.
.
.
EXHIBIT 13
TEN-YEAR FINANCIAL REVIEW
ROWAN COMPANIES, INC.
(In thousands except per share amounts and ratios) 2003 2002 2001
- -------------------------------------------------- ---- ---- ----
OPERATIONS
Revenues:
Drilling services $ 421,412 $ 357,244 $ 486,291
Manufacturing sales and services 133,186 118,120 102,150
Aviation services 124,490 141,894 142,623
------------- ------------- -------------
Total 679,088 617,258 731,064
------------- ------------- -------------
Costs and expenses:
Drilling services 330,124 304,846 303,420
Manufacturing sales and services 122,229 109,842 88,691
Aviation services 112,391 112,286 118,153
Depreciation and amortization 86,851 78,091 68,499
General and administrative 25,357 25,140 27,670
------------- ------------- -------------
Total 676,952 630,205 606,433
------------- ------------- -------------
Income (loss) from operations 2,136 (12,947) 124,631
------------- ------------- -------------
Other income (expense):
Net proceeds from Gorilla V settlement 157,125(1)
Interest expense (20,027) (20,645) (24,240)
Less interest capitalized 4,142 4,722 11,170
Interest income 1,124 4,106 8,382
Other - net 673 458 264
------------- ------------- -------------
Other income (expense) - net (14,088) 145,766 (4,424)
------------- ------------- -------------
Income (loss) before income taxes (11,952) 132,819 120,207
Provision (credit) for income taxes (4,178) 46,541 43,209
------------- ------------- -------------
Income (loss) before extraordinary charges (7,774) 86,278 76,998
Extraordinary charges from redemption of debt
------------- ------------- -------------
Net income (loss) $ (7,774) $ 86,278(1) $ 76,998
------------- ------------- -------------
Per share of common stock:
Net income (loss):
Basic:
Income (loss) before extraordinary charges $ (.08) $ .92 $ .82
Extraordinary charges from redemption of debt
------------- ------------- -------------
Net income (loss) $ (.08) $ .92 $ .82
------------- ------------- -------------
Diluted:
Income (loss) before extraordinary charges $ (.08) $ .90 $ .80
Extraordinary charges from redemption of debt
------------- ------------- -------------
Net income (loss) $ (.08) $ .90(1) $ .80
------------- ------------- -------------
Cash dividends $ - $ .25 $ -
------------- ------------- -------------
FINANCIAL POSITION
Working capital $ 293,859 $ 353,927 $ 305,188
------------- ------------- -------------
Property, plant and equipment - at cost:
Drilling equipment 2,133,365 1,922,341 1,634,370
Aircraft and related equipment 265,165 264,212 255,600
Manufacturing plant and equipment 138,803 120,705 104,018
Construction in progress 135,707 199,352 327,032
Other property and equipment 162,010 155,815 140,706
------------- ------------- -------------
Total 2,835,050 2,662,425 2,461,726
------------- ------------- -------------
Property, plant and equipment - net 1,728,219 1,567,144 1,418,843
Total assets 2,190,809 2,054,504 1,938,955
Capital expenditures 250,463 242,896 305,180
Long-term debt 569,067 512,844 438,484
Common stockholders' equity 1,136,830 1,131,777 1,108,087
------------- ------------- -------------
STATISTICAL INFORMATION
Current ratio 2.95 4.05 2.51
Long-term debt/total capitalization .33 .31 .28
Book value per share of common stock $ 12.08 $ 12.09 $ 11.84
Price range of common stock $ 17.70-26.72 $ 15.89-26.84 $ 11.10-33.89
============= ============= =============
(1) Excluding the Gorilla V settlement, net income (loss) and net income
(loss) per diluted share would have been approximately $(16) million
and $(.17), respectively.
(2) 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.
14
TEN-YEAR FINANCIAL REVIEW
ROWAN COMPANIES, INC.
2000 1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
$ 418,948 $ 260,939 $ 431,664 $ 434,004 $ 316,123 $ 250,080 $ 245,917
103,465 95,545 158,913 154,852 143,768 133,755 96,664
123,546 104,078 115,773 106,396 111,269 87,462 95,578
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
645,959 460,562 706,350 695,252 571,160 471,297 438,159
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
256,615 213,356 218,372 217,514 202,394 203,415 207,306
88,463 88,430 134,535 134,324 131,693 120,328 86,883
106,374 93,806 98,037 95,368 91,570 77,964 79,381
58,865 54,699 49,703 47,078 47,882 50,555 50,790
24,072 18,399 18,366 16,971 16,591 14,692 13,862
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
534,389 468,690 519,013 511,255 490,130 466,954 438,222
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
111,570 (8,128) 187,337 183,997 81,030 4,343 (63)
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
(25,652) (22,755) (17,500) (26,208) (27,547) (27,702) (27,530)
13,510 11,238 16,264 9,966 2,516
10,948 4,583 7,205 5,190 4,157 5,209 4,813
487 526 395 343 374 468 260
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
(707) (6,408) 6,364 (10,709) (20,500) (22,025) (22,457)
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
110,863 (14,536) 193,701 173,288 60,530 (17,682) (22,520)
40,650 (4,870) 69,241 16,863 (808) 754 469
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
70,213 (9,666) 124,460 156,425 61,338 (18,436) (22,989)
9,766
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
$ 70,213 $ (9,666) $ 124,460 $ 146,659 $ 61,338 $ (18,436) $ (22,989)
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
$ .76 $ (.12) $ 1.45 $ 1.82 $ .72 $ (.22) $ (.27)
$ .12
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
$ .76 $ (.12) $ 1.45 $ 1.70 $ .72 $ (.22) $ (.27)
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
$ .74 $ (.12) $ 1.43 $ 1.76 $ .70 $ (.22) $ (.27)
$ .11
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
$ .74 $ (.12) $ 1.43 $ 1.65 $ .70 $ (.22) $ (.27)
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
$ - $ - $ - $ - $ - $ - $ -
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
$ 379,003 $ 122,792(2) $ 286,059 $ 330,852 $ 232,045 $ 200,588 $ 195,945
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
1,553,849 1,268,704 1,238,361 965,292 954,249 944,021 961,391
236,760 221,776 211,313 202,044 188,681 189,954 176,874
94,077 83,835 75,949 60,902 37,377 25,037 18,955
157,314 248,567 127,075 195,996 77,318
121,997 113,008 108,353 94,476 94,517 91,089 86,883
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
2,163,997 1,935,890 1,761,051 1,518,710 1,352,142 1,250,101 1,244,103
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
1,182,780 1,025,739 877,197 677,160 546,200 487,039 506,121
1,678,426 1,356,067 1,249,108 1,122,135 899,308 802,488 805,179
223,082 204,689 247,747 180,066 117,947 33,881 43,377
372,212 296,677 310,250 256,150 267,321 247,744 248,504
1,052,757 723,724 729,996 653,098 496,219 429,155 442,347
- ------------- ------------ ------------ -------------- -------------- ------------ ------------
4.63 1.61(2) 4.59 5.06 3.72 3.75 4.39
.26 .29 .30 .28 .35 .37 .36
$ 11.17 $ 8.69 $ 8.77 $ 7.53 $ 5.80 $ 5.06 $ 5.25
$ 19.06-34.25 $ 8.50-21.69 $ 9.00-32.50 $ 16.75-43.94 $ 8.88-24.50 $ 5.38-10.00 $ 5.75-9.25
============= ============ ============ ============== ============== ============ ============
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ROWAN COMPANIES, INC.
