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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____TO_____
ROWAN COMPANIES, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 1-5491 75-0759420
- ------------------------------ -------------- -------------------
(State or other jurisdiction of Commission File (I.R.S. Employer
incorporation or organization) Number Identification No.)
2800 Post Oak Boulevard, Suite 5450 Houston, Texas 77056-6127
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(713) 621-7800
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Registrant's telephone number, including area code
Inapplicable
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
The number of shares of common stock, $.125 par value, outstanding at
October 31, 2001 was 93,739,205.
ROWAN COMPANIES, INC.
INDEX
Page No.
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PART I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheet --
September 30, 2001 and December 31, 2000 . . . . . . . . . . . .2
Consolidated Statement of Income --
Three and Nine Months Ended September 30, 2001
and 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows --
Nine Months Ended September 30, 2001 and 2000 . . . .. . . . . .5
Notes to Consolidated Financial Statements.. . . . . .. . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . .. . . .8
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . .12
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-k . . . . . . . . .. . . . .. . .13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -------------------------------
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, December 31,
2001 2000
------------ -------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . $ 162,341 $ 192,828
Receivables - trade and other. . . . . . . . . 146,092 154,541
Inventories - at cost:
Raw materials and supplies . . . . . . . . . 113,663 103,352
Work-in-progress . . . . . . . . . . . . . . 23,871 22,456
Finished goods . . . . . . . . . . . . . . . 1,466 3,084
Prepaid expenses . . . . . . . . . . . . . . . 6,625 3,397
Deferred tax assets - net. . . . . . . . . . . 2,424 3,699
------------ -------------
Total current assets . . . . . . . . . . . 456,482 483,357
------------ -------------
PROPERTY, PLANT AND EQUIPMENT - at cost:
Drilling equipment . . . . . . . . . . . . . . 1,600,550 1,553,849
Aircraft and related equipment . . . . . . . . 251,834 236,760
Manufacturing plant and equipment. . . . . . . 102,012 94,077
Construction in progress . . . . . . . . . . . 285,723 157,314
Other property and equipment . . . . . . . . . 135,455 121,997
------------ -------------
Total. . . . . . . . . . . . . . . . . . . 2,375,574 2,163,997
Less accumulated depreciation and amortization 1,025,633 981,217
------------ -------------
Property, plant and equipment - net. . . 1,349,941 1,182,780
------------ -------------
OTHER ASSETS AND DEFERRED CHARGES. . . . . . . . 12,225 12,289
------------ -------------
TOTAL. . . . . . . . . . . . . . . . . . . $ 1,818,648 $ 1,678,426
============ =============
See Notes to Consolidated Financial Statements.
2
September 30, December 31,
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . $ 34,994 $ 28,008
Accounts payable - trade . . . . . . . . . . . . . . . . . . . . . . . . . 27,234 24,769
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 42,301 51,577
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 104,529 104,354
------------ ------------
LONG-TERM DEBT - less current maturities . . . . . . . . . . . . . . . . . . 410,388 372,212
------------ ------------
OTHER LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,464 57,713
------------ ------------
DEFERRED INCOME TAXES - net. . . . . . . . . . . . . . . . . . . . . . . . . 128,958 91,390
------------ ------------
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 94,987,005 shares at
September 30, 2001 and 94,384,704 shares at December 31, 2000 . . . . . 11,873 11,798
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 636,636 626,309
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504,426 417,758
Less cost of 1,255,300 and 150,000 treasury shares, respectively . . . . . 21,626 3,108
------------ ------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . 1,131,309 1,052,757
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,818,648 $ 1,678,426
============ ============
See Notes to Consolidated Financial Statements.
