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EX-32.2 - EXHIBIT 32.2 - ROWAN COMPANIES PLCexhibit-322xq12017.htm
EX-32.1 - EXHIBIT 32.1 - ROWAN COMPANIES PLCexhibit-321xq12017.htm
EX-31.2 - EXHIBIT 31.2 - ROWAN COMPANIES PLCexhibit-312xq12017.htm
EX-31.1 - EXHIBIT 31.1 - ROWAN COMPANIES PLCexhibit-311xq12017.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.  20549

FORM 10-Q

þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

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
rowanlogoa01.jpg
Rowan Companies plc
(Exact name of registrant as specified in its charter)

England and Wales
98-1023315
(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 þ   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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer         þ                  Accelerated filer             ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company     ¨                 Emerging growth company     ¨




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨   No þ

The number of Class A ordinary shares, $0.125 par value, outstanding at Tuesday, April 25, 2017, was 126,098,617, which excludes 1,876,100 shares held by an affiliated employee benefit trust.



ROWAN COMPANIES PLC
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 



FORWARD-LOOKING STATEMENTS
Statements contained in this report, including in the documents incorporated by reference herein, that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include words or phrases such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “could,” “may,” “might,” “should,” “will,” “forecast,” “potential,” “outlook,” “scheduled,” “predict,” “will be,” “will continue,” “will likely result,” and similar words and specifically include statements regarding expected financial and operating performance; dividend payments; share repurchases or repayment of debt; business strategies; expected utilization, day rates, revenues, operating expenses, contract terms, contract backlog and fleet status; benefits of our joint venture with Saudi Aramco; capital expenditures; tax rates and positions; impairments; insurance coverages; access to financing and funding sources, including borrowings under our credit facility; the availability, delivery, mobilization, contract commencement, relocation or other movement of rigs and the timing thereof; construction, enhancement, upgrade or repair and costs and timing thereof; the suitability of rigs for future contracts; general market, business and industry conditions, trends and outlook; rig demand; future operations; the impact of regulatory requirements; divestiture of selected assets; expense management; the likely outcome of legal proceedings; the impact of competition and consolidation in the industry; the timing of acquisitions, dispositions and other business transactions; customer financial position; and commodity prices. Such statements are subject to numerous risks, uncertainties and assumptions that may cause actual results to vary materially from those indicated, including:
prices of oil and natural gas and industry expectations about future prices and impacts of regional or global financial or economic downturns;
changes in the offshore drilling market, including fluctuations in worldwide rig supply and demand, competition or technology, including as a result of delivery of newbuild drilling units;
variable levels of drilling activity and expenditures in the energy industry, whether as a result of actions by OPEC, global capital markets and liquidity, prices of oil and natural gas or otherwise, which may result in decreased demand and/or cause us to idle or stack, sell or scrap additional rigs;
possible termination, suspension, renegotiation or cancellation of drilling contracts (with or without cause) as a result of general and industry economic conditions, distressed financial condition of our customers, force majeure, mechanical difficulties, delays, labor disturbances, strikes, performance or other reasons; payment or operational delays by our customers; or restructuring or insolvency of significant customers;
changes or delays in actual contract commencement dates, contract option exercises, contract revenues and contract awards;
our ability to enter into, and the terms of, future drilling contracts for drilling units whose contracts are expiring and drilling units currently idled or stacked;
downtime, lost revenue and other risks associated with drilling operations, operating hazards, or rig relocations and transportation, including rig or equipment failure, collisions, damage and other unplanned repairs, the availability of transport vessels, hazards, self-imposed drilling limitations and other delays due to weather conditions, work stoppages or otherwise, and the availability or high cost of insurance coverage for certain offshore perils or associated removal of wreckage or debris and other losses;
regulatory, legislative or permitting requirements affecting drilling operations and other compliance obligations;
tax matters, including our tax rates, tax positions, results of audits, tax disputes, changes in tax laws, treaties and regulations, tax assessments and liabilities for taxes;
our ability to realize the expected benefits of our joint venture with Saudi Aramco and increased risks of concentrated operations in the Middle East;
access to spare parts, equipment and personnel to maintain, service and upgrade our fleet;
potential cost overruns and other risks inherent to repair, inspections or upgrade of drilling units, unexpected delays in rig and equipment delivery and engineering or design issues, delays in acceptance by our customers, or delays in the dates our drilling units will enter a shipyard, be transported and delivered, enter service or return to service;

1


operating hazards, including environmental or other liabilities, risks, expenses or losses, whether related to well-control issues, collisions, groundings, blowouts, fires, explosions, weather or hurricane delays or damage, losses or liabilities (including wreckage or debris removal) or otherwise;
our ability to retain highly skilled personnel on commercially reasonable terms, whether due to competition, cost cutting initiatives, labor regulations, unionization or otherwise; our ability to seek and receive visas for our personnel to work in our areas of operation in a timely manner;
governmental action and political and economic uncertainties, including uncertainty or instability resulting from civil unrest, military or political demonstrations, acts of war, strikes, terrorism, piracy or outbreak or escalation of hostilities or other crises which may result in expropriation, nationalization, confiscation or deprivation of assets, extended business interruptions, suspended operations, or suspension and/or termination of contracts and payment disputes based on force majeure events;
cyber-breaches of our corporate or offshore control networks;
epidemics or other related travel restrictions which may result in business interruptions and shortages of available labor;
the outcome of legal proceedings, or other claims or contract disputes, including inability to collect receivables or resolve significant contractual or day rate disputes, any renegotiation, nullification, cancellation or breach of contracts with customers or other parties;
potential for additional asset impairments;
our liquidity, adequacy of cash flows to meet obligations, or our ability to access or obtain financing and other sources of capital, such as in the debt or equity capital markets;
volatility in currency exchange rates and limitations on our ability to use or convert illiquid currencies;
effects of accounting changes and adoption of accounting policies;
potential unplanned expenditures and funding requirements, including investments in pension plans and other benefit plans;
economic volatility and political, legal and tax uncertainties following the vote in the U.K. to exit the European Union (“Brexit”) and any subsequent referendum in Scotland to seek independence from the U.K.;
other important factors described from time to time in the reports filed by us with the Securities and Exchange Commission and the New York Stock Exchange.
Such risks and uncertainties are beyond our ability to control, and in many cases we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. Should one or more of these risks or uncertainties materialize or should our underlying assumptions prove incorrect, actual results may vary materially from those indicated. In addition to the risks, uncertainties and assumptions described above, you should also carefully read and consider the risk factors and forward-looking statement disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2016 and any subsequent Quarterly Reports on Form 10-Q.
All forward-looking statements contained in this report speak only as of the date of this report and are expressly qualified in their entirety by such factors.  We undertake no obligation to update or revise publicly any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report, or to reflect the occurrence of unanticipated events, except as required by applicable law.