RESULTS OF OPERATIONS
The following analysis highlights Rowan's operating results for the years
indicated (in millions):
2003 2002 2001
---- ---- ----
Revenues:
Drilling $ 421.4 $ 357.3 $ 486.3
Manufacturing 133.2 118.1 102.2
Aviation 124.5 141.9 142.6
---------- ---------- ----------
Total $ 679.1 $ 617.3 $ 731.1
========== ========== ==========
Operating Expenses*:
Drilling $ 390.8 $ 359.7 $ 349.9
Manufacturing 130.9 117.3 96.5
Aviation 129.9 128.1 132.4
---------- ---------- ----------
Total $ 651.6 $ 605.1 $ 578.8
========== ========== ==========
Operating Profit (Loss)**:
Drilling $ 30.6 $ (2.4) $ 136.4
Manufacturing 2.3 0.8 5.7
Aviation (5.4) 13.8 10.2
---------- ---------- ----------
Total $ 27.5 $ 12.2 $ 152.3
========== ========== ==========
General & Administrative
Expenses $ 25.4 $ 25.1 $ 27.7
========== ========== ==========
Net Income (Loss) $ (7.8) $ 86.3 $ 77.0
========== ========== ==========
* Including depreciation and amortization expense
**Revenues less operating expenses. Operating profit is income (loss) from
operations before general and administrative expenses, many of which are
incurred in support of all of Rowan's businesses and not allocable to specific
segments.
As indicated in the preceding table, Rowan's results of operations are heavily
dependent upon the performance of our drilling division, which comprises about
88% of our fixed assets and, over the past three years, has generated more than
60% of our revenues and more than 85% of our aggregate operating profit. The
performance of each of our operating segments over the 2001-2003 period is
discussed more fully below.
The settlement in March 2002 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. General and administrative expenses were
higher in 2001 due primarily to legal costs associated with this matter. Such
settlement is discussed more fully under Liquidity and Capital Resources, which
follows the review of our operating results.
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 expenditures by energy companies, which are heavily influenced by oil
and natural gas prices and the availability of competitive equipment.
In recent years, Rowan's offshore drilling operations have been focused in the
Gulf of Mexico, where 22 of our 24 offshore rigs are currently deployed. This
market is extremely fragmented among many oil and gas companies, most of whom
are independent operators whose drilling activities are often highly dependent
upon near-term operating cash flows. A typical drilling assignment is for 30-45
days of exploration or development work, performed under a single-well contract
containing negotiable renewal options. Thus, drilling activity and day rates in
this market tend to fluctuate rather quickly and generally follow the trend in
natural gas prices. Rowan generally avoids long-term, fixed-rate commitments -
which are available only from the major integrated oil companies and a few of
the larger independents - in order to maximize opportunities for day rate
increases in the future.
The North Sea is a mature offshore drilling market that has long been dominated
by major oil and gas companies operating within a relatively tight regulatory
environment. Drilling assignments can range from several months to several years
and project lead times are often lengthy. Thus, drilling activity and day rates
move slowly in response to market conditions and generally follow trends in oil
prices.
We have operated offshore eastern Canada to varying degrees since the early
1980s. In recent years, the market for harsh environment jack-ups in this area
has been sporadic, with Rowan ranging from three rigs fully utilized in the area
in mid-2000 to having only one rig approximately 60% utilized there over the
past three years.
Rowan does not cold-stack its drilling rigs during slack periods as we believe
the long-term costs of retraining personnel and restarting equipment outweighs
any short-term savings. Thus, our drilling expenses do not typically fluctuate
with rig activity, though they have increased in recent years as our drilling
fleets have expanded. Rowan added to its offshore fleet the Super Gorilla XL
class Bob Palmer in September 2003 and the Super Gorilla class Rowan Gorilla VII
in early 2002. Four new land rigs were constructed over the 2001-2002 period and
two existing land rigs were substantially rebuilt during 2003.
2003 compared to 2002
Rowan's drilling division generated a $33 million increase in operating profit
in 2003 compared to 2002.
Drilling revenues increased by $64.1 million or 18% in 2003, due to the effects
of increases in both drilling activity and average day rates, as follows (in
millions):
Increase in drilling activity $ 35.7
Increase in drilling rates 28.4
Natural gas prices remained fairly stable at or above $5.00 per mcf throughout
2003 and the size of the competitive Gulf of Mexico jack-up fleet declined by
more than 10% during the year. Thus, our Gulf of Mexico fleet utilization was
consistently strong in 2003 and, as a result, our average day rates in the area
improved throughout the year.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ROWAN COMPANIES, INC.
The following table summarizes average natural gas prices and Rowan's overall
Gulf of Mexico fleet utilization and average day rates during 2003:
NATURAL AVERAGE AVERAGE
GAS (MCF)* UTILIZATION DAY RATE
---------- ----------- --------
First quarter $ 5.92 90% $ 34,700
Second quarter 5.74 93% 35,700
Third quarter 4.89 93% 39,100
Fourth quarter 5.43 92% 42,400
Full year 5.49 92% 38,100
* Source: New York Mercantile Exchange
We consider only revenue-producing days in computing rig utilization and average
day rates. Our average Gulf of Mexico day rate in 2003 as shown in the preceding
table was approximately 17% higher than our average for 2002. Our Gulf of Mexico
fleet increased to 22 units in September 2003 with the commencement of
operations by the Bob Palmer.
Oil prices were also fairly stable throughout 2003, at or above $30 per barrel,
which helped influence an increase in rig demand in many foreign markets and the
migration of many jack-ups from the Gulf of Mexico. However, market conditions
in our principal foreign areas, the North Sea and offshore eastern Canada, did
not improve measurably during the year.
After being idle for most of the first half of 2003, Gorilla VII began in June a
contract to drill and produce wells in the UK sector of the North Sea. The rig
was 100% utilized in the area throughout the remainder of the year. Rowan
Gorilla V was only 58% utilized offshore eastern Canada during 2003.
Rowan's fleet of 18 deep-well land rigs was 74% utilized in 2003 and achieved an
average day rate of $10,700 during the year, compared to 67% and $9,900 in 2002.
The fleet includes four rigs constructed during the 2001-2002 period and nine
rigs that have been substantially rebuilt in recent years, including two in
2003. Fifteen of our land rigs are actively marketed in Texas, Louisiana and
Mississippi.
Our fleet of six anchor-handling, towing and supply (AHTS) vessels was 74%
utilized in 2003, compared to 76% in 2002. Each vessel was obtained in 1999-2000
under five-year lease agreements that contain 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.
Drilling operating expenses were about $31.1 million or 9% higher in 2003
compared to 2002, due to the addition of the Bob Palmer, the continued expansion
of our land rig operations and higher pension and insurance costs.
2002 compared to 2001
Rowan's drilling division suffered a $138.8 million decrease in operating profit
(loss) in 2002 compared to 2001.
Drilling revenues decreased by $129 million or 27% in 2002, as the effects of a
significant decline in average day rates more than offset an increase in
drilling activity, as follows (in millions):
Increase in drilling activity $ 37.1
Decrease in drilling rates (166.1)
During 2000 and 2001, natural gas prices were extremely volatile, increasing
from around $2 per mcf to about $10 during 2000 and falling back to around $2 by
the end of 2001. Gulf of Mexico jack-up demand followed a similar pattern,
improving steadily throughout 2000 only to fall by nearly 50% during 2001. Gas
prices improved rather steadily throughout 2002, finishing the year near $5 per
mcf. Our Gulf of Mexico drilling operations, which continued to experience the
effects of the 2000-2001 market volatility in early 2002, showed improvement
over most of the second and third quarters, but leveled off during the fourth
quarter and began weakening by year end. The following table summarizes average
natural gas prices and Rowan's overall Gulf of Mexico fleet utilization and
average day rates during 2002:
NATURAL AVERAGE AVERAGE
GAS (MCF)* UTILIZATION DAY RATE
---------- ----------- --------
First quarter $ 2.49 83% $ 29,400
Second quarter 3.42 95% 30,500
Third quarter 3.20 95% 35,000
Fourth quarter 4.32 93% 35,600
Full year 3.36 91% 32,700
* Source: New York Mercantile Exchange
Our Gulf of Mexico day rates finished 2002 only slightly higher than where they
started the year, with our full year average as shown in the preceding table
about 38% below our average for 2001. Our Gulf of Mexico fleet increased to 22
units with the addition, in February 2002, of Gorilla VII. It 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 following
the review of our operating results.
In March 2000, Rowan temporarily withdrew from the North Sea market, though we
remained confident in its long-term viability, particularly for our Gorilla and
Super Gorilla jack-ups. During 2001, we constructed a new area headquarters
facility near Aberdeen, Scotland and drilling activity improved somewhat
throughout that year. In anticipation of the continued strengthening of that
market, we relocated the newly-constructed Gorilla VII to the North Sea in early
2002 and it was 76% utilized in the area over the last half of the year. Gorilla
V was only 34% utilized offshore eastern Canada in 2002.