3
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
-------------------------- -----------------------
2001 2000 2001 2000
------------- ----------- --------- ---------
(Unaudited)
REVENUES:
Drilling services . . . . . . . . $ 117,694 $ 117,434 $ 405,419 $ 291,311
Manufacturing sales and services. 24,490 28,223 76,531 72,770
Aviation services . . . . . . . . 49,141 45,192 113,283 97,659
------------- ----------- --------- ---------
Total . . . . . . . . . . . . 191,325 190,849 595,233 461,740
------------- ----------- --------- ---------
COSTS AND EXPENSES:
Drilling services . . . . . . . . 79,759 71,694 227,750 188,474
Manufacturing sales and services. 21,146 25,413 70,159 64,310
Aviation services . . . . . . . . 32,306 30,040 87,821 81,095
Depreciation and amortization . . 17,276 15,608 50,203 43,051
General and administrative. . . . 7,249 6,690 21,432 17,479
------------- ---------- --------- ---------
Total . . . . . . . . . . . . 157,736 149,445 457,365 394,409
------------- ---------- --------- ---------
INCOME FROM OPERATIONS. . . . . . . 33,589 41,404 137,868 67,331
------------- ---------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . (5,617) (6,283) (18,122) (18,715)
Less interest capitalized . . . . 2,687 2,038 7,733 10,940
Interest income . . . . . . . . . 1,663 2,938 7,021 7,827
Other - net . . . . . . . . . . . 87 136 211 389
------------- ---------- --------- ---------
Other income (expense) - net. (1,180) (1,171) (3,157) 441
------------- ----------- --------- ---------
INCOME BEFORE INCOME TAXES. . . . . 32,409 40,233 134,711 67,772
Provision for income taxes. . . . 11,769 14,674 48,043 25,013
------------- ----------- --------- ---------
NET INCOME. . . . . . . . . . . . . $ 20,640 $ 25,559 $ 86,668 $ 42,759
========= ========= ========= ==========
EARNINGS PER SHARE
OF COMMON STOCK (Note 5):
Basic . . . . . . . . . . . . . . $ .22 $ .27 $ .92 $ .46
========= ========= ========= ========
Diluted . . . . . . . . . . . . . $ .22 $ .27 $ .90 $ .45
========= ========= ========= ========
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,
------------------------
2001 2000
------------ ----------
(Unaudited)
CASH PROVIDED BY (USED IN):
Operations:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,668 $ 42,759
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 50,203 43,051
Gain on disposals of property, plant and equipment . . . . . . . . . . (1,695) (2,314)
Compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . 5,722 4,956
Provision for pension and postretirement benefits. . . . . . . . . . . (10,053) 3,054
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 38,843 18,613
Change in sale/leaseback payable. . . . . . . . . . . . . . . . . . (4,151)
Amortization of sale/leaseback gain . . . . . . . . . . . . . . . . . (2,344)
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Changes in current assets and liabilities:
Receivables- trade and other . . . . . . . . . . . . . . . . . . . . . 8,449 (48,910)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,108) 13,068
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . (3,228) 132
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . (9,640) (1,130)
Net changes in other noncurrent assets and liabilities . . . . . . . . . (1,269) 299
------------ ----------
Net cash provided by operations. . . . . . . . . . . . . . . . . . . . . . 153,892 67,203
------------ ----------
Investing activities:
Property, plant and equipment additions. . . . . . . . . . . . . . . . . (218,069) (183,637)
Proceeds from disposals of property, plant and equipment. . . . . . . . 2,903 3,214
Purchase of pump companies, net of cash acquired . . . . . . . . . . . . (7,245)
------------ ----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . (215,166) (187,668)
------------ ----------
Financing activities:
Proceeds from borrowings. . . . . . . . . . . . . . . . . . . . . . . . 73,170 80,184
Repayments of borrowings . . . . . . . . . . . . . . . . . . . . . . . . (28,008) (129,882)
Payments to acquire treasury stock . . . . . . . . . . . . . . . . . . . (18,518)
Proceeds from stock option and convertible debenture plans . . . . . . . 4,143 6,026
Proceeds from common stock offering, net of issue costs. . . . . . . . . 246,683
------------ ----------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . 30,787 203,011
------------ ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. . . . . . . . . . . . . . (30,487) 82,546
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 192,828 87,055
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 162,341 $ 169,601
============ ===========
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
2000 Annual Report to Stockholders, which are incorporated by reference in
our Form 10-K for the year ended December 31, 2000.
2. We believe the accompanying unaudited consolidated financial statements
contain all adjustments and reclassifications, which are of a normal
recurring nature, necessary to present fairly Rowan's financial position as
of September 30, 2001 and December 31, 2000, and the results of its
operations for the three and nine months ended September 30, 2001 and 2000
and its cash flows for the nine months ended September 30, 2001 and 2000.
3. Rowan's results of operations and cash flows for the nine months ended
September 30, 2001 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 equipment ("Manufacturing"). The
following table presents certain financial information of Rowan by
operating segment as of September 30, 2001 and 2000 and for the nine month
periods then ended (in thousands).
