.
.
.
EXHIBIT 13
Ten-Year Financial Review
<Table>
<Caption>
(In thousands except per share amounts and ratios) 2002 2001 2000
------------ ------------ ------------
OPERATIONS
Revenues:
Drilling services $ 357,244 $ 486,291 $ 418,948
Manufacturing sales and services 118,120 102,150 103,465
Aviation services 141,894 142,623 123,546
------------ ------------ ------------
Total 617,258 731,064 645,959
------------ ------------ ------------
Costs and expenses:
Drilling services 304,846 303,420 256,615
Manufacturing sales and services 109,842 88,691 88,463
Aviation services 112,286 118,153 106,374
Depreciation and amortization 78,091 68,499 58,865
General and administrative 25,140 27,670 24,072
------------ ------------ ------------
Total 630,205 606,433 534,389
------------ ------------ ------------
Income (loss) from operations (12,947) 124,631 111,570
------------ ------------ ------------
Other income (expense):
Net proceeds from Gorilla V settlement 157,125(2)
Interest expense (20,645) (24,240) (25,652)
Less interest capitalized 4,722 11,170 13,510
Interest income 4,106 8,382 10,948
Other - net 458 264 487
------------ ------------ ------------
Other income (expense) - net 145,766 (4,424) (707)
------------ ------------ ------------
Income (loss) before income taxes 132,819 120,207 110,863
Provision (credit) for income taxes 46,541 43,209 40,650
------------ ------------ ------------
Income (loss) before extraordinary charges 86,278 76,998 70,213
Extraordinary charges from redemption of debt
------------ ------------ ------------
Net income (loss) $ 86,278(2) $ 76,998 $ 70,213
------------ ------------ ------------
Per share of common stock:
Net income (loss):
Basic:
Income (loss) before extraordinary charges $ .92 $ .82 $ .76
Extraordinary charges from redemption of debt
------------ ------------ ------------
Net income (loss) $ .92 $ .82 $ .76
------------ ------------ ------------
Diluted:
Income (loss) before extraordinary charges $ .90 $ .80 $ .74
Extraordinary charges from redemption of debt
------------ ------------ ------------
Net income (loss) $ .90(2) $ .80 $ .74
------------ ------------ ------------
Cash dividends $ .25 $ -- $ --
------------ ------------ ------------
FINANCIAL POSITION
Working capital $ 353,927 $ 305,188 $ 379,003
------------ ------------ ------------
Property, plant and equipment - at cost:
Drilling equipment 1,922,341 1,634,370 1,553,849
Aircraft and related equipment 264,212 255,600 236,760
Manufacturing plant and equipment 120,705 104,018 94,077
Construction in progress 199,352 327,032 157,314
Other property and equipment 155,815 140,706 121,997
------------ ------------ ------------
Total 2,662,425 2,461,726 2,163,997
------------ ------------ ------------
Property, plant and equipment - net 1,567,144 1,418,843 1,182,780
Total assets 2,054,504 1,938,955 1,678,426
Capital expenditures 242,896 305,180 223,082
Long-term debt 512,844 438,484 372,212
Common stockholders' equity 1,131,777 1,108,087 1,052,757
------------ ------------ ------------
STATISTICAL INFORMATION
Current ratio 4.05 2.51 4.63
Long-term debt/total capitalization .31 .28 .26
Book value per share of common stock $ 12.09 $ 11.84 $ 11.17
Price range of common stock $15.89-26.84 $11.10-33.89 $19.06-34.25
============ ============ ============
</Table>
(1) Amounts reflect advances of $110 million outstanding under the Company's
$155 million revolving credit facility expiring in October 2000. The
Company repaid such advances during February 2000 from the $247 million net
proceeds from a stock offering and cancelled the facility. Giving effect to
these transactions at December 31, 1999, the Company's Working capital and
Current ratio would have been $370 million and 5.00, respectively.
(2) Excluding the Gorilla V settlement, net income (loss) and net income (loss)
per diluted share would have been approximately $(16) million and $(.17),
respectively.
Rowan 2002 | 14
<Table>
<Caption>
(In thousands except per share amounts and ratios) 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
OPERATIONS
Revenues:
Drilling services $ 260,939 $ 431,664 $ 434,004 $ 316,123 $ 250,080
Manufacturing sales and services 95,545 158,913 154,852 143,768 133,755
Aviation services 104,078 115,773 106,396 111,269 87,462
------------ ------------ ------------ ------------ ------------
Total 460,562 706,350 695,252 571,160 471,297
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Drilling services 213,356 218,372 217,514 202,394 203,415
Manufacturing sales and services 88,430 134,535 134,324 131,693 120,328
Aviation services 93,806 98,037 95,368 91,570 77,964
Depreciation and amortization 54,699 49,703 47,078 47,882 50,555
General and administrative 18,399 18,366 16,971 16,591 14,692
------------ ------------ ------------ ------------ ------------
Total 468,690 519,013 511,255 490,130 466,954
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (8,128) 187,337 183,997 81,030 4,343
------------ ------------ ------------ ------------ ------------
Other income (expense):
Net proceeds from Gorilla V settlement
Interest expense (22,755) (17,500) (26,208) (27,547) (27,702)
Less interest capitalized 11,238 16,264 9,966 2,516
Interest income 4,583 7,205 5,190 4,157 5,209
Other - net 526 395 343 374 468
------------ ------------ ------------ ------------ ------------
Other income (expense) - net (6,408) 6,364 (10,709) (20,500) (22,025)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (14,536) 193,701 173,288 60,530 (17,682)
Provision (credit) for income taxes (4,870) 69,241 16,863 (808) 754
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary charges (9,666) 124,460 156,425 61,338 (18,436)
Extraordinary charges from redemption of debt 9,766
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (9,666) $ 124,460 $ 146,659 $ 61,338 $ (18,436)
------------ ------------ ------------ ------------ ------------
Per share of common stock:
Net income (loss):
Basic:
Income (loss) before extraordinary charges $ (.12) $ 1.45 $ 1.82 $ .72 $ (.22)
Extraordinary charges from redemption of debt $ .12
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (.12) $ 1.45 $ 1.70 $ .72 $ (.22)
------------ ------------ ------------ ------------ ------------
Diluted:
Income (loss) before extraordinary charges $ (.12) $ 1.43 $ 1.76 $ .70 $ (.22)
Extraordinary charges from redemption of debt $ .11
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (.12) $ 1.43 $ 1.65 $ .70 $ (.22)
------------ ------------ ------------ ------------ ------------
Cash dividends $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
FINANCIAL POSITION
Working capital $ 122,792(1) $ 286,059 $ 330,852 $ 232,045 $ 200,588
------------ ------------ ------------ ------------ ------------
Property, plant and equipment - at cost:
Drilling equipment 1,268,704 1,238,361 965,292 954,249 944,021
Aircraft and related equipment 221,776 211,313 202,044 188,681 189,954
Manufacturing plant and equipment 83,835 75,949 60,902 37,377 25,037
Construction in progress 248,567 127,075 195,996 77,318
Other property and equipment 113,008 108,353 94,476 94,517 91,089
------------ ------------ ------------ ------------ ------------
Total 1,935,890 1,761,051 1,518,710 1,352,142 1,250,101
------------ ------------ ------------ ------------ ------------
Property, plant and equipment - net 1,025,739 877,197 677,160 546,200 487,039
Total assets 1,356,067 1,249,108 1,122,135 899,308 802,488
Capital expenditures 204,689 247,747 180,066 117,947 33,881
Long-term debt 296,677 310,250 256,150 267,321 247,744
Common stockholders' equity 723,724 729,996 653,098 496,219 429,155
------------ ------------ ------------ ------------ ------------
STATISTICAL INFORMATION
Current ratio 1.61(1) 4.59 5.06 3.72 3.75
Long-term debt/total capitalization .29 .30 .28 .35 .37
Book value per share of common stock $ 8.69 $ 8.77 $ 7.53 $ 5.80 $ 5.06
Price range of common stock $ 8.50-21.69 $ 9.00-32.50 $16.75-43.94 $ 8.88-24.50 $ 5.38-10.00
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
(In thousands except per share amounts and ratios) 1994 1993
------------ ------------
OPERATIONS
Revenues:
Drilling services $ 245,917 $ 271,022
Manufacturing sales and services 96,664
Aviation services 95,578 82,174
------------ ------------
Total 438,159 353,196
------------ ------------
Costs and expenses:
Drilling services 207,306 210,901
Manufacturing sales and services 86,883
Aviation services 79,381 67,121
Depreciation and amortization 50,790 51,918
General and administrative 13,862 13,940
------------ ------------
Total 438,222 343,880
------------ ------------
Income (loss) from operations (63) 9,316
------------ ------------
Other income (expense):
Net proceeds from Gorilla V settlement
Interest expense (27,530) (25,361)
Less interest capitalized
Interest income 4,813 2,348
Other - net 260 150
------------ ------------
Other income (expense) - net (22,457) (22,863)
------------ ------------
Income (loss) before income taxes (22,520) (13,547)
Provision (credit) for income taxes 469 (288)
------------ ------------
Income (loss) before extraordinary charges (22,989) (13,259)
Extraordinary charges from redemption of debt
------------ ------------
Net income (loss) $ (22,989) $ (13,259)
------------ ------------
Per share of common stock:
Net income (loss):
Basic:
Income (loss) before extraordinary charges $ (.27) $ (.17)
Extraordinary charges from redemption of debt
------------ ------------
Net income (loss) $ (.27) $ (.17)
------------ ------------
Diluted:
Income (loss) before extraordinary charges $ (.27) $ (.17)
Extraordinary charges from redemption of debt
------------ ------------
Net income (loss) $ (.27) $ (.17)
------------ ------------
Cash dividends $ -- $ --
------------ ------------
FINANCIAL POSITION
Working capital $ 195,945 $ 172,117
------------ ------------
Property, plant and equipment - at cost:
Drilling equipment 961,391 950,538
Aircraft and related equipment 176,874 166,791
Manufacturing plant and equipment 18,955
Construction in progress
Other property and equipment 86,883 81,636
------------ ------------
Total 1,244,103 1,198,965
------------ ------------
Property, plant and equipment - net 506,121 507,193
Total assets 805,179 765,263
Capital expenditures 43,377 21,989
Long-term debt 248,504 207,137
Common stockholders' equity 442,347 460,300
------------ ------------
STATISTICAL INFORMATION
Current ratio 4.39 4.90
Long-term debt/total capitalization .36 .31
Book value per share of common stock $ 5.25 $ 5.49
Price range of common stock $ 5.75-9.25 $ 6.63-10.75
============ ============
</Table>
Rowan 2002 | 15
Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following analysis highlights Rowan's operating results for the years
indicated (in millions):
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Revenues:
Drilling $ 357.3 $ 486.3 $ 418.9
Manufacturing 118.1 102.2 103.5
Aviation 141.9 142.6 123.6
-------- -------- --------
Total $ 617.3 $ 731.1 $ 646.0
======== ======== ========
Operating Profit (Loss)*:
Drilling $ (2.4) $ 136.4 $ 124.0
Manufacturing 0.8 5.7 7.6
Aviation 13.8 10.2 4.0
-------- -------- --------
Total $ 12.2 $ 152.3 $ 135.6
======== ======== ========
Net Income (Loss) $ 86.3 $ 77.0 $ 70.2
======== ======== ========
</Table>
* Income (loss) from operations before deducting general and administrative
expenses
Prevailing uncertainty throughout the post-9/11 world, featuring the ongoing
conflict with Iraq and the collapse of oil and natural gas prices during 2001,
continued to hamper business conditions in 2002 such that the virtual doubling
of energy prices during the year had little impact on worldwide drilling
activity. In our area of primary emphasis, the Gulf of Mexico, market conditions
began the year improving, but by mid-year had leveled off and, despite
near-$5/mcf natural gas prices, began declining prior to year end. Activity in
certain international markets improved during the year, helping to alleviate the
oversupply of equipment in the Gulf of Mexico, though there was little
meaningful change in the foreign areas where we operate. Thus, as reflected in
the table above, our overall 2002 operating results were significantly below the
prior year levels. The settlement in March of the Gorilla V contract dispute
yielded approximately $102 million of net income in 2002, improving upon what
otherwise would have been a $16 million net loss.