Drilling operating expenses were about $9.8 million or less than 3% higher in
2002 compared to 2001, due primarily to the addition of Gorilla VII.
Rowan's land rig fleet was 67% utilized in 2002 and achieved an average day rate
of $9,900 during the year, compared to 72% and $13,400 in 2001. Our fleet of six
AHTS boats was 76% utilized in 2002, compared to 90% in 2001.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ROWAN COMPANIES, INC.
Outlook
With generally favorable oil and natural gas prices over the past two years,
energy companies have and will likely continue to realize improved cash flows.
Many are also struggling to offset declining production and the depletion of
their reserve base. Recent royalty waivers on natural gas production from "deep
shelf" wells in the shallow waters of the Gulf of Mexico should increase
drilling activity there. As a result, we continue to believe that, ultimately,
such cash flows will be reinvested in additional drilling projects, but are
uncertain as to when this will occur.
The majority of our capital investments in recent years have been for new
jack-up rigs. We designed these rigs to target emerging market niches, such as
simultaneous drilling and production in harsh environments as is currently being
performed by Gorilla VII and more efficient deep shelf drilling offered by the
Tarzan Class rigs. Such investments have yet to consistently provide the returns
that we originally envisioned, but we remain optimistic that they will do so in
the future.
Though near-term drilling demand is uncertain, we remain confident in the
long-term potential of the harsh environment jack-up markets in the North Sea
and offshore eastern Canada. We are optimistic that recent regulatory and tax
changes in the United Kingdom will increase participation in that market by
independent operators, which should increase rig demand.
In recent months, we have seen an increase in bid activity in many other foreign
locations, especially in areas with perceived liquefied natural gas (LNG)
potential such as Trinidad and Qatar. We are aggressively pursuing contracts
where we see an opportunity to maximize the contribution of our Super Gorilla
class and other offshore rigs and measurably improve our operating results.
Worldwide rig demand is inherently volatile and generally varies from one market
to the next, as does the supply of competitive equipment. Exploration and
development expenditures on the part of energy companies are affected by many
factors beyond oil and natural gas price levels and trends, such as political
and regulatory policies, seasonal weather patterns, lease expirations, mergers
and acquisitions and new oil and gas discoveries. The outlook for most worldwide
drilling markets appears to be stable or improving. However, the volatility
inherent in the drilling business prevents us from being able to accurately
predict whether existing market conditions will continue beyond the near term or
whether any expected improvements will materialize. 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 we believe such moves are
economically justified over the longer term. Currently, Rowan's drilling
operations are unprofitable and they will be adversely affected should market
conditions deteriorate.
MANUFACTURING OPERATIONS
We have manufacturing facilities in Longview, Texas, Vicksburg, Mississippi and
Houston, Texas that produce mining and timber equipment, alloy steel and steel
plate and various drilling rig components. Through the acquisition of The Ellis
Williams Company, now LEWCO, we expanded our drilling products group in 2000 to
include the production of oilfield mud pumps. In early 2002, we acquired, for
approximately $8 million of our common stock, net assets of two companies that
collectively manufacture variable speed AC motors and variable frequency drive
systems and consoles for marine boats and lay barges, the oil and gas drilling
industry and the mining and dredging industries.
Rowan's manufacturing division has continued to generate operating profits while
leading the effort to expand and upgrade our drilling fleets. During 2003, our
manufacturing division delivered the Bob Palmer, achieved significant
construction progress on the first two Tarzan Class jack-ups and provided key
components for the rebuilding of two land rigs.
2003 compared to 2002
Our manufacturing division achieved a $15.1 million or 13% increase in revenues
in 2003 compared to 2002 which, after a $13.6 million or 12% increase in
operating expenses, yielded a $1.5 million increase or near-tripling of
operating profit between periods.
The equipment group generated a $14.8 million or 25% increase in revenues in
2003. New equipment sales increased by 22% between periods as the group shipped
14 new loaders and stackers during 2003, compared to 12 units in 2002. Parts
sales improved by 9% in 2003.
The steel group suffered a $1.4 million or 7% decrease in revenues in 2003 on a
1% decrease in external steel shipments.
The drilling products group increased outside sales of rig components, parts and
fabrication services by $1.6 million or 4% in 2003. The group shipped 15 pumps
to outside customers during 2003, up from 11 pumps in 2002.
Our 2003 manufacturing operations exclude approximately $136 million of products
and services provided to Rowan's drilling division during the year, most of
which was attributable to construction progress on the Bob Palmer and the
Scooter Yeargain. The drilling products group completed and delivered the Bob
Palmer during August 2003.
2002 compared to 2001
Our manufacturing division achieved a $15.9 million or 16% increase in revenues
in 2002 compared to 2001 which, after a $20.8 million or 22% increase in
operating expenses, yielded a $4.9 million or 86% decline in operating profit
between periods.
The equipment group experienced an $8.3 million or 12% decrease in revenues in
2002, as the effects of unfavorable commodities prices and mining company
mergers contributed to a $7.3 million or 18% decrease in parts sales between
periods. The group shipped 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.
The drilling products group increased outside sales of rig components, parts and
fabrication services by $21.8 million or 119% in 2002. The group shipped 11
pumps to outside customers during 2002, down from 23 pumps in 2001.
Our 2002 manufacturing operations exclude approximately $113 million of products
and services provided to Rowan's drilling division during the year, most of
which was attributable to construction progress on the Bob Palmer.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ROWAN COMPANIES, INC.
Outlook
Though considerably less volatile than our drilling operations, our
manufacturing operations, especially the equipment group, have in recent years
been adversely impacted by a prolonged period of unfavorable world commodities
prices; in particular, prices for copper, iron ore, coal and gold. In addition,
prospects for our drilling products group are ultimately tied to the condition
of the overall drilling industry and its demand for equipment, parts and
services. Many commodity prices have increased in recent months due to growth in
worldwide demand - and the de facto devaluation of the U.S. dollar - and our
external manufacturing backlog, currently at $46 million, is more than double
the prior-year level. We are optimistic that a recovery in the mining equipment
business may be underway, but cannot, however, accurately predict whether or not
any such recovery will continue beyond the near term or its impact on our
manufacturing operations.
AVIATION OPERATIONS
Rowan's aviation operations are heavily influenced by oil and natural gas
exploration and production activities, principally in the Gulf of Mexico and
seasonal weather conditions, primarily in Alaska. The division continues to
diversify its flight services and other key sources of aviation revenues include
a commuter airline in Alaska, forest fire control services throughout the
western United States and Alaska tourism.
Most of our flight services are provided under short-term charter arrangements
or, on an as-needed basis, under master service agreements. Term contracts are
only occasionally available, and then they are usually confined to
energy-related flying for major oil and gas companies.
Based upon fleet size, we are the largest operator in Alaska and third-largest
in the Gulf of Mexico area. We have gradually restructured our fleet over the
years, placing more emphasis on higher-capacity and longer-range twin-engine
helicopters.
The following table reflects the numbers of our aircraft at the end of each of
the last three years and the revenue hours flown for each of those years.
2003 2002 2001
---- ---- ----
Alaska:
Number of helicopters 40 45 46
Revenue hours 13,342 15,600 18,785
Number of fixed-wing aircraft 16 19 19
Revenue hours 18,148 18,798 19,789
Gulf of Mexico:
Number of helicopters 45 47 49
Revenue hours 15,619 24,283 28,124
2003 compared to 2002
Our aviation division suffered a $17.4 million or 12% decrease in revenues in
2003 compared to 2002 which, after a $1.8 million or 1% increase in operating
expenses, yielded a $19.2 million decrease in operating profit (loss) between
periods. As indicated in the preceding table, revenue flight hours decreased by
20% in 2003.
Our revenues from energy-related flying, primarily in support of Gulf of Mexico
deepwater drilling operations, declined by 23% in 2003, consistent with the
decline in deepwater drilling activity. We achieved a 15% increase in forest
fire control revenues and a 7% increase in tourism-related revenues over 2002.