2001 Drilling Manufacturing Aviation Consolidated
-------------------- ------------ ------------- -------- -------------
Total Assets $ 1,442,427 $ 211,181 $ 165,040 $ 1,818,648
Revenues 405,419 76,531 113,283 595,233
Operating Profit (1) 143,734 623 14,943 159,300
2000 Drilling Manufacturing Aviation Consolidated
-------------------- ------------ ------------- -------- -------------
Total Assets $ 1,277,864 $ 184,327 $ 154,340 $ 1,616,531
Revenues 291,311 72,770 97,659 461,740
Operating Profit (1) 75,165 2,969 6,676 84,810
(1) Income from operations before deducting general and
administrative expenses.
Excluded from the preceding table are the effects of transactions between
segments. During the nine months ended September 30, 2001 and 2000, Rowan's
manufacturing division provided approximately $83 million and $83 million
respectively, of products and services to its drilling division and Rowan's
aviation division provided approximately $1,070,000 and $1,015,000,
respectively, of flight services to its drilling division.
6
5. Computation of basic and diluted earnings per share is as follows
(in thousands, except per share amounts):
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
---------------------- --------------------
2001 2000 2001 2000
------- ------ ------ ------
Weighted average shares of common
stock outstanding. . . . . . . . . . . . . . . 94,282 94,312 94,349 91,972
Stock options and related (treasury stock method) 403 932 791 1,043
Shares issuable from assumed conversion of
floating rate subordinated debentures. . . . . 736 1,086 980 1,088
------- ------ ------- ------
Weighted average shares for diluted earnings
per share calculation. . . . . . . . . . . . . 95,421 96,330 96,120 94,103
======= ======= ====== ======
Net income for basic and
diluted calculations . . . . . . . . . . . . . $ 20,640 $ 25,559 $ 86,668 $ 42,759
======= ======= ====== ======
Earnings per share:
Basic. . . . . . . . . . . . . . . . . . . . . $ .22 $ .27 $ .92 $ .46
======= ======= ====== ======
Diluted. . . . . . . . . . . . . . . . . . . . $ .22 $ .27 $ .90 $ .45
======= ======= ====== ======
6. In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations", which essentially mandates the purchase method of
accounting for business combinations, effective July 1, 2001. Rowan
believes that the provisions of Statement No. 141 will not materially
impact our financial position or results of operations.
In June 2001, FASB also issued Statement No. 142, "Goodwill and Other
Intangible Assets", which governs accounting and reporting for acquired
goodwill and other intangible assets at acquisition and after initial
recognition in the financial statements. Statement No. 142 is effective for
fiscal years beginning after December 15, 2001. Rowan believes that the
provisions of Statement No. 142, when adopted effective January 1, 2002,
will not materially impact its financial position or results of operations.
In October 2001, FASB also issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supercedes existing
standards pertaining to accounting and reporting for long-lived assets,
especially those held for disposal. Statement No. 144 is effective for
fiscal years beginning after December 15, 2001. Rowan believes that the
provisions of Statement No. 144, when adopted effective January 1, 2002,
will not materially impact its financial position or results of operations.
7
ROWAN COMPANIES, INC. AND SUBSIDIARIES
--------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2001 Compared to
- -------------------------------------------------
Nine Months Ended September 30, 2000
------------------------------------
Rowan achieved net income of $86.7 million in the first nine months of 2001
compared to $42.8 million in the same period of 2000. The improved results were
attained largely through an increase in average Gulf of Mexico drilling day
rates, together with increased contributions from our land rig operations, boat
operations and aviation division
A comparison of the revenues and operating profit from drilling, manufacturing,
aviation and consolidated operations for the first nine months of 2001 and 2000,
respectively, is reflected below (dollars in thousands):
Drilling Manufacturing Aviation Consolidated
------------------- ------------------ ----------------- --------------------
2001 2000 2001 2000 2001 2000 2001 2000
--------- -------- -------- -------- -------- ------- --------- ---------
Revenues. . . . . . . . . . $405,419 $291,311 $76,531 $72,770 $113,283 $97,659 $595,233 $461,740
Percent of Consolidated
Revenues. . . . . . . . . . 68% 63% 13% 16% 19% 21% 100% 100%
Operating Profit (1) $143,734 $ 75,165 $ 623 $ 2,969 $ 14,943 $6,676 $159,300 $ 84,810
- --------------------------------------------------------------------------------
(1) Income from operations before deducting general and
administrative expenses.
