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 MARCH 31, 2002
[ ] 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
-------------------------------------------------------
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
April 30, 2002 was 93,916,190.
ROWAN COMPANIES, INC.
INDEX
Page No.
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PART I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheet --
March 31, 2002 and December 31, 2001 .. . . . . . . . . . .. . . 2
Consolidated Statement of Operations --
Three Months Ended March 31, 2002 and 2001. . . . . . . . . . . . 4
Consolidated Statement of Cash Flows --
Three Months Ended March 31, 2002 and 2001 . . . . . . . . . . . 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 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . .. . .12
Item 4. Submission of Matters to a Vote of Security Holders .. . . . .. . .12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . .. . . . .. . .12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -------------------------------
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, December 31,
2002 2001
------------ -------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . $ 260,687 $ 236,989
Receivables - trade and other. . . . . . . . . 107,634 120,199
Inventories - at cost:
Raw materials and supplies . . . . . . . . . 126,154 121,609
Work-in-progress . . . . . . . . . . . . . . 22,697 20,839
Finished goods . . . . . . . . . . . . . . . 600 741
Prepaid expenses . . . . . . . . . . . . . . . 3,294 3,188
Deferred tax assets - net. . . . . . . . . . . 2,325 3,117
------------ -------------
Total current assets . . . . . . . . . . . 523,391 506,682
------------ -------------
PROPERTY, PLANT AND EQUIPMENT - at cost:
Drilling equipment . . . . . . . . . . . . . . 1,892,600 1,634,370
Aircraft and related equipment . . . . . . . . 258,874 255,600
Manufacturing plant and equipment. . . . . . . 107,403 104,018
Construction in progress . . . . . . . . . . . 122,286 327,032
Other property and equipment . . . . . . . . . 144,043 140,706
------------ -------------
Total. . . . . . . . . . . . . . . . . . . 2,525,206 2,461,726
Less accumulated depreciation and amortization 1,060,814 1,042,883
------------ -------------
Property, plant and equipment - net. . . 1,464,392 1,418,843
------------ -------------
OTHER ASSETS AND DEFERRED CHARGES. . . . . . . . 18,478 13,430
------------ -------------
TOTAL. . . . . . . . . . . . . . . . . . . $ 2,006,261 $ 1,938,955
============ =============
See Notes to Consolidated Financial Statements.
2
March 31, December 31,
2002 2001
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . $ 42,458 $ 42,458
Accounts payable - trade . . . . . . . . . . . . . . . . . . . . . . . . . 24,453 28,903
Deferred revenues 4,187 87,962
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 76,445 42,171
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 147,543 201,494
------------ ------------
LONG-TERM DEBT - less current maturities . . . . . . . . . . . . . . . . . . 453,782 438,484
------------ ------------
OTHER LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,355 62,938
------------ ------------
DEFERRED INCOME TAXES - net. . . . . . . . . . . . . . . . . . . . . . . . . 137,677 127,952
------------ ------------
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 95,028,280 shares at
March 31, 2002 and 95,002,430 shares at December 31, 2001 . . . . . 11,879 11,875
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 640,305 638,303
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582,433 494,756
Cost of 1,133,240 and 1,435,300 treasury shares, respectively . . . . . . . (19,173) (24,307)
Accumulated other comprehensive income (loss). . . . . . . . . . .. . . . . (12,540) (12,540)
----------- ------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . 1,202,904 1,108,087
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,006,261 $ 1,938,955
============ ============
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
Ended March 31,
--------------------------
2002 2001
------------- -----------
(Unaudited)
REVENUES:
Drilling services . . . . . . . . . . . . . $ 77,624 $ 140,466
Manufacturing sales and services .. . . . .. 31,635 26,615
Aviation services. . . . . . . . . . . . . . 28,546 26,433
------------- -----------
Total . . . . . . . . . . .. . . . . . . 137,805 193,514
------------- -----------
COSTS AND EXPENSES:
Drilling services . . . . . .. . . . . . . . 75,444 70,534
Manufacturing sales and services.. . . . . . 29,546 25,348
Aviation services . . . . . .. . . . . . . . 27,847 24,516
Depreciation and amortization . . . . . . . 18,248 16,194
General and administrative. . .. . . . . . . 6,395 6,389
------------- ----------
Total . . . . . . . . . . . . . . . . . . 157,480 142,981
------------- ----------
INCOME (LOSS) FROM OPERATIONS. . . . . .. . . (19,675) 50,533
------------- ----------
OTHER INCOME (EXPENSE):
Net proceeds from Gorilla V settlement. . . . 157,125
Interest expense. . . . . . .. . . . . . . . (4,981) (6,688)
Less interest capitalized . .. . . . . . . . 1,618 2,631
Interest income . . . . . . . . . . . . . . . 1,138 2,986
Other - net . . . . . . . . .. . . . . . . . 102 95
------------- ----------
Other income (expense) - net. . . . . . . 155,002 (976)
------------- -----------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . 135,327 49,557
Provision for income taxes. .. . . . . . . . 47,650 17,841
------------- -----------
NET INCOME. . . . . . . . . . . . . . . . . . . $ 87,677 $ 31,716
========= =========
NET INCOME PER SHARE
OF COMMON STOCK (Note 6):
Basic . . . . . . . . . . . .. . . . . . . . . $ .93 $ .34
========= =========
Diluted . . . . . . . . . . . . . . . . . . . $ .92 $ .33
========= =========
See Notes to Consolidated Financial Statements.