Our commuter airline in Alaska generated a 4% increase in revenues in 2003.
Aviation operating expenses increased slightly in 2003 primarily due to higher
pension costs.
2002 compared to 2001
Our aviation division experienced a $.7 million or less than 1% decrease in
revenues in 2002 compared to 2001 which, after a $4.3 million or 3% decrease in
operating expenses, yielded a $3.6 million or 35% increase in operating profit
between periods.
The 12% decrease in 2002 revenue flight hours, as shown in the preceding table,
was virtually offset by the effects of rate increases in each of the current and
prior years.
Our revenues from energy-related flying improved by only 3% in 2002, due
primarily to the lethargic deepwater drilling market that prevailed for much of
the year. We achieved a 36% increase in forest fire control revenues, which was
substantially offset by a 13% decrease in tourism-related revenues. Revenues
from our commuter airline were virtually unchanged in 2002.
Aviation operating expenses declined in 2002 as gains on aircraft sales more
than offset a near-50% increase in insurance costs from 2001 in the aftermath of
9/11.
Outlook
We currently do not anticipate any significant improvement in the Alaska
aviation market in 2004, though longer-term we are encouraged by proposals for
additional drilling and pipeline construction activities in the area. We are
optimistic that the Gulf of Mexico aviation market will strengthen if offshore
drilling activity improves as expected.
Changes in energy company exploration and production activities, seasonal
weather patterns and many other factors affect the demand for flight services in
the aviation markets in which we compete. The inherent uncertainty underlying
such factors prevents us from being able to accurately predict whether existing
market conditions will continue beyond the near term, whether any expected
improvements will materialize or their impact on our aviation operations.
19
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ROWAN COMPANIES, INC.
LIQUIDITY AND CAPITAL RESOURCES
Key balance sheet amounts and ratios for 2003 and 2002 were as follows (dollars
in millions):
2003
-------------------------
DECEMBER 31, ACTUAL PRO FORMA* 2002
- ------------ ------ ---------- ----
Cash and cash
equivalents $ 58.2 $ 322.8 $ 178.8
Current assets $ 444.2 $ 708.8 $ 469.9
Current liabilities $ 150.4 $ 150.4 $ 116.0
Current ratio 2.95 4.71 4.05
Current maturities of
long-term debt $ 55.3 $ 55.3 $ 42.5
Long-term debt $ 569.1 $ 569.1 $ 512.8
Stockholders' equity $ 1,136.8 $ 1,401.4 $ 1,131.8
Long-term debt/
total capitalization .33 .29 .31
* As adjusted for early 2004 common stock sale
Reflected in the comparisons shown in the preceding table are the effects of the
following 2003 transactions: net cash provided by operations of $48.3 million;
capital expenditures of $250.5 million; proceeds from borrowings of $111.5
million and debt repayments of $42.5 million. Pro forma 2003 amounts give effect
to the sale, in early 2004, of 11.5 million shares of Rowan common stock for
approximately $265 million as if such transactions had occurred at December 31,
2003.
Capital expenditures in 2003 included $118 million towards construction of the
first two of 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 rigs 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 rig, the
Scooter Yeargain, is at our Sabine Pass, Texas facility for final outfitting and
is scheduled for delivery during April 2004. The Bob Keller (formerly Tarzan II)
is being constructed at our Vicksburg, Mississippi shipyard with delivery
expected during the third quarter of 2005. Two additional Tarzan Class jack-ups
are tentatively planned.
During May 2003, Rowan obtained financing for up to 87.5% of the cost of the
first two Tarzan Class rigs through 15-year bank loans 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 .15% 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 within four years following rig delivery. Interest is payable
semi-annually on each May 10 and November 10 and the principal will be repaid in
30 semi-annual installments commencing November 10, 2004. Each Tarzan Class rig
is pledged as security for the respective government guarantee. At December 31,
2003, we had drawn down about $72 million of the $91.2 million Scooter Yeargain
credit facility, which bore interest of 1.26%. No borrowings were outstanding
under the $89.7 million Bob Keller credit facility at year end.
We have applied to MARAD for Title XI government-guaranteed financing for up to
87.5% of the cost of Tarzans III and IV on terms and conditions similar to those
in effect for the Scooter Yeargain. However, there can be no assurance that any
such financing will be obtained.
Capital expenditures in 2003 included $49 million towards the completion of the
Bob Palmer, an enhanced version of our Super Gorilla class jack-up designated as
Super Gorilla XL, which was delivered in August 2003. The Bob Palmer is
outfitted with 713 feet of leg, 139 feet more than Gorillas V, VI or VII and has
30% larger spud cans, enabling operation in the Gulf of Mexico in water depths
up to 550 feet. The Bob Palmer was also designed to operate in water depths up
to 400 feet in the hostile environments offshore eastern Canada and in the North
Sea.
Rowan financed 87.5% of the cost of the Bob Palmer through an 18-year bank loan
guaranteed under the MARAD Title XI Program. Outstanding borrowings 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 August 18, 2007. Interest is payable semi-annually on each January 15
and July 15 and the first of 36 semi-annual principal repayments occurred on
January 15, 2004. The Bob Palmer is pledged as security for the government
guarantee. At December 31, 2003, we had $187.3 million of the credit facility
outstanding, which bore interest of 1.36%.
Capital expenditures during 2003 also included $22 million toward the expansion
and upgrade of our land drilling capabilities, including the substantial
rebuilding of two existing land rigs.
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 2003 capital expenditures was primarily for major
enhancements to existing offshore rigs and manufacturing facilities and
purchases of aircraft and components. Our 2004 capital budget is estimated to be
in the range of about $120 million, including approximately $75 million for the
first two Tarzan Class rigs. We will review and adjust the capital budget as
necessary to take advantage of market opportunities in our drilling,
manufacturing and aviation businesses.
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 2005
and that their total cost, estimated to approach $50 million, will be funded
from existing working capital or outside financing. However, there can be no
assurance that working capital will be adequate or outside financing will be
available.
Construction of Rowan Gorilla VII, completed during December 2001, was
substantially financed through a $185.4 million government-guaranteed bank note
issued under the Title XI Program. On June 30, 2003, we fixed the interest rate
on all outstanding principal amounts at 2.8%.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ROWAN COMPANIES, INC.
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 totaled $154.5 million at December 31, 2003.
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 $121.1 million at December 31, 2003.
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 guarantees. Outstanding
borrowings at December 31, 2003, were as follows: $39.1 million at 6.94% and
$50.2 million at 6.15%.
During the 2001-2003 period, Rowan contributed about $47 million to our defined
benefit pension plans. Such contributions were 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 other comprehensive loss
resulting from unfunded pension liabilities of $54.7 million at December 31,
2003. We believe that our pension costs will increase in 2004, in amounts not
presently determinable and currently expect to contribute approximately $20
million in 2004 for our pension and other benefit plans.
Contractual Obligations and Commercial Commitments
The following is a summary of our contractual obligations at December 31, 2003
(dollars in millions):
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
CONTRACTUAL WITHIN 2-3 4-5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- ----- ------ ----- ----- -------
Long-term debt $ 624.3 $ 55.3 $ 115.4 $ 115.4 $ 338.2
Operating leases 88.1 39.4 32.5 15.6 0.6
-------- ------- ------- ------- ---------
Total $ 712.4 $ 94.7 $ 147.9 $ 131.0 $ 338.8
======== ======= ======= ======= =========
Rowan periodically employs letters of credit or other bank-issued guarantees in
the normal course of its businesses and was contingently liable for performance
under such agreements to the extent of approximately $10.5 million at December
31, 2003.
In December 2003, Rowan filed a $500 million universal shelf registration
statement. In early 2004, we sold 11.5 million shares of common stock,
consisting of approximately 1.7 million shares of treasury stock and 9.8 million
newly issued shares. The net proceeds of approximately $265 million were
retained for general corporate purposes, including working capital and capital
expenditures.
Based on current and anticipated near-term operating levels, we believe that
2004 operations, together with existing working capital and available financial
resources, will be adequate to sustain planned capital expenditures and debt
service and other requirements at least through the remainder of 2004. We
currently have no other available credit facilities, but believe financing could
be obtained if deemed necessary.