During 2000, energy demand was growing, to levels in excess of available supply,
which caused a sharp rise in oil prices and, in particular, natural gas prices,
and spot shortages in certain markets. Energy company expenditures responded in
kind, especially in gas-driven markets like the Gulf of Mexico, and drilling
activity surged. By year end, with gas prices at then record levels, virtually
every available jack-up in the Gulf of Mexico was under contract, and most
surveys of energy company budgets taken at the time indicated exploration and
production expenditures, especially in domestic areas, would be substantially
higher in 2001.
After peaking at almost $10/mcf early in 2001, natural gas prices began a steady
decline to around $2 at year end. In addition, oil prices, which had experienced
a two-year run-up to the mid-$30s in late 2000, had fallen to well below $20 per
barrel by year-end 2001. With prices deteriorating, energy companies responded
quickly and, by mid-year, had begun deferring drilling projects and reducing
their 2001 drilling budgets, particularly in domestic areas. Rowan began
experiencing curtailed drilling assignments in our most prominent market, the
Gulf of Mexico. By year end, overall Gulf of Mexico jack-up drilling had
collapsed and, as a result, our average day rates in the area were significantly
lower than the levels we had obtained earlier in the year and our fleet
utilization had suffered dramatically. Though Rowan's 2001 drilling operations
yielded improved revenues and results over 2000, the trend over the last half of
the year was decidedly unfavorable.
Rowan's manufacturing division has continued to generate operating profits while
playing a lead role in our drilling fleet expansion program. During 2002, the
manufacturing division achieved significant progress on the Bob Palmer (formerly
Gorilla VIII) and completed major design work for the first of as many as four
of the new Tarzan class jack-up.
During the past three years, Rowan's aviation division has continued to
diversify its flight services, though improvements in revenues and operating
results reflected herein were largely due to increased energy-related flying
activity and, effective in April 2001, an average 30% rate increase.
The fluctuations in Rowan's overall financial results over the past two years,
as shown in the preceding table, were also impacted by higher than expected
general and administrative costs in 2001, due primarily to legal costs related
to the Gorilla V contract dispute, increasing net interest costs, due to
declining investment rates outweighing lower borrowing costs, and greater
depreciation expense associated with our rig fleet expansion. While Rowan's
current fleet includes 20 offshore rigs delivered during the 1971-1986 period
whose original construction cost has been fully depreciated, the three rigs
constructed since 1995, together with the two rigs currently in progress,
comprise more than 80% of our offshore drilling equipment carrying value. The
Gorilla V contract dispute and our rig fleet expansion program are discussed
more fully under Liquidity and Capital Resources beginning on page 19.
DRILLING OPERATIONS
Rowan's drilling operating results are generally a function of rig rates and
activity in our principal operating areas: the Gulf of Mexico, the North Sea and
offshore eastern Canada. Such rates and activity are primarily determined by the
level of offshore expenditures by energy companies and the availability of
competitive equipment. In recent years, our offshore operations have been
heavily concentrated in the drilling of natural gas wells for independent
operators on the Gulf of Mexico's outer continental shelf.
Natural gas prices improved steadily throughout 2000, from around $2.50/mcf at
the beginning of the year to almost $10.00 at the end, and Rowan's domestic
drilling operations followed suit. Our Gulf of Mexico rig fleet was 94% utilized
during the year and achieved a 91% increase in average day rates over 1999. The
fleet grew from 17 to 22 units during the year following the relocation of two
units from each of the North Sea and offshore eastern Canada and the delivery of
Gorilla VI.
Gas prices reversed course in 2001, declining by about 80% during the year, and
Rowan's domestic drilling operations were adversely affected. Our Gulf of Mexico
rig fleet, which included all but one of our offshore rigs, experienced rapidly
declining utilization, as follows: 1st quarter - 96%; 2nd quarter - 92%; 3rd
quarter - 69%; 4th quarter - 58%; and full year - 79%. Largely on the strength
of the first six months, we achieved a 23% increase in average day
Rowan 2002 | 16
rates over 2000. At year end, Gulf of Mexico drilling activity appeared to have
bottomed, but drilling day rates showed signs of continued weakness.
Natural gas prices again improved rather steadily throughout 2002, from around
$2.00/mcf at the beginning of the year to about $5.00 at the end. This time,
however, Rowan's domestic drilling operations, which began the year still
feeling the effects of 2001, showed improvement over most of the second and
third quarters, but leveled off during the fourth quarter and began weakening by
year end. Our Gulf of Mexico rig fleet, featuring all but two of our offshore
rigs, experienced fluctuating utilization, as follows: 1st quarter - 83%; 2nd
quarter - 95%; 3rd quarter - 95%; 4th quarter - 93%; and full year - 91%. Our
drilling day rates finished the year only slightly higher than where they
started, with our overall average for 2002 about 38% below 2001. The fleet
declined to 21 units following the loss in October of the Rowan-Houston during
Hurricane Lili, which is discussed more fully under Liquidity and Capital
Resources beginning on page 19.
With the relocation of Gorilla IV and the Arch Rowan to the Gulf of Mexico in
March 2000, Rowan essentially withdrew from the North Sea market. We remained
confident in the North Sea market's long-term viability, particularly for our
Super Gorilla jack-ups, and, during 2001, constructed a new area headquarters
facility near Aberdeen, Scotland. North Sea drilling activity improved somewhat
throughout 2001. In anticipation of the continued strengthening of this market,
we relocated the newly-constructed Gorilla VII to the area in early 2002, and it
was 76% utilized in the area over the last half of the year.
Despite the favorable commodity price environment during 2000 as previously
discussed, and notwithstanding reports of major hydrocarbon discoveries in the
area, demand for drilling equipment offshore eastern Canada was lower at the end
of that year than at the beginning. As a result, Gorilla II, which entered the
eastern Canada market in early 1998, left in July 2000, and Gorilla III, after
nearly a decade of full utilization as a combination drilling/production unit in
the area, left in November. Each rig was mobilized to the more promising Gulf of
Mexico market where they immediately underwent modifications to expand their
operating capability. Gorilla V, which entered the eastern Canada market during
the fourth quarter of 1999, was 76% utilized in 2000, 85% in 2001 and 34% in
2002. Though near-term drilling demand is uncertain, we remain confident in the
long-term potential of the harsh environment jack-up market offshore eastern
Canada.
Overall, Rowan's worldwide fleet of 23 jack-ups, including two rigs that are
leased through mid-2008 and the Rowan-Houston, was utilized 88%, 79% and 92% in
2002, 2001 and 2000, respectively, while our semi-submersible achieved
utilization of 58%, 80% and 94%, respectively. We consider only
revenue-producing days in computing rig utilization.
The effects of fluctuations in activity and day rates are shown in the following
analysis of changes in our contract drilling revenues (in millions):
<Table>
<Caption>
2001 2000
TO 2002 TO 2001
------- -------
Utilization $ 37.1 $ (10.5)
Drilling rates (166.1) 77.9
======= =======
</Table>
These fluctuations caused a $129 million or 27% decrease in 2002 drilling
revenues compared to 2001, which was about 16% higher than 2000. Drilling
expenses were less than 1% higher in 2002 compared to 2001, as reduced land and
anchor-handling, towing and supply (AHTS) boat operations largely offset effects
of the addition, in February 2002, of Gorilla VII. Drilling expenses were 18%
higher in 2001 than in 2000, primarily due to the expansion of our land drilling
fleet, the growth of our AHTS boat operations and the addition, in June 2000, of
Gorilla VI.
Rowan's land rig fleet was 67% utilized in 2002 and achieved an average day rate
of $9,900, compared to 72% and $13,400 in 2001 and 47% and $8,300 in 2000. Our
fleet of 18 deep-well land rigs features four newly constructed rigs and seven
rigs that have been substantially rebuilt over the past three years, including
four rigs relocated from Alaska during the period.
In 2000, we expanded our AHTS fleet to six vessels, each of which was obtained
under five-year lease agreements containing purchase options. The boats are
fully-crewed by the lessor, but managed by Rowan to provide towing and supply
services to our drilling operations. We also directly market the boats to third
parties, with emphasis on their anchor-handling capabilities for deepwater
semi-submersibles.
With increasingly favorable oil and natural gas prices, energy companies have
and will likely continue to realize dramatically improved cash flows. We believe
that, ultimately, such cash flows will be reinvested in additional drilling
projects, but are uncertain as to when this will occur. Based upon recent bid
inquiries and other indications from our energy company customers, we expect the
following near-term market conditions in our principal operating areas:
GULF OF MEXICO - Generally stable exploration and development activity in the
near term, improving moderately in the latter half of the year as long as gas
prices remain above $3.00/mcf
NORTH SEA - Moderately improving jack-up drilling activity, fluctuating with
oil prices
EASTERN CANADA - Moderately improving demand for harsh environment equipment
The drilling markets in which we compete frequently experience significant
fluctuations in 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,
Rowan 2002 | 17
trends in finding and lifting costs and, probably most influential, oil and
natural gas prices. 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, as
we have done in the past, relocate drilling rigs from one geographic area to
another, but only when 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.
MANUFACTURING OPERATIONS
Rowan's manufacturing division achieved a 16% increase in revenues in 2002
compared to 2001, which was 1% lower than 2000, but suffered a decrease in
profitability between periods, while devoting substantial efforts towards the
design and construction of the Bob Palmer and the first of as many as four of
the new Tarzan class jack-up.