4
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
For The Three Months
Ended March 31,
------------------------
2002 2001
------------ ----------
(Unaudited)
CASH PROVIDED BY (USED IN):
Operations:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,677 $ 31,716
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 18,248 16,194
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 10,428 10,781
Compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . 1,982 1,811
Provision for pension and postretirement benefits. . . . . . . . . . . 2,983 752
Gain on disposals of property, plant and equipment. . . . . . . . . . (66) (1,050)
Changes in current assets and liabilities:
Receivables- trade and other . . . . . . . . . . . . . . . . . . . . . 16,525 9,173
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,048) (1,541)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . (63) (2,576)
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . (59,151) 2,398
Net changes in other noncurrent assets and liabilities . . . . . . . . . (193) (794)
------------ ----------
Net cash provided by operations. . . . . . . . . . . . . . . . . . . . . . 73,322 66,864
------------ ----------
Investing activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . .. . . . (62,850) (59,570)
Proceeds from disposals of property, plant and equipment. . . . . . . . 101 1,831
------------ ----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . (62,749) (57,739)
------------ ----------
Financing activities:
Proceeds from borrowings. . . . . . . . . . . . . . . . . . . . . . . . 28,802 23,615
Repayments of borrowings . . . . . . . . . . . . . . . . . . . . . . . . (13,504) (14,504)
Payments to acquire treasury stock . . . . . . . . . . . . . . . . . . . (2,308)
Proceeds from stock option and convertible debenture plans . . . . . . . 135 621
------------ ----------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . 13,125 9,732
------------ ----------
INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . 23,698 18,857
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 236,989 192,828
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 260,687 $ 211,685
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Acquisition of net manufacturing assets through issuance of
439,560 shares of treasury stock (Note 8). . . . . . . . . . . . . . . . $ 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
2001 Annual Report to Stockholders, which are incorporated by reference in
our Form 10-K for the year ended December 31, 2001.
2. We believe the accompanying unaudited consolidated financial statements
contain all adjustments, which are of a normal recurring nature, necessary
to prevent fairly Rowan's financial position as of March 31, 2002 and
December 31, 2001, and the results of its operations and cash flows for
the three months ended March 31, 2002 and 2001.
3. Rowan's results of operations and cash flows for the three months ended
March 31, 2002 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 March 31, 2002 and 2001 and for the three month
periods then ended (in thousands).
2002 Drilling Manufacturing Aviation Consolidated
-------------------- ------------ ------------- -------- -------------
Total Assets $ 1,618,670 $ 232,999 $ 154,592 $ 2,006,261
Unamortized goodwill 1,493 10,863 12,356
Revenues 77,624 31,635 28,546 137,805
Operating profit (loss)(1) (10,432) 334 (3,182) (13,280)
2001 Drilling Manufacturing Aviation Consolidated
-------------------- ------------ ------------- -------- -------------
Total Assets $ 1,388,870 $ 202,633 $ 142,424 $ 1,733,927
Unamortized goodwill 1,666 6,405 8,071
Revenues 140,466 26,615 26,433 193,514
Operating profit (loss)(1) 59,127 (649) (1,556) 56,922
(1) Income from operations before deducting general and
administrative expenses.