During November, 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 2001 or 2003 and,
at December 31, 2003, had approximately $254 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 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.
During 2002, we repurchased another 738,700 shares of Rowan's outstanding common
stock at an average cost of $17.87 per share. The 1.7 million shares we held in
treasury at December 31, 2003 had an average cost of $17.33 per share and were
included within the sale of 11.5 million shares of common stock in early 2004 at
a net price of $23.05 per share.
In October 2002, our jack-up rig, Rowan-Houston, collapsed and sank during
Hurricane Lili. With the assistance of outside consultants, we have completed a
detailed post-incident investigation and analysis of the loss of the rig. Wind
gusts were measured between 165 and 169 mph
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ROWAN COMPANIES, INC.
and wave heights were from 54 to 59 feet in the area, which greatly exceeded the
50-year storm criteria in the Gulf of Mexico. Winds and waves of that magnitude
would environmentally overload the rig and are the probable cause of its total
loss. These storm conditions were localized, not widespread, or there would have
been much greater damage than was actually suffered by offshore installations,
including other rigs. Contrary to initial reports that indicated a collision had
occurred, the failure of the starboard leg gear unit foundation was the most
likely cause of the sequence of events that led to the rig's ultimate collapse
and sinking. The majority of the wreckage has been removed with completion
scheduled during the second quarter of 2004. We received the full insured value
of the rig, which exceeded its carrying value, and believe the remaining costs
of wreckage removal will continue to be 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 $4.4 million or $.05 per diluted share in 2003, $3.9
million or $.04 per diluted share in 2002 and $3.4 million or $.03 per diluted
share in 2001.
Rowan does not hold or issue derivative financial instruments and our adoption
of Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, has not materially
impacted our 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. 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", superceded existing standards
pertaining to accounting and reporting for long-lived assets, especially those
held for disposal. 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. 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. Rowan's adoption of Statement No. 146 did not materially
impact our financial position or results of operations.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003,
signed into law on December 8, 2003, introduced a prescription drug benefit
under Medicare (Part D) and a federal subsidy to sponsors of retiree healthcare
plans like Rowan that provide benefits at least actuarially equivalent to Part
D. We have elected to defer recognizing any effects of the Act on our plan
benefit obligations or benefits costs pursuant to Financial Accounting Standards
Board Staff Position No. FAS 106-1. Specific authoritative guidance on
accounting for the federal subsidy is pending and such guidance, when issued,
may require us to change previously reported information.
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:
- - oil and natural gas prices
- - the level of exploration and development expenditures by energy companies
- - changes in rig utilization and day rates for our rigs
- - energy demand
- - the general economy, including inflation
- - weather conditions in our principal operating areas
- - environmental and other laws and regulations
Other relevant factors have been disclosed in Rowan's filings with the U.S.
Securities and Exchange Commission.
22
CONSOLIDATED BALANCE SHEET
ROWAN COMPANIES, INC.
DECEMBER 31,
------------------------------
(In thousands except share amounts) 2003 2002
- ----------------------------------- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 58,227 $ 178,756
Receivables - trade and other 135,538 109,320
Inventories:
Raw materials and supplies 140,413 122,846
Work-in-progress 29,421 31,348
Finished goods 11,203 8,766
Prepaid expenses 2,948 8,011
Deferred tax assets - net (Note 7) 66,474 10,855
----------- -----------
Total current assets 444,224 469,902
----------- -----------
Property, plant and equipment - at cost:
Drilling equipment 2,133,365 1,922,341
Aircraft and related equipment 265,165 264,212
Manufacturing plant and equipment 138,803 120,705
Construction in progress 135,707 199,352
Other property and equipment 162,010 155,815
----------- -----------
Total 2,835,050 2,662,425
Less accumulated depreciation and amortization 1,106,831 1,095,281
----------- -----------
Property, plant and equipment - net 1,728,219 1,567,144
----------- -----------
Goodwill and other assets (Notes 1 and 6) 18,366 17,458
----------- -----------
Total $ 2,190,809 $ 2,054,504
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 2) $ 55,267 $ 42,458
Accounts payable - trade 25,898 30,000
Other current liabilities (Note 4) 69,200 43,517
----------- -----------
Total current liabilities 150,365 115,975
----------- -----------
Long-term debt - less current maturities (Note 2) 569,067 512,844
----------- -----------
Other liabilities (Note 6) 116,268 127,848
----------- -----------
Deferred income taxes - net (Note 7) 218,279 166,060
----------- -----------
Commitments and contingent liabilities (Note 9)
Stockholders' equity (Notes 3, 5, 6 and 12):
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 95,845,180 shares at December 31, 2003 and 95,340,597
shares at December 31, 2002 11,981 11,918
Additional paid-in capital 659,849 647,600
Retained earnings 549,749 557,523
Cost of 1,734,440 treasury shares (30,064) (30,064)
Accumulated other comprehensive income (loss) (54,685) (55,200)
----------- -----------
Total stockholders' equity 1,136,830 1,131,777
----------- -----------
Total $ 2,190,809 $ 2,054,504
=========== ===========
See Notes to Consolidated Financial Statements.
23
CONSOLIDATED STATEMENT OF OPERATIONS
ROWAN COMPANIES, INC.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
(In thousands except per share amounts) 2003 2002 2001
- --------------------------------------- ---- ---- ----
Revenues:
Drilling services $ 421,412 $ 357,244 $ 486,291
Manufacturing sales and services 133,186 118,120 102,150
Aviation services 124,490 141,894 142,623
---------- ---------- ----------
Total 679,088 617,258 731,064
---------- ---------- ----------
Costs and expenses:
Drilling services 330,124 304,846 303,420
Manufacturing sales and services 122,229 109,842 88,691
Aviation services 112,391 112,286 118,153
Depreciation and amortization 86,851 78,091 68,499
General and administrative 25,357 25,140 27,670
---------- ---------- ----------
Total 676,952 630,205 606,433
---------- ---------- ----------
Income (loss) from operations 2,136 (12,947) 124,631
---------- ---------- ----------
Other income (expense):
Net proceeds from Gorilla V settlement 157,125
Interest expense (20,027) (20,645) (24,240)
Less interest capitalized 4,142 4,722 11,170
Interest income 1,124 4,106 8,382
Other - net 673 458 264
---------- ---------- ----------
Other income (expense) - net (14,088) 145,766 (4,424)
---------- ---------- ----------
Income (loss) before income taxes (11,952) 132,819 120,207
Provision (credit) for income taxes (Note 7) (4,178) 46,541 43,209
---------- ---------- ----------
Net income (loss) $ (7,774) $ 86,278 $ 76,998
========== ========== ==========
Net income (loss) per share of common stock (Note 1):
Basic $ (.08) $ .92 $ .82
---------- ---------- ----------
Diluted $ (.08) $ .90 $ .80
========== ========== ==========
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
ROWAN COMPANIES, INC.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
(In thousands) 2003 2002 2001
- -------------- ---- ---- ----
Net income (loss) $ (7,774) $ 86,278 $ 76,998
Other comprehensive income (loss):
Minimum pension liability adjustment, net of income taxes
of $277, $(22,971) and $(6,752), respectively (Note 6) 515 (42,660) (12,540)
--------- --------- ---------
Comprehensive income (loss) $ (7,259) $ 43,618 $ 64,458
========= ========= =========
See Notes to Consolidated Financial Statements.
24
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
ROWAN COMPANIES, INC.
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------------
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, 2001 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
debentures 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
Exercise of stock options 493 62 5,370
Value of services rendered by
participants in the nonqualified
stock option plan (Note 3) 6,720
Conversion of subordinated
debentures 12 1 159
Minimum pension liability
adjustment, net of income taxes 515
Net loss (7,774)
------ ----------- ------ -------- --------- ------------- --------
Balance, December 31, 2003 95,845 $ 11,981 (1,734) $(30,064) $ 659,849 $ (54,685) $549,749
====== =========== ====== ======== ========= ============= ========
See Notes to Consolidated Financial Statements.
