and 2009 (in millions):


   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenues:
                       
Drilling Services (Note 10)
  $ 328.3     $ 320.8     $ 659.3     $ 701.2  
Manufacturing:
                               
Drilling Products and Systems
    124.1       141.8       220.1       286.4  
Mining, Forestry and Steel Products
    90.1       54.7       141.2       98.0  
Total manufacturing
    214.2       196.5       361.3       384.4  
Eliminations
    (52.4 )     (35.1 )     (98.1 )     (108.6 )
Total revenues from external customers
  $ 490.1     $ 482.2     $ 922.5     $ 977.0  
                                 
Income (loss) from operations:
                               
Drilling Services
  $ 121.8     $ 127.2     $ 256.6     $ 312.7  
Manufacturing:
                               
Drilling Products and Systems (Note 10)
    -       3.7       (38.4 )     30.2  
Mining, Forestry and Steel Products
    21.7       8.9       32.9       14.0  
Total manufacturing
    21.7       12.6       (5.5 )     44.2  
Eliminations
    (13.1 )     (9.2 )     (22.6 )     (28.1 )
Total income from operations
  $ 130.4     $ 130.6     $ 228.5     $ 328.8  


 
5

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 3 – Earnings Per Share

A reconciliation of basic and diluted shares for the three and six months ended June 30, 2010 and 2009 follows (in thousands):


   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Average common shares outstanding - basic
    113,171       113,596       113,016       113,362  
Add: Dilutive shares issuable under stock-based compensation plans
    1,827       46       1,758       53  
Average shares for diluted calculations
    114,998       113,642       114,774       113,415  

There were no adjustments to net income required for purposes of computing diluted earnings per share.

The following table sets forth the share effects of securities excluded from the diluted calculations for the three and six months ended June 30, 2010 and 2009, because they were antidilutive.  Options and other potentially dilutive securities are antidilutive when the exercise or conversion price exceeds the average market price of the Company’s common stock during the period (in thousands):


   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Employee and director stock options
    164       1,792       164       1,792  
Stock appreciation rights
    180       514       169       514  
Shares issuable upon conversion of debentures
    -       35       -       35  
Total potentially dilutive shares
    344       2,341       333       2,341  


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 six months ended June 30, 2010 and 2009 included the following components (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Service cost
  $ 3,969     $ 4,477     $ 7,894     $ 8,905  
Interest cost
    7,737       8,405       15,389       16,718  
Expected return on plan assets
    (7,611 )     (7,233 )     (15,138 )     (14,387 )
Recognized actuarial loss
    5,318       4,040       10,621       8,056  
Amortization of prior service cost
    (1,665 )     (63 )     (3,312 )     (125 )
Total net pension cost
  $ 7,748     $ 9,626     $ 15,454     $ 19,167  


 
6

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Other postretirement benefit cost recognized for the three and six months ended June 30, 2010 and 2009 included the following components (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Service cost
  $ 589     $ 631     $ 1,172     $ 1,254  
Interest cost
    1,147       1,244       2,282       2,474  
Recognized actuarial loss
    98       155       195       310  
Amortization of transition obligation
    165       165       328       328  
Amortization of prior service cost
    (51 )     (51 )     (102 )     (101 )
Total other postretirement benefit cost
  $ 1,948     $ 2,144     $ 3,875     $ 4,265  

During the six months ended June 30, 2010, Rowan contributed $43.8 million to its pension and other postretirement benefit plans and expects to make additional contributions to such plans totaling approximately $16.9 million during the remainder of 2010.


Note 5 – Cash and Cash Equivalents

Certain of Rowan’s debt securities are government-guaranteed through the Title XI program of the 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 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 long-term manufacturing 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 thousands):


   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Total contract value of long-term contracts in process or not yet begun
  $ 206,382     $ 204,201  
Payments received
    162,992       119,653  
Revenues recognized
    145,282       102,155  
Costs recognized
    90,358       61,407  
Payments received in excess of revenues recognized
    17,710       17,498  
Billings in excess of costs and estimated profits on uncompleted contracts (included in current liabilities)
  $ 21,602     $ 25,226  
Costs and estimated profits in excess of billings on uncompleted contracts (included in prepaid expenses and other current assets)
  $ 3,892     $ 7,728  


 
7

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


During the three months ended June 30, 2010, Rowan recognized approximately $25.2 million of manufacturing revenues and $17.4 million of manufacturing costs related to long-term construction contracts on the percentage-of-completion basis, as compared to $24.5 million of revenues and $19.3 million of costs for the comparable period of 2009.

During the six months ended June 30, 2010, Rowan recognized approximately $43.7 million of manufacturing revenues and $29.3 million of manufacturing costs on the percentage-of-completion basis, as compared to $50.6 million of revenues and $35.5 million of costs for the comparable period of 2009.


