SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____TO_____
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ROWAN COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 1-5491 | 75-0759420 | ||
(State or other jurisdiction of | Commission File | (I.R.S. Employer | ||
incorporation or organization) | Number | Identification No.) |
2800 Post Oak Boulevard, Suite 5450 Houston, Texas | 77056-6127 | |
(Address of principal executive offices) | (Zip Code) | |
|
|
(713) 621-7800
Registrant's telephone number, including area code
Inapplicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x Noo
The number of shares of common stock, $.125 par value, outstanding at October 31, 2003 was 94,062,562.
ROWAN COMPANIES, INC.
INDEX
Page No. | ||
PART I. | Financial Information: | |
Item 1. | ||
Consolidated Balance Sheet -- September 30, 2003 and December 31, 2002 | 2 | |
Consolidated Statement of Operations -- Three and Nine Months Ended September 30, 2003 and 2002 | 4 | |
Consolidated Statement of Cash Flows -- Nine Months Ended September 30, 2003 and 2002 | 5 | |
Notes to Consolidated Financial Statements | 6 | |
Item 2. | 9 | |
Item 3. | 15 | |
Item 4. | 15 | |
PART II. | Other Information: | |
Item 6. | 15 | |
16 |
Item 1. Financial Statements | |||||||
ROWAN COMPANIES, INC. AND SUBSIDIARIES | |||||||
CONSOLIDATED BALANCE SHEET | |||||||
(IN THOUSANDS EXCEPT SHARE AMOUNTS) |
September 30, |
|
| December 31, |
| |||
|
| 2003 |
|
| 2002 |
| |
ASSETS | (Unaudited) | ||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 50,014 | $ | 178,756 | |||
Receivables - trade and other | 120,066 | 109,320 | |||||
Inventories - at cost: | |||||||
Raw materials and supplies | 144,770 | 122,846 | |||||
Work-in-progress | 44,915 | 31,348 | |||||
Finished goods | 10,235 | 8,766 | |||||
Prepaid expenses | 6,616 | 8,011 | |||||
Deferred tax assets - net | 58,830 | 10,855 | |||||
Total current assets | 435,446 | 469,902 | |||||
PROPERTY, PLANT AND EQUIPMENT - at cost: | |||||||
Drilling equipment | 2,125,426 | 1,922,341 | |||||
Aircraft and related equipment | 261,549 | 264,212 | |||||
Manufacturing plant and equipment | 135,404 | 120,705 | |||||
Construction in progress | 88,481 | 199,352 | |||||
Other property and equipment | 160,390 | 155,815 | |||||
Total | 2,771,250 | 2,662,425 | |||||
Less accumulated depreciation and amortization | 1,084,534 | 1,095,281 | |||||
Property, plant and equipment - net | 1,686,716 | 1,567,144 | |||||
GOODWILL AND OTHER ASSETS | 19,326 | 17,458 | |||||
TOTAL | $ | 2,141,488 | $ | 2,054,504 | |||
See Notes to Consolidated Financial Statements. |
-2- | ||
ROWAN COMPANIES, INC. AND SUBSIDIARIES | |
CONSOLIDATED BALANCE SHEET | |
(IN THOUSANDS EXCEPT SHARE AMOUNTS) |
September 30, | December 31, | ||||||
2003 |
|
| 2002 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | (Unaudited) | ||||||
CURRENT LIABILITIES: | |||||||
Current maturities of long-term debt | $ | 52,809 | $ | 42,458 | |||
Accounts payable - trade | 29,083 | 30,000 | |||||
Other current liabilities | 61,982 | 43,517 | |||||
Total current liabilities | 143,874 | 115,975 | |||||
LONG-TERM DEBT - less current maturities | 552,110 | 512,844 | |||||
OTHER LIABILITIES | 109,864 | 127,848 | |||||
DEFERRED INCOME TAXES - net | 207,308 | 166,060 | |||||
STOCKHOLDERS' EQUITY: | |||||||
Preferred stock, $1.00 par value: | |||||||
Authorized 5,000,000 shares issuable in series: | |||||||
Series III Preferred Stock, authorized 10,300 shares, none outstanding | |||||||
Series A Preferred Stock, authorized 4,800 shares, none outstanding | |||||||
Series B Preferred Stock, authorized 4,800 shares, none outstanding | |||||||
Series C Preferred Stock, authorized 9,606 shares, none outstanding | |||||||
Series D Preferred Stock, authorized 9,600 shares, none outstanding | |||||||
Series E Preferred Stock, authorized 1,194 shares, none outstanding | |||||||
Series A Junior Preferred Stock, authorized 1,500,000 shares, none issued | |||||||