Excluded from the preceding table are the effects of transactions between
segments. During the three months ended March 31, 2002 and 2001, Rowan's
manufacturing division provided approximately $24 million and $19 million,
respectively, of products and services to its drilling division and Rowan's
aviation division provided approximately $447,000 and $250,000,
respectively, of flight services to its drilling division.
5. Rowan had no items of other comprehensive income during the three months
ended March 31, 2002 and 2001.
6
6. Rowan's computation of basic and diluted income per share is as follows
(in thousands, except per share amounts):
The Three Months
Ended March 31,
----------------------
2002 2001
------- ------
Weighted average shares of common stock outstanding . . . 93,787 94,282
Dilutive securities:
Stock options. . . . . . . . . . . . . . . . . . 638 927
Convertible debentures. . . . . . . . . . . . . . 825 1,070
------- -------
Weighted average shares for diluted calculation. . . . . 95,250 96,279
======= =======
Net income for basic and diluted calculation . . . . . $ 87,677 $ 31,716
======= =======
Net income per share:
Basic. . . . . . . . . . . . . . . . . . .. . . . $ .93 $ .34
======= =======
Diluted. . . . . . . . . . . . . . . . . .. . . . $ .94 $ .33
======= =======
7. Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", generally provides that goodwill and other intangible
assets with indefinite useful lives no longer be amortized to expense, but
rather be assessed periodically for impairment losses. Rowan's adoption of
SFAS No. 142, effective January 1, 2002, did not materially impact its
financial position or results of operations. Goodwill amortization during
the three months ended March 31, 2001 was approximately $142,000. At March
31, 2002, Rowan had approximately $1.8 million of intangible assets subject
to amortization.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", superceded existing standards pertaining to accounting and
reporting for long-lived assets, especially those held for disposal.
Rowan's adoption of SFAS No. 144, effective January 1, 2002, did not
materially impact its financial position or results of operations.
8. On January 31, 2002, Rowan completed the purchase of certain assets of
Oilfield-Electric-Marine, Inc.(O-E-M) and Industrial Logic Systems, Inc.,
by issuing from treasury 439,560 shares of common stock valued at
approximately $8 million. The acquisition gave rise to approximately $4.7
million of goodwill. O-E-M manufactures variable speed AC motors and
variable frequency drive systems, DC motors and drive systems, and consoles
for marine boats and lay barges, the oil and gas drilling industry, and the
mining and dredging industries. Additionally, O-E-M manufactures medium
voltage switchgear from 5KV through 38 KV for the industrial and
petrochemical markets.
9. 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 rig Rowan 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 subsequently 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 and all litigation involving this
matter was dropped. Pursuant to such agreement, Rowan subsequently received
an additional $84.2 million. Such amounts are shown, net of final legal
costs and expenses, as Other Income on the Consolidated Statement of
Operations for the three months ended March 31, 2002.
7
ROWAN COMPANIES, INC. AND SUBSIDIARIES
--------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to
- -------------------------------------------------
Three Months Ended March 31, 2001
------------------------------------
Rowan generated net income of $87.7 million in the first quarter of 2002
compared to $31.7 million in the same period of 2001. The current period
included net proceeds from the settlement of the Gorilla V contract dispute,
which increased net income by approximately $102 million, or $1.07 per share.
Excluding the effects of the settlement, Rowan's first quarter 2002 results
would have been a net loss of approximately $14 million, or $.15 per share. The
decrease in operating performance was caused largely by declines in drilling
activity and day rates between periods, primarily in the Gulf of Mexico.
A comparison of the revenues and operating profit (loss) from drilling,
manufacturing, aviation and consolidated operations for the first quarters of
2002 and 2001, respectively, is reflected below (dollars in thousands):
Drilling Manufacturing Aviation Consolidated
------------------- ------------------ ----------------- --------------------
2002 2001 2002 2001 2002 2001 2002 2001
--------- -------- -------- -------- -------- ------- --------- ---------
Revenues. . . . . . . . . . $ 77,624 $140,466 $31,635 $26,615 $28,546 $26,433 $137,805 $193,514
Percent of Consolidated
Revenues. . . . . . . . . . 56% 72% 23% 14% 21% 14% 100% 100%
Operating Profit (Loss)(1) $(10,432) $ 59,127 $ 334 $ (649) $(3,182) $(1,556) $(13,280) $ 56,922
- --------------------------------------------------------------------------------
(1) Income (loss) from operations before deducting general and
administrative expenses.