2


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
Three months ended March 31,
 
2017
 
2016
REVENUES
$
374.3

 
$
500.2

 
 
 
 
COSTS AND EXPENSES:
 

 
 

Direct operating costs (excluding items below)
170.0

 
204.8

Depreciation and amortization
99.1

 
98.9

Selling, general and administrative
24.0

 
26.9

Loss on disposals of property and equipment
3.4

 
2.2

Total costs and expenses
296.5

 
332.8

 
 
 
 
INCOME FROM OPERATIONS
77.8

 
167.4

 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

Interest expense
(39.6
)
 
(38.9
)
Gain (loss) on extinguishment of debt
(0.2
)
 
0.6

Interest income
2.0

 
0.4

Other - net

 
(2.6
)
Total other (expense), net
(37.8
)
 
(40.5
)
 
 
 
 
INCOME BEFORE INCOME TAXES
40.0

 
126.9

Provision for income taxes
29.7

 
4.1

 
 
 
 
NET INCOME
$
10.3

 
$
122.8

 
 
 
 
NET INCOME PER SHARE - BASIC
$
0.08

 
$
0.98

 
 
 
 
NET INCOME PER SHARE - DILUTED
$
0.07

 
$
0.98

 
 
 
 


3


ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three months ended March 31,
 
2017
 
2016
NET INCOME
$
10.3

 
$
122.8

 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

Net reclassification adjustment for amounts recognized in net income as a component of net periodic benefit cost, net of income tax expense of $0.5 and $1.3 for the three months ended March 31, 2017 and 2016, respectively (see Notes 3 and 8).
0.9

 
2.5

 
 
 
 
COMPREHENSIVE INCOME
$
11.2

 
$
125.3



4


ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
(Unaudited)
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,173.2

 
$
1,255.5

Receivables - trade and other
317.1

 
301.3

Prepaid expenses and other current assets
24.6

 
23.5

Total current assets
1,514.9

 
1,580.3

 
 
 
 
PROPERTY AND EQUIPMENT:
 

 
 

Drilling equipment
8,984.1

 
8,965.3

Other property and equipment
138.1

 
135.5

Property and equipment - gross
9,122.2

 
9,100.8

Less accumulated depreciation and amortization
2,138.4

 
2,040.8

Property and equipment - net
6,983.8

 
7,060.0

 
 
 
 
Other assets
54.6

 
35.3


$
8,553.3

 
$
8,675.6

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$

 
$
126.8

Accounts payable - trade
93.1

 
94.3

Deferred revenues
108.2

 
103.9

Accrued liabilities
138.3

 
158.8

Total current liabilities
339.6

 
483.8

 
 
 
 
Long-term debt, less current portion
2,552.5

 
2,553.4

Other liabilities
320.6

 
338.8

Deferred income taxes - net
8.8

 
185.7

Commitments and contingent liabilities (Note 4)


 


 
 
 
 
SHAREHOLDERS' EQUITY:
 

 
 

Class A Ordinary Shares, $0.125 par value, 128.0 and 128.0 shares issued, respectively; and 126.1 and 125.5 shares outstanding, respectively
16.0

 
16.0

Additional paid-in capital
1,473.9

 
1,471.7

Retained earnings
4,047.3

 
3,830.4

Cost of 1.9 and 2.5 treasury shares, respectively
(9.3
)
 
(7.2
)
Accumulated other comprehensive loss
(196.1
)
 
(197.0
)
Total shareholders' equity
5,331.8

 
5,113.9


$
8,553.3

 
$
8,675.6


5


ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In millions)
(Unaudited)
 
Shares outstanding
 
Class A ordinary shares/ Common stock
 
Additional paid-in capital
 
Retained earnings
 
Treasury shares
 
Accumulated other comprehensive income (loss)
 
Total shareholders' equity
Balance, January 1, 2016
124.8

 
$
15.7

 
$
1,458.5

 
$
3,509.8

 
$
(12.2
)
 
$
(199.3
)
 
$
4,772.5

Net shares issued (acquired) under share-based compensation plans
0.4

 

 
(6.6
)
 

 
3.8

 

 
(2.8
)
Share-based compensation

 

 
5.9

 

 

 

 
5.9

Excess tax deficit from share-based awards

 

 
(0.8
)
 

 

 

 
(0.8
)
Retirement benefit adjustments, net of taxes of $1.3

 

 

 

 

 
2.5

 
2.5

Net income

 

 

 
122.8

 

 

 
122.8

Balance, March 31, 2016
125.2

 
$
15.7

 
$
1,457.0

 
$
3,632.6

 
$
(8.4
)
 
$
(196.8
)
 
$
4,900.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
125.5

 
$
16.0

 
$
1,471.7

 
$
3,830.4

 
$
(7.2
)
 
$
(197.0
)
 
$
5,113.9

Net shares issued (acquired) under share-based compensation plans
0.6

 

 
(3.2
)
 

 
(2.1
)
 

 
(5.3
)
Share-based compensation

 

 
5.4

 

 

 

 
5.4

Adoption of new accounting standard

 

 

 
206.6

 

 

 
206.6

Retirement benefit adjustments, net of taxes of $0.5

 

 

 

 

 
0.9

 
0.9

Net income

 

 

 
10.3

 

 

 
10.3

Balance, March 31, 2017
126.1

 
$
16.0

 
$
1,473.9

 
$
4,047.3

 
$
(9.3
)
 
$
(196.1
)
 
$
5,331.8


6


ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three months ended March 31,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
10.3

 
$
122.8

Adjustments to reconcile net income to net cash provided by operations:
 

 
 

Depreciation and amortization
99.1

 
98.9

Deferred income taxes
16.8

 
(12.6
)
Provision for pension and other postretirement benefits
2.5

 
4.8

Share-based compensation expense
6.8

 
8.2

Loss on disposals of property and equipment
3.4

 
2.2

Other
0.2

 

Changes in current assets and liabilities:
 

 
 

Receivables - trade and other
(22.2
)
 
(16.4
)
Prepaid expenses and other current assets
(1.2
)
 
6.8

Accounts payable
3.4

 
(17.2
)
Accrued income taxes
2.3

 
5.2

Other current liabilities
(17.1
)
 
(28.1
)
Other postretirement benefit claims paid
(0.9
)
 
(3.0
)
Contributions to pension plans
(5.9
)
 
(3.1
)
Deferred revenues
(6.3
)
 
(2.5
)
Net changes in other noncurrent assets and liabilities
(9.7
)
 
(3.1
)
Net cash provided by operating activities
81.5

 
162.9

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(30.9
)
 