As shown above, Rowan's consolidated operating results increased by $74.5
million when comparing the first nine months of 2001 and 2000. Drilling revenues
increased by $114.1 million, or 39%, as our offshore fleet was 85% utilized
during the first nine months of 2001, compared to 91% in the prior-year period,
and achieved a 28% increase in average day rates between periods. Rowan's fleet
of 15 land rigs was 77% utilized during the first nine months of 2001, compared
to 42% in the prior-year period, and achieved a 74% increase in average day
rates between periods. Drilling expenses increased by $39.3 million, or 21%,
between periods, primarily due to the expansion of our AHTS (anchor-handling,
towing and supply) boat operations, the costs of which were more than offset by
outside revenues, increased land rig activity and the addition to our offshore
fleet, in late June 2000, of Rowan Gorilla VI.
The $2.3 million decrease shown above in Rowan's manufacturing results between
periods reflects reduced contributions from the steel and marine groups, which
more than offset the improved performance of the equipment group. Manufacturing
operations exclude approximately $83 million of products and services provided
to our drilling division during the first nine months of 2001, most of which was
attributable to construction progress on Rowan Gorilla VII and Rowan Gorilla
VIII, compared to $83 million in the same period of 2000. The division's
external backlog was $13.7 million at September 30, 2001.
8
Rowan's aviation operating results during the first nine months of 2001 were
significantly improved over the prior-year period due primarily to a 49%
increase in revenues from energy-related flying in the Gulf of Mexico and Alaska
which, together with an 11% increase in tourism-related revenues, more than
offset a 52% decline in fire response revenues between periods.
Three Months Ended September 30, 2001 Compared to
- -------------------------------------------------
Three Months Ended September 30, 2000
--------------------------------------
Rowan achieved net income of $20.6 million in the third quarter of 2001 compared
to $25.6 million in the same period of 2000. This reduction in profitability was
primarily attributable to declining offshore rig utilization, the effects of
which more than offset increased contributions from our land rig operations,
boat operations, manufacturing division and aviation division. Declining natural
gas prices throughout 2001 have, over the past several months, significantly
reduced domestic drilling activity, particularly in the Gulf of Mexico, with
adverse consequences for Rowan's rig utilization, average day rates and drilling
operating results.
A comparison of the revenues and operating profit from drilling, manufacturing,
aviation and consolidated operations for the third quarters of 2001 and 2000,
respectively, is reflected below (dollars in thousands):
Drilling Manufacturing Aviation Consolidated
------------------- ------------------ ----------------- --------------------
2001 2000 2001 2000 2001 2000 2001 2000
--------- -------- -------- -------- -------- -------- --------- ---------
Revenues . . . . . . . . $117,694 $117,434 $24,490 $28,223 $49,141 $45,192 $191,325 $190,849
Percent of Consolidated
Revenues . . . . . . . . 62% 62% 13% 15% 25% 23% 100% 100%
Operating Profit . $ 26,177 $35,267 $ 1,428 $ 928 $ 13,233 $ 11,899 $ 40,838 $ 48,094
As shown above, Rowan's consolidated operating results decreased by $7.3 million
when comparing the third quarters of 2001 and 2000. Drilling revenues increased
by $0.3 million as our offshore fleet was 70% utilized during the third quarter
of 2001, compared to 92% in the third quarter of 2000, but achieved a 10%
increase in average operating day rates between periods. Rowan's fleet of 15
land rigs was 71% utilized during the third quarter of 2001, compared to 47% in
the prior-year period, and achieved a 91% increase in average day rates between
periods. Drilling expenses increased by $8.1 million, or 11%, between periods,
primarily due to the expansion of our AHTS (anchor-handling, towing and supply)
boat operations, the costs of which were more than offset by outside revenues,
and increased land rig activity.
The $0.5 million increase shown above in Rowan's manufacturing results reflects
an increased contribution from the equipment group, which achieved a 9% increase
in part sales between periods. Manufacturing operations exclude approximately
$29 million of products and services provided to our drilling division during
the third quarter of 2001, most of which was attributable to construction
progress on Rowan Gorilla VII and Rowan Gorilla VIII, compared to $24 million in
the same period of 2000. The division's external backlog was $13.7 million at
September 30, 2001.