The equipment group experienced an $8.3 million or 12% decrease in revenues in
2002 compared to 2001, as continued unfavorable commodities prices and effects
of mining company mergers contributed to a $7.3 million or 18% decrease in parts
sales between periods and limited the group to sales of 12 new loaders and
stackers during 2002, compared to 11 units in 2001. The steel group achieved a
$2.4 million or 15% increase in revenues in 2002 on an 18% increase in external
steel shipments.
Effective January 31, 2002, we acquired, for common stock valued at
approximately $8 million, net assets of two companies that collectively
manufacture 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. Rowan
Electric, Inc. dba Oilfield-Electric-Marine (OEM) also manufactures medium
voltage switchgear from 5KV through 38KV for the industrial and petrochemical
markets.
The drilling products group increased outside sales of rig components, parts and
fabrication services by $21.8 million or 119% in 2002 over 2001, including $10
million contributed by OEM. The group also includes the LeTourneau Ellis
Williams (LEWCO) mud pump operation acquired in 2000, which shipped 11 pumps to
outside customers during 2002, down from 23 pumps in 2001.
Consolidated manufacturing operations exclude approximately $113 million of
products and services provided to Rowan's drilling division in 2002, most of
which was attributable to construction progress on the Bob Palmer, compared to
$118 million in 2001. The drilling products group completed and delivered
Gorilla VII during December 2001.
Though considerably less volatile than our drilling operations, our
manufacturing operations, especially the equipment group, have continued to be
adversely impacted by a prolonged period of unfavorable world commodities
prices; in particular, prices for copper, iron ore, coal, gold and diamonds. In
addition, prospects for our drilling products group, though much improved over
the past year, are ultimately tied to the condition of the overall drilling
industry and its demand for equipment, parts and services. Our external
manufacturing backlog remains at a depressed level and, as a result, we cannot
accurately predict the results of our manufacturing operations for 2003.
AVIATION OPERATIONS
Although the aviation division's operating results are still heavily influenced
by oil and natural gas exploration and production, principally in the Gulf of
Mexico, and seasonal weather conditions, primarily in Alaska, the division has
continued to diversify its flight services. Other key sources of aviation
revenues include a commuter airline in Alaska, forest fire control services and
flying in connection with Alaska tourism.
Aviation revenues decreased by 1% in 2002 compared to 2001, which was 15%
higher than 2000. Aviation division expenses in 2002 declined by 5% from 2001,
which was 11% higher than 2000, as a near-50% increase in insurance costs
between years in the aftermath of 9/11 was more than offset by additional
gains on aircraft sales. Flying for energy companies, primarily in support of
Gulf of Mexico deepwater drilling operations, improved by only 3% in 2002, due
primarily to the lethargic drilling market prevailing for much of the year as
discussed previously. Also in 2002, we achieved a 36% increase in forest fire
control revenues, which was substantially offset by a 13% decrease in
tourism-related revenues.
The number of aircraft operated by Rowan at the end of each of the last three
years and the revenue hours for each of those years are reflected in the
following table:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Twin-engine helicopters:
Number 64 66 64
Revenue hours 32,134 36,064 33,647
Single-engine helicopters:
Number 28 29 31
Revenue hours 7,749 10,845 12,658
Fixed-wing aircraft:
Number 19 19 19
Revenue hours 18,798 19,789 20,834
======== ======== ========
</Table>
Expected near-term market conditions in the aviation markets in which we
continue to operate, are shown below:
ALASKA - Generally stable market conditions
GULF OF MEXICO - Moderately improving market conditions
We cannot predict whether these expected market conditions will materialize.
Changes in energy company exploration and production activities, seasonal
weather patterns and other factors can affect the demand for flight services in
the aviation markets in which we compete. We can, as we have done in the past,
move aircraft from one market to another, but only when the likelihood of higher
returns makes such action economical. Assuming the foregoing expected market
conditions prevail, the aviation division should contribute positive operating
results in 2003.
Rowan 2002 | 18
LIQUIDITY AND CAPITAL RESOURCES
Key balance sheet amounts and ratios for 2002 and 2001 were as follows (dollars
in millions):
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Cash and cash equivalents $ 178.8 $ 237.0
Current assets $ 469.9 $ 506.7
Current liabilities $ 116.0 $ 201.5
Current ratio 4.05 2.51
Current maturities of long-term debt $ 42.5 $ 42.5
Long-term debt $ 512.8 $ 438.5
Stockholders' equity $ 1,131.8 $ 1,108.1
Long-term debt/total capitalization .31 .28
========== ==========
</Table>
Reflected in the comparisons above are the effects of the following 2002
transactions: net cash provided by operations of $118.2 million; capital
expenditures of $242.9 million; proceeds from borrowings of $116.8 million; debt
repayments of $42.5 million; proceeds from disposals of equipment of $25.8
million; payment of cash dividends of $23.5 million and repurchases of stock
totaling $13.2 million. Operating cash flows in 2002 included approximately $73
million of net proceeds from settlement of the Gorilla V contract dispute, which
is discussed more fully below.
Capital expenditures in 2002 included $102 million towards construction of the
Bob Palmer (formerly Gorilla VIII), an enhanced version of our Super Gorilla
class jack-up designated as Super Gorilla XL. The Bob Palmer 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. The Bob Palmer 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.
Construction of the Bob Palmer is proceeding on schedule at Rowan's Vicksburg,
Mississippi facility and is expected to be completed during the third quarter of
2003.
During May 2001, Rowan obtained financing for up to 87.5% of the cost of the Bob
Palmer through an 18-year bank loan guaranteed by the U.S. Department of
Transportation's Maritime Administration (MARAD) under its Title XI Program.
Under the Title XI Program, we obtain reimbursements for expenditures based upon
actual construction progress. Outstanding borrowings initially bear interest at
..25% above a short-term commercial paper rate. Rowan may fix the interest rate
at any time and must fix the rate on all outstanding principal amounts by the
earlier of January 15, 2008 or four years following completion of construction.
Interest is payable semi-annually on each January 15 and July 15 and the
principal will be repaid in 36 semi-annual installments commencing January 15,
2004. The Bob Palmer is pledged as security for the government guarantee. At
December 31, 2002, we had drawn down about $148 million of the $187 million
total credit facility, which bore interest of 1.71% at year end.
Capital expenditures during 2002 also included $33 million toward the expansion
and upgrade of our land drilling capabilities, including the construction of one
new land rig.
Design work is virtually complete and construction efforts have begun 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). The first of as many as four
rigs, the Scooter Yeargain, is being constructed at Vicksburg, Mississippi with
delivery expected by mid-year 2004. The three additional Tarzan class jack-ups
are currently planned to be delivered in six- to nine-month intervals in 2005
and 2006. The aggregate cost of the four Tarzan rigs will approach $400 million.
We have received a commitment for Title XI government-guaranteed financing for
up to 87.5% of the cost of the first two Tarzan rigs on terms and conditions
similar to those in effect for the Bob Palmer. We intend to pursue outside
financing for Tarzans III and IV, if necessary. However, there can be no
assurance that any financing will be available or that working capital will be
adequate throughout the period required to complete construction.
We have 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 available in the first half of 2004
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 working capital will be adequate or outside financing will be
available.
Capital expenditures encompass new assets or enhancements to existing assets as
expenditures for routine maintenance and major repairs are charged to operations
as incurred. The remainder of 2002 capital expenditures was primarily for major
enhancements to existing offshore rigs and manufacturing facilities and
purchases of aircraft and components. We estimate 2003 capital expenditures will
be between $220 million and $230 million, including $130-140 million for the Bob
Palmer and the first two Tarzan class rigs. We may also spend amounts to acquire
additional aircraft as market conditions justify or to upgrade existing drilling
equipment.
Rowan 2002 | 19
Construction of Rowan Gorilla VII, completed during December 2001, was
substantially financed through a $185.4 million government-guaranteed,
floating-rate bank note issued under the Title XI Program. Currently, we must
fix the interest rate on all outstanding principal amounts by December 10, 2003,
but have approached MARAD about extending the floating-rate period. Principal
and accrued interest are payable semi-annually on each April 20 and October 20
through 2013. Gorilla VII is pledged as security for the government guarantee.
Outstanding borrowings of $169.9 million at December 31, 2002 bore interest of
1.76%.
Construction of Rowan Gorilla VI, completed during June 2000, was substantially
financed through a $171 million government-guaranteed bank note issued under the
Title XI Program. On March 15, 2001, we fixed the interest rate on all
outstanding principal amounts at 5.88%. Principal and accrued interest are
payable semi-annually on each March 15 and September 15 through March 2012.
Gorilla VI is pledged as security for the government guarantee. Outstanding
borrowings totaled $135.4 million at December 31, 2002.
Construction of Rowan Gorilla V, completed in late 1998, was substantially
financed through two government-guaranteed bank notes totaling $153.1 million
issued under the Title XI Program in 1997 and 1998. Principal and accrued
interest are payable semi-annually on each January 1 and July 1 through 2010.
Gorilla V is pledged as security for the government guarantee. Outstanding
borrowings at December 31, 2002, were as follows: $44.7 million at 6.94% and
$57.4 million at 6.15%.
On January 31, 2000, in connection with the Ellis Williams acquisition, Rowan
issued $3 million in 7.5% promissory notes that were repaid in full during 2001.
In early 2000, Rowan completed the sale of 10.3 million shares of its common
stock, consisting of approximately 5.8 million shares of treasury stock and 4.5
million newly-issued shares. The net proceeds of approximately $247 million were
first applied to repayment of the $110 million outstanding under our $155
million bank revolving credit facility, which was subsequently cancelled.
Remaining offering proceeds were retained for working capital and general
corporate purposes. We currently have no other available credit facilities, but
believe financing could be obtained if deemed necessary.
During the 2000-2002 period, Rowan contributed $28.6 million to our defined
benefit pension plans. Such contributions are 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 December 31,
2002. We believe that our pension costs will increase in 2003 and that our
funding requirement could exceed the average level of the past three years.
Based on current and anticipated near-term operating levels, we believe that
2003 operations, together with existing working capital and available financial
resources, will generate sufficient cash flow to sustain planned capital
expenditures and debt service and other requirements at least through the
remainder of 2003.
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 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 the Gorilla V contract
dispute and such amount is shown, net of final legal costs and expenses, as
Other Income on the Consolidated Statement of Operations for the year ended
December 31, 2002.
The Company is involved in various other legal proceedings incidental to its
businesses and is vigorously defending its position in all such matters. Rowan
believes that there are no known contingencies, claims or lawsuits, including
matters related to the loss of the Rowan-Houston as discussed below, that will
have a material adverse effect on its financial position, results of operations
or cash flows.
On April 26, 2002, our Board of Directors declared a special cash dividend of
$.25 per share of common stock that was paid on June 6, 2002 to shareholders of
record on May 16, 2002. Rowan did not pay any dividends during 2000 or 2001 and,
at December 31, 2002, had approximately $334 million of retained earnings
available for distribution to stockholders under the most restrictive provisions
of our debt agreements. Future dividends, if any, will only be paid at the
discretion of the Board of Directors.