Common stock, $.125 par value: | |||||||
Authorized 150,000,000 shares; issued 95,697,024 shares atSeptember 30, 2003 and 95,340,597 shares at December 31, 2002 | 11,962 | 11,918 | |||||
Additional paid-in capital | 656,330 | 647,600 | |||||
Retained earnings | 545,304 | 557,523 | |||||
Cost of 1,734,440 treasury shares | (30,064 | ) | (30,064 | ) | |||
Accumulated other comprehensive loss | (55,200 | ) | (55,200 | ) | |||
Total stockholders' equity | 1,128,332 | 1,131,777 | |||||
TOTAL | $ | 2,141,488 | $ | 2,054,504 | |||
See Notes to Consolidated Financial Statements. |
-3- | ||
ROWAN COMPANIES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENT OF OPERATIONS |
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) |
For The Three Months | For The Nine Months | ||||||||||||
Ended September 30, | Ended September 30, | ||||||||||||
2003 |
|
| 2002 |
|
| 2003 |
|
| 2002 | ||||
(Unaudited) | |||||||||||||
REVENUES: | |||||||||||||
Drilling services | $ | 124,582 | $ | 108,483 | $ | 297,606 | $ | 265,450 | |||||
Manufacturing sales and services | 27,067 | 28,754 | 86,738 | 92,340 | |||||||||
Aviation services | 42,234 | 46,916 | 98,994 | 112,666 | |||||||||
Total | 193,883 | 184,153 | 483,338 | 470,456 | |||||||||
COSTS AND EXPENSES: | |||||||||||||
Drilling services | 86,162 | 79,091 | 242,793 | 229,162 | |||||||||
Manufacturing sales and services | 25,199 | 26,852 | 80,518 | 86,896 | |||||||||
Aviation services | 33,327 | 32,005 | 86,697 | 89,681 | |||||||||
Depreciation and amortization | 21,740 | 20,330 | 62,973 | 57,332 | |||||||||
General and administrative | 6,126 | 6,434 | 19,420 | 19,251 | |||||||||
Total | 172,554 | 164,712 | 492,401 | 482,322 | |||||||||
INCOME (LOSS) FROM OPERATIONS | 21,329 | 19,441 | (9,063 | ) | (11,866 | ) | |||||||
OTHER INCOME (EXPENSE): | |||||||||||||
Net proceeds from Gorilla V settlement | 157,125 | ||||||||||||
Interest expense | (5,213 | ) | (5,255 | ) | (14,869 | ) | (15,479 | ) | |||||
Less interest capitalized | 1,004 | 846 | 3,457 | 3,980 | |||||||||
Interest income | 139 | 945 | 1,023 | 3,267 | |||||||||
Other - net | 38 | 48 | 417 | 433 | |||||||||
Other income (expense) - net | (4,032 | ) | (3,416 | ) | (9,972 | ) | 149,326 | ||||||
INCOME (LOSS) BEFORE INCOME TAXES | 17,297 | 16,025 | (19,035 | ) | 137,460 | ||||||||
Provision (credit) for income taxes | 5,710 | 5,861 | (6,816 | ) | 48,358 | ||||||||
NET INCOME (LOSS) | $ | 11,587 | $ | 10,164 | $ | (12,219 | ) | $ | 89,102 | ||||
NET INCOME (LOSS) PER SHAREOF COMMON STOCK (Note 6): | |||||||||||||
Basic | $ | .12 | $ | .11 | $ | (.13 | ) | $ | .95 | ||||
Diluted | $ | .12 | $ | .11 | $ | (.13 | ) | $ | .93 | ||||
See Notes to Consolidated Financial Statements. |
-4- | ||
ROWAN COMPANIES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENT OF CASH FLOWS |
(IN THOUSANDS) |
For the Nine Months |
| ||||||
|
|
| Ended September 30, | ||||
2003 |
|
| 2002 |
| |||
(Unaudited) | |||||||
CASH PROVIDED BY (USED IN): | |||||||
Operations: | |||||||
Net income (loss) | $ | (12,219 | ) | $ | 89,102 | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: | |||||||
Depreciation and amortization | 62,973 | 57,332 | |||||
Deferred income taxes | (6,727 | ) | 44,286 | ||||
Compensation expense | 5,278 | 5,511 | |||||
Pension and postretirement benefits | (2,767 | ) | 2,204 | ||||
Gain on disposals of property, plant and equipment | (4,096 | ) | (2,374 | ) | |||
Changes in current assets and liabilities: | |||||||
Receivables- trade and other | (11,586 | ) | (6,253 | ) | |||
Inventories | (36,960 | ) | (20,279 | ) | |||
Other current assets | 1,395 | (3,406 | ) | ||||
Current liabilities | 1,949 | (85,391 | ) | ||||
Net changes in other noncurrent assets and liabilities | (1,124 | ) | (218 | ) | |||
Net cash provided by (used in) operations | (3,884 | ) | 80,514 | ||||
Investing activities: | |||||||
Property, plant and equipment additions | (184,711 | ) | (176,581 | ) | |||