(32.9
)
Proceeds from disposals of property and equipment
0.1

 
0.3

Net cash used in investing activities
(30.8
)
 
(32.6
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Reductions of long-term debt
(127.7
)
 
(16.5
)
Shares repurchased for tax withholdings on vesting of restricted share units
(5.3
)
 
(2.8
)
Net cash used in financing activities
(133.0
)
 
(19.3
)
 
 
 
 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(82.3
)
 
111.0

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,255.5

 
484.2

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,173.2

 
$
595.2



7

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1 – Nature of Operations and Basis of Presentation
Rowan Companies plc, a public limited company incorporated under the laws of England and Wales, is a global provider of offshore contract drilling services to the international oil and gas industry. Our fleet currently consists of 29 mobile offshore drilling units, including 25 self-elevating jack-up drilling units and four ultra-deepwater drillships. The Company contracts its drilling rigs, related equipment and work crews primarily on a day-rate basis in markets throughout the world, currently including the United States Gulf of Mexico (US GOM), United Kingdom (U.K.) and Norwegian sectors of the North Sea, the Middle East and Trinidad.
The financial statements included in this Form 10-Q are presented in United States (U.S.) dollars and include the accounts of Rowan Companies plc (Rowan plc) and its direct and indirect subsidiaries. Unless the context otherwise requires, the terms “Rowan,” “Company,” “we,” “us” and “our” are used to refer to Rowan plc and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
The financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commission. Certain information and notes have been condensed or omitted as permitted by those rules and regulations. The financial information included in this report is unaudited, but management believes the accompanying financial statements contain all adjustments, which are of a normal recurring nature unless otherwise noted, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The preparation of our condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s results of operations and cash flows for the interim periods are not necessarily indicative of results to be expected for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Joint Venture
On November 21, 2016, Rowan and the Saudi Arabian Oil Company (“Saudi Aramco”), through their subsidiaries, entered into a Shareholders’ Agreement to create a 50/50 joint venture to own, manage and operate offshore drilling units in Saudi Arabia. The new entity is anticipated to commence operations in the second quarter of 2017.
At formation of the new company, Rowan and Saudi Aramco will each contribute $25 million to be used for working capital needs. The Asset Contribution and Transfer Agreements provide that at commencement of operations, Rowan will contribute three rigs and its local shore based operations, and Saudi Aramco will contribute two rigs and cash to maintain equal equity ownership in the new company. Rowan will then contribute two more rigs in late 2018 when those rigs complete their current contracts, and Saudi Aramco will make a matching cash contribution at that time. At the various asset contribution dates, excess cash is expected to be distributed in equal parts to the shareholders. Rigs contributed will receive contracts for an aggregate 15 years, renewed and re-priced every three years, provided that the rigs meet the technical and operational requirements of Saudi Aramco.
Rowan rigs in Saudi Arabia not selected for contribution will be managed by the new company until the end of their current contracts pursuant to a management services agreement that provides for a management fee equal to a percentage of revenue to cover overhead costs. After the management period ends, such rigs may be selected for contribution, lease, or they will be required to relocate outside of the Kingdom.
Each of Rowan and Saudi Aramco will be obligated to fund their portion of the purchase of up to 20 newbuild jack-up rigs ratably over 10 years. The first rig is expected to be delivered as early as 2021. The partners intend that the newbuild jack-up rigs will be financed out of available cash from operations and/or funds available from third party debt financing. Saudi Aramco as a customer will provide drilling contracts to support the new company in the acquisition of the new rigs. If cash from operations or financing is not available to fund the cost of the newbuild jack-up rig, each partner will be obligated to contribute funds to purchase such rigs, up to a maximum amount of $1.25 billion per partner in the aggregate for all 20 newbuild jack-up rigs.

New Accounting Pronouncements
Revenue Recognition In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, (ASC 606), which sets forth a global standard for revenue recognition and replaces most existing industry-specific guidance. The Company will be required to adopt the new standard in

8

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

annual and interim periods beginning January 1, 2018. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company will adopt ASC 606, effective January 1, 2018 concurrently with ASU No. 2016-02, Leases (ASC 842) as discussed below. The Company is currently evaluating the impact ASC 606 will have on our consolidated financial statements and to complete that evaluation, the Company has completed training on the ASU, formed an implementation team and has started the review and documentation of contracts.
Lease Accounting In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842): Amendments to the FASB Accounting Standards Codification, which requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key qualitative and quantitative information about the entity's leasing arrangements. Lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including a number of optional practical expedients that entities may elect to apply. ASC 842 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Under the updated accounting standards, the Company has preliminarily determined that our drilling contracts contain a lease component, and our adoption, therefore, will require that the Company separately recognize revenues associated with the lease and services components. Our adoption, and the ultimate effect on our consolidated financial statements, will be based on an evaluation of the contract-specific facts and circumstances, and such effect could result in differences in the timing of our revenue recognition relative to current accounting standards. Due to the interaction with the issued accounting standard on revenue recognition, the Company expects to adopt ASC 842 effective January 1, 2018 concurrently with ASC 606. Our adoption will have an impact on how our consolidated balance sheets, statements of income, cash flows and disclosures contained in our notes to consolidated financial statements will be presented. The Company is currently evaluating the impact ASC 842 will have on our consolidated financial statements and to complete that evaluation, the Company has completed training on the ASU, formed an implementation team and has started the review and documentation of contracts.
Stock Compensation In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, which simplifies several aspects of accounting for employee share-based payment awards, including the accounting for income taxes, withholding taxes and forfeitures, as well as classification on the statement of cash flows. The Company adopted this ASU as of January 1, 2017 and elected to account for forfeitures when they occur, on a modified retrospective basis. As required by this ASU, the Condensed Consolidated Statement of Cash Flows was retroactively adjusted for the three months ended March 31, 2016 to reclass $2.8 million from operating activities to financing activities related to shares repurchased for tax withholdings on vesting of restricted share units. The Company prospectively adopted the provision of this ASU related to the classification of excess tax benefits on the statement of cash flows as an operating cash flow. The adoption did not have a material impact on our financial statements.
Financial Instruments In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the FASB's guidance on the impairment of financial instruments. The ASU adds to US GAAP an impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The Company will be required to adopt the amended guidance in annual and interim reports beginning January 1, 2020, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is in the process of evaluating the impact this amendment may have on our consolidated financial statements.
Statement of Cash Flows - In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight cash flow classification issues with the objective of reducing differences in practice. The Company will be required to adopt the amendments in this ASU in annual and interim periods beginning January 1, 2018, with early adoption permitted. Adoption is required to be on a retrospective basis, unless impracticable for any of the amendments, in which case a prospective application is permitted. The Company is in the process of evaluating the impact these amendments may have on our consolidated financial statements.
Income Taxes - In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. As permitted under this ASU, the Company elected early adoption of this ASU as of January 1, 2017 and recorded a $206.6 million increase to retained earnings for the remaining unamortized deferred tax liability resulting from intra-entity transactions. The Company evaluated the impact to net income and earnings per share related to the adoption of this ASU on the three months ended March 31, 2017 and determined such impact to be immaterial.