Note 7 – Commitments

The following table presents the status of all of the Company’s rigs under construction as of June 30, 2010, and includes the estimated amounts necessary to complete construction of the rigs to be acquired in the transaction to purchase Skeie Drilling & Production ASA (see Note 11 – Subsequent Events).  Amounts include capitalized interest (in millions):

   
Total estimated project costs
   
Total costs incurred through June 30, 2010
   
Projected costs for the remainder of 2010
   
Projected costs in 2011
   
Projected costs in 2012
 
                               
Joe Douglas (240C)
  $ 246     $ 130     $ 51     $ 65     $ -  
EXL #2
    194       166       28       -       -  
EXL #3
    197       149       48       -       -  
EXL #4
    197       58       66       41       32  
Skeie rigs
    725       -       483       242       -  
Total rigs under construction
  $ 1,559     $ 503     $ 676     $ 348     $ 32  

Projected costs for the Skeie rigs totaling $725 million per the table above includes amounts expected to be paid from cash and restricted cash held by Skeie totaling $269 million at June 30, 2010, and includes estimated capitalized interest of $12 million and $10 million in 2010 and 2011, respectively.

Rowan periodically employs letters of credit or other bank-issued guarantees in the normal course of its businesses, and had outstanding letters of credit of approximately $41.4 million at June 30, 2010.


Note 8 – 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

 
8

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 filed another motion for rehearing, which motion was denied in January 2010.  On March 22, 2010, the owner interests filed its petition for review in the Supreme Court of Texas.  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.

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, ending November 2010.  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.  On July 28, 2010, the District Court dismissed the claims of the plaintiff.  At this time, the Company is not aware of any appeal by the plaintiff.  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

 
9

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 $88 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 June 30, 2010.

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 9 – Stock-Based Compensation

On March 5, 2010, the Company granted restricted stock awards and stock appreciation rights covering a total of 798,846 shares, which vest in one-third increments over a three-year service period, with a fair value aggregating approximately $17.7 million.  Grant-date fair value, net of estimated forfeitures, was $17.1 million, which will be amortized on a straight-line basis over three years from the grant date.

At June 30, 2010, Rowan had approximately $30.5 million of unrecognized future stock-based compensation expense, which is expected to be recognized over a remaining weighted-average period of 1.5 years.


Note 10 – Other Financial Statement Disclosures

Receivables – Trade and Other – Due to a contract dispute with its Mexico agent, the Company has been unable to submit billings to or make collections from PEMEX for use of the Gorilla IV during 2010 and, as a result, had $30.8 million of accrued or unbilled revenues and related value added taxes included in trade accounts receivable at June 30, 2010.  The Company believes all amounts due or accrued under the PEMEX contract will be collected.

Fair Values of Financial Instruments – The carrying amounts of the Company’s cash and cash equivalents, trade receivables and trade payables approximated their fair values due to their short maturities.  As of June 30, 2010, the fair values of the Company’s debt, which had an aggregate carrying value of $820.1 million, approximated $890 million.  Fair values of the Company’s debt was 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 – Accrued capital expenditures, which are excluded from capital expenditures in the Condensed Consolidated Statements of Cash Flows until settlement, were $25.0 million and $39.9 million at June 30, 2010 and 2009, respectively.

Other Comprehensive Income – Rowan had no items of other comprehensive income during the three or six months ended June 30, 2010 or 2009.


 
10

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Material Charge – During the first quarter of 2010, the Drilling Products and Systems manufacturing segment performed an assessment of its Houston-based raw materials and supplies inventory.  As a result, the Company increased its inventory valuation reserve by approximately $42.0 million and recorded a corresponding charge to its operations during the period to reflect a reduction in the estimated realizable value of items that were deemed to be nonconforming or slow-moving.  Such amount is reflected in the Condensed Consolidated Statements of Income on the line, “Material charge – manufacturing inventories.”


Note 11 – Subsequent Events

On July 1, 2010, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with certain shareholders of Skeie Drilling & Production ASA (“Skeie”) and obtained irrevocable commitments from two other shareholders of Skeie (collectively, the “Sellers”) for the purchase of their shares constituting 48.8% of the outstanding ordinary shares of Skeie.  Rowan had previously acquired approximately 1.5% of Skeie’s outstanding ordinary shares in open market purchases for cash.  As of July 19, 2010, the Company’s obligation to purchase the Sellers’ shares and to tender for the remaining outstanding shares of Skeie became unconditional.