Proceeds from disposals of property, plant and equipment | 6,360 | 4,387 | |||||
Net cash used in investing activities | (178,351 | ) | (172,194 | ) | |||
Financing activities: | |||||||
Proceeds from borrowings | 84,350 | 91,097 | |||||
Repayments of borrowings | (34,733 | ) | (34,733 | ) | |||
Proceeds from stock option and convertible debenture plans | 3,876 | 2,188 | |||||
Payment of cash dividend | (23,511 | ) | |||||
Payments to acquire treasury stock | (12,056 | ) | |||||
Net cash provided by financing activities | 53,493 | 22,985 | |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (128,742 | ) | (68,695 | ) | |||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 178,756 | 236,989 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 50,014 | $ | 168,294 | |||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: | |||||||
Acquisition of net manufacturing assets through issuanceof 439,560 shares of treasury stock | $ | 7,925 | |||||
See Notes to Consolidated Financial Statements. |
-5- | ||
ROWAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements of Rowan included in this Form 10-Q have been prepared without audit in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission. Certain information and notes have been condensed or omitted as permitted by those rules and regulations. We believe that the disclosures included herein are adequate, but suggest that you read these consolidated financial statements in conjunction with the financial statements and related notes included in our 2002 Annual Report to Stockholders, which are incorporated by reference in our Form 10-K for the year ended D ecember 31, 2002.
2. We believe the accompanying unaudited consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly Rowan’s financial position as of September 30, 2003 and December 31, 2002, and the results of its operations for the three and nine months ended September 30, 2003 and 2002 and its cash flows for the nine months ended September 30, 2003 and 2002.
3. Rowan’s results of operations and cash flows for the nine months ended September 30, 2003 are not necessarily indicative of results to be expected for the full year.
4. Rowan has three principal operating segments: contract drilling of oil and gas wells, both onshore and offshore ("Drilling"), helicopter and fixed-wing aircraft services ("Aviation") and the manufacture and sale of heavy equipment for the mining, timber and transportation industries, alloy steel and steel plate and drilling products ("Manufacturing"). The following table presents certain financial information of Rowan by operating segment as of September 30, 2003 and 2002 and for the nine month periods then ended (in thousands).
Drilling | Manufacturing | Aviation | Consolidated | ||||||||||
2003 | |||||||||||||
Total assets | $ | 1,682,792 | $ | 289,317 | $ | 169,379 | $ | 2,141,488 | |||||
Unamortized goodwill | 1,493 | 10,863 | - | 12,356 | |||||||||
Revenues | 297,606 | 86,738 | 98,994 | 483,338 | |||||||||
Operating profit (loss) (1) | 11,142 | (185 | ) | (600 | ) | 10,357 | |||||||
2002 | |||||||||||||
Total assets | $ | 1,612,202 | $ | 242,573 | $ | 167,244 | $ | 2,022,019 | |||||
Unamortized goodwill | 1,493 | 10,863 | - | 12,356 | |||||||||
Revenues | 265,450 | 92,340 | 112,666 | 470,456 | |||||||||
Operating profit (loss) (1) | (3,833 | ) | (20 | ) | 11,238 | 7,385 | |||||||
| |||||||||||||
(1)General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arriveat Operating profit (loss), which Rowan believes is a better measure of segment financial performance. |
Excluded from the preceding table are the effects of transactions between segments. During the nine months ended September 30, 2003 and 2002, Rowan’s manufacturing division provided approximately $92 million and $82 million, respectively, of products and services to its drilling division and Rowan’s aviation division provided approximately $1.6 million and $1.4 million, respectively, of flight services to its drilling division.