9

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Business Combinations - In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company will be required to adopt the amendments in this ASU in annual and interim periods beginning January 1, 2018, with early adoption permitted. Adoption is required to be applied on a prospective basis on or after the effective date. The Company is in the process of evaluating the impact these amendments may have on our consolidated financial statements.
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost - In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires entities to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Entities will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statementThe ASU also allows only the service cost component to be eligible for capitalization. This ASU is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company is in the process of evaluating the impact these amendments may have on our consolidated financial statements.
Note 2 – Earnings Per Share
A reconciliation of income from continuing operations for basic and diluted income per share is set forth below (in millions):
 
Three months ended March 31,
 
2017
 
2016
Income from continuing operations
$
10.3

 
$
122.8

Income from continuing operations allocated to non-vested share awards
(0.9
)
 

Income from continuing operations available to shareholders
$
9.4

 
$
122.8

A reconciliation of shares for basic and diluted income per share is set forth below (in millions):
 
Three months ended March 31,
 
2017
 
2016
Average common shares outstanding
125.7

 
125.0

Effect of dilutive securities - share-based compensation
1.7

 
0.8

Average shares for diluted computations
127.4

 
125.8

Share options, share appreciation rights, nonvested restricted stock, performance units (“P-Units”) and restricted share units granted under share-based compensation plans are anti-dilutive and excluded from diluted earnings per share when the hypothetical number of shares that could be repurchased under the treasury stock method exceeds the number of shares that can be exercised, or when the Company reports a net loss from continuing operations. Anti-dilutive shares, which could potentially dilute earnings per share in the future, are set forth below (in millions):
 
Three months ended March 31,
 
2017
 
2016
Share options and appreciation rights
1.5

 
1.7

Nonvested restricted shares and restricted share units
1.4

 
2.2

Total potentially dilutive shares
2.9

 
3.9

Note 3 – Pension and Other Postretirement Benefits
The Company provides defined-benefit pension, health care and life insurance benefits upon retirement for certain full-time employees.

10

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The components of net periodic pension cost were as follows (dollars in millions):
 
Three months ended March 31,
 
2017
 
2016
Service cost
$
4.0

 
$
3.8

Interest cost
6.3

 
6.5

Expected return on plan assets
(9.4
)
 
(9.9
)
Amortization of net loss
5.7

 
5.1

Amortization of prior service credit
(1.2
)
 
(1.2
)
Net periodic pension cost
$
5.4

 
$
4.3

The components of net periodic cost of other postretirement benefits were as follows (dollars in millions):
 
Three months ended March 31,
 
2017
 
2016
Service cost
$

 
$
0.1

Interest cost
0.2

 
0.5

Amortization of net loss
0.2

 

Amortization of prior service credit
(3.3
)
 
(0.1
)
Total other postretirement benefit cost
$
(2.9
)
 
$
0.5

During the three months ended March 31, 2017, the Company contributed $6.8 million to its pension and other postretirement benefit plans and expects to make additional contributions to such plans totaling approximately $25.3 million for the remainder of 2017.
Note 4 – Commitments and Contingent Liabilities
Uncertain tax positions – The Company has been advised by the U.S. Internal Revenue Service (IRS) of proposed unfavorable tax adjustments of $85 million including applicable penalties for the open tax years 2009 through 2012. The unfavorable tax adjustments primarily related to the following items: 2009 tax benefits recognized as a result of applying the facts of a third-party tax case that provided favorable tax treatment for certain foreign contracts entered into in prior years to the Company’s situation; transfer pricing; and domestic production activity deduction. The Company has protested the proposed adjustment. However, the IRS does not agree with our protest and they have submitted the proposed unfavorable tax adjustments to be reviewed by the IRS Appeals group. In years subsequent to 2012, the Company has similar positions that could be subject to adjustments for the open years. The Company has provided for amounts that the Company believes will be ultimately payable under the proposed adjustments and intends to vigorously defend our positions; however, if the Company determines the provisions for these matters to be inadequate due to new information or the Company is required to pay a significant amount of additional U.S. taxes and applicable penalties and interest in excess of amounts that have been provided for these matters, our consolidated results of operations and cash flows could be materially and adversely affected.
The gross unrecognized tax benefits excluding penalties and interest are $121 million and $120 million as of March 31, 2017 and December 31, 2016, respectively. The increase to gross unrecognized tax benefits was primarily due to interest, penalties, foreign currency exchange revaluation and tax positions taken related to current year-to-date anticipated transfer pricing positions. Realization of the net unrecognized tax benefits excluding penalties and interest would favorably impact our tax provision by $60 million.
It is reasonable that the existing liabilities for the unrecognized tax benefits may increase or decrease over the next 12 months as a result of audit closures and statute expirations, however, the ultimate timing of the resolution and/or closure of audits is highly uncertain.
Letters of credit – The Company periodically employs letters of credit in the normal course of our business, and had outstanding letters of credit of approximately $9.9 million at March 31, 2017.

11

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Joint venture funding obligations – If the new joint venture company has insufficient cash from operations or financing is not available to fund the cost of the newbuild jack-up rigs, Rowan will be obligated to contribute funds to purchase such rigs, up to a maximum amount of $1.25 billion for all 20 newbuild jack-up rigs (see Note 1).
Pending or threatened litigation – The Company is involved in various legal proceedings incidental to our businesses and are vigorously defending our position in all such matters. Although the outcome of such proceedings cannot be predicted with certainty, the Company believes that there are no known contingencies, claims or lawsuits that will have a material effect on its financial position, results of operations or cash flows.
Note 5 – Share-Based Compensation
On February 22, 2017, the Company granted restricted share units (“RSUs”) to employees for annual incentive awards pursuant to our long-term incentive plan with a grant-date fair value aggregating $24.1 million which will be recognized as compensation expense over a weighted-average period of 2.7 years from the grant date. The awards vest ratably over three years except to the extent they may vest earlier under our retirement policy.
Additionally, on February 22, 2017, the Company granted to certain members of management P-Units that have a target value of $100 per unit. The amount ultimately earned is determined by the Company’s total shareholder return (TSR) relative to a selected group of peer companies, as defined in the award agreement, over a three-year period ending December 31, 2019. The amount earned could range from zero to $200 per unit depending on performance. Twenty-five percent of the P-Units’ value is determined by the Company’s relative TSR ranking for each one-year period ended December 31, 2017, 2018, and 2019 and 25% of the P-Units’ value is determined by the relative TSR ranking for the three-year period ending December 31, 2019. P-Units cliff vest and payment is made, if any, on the third anniversary following the grant date. Any employee who terminates employment with the Company prior to the third anniversary for any reason other than retirement will not receive any payment with respect to P-Units unless approved by the Compensation Committee. Settlement of the P-Units granted may be in cash or shares, at the Compensation Committee's discretion.
The grant date fair value of P-Units was estimated to be $8.4 million. Fair value was estimated using a Monte Carlo simulation model, which considers the probabilities of the Company’s TSR ranking at the end of each performance period, and the amount of the payout at each rank to determine the probability-weighted expected payout. The Company uses liability accounting to account for the P-Units. Compensation is recognized on a straight-line basis over a maximum period of three years from the grant date and is adjusted for changes in fair value through the end of the performance period. 
Liabilities for estimated P-Unit obligations at March 31, 2017 for 2017 grants and prior, included $9.0 million and $5.5 million classified as current and noncurrent, respectively, compared to $10.9 million and $12.8 million, respectively, at December 31, 2016. Current and noncurrent estimated P-Unit liabilities are included in Accrued Liabilities, and Other Liabilities, respectively, in the Condensed Consolidated Balance Sheets.