Under the terms of the Purchase Agreement and irrevocable commitments, the Company will issue 0.00574167 shares of the Company’s common stock for each of the 1,037,006,792 ordinary shares of Skeie collectively owned by the Sellers, resulting in the issuance of 5,954,151 shares of the Company’s common stock.  Rowan intends to commence a tender offer in August for the remaining 49.7% of outstanding shares of Skeie on the same terms, which would result in the issuance of approximately 6.1 million additional Rowan shares.

Skeie is a Norwegian entity that owns and manages the construction of three high-spec jack-up rigs, designated “N-Class,” designed and being built by Keppel FELS Ltd. in Singapore.  The rigs are scheduled for delivery in September 2010, December 2010 and June 2011.  Skeie has earned no revenues since its inception in 2006 and has not entered into any drilling contracts for the operation of its three rigs under construction.

As of June 30, 2010, Skeie had approximately $269 million in cash and restricted cash and $530 million of first and second lien debt outstanding, secured by the rigs.  The Company expects the three rigs will require an additional $434 million for completion, net of cash and restricted cash acquired, plus approximately $22 million of capitalized interest.  The Company currently anticipates funding the incremental amount from existing cash and operating cash flows.  Assuming a Rowan stock price of $25.00 per share and the Company obtains 100% of the Skeie shares, the total cost to the Company would be approximately $1.3 billion, including estimated transaction costs.  The actual consideration will depend upon the market prices of Rowan’s common stock at the time of issuance and the number of Skeie shares acquired.

The Company intends to account for the transaction as an asset acquisition and allocate the total purchase price  to individual assets acquired and liabilities assumed based on relative fair values with no recognition of goodwill.

There were no other events or transactions that occurred subsequent to June 30, 2010, requiring recognition or disclosure in the financial statements.



ROWAN COMPANIES, INC. AND SUBSIDIARIES



SUMMARY

In May 2010, the Company took delivery of the first newly constructed EXL-Class rig.  The EXL#1 commenced operations in the U.S. Gulf of Mexico in late May under the first of two contracts for work through approximately July 2011.  In June, we obtained a contract extension for the Gorilla V in the North Sea for an additional two years.  We recently obtained a contract for one of our rigs currently under construction, the EXL#2, as more fully discussed below.

Although utilization of the Company’s offshore rigs improved in the first and second quarters of 2010 over the fourth quarter of 2009, leading day rates have yet to show significant improvement and remain well below peak levels, and our results of operations have continued to benefit from contracts executed prior to the global downturn that began in mid 2008.  Although we have made significant increases to our drilling backlog in recent weeks, we can provide no assurance that we will continue to do so.

As of July 26, 2010, we had nine offshore rigs in the Middle East, nine in the U.S. Gulf of Mexico, two in the North Sea plus another en-route to the North Sea from West Africa, one each offshore Eastern Canada, Mexico and Egypt, and four under construction.  Additionally, we had 29 actively marketed land rigs located in Texas, Louisiana and Alaska.

The Company’s second EXL-Class rig, which is currently under construction with expected delivery in September 2010, is expected to commence operations in Trinidad during the fourth quarter under a three-year contract following completion of construction in Brownsville, Texas, inspections and acceptance.

As previously reported, following the Deepwater Horizon incident, the Bureau of Ocean Energy Management, Regulation and Enforcement (formerly known as the Minerals Management Service) issued two Notices to Lessees (NTLs) implementing new safety regulations and information requirements applicable to shallow water drilling operations in the U.S. Gulf of Mexico.  These NTLs impact the ability of our customers to obtain new permits on a timely basis and continue operations uninterrupted under existing permits.  Although utilization of our rigs in the Gulf of Mexico declined slightly in the second quarter of 2010 as compared to the 2010 first quarter, we do not believe that our operations to date have been materially impacted by the issuance of these NTLs or the current regulatory environment.  One of our Gulf rigs is under contract but is waiting on a permit.  Another has been released from its contract, and we expect it to return to work in the Gulf on a well-to-well basis.  The Company currently has nine jack-up drilling rigs located in the U.S. Gulf of Mexico which may be impacted from time to time by the requirements of these recent NTLs.  We are working with our customers to meet these requirements.  See further discussion under “Outlook – Drilling Operations.”