-6- | ||
5. Rowan had no items of other comprehensive income during the nine months ended September 30, 2003 and 2002.
6. Rowan’s computation of basic and diluted income (loss) per share is as follows (in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2003 |
|
| 2002 |
|
| 2003 |
|
| 2002 | ||||
Weighted average shares of common stock outstanding | 93,877 | 93,724 | 93,738 | 93,836 | |||||||||
Dilutive securities: | |||||||||||||
Stock options | 1,064 | 602 | - | 705 | |||||||||
Convertible debentures | 936 | 851 | - | 892 | |||||||||
Weighted average shares for diluted calculation | 95,877 | 95,177 | 93,738 | 95,433 | |||||||||
Net income (loss) for basic and diluted calculation | $ | 11,587 | $ | 10,164 | $ | (12,219 | ) | $ | 89,102 | ||||
Net income (loss) per share: | |||||||||||||
Basic | $ | .12 | $ | .11 | $ | (.13 | ) | $ | .95 | ||||
Diluted | $ | .12 | $ | .11 | $ | (.13 | ) | $ | .93 | ||||
Incremental shares related to convertible debentures and stock options are excluded from the computation of diluted income (loss) per share for the nine months ended September 30, 2003 as their inclusion would have reduced the per share amount of loss for such period.
Rowan uses the intrinsic value method of accounting for stock-based employee compensation, whereby the cost of each option is measured as the difference between the market price per share and the option price per share on the date of grant, in accordance with Accounting Principles Board Opinion No. 25. The following table is provided pursuant to Statement of Financial Accounting Standards No. 148 to illustrate the effect on Rowan’s net income (loss) and net income (loss) per share for the first nine months of 2003 and 2002 of measuring stock-based compensation cost based upon estimated fair values in accordance with Statement of Financial Accounting Standards No. 123:
| Per Share | |||||||||
Net Income |
|
| ||||||||
|
|
| (Loss) |
|
| Basic |
|
| Diluted | |
2003 | ||||||||||
Net loss, as reported | $ | (12,219 | ) | $ | (.13 | ) | $ | (.13 | ) | |
Stock-based compensation, net of related tax effects: | ||||||||||
As recorded under APB 25 | 3,536 | |||||||||
Pro forma under SFAS 123 | (6,837 | ) | ||||||||
Pro forma net loss | $ | (15,520 | ) | $ | (.17 | ) | $ | (.17 | ) | |
2002 | ||||||||||
Net income, as reported | $ | 89,102 | $ | .95 | $ | .93 | ||||
Stock-based compensation, net of related tax effects: | ||||||||||
As recorded under APB 25 | 3,572 | |||||||||
Pro forma under SFAS 123 | (6,581 | ) | ||||||||
Pro forma net income | $ | 86,093 | $ | .92 | $ | .90 | ||||
-7- | ||
7. On November 16, 2001, an English Court ruled in Rowan’s favor and dismissed the plaintiff’s claim that it had been entitled, in January 1999, to terminate its drilling contract with a Rowan subsidiary for the use of the jack-up rigRowan Gorilla V. The Court ordered the plaintiff to pay Rowan for all unpaid day rates, damages, interest and an interim payment for legal costs, for which Rowan received $88.6 million. The matter was under appeal at December 31, 2001 and such amoun t, along with investment earnings, less outstanding receivables dating from contract inception, was deferred at year end. On March 14, 2002, a settlement agreement was reached among the parties whereby all litigation involving this matter was dropped and Rowan received an additional $84.2 million. In total, Rowan received $175 million in connection with theGorilla Vcontract dispute and such amount is shown, net of final legal costs and expenses, as Other Income on the Consolidated Statement of Operations for the nine months ended September 30, 2002.
8. Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations", addresses accounting and reporting for fixed asset retirement costs and obligations. Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", addresses accounting and reporting for costs and obligations related to exit or disposal activities initiated on or after January 1, 2003. Rowan’s adoption of Statement Nos. 143 and 146, effective January 1, 2003, did not materially impact its financial position or results of operations.
-8- | ||
ROWAN COMPANIES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Rowan incurred a net loss of $12.2 million, or $.13 per diluted share, in the first nine months of 2003 compared to net income of $89.1 million, or $.93 per share, in the same period of 2002. The prior year period included net proceeds from the settlement of theGorilla Vcontract dispute, which increased net income by approximately $102 million, or $1.07 per share. Excluding the effects of the settlement, Rowan’s results for the first nine months of 2002 would have been a net loss of approximately $13 million, or $.14 per share.