At March 31, 2017, estimated unrecognized compensation cost related to nonvested share-based compensation arrangements totaled approximately $54.8 million, which is expected to be recognized as compensation expense over a remaining weighted-average period of 2.2 years.
Note 6 – Derivatives
On May 23, 2016, the Company reached an agreement with Freeport-McMoRan Oil and Gas LLC (“FMOG”) and its parent company, Freeport-McMoRan Inc. (“FCX”) in connection with the drilling contract for the drillship Rowan Relentless (“FMOG Agreement”), which was scheduled to terminate in June 2017. In connection with this agreement, the Company signed rights to receive two additional contingent payments from FCX, payable on September 30, 2017, of $10 million and $20 million depending on the average price of West Texas Intermediate (“WTI”) crude oil over a 12-month period beginning June 30, 2016. The $10 million payment would have been due if the average price over the period was greater than $50 per barrel and the additional $20 million payment will be due if the average price over the period is greater than $65 per barrel (“FMOG Provision”) In January 2017, the Company and FCX settled the $10 million contingent payment provision with a $6.0 million payment received by the Company.
The Company determined that the FMOG Provision of the FMOG Agreement is a freestanding financial instrument and that it met the criteria of a derivative instrument (“Contingent Payment Derivative”). The Contingent Payment Derivative was initially recorded to revenue at a fair value of $6.2 million on May 23, 2016, and will be revalued at each reporting date with changes in

12

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

the fair value reported as non-operating income or expense. The fair value of the remaining Contingent Payment Derivative related to the $20 million contingent payment provision was determined using a Monte Carlo simulation and has no value as of March 31, 2017 (see Note 7).
The following table provides the fair value of the Company’s derivative as reflected in the Condensed Consolidated Balance Sheets (in millions):
 
Fair value
Balance sheet classification
March 31, 2017
December 31, 2016
Derivative:
 
 
Contingent Payment Derivative
 
 
Prepaid expenses and other current assets
$

$
6.1


The following table provides the revaluation effect of the Company’s derivative on the Condensed Consolidated Statements of Operations (in millions):
 
 
 
 
Amount of gain (loss) recognized in income (loss)
Derivative
 
Classification of gain (loss) recognized in income (loss)
 
Three months ended March 31, 2017
Contingent Payment Derivative
 
Other - net
 
$
(0.1
)
Note 7 – Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by US GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are:
Level 1 – Quoted prices for identical instruments in active markets;
Level 2 – Quoted market prices for similar instruments in active markets; quoted prices for identical instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable, such as those used in pricing models or discounted cash flow methodologies, for example.
The applicable level within the fair value hierarchy is the lowest level of any input that is significant to the fair value measurement.
Derivative
The fair value of the Contingent Payment Derivative (Level 3) was estimated using a Monte Carlo simulation model, which calculates the probabilities of the daily closing WTI spot price exceeding the $50 price target and the $65 price target (“Price Targets”), respectively, on a daily averaging basis during the 12-month payment measurement period ending on June 30, 2017. The probabilities are applied to the payout at each Price Target to calculate the probability-weighted expected payout. The following are the significant inputs used in the valuation of the Contingent Payment Derivative: the WTI Spot Price on the valuation date, the expected volatility, and the risk-free interest rate, and the slope of the WTI forward curve, which were $47.48, 37.5%, 0.765% and 5.5% at May 23, 2016, respectively and $50.6, 28.337%, 0.908%, and 7.071% at March 31, 2017, respectively. The expected volatility was estimated from the implied volatility rates of WTI Crude Futures. The risk-free rate was based on yields of U.S. Treasury securities commensurate with the remaining term of the Contingent Payment Derivative. At December 31, 2016, the Company held a Contingent Payment Derivative in the amount of $6.1 million which was classified as Prepaid Expenses and Other Current Assets on the Consolidated Balance Sheet. In January 2017, the Company and FCX settled the $10 million contingent payment provision with a $6.0 million payment received by the Company (see Note 6). The remaining Contingent Payment Derivative had no value at March 31, 2017.

13

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):
 
 
 
Estimated fair value measurements
 
Fair value
 
Quoted prices in active markets (Level 1)
 
Significant other observable inputs (Level 2)
 
Significant other unobservable inputs (Level 3)
March 31, 2017:
 
 
 
 
 
 
 
Assets - cash equivalents
$
1,160.1

 
$
1,160.1

 
$

 
$

Derivative

 

 

 

Other assets (Egyptian Pounds)
3.5

 
3.5

 

 

 
 
 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
 
 
Assets - cash equivalents
$
1,242.3

 
$
1,242.3

 
$

 
$

Derivative
6.1

 

 

 
6.1

Other assets (Egyptian Pounds)
4.2

 
4.2

 

 