RESULTS OF OPERATIONS

The following table highlights Rowan’s operating results for the three and six months ended June 30, 2010 and 2009 (dollars in millions):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
% Change
   
2010
   
2009
   
% Change
 
                                     
Revenues:
                                   
Drilling
  $ 328.3     $ 320.8       2 %   $ 659.3     $ 701.2       -6 %
Manufacturing:
                                               
Drilling Products and Systems
    71.7       106.7       -33 %     122.0       177.8       -31 %
Mining, Forestry and Steel Products
    90.1       54.7       65 %     141.2       98.0       44 %
Total Manufacturing
    161.8       161.4       0 %     263.2       275.8       -5 %
Total revenues
  $ 490.1     $ 482.2       2 %   $ 922.5     $ 977.0       -6 %
                                                 
Costs and expenses:
                                               
Drilling
  $ 204.4     $ 192.9       6 %   $ 398.5     $ 386.2       3 %
Manufacturing:
                                               
Drilling Products and Systems
    86.9       112.9       -23 %     187.2       178.0       5 %
Mining, Forestry and Steel Products
    68.4       45.8       49 %     108.3       84.0       29 %
Total Manufacturing
    155.3       158.7       -2 %     295.5       262.0       13 %
Total costs and expenses
  $ 359.7     $ 351.6       2 %   $ 694.0     $ 648.2       7 %
                                                 
Operating income (loss):
                                               
Drilling
  $ 123.9     $ 127.9       -3 %   $ 260.8     $ 315.0       -17 %
Manufacturing:
                                               
Drilling Products and Systems
    (15.2 )     (6.2 )     145 %     (65.2 )     (0.2 )     32500 %
Mining, Forestry and Steel Products
    21.7       8.9       144 %     32.9       14.0       135 %
Total Manufacturing
    6.5       2.7       141 %     (32.3 )     13.8       -334 %
Total operating income
  $ 130.4     $ 130.6       0 %   $ 228.5     $ 328.8       -31 %
                                                 
Net income
  $ 90.9     $ 96.6       -6 %   $ 155.5     $ 228.3       -32 %


Our consolidated operating income for the second quarter of 2010 was $130.4 million, which was relatively flat as compared to the second quarter of 2009.  Revenues were higher by $7.9 million or 2% and operating costs were higher by $8.1 million or 2% compared to the prior year period.

Net income includes income tax expense of $33.0 million (26.6% effective rate) and $36.5 million (27.4% effective rate) for the second quarter of 2010 and 2009, respectively.  During the second quarter of 2010, we adjusted the full year income tax rate to approximately 29% from 31% as a result of outbounding certain rigs into our offshore subsidiaries.  This resulted in lowering our second quarter effective tax rate to 26.6%.  In the second quarter of 2009, we recognized an $8 million tax benefit ($0.07 per diluted share) as a result of applying our facts to a 2009 third-party tax case that provides a more favorable tax treatment for certain foreign contracts entered into in prior years.

For the first six months of 2010, our consolidated operating income was $228.5 million, which was lower by $100.3 million or 31%, as compared to the comparable prior year period, on a $54.5 million or 6% decrease in revenues and a $45.8 million or 7% increase in costs.  Included in operating income and costs for the six months ended June 30, 2010, was a $42.0 million manufacturing inventory charge discussed below.

During the first quarter of 2010, the Drilling Products and Systems manufacturing segment performed an assessment of its Houston-based raw materials and supplies inventory.  As a result, the Company increased its inventory valuation reserve by approximately $42.0 million and recorded a corresponding charge to its operations during the period to reflect a reduction in the estimated realizable value of items that were deemed to be nonconforming or slow-moving.  (See further discussion under “Results of Operations – Drilling Products and Systems.”)


The income tax provision for the first six months of 2010 and 2009 was $62.5 million (28.7% effective rate) and $104.4 million (31.4% effective rate), respectively.

Drilling operations

Three months ended June 30, 2010, compared to three months ended June 30, 2009

The following table highlights the performance of our Drilling Services segment for the three months ended June 30, 2010 and 2009 (dollars in millions, except for average day rate):


   
Three months ended June 30,
 
   
2010
   
2009
 
   
Amount
   
% of Revenues
   
Amount
   
% of Revenues
 
                         
Revenues
  $ 328.3       100 %   $ 320.8       100 %
Operating costs
    (139.0 )     -42 %     (136.8 )     -43 %
Depreciation expense
    (41.9 )     -13 %     (38.7 )     -12 %
Selling, general and administrative expenses
    (23.5 )     -7 %     (17.4 )     -5 %
Net gain on property disposals
    -       0 %     -       0 %
Operating income
  $ 123.9       38 %   $ 127.9       40 %
                                 
Offshore fleet:
                               
Average day rate
  $ 174,500             $ 177,200          
Rig utilization
    75 %             78 %        
Revenue-producing days
    1,589               1,561          
                                 
Land fleet:
                               
Average day rate
  $ 19,800             $ 22,400          
Rig utilization
    78 %             60 %        
Revenue-producing days
    2,265               1,721          


Drilling revenues for the three months ended June 30, 2010 increased by $7.5 million or 2% compared to the second quarter of 2009 as a result of the following (in millions):

   
Increase
 
   
(Decrease)
 
       
Addition of the Ralph Coffman and EXL#11
  $ 19.0  
Higher land rig utilization
    10.7  
Addition of one land rig in 20092
    1.6  
Higher revenues for reimbursable costs and other, net
    0.4  
Lower average offshore day rates
    (0.9 )
Lower average land day rates
    (6.0 )
Lower offshore rig utilization
    (17.3 )
Net increase
  $ 7.5  

__________________________________
1The Ralph Coffman and EXL#1 commenced operations in January and May 2010, respectively, and contributed 91 and 35 revenue-producing days, respectively, in the second quarter of 2010.
2The land rig added to the fleet in May 2009 contributed 62 incremental revenue-producing days in the second quarter of 2010.