A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the first nine months of 2003 and 2002, respectively, is reflected below (dollars in thousands):
Drilling | Manufacturing | Aviation | Consolidated | ||||||
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|
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|
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| 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |
|
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|
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Revenues |
| $ 297,606 | $ 265,450 | $ 86,738 | $ 92,340 | $ 98,994 | $ 112,666 | $ 483,338 | $ 470,456 |
| |||||||||
Percent of Consolidated Revenues |
| 62% | 56% | 18% | 20% | 20% | 24% | 100% | 100% |
| |||||||||
Operating Profit (Loss) (1) |
| $ 11,142 | $ (3,833) | $ (185) | $ (20) | $ (600) | $ 11,238 | $ 10,357 | $ 7,385 |
| |||||||||
(1)General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arriveat Operating profit (loss), which Rowan believes is a better measure of segment financial performance. |
As shown above, Rowan’s consolidated operating results improved by $3.0 million or 40% when comparing the first nine months of 2003 and 2002. Drilling revenues increased by $32.2 million or 12% as our offshore fleet of 23 jack-ups and one semi-submersible was 88% utilized during the first nine months of 2003, compared to 87% in the first nine months of 2002, and achieved a 17% increase in average day rates between periods. Rowan’s fleet of 18 land rigs was 72% utilized during the first nine months of 2003, compared to 67% in the first nine months of 2002, and achieved a 4% increase in average day rates between periods. Drilling expenses increased by $13.6 million or 6% between periods, primarily due to higher pension and insurance costs, the expansion of our land drilling operations and the addition to our offshore fleet, in February 2002, ofRowan Gorilla VII.
Rowan’s manufacturing operating results in the first nine months of 2003 reflect the effects of generally weak market conditions prevailing in the division’s equipment and steel groups, which were largely offset by the contribution from the drilling products group during the period. Manufacturing operations exclude approximately $92 million of products and services provided to the drilling division during the first nine months of 2003, most of which was attributable to construction progress on theBob Palmer(formerlyGorilla VIII) and theScooter Yeargain, compared to about $82 million in the same period of 2002, primarily due to theBob Palmer. The division’s external backlog was approximately $45 million at September 30, 2003.
-9- | ||
Rowan’s aviation operating results in the first nine months of 2003 reflect the effects of reduced energy-related flying activity, particularly in support of deepwater drilling operations in the Gulf of Mexico, and higher pension costs.
Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002
Rowan generated net income of $11.6 million in the third quarter of 2003 compared to $10.2 million in the same period of 2002. The improvement in operating performance was largely due to an increase in offshore average day rates in the Gulf of Mexico between periods and the resumption of drilling operations in the North Sea and offshore eastern Canada.
A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the third quarters of 2003 and 2002, respectively, is reflected below (dollars in thousands):
Drilling | Manufacturing | Aviation | Consolidated | ||||||
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|
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| 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |
|
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Revenues |
| $ 124,582 | $ 108,483 | $ 27,067 | $ 28,754 | $ 42,234 | $ 46,916 | $ 193,883 | $ 184,153 |
| |||||||||
Percent of Consolidated Revenues |
| 64% | 59% | 14% | 16% | 22% | 25% | 100% | 100% |
| |||||||||
Operating Profit (Loss) (1) |
| $ 23,404 | $ 14,897 | $ (482) | $ 6 | $ 4,533 | $ 10,972 | $ 27,455 | $ 25,875 |
| |||||||||
(1)General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arriveat Operating profit (loss), which Rowan believes is a better measure of segment financial performance. |
As shown above, Rowan’s consolidated operating results improved by $1.6 million or 6% when comparing the third quarters of 2003 and 2002. Drilling revenues increased by $16.1 million or 15% as our offshore fleet of 23 jack-ups and one semi-submersible was 94% utilized during the third quarter of 2003, compared to 93% in the third quarter of 2002, and achieved a 17% increase in average day rates between periods. Rowan’s fleet of 18 land rigs was 72% utilized during the third quarter of 2003, compared to 76% in the third quarter of 2002, and achieved a 15% increase in average day rates between periods. Drilling expenses increased by $7.1 million or 9% between periods, primarily due to higher pension costs, the expansion of our land drilling operations and the addition to our offshore fleet, in August 2003, of theBob Palmer.
Rowan’s manufacturing operating results in the third quarter of 2003 reflect the effects of generally weak market conditions prevailing in the division’s equipment and steel groups, which were largely offset by the contribution from the drilling products group during the period. Manufacturing operations exclude approximately $22 million of products and services provided to the drilling division during the third quarter of 2003, most of which was attributable to construction progress on theScooter Yeargain, compared to about $25 million in the same period of 2002, primarily due to th eBob Palmer. The division’s external backlog was approximately $45 million at September 30, 2003.