At March 31, 2017 and December 31, 2016, the Company held Egyptian pounds in the amount of $3.5 million and $4.2 million, respectively, that are classified as Other Assets on the Condensed Consolidated Balance Sheets. The Company ceased drilling operations in Egypt in 2014, and is currently working to obtain access to the funds for use outside Egypt to the extent they are not utilized. The Company can provide no assurance it will be able to convert or utilize such funds in the future.
Trade receivables and trade payables, which are required to be measured at fair value, have carrying values that approximate their fair values due to their short maturities.
Other Fair Value Measurements
Financial instruments not required to be measured at fair value consist of the Company’s publicly traded debt securities. Our publicly traded debt securities had a carrying value of $2.553 billion at March 31, 2017, and an estimated fair value at that date aggregating $2.300 billion, compared to a carrying and fair value of $2.680 billion and $2.448 billion, respectively, at December 31, 2016. Fair values of our publicly traded debt securities were provided by a broker who makes a market in such securities and were measured using a market-approach valuation technique, which is a Level 2 fair value measurement.
Note 8 – Shareholders' Equity
Reclassifications from Accumulated Other Comprehensive Loss – The following table sets forth the significant amounts reclassified out of each component of accumulated other comprehensive loss and their effect on net income (loss) for the period (in millions):
 
Three months ended March 31,
 
2017
 
2016
Amounts recognized as a component of net periodic pension and other postretirement benefit cost:
 
 
 
Amortization of net loss
$
(5.9
)
 
$
(5.1
)
Amortization of prior service credit
4.5

 
1.3

Total before income taxes
(1.4
)
 
(3.8
)
Income tax benefit
0.5

 
1.3

Total reclassifications for the period, net of income taxes
$
(0.9
)
 
$
(2.5
)

14

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company records unrealized gains and losses related to net periodic pension and other postretirement benefit cost net of estimated taxes in Accumulated other comprehensive income (loss). The Company has a valuation allowance against its net U.S. deferred tax asset that is not expected to be realized. A portion of this valuation allowance is related to deferred tax benefits or expense as recorded in Accumulated other comprehensive income (loss). 
Note 9 – Other Financial Statement Disclosures
Accounts Receivable – The following table sets forth the components of Receivables - Trade and Other (in millions):
 
March 31, 2017
 
December 31, 2016
Trade
$
297.6

 
$
286.2

Income tax
8.7

 
7.7

Other
10.8

 
7.4

Total receivables - trade and other
$
317.1

 
$
301.3

Accrued Liabilities – The following table sets forth the components of Accrued Liabilities (in millions):
 
March 31, 2017
 
December 31, 2016
Pension and other postretirement benefits
$
27.4

 
$
32.1

Compensation and related employee costs
42.2

 
62.4

Interest
39.8

 
33.6

Income taxes
20.7

 
18.3

Other
8.2

 
12.4

Total accrued liabilities
$
138.3

 
$
158.8

Long-term Debt – Long-term debt consisted of the following (in millions):

 
March 31, 2017
 
December 31, 2016
5% Senior Notes, due September 2017 ($92.2 million principal amount; 5.2% effective rate)
$

 
$
92.0

7.875% Senior Notes, due August 2019 ($207.9 million and $209.8 million principal amount, respectively; 8.0% effective rate)
207.1

 
208.9

4.875% Senior Notes, due June 2022 ($656.6 million and $690.2 million principal amount, respectively; 4.7% effective rate)
661.3

 
695.4

4.75% Senior Notes, due January 2024 ( $398.1 million principal amount; 4.8% effective rate)
395.7

 
395.6

7.375% Senior Notes, due June 2025 ($500 million principal amount; 7.4% effective rate)
497.2

 
497.2

5.4% Senior Notes, due December 2042 ($400 million principal amount; 5.4% effective rate)
395.0

 
394.9

5.85% Senior Notes, due January 2044 ($400 million principal amount; 5.9% effective rate)
396.2

 
396.2

Total carrying value
2,552.5

 
2,680.2

Current portion (1)

 
126.8

Carrying value, less current portion
$
2,552.5

 
$
2,553.4

(1) Current portion of long-term debt at December 31, 2016 included the 5% Senior Notes due 2017, as well as the portion of 7.875% Senior Notes due 2019 and 4.875% Senior Notes due 2022 tendered in December 2016 but not settled until January 2017.

In the first quarter of 2016, the Company paid $15.8 million in cash to retire $16.5 million aggregate principal amount of the 5% Senior Notes due 2017 and 7.875% Senior Notes due 2019 and recognized a $0.6 million gain on early extinguishment of debt.

15

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Also during the first quarter of 2016, the Company repurchased an additional $21.4 million aggregate principal amount of the 5% and 7.875% Senior Notes, which settled in April 2016 for cash paid of $20.1 million and resulted in a $1.2 million gain on early extinguishment of debt in the second quarter of 2016.
In April 2016, the Company paid $9.4 million to repurchased $10.0 million aggregate principal amount of the 7.875% Senior Notes which resulted in a $0.6 million gain on early extinguishment of debt in the second quarter of 2016.
In December 2016, the Company commenced cash tender offers for $750 million aggregate principal amount of certain Senior Notes (the 2017 Notes, 2019 Notes, 2022 Notes and the 2024 Notes) issued by the Company. The tender offers expired on January 3, 2017; however, there was also an early tender expiration on December 16, 2016 which provided for an early tender premium. Senior Notes in the amount of $463.9 million were redeemed in December 2016 pursuant to notes validly tendered and accepted for purchase prior to the early tender expiration time. At the expiration of the tender offers on January 3, 2017, the Company paid $32.8 million to redeem $34.6 million aggregate principal amount of outstanding Senior Notes, consisting of $0.1 million of the 2017 Notes, $0.9 million of the 2019 Notes and $33.6 million of the 2022 Notes.
On January 9, 2017, the Company called for redemption $92.1 million aggregate principal amount of the 2017 Notes that remained outstanding and on February 8, 2017, the Company paid $94.0 million to redeem such notes.
Supplemental Cash Flow Information – Accrued capital expenditures, which are excluded from capital expenditures in the Condensed Consolidated Statements of Cash Flows until settlement, totaled $15.9 million and $27.0 million at March 31, 2017 and 2016, respectively.
Income TaxesIn accordance with US GAAP for interim reporting, the Company estimates its full-year effective tax rate and applies this rate to its year-to-date pretax income. In addition, the Company separately calculates the tax impact of unusual items, if any. The Company provides for income taxes based upon the tax laws and rates in effect in the countries in which it conducts operations. The amounts of our provisions are impacted by such laws and rates and the availability of deductions, credits and other benefits in each of the various jurisdictions. Our overall effective tax rate may therefore vary considerably from quarter to quarter and from year to year based on the actual or projected location of operations, levels of income, our consolidated effective income tax rate, deferred intercompany gains or losses, and other factors.
The Company recognized tax expense of $29.7 million for the three months ended March 31, 2017, compared to tax expense of $4.1 million for the comparable period in 2016.
Our effective tax rate was 74.2% for the three months ended March 31, 2017 compared to 3.2% for the comparable prior-year period ended March 31, 2016.
The increase in tax expense of $25.6 million for the three month period compared to the prior-year period is primarily attributed to:
an increase in deferred tax expense as a result of prior year restructuring and an increase to the valuation allowance on Luxembourg deferred tax assets, and
a reduction of tax benefit from amortization of intra-entity transfers due to adoption of ASU No. 2016-16.