During 1998 and early 1999, we repurchased in the open market 4.3 million shares
or almost 5% of Rowan's outstanding common stock under the previously announced
Share Repurchase Program begun in June 1998. The 5.8 million shares we held in
treasury at December 31, 1999 had an average cost of $10.65 per share and were
included within the sale of 10.3 million shares of common stock in early 2000 at
a net price of $24.00 per share.
Rowan 2002 | 20
During 2000 and 2001, we repurchased in the open market 1,435,300 shares of
Rowan's outstanding common stock at an average cost of $16.93 per share. On
January 31, 2002, in connection with the OEM acquisition, we issued from
treasury 439,560 shares of Rowan common stock valued at approximately $8 million
and subsequently filed a registration statement to permit the resale of such
shares in the market from time to time. During 2002, we repurchased another
738,700 shares of Rowan's outstanding common stock under the Share Repurchase
Program at an average cost of $17.87 per share.
On October 4, 2002, we discovered substantial damage to our jack-up rig,
Rowan-Houston, in the aftermath of Hurricane Lili. The rig had been jacked up in
105 feet of water in Ship Shoal Block 207, offshore Louisiana, adjacent to a
production platform, with the hull 63 feet above the water. Following the storm,
portions of the rig, including the hull, were found approximately 1,750 feet
northwest of the pre-storm location, with the stern of the rig's hull resting on
the bottom of the Gulf of Mexico and the bow elevated at approximately 30
degrees. The port side of the hull near the bow and the bow leg at the waterline
had been severely damaged, indicating a collision had occurred. The legs, which
had been severed below the hull, remained elevated at the pre-storm location.
The removal of wreckage and investigation of the accident are ongoing. We have
received the full insured value of the rig, which exceeded its carrying value by
approximately $1.5 million, and believe that the costs of wreckage removal are
fully insured under our prevailing coverages.
Critical Accounting Policies and Management Estimates
Rowan's significant accounting policies are outlined in Note 1 to our financial
statements. 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, 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 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 No. 123, as amended, would have reduced reported amounts of net income
and net income per share by $3.6 million or $.03 per diluted share in 2002, $3.4
million or $.03 per diluted share in 2001 and $2.2 million or $.02 per diluted
share in 2000.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", generally requires recognition of
derivative financial instruments as assets or liabilities, measured at fair
value. Statement No. 133, as amended by Statements No. 137 and 138, was
effective for fiscal years beginning after June 15, 2000. Rowan does not hold or
issue derivative financial instruments and the adoption of Statement No. 133, as
amended, effective January 1, 2001, did not materially impact our financial
position or results of operations.
Statement of Financial Accounting Standards No. 141, "Business Combinations",
essentially mandates the purchase method of accounting for business combinations
effective July 1, 2001. We believe that the provisions of Statement No. 141 will
not materially impact Rowan's financial position or results of operations.
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. Statement No. 142 was effective for
fiscal years beginning after December 15, 2001. Rowan's adoption of Statement
No. 142, effective January 1, 2002, did not materially impact our financial
position or results of operations.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", supercedes existing standards
pertaining to accounting and reporting for long-lived assets, especially those
held for disposal. Statement No. 144 was effective for fiscal years beginning
after December 15, 2001. Rowan's adoption of Statement No. 144, effective
January 1, 2002, did not materially impact our financial position or results of
operations.
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations", addresses accounting and reporting for fixed asset
retirement costs and obligations. Statement No. 143 is effective for fiscal
years beginning after June 15, 2002. Rowan's adoption of Statement No. 143,
effective January 1, 2003, did not materially impact our financial position or
results of operations.
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. We believe that the provisions of
Statement No. 146 will 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 Rowan 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 us. Among the factors that could cause
actual results to differ materially are the following:
o oil and natural gas prices
o the level of offshore expenditures by energy companies
o energy demand
o the general economy, including inflation
o weather conditions in our principal operating areas
o environmental and other laws and regulations
Other relevant factors have been disclosed in Rowan's filings with the U.S.
Securities and Exchange Commission.
Rowan 2002 | 21
Selected Quarterly Financial Data
(Unaudited)
The following unaudited information for the quarters ended March 31, June 30,
September 30 and December 31, 2001 and 2002 includes, in the Company's opinion,
all adjustments (which comprise only normal recurring accruals) necessary for a
fair presentation of such amounts (in thousands except per share amounts):
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
2001:
Revenues $ 193,514 $ 210,394 $ 191,325 $ 135,831
Operating
profit (loss) 56,922 61,540 40,838 (6,999)
Net income (loss) 31,716 34,312 20,640 (9,670)
Net income
(loss) per
common share:
Basic .34 .36 .22 (.10)
Diluted .33 .36 .22 (.10)
--------- --------- --------- ---------
2002:
Revenues $ 137,805 $ 148,498 $ 184,153 $ 146,802
Operating
profit (loss) (13,280) (5,210) 25,875 4,808
Net income (loss) 87,677 (8,739) 10,164 (2,824)
Net income
(loss) per
common share:
Basic .93 (.09) .11 (.03)
Diluted .92 (.09) .11 (.03)
========= ========= ========= =========
</Table>
The sum of the per share amounts for the quarters may not equal the per share
amounts for the full year since the quarterly and full year per share
computations are made independently.
Common Stock Price Range, Cash
Dividends and Stock Splits (Unaudited)
The price range below is as reported by the New York Stock Exchange on the
Composite Tape. On February 28, 2003, there were approximately 2,100 holders of
record.
<Table>
<Caption>
2002 2001
------------------ ------------------
QUARTER HIGH LOW HIGH LOW
- -------- -------- ------- -------- -------
First $ 23.28 $ 15.89 $ 33.45 $ 24.56
Second 26.84 20.01 33.89 21.50
Third 22.57 16.36 22.45 11.10
Fourth 24.60 17.40 20.14 11.66
======== ======= ======== =======
</Table>
On April 26, 2002, Rowan's Board of Directors declared a special cash dividend
of $.25 per common share which was paid on June 6, 2002 to shareholders of
record on May 16, 2002. The Company did not pay any dividends on its common
stock during 2001. See Note 5 of the Notes to the Consolidated Financial
Statements for restrictions on dividends. Stock splits and stock dividends since
the Company became publicly owned in 1967 have been as follows: 2 for 1 stock
splits on January 25, 1973, December 16, 1976 and May 13, 1980; 2 for 1 stock
splits effected in the form of a stock dividend on February 6, 1978 and January
20, 1981; and a 5% stock dividend on May 21, 1975. On the basis of these splits
and dividends, each share acquired prior to January 25, 1973 would be
represented by 33.6 shares if still owned at present.
Rowan 2002 | 22
Independent Auditors' Report
ROWAN COMPANIES, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheet of Rowan Companies,
Inc. and Subsidiaries (the "Company") as of December 31, 2002 and 2001, and the
related consolidated statements of operations, comprehensive income (loss),
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for Goodwill and Other Intangible Assets.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
March 7, 2003
Rowan 2002 | 23
Consolidated Balance Sheet
<Table>
<Caption>
DECEMBER 31,
----------------------------
(In thousands except share amounts) 2002 2001
- ----------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 178,756 $ 236,989
Receivables - trade and other 109,320 120,199
Inventories:
Raw materials and supplies 122,846 121,609
Work-in-progress 31,348 20,839
Finished goods 8,766 741
Prepaid expenses 8,011 3,188
Deferred tax assets - net (Note 7) 10,855 3,117
------------ ------------
Total current assets 469,902 506,682
------------ ------------
Property, plant and equipment - at cost:
Drilling equipment 1,922,341 1,634,370
Aircraft and related equipment 264,212 255,600
Manufacturing plant and equipment 120,705 104,018
Construction in progress 199,352 327,032
Other property and equipment 155,815 140,706
------------ ------------
Total 2,662,425 2,461,726
Less accumulated depreciation and amortization 1,095,281 1,042,883
------------ ------------
Property, plant and equipment - net 1,567,144 1,418,843
------------ ------------
Goodwill and other assets (Notes 1, 6 and 10) 17,458 13,430
------------ ------------
Total $ 2,054,504 $ 1,938,955
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 2) $ 42,458 $ 42,458
Accounts payable - trade 30,000 28,903
Other current liabilities (Note 4) 43,517 130,133
------------ ------------
Total current liabilities 115,975 201,494
------------ ------------
Long-term debt - less current maturities (Note 2) 512,844 438,484
------------ ------------
Other liabilities (Note 6) 127,848 62,938
------------ ------------
Deferred income taxes - net (Note 7) 166,060 127,952
------------ ------------
Commitments and contingent liabilities (Note 9)
Stockholders' equity (Notes 3, 5 and 6):
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 95,340,597
shares at December 31, 2002 and 95,002,430 shares at December 31, 2001 11,918 11,875
Additional paid-in capital 647,600 638,303
Retained earnings 557,523 494,756
Cost of 1,734,440 and 1,435,300 treasury shares, respectively (30,064) (24,307)
Accumulated other comprehensive income (loss) (55,200) (12,540)
------------ ------------
Total stockholders' equity 1,131,777 1,108,087
------------ ------------
Total $ 2,054,504 $ 1,938,955
============ ============
</Table>
See Notes to Consolidated Financial Statements.
Rowan 2002 | 24
Consolidated Statement of Operations
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
(In thousands except per share amounts) 2002 2001 2000
- --------------------------------------- ---------- ---------- ----------
Revenues:
Drilling services $ 357,244 $ 486,291 $ 418,948
Manufacturing sales and services 118,120 102,150 103,465
Aviation services 141,894 142,623 123,546
---------- ---------- ----------
Total 617,258 731,064 645,959
---------- ---------- ----------
Costs and expenses:
Drilling services 304,846 303,420 256,615
Manufacturing sales and services 109,842 88,691 88,463
Aviation services 112,286 118,153 106,374
Depreciation and amortization 78,091 68,499 58,865
General and administrative 25,140 27,670 24,072
---------- ---------- ----------
Total 630,205 606,433 534,389
---------- ---------- ----------
Income (loss) from operations (12,947) 124,631 111,570
---------- ---------- ----------
Other income (expense):
Net proceeds from Gorilla V settlement (Note 4) 157,125
Interest expense (20,645) (24,240) (25,652)
Less interest capitalized 4,722 11,170 13,510
Interest income 4,106 8,382 10,948
Other - net 458 264 487
---------- ---------- ----------
Other income (expense) - net 145,766 (4,424) (707)
---------- ---------- ----------
Income before income taxes 132,819 120,207 110,863
Provision for income taxes (Note 7) 46,541 43,209 40,650
---------- ---------- ----------
Net income $ 86,278 $ 76,998 $ 70,213
========== ========== ==========
Net income per share of common stock (Note 1):
Basic $ .92 $ .82 $ .76
---------- ---------- ----------
Diluted $ .90 $ .80 $ .74
========== ========== ==========
</Table>
See Notes to Consolidated Financial Statements.