Rowan’s aviation operating results in the third quarter of 2003 reflect the effects of reduced energy-related flying activity, particularly in support of deepwater drilling operations in the Gulf of Mexico, and higher pension costs.
-10- | ||
Expected near-term conditions in our principal drilling markets, based upon recent bid inquiries and other indications from our energy company customers, and the numbers of our rigs in each of those areas are as follows:
AREA | RIGS | EXPECTED NEAR-TERM CONDITIONS | ||
Gulf of Mexico | 22 | Moderately improving exploration and development activity, with increasing emphasis on potential deep-well natural gas reserves on the Outer Continental Shelf | ||
North Sea | 1 | Moderately improving jack-up drilling activity, fluctuating with oil prices | ||
Eastern Canada | 1 | Moderately improving demand for harsh environment equipment, fluctuating with oil and natural gas prices |
Expected near-term conditions in our principal aviation markets and the numbers of our aircraft based in each of those markets are as follows:
AREA | AIRCRAFT | EXPECTED NEAR-TERM CONDITIONS | ||
Alaska | 59 | Normal seasonal decline | ||
Gulf of Mexico | 47 | Generally stable levels of flight support activity |
The drilling and aviation markets in which Rowan competes frequently experience significant changes in supply and demand. Drilling utilization and day rates are primarily a function of the demand for drilling services, as measured by the level of exploration and development expenditures, and the supply of capable drilling equipment. These expenditures, in turn, are affected by many factors such as existing and newly discovered oil and natural gas reserves, political and regulatory policies, seasonal weather patterns, contractual requirements under leases or concessions, effects of energy company consolidations, and, probably most influential, oil and natural gas prices. Our aviation operations are also affected by the same factors, as flying in support of offshore energy operations remains a major source of business and Alaska operations are hampered by weather each winter. The volatile nature of these factors prevents us from being able to accurately predict whether existing market conditions will continue beyond the near term. In response to fluctuating market conditions, we can relocate our drilling rigs and aircraft from one geographic area to another, but only when we believe such moves are economically justified. Currently, Rowan’s drilling operations are profitable, but we can offer no assurance that existing operating conditions will prevail or that expected improvements in market conditions, as reflected in the preceding tables, will materialize. Our operations will be adversely affected should market conditions deteriorate.
Though considerably less volatile than our drilling and aviation operations, our manufacturing operations, especially the equipment group, have continued to be adversely impacted by a prolonged period of unfavorable world commodity prices, especially those for copper, iron ore, coal and gold, and a lack of new rig construction. Certain commodity prices appear to be on an upswing due to increasing worldwide demand. Rowan’s external manufacturing backlog has grown in recent months, and we are optimistic that a recovery in the demand for mining equipment may be underway. We cannot, however, accurately predict whether or not any such recovery will be sustained beyond the near term.
-11- | ||
LIQUIDITY AND CAPITAL RESOURCES
A comparison of key balance sheet figures and ratios as of September 30, 2003 and December 31, 2002 is as follows (dollars in thousands):
September 30, 2003 | December 31,2002 | ||||||
Cash and cash equivalents | $ | 50,014 | $ | 178,756 | |||
Current assets | $ | 435,446 | $ | 469,902 | |||
Current liabilities | $ | 143,874 | $ | 115,975 | |||
Current ratio | 3.03 | 4.05 | |||||
Long-term debt | $ | 552,110 | $ | 512,844 | |||
Stockholders' equity | $ | 1,128,332 | $ | 1,131,777 | |||
Long-term debt/total capitalization | .33 | .31 |
Reflected in the comparison above are the effects in the first nine months of 2003 of capital expenditures of $184.7 million, proceeds from borrowings of $84.4 million, debt repayments of $34.7 million and net cash used in operations of $3.9 million.
Capital expenditures during the first nine months of 2003 were primarily related to the construction of theBob Palmer, theScooter Yeargainand the continued upgrade of our existing offshore and land drilling fleets.