Rowan's aviation operating results during the third quarter of 2001 were
significantly improved over the prior-year period due primarily to a 63%
increase in revenues from energy-related flying in the Gulf of Mexico and Alaska
which, together with an 14% increase in tourism-related revenues, more than
offset a 57% decline in fire response revenues between periods.
9
Perceptible trends in the offshore drilling markets in which we are currently
operating and the numbers of Rowan-operated rigs in each of those markets are as
follows:
AREA RIGS PERCEPTIBLE INDUSTRY TRENDS
- ----------------- ---- --------------------------------------------
Gulf of Mexico 22 Reduced exploration and development activity in
the near term, improving moderately in
late 2001 and early 2002
Eastern Canada 1 Improving demand for harsh environment equipment
in 2002 and 2003
North Sea - Improving demand for harsh environment equipment
in 2002 and 2003
Demand for jack-ups in the North Sea has increased and we are responding to bid
requests for our Gorilla Class rigs for work commencing in early 2002. Upon its
delivery in the fourth quarter, Gorilla VII will be relocated to the North Sea.
We remain confident in the long-term viability of the North Sea jack-up drilling
market.
Perceptible trends in the aviation markets in which we are currently operating
and the number of Rowan-operated aircraft based in each of those markets are as
follows:
AREA AIRCRAFT PERCEPTIBLE INDUSTRY TRENDS
- ----------------- --------- --------------------------------------------
Alaska 65 Normal seasonal decline
Gulf of Mexico 49 Moderately improving levels of flight
support activity
The drilling and aviation markets in which Rowan competes frequently experience
significant changes in supply and demand. Offshore 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 oil and natural gas reserves, political and regulatory policies,
seasonal weather patterns, contractual requirements under leases or concessions,
and, probably most influential, oil and natural gas prices. Rowan's aviation
operations are also affected by such 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 such factors prevents us
from being able to accurately predict whether existing market conditions or the
perceptible market trends reflected in the preceding tables will continue. 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.
Natural gas prices, in particular, have fluctuated wildly over the past eighteen
months, and are presently at about one-third of their peak price attained just
last winter. Such price volatility typically has an adverse effect on drilling
activity. Recently, domestic drilling activity, particularly in the Gulf of
Mexico, has weakened dramatically, market day rates have continued to
deteriorate and Rowan's drilling operations have been adversely impacted. At
current levels, Rowan's drilling operations are marginally profitable, but there
can be no assurance that market conditions will not deteriorate further.
Though considerably less volatile than its drilling and aviation operations,
Rowan's manufacturing operations have been adversely impacted by a prolonged
period of unfavorable world commodity prices; in particular, prices for copper,
iron ore, coal, gold and diamonds. Rowan's external manufacturing backlog
remains at a depressed level. As a result, we cannot accurately predict whether
or not our manufacturing operations will remain profitable during the balance of
2001.
10
LIQUIDITY AND CAPITAL RESOURCES
A comparison of key balance sheet amounts and ratios as of September 30, 2001
and December 31, 2000 is as follows (dollars in thousands):
September 30, December 31,
2001 2000
--------- -------------
Cash and cash equivalents $ 162,341 $ 192,828
Current assets $ 456,482 $ 483,357
Current liabilities $ 104,529 $ 104,354
Current ratio 4.37 4.63
Long-term debt $ 410,388 $ 372,212
Stockholders' equity $1,131,309 $1,052,757
Long-term debt/total capitalization .27 .26
Reflected in the comparison above are the effects during the first nine months
of 2001 of net cash provided by operations of $153.9 million, proceeds from
borrowings of $73.2 million, capital expenditures of $218.1 million, debt
payments of $28.0 million and purchases of Rowan stock totaling $18.5 million.
Capital expenditures during the first nine months of 2001 were primarily related
to the construction of Rowan Gorilla VII and Rowan Gorilla VIII and the
reactivation of our land drilling division.
Rowan Gorilla VII, a Super Gorilla Class jack-up like Rowan Gorilla V and Rowan
Gorilla VI featuring a combination drilling and production capability, is at
Rowan's Sabine Pass, Texas facility for final outfitting and should be completed
prior to year-end 2001. We have financed up to $185 million of the cost of
Gorilla VII through a 12-year bank loan guaranteed by the U. S. Department of
Transportation's Maritime Administration under its Title XI Program. The notes
require semiannual payments in each of April and October and Gorilla VII secures
the government guarantee. At September 30, 2001, we had drawn down about $168
million under this facility, which bore interest at floating rates averaging
approximately 4%.