The Company has not provided deferred income taxes on certain undistributed earnings of its non-U.K. subsidiaries. Generally, earnings of non-U.K. subsidiaries in which Rowan Companies, Inc. (“RCI”) does not have a direct or indirect ownership interest can be distributed to Rowan plc without imposition of either U.K. or local country tax. It is generally the Company’s policy and intention to permanently reinvest earnings of non-U.S. subsidiaries of RCI outside the U.S. However, the Company has recognized taxes related to the earnings of certain subsidiaries that are not permanently reinvested or that will not be permanently reinvested in the future.

16

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 10 – Segment Information
The Company operates in two principal operating segments deepwater, which consists of our drillship operations, and jack-ups. Both segments provide one service contract drilling. The Company evaluates performance primarily based on income from operations.
Depreciation and amortization and selling, general and administrative expenses related to our corporate function and other administrative offices have not been allocated to our operating segments for purposes of measuring segment operating income and are included in “Unallocated costs and other.” “Other operating items” consists of net losses on equipment sales.

17

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Segment information for the three months ended March 31, 2017 and 2016 is set forth below (in millions):
 
Three months ended March 31,
 
2017
 
2016
Deepwater:
 
 
 
Revenues
$
160.7

 
$
222.5

Operating expenses:
 
 
 
Direct operating costs (excluding items below)
44.6

 
67.0

Depreciation and amortization
28.3

 
27.3

Selling, general and administrative

 

Other operating items

 
0.3

Income from operations
$
87.8

 
$
127.9

 
 
 
 
Jack-ups:
 
 
 
Revenues
$
213.6

 
$
277.7

Operating expenses:
 
 
 
Direct operating costs (excluding items below)
125.4

 
137.8

Depreciation and amortization
70.1

 
68.4

Selling, general and administrative

 

Other operating items
3.4

 
1.9

Income from operations
$
14.7

 
$
69.6

 
 
 
 
Unallocated costs and other:
 
 
 
Revenues
$

 
$

Operating expenses:
 
 
 
Direct operating costs (excluding items below)

 

Depreciation and amortization
0.7

 
3.2

Selling, general and administrative
24.0

 
26.9

Loss from operations
$
(24.7
)
 
$
(30.1
)
 
 
 
 
Consolidated:
 
 
 
Revenues
$
374.3

 
$
500.2

Operating expenses:
 
 
 
Direct operating costs (excluding items below)
170.0

 
204.8

Depreciation and amortization
99.1

 
98.9

Selling, general and administrative
24.0

 
26.9

Other operating items
3.4

 
2.2

Income from operations
$
77.8

 
$
167.4


18

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 11 – Guarantees of Registered Securities
RCI, a 100%-owned Delaware subsidiary of Rowan plc, is the issuer of all of our publicly traded debt securities consisting of the following series: 7.875% Senior Notes due 2019; 4.875% Senior Notes due 2022; 4.75% Senior Notes due 2024; 7.375% Senior Notes due 2025; 5.4% Senior Notes due 2042; and 5.85% Senior Notes due 2044 (the “Senior Notes”). The Senior Notes and amounts outstanding under our revolving credit facility are guaranteed by Rowan plc on a full, unconditional and irrevocable basis.
The condensed consolidating financial information that follows is presented on the equity method of accounting in accordance with Rule 3-10 of Regulation S-X in connection with Rowan plc’s guarantee of the Senior Notes and reflects the ownership structure as of March 31, 2017. Financial Information for the three months ended March 31, 2016, has been recast to reflect changes to the corporate ownership structure that occurred in the fourth quarter of 2016.


Rowan Companies plc and Subsidiaries
Condensed Consolidating Statements of Operations
Three months ended March 31, 2017
(In millions)
(Unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
REVENUES
$

 
$
14.5

 
$
374.5

 
$
(14.7
)
 
$
374.3

 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 

 
 

 
 

 
 

 
 

Direct operating costs (excluding items below)

 
5.1

 
178.5

 
(13.6
)
 
170.0

Depreciation and amortization

 
4.7

 
94.4

 

 
99.1

Selling, general and administrative
5.9

 

 
19.2

 
(1.1
)
 
24.0

Loss on disposals of property and equipment

 
0.2

 
3.2

 

 
3.4

Total costs and expenses
5.9

 
10.0

 
295.3

 
(14.7
)
 
296.5

 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
(5.9
)
 
4.5

 
79.2

 

 
77.8

 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 

 
 

 
 

Interest expense

 
(39.6
)
 
(0.1
)
 
0.1

 
(39.6
)
Interest income

 
0.7

 
1.4

 
(0.1
)
 
2.0

Loss on extinguishment of debt

 
(0.2
)
 

 

 
(0.2
)
Other - net
5.1

 
(5.1
)
 

 

 

Total other income (expense), net
5.1

 
(44.2
)
 
1.3

 

 
(37.8
)
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
(0.8
)
 
(39.7
)
 
80.5

 

 
40.0

Provision (benefit) for income taxes

 
(9.6
)
 
39.6

 
(0.3
)
 
29.7

Equity in earnings of subsidiaries, net of tax
11.1

 
19.9

 

 
(31.0
)
 

 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
10.3

 
$
(10.2
)
 
$
40.9

 
$
(30.7
)
 
$
10.3



19

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Statements of Operations
Three months ended March 31, 2016
(In millions)
(Unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
REVENUES
$

 
$
20.8

 
$
499.4

 
$
(20.0
)
 
$
500.2

 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 

 
 

 
 

 
 

 
 

Direct operating costs (excluding items below)

 
1.0

 
222.3

 
(18.5
)
 
204.8

Depreciation and amortization

 
4.2

 
94.4

 
0.3

 
98.9

Selling, general and administrative
7.0

 

 
21.7

 
(1.8
)
 
26.9

Loss on disposals of property and equipment

 

 
2.2

 

 
2.2

Total costs and expenses
7.0

 
5.2

 
340.6

 
(20.0
)
 
332.8

 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
(7.0
)
 
15.6

 
158.8

 

 
167.4

 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 

 
 

 
 

Interest expense

 
(38.9
)
 
(2.0
)
 
2.0

 
(38.9
)
Interest income

 
2.0

 
0.4

 
(2.0
)
 
0.4

Gain on extinguishment of debt

 
0.6

 

 

 
0.6

Other - net
5.4

 
(5.4
)
 
(2.6
)
 

 
(2.6
)
Total other income (expense), net
5.4

 
(41.7
)
 
(4.2
)
 

 
(40.5
)
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
(1.6
)
 
(26.1
)
 