Drilling operating costs for the second quarter of 2010 increased by $2.2 million, or 2%, from the second quarter of 2009 due to the addition of the Ralph Coffman and EXL#1 and incremental Norwegian operating costs for the Gorilla VI.  Our operating margin (before depreciation and selling, general and administrative expenses) for the


 second quarter of 2010 increased slightly to 58% from 57% in the second quarter of 2009.  Drilling depreciation expense increased by $3.2 million or 8% between periods due primarily to the addition of the Ralph Coffman and EXL#1.  Selling, general and administrative expenses increased by $6.1 million or 35% between periods due primarily to a $4.5 million provision during the quarter for the expected cost of terminating the Company’s agency agreement in Mexico and to personnel related costs and professional fees.

The following table presents certain key performance measures by geographic area for our offshore fleet for the second quarters of 2010 and 2009.  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 those received from customers for contract reimbursable costs.  Average day rates are computed by dividing revenues recognized during the period, excluding revenues attributable to reimbursable costs, by the number of revenue-producing days.  Rig utilization is computed as the number of revenue-producing days divided by total available rig days during the period.


   
Three months ended June 30,
 
   
2010
   
2009
 
             
Gulf of Mexico:
           
Number of rigs
    9       9  
Revenues
  $ 80,784,000     $ 84,125,000  
Average day rate
  $ 137,200     $ 150,400  
Utilization
    76 %     66 %
                 
Middle East:
               
Number of rigs
    9       9  
Revenues
  $ 67,123,000     $ 102,324,000  
Average day rate
  $ 142,700     $ 144,700  
Utilization
    57 %     86 %
                 
North Sea:
               
Number of rigs
    2       2  
Revenues
  $ 48,144,000     $ 52,314,000  
Average day rate
  $ 269,300     $ 285,400  
Utilization
    96 %     100 %
                 
Other international:
               
Number of rigs
    4       2  
Revenues
  $ 85,794,000     $ 40,622,000  
Average day rate
  $ 229,600     $ 314,000  
Utilization
    100 %     71 %


 
 


Six months ended June 30, 2010, compared to six months ended June 30, 2009

The following table highlights the performance of our Drilling Services segment for the six months ended June 30, 2010 and 2009 (dollars in millions, except for average day rate):


   
Six months ended June 30,
 
   
2010
   
2009
 
   
Amount
   
% of Revenues
   
Amount
   
% of Revenues
 
                         
Revenues
  $ 659.3       100 %   $ 701.2       100 %
Operating costs
    (275.6 )     -42 %     (282.2 )     -40 %
Depreciation expense
    (83.4 )     -13 %     (75.5 )     -11 %
Selling, general and administrative expenses
    (39.8 )     -6 %     (33.2 )     -5 %
Net gain on property disposals
    0.3       0 %     4.7       1 %
Operating income
  $ 260.8       40 %   $ 315.0       45 %
                                 
Offshore fleet:
                               
Average day rate
  $ 178,800             $ 175,200          
Rig utilization
    75 %             85 %        
Revenue-producing days
    3,145               3,402          
                                 
Land fleet:
                               
Average day rate
  $ 20,100             $ 24,100          
Rig utilization
    74 %             67 %        
Revenue-producing days
    4,309               3,776          

Drilling revenues for the six months ended June 30, 2010 decreased by $41.9 million or 6% compared to the comparable period of 2009 as a result of the following (in millions):

   
Increase
 
   
(Decrease)
 
       
Lower offshore rig utilization
  $ (80.4 )
Lower average land day rates
    (17.3 )
Lower revenues for reimbursable costs and other, net
    (3.8 )
Addition of two land rigs in 20091
    4.5  
Higher land rig utilization
    8.4  
Higher average offshore day rates
    18.4  
Addition of the Ralph Coffman and EXL#12
    28.3  
Net decrease
  $ (41.9 )

__________________________________
1The two land rigs added to the fleet in the first half of 2009 contributed 182 incremental revenue-producing days in the first six months of 2010.
2The Ralph Coffman and EXL#1 commenced operations in January and May 2010, respectively, and contributed 167 and 35 revenue-producing days, respectively, in the first six months of 2010.