Rowan Gorilla VIII is an enhanced version of our Super Gorilla Class jack-up and
is designated as a Super Gorilla XL. Gorilla VIII will be outfitted with 708
feet of leg, 134 feet more than Gorillas V, VI or VII, and have 30% larger spud
cans enabling operation in the Gulf of Mexico in water depths up to 550 feet.
Gorilla VIII will also be able to operate in water depths up to 400 feet in the
hostile environments offshore eastern Canada and in the North Sea. Gorilla VIII
is being constructed at Vicksburg, Mississippi with delivery expected during the
third quarter of 2003. Rowan has secured Title XI government-guaranteed
financing for up to $187 million of the cost of Gorilla VIII. The notes require
semiannual payments in each of January and July and Gorilla VIII secures the
government guarantee. At September 30, 2001, we had drawn down about $11 million
under this facility, which bore interest at floating rates averaging
approximately 4%.
Design work continues on a new class of jack-up rig, specifically targeted for
deep drilling in water depths up to 250 feet on the outer continental shelf in
the Gulf of Mexico. The Tarzan Class rig will offer drilling capabilities
similar to our Gorilla Class jack-ups, enabling more efficient drilling beyond
15,000 feet, but with reduced environmental criteria (wind, wave and current)
and at about one-third of the construction cost. The first rig, to be named
Scooter Yeargain, will be constructed at Vicksburg, Mississippi with delivery
expected during the third quarter of 2004.
In July, Rowan committed 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. The total cost will approach $50 million and the helicopters
should be delivered in early 2003.
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On October 31, 2001, Rowan announced its intention to acquire, subject to
execution of a definitive purchase agreement, Oilfield-Electric-Marine, Inc.
("OEM") and Industrial Logic Systems, Inc. OEM manufactures variable speed AC
motors and variable frequency drive systems, DC motors and drive systems, and
filters and consoles for marine boats and lay barges, the oil and gas drilling
industry, and the mining and dredging industries. OEM also manufactures medium
voltage switchgear from 5KV through 38KV for the industrial and petrochemical
markets. The purchase price is approximately $8 million in Rowan stock and
closing is expected to occur during the fourth quarter.
Rowan estimates remaining 2001 capital expenditures will be around $50-60
million, including approximately $35-40 million for Gorillas VII and VIII. We
may also spend amounts to acquire additional aircraft as market conditions
justify, build additional land rigs and upgrade existing equipment and
manufacturing facilities.
During March 2001, Rowan completed the refinancing of its $156.8 million of
outstanding floating-rate Gorilla VI debt through the issuance of a 5.88%
fixed-rate note maturing in 2012. The fixed-rate note is U. S.
Government-guaranteed under the Title XI Program and Gorilla VI secures the
government guarantee.
Based upon current operating levels and the previously discussed market trends,
we believe that fourth quarter operations, together with existing working
capital and available financial resources, will generate sufficient cash flow to
sustain planned capital expenditures and debt service requirements at least
through the remainder of 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------------
Rowan believes that its exposure to risk of earnings loss due to changes in
interest rates is not significant.
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; the general economy, including inflation; weather
conditions in the Company's principal operating areas; and environmental and
other laws and regulations. Other relevant factors have been disclosed in the
Company's filings with the U. S. Securities and Exchange Commission.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------------------------
(b) Reports on Form 8-K
During the third quarter of 2001, Rowan filed a Form 8-K
dated September 17, 2001 containing items pertinent to the
current quarter, as follows:
Item 5. Other Events
Press release reporting a revision of Rowan's third
quarter business outlook.
Item 7. Financial Statements and Exhibits
Rowan press release, dated September 17, 2001
SIGNATURES
-------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROWAN COMPANIES, INC.
(Registrant)
Date: November 14, 2001 /s/ E. E. THIELE
-------------------------------
E. E. Thiele
Senior Vice President- Finance,
Administration and Treasurer
(Chief Financial Officer)
Date: November 14, 2001 /s/ W. H. WELLS
-------------------------------
W. H. Wells
Controller
(Chief Accounting Officer)
13