25
CONSOLIDATED STATEMENT OF CASH FLOWS
ROWAN COMPANIES, INC.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
(In thousands) 2003 2002 2001
- -------------- ---- ---- ----
Cash provided by (used in):
Operations:
Net income (loss) $ (7,774) $ 86,278 $ 76,998
Adjustments to reconcile net income (loss) to net cash provided by
operations:
Depreciation and amortization 86,851 78,091 68,499
Deferred income taxes (3,677) 53,252 43,896
Provision for pension and postretirement benefits 30,232 15,500 11,221
Compensation expense 7,108 7,176 7,769
Gain on disposals of property, plant and equipment (4,393) (7,315) (2,587)
Contributions to pension plans (22,742) (7,619) (16,675)
Postretirement benefit claims paid (2,358) (1,666) (1,922)
Gorilla V judgement proceeds deferred in 2001 and recognized in 2002 (88,628) 88,628
Changes in current assets and liabilities:
Receivables - trade and other (27,058) 14,839 34,342
Inventories (18,077) (25,078) (14,297)
Other current assets 5,063 (4,780) 209
Current liabilities 5,476 (2,369) (11,188)
Net changes in other noncurrent assets and liabilities (401) 509 (3,165)
--------- --------- ---------
Net cash provided by operations 48,250 118,190 281,728
--------- --------- ---------
Investing activities:
Property, plant and equipment additions (250,463) (242,896) (305,180)
Proceeds from disposals of property, plant and equipment 7,060 25,781 3,875
--------- --------- ---------
Net cash used in investing activities (243,403) (217,115) (301,305)
--------- --------- ---------
Financing activities:
Proceeds from borrowings 111,490 116,818 110,730
Repayments of borrowings (42,458) (42,458) (30,008)
Payment of cash dividend (23,511)
Payments to acquire treasury stock (13,199) (21,199)
Proceeds from stock option and convertible debenture plans 5,592 3,042 4,215
--------- --------- ---------
Net cash provided by financing activities 74,624 40,692 63,738
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (120,529) (58,233) 44,161
Cash and cash equivalents, beginning of year 178,756 236,989 192,828
--------- --------- ---------
Cash and cash equivalents, end of year $ 58,227 $ 178,756 $ 236,989
========= ========= =========
See Notes to Consolidated Financial Statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
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
In early 2002, Rowan acquired, for approximately $8 million of its common stock,
net assets of two companies (OEM) that collectively manufacture variable speed
AC motors and variable frequency drive systems and consoles for marine boats and
lay barges, the oil and gas drilling industry and the mining and dredging
industries. 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. Effective January 1, 2002, Rowan adopted Statement of
Financial Accounting Standards No. 142, 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.
Rowan had goodwill with a carrying value of $12.4 million at each of December
31, 2003 and 2002, of which $10.9 million related to the manufacturing division
and $1.5 million related to the drilling division. At December 31, 2003 and
2002, the Company had intangible assets subject to amortization totaling $1.5
million and $1.7 million, respectively.
REVENUE RECOGNITION
Rowan's drilling contracts provide for payment on a day rate basis and revenues
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 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
$108.1 million and $84.3 million, $106.2 million and $84.9 million and $97.3
million and $71.4 million in 2003, 2002 and 2001, 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 (LOSS) PER COMMON SHARE
"Basic" income (loss) per share is determined as income (loss) available to
common stockholders divided by the weighted-average number of common shares
outstanding during the period. "Diluted" income (loss) 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 (loss) per share for each of the
past three years is as follows (in thousands except per share amounts):
NET INCOME PER SHARE
YEAR ENDED DECEMBER 31, (LOSS) SHARES AMOUNT
---------------------- ---------- ------ ---------
2003:
Basic income (loss)
per share $ (7,774) 93,820 $ (.08)
Effect of dilutive
securities:
Convertible debentures
Stock options
---------- ------
Diluted income (loss)
per share $ (7,774) 93,820 $ (.08)
========== ====== =========
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
========== ====== =========
Excluded from the 2003 computation of Diluted income (loss) per share are
incremental shares of 913,000 related to convertible debentures and 836,000
related to stock options as their inclusion would have reduced the per share
amount of loss for the year. The 2003 presentation also excludes any effects of
the Company's sale, in early 2004, of 11.5 million shares of common stock. See
Note 3 for further information regarding the Company's stock option and
debenture plans and Note 12 for further information on the common stock sale.
STATEMENT OF CASH FLOWS
In practice, Rowan invests only 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.
Noncash investing and financing activities excluded from the Company's
Consolidated Statement of Cash Flows were as follows: in 2003 - the conversion
of $160,000 of Series B Floating Rate Subordinated Convertible Debentures into
11,377 shares of common stock, the addition of $388,000 of tax benefits related
to employee stock options and the reduction of $840,000 of accounts receivable
in exchange for drilling equipment; in 2002 - the issuance of 439,560 shares of
common stock, valued at approximately $8 million, in connection with the OEM
acquisition, the addition of $1,361,000 of tax benefits related to employee
stock options, the conversion of $150,000 of Series III Floating Rate
Subordinated Convertible Debentures into 22,222 shares of common stock and the
conversion of $140,000 of Series B Floating Rate Subordinated Convertible
Debentures into 9,956 shares of common stock; in 2001 - the reduction of $87,000
of tax benefits
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
related to employee stock options and the conversion of $445,000 of Series III
Floating Rate Subordinated Convertible Debentures into 65,926 shares of common
stock. See Notes 2 and 3 for further information regarding the Company's
convertible debentures.
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:
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
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, a
portion of interest cost incurred. 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, which 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, which addresses accounting for 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 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 regarding income taxes.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). During 2003, 2002 and 2001, Rowan recognized other
comprehensive income or loss relating to minimum pension liabilities. See Note 6
for further information.
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, 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.
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 2002 and 2001 amounts to conform
to the 2003 presentations.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
2. LONG-TERM DEBT
Long-term debt consisted of (in thousands):
DECEMBER 31,
--------------------------
2003 2002
---- ----
6.94% Title XI note payable;
secured by Gorilla V $ 39,090 $ 44,672
6.15% Title XI note payable;
secured by Gorilla V 50,221 57,395
5.88% Title XI note payable;
secured by Gorilla VI 121,125 135,377
2.80% Title XI note payable;
secured by Gorilla VII 154,498 169,948
Floating-rate Title XI note payable;
secured by the Bob Palmer 187,295 147,910
Floating-rate Title XI note payable;
secured by the Scooter Yeargain 72,105
--------- ---------
Total 624,334 555,302
Less current maturities 55,267 42,458
--------- ---------
Remainder $ 569,067 $ 512,844
========= =========
Maturities of long-term debt for each of the next five years ending December 31,
are as follows: 2004 - $55.3 million and for each of 2005, 2006, 2007 and 2008 -
$57.7 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 guarantees.
Rowan financed $171.0 million of the cost of Rowan Gorilla VI through a
floating-rate bank loan guaranteed under MARAD's 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 through 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 under MARAD's Title XI Program. On June 30,
2003, the Company fixed the $162.2 million of outstanding borrowings at 2.80%.
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.
Rowan financed $187.3 million of the cost of the Bob Palmer through a
floating-rate bank loan guaranteed under MARAD's Title XI program. The Company
may fix the interest rate at any time and must fix the rate on all outstanding
principal amounts by August 18, 2007. Principal and accrued interest are payable
semi-annually on each January 15 and July 15 through July 2021. The Bob Palmer
is pledged as security for the government guarantee. At December 31, 2003,
outstanding borrowings bore interest of 1.36%.
During 2003, Rowan obtained financing for up to $91.2 million of the cost of
designing and constructing the Scooter Yeargain through a 15-year bank loan
guaranteed under MARAD's Title XI program. The Company obtains reimbursements
for expenditures based upon actual construction progress and outstanding
borrowings initially bear interest at .15% 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 October 1, 2008. Interest is
payable semi-annually on each May 10 and November 10 and the principal will be
repaid in semi-annual installments commencing November 10, 2004. The Scooter
Yeargain is pledged as security for the government guarantee. At December 31,
2003, outstanding borrowings bore interest of 1.26%.