Consolidated Statement of Comprehensive Income (Loss)
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(In thousands) 2002 2001 2000
- -------------- -------- -------- --------
Net income $ 86,278 $ 76,998 $ 70,213
Other comprehensive income (loss):
Minimum pension liability adjustment
(net of credit for income taxes of $22,971 and
$6,752 in 2002 and 2001, respectively) (Note 6) (42,660) (12,540)
-------- -------- --------
Comprehensive income $ 43,618 $ 64,458 $ 70,213
======== ======== ========
</Table>
See Notes to Consolidated Financial Statements.
Rowan 2002 | 25
Consolidated Statement of Changes in Stockholders' Equity
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
-------------------------------------------------------------------------------
COMMON STOCK
--------------------------------------- ACCUMULATED
ISSUED IN TREASURY ADDITIONAL OTHER
------------------ ------------------- PAID-IN COMPREHENSIVE RETAINED
(IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS
- -------------- -------- -------- -------- -------- ---------- ------------- --------
Balance, January 1, 2000 89,062 $ 11,133 (5,759) $(61,334) $ 426,380 $347,545
Exercise of stock options 689 86 5,551
Value of services rendered
by participants in the nonqualified
stock option plan (Note 3) 8,979
Conversion of subordinated debentures 93 11 618
Sale of common stock (Note 3) 4,541 568 5,759 61,334 184,781
Treasury stock purchases (150) (3,108)
Net income 70,213
-------- -------- -------- -------- ---------- ------------- --------
Balance, December 31, 2000 94,385 11,798 (150) (3,108) 626,309 417,758
Exercise of stock options 551 69 3,701
Value of services rendered
by participants in the nonqualified
stock option plan (Note 3) 7,856
Conversion of subordinated debenture 66 8 437
Treasury stock purchases (1,285) (21,199)
Minimum pension liability adjustment,
net of income taxes $ (12,540)
Net income 76,998
-------- -------- -------- -------- ---------- ------------- --------
Balance, December 31, 2001 95,002 11,875 (1,435) (24,307) 638,303 (12,540) 494,756
Exercise of stock options 306 39 2,713
Value of services rendered
by participants in the nonqualified
stock option plan (Note 3) 5,815
Treasury stock issued for business acquisition 440 7,442 483
Payment of cash dividend
($.25 per common share) (23,511)
Conversion of subordinated debentures 32 4 286
Treasury stock purchases (739) (13,199)
Minimum pension liability adjustment,
net of income taxes (42,660)
Net income 86,278
-------- -------- -------- -------- ---------- ------------- --------
Balance, December 31, 2002 95,340 $ 11,918 (1,734) $(30,064) $ 647,600 $ (55,200) $557,523
======== ======== ======== ======== ========== ============= ========
</Table>
See Notes to Consolidated Financial Statements.
Rowan 2002 | 26
Consolidated Statement of Cash Flows
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
(In thousands) 2002 2001 2000
- -------------- ---------- ---------- ----------
Cash provided by (used in):
Operations:
Net income $ 86,278 $ 76,998 $ 70,213
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 78,091 68,499 58,865
Deferred income taxes 53,252 43,896 27,767
Provision for pension and postretirement benefits 13,814 9,264 8,295
Compensation expense 7,176 7,769 6,766
Gain on disposals of property, plant and equipment (7,315) (2,587) (2,541)
Contributions to pension plans (7,600) (16,640) (4,399)
Gorilla V judgement proceeds deferred in 2001 and recognized in 2002 (88,628) 88,628
Change in sale/leaseback payable (1,791)
Amortization of sale/leaseback gain (2,751)
Other - net 120
Changes in current assets and liabilities:
Receivables - trade and other 14,839 34,342 (60,665)
Inventories (25,078) (14,297) (6,561)
Other current assets (4,780) 209 2,624
Current liabilities (2,369) (11,188) 7,419
Net changes in other noncurrent assets and liabilities 510 (3,165) 672
---------- ---------- ----------
Net cash provided by operations 118,190 281,728 104,033
---------- ---------- ----------
Investing activities:
Capital expenditures:
Property, plant and equipment additions (242,896) (305,180) (215,837)
Purchase of pump companies, net of cash acquired (7,245)
Proceeds from disposals of property, plant and equipment 25,781 3,875 3,561
---------- ---------- ----------
Net cash used in investing activities (217,115) (301,305) (219,521)
---------- ---------- ----------
Financing activities:
Proceeds from borrowings 116,818 110,730 101,302
Repayments of borrowings (42,458) (30,008) (129,882)
Payment of cash dividend (23,511)
Payments to acquire treasury stock (13,199) (21,199) (3,108)
Proceeds from stock option and convertible debenture plans 3,042 4,215 6,266
Proceeds from common stock offering, net of issue costs 246,683
---------- ---------- ----------
Net cash provided by financing activities 40,692 63,738 221,261
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (58,233) 44,161 105,773
Cash and cash equivalents, beginning of year 236,989 192,828 87,055
---------- ---------- ----------
Cash and cash equivalents, end of year $ 178,756 $ 236,989 $ 192,828
========== ========== ==========
</Table>
See Notes to Consolidated Financial Statements.
Rowan 2002 | 27
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Rowan Companies,
Inc. and all of its wholly and majority owned subsidiaries, hereinafter referred
to as "Rowan" or "the Company". Intercompany balances and transactions are
eliminated in consolidation.
ACQUISITIONS AND GOODWILL
On January 31, 2000, Rowan completed the purchase of The Ellis Williams Company,
Inc. and EWCO, Inc. dba Traitex Machine Co., which collectively design and
manufacture mud pumps in a wide range of sizes for both oilfield and
non-oilfield applications. The Company paid approximately $7.3 million in cash
and issued $3 million in promissory notes and recorded the acquisition using the
purchase method of accounting. The transaction resulted in the initial
recognition of $6.8 million of goodwill and $1.5 million of other intangible
assets.
On January 31, 2002, Rowan, through its subsidiary Rowan Electric, Inc.,
completed the purchase of certain assets of Oilfield-Electric-Marine, Inc. and
Industrial Logic Systems, Inc. (OEM) for a price of approximately $8 million in
Rowan common stock. OEM 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. OEM also manufactures medium voltage switchgear from 5KV
through 38KV for the industrial and petrochemical markets. The transaction
resulted in the initial recognition of $4.7 million of goodwill and $0.5 million
of other intangible assets.
Through December 31, 2001, Rowan amortized goodwill on a straight-line basis
over periods up to 30 years, and goodwill amortization totaled approximately
$570,000 in 2001 and $541,000 in 2000. Effective January 1, 2002, Rowan adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", which provides that goodwill and other intangible assets
with indefinite useful lives no longer be amortized to expense, but rather be
assessed at least annually for impairment losses using a fair-value-based test.
Rowan's implementation of Statement No. 142 has not materially impacted its
financial position or results of operations.
At December 31, 2002 and 2001, Rowan had goodwill with carrying values of $12.4
million and $7.6 million, respectively, and intangible assets subject to
amortization totaling $1.7 million and $1.3 million, respectively. See Note 10
for further information.
REVENUE RECOGNITION
Rowan's drilling contracts provide for payment on a day rate basis, and revenues
and expenses are recognized as the work progresses.
Aviation services generally are provided under master service agreements calling
for incremental payments based on usage, term contracts or day-to-day charter
arrangements. Aviation revenues and expenses are recognized as services are
rendered.
Manufacturing sales and related costs are generally recognized as products are
shipped. Revenues and costs and expenses included sales and costs of sales of
$106.2 million and $84.9 million, $97.3 million and $71.4 million, and $96.3
million and $66.6 million in 2002, 2001 and 2000, respectively. Revenues from
longer-term manufacturing projects such as rig kits are recognized on a
percentage-of-completion basis using costs incurred relative to total estimated
costs and full provision is made for any anticipated losses.
INCOME PER COMMON SHARE
"Basic" income per share is determined as income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. "Diluted" income per share reflects the issuance of
additional shares in connection with the assumed conversion of stock options and
other convertible securities, and corresponding adjustments to income for any
charges related to such securities.
The computation of basic and diluted income per share for each of the past
three years is as follows (in thousands except per share amounts):
<Table>
<Caption>
PER SHARE
YEAR ENDED DECEMBER 31, NET INCOME SHARES AMOUNT
- ----------------------- ---------- ---------- ----------
2002:
Basic income per share $ 86,278 93,764 $ .92
Effect of dilutive securities:
Convertible debentures 893
Stock options 735
---------- ----------
Diluted income per share $ 86,278 95,392 $ .90
========== ========== ==========
2001:
Basic income per share $ 76,998 94,173 $ .82
Effect of dilutive securities:
Convertible debentures 936
Stock options 702
---------- ----------
Diluted income per share $ 76,998 95,811 $ .80
========== ========== ==========
2000:
Basic income per share $ 70,213 92,562 $ .76
Effect of dilutive securities:
Convertible debentures 1,068
Stock options 1,007
---------- ----------
Diluted income per share $ 70,213 94,637 $ .74
========== ========== ==========
</Table>
See Note 3 for further information regarding the Company's stock option and
debenture plans.
STATEMENT OF CASH FLOWS
In practice, Rowan invests in highly liquid U.S. Government securities, bank
time deposits, A1/P1-rated commercial paper, money market preferred stock
custodial receipts or repurchase agreements with terms no greater than 90 days,
all of which are considered to be cash equivalents.
Rowan 2002 | 28
Noncash investing and financing activities excluded from the Company's
Consolidated Statement of Cash Flows were as follows: the issuance in 2002 of
439,560 shares of common stock, valued at approximately $8 million, in
connection with the OEM acquisition; the addition in 2002 of $1,361,000 of tax
benefits related to employee stock options; the conversion in 2002 of $150,000
of Series III Floating Rate Subordinated Convertible Debentures into 22,222
shares of common stock; the conversion in 2002 of $140,000 of Series B Floating
Rate Subordinated Convertible Debentures into 9,956 shares of common stock; the
reduction in 2001 of $87,000 of tax benefits related to employee stock options;
the conversion in 2001 of $445,000 of Series III Floating Rate Subordinated
Convertible Debentures into 65,926 shares of common stock; the reduction in 2000
of $2.2 million of tax benefits related to employee stock options; the issuance
in 2000 of $3 million in 7.5% promissory notes in connection with the Ellis
Williams acquisition; the conversion in 2000 of $630,000 of Series III Floating
Rate Subordinated Convertible Debentures into 93,333 shares of common stock. See
Notes 2 and 3 for further information.
INVENTORIES
Manufacturing inventories are carried at lower of average cost or market.
Drilling and aviation inventories consist of consumable parts and supplies and
are carried at average cost.