Drilling operating costs for the first six months of 2010 decreased by $6.6 million or 2% from the same period of 2009 due to reduced operating costs on four idle rigs in the Middle East and one in the Gulf of Mexico.  Lower costs of the stacked rigs were partially offset by the addition of the Ralph Coffman and EXL#1 in January and May 2010, respectively, and incremental Norwegian operating costs for the Gorilla VI.  Our operating margin (before depreciation and selling, general and administrative expenses) for the first six months of 2010 declined slightly to 58% from 60% in the same period of 2009.  Drilling depreciation expense increased by $7.9 million or 10% between periods due primarily to the addition of the Ralph Coffman and EXL#1.  Selling, general and administrative expenses increased by $6.6 million or 20% over the comparable prior year period due primarily to a $4.5 million


provision during the second quarter of 2010 for the expected cost of terminating the Company’s agency agreement in Mexico and to personnel related costs and professional fees.

The following table presents certain key performance measures by geographic area for our offshore fleet for the first six months of 2010 and 2009.  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 those received from customers for contract reimbursable costs.  Average day rates are computed by dividing revenues recognized during the period, excluding revenues attributable to reimbursable costs, by the number of revenue-producing days.  Rig utilization is computed as the number of revenue-producing days divided by total available rig days during the period.


   
Six months ended June 30,
 
   
2010
   
2009
 
             
Gulf of Mexico:
           
Number of rigs
    9       10  
Revenues
  $ 162,079,000     $ 208,269,000  
Average day rate
  $ 139,600     $ 153,400  
Utilization
    78 %     77 %
                 
Middle East:
               
Number of rigs
    9       9  
Revenues
  $ 140,130,000     $ 222,819,000  
Average day rate
  $ 152,000     $ 147,600  
Utilization
    56 %     92 %
                 
North Sea:
               
Number of rigs
    2       2  
Revenues
  $ 100,341,000     $ 102,425,000  
Average day rate
  $ 278,600     $ 282,600  
Utilization
    98 %     99 %
                 
Other international:
               
Number of rigs
    4       1  
Revenues
  $ 167,641,000     $ 71,478,000  
Average day rate
  $ 226,800     $ 320,400  
Utilization
    100 %     81 %


Drilling Products and Systems

Three months ended June 30, 2010, compared to three months ended June 30, 2009

The following table highlights the performance of our Drilling Products and Systems segment for the second quarters of 2010 and 2009 (dollars in millions):


   
Three months ended June 30,
 
   
2010
   
2009
 
   
Amount
   
% of Revenues
   
Amount
   
% of Revenues
 
                         
Revenues
  $ 71.7       100 %   $ 106.7       100 %
Operating costs
    (76.4 )     -107 %     (107.7 )     -101 %
Depreciation expense
    (2.6 )     -4 %     (2.2 )     -2 %
Selling, general and administrative expenses
    (8.0 )     -11 %     (3.0 )     -3 %
Net loss on property disposals
    0.1       0 %     -       0 %
Operating income (loss)
  $ (15.2 )     -21 %   $ (6.2 )     -6 %

Revenues from Drilling Products and Systems decreased by $35.0 million or 33% between periods due to the following (in millions):


   
Increase
 
   
(Decrease)
 
       
Lower sales of land rigs and rig kits
  $ (20.2 )
Lower sales of power system packages and motors
    (13.0 )
Lower mud pump sales
    (8.9 )
Lower parts sales
    (4.6 )
Higher revenues recognized on offshore rig kits in progress
    11.1  
Other, net
    0.6  
Net decrease
  $ (35.0 )


Revenues from Drilling Products and Systems include revenues recognized upon shipment as well as under the percentage-of-completion method of accounting.  Our product revenues are therefore influenced by the timing of shipments and progress on long-term contracts in process, 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 declined to a negative 7% of revenues in 2010 from a negative 1% in 2009.  The negative gross margins were primarily the result of certain inventory and cost of sales adjustments and significantly higher warranty costs coupled with low overall sales volumes and the increased concentration of lower-margin sales (i.e., land rigs), as compared to higher-margin sales (i.e., parts and offshore rig kits).

Selling, general and administrative costs increased by $5.0 million between periods due primarily to the addition of personnel in the fourth quarter of 2009 and first quarter of 2010 in connection with the quality initiative at the Company’s manufacturing operations and increases to the reserve for uncollectible trade receivables.

Our Drilling Products and Systems operating results for the 2010 second quarter excludes $52.4 million of revenues and $37.2 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, Joe Douglas.  Drilling Products and Systems operating results for the comparable quarter of 2009 excludes $35.1 million of revenues and $25.2 million of expenses, primarily for construction of the Ralph Coffman.