TheBob Palmeris an enhanced version of ourSuper Gorillaclass jack-up, designated aSuper Gorilla XL, that is outfitted with 713 feet of leg, 139 feet more thanGorillas V, VIorVII, and has 30% larger spud cans, enabling operation in the Gulf of Mexico in water depths up to 550 feet. The rigcan also operate in water depths up to 400 feet in the hostile environments offshore eastern Canada and in the North Sea. TheBob Palmerwas delivered on August 18, 2003 and is currently under contract in the Gulf of Mexico. We financed $187.3 million of the cost of theBob Palmerthrough an 18-year bank loan guaranteed by the U. S. Department of Transportation’s Maritime Administration ("MARAD") under its Title XI Program. The notes require semiannual interest payments in each January and July, with semiannual principal repayments commencing on January 15, 2004, and theBob Palmersecures the government guarantee. At September 30, 2003, we had borrowed about $186 million under this facility, which bore interest at a n annual rate of 1.35%.
TheScooter Yeargainis the first of as many as four of a newTarzanclass of jack-up rig, designed specifically for deep drilling in water depths up to 250 feet on the outer continental shelf in the Gulf of Mexico. TheTarzanclass will offer drilling capabilities similar to ourGorillaclass jack-ups, enabling more efficient drilling beyond 15,000 feet, but with reduced environmental criteria (wind, wave and current). TheScooter Yeargainis being constructed at Vicksburg, Mississippi with delivery expected during the second quarter of 2004. Construction ofTarzan IIrecently began at Vicksburg and should be completed during the first quarter of 2005. Delivery of the two additionalTarzanclass jack-ups is expected to follow in six- to nine-month intervals in 2005 and 2006. The aggregate cost of the fourTarzanrigs will be around $400 million. We are financing up to $181 million of the cost of the first twoTarzanrigs through 15-year bank loans guaranteed by MARAD under its Title XI Program. The notes require se miannual interest payments in each May and November, with semiannual principal repayments commencing on November 10, 2004, and the rigs secure the government guarantees. At September 30, 2003, we had borrowed about $46 million under theScooter Yeargainfacility, which bore interest at an annual rate of 1.25%. We intend to pursue outside financing forTarzans IIIandIV, if necessary. However, there can be no ass urance that such financing will be obtainable.
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We have signed a non-binding letter of intent to purchase three Sikorsky S-92 helicopters for the deepwater drilling market, subject to our obtaining long-term operating contracts. The S-92 design features a 19-passenger capacity and a range of 475 nautical miles. We currently expect the helicopters to be available in the first half of 2005 and that their total cost, estimated to approach $50 million, will be funded from existing working capital or outside financing. However, there can be no assurance that we will obtain suitable operating contracts, that working capital will be adequate or outside financing will be available.
Rowan estimates remaining 2003 capital expenditures will be between $45 million and $60 million, including approximately $30-40 million towards the construction of theTarzanrigs. We may also spend amounts to acquire additional aircraft as market conditions justify and to upgrade existing rigs and manufacturing facilities.
Since 2000, Rowan has contributed more than $50 million to our defined benefit pension plans, including $21.9 million during the third quarter of 2003. Such contributions were determined based upon actuarial calculations of pension assets and liabilities that involve, among other things, assumptions about long-term asset returns and discount rates. Similar calculations were used to estimate pension costs and obligations as reflected in our consolidated financial statements, which showed an accumulated comprehensive loss resulting from minimum pension liability adjustments of $55.2 million at September 30, 2003. We may be required to make similar or greater contributions in each of 2004, 2005 and 2006.
On June 30, 2003, Rowan completed the refinancing of our $162.2 million of outstanding floating-rateGorilla VIIdebt through the issuance of a 2.8% fixed-rate note maturing in October 2013. The floating-rate debt was issued under MARAD’s Title XI program to finance the construction ofRowan Gorilla VII, which was completed in December 2001. The fixed-rate note is U.S. Government-guaranteed under the Title XI program, andGorilla VIIsecures the government guarantee.
In recent years, Rowan has used operating cash flow and net proceeds from Title XI borrowings to finance capital expenditures. During 2003, however, our operations have required rather that generated cash and our capital expenditures have greatly exceeded our net Title XI borrowings, such that our cash position has declined by $128.7 million to $50.0 at September 30, 2003. Based upon current and anticipated near-term operating levels, we believe that our operations will again generate cash during the fourth quarter to an extent that, when combined with expected Title XI borrowings, should exceed planned capital expenditures and debt service and other requirements during the period, such that our cash position should be improved by year end. As noted previously, however, our operating cash flo w depends largely upon factors beyond our control and there can be no assurance that our cash position will improve. Should our cash position deteriorate further we could defer some of our planned capital expenditures or pursue outside financing alternatives.