PROPERTY AND DEPRECIATION
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
on the following estimated lives and salvage values:
<Table>
<Caption>
SALVAGE
YEARS VALUE
--------- ---------
Offshore drilling equipment:
Super Gorilla jack-ups 25 20%
Semi-submersible 15 20%
Gorilla and other cantilever jack-ups 15 20%
Conventional jack-ups 12 20%
Land drilling equipment 12 20%
Drill pipe and tubular equipment 4 10%
Aviation equipment:
Aircraft 7 to 15 15 to 25%
Other 2 to 10 various
Manufacturing plant and equipment:
Buildings and improvements 10 to 25 10 to 20%
Other 2 to 12 various
Other property and equipment 3 to 40 various
========= =========
</Table>
Expenditures for new property or enhancements to existing property are
capitalized. Expenditures for routine maintenance and major repairs are charged
to operations as incurred. Rowan capitalizes, during the construction period,
interest cost incurred during the period required to complete the asset. See
Note 10 for further information regarding the Company's depreciation and
amortization, capital expenditures and repairs and maintenance. Long-lived
assets are reviewed for impairment whenever circumstances indicate their
carrying amounts may not be recoverable.
Rowan's adoption, effective January 1, 2002, of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which essentially governs accounting and reporting for
long-lived assets held for disposal, did not materially impact its financial
position or results of operations.
Rowan's adoption, effective January 1, 2003, of Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations",
which addresses fixed asset retirement costs and obligations, did not materially
impact its financial position or results of operations.
ENVIRONMENTAL MATTERS
Environmental remediation costs are accrued using estimates of future
monitoring, testing and clean-up costs where it is probable that such costs will
be incurred. Estimates of future monitoring, testing and clean-up costs and
assessments of the probability that such costs will be incurred incorporate many
factors, including: approved monitoring, testing and/or remediation plans;
ongoing communications with environmental regulatory agencies; the expected
duration of remediation measures; historical monitoring, testing and clean-up
costs; and current and anticipated operational plans and manufacturing
processes. Ongoing environmental compliance costs are expensed as incurred and
expenditures to mitigate or prevent future environmental contamination are
capitalized. Rowan's estimated liability is not discounted. See Note 9 for
further information.
INCOME TAXES
Rowan accounts for income taxes under an asset and liability approach that
recognizes deferred income tax assets and liabilities for the estimated future
tax consequences of differences between the financial statement and tax bases of
assets and liabilities. Valuation allowances are provided against deferred tax
assets that are not likely to be realized. See Note 7 for further information.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). During 2002 and 2001, Rowan recognized other
comprehensive losses relating to minimum pension liabilities. See Note 6 for
further information. Rowan had no items of other comprehensive income (loss)
during 2000.
DERIVATIVES
Rowan does not hold or issue derivative financial instruments and its adoption,
effective January 1, 2001, of Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended,
which requires recognition of derivative financial instruments as assets or
liabilities, measured at fair value, did not materially impact its financial
position or results of operations.
Rowan 2002 | 29
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2001 and 2000 amounts to conform
to the 2002 presentations.
2. LONG-TERM DEBT
Long-term debt consisted of (in thousands):
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
6.94% Title XI note payable;
secured by Gorilla V $ 44,672 $ 50,254
6.15% Title XI note payable;
secured by Gorilla V 57,395 64,569
5.88% Title XI note payable;
secured by Gorilla VI 135,377 149,629
Floating-rate Title XI note payable;
secured by Gorilla VII 169,948 185,398
Floating-rate Title XI note payable;
secured by the Bob Palmer
(formerly Gorilla VIII) 147,910 31,092
---------- ----------
Total 555,302 480,942
Less current maturities 42,458 42,458
---------- ----------
Remainder $ 512,844 $ 438,484
========== ==========
</Table>
Maturities of long-term debt for each of the next five years ending December 31,
are as follows: 2003 - $42.5 million and for each of 2004, 2005, 2006 and 2007 -
$50.7 million.
Rowan financed $153.1 million of the cost of Rowan Gorilla V through a
floating-rate bank loan guaranteed by the U.S. Department of Transportation's
Maritime Administration ("MARAD") under its Title XI Program. On July 1, 1997,
the Company fixed $67 million of outstanding borrowings at 6.94%. On July 1,
1998, Rowan fixed the remaining $86.1 million principal amount at 6.15%.
Principal and accrued interest on each note are payable semi-annually on each
January 1 and July 1 through 2010. Rowan Gorilla V is pledged as security for
the government guarantee.
Rowan financed $171.0 million of the cost of Rowan Gorilla VI through a
floating-rate bank loan guaranteed by MARAD under its Title XI Program. On March
15, 2001, the Company fixed the $156.8 million of outstanding borrowings at
5.88%. Principal and accrued interest are payable semi-annually on each March 15
and September 15 though March 2012. Rowan Gorilla VI is pledged as security for
the government guarantee.
Rowan financed $185.4 million of the cost of Rowan Gorilla VII through a
floating-rate bank loan guaranteed by MARAD under its Title XI Program.
Currently, the Company must fix the rate on all outstanding principal amounts by
December 10, 2003, but has approached MARAD about extending the floating-rate
period. Principal and accrued interest are payable semi-annually on each April
20 and October 20 through 2013. Rowan Gorilla VII is pledged as security for the
government guarantee. At December 31, 2002, outstanding borrowings bore interest
of 1.76%.
In May 2001, Rowan obtained financing for up to $187.3 million of the cost of
designing and constructing the Bob Palmer through an 18-year bank loan
guaranteed by MARAD under its Title XI program. The Company obtains
reimbursements for expenditures based upon actual construction progress and
outstanding borrowings initially bear interest at .25% above a short-term
commercial paper rate. The Company may fix the interest rate at any time and
must fix the rate on all outstanding principal amounts on or before January 15,
2008. Interest is payable semi-annually on each January 15 and July 15 and the
principal will be repaid in semi-annual installments commencing January 15,
2004. The Bob Palmer is pledged as security for the government guarantee. At
December 31, 2002, Rowan had borrowed about $147.9 million, which bore interest
of 1.71%.
Rowan has received a commitment for Title XI, government-guaranteed financing
for up to 87.5% of the cost of the first two Tarzan class rigs under terms and
conditions similar to those in effect for the Bob Palmer.
Rowan's $7.3 million of Series III Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2002 are ultimately convertible into
common stock at the rate of $6.75 per share for each $1,000 principal amount of
debenture through November 30, 2004.
Rowan's $4.8 million of Series A Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2002 are ultimately convertible into
common stock at the rate of $29.75 per share for each $1,000 principal amount of
debenture through April 24, 2008.
Rowan's $4.7 million of Series B Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2002 are ultimately convertible into
common stock at the rate of $14.06 per share for each $1,000 principal amount of
debenture through April 22, 2009, as follows: $3.5 million through April 21,
2003 and $4.7 million on or after April 22, 2003.
Rowan's $9.6 million of Series C Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2002 are ultimately convertible into
common stock at the rate of $28.25 per share for each $1,000 principal amount of
debenture through April 27, 2010, as follows: $4.8 million through April 26,
2003, $7.2 million on or after April 27, 2003 and $9.6 million on or after April
27, 2004.
Rowan 2002 | 30
Rowan's $9.6 million of Series D Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2002 are ultimately convertible into
common stock at the rate of $32.00 per share for each $1,000 principal amount of
debenture through April 26, 2011, as follows: $2.4 million through April 25,
2003, $4.8 million on or after April 26, 2003, $7.2 million on or after April
26, 2004 and $9.6 million on or after April 26, 2005.
Rowan's $1.2 million of Series E Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2002 are ultimately convertible into
common stock at the rate of $13.12 per share for each $1,000 principal amount of
debenture through September 20, 2011, as follows: $298,000 through September
19, 2003, $596,000 on or after September 20, 2003, $895,000 on or after
September 20, 2004 and $1.2 million on or after September 20, 2005.
All of the Company's outstanding subordinated convertible debentures were
originally issued in exchange for promissory notes containing provisions for
setoff, protecting Rowan against any credit risk. Accordingly, the debentures
and notes, and the related interest amounts, have been offset in the
consolidated financial statements pursuant to Financial Accounting Standards
Board Interpretation No. 39. See Note 3 for further information regarding
Rowan's convertible debenture incentive plans.
During 2001, Rowan repaid the $3 million of unsecured 7.5% promissory notes
originally issued in January 2000 in connection with the Ellis Williams
acquisition.
During February 2000, using proceeds from the sale of common stock, Rowan repaid
the $110 million outstanding under its $155 million bank revolving credit
facility, which was scheduled to mature in October 2000, and immediately
canceled the credit facility.
Interest payments exceeded interest capitalized by $16.1 million in 2002, $14.5
million in 2001 and $10.9 million in 2000.
Rowan's debt agreements contain provisions that require minimum levels of
working capital and stockholders' equity and limit the amount of long-term debt,
and, in the event of noncompliance, restrict investment activities, asset
purchases and sales, lease obligations, borrowings and mergers or acquisitions.
Rowan believes it was in compliance with each of its debt covenants at December
31, 2002. See Note 5 for further information.
3. STOCKHOLDERS' EQUITY
Rowan's 1988 Nonqualified Stock Option Plan, as amended, authorizes the Board of
Directors to grant, before January 21, 2008, options to purchase a total of 14
million shares of the Company's common stock. At December 31, 2002, options for
10,209,440 shares had been granted under the plan at an average exercise price
of $9.21 per share and 459 active, key employees had been granted options.
Options become exercisable over a four-year service period to the extent of 25%
per year, and all options not exercised expire ten years after the date of
grant.
Rowan's 1998 Nonemployee Directors Stock Option Plan provides for the issuance
to nonemployee Directors of the Company of nonqualified options to purchase up
to 200,000 shares of Rowan's common stock. At December 31, 2002, 125,000 shares
had been granted under the plan at an average exercise price of $24.03 per
share. Options are 100% exercisable after one year and all options not exercised
expire five years after the date of grant.
Stock option activity for the last three years was as follows:
<Table>
<Caption>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
---------- ----------
Outstanding at January 1, 2000 3,202,750 9.77
Granted 901,800 18.51
Exercised (688,725) 8.19
Forfeited (51,825) 11.33
---------- ----------
Outstanding at December 31, 2000 3,364,000 12.41
Granted 2,082,396 19.33
Exercised (551,800) 6.83
Forfeited (37,840) 15.49
---------- ----------
Outstanding at December 31, 2001 4,856,756 15.99
Granted 254,544 15.21
Exercised (305,989) 9.00
Forfeited (43,414) 15.54
---------- ----------
Outstanding at December 31, 2002 4,761,897 $ 16.40
========== ==========
Exercisable at December 31, 2000 1,339,050 $ 10.52
---------- ----------
Exercisable at December 31, 2001 1,570,200 $ 13.44
---------- ----------
Exercisable at December 31, 2002 2,382,386 $ 15.44
========== ==========
</Table>
Rowan 2002 | 31
The following table summarizes information about stock options outstanding at
December 31, 2002.