Six months ended June 30, 2010, compared to six months ended June 30, 2009

The following table highlights the performance of our Drilling Products and Systems segment for the first six months of 2010 and 2009 (dollars in millions):


   
Six months ended June 30,
 
   
2010
   
2009
 
   
Amount
   
% of Revenues
   
Amount
   
% of Revenues
 
                         
Revenues
  $ 122.0       100 %   $ 177.8       100 %
Operating costs
    (127.0 )     -104 %     (166.5 )     -94 %
Depreciation expense
    (4.7 )     -4 %     (4.4 )     -2 %
Selling, general and administrative expenses
    (13.5 )     -11 %     (7.1 )     -4 %
Material charge - manufacturing inventories
    (42.0 )     -34 %     -       0 %
Operating income (loss)
  $ (65.2 )     -53 %   $ (0.2 )     0 %

Revenues from Drilling Products and Systems decreased by $55.8 million or 31% between periods due to the following (in millions):


   
Increase
 
   
(Decrease)
 
       
Lower mud pump sales
  $ (21.0 )
Lower sales of power system packages and motors
    (19.0 )
Lower parts sales
    (11.1 )
Lower sales of land rigs and rig kits
    (9.3 )
Higher revenues recognized on offshore rig kits in progress
    6.5  
Other, net
    (1.9 )
Net decrease
  $ (55.8 )


Revenues from Drilling Products and Systems include revenues recognized upon shipment as well as under the percentage-of-completion method of accounting.  Our product revenues are therefore influenced by the timing of shipments and progress on long-term contracts in process, 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, selling, general and administrative expenses and the inventory charge discussed below declined to a negative 4% of revenues in 2010 from a 6% gross profit in 2009.  The negative margin in 2010 was primarily the result of certain inventory and cost of sales adjustments and significantly higher warranty costs coupled with lower overall sales volumes.

Selling, general and administrative costs increased by $6.4 million between periods due primarily to the addition of personnel in the fourth quarter of 2009 and first quarter of 2010 in connection with the quality initiative at the Company’s manufacturing operations and increases to the reserve for uncollectible accounts.

During the first quarter of 2010, the Company’s Drilling Products and Systems segment performed an assessment of its Houston-based raw materials and supplies inventory.  Management determined that a significant number of items had experienced some level of deterioration such that they were not within tolerance of original specifications or no longer conformed to minimum quality standards.  Full provision was made for the cost of items that cannot be efficiently reworked.  In addition, as the Company continued to work off existing drilling products backlog during the first quarter of 2010, the quantity and age of slow-moving inventory items was continuing to grow.  Management expects this trend will continue for the foreseeable future.  As a result, the Company increased its


 inventory valuation reserve by approximately $42.0 million and recorded a corresponding charge to its first quarter 2010 operations.

Our Drilling Products and Systems operating results for the six months ended June 30, 2010 excludes $98.1 million of revenues and $71.3 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, Joe Douglas.  Drilling Products and Systems operating results for the comparable period of 2009 excludes $108.6 million of revenues and $78.2 million of expenses, primarily for construction of the Ralph Coffman.

Mining, Forestry and Steel Products

Three months ended June 30, 2010, compared to three months ended June 30, 2009

The following table highlights the performance of our Mining, Forestry and Steel Products segment for the second quarters of 2010 and 2009 (dollars in millions):


   
Three months ended June 30,
 
   
2010
   
2009
 
   
Amount
   
% of Revenues
   
Amount
   
% of Revenues
 
                         
Revenues
  $ 90.1       100 %   $ 54.7       100 %
Operating costs
    (61.8 )     -69 %     (39.7 )     -73 %
Depreciation expense
    (2.0 )     -2 %     (1.6 )     -3 %
Selling, general and administrative expenses
    (4.6 )     -5 %     (4.5 )     -8 %
Operating income
  $ 21.7       24 %   $ 8.9       16 %


Revenues from Mining, Forestry and Steel Products increased by $35.4 million or 65% between periods due to the following (in millions):


   
Increase
 
   
(Decrease)
 
       
Higher sales of mining loaders
  $ 18.9  
Increase in parts sales
    7.3  
Higher sales of steel plate
    6.0  
Other, net
    3.2  
Net increase
  $ 35.4  


Our average margin before depreciation and selling, general and administrative expenses increased to 31% of revenues in 2010 from 27% in 2009.  The higher margins were attributable primarily to product sales mix, particularly a greater proportion of larger, higher-margin mining loaders and parts sales in 2010.  Selling, general and administrative expenses were relatively flat between periods.