Also during 2003, Rowan obtained Title XI financing for up to $89.7 million of
the cost of designing and constructing the Bob Keller (formerly Tarzan II) under
terms and conditions similar to those in effect for the Scooter Yeargain. At
December 31, 2003, Rowan did not have any outstanding borrowings related to the
Bob Keller.
Rowan's $7.3 million of Series III Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2003 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, 2003 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 $4.5 million of Series B Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2003 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.
Rowan's $9.6 million of Series C Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2003 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: $8.5 million through April 26,
2004 and $9.6 million on or after April 27, 2004.
Rowan's $9.6 million of Series D Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2003 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.
Rowan's $1.2 million of Series E Floating Rate Subordinated Convertible
Debentures outstanding at December 31, 2003 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.
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.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
Interest payments exceeded interest capitalized by $16.2 million in 2003, $16.1
million in 2002 and $14.5 million in 2001.
Rowan's debt agreements contain provisions that require minimum levels of
working capital and stockholders' equity, 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, 2003. See Note 5 for further information regarding dividend restrictions.
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, 2003, options for
11,582,632 shares had been granted under the plan at an average exercise price
of $9.70 per share and 507 active, key employees had been granted options.
Options generally 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, 2003, options for
132,000 shares had been granted under the plan at an average exercise price of
$21.61 per share. Options are 100% exercisable after one year and all options
not exercised expire five or ten years after the date of grant.
Stock option activity for each of the last three years was as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
Outstanding at January 1, 2001 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
Granted 1,471,248 13.65
Exercised (493,131) 11.01
Forfeited (91,056) 20.76
--------- --------
Outstanding at December 31, 2003 5,648,958 $ 16.08
========= ========
Exercisable at December 31, 2001 1,570,200 $ 13.44
--------- --------
Exercisable at December 31, 2002 2,382,386 $ 15.44
--------- --------
Exercisable at December 31, 2003 2,914,074 $ 16.01
========= ========
The following table summarizes information about stock options outstanding at
December 31, 2003.
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE NUMBER OF EXERCISE REMAINING
PRICE OPTIONS PRICE LIFE (YEARS)
--------- --------- -------- ------------
OUTSTANDING:
$ 1.00 64,975 $ 1.00 1.0
$ 4.06 to $ 9.81 1,304,803 6.18 7.1
$13.12 to $15.25 1,075,295 13.42 6.9
$18.25 to $19.75 1,368,575 18.90 5.5
$21.19 to $32.00 1,835,310 23.12 8.0
--------- -------- ---
5,648,958 $ 16.08 6.9
========= ======== ===
EXERCISABLE:
$ 1.00 64,975 $ 1.00
$ 4.06 to $ 9.81 571,250 6.16
$13.12 to $15.25 635,706 13.62
$18.25 to $19.75 1,090,625 19.05
$21.19 to $32.00 551,518 24.71
--------- --------
2,914,074 $ 16.01
========= ========
The weighted average per-share fair values at date of grant for options granted
during 2003, 2002 and 2001 were estimated to be $12.08, $12.24 and $11.61,
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 and 148, under which compensation cost is based upon estimated
fair values, would have reduced (increased) reported amounts of net income
(loss) and net income (loss) per share as follows (in thousands, except per
share amounts):
2003 2002 2001
---- ---- ----
Net income (loss), as reported $ (7,774) $ 86,278 $ 76,998
Stock-based compensation, net
of related tax effects:
As recorded under APB 25 4,624 4,661 4,976
Pro forma under SFAS 123 (9,000) (8,590) (8,340)
--------- --------- --------
Pro forma net income (loss) $ (12,150) $ 82,349 $ 73,634
========= ========= ========
Net income (loss)
per basic share:
As reported $ (.08) $ .92 $ .82
Pro forma (.13) .88 .78
Net income (loss)
per diluted share:
As reported (.08) .90 .80
Pro forma (.13) .86 .77
========= ========= ========
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
The foregoing fair value estimates were determined using the Black-Scholes
option valuation model with the following weighted average assumptions:
2003 2002 2001
---- ---- ----
Expected life in years 3.0 3.5 3.2
Risk-free interest rate 1.7% 2.3% 3.4%
Expected volatility 54.5% 54.8% 55.5%
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, of which $30 million has been issued. 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, 2003, 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, $4.5 million was outstanding at December
31, 2003. The outstanding Series A, B, C, D and E debentures are collectively
convertible into 1,212,386 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, 2003, 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, 2003 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.
4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of (in thousands):
DECEMBER 31,
-----------------------
2003 2002
--------- ----------
Deferred revenues $ 11,510 $ 4,518
Accrued liabilities:
Income taxes 35 17
Compensation and related
employee costs 39,954 24,046
Interest 7,147 7,453
Taxes and other 10,554 7,483
--------- ----------
Total $ 69,200 $ 43,517
========= ==========
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 $254 million of retained
earnings available for distribution at December 31, 2003. 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.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
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 2003 and 2002 and the funded
status of the plans at December 31, 2003 and 2002 were as follows (in
thousands):
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
BENEFIT OBLIGATIONS:
Balance,
January 1 $ 297,908 $ 231,256 $ 61,660 $ 52,529
Service cost 12,436 9,371 2,461 1,903
Interest cost 19,634 17,159 3,942 3,653
Plan changes 22
Actuarial loss 20,374 49,255 1,985 5,241
Benefits paid (10,456) (9,133) (2,358) (1,666)
----------- ---------- -------- --------
Balance,
December 31 339,918 297,908 67,690 61,660
=========== ========== ======== ========
PLAN ASSETS:
Fair value,
January 1 158,203 170,740
Actual return 23,589 (11,023)
Employer
contributions 22,742 7,619
Benefits paid (10,456) (9,133)
----------- ---------- -------- --------
Fair value,
December 31 194,078 158,203
=========== ========== ======== ========
Funded status (145,840) (139,705) (67,690) (61,660)
Unrecognized
amounts:
Actuarial loss 131,962 125,313 21,834 20,816
Transition
obligation 6,808 7,565
Prior service cost 1,197 1,386 (3,193) (3,505)
=========== ========== ======== ========
Net liabilities
recognized (12,681) (13,006) (42,241) (36,784)
Additional
minimum
liability (85,315) (86,309)
----------- ---------- -------- --------
Net benefit
liabilities $ (97,996) $ (99,315) $(42,241) $(36,784)
=========== ========== ======== ========
The additional minimum pension liability shown in the preceding table 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):
DECEMBER 31,
---------------------
2003 2002
---- ----
Goodwill and other assets $ 1,184 $ 1,386
Accumulated other comprehensive loss 84,131 84,923
-------- ---------
Other liabilities $ 85,315 $ 86,309
======== =========
Additional information related to Rowan's pension plans are as follows (in
thousands):
DECEMBER 31,
-----------------------
2003 2002
---- ----
Projected benefit obligation $ 339,918 $ 297,908
Accumulated benefit obligation 292,051 257,518
Fair value of plan assets 194,078 158,203
Net periodic pension cost included the following components (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Service cost $ 12,436 $ 9,371 $ 7,482
Interest cost 19,634 17,159 15,678
Expected return on
plan assets (16,935) (18,522) (17,374)
Recognized actuarial loss 7,071 654
Amortization of
prior service cost 211 209 269
--------- ---------- ----------
Total $ 22,417 $ 8,871 $ 6,055
========= ========== ==========
Other benefits cost included the following components (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Service cost $ 2,461 $ 1,903 $ 1,578
Interest cost 3,942 3,653 2,983
Recognized actuarial loss 967 630 161
Amortization:
Transition obligation 757 756 756
Prior service cost (312) (313) (312)
--------- ---------- ----------
Total $ 7,815 $ 6,629 $ 5,166
========= ========== ==========
Assumptions used to determine benefit obligations were as follows:
DECEMBER 31,
--------------------------
2003 2002 2001
---- ---- ----
Discount rate 6.25% 6.50% 7.25%
Rate of compensation increase 4.0% 4.0% 4.0%
==== ==== ====
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
Assumptions used to determine net periodic benefit costs were as follows:
YEAR ENDED DECEMBER 31,
-------------------------
2003 2002 2001
---- ---- ----
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%
The pension plans had weighted average asset allocations as follows:
ALLOCATION AT
DECEMBER 31,
-------------
Asset category 2003 2002
---- ----
Rowan common stock 20% 23%
S&P 500 index fund 19% 0%
Other equity securities 39% 39%
Debt securities 18% 20%
Cash and other 4% 18%
--- ---
Total 100% 100%
=== ===
Approximately 60% of the plans' assets are actively managed by investment
companies who tailor asset mix between debt and equity securities to strive for
an average annual return of at least 8.5%. Plan management has imposed certain
investment criteria on the managers to enhance portfolio diversification and
asset quality, including overall debt-equity allocation, number of holdings,
minimum market capitalizations, a preference for dividend-paying equities and a
prohibition against certain industries or high-risk situations. Individual
manager performance is regularly evaluated against the target return and broad
market benchmarks.