<Table>
<Caption>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE NUMBER OF EXERCISE REMAINING
PRICE OPTIONS PRICE LIFE (YEARS)
- -------- ------------ ------------ ------------
Outstanding:
$ 1.00 103,925 $ 1.00 1.8
$ 4.06 to $ 9.81 772,650 5.82 5.4
$13.12 to $15.25 1,190,612 13.40 8.0
$17.47 to $19.75 1,495,450 18.88 6.5
$22.00 to $32.00 1,199,260 24.43 8.0
------------ ------------ ------------
4,761,897 $ 16.40 6.9
============ ============ ============
Exercisable:
$ 1.00 103,925 $ 1.00
$ 4.06 to $ 9.81 570,150 6.45
$13.12 to $15.25 378,265 14.00
$17.47 to $ 19.75 978,650 19.19
$22.00 to $32.00 351,396 25.39
------------ ------------
2,382,386 $ 15.44
============ ============
</Table>
The weighted average per-share fair values at date of grant for options granted
during 2002, 2001 and 2000 were estimated to be $11.96, $11.60 and $14.77,
respectively.
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, pursuant to Accounting Principles Board Opinion No. 25. The compensation
is recognized as expense and additional paid-in capital over the period in which
the employee performs services to earn the right to exercise the option. Rowan
estimates that the accounting provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", which provides an
alternative method for measuring compensation cost based upon estimated fair
values, would have reduced reported amounts of net income and net income per
share, as follows:
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
Net income, as reported $ 86,278 $ 76,998 $ 70,213
Stock-based compensation,
net of related tax effects:
As recorded under APB 25 4,661 4,976 4,285
Pro forma under SFAS 123 (8,250) (8,340) (6,499)
---------- ---------- ----------
Pro forma net income $ 82,689 $ 73,634 $ 67,999
========== ========== ==========
Net income per basic share:
As reported $ .92 $ .82 $ .76
Pro forma .88 .78 .73
Net income per diluted share:
As reported .90 .80 .74
Pro forma .87 .77 .72
========== ========== ==========
</Table>
The foregoing fair value estimates were determined using the Black-Scholes
option valuation model with the following weighted average assumptions:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Expected life in years 3.3 3.2 3.0
Risk-free interest rate 2.1% 3.3% 5.3%
Expected volatility 54.8% 55.5% 55.9%
======== ======== ========
</Table>
The Rowan Companies, Inc. 1998 Convertible Debenture Incentive Plan, as amended,
provides for the issuance to key employees of up to $35 million in floating-rate
subordinated convertible debentures. The debentures are initially convertible
into preferred stock, which has no voting rights (except as required by law or
the Company's charter), no dividend and a nominal liquidation preference. The
preferred stock is immediately convertible into common stock. At December 31,
2002, all $4.8 million principal amount of Series A debentures issued in 1998,
all $9.6 million principal amount of Series C debentures issued in 2000, all
$9.6 million principal amount of Series D debentures issued in 2001 and all $1.2
million principal amount of Series E debentures issued in 2001 were outstanding.
Of the $4.8 million principal amount of Series B debentures issued in 1999, $4.7
million was outstanding at December 31, 2002. The outstanding Series A, B, C, D
and E debentures are collectively convertible into 1,223,763 shares of Rowan's
common stock.
Under the Rowan Companies, Inc. 1986 Convertible Debenture Incentive Plan,
floating-rate subordinated convertible debentures totaling $19.9 million were
issued by the Company. The debentures are initially convertible into preferred
stock, which has no voting rights (except as required by law or the Company's
charter), no dividend and a nominal liquidation preference. The preferred stock
is immediately convertible into common stock. At December 31, 2002, all $9.6
million of Series I and Series II debentures, issued in 1986 and 1987, had been
converted into an aggregate 1,391,304 shares of Rowan's common stock. Of the
$10.3 million principal amount of Series III debentures issued in 1994, $7.3
million was outstanding at December 31, 2002 and is ultimately convertible into
1,081,483 shares of Rowan's common stock.
In 1992, Rowan adopted a Stockholder Rights Agreement to protect against
coercive takeover tactics. The agreement, as amended, provides for the
distribution to Rowan's stockholders of one Right for each outstanding share of
common stock. Each Right entitles the holder to purchase from the Company one
one-hundredth of a share of Series A Junior Preferred Stock of Rowan at an
exercise price of $80. In addition, under certain circumstances, each Right will
entitle the holder to purchase securities of Rowan or an acquiring entity at
one-half market value. The Rights are exercisable only if a person or group
knowingly acquires 15% or more of Rowan's outstanding common stock or makes a
tender offer for 30% or more of the Company's outstanding common stock. The
Rights will expire on January 24, 2012.
Rowan 2002 | 32
During February and March 2000, Rowan sold 10.3 million shares of its common
stock, consisting of approximately 5.8 million shares of treasury stock and 4.5
million newly issued shares. Net proceeds from the sale were $246.7 million
after deducting the underwriting commission of $5.2 million and direct offering
costs of $517,000.
4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of (in thousands):
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Deferred revenues $ 4,518 $ 87,962
Accrued liabilities:
Income taxes 17 39
Compensation and related
employee costs 24,046 25,075
Interest 7,453 7,642
Taxes and other 7,483 9,415
---------- ----------
Total $ 43,517 $ 130,133
========== ==========
</Table>
At December 31, 2001, deferred revenues included $88.6 million received in
November 2001 (net of outstanding receivables, plus investment earnings) in
connection with the Gorilla V contract dispute as the English Court judgement
was being contested. 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 the Gorilla V contract dispute and such amount is shown, net of
final legal costs and expenses, as Other Income on the Consolidated Statement of
Operations for the Year Ended December 31, 2002.
5. RESTRICTIONS ON RETAINED EARNINGS
Rowan's Title XI debt agreements contain financial covenants that limit the
amount the Company may distribute to its stockholders. Under the most
restrictive of such covenants, Rowan had approximately $334 million of retained
earnings available for distribution at December 31, 2002. Subject to this and
other restrictions, the Board of Directors will determine payment, if any, of
future dividends or distributions in light of conditions then existing,
including the Company's earnings, financial condition and requirements,
opportunities for reinvesting earnings, business conditions and other factors.
6. BENEFIT PLANS
Since 1952, Rowan has sponsored defined benefit pension plans covering
substantially all of its employees. In addition, Rowan provides certain health
care and life insurance benefits for retired drilling and aviation employees.
Changes in plan assets and obligations during 2002 and 2001 and the funded
status of the plans at December 31, 2002 and 2001 were as follows (in
thousands):
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
BENEFIT OBLIGATIONS:
Balance,
January 1 $ 224,302 $ 195,610 $ 52,529 $ 39,147
Service cost 9,218 7,290 1,903 1,578
Interest cost 16,647 15,170 3,653 2,983
Plan changes 433
Actuarial loss 48,295 14,005 5,241 10,743
Benefits paid (9,114) (8,206) (1,666) (1,922)
---------- ---------- ---------- ----------
Balance,
December 31 289,348 224,302 61,660 52,529
---------- ---------- ---------- ----------
PLAN ASSETS:
Fair value,
January 1 170,740 180,128
Actual return (11,023) (17,822)
Employer
contributions 7,600 16,640
Benefits paid (9,114) (8,206)
---------- ---------- ---------- ----------
Fair value,
December 31 158,203 170,740
---------- ---------- ---------- ----------
Funded status (131,145) (53,562) (61,660) (52,529)
Unrecognized
amounts:
Actuarial loss 123,658 46,455 20,816 16,204
Transition
obligation 7,565 8,321
Prior service cost 1,002 1,126 (3,505) (3,818)
---------- ---------- ---------- ----------
Net liabilities
recognized (6,485) (5,981) (36,784) (31,822)
Additional
minimum
liability (84,605) (20,209)
---------- ---------- ---------- ----------
Net benefit
liabilities $ (91,090) $ (26,190) $ (36,784) $ (31,822)
========== ========== ========== ==========
</Table>
The additional minimum pension liability shown above reflects
actuarially-determined unfunded accumulated pension benefit obligations at each
year end, and is included in the Company's Consolidated Balance Sheet, as
follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
-------------------
2002 2001
-------- --------
Goodwill and other assets $ 1,002 $ 1,126
Accumulated other comprehensive loss 83,603 19,083
-------- --------
Other liabilities $ 84,605 $ 20,209
======== ========
</Table>
Rowan 2002 | 33
The plans' assets consist primarily of equity securities and U.S. Treasury bonds
and notes and, at December 31, 2002, included 1,630,000 shares of Rowan's common
stock at an average cost of $5.49 per share. At December 31, 2002, $8.8 million
of the plans' assets were invested in a dedicated bond fund. The plans had a
basis in these assets of $6.0 million yielding approximately 3.67% to maturity.
Net periodic pension cost included the following components (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Service cost $ 9,218 $ 7,290 $ 6,451
Interest cost 16,647 15,170 13,895
Expected return on plan assets (18,522) (17,374) (16,362)
Recognized actuarial loss 636
Amortization of
prior service cost 124 100 162
-------- -------- --------
Total $ 8,103 $ 5,186 $ 4,146
======== ======== ========
</Table>
Other benefits cost included the following components (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Service cost $ 1,903 $ 1,578 $ 1,313
Interest cost 3,653 2,983 2,788
Recognized actuarial loss 630 161 182
Amortization:
Transition obligation 756 756 756
Prior service cost (313) (312) (312)
-------- -------- --------
Total $ 6,629 $ 5,166 $ 4,727
======== ======== ========
</Table>
Assumptions used in actuarial calculations were as follows:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Discount rate 6.50% 7.25% 7.75%
Expected return on plan assets 9.0% 9.5% 9.5%
Rate of compensation increase 4.0% 4.0% 4.0%
======== ======== ========
</Table>
Rowan sponsors pension restoration plans to supplement the benefits for certain
key executives that would otherwise be limited by section 415 of the Internal
Revenue Code. The plans are unfunded and had projected benefit obligations at
December 31, 2002 and 2001 of $8.6 million and $7.0 million, respectively. The
net pension liabilities included in Rowan's Consolidated Balance Sheet were $8.2
million at December 31, 2002 and $6.4 million at December 31, 2001, including
minimum liability adjustments of $1,704,000 and $667,000, respectively. The
minimum liability adjustments resulted in other comprehensive losses of
$1,111,000 and $209,000 in 2002 and 2001, respectively. Net pension cost was
$768,000 in 2002, $869,000 in 2001 and $778,000 in 2000.
The assumed increase in per capita health care costs ranged from 9% in 2002 to
5% in 2010 and thereafter. A one-percentage-point change in assumed health care
cost trend rates would change reported amounts as follows (in thousands):
<Table>
<Caption>
1-PERCENTAGE-
POINT CHANGE
-------------------
INCREASE DECREASE
-------- --------
Increase (decrease) in:
Service and interest cost $ 795 $ (658)
Postretirement benefit
obligation 7,828 (6,603)
======== ========
</Table>
Rowan also sponsors defined contribution 401(k) plans covering substantially all
employees. Rowan contributed to the plans about $3.4 million in 2002, $3.1
million in 2001 and $2.9 million in 2000.