As reflected above, Rowan's consolidated operating results declined by $70.2
million or 123% when comparing the first quarters of 2002 and 2001. Drilling
revenues decreased by $62.8 million or 45% as our offshore fleet of 23 jack-ups
and one semi-submersible was 80% utilized during the first quarter of 2002,
compared to 97% in the first quarter of 2001, and suffered a 44% decrease in
average day rates between periods. Rowan's fleet of 17 land rigs was 58%
utilized during the first quarter of 2002, compared to 76% in the first quarter
of 2001, and experienced a 4% decrease in average day rates between periods.
Drilling expenses increased by $4.9 million between periods, primarily due to
the expansion of our land drilling fleet and the addition to our offshore fleet,
in February 2002, of Rowan Gorilla VII.
The $1.0 million increase shown above in Rowan's manufacturing results between
periods primarily reflects the increased contribution from the division's steel
group and the recent addition to the drilling products group of newly-acquired
Oilfield-Electric-Marine. Manufacturing operations exclude approximately $24
million of products and services provided to the drilling division during the
first quarter of 2002, most of which was attributable to construction progress
on Rowan Gorilla VIII, compared to about $19 million in the same period of 2001,
primarily due to Gorilla VII. The division's external backlog was
approximately $26 million at March 31, 2002.
8
Rowan's aviation operating results in the first quarter of 2002 were impacted by
higher insurance and maintenance costs, which more than offset the increase in
Gulf of Mexico revenues that followed the average 30% rate increase implemented
last April. Both periods reflect the normal seasonal slowdown in helicopter
flying activity in Alaska.
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 greater 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 65 Normal seasonal improvement
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. 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 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 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 unprofitable, and there
can be no assurance that expected improvements in market conditions, as
reflected in the preceding table, will materialize. Our operations will be
adversely affected should market conditions deteriorate further.
Though considerably less volatile than our drilling and aviation operations, our
manufacturing operations have continued to be 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 remainder
of 2002.
9
LIQUIDITY AND CAPITAL RESOURCES
A comparison of key balance sheet amounts and ratios as of March 31, 2002
and December 31, 2001 is as follows (dollars in thousands):
March 31, December 31,
2002 2001
--------- -------------
Cash and cash equivalents $ 260,687 $ 236,989
Current assets $ 523,391 $ 506,682
Current liabilities $ 147,543 $ 201,494
Current ratio 3.55 2.51
Long-term debt $ 453,782 $ 438,484
Stockholders' equity $1,202,904 $1,108,087
Long-term debt/total capitalization .27 .28
Reflected in the comparison above are the effects in the first quarter of
2002 of net cash provided by operations of $73.3 million, proceeds from
borrowings of $28.8 million, capital expenditures of $62.9 million and debt
repayments of $13.5 million. Net cash provided by operations during the period
included approximately $73 million net proceeds from the settlement of the
Gorilla V contract dispute, which is discussed more fully below.
Capital expenditures during the first quarter were primarily related to the
construction of Rowan Gorilla VIII and the continued upgrade of our existing
offshore and land drilling fleet.
Rowan Gorilla VIII is an enhanced version of our Super Gorilla class jack-up,
designated 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. The
construction of Gorilla VIII continues on schedule at Rowan's Vicksburg,
Mississippi facility with delivery expected during the third quarter of 2003. We
are financing up to $187 million of the cost of Gorilla VIII through 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 principal repayments
commencing January 15, 2004, and Gorilla VIII secures the government guarantee.
At March 31, 2002, we had drawn down about $60 million under this facility,
which bore interest at floating rates averaging approximately 2.1%.
Rowan Gorilla VII, a Super Gorilla class jack-up like Gorillas V and VI
featuring a combination drilling and production capability, was delivered in
December 2001 and mobilized to the North Sea during the first quarter. We
financed $185 million of the cost of Gorilla VII through a 12-year bank loan
guaranteed by MARAD under its Title XI Program. The notes require semiannual
payments in each April and October and Gorilla VII secures the government
guarantee. At March 31, 2002, we had fully drawn down the facility and
outstanding borrowings bore interest at floating rates averaging approximately
2.1%.