On November 16, 2001, an English Court ruled in Rowan’s favor and dismissed the plaintiff’s claim that it had been entitled, in January 1999, to terminate its drilling contract with a Rowan subsidiary for the use of the jack-up rigRowan Gorilla V. The Court ordered the plaintiff to pay Rowan for all unpaid day rates, damages, interest and an interim payment for legal costs, for which we received $88.6 million. The matter was under appeal at December 31, 2001 and such amount, along with investment earnings, less outstanding receivables dating from contract inception, was deferred at year end. On March 14, 2002, a settlement agreement was reached among the parties whereby all litigation involving this matter was dropped and we received an additional $84.2 million. In total, Rowan received $175 million in connection with theGorilla Vcontract dispute and such amount is shown, net of final legal costs and expenses, as Other Income on the Consolidated Statement of Operations for the nine months ended September 30, 2002.
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Critical Accounting Policies and Management Estimates.Rowan’s significant accounting policies are outlined in Note 1 to our financial statements included in our 2002 Annual Report to Stockholders, which is incorporated by reference in our Form 10-K for the year ended December 31, 2002. Such policies, and management judgments, assumptions and estimates made in their application, underlie reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. We believe our most critical accounting policies and management estimates involve property and depreciation, specifically capitali zable costs, useful lives and salvage values, and pension liabilities and costs, specifically assumptions used in actuarial calculations, as changes in such policies and/or estimates would produce significantly different amounts from those reported herein.
Rowan provides depreciation under the straight-line method from the date an asset is placed into service until it is sold or becomes fully depreciated based upon estimated lives and salvage values. Such estimates of lives and salvage values include 25 years and 20%, respectively, for each of ourSuper GorillaandTarzanclass rigs which collectively comprise more than 80% of our offshore drilling equipment carrying value. Expenditures for new property or enhancements to existing property are capitalized and expenditures for routine maintenance and major repairs are charged to operations as incurred. On construction projects, Rowan capitalizes a portion of interest cost incurred during the period required to complete the asset. Long-lived assets are reviewed for impairment whenever circumstances indicate their carrying amounts may not be recoverable.
Rowan uses the intrinsic value method of accounting for stock-based employee compensation pursuant to Accounting Principles Board Opinion No. 25. We estimate that use of the fair value method outlined by Statement of Financial Accounting Standards Nos. 123 and 148 would have reduced (increased) reported amounts of net income (loss) and net income (loss) per share by approximately $(3.3) million or $(.04) per share for the nine months ended September 30, 2003 and by approximately $3.0 million or $.03 per share for the nine months ended September 30, 2002.
Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations", addresses accounting and reporting for fixed asset retirement costs and obligations. Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", addresses accounting and reporting for costs and obligations related to exit or disposal activities initiated on or after January 1, 2003. Rowan’s adoption of Statement Nos. 143 and 146, effective January 1, 2003, did not materially impact our financial position or results of operations.
This report contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements as to the expectations, beliefs and future expected financial performance of the Company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected by the Company. Among the factors that could cause actual results to differ materially are the following: oil, natural gas and other commodity prices; the level of offshore expenditures by energy companies; energy demand; the general economy, including inflation; weather conditions in the Company’s principal operating areas; and environmental and other laws and regulations. Other relevant factors have been disclosedin the Company’s filings with the U. S. Securities and Exchange Commission.
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Rowan believes that its exposure to risk of earnings loss due to changes in market interest rates is not significant. In addition, virtually all of the Company’s transactions are carried out in U. S. dollars, thus Rowan’s foreign currency exposure is not material. Fluctuating commodity prices affect Rowan’s future earnings only to the extent that they influence demand for Rowan’sproducts and services, as contracts based directly upon such prices are not significant to the Company’s operations.Rowan does not hold or issue derivative financial instruments.
The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer, along with the Company’s Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Exchange Act reports. There have been no changes in the Company’s internal control over financial reporting th at occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.
PART II. OTHER INFORMATION
Item 6. | ||
(a) | The following is a list of Exhibits filed with this Form 10-Q: | |
31 | ||
32 | ||
(b) | Reports on Form 8-K filed by the Registrant during the third quarter of fiscal year 2003: | |
July 15, 2003 – pertaining to the Company’s press release announcing its results for the second quarter of 2003. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROWAN COMPANIES, INC. | |
(Registrant) | |
Date: November 13, 2003 | /s/ E. E. THIELE |
E. E. Thiele | |
Senior Vice President- Finance, | |
Administration and Treasurer | |
(Chief Financial Officer) | |
Date: November 13, 2003 | /s/ W. H. WELLS |
W. H. Wells | |
Controller | |
(Chief Accounting Officer) |
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