Six months ended June 30, 2010, compared to six months ended June 30, 2009

The following table highlights the performance of our Mining, Forestry and Steel Products segment for the first six months of 2010 and 2009 (dollars in millions):


   
Six months ended June 30,
 
   
2010
   
2009
 
   
Amount
   
% of Revenues
   
Amount
   
% of Revenues
 
                         
Revenues
  $ 141.2       100 %   $ 98.0       100 %
Operating costs
    (95.7 )     -68 %     (71.7 )     -73 %
Depreciation expense
    (3.9 )     -3 %     (3.1 )     -3 %
Selling, general and administrative expenses
    (8.6 )     -6 %     (9.2 )     -9 %
Net loss on property disposals
    (0.1 )     0 %     -       0 %
Operating income
  $ 32.9       23 %   $ 14.0       14 %


Revenues from Mining, Forestry and Steel Products increased by $43.2 million or 44% between periods due to the following (in millions):


   
Increase
 
   
(Decrease)
 
       
Higher sales of mining loaders
  $ 25.5  
Increase in parts sales
    10.9  
Higher sales of steel plate
    3.4  
Other, net
    3.4  
Net increase
  $ 43.2  


Our average margin before depreciation and selling, general and administrative expenses increased to 32% of revenues in 2010 from 27% in 2009.  The higher margins were attributable primarily to product sales mix, particularly a greater proportion of larger, higher-margin mining loaders and parts sales in 2010.  Selling, general and administrative expenses decreased by $0.6 million or 7% between periods due primarily to cost-control efforts.

Outlook

Drilling Operations

Our drilling backlog by geographic area as of July 26, 2010 (the date of our most recent “Rig Fleet and Contract Status” report) and February 16, 2010 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2009), is set forth below (in millions):


   
July 26, 2010
   
February 16, 2010
 
             
North Sea
  $ 336     $ 327  
Middle East
    207       275  
Gulf of Mexico
    117       234  
Other international
    293       240  
Subtotal - offshore
    953       1,076  
Land
    198       234  
Total drilling backlog
  $ 1,151     $ 1,310  




We estimate our drilling backlog will be realized as follows (in millions):


   
Offshore
   
Land
   
Total
 
                   
2010
  $ 381     $ 69     $ 450  
2011
    385       66       451  
2012
    119       33       152  
2013
    68       14       82  
2014 and later
    -       16       16  
Total drilling backlog
  $ 953     $ 198     $ 1,151  
About 66% of our remaining available offshore rig days in 2010 and 29% of available days in 2011 are currently under contract, and most of our drilling contracts have termination penalties.

As of July 26, 2010, seven of our offshore rigs had drilling contracts estimated to complete in 2010, ten had contracts estimated to complete in 2011, one had a contract estimated to complete in 2012, two had contracts estimated to complete in 2013 including one under construction, and five were available.  The four rigs under construction are expected to be delivered over the period from the third quarter of 2010 through the first quarter of 2012; three of the four are not yet contracted.

In May 2010, the Company took delivery of the first newly constructed EXL-Class rig.  The EXL#1 commenced operations in the U.S. Gulf of Mexico in late May under the first of two contracts for work through approximately July 2011.  In June, we obtained a contract extension for the Gorilla V in the North Sea for an additional two years.

The Company’s second EXL-Class rig, which is currently under construction with expected delivery in September 2010, is expected to commence operations in Trinidad during the fourth quarter under a three-year contract following completion of construction in Brownsville, Texas, inspections and acceptance.

Although utilization of our rigs improved in the first and second quarters of 2010 over the fourth quarter of 2009, leading day rates have yet to show significant improvements and remain well below peak levels, and our results of operations have continued to benefit from long-term contracts with above-market day rates executed prior to the global downturn that began in mid 2008.  As noted above, most of these contracts are scheduled to conclude in 2010 or 2011.

As previously reported, following the Deepwater Horizon incident, the Bureau of Ocean Energy Management, Regulation and Enforcement (formerly known as the Minerals Management Service) issued two Notices to Lessees (NTLs) implementing new safety regulations and information requirements applicable to shallow water drilling operations in the U.S. Gulf of Mexico.  These NTLs impact the ability of our customers to obtain new permits on a timely basis and continue operations uninterrupted under existing permits.  We are working with our customers to meet the new requirements.

The Company currently has nine jack-up drilling rigs located in the U.S. Gulf of Mexico which may be impacted from time to time by the requirements of these recent NTLs.  The Rowan Juneau and the Rowan Alaska are currently stacked and are unlikely to receive new contracts until the issuance of permits resumes.  The Rowan Louisiana is under contract but is waiting on a permit.  The Bob Palmer has been recently released from its contract, and we expect it to return to work in the Gulf on a well-to-well basis.

Permitted activities are expected to take the Rowan Mississippi and the Ralph Coffman through their contracted terms.

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