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.
10
During 2001, we 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. We currently expect the helicopters to be delivered in the third
quarter of 2003 and that their total cost, estimated to approach $50 million,
will be funded from existing working capital. However, there can be no assurance
that working capital will be adequate.
On January 31, 2002, we completed the purchase of certain assets of
Oilfield-Electric-Marine, Inc. and Industrial Logic Systems, Inc., issuing from
treasury 439,560 shares of Rowan common stock valued at approximately $8
million. Oilfield-Electric-Marine manufactures variable speed AC motors and
variable frequency drive systems, DC motors and drive systems, and consoles for
marine boats and lay barges, the oil and gas drilling industry, and the mining
and dredging industries. Additionally, Oilfield-Electric-Marine manufactures
medium voltage switchgear from 5KV through 38 KV for the industrial and
petrochemical markets.
Rowan estimates remaining 2002 capital expenditures will be between $160 million
and $180 million, including approximately $75-90 million for Gorilla VIII. We
may also spend amounts to acquire additional aircraft as market conditions
justify and to upgrade existing rigs and manufacturing facilities.
Based upon current and anticipated near-term operating levels, we believe that
2002 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
2002.
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 rig
Rowan 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
subsequently 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 and all
litigation involving this matter was dropped. Pursuant to such agreement, Rowan
subsequently received an additional $84.2 million. Such amounts are shown, net
of final legal costs and expenses, as Other Income on the Consolidated Statement
of Operations for the three months ended March 31, 2002.
On April 26, 2002, Rowan's Board of Directors declared a special cash dividend
of $.25 per share of Common Stock payable on June 6, 2002 to shareholders of
record on May 16, 2002.
Critical Accounting Policies and Management Estimates. Rowan's significant
accounting policies are outlined in Note 1 to our financial statements included
in our 2001 Annual Report to Stockholders, which is incorporated by reference in
our Form 10-K for the year ended December 31, 2001. 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 capitalizable costs,
useful lives and salvage values, as changes in such policies and/or estimates
would produce significantly different amounts from those reported herein.
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 disclosed in
the Company's filings with the U. S. Securities and Exchange Commission.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 the Company's
products and services. Rowan does not hold or issue derivative financial
instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the fifth paragraph on page 11 within PART I. Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Form 10-Q for a discussion of material developments in the
Gorilla V contract dispute.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on April 26, 2002, stockholders elected
the three nominees for Class II Director as set forth in Rowan's Proxy Statement
relating to the meeting. With respect to such election, proxies were solicited
pursuant to Regulation 14 under the Securities Exchange Act of 1934 and there
was no solicitation in opposition to such nominees. Of Rowan's 93,884,615 shares
of record, 85,541,781 were voted at the meeting by proxy. The following numbers
of votes were cast as to the Class II Director nominees: R. G. Croyle,
79,772,313 votes for and 5,769,468 votes withheld; D. F. McNease, 79,772,540
votes for and 5,769,241 votes withheld; and Lord Moynihan, 79,686,526 votes for
and 5,854,625 votes withheld.
Also at the 2002 Annual Meeting, stockholders approved both Director Proposals.
With respect to the proposed amendment to the 1998 Convertible Debenture
Incentive Plan, 60,354,819 votes were cast for, 3,295,367 votes were cast
against and 9,828,742 shares abstained. With respect to the proposed amendment
to the Restated 1988 Nonqualified Stock Option Plan, 39,250,222 votes were cast
for, 33,762,310 votes were cast against and 466,396 shares abstained. For each
proposal, 12,062,853 shares were not voted.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K filed by the Registrant during the first quarter of
fiscal year 2002:
February 12, 2002 - pertaining to the Company's Amended and Restated
Rights Agreement, as authorized and approved by the Board of Directors
on January 24, 2002
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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: March 13, 2002 /s/ E. E. THIELE
-------------------------------
E. E. Thiele
Senior Vice President- Finance,
Administration and Treasurer
(Chief Financial Officer)
Date: March 13, 2002 /s/ W. H. WELLS
-------------------------------
W. H. Wells
Controller
(Chief Accounting Officer)
13