7. INCOME TAXES
The detail of income tax provisions (credits) is presented below (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Current:
Federal $ (6,863) $ (871) $ 11,326
Foreign 86 81 831
State 66 103 311
-------- -------- --------
Total current provision (6,711) (687) 12,468
Deferred 53,252 43,896 28,182
-------- -------- --------
Total $ 46,541 $ 43,209 $ 40,650
======== ======== ========
</Table>
Rowan's provision for income taxes differs from that determined simply by
applying the federal income tax rate (statutory rate) to income before income
taxes, as follows (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
-------- -------- --------
Statutory rate 35% 35% 35%
Tax at statutory rate $ 46,487 $ 42,072 $ 38,802
Increase (decrease) due to:
Foreign companies' operations 668 228 680
Other - net (614) 909 1,168
-------- -------- --------
Total provision $ 46,541 $ 43,209 $ 40,650
======== ======== ========
</Table>
Rowan 2002 | 34
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities at December 31, 2002 and 2001, were as follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
--------------------------------------------------
2002 2001
----------------------- -----------------------
NON- NON-
CURRENT CURRENT CURRENT CURRENT
---------- ---------- ---------- ----------
Deferred tax assets:
Accrued employee
benefit plan
costs $ 2,887 $ 41,629 $ 420 $ 19,694
Alternative
minimum tax 5,042 1,142
Other 2,926 9,024 1,555 4,454
---------- ---------- ---------- ----------
10,855 50,653 3,117 24,148
---------- ---------- ---------- ----------
Deferred tax liabilities:
Property, plant and
equipment 208,478 148,729
Other 8,235 3,371
---------- ---------- ---------- ----------
216,713 152,100
---------- ---------- ---------- ----------
Deferred tax asset
(liability) - net $ 10,855 $ (166,060) $ 3,117 $ (127,952)
========== ========== ========== ==========
</Table>
Rowan did not deem necessary a valuation allowance against deferred tax assets
at December 31, 2002 and 2001.
Undistributed earnings of Rowan's foreign subsidiaries were estimated to be
$53.6 million at December 31, 2002. Deferred income taxes have not been provided
on undistributed foreign earnings because such earnings are considered
permanently invested abroad. Determination of the deferred tax liability that
would result upon repatriation of the Company's undistributed foreign earnings
is not practicable.
Income (loss) before income taxes consisted of $136.5 million, $106.7 million
and $100.1 million of domestic earnings, and $(3.7) million, $13.5 million and
$10.8 million of foreign earnings (losses) in 2002, 2001 and 2000, respectively.
Income tax payments exceeded refunds by $12.8 million in 2002, $16.7 million in
2001 and $4.3 million in 2000.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
At December 31, 2002, the carrying amounts of Rowan's cash and cash equivalents,
receivables and payables approximated their fair values due to the short
maturity of such financial instruments. The carrying amount of the Company's
floating-rate debt approximated its fair value at December 31, 2002 as such
instruments bear short-term, market-based interest rates. The fair value of
Rowan's fixed-rate debt at December 31, 2002 was estimated to be approximately
$267 million, or a $30 million premium to carrying value, based upon quoted
market prices for similar issues.
9. COMMITMENTS AND CONTINGENT LIABILITIES
During 1984 and 1985, Rowan sold two cantilever jack-ups, Rowan-Halifax and
Cecil Provine, and leased each rig back under operating leases with initial
lease periods that expired in September and December 2000, respectively. Each
sale resulted in a gain that was recognized over the initial lease period. Rowan
exercised its option to extend each lease for a period of seven and one-half
years, with lease amounts equal to half of the weighted average lease payments
made during the basic lease periods and payable semiannually.
Rowan has operating leases covering six anchor-handling, towing and supply
(AHTS) boats deployed in support of its Gulf of Mexico drilling business. The
five-year lease agreements contain purchase options and expire during 2004 and
2005.
Rowan has other operating leases covering aircraft hangars, offices and computer
equipment. Net rental expense under all operating leases was $51.5 million in
2002, $56.0 million in 2001 and $40.7 million in 2000.
At December 31, 2002, the future minimum payments to be made under noncancelable
operating leases were (in thousands):
<Table>
2003 $ 41,445
2004 37,959
2005 20,573
2006 10,535
2007 10,335
Later years 5,740
--------
Total $126,587
========
</Table>
Rowan has ongoing environmental responsibilities related primarily to its
manufacturing operations and facilities. The measurement of remediation costs is
subject to uncertainties, including the evolving nature of environmental
regulations and the extent of any agreements to mitigate remediation costs.
The Company is involved in various legal proceedings incidental to its
businesses and is vigorously defending its position in all such matters. Rowan
believes that there are no known contingencies, claims or lawsuits, including
matters arising from the loss of the Rowan-Houston, that will have a material
adverse effect on its financial position, results of operations or cash flows.
Rowan estimates 2003 capital expenditures will be between $220 million and $230
million, including $130-140 million toward construction of the offshore rig Bob
Palmer (formerly Gorilla VIII) and the first two Tarzan class jack-ups.
Rowan 2002 | 35
10. SEGMENTS OF BUSINESS
Rowan has three principle 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"). Rowan's reportable segments
reflect separately managed, strategic business units that provide different
products and services, and for which financial information is separately
prepared and monitored. The accounting policies of each segment are as described
in Rowan's summary of significant accounting policies. See Note 1 for further
information.
Drilling services are provided both onshore and offshore in domestic and foreign
areas. Aviation services are provided primarily in Alaska, the western United
States and along the Gulf Coast and include commuter airline, flightseeing and
forest fire control services as well as oil and gas related flying.
Manufacturing operations are primarily conducted in Longview, Texas, Vicksburg,
Mississippi and Houston, Texas, though products are shipped throughout the
United States and to many foreign locations.
Assets are ascribed to a segment based upon their direct use. Rowan classifies
its drilling rigs as domestic or foreign based upon the rig's operating
location. Accordingly, drilling rigs operating in or offshore the United States
are considered domestic assets and rigs operating in other areas are deemed
foreign assets.
Rowan's total assets are identified by operating segment, and its fixed assets
are shown geographically as follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Consolidated assets:
Drilling $1,642,320 $1,567,137 $1,327,392
Manufacturing 249,562 217,169 206,456
Aviation 162,622 154,649 144,578
---------- ---------- ----------
Total $2,054,504 $1,938,955 $1,678,426
========== ========== ==========
Property, plant and
equipment - net:
Domestic $1,094,053 $1,181,960 $ 942,077
Eastern Canada 212,033 218,831 224,721
North Sea 259,887 16,327 14,178
Other foreign 1,171 1,725 1,804
---------- ---------- ----------
Total $1,567,144 $1,418,843 $1,182,780
========== ========== ==========
</Table>
At December 31, 2002, 39 drilling rigs, including 21 offshore rigs, were located
in domestic areas and two offshore rigs were located in foreign areas.
Information regarding revenues and profitability by operating segment is as
follows (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
---------- ---------- ----------
Revenues:
Drilling services $ 357,244 $ 486,291 $ 418,948
Manufacturing sales
and services 118,120 102,150 103,465
Aviation services 141,894 142,623 123,546
---------- ---------- ----------
Consolidated $ 617,258 $ 731,064 $ 645,959
========== ========== ==========
Operating profit (loss)*:
Drilling services $ (2,452) $ 136,409 $ 124,020
Manufacturing sales
and services 837 5,686 7,602
Aviation services 13,808 10,206 4,020
---------- ---------- ----------
Consolidated $ 12,193 $ 152,301 $ 135,642
========== ========== ==========
</Table>
* Income (loss) from operations before deducting general and administrative
expenses
Excluded from the preceding table are the effects of transactions between
segments. During 2002, 2001 and 2000, Rowan's manufacturing division provided
approximately $112.9 million, $118.1 million and $103.9 million, respectively,
of products and services to the drilling division and Rowan's aviation division
provided approximately $2.2 million, $1.4 million and $1.3 million,
respectively, of flight services to the drilling division.
Foreign-source revenues were as follows (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Drilling services:
Eastern Canada $ 19,635 $ 44,296 $ 74,327
North Sea 16,265 287 8,573
Manufacturing sales
and services 2,280 2,798 1,612
Aviation services 2,082 2,483 2,665
-------- -------- --------
Total $ 40,262 $ 49,864 $ 87,177
======== ======== ========
</Table>
Rowan had revenues, primarily from drilling operations, in excess of 10% of
consolidated revenues from one customer during each of 2002 (13%), 2001 (14%)
and 2000 (11%).
Rowan 2002 | 36
Rowan believes that it has no significant concentrations of credit risk. The
Company has never experienced any significant credit losses and its drilling and
aviation services customers have heretofore primarily been large energy
companies and government bodies. Rowan's manufacturing operations help diversify
the Company's operations and attendant credit risk. Further, Rowan retains the
ability to relocate its major drilling and aviation assets over significant
distances on a timely basis in response to changing market conditions.
Certain other financial information for each of Rowan's principal operating
segments is summarized as follows (in thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Depreciation and
amortization:
Drilling $ 54,850 $ 46,462 $ 38,313
Manufacturing 7,441 7,772 7,401
Aviation 15,800 14,265 13,151
Capital expenditures:
Drilling 205,628 270,341 185,321
Manufacturing 14,839 10,048 17,099
Aviation 22,429 24,791 20,662
Repairs and maintenance:
Drilling 43,773 47,035 38,562
Manufacturing 10,503 10,155 9,231
Aviation 19,758 22,558 22,311
Goodwill:
Drilling 1,493 1,493 1,723
Manufacturing 12,356 6,150 6,491
======== ======== ========
</Table>
11. RELATED PARTY TRANSACTIONS
A Rowan director who joined the Board in April 2001 also serves as a Managing
Director for a financial institution to which the Company paid interest and
lending fees totaling $0.7 million in 2002 and $6.4 million in 2001.
Transactions with this lender were on terms and conditions, and involved
interest rates and fees, then prevailing in the market. Transactions between
Rowan and this lender were reviewed and ratified by the Company's Board of
Directors.
A Rowan director also served as Vice President for one of the Company's drilling
customers through May 2002. Transactions with this customer were on terms and
conditions, and involved day rates and operating costs, which were comparable to
those experienced by Rowan in connection with third-party contracts for similar
rigs. Because of the aforementioned relationships, the contracts between Rowan
and this customer were reviewed and ratified by the Company's Board of
Directors. Related revenues were approximately $5.1 million in 2001 and $2.9
million in 2000.
A Rowan director also serves as a consultant for an investment banking firm to
which the Company paid $5.2 million in commissions in connection with its 10.3
million share common stock offering in 2000, at which time he was a Managing
Director. Both the common stock offering and the underwriting agreement were
approved by the Company's Board of Directors.
Rowan 2002 | 37