154.6

 

 
126.9

Provision for income taxes

 
11.0

 
2.4

 
(9.3
)
 
4.1

Equity in earnings of subsidiaries, net of tax
124.4

 
25.1

 

 
(149.5
)
 

 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
122.8

 
$
(12.0
)
 
$
152.2

 
$
(140.2
)
 
$
122.8


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


20

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Statements of Comprehensive Income (Loss)
Three months ended March 31, 2017
(In millions)
(Unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
NET INCOME (LOSS)
$
10.3

 
$
(10.2
)
 
$
40.9

 
$
(30.7
)
 
$
10.3

 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

 
 

 
 

 
 

Net reclassification adjustments for amount recognized in net income (loss) as a component of net periodic benefit cost, net of income taxes
0.9

 
0.9

 

 
(0.9
)
 
0.9

 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
$
11.2

 
$
(9.3
)
 
$
40.9

 
$
(31.6
)
 
$
11.2


Rowan Companies plc and Subsidiaries
Statements of Comprehensive Income (Loss)
Three months ended March 31, 2016
(In millions)
(Unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
NET INCOME (LOSS)
$
122.8

 
$
(12.0
)
 
$
152.2

 
$
(140.2
)
 
$
122.8

 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

 
 

 
 

 
 

Net reclassification adjustments for amount recognized in net income (loss) as a component of net periodic benefit cost, net of income taxes
2.5

 
2.5

 

 
(2.5
)
 
2.5

 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
$
125.3

 
$
(9.5
)
 
$
152.2

 
$
(142.7
)
 
$
125.3


 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 

21

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Balance Sheets
March 31, 2017
(In millions)
(Unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
CURRENT ASSETS:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
3.9

 
$
302.1

 
$
867.2

 
$

 
$
1,173.2

Receivables - trade and other

 
6.3

 
310.8

 

 
317.1

Prepaid expenses and other current assets
0.2

 
20.9

 
3.5

 

 
24.6

Total current assets
4.1

 
329.3

 
1,181.5

 

 
1,514.9

 
 
 
 
 
 
 
 
 
 
Property and equipment - gross

 
615.7

 
8,506.5

 

 
9,122.2

Less accumulated depreciation and amortization

 
280.0

 
1,858.4

 

 
2,138.4

Property and equipment - net

 
335.7

 
6,648.1

 

 
6,983.8

 
 
 
 
 
 
 
 
 
 
Investments in subsidiaries
5,339.6

 
6,118.8

 

 
(11,458.4
)
 

Due from affiliates
0.3

 
623.4

 
48.8

 
(672.5
)
 

Other assets

 
6.9

 
47.7

 

 
54.6

 
$
5,344.0

 
$
7,414.1

 
$
7,926.1

 
$
(12,130.9
)
 
$
8,553.3

 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 

 
 

 
 

 
 

 
 

Accounts payable - trade
0.2

 
27.7

 
65.2

 

 
93.1

Deferred revenues

 

 
108.2

 

 
108.2

Accrued liabilities
0.1

 
94.1

 
44.1

 

 
138.3

Total current liabilities
0.3

 
121.8

 
217.5

 

 
339.6

 
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion

 
2,552.5

 

 

 
2,552.5

Due to affiliates
7.5

 
47.6

 
617.4

 
(672.5
)
 

Other liabilities
4.4

 
277.6

 
38.6

 

 
320.6

Deferred income taxes - net

 
521.4

 
39.6

 
(552.2
)
 
8.8

Shareholders' equity
5,331.8

 
3,893.2

 
7,013.0

 
(10,906.2
)
 
5,331.8

 
$
5,344.0

 
$
7,414.1

 
$
7,926.1

 
$
(12,130.9
)
 
$
8,553.3



22

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Balance Sheets
December 31, 2016
(In millions)
(Unaudited)

 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3.7

 
$
532.0

 
$
719.8

 
$

 
$
1,255.5

Receivables - trade and other

 
1.8

 
299.5

 

 
301.3

Prepaid expenses and other current assets
0.3

 
12.9

 
10.3

 

 
23.5

Total current assets
4.0

 
546.7

 
1,029.6

 

 
1,580.3

 
 
 
 
 
 
 
 
 
 
Property and equipment - gross

 
631.0

 
8,469.8

 

 
9,100.8

Less accumulated depreciation and amortization

 
273.8

 
1,767.0

 

 
2,040.8

Property and equipment - net

 
357.2

 
6,702.8

 

 
7,060.0

 
 
 
 
 
 
 
 
 
 
Investments in subsidiaries
5,115.8

 
6,097.9

 

 
(11,213.7
)
 

Due from affiliates
0.4

 
437.2

 
64.2

 
(501.8
)
 

Other assets

 
5.6

 
29.7

 

 
35.3

 
$
5,120.2

 
$
7,444.6

 
$
7,826.3

 
$
(11,715.5
)
 
$
8,675.6

 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$

 
$
126.8

 
$

 
$

 
$
126.8

Accounts payable - trade
$
0.4

 
$
22.4

 
$
71.5

 
$

 
$
94.3

Deferred revenues

 
0.1

 
103.8

 

 
103.9

Accrued liabilities
0.3

 
107.4

 
51.1

 

 
158.8

Total current liabilities
0.7

 
256.7

 
226.4

 

 
483.8

 
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion

 
2,553.4

 

 

 
2,553.4

Due to affiliates
0.4

 
63.9

 
437.5

 
(501.8
)
 

Other liabilities
5.2

 
283.9

 
49.7

 

 
338.8

Deferred income taxes - net

 
598.3

 
139.3

 
(551.9
)
 
185.7

Shareholders' equity
5,113.9

 
3,688.4

 
6,973.4

 
(10,661.8
)
 
5,113.9

 
$
5,120.2

 
$
7,444.6

 
$
7,826.3

 
$
(11,715.5
)
 
$
8,675.6



23

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2017
(In millions)
(Unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
$
(1.7
)
 
$
87.5

 
$
(4.3
)
 
$

 
$
81.5

 
 
 
 
 
 
 
 
 
 
INVESTING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Capital expenditures

 
(9.7
)
 
(21.2
)
 

 
(30.9
)
Proceeds from disposals of property and equipment

 

 
0.1

 

 
0.1

 
 
 
 
 
 
 
 
 
 
Net cash used in investing activities

 
(9.7
)
 
(21.1
)
 

 
(30.8
)
 
 
 
 
 
 
 
 
 
 
FINANCING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Advances (to) from affiliates
7.2

 
(180.0
)
 
172.8

 

 

Reductions of long-term debt

 
(127.7
)
 

 

 
(127.7
)
Shares repurchased for tax withholdings on vesting of restricted share units
(5.3
)