Rowan's common stock has averaged a 10.4% annual return since its 1967 initial
public offering. Subject to regulatory limits, the plans have acquired Rowan
shares at various dates over the years at what were believed to be depressed
prices in order to enhance long-term returns. The plans held 1,630,000 shares of
Rowan common stock at December 31, 2003 having a market value of $37.8 million.
Such shares were acquired at an average cost of $5.49 per share.
In an effort to improve equity diversification and take advantage of the
recovering U.S. economy and equity markets, recent contributions made to the
plans have been directed towards a low-cost equity index fund comprised of
companies in the Standard & Poors 500.
The plans attempt to maintain enough available cash to cover at least one year's
benefit payments and ongoing administrative expenses. Additionally, $7.9 million
of the plans' assets were invested in a dedicated bond fund at December 31,
2003. The plans had a basis in these assets of $5.1 million yielding
approximately 3.75% to maturity.
The plans do not have overall target asset allocations. Active management is
employed in an attempt to outperform the broader market. Assets are managed for
the long-term, with little consideration given to short-term performance or
market trends. To develop the expected long-term rate of return on assets
assumption, Rowan considered the current level of expected returns on risk-free
investments (primarily government bonds), the historical level of the risk
premium associated with the plans' other asset classes and the expectations for
future returns of each asset class. The expected return for each asset class was
then weighted based upon the current asset allocation to develop the expected
long-term rate of return on assets assumption for the plans at December 31,
2003, which was set at 8.5%.
Rowan currently expects to contribute approximately $20 million in 2004 for its
pension and other benefit plans.
The assumed increase in per capita health care costs ranged from 11% for 2004 to
5% for 2010 and thereafter. The Company's average health care cost per employee
during 2003 was less than 4% higher than the average in 2002 and virtually
unchanged from the average in 2001. A one-percentage-point change in assumed
health care cost trend rates would change reported amounts as follows (in
thousands):
1-PERCENTAGE-POINT CHANGE
-------------------------
INCREASE DECREASE
-------- --------
Increase (decrease) in:
Service and interest cost $ 582 $ (512)
Postretirement benefit obligation 4,858 (4,400)
The Company also sponsors defined contribution plans covering substantially all
employees. Rowan contributed to the plans about $4.3 million in 2003, $4.2
million in 2002 and $3.9 million in 2001.
7. INCOME TAXES
The detail of income tax provisions (credits) is presented below (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
---- ---- ----
Current:
Federal $ (643) $ (6,863) $ (871)
Foreign (7) 86 81
State 149 66 103
--------- ------------ --------
Total current provision (501) (6,711) (687)
Deferred (3,677) 53,252 43,896
--------- ------------ --------
Total $ (4,178) $ 46,541 $ 43,209
========= ============ ========
Rowan's provision (credit) for income taxes differs from that determined by
applying the federal income tax rate (statutory rate) to income (loss) before
income taxes, as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
---- ---- ----
Statutory rate 35% 35% 35%
Tax at statutory rate $ (4,183) $ 46,487 $ 42,072
Increase (decrease)
due to:
Foreign companies'
operations 778 668 228
Research and devel-
opment tax credit (575)
Other - net (198) (614) 909
----------- ---------- ---------
Total provision (credit) $ (4,178) $ 46,541 $ 43,209
=========== ========== =========
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities at December 31, 2003 and 2002, were as follows (in thousands):
DECEMBER 31,
------------------------------------------------------------
2003 2002
--------------------------- ----------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
Deferred tax assets:
Accrued employee
benefit plan
costs $ 5,137 $ 36,221 $ 2,887 $ 41,629
Alternative
minimum tax 5,042 5,042
Net operating loss
carryforward 54,705
Research and
development
tax credit 3,363
Other 1,590 11,897 2,926 9,024
----------- ------------ ---------- -------------
66,474 51,481 10,855 50,653
Less valuation
allowance (3,363)
----------- ------------ ---------- -------------
Net deferred
tax assets 66,474 48,118 10,855 50,653
=========== ============ ========== =============
Deferred tax
liabilities:
Property, plant
and equipment 258,121 208,478
Other 8,276 8,235
----------- ------------ ---------- -------------
266,397 216,713
----------- ------------ ---------- -------------
Deferred tax asset
(liability)- net $ 66,474 $ (218,279) $ 10,855 $ (166,060)
=========== ============ ========== =============
During 2003, Rowan developed a claim for an income tax credit for qualifying
research and development activities undertaken and expenditures made over the
past several years. The Company claimed a portion of such credit in amending
certain prior years' tax returns, and reduced its 2003 tax provision by $0.6
million, the estimated amount of taxes recoverable from the credit claimed. The
remaining amount of the credit, estimated at $3.4 million at December 31, 2003,
may not be recoverable and was therefore fully offset by a valuation allowance
at year end. Rowan did not deem necessary a valuation allowance against its
deferred tax assets at December 31, 2002.
At December 31, 2003, the Company had net operating loss carryforwards for
federal income tax purposes of $54.7 million, which will expire, if not
utilized, in 2023.
Undistributed earnings of Rowan's foreign subsidiaries were estimated to be
$47.6 million at December 31, 2003. 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 $(9.4) million, $136.5 million
and $106.7 million of domestic earnings (losses), and $(2.6) million, $(3.7)
million and $13.5 million of foreign earnings (losses) in 2003, 2002 and 2001,
respectively.
Income tax refunds exceeded payments by $2.5 million in 2003 and income tax
payments exceeded refunds by $12.8 million and $16.7 million in 2002 and 2001,
respectively.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
At December 31, 2003, 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, 2003 as such
instruments bear short-term, market-based interest rates. The fair value of
Rowan's fixed-rate debt at December 31, 2003 was estimated to be approximately
$385 million, or a $20 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 during 2000. At that time, Rowan exercised its option to
extend each lease for a period of seven and one-half years, with semi-annual
lease payments equal to one-half of the weighted average lease payments made
during the original lease periods.
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.
The Company has other operating leases covering aircraft hangars, offices and
computer equipment. Net rental expense under all operating leases was $49.7
million in 2003, $51.5 million in 2002 and $56.0 million in 2001.
At December 31, 2003, the future minimum payments to be made under noncancelable
operating leases were as follows (in thousands):
2004 $ 39,386
2005 21,487
2006 11,016
2007 10,329
2008 5,260
Later years 604
- ----------- ---------
Total $ 88,082
=========== =========
Rowan periodically employs letters of credit or other bank-issued guarantees in
the normal course of its businesses, and was contingently liable for performance
under such agreements to the extent of approximately $10.5 million at December
31, 2003.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
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 currently estimates 2004 capital expenditures will be approximately $120
million, including about $75 million towards construction of the Tarzan Class
rigs Scooter Yeargain and Bob Keller.
10. SEGMENTS OF BUSINESS
Rowan has three 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 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):
DECEMBER 31,
----------------------------------------------
2003 2002 2001
---- ---- ----
Consolidated assets:
Drilling $ 1,746,677 $ 1,642,320 $ 1,567,137
Manufacturing 281,389 249,562 217,169
Aviation 162,743 162,622 154,649
------------- ------------- --------------
Total $ 2,190,809 $ 2,054,504 $ 1,938,955
============= ============= ==============
Property, plant and
equipment - net:
Domestic $ 1,269,143 $ 1,094,053 $ 1,181,960
Eastern Canada 204,244 212,033 218,831
North Sea 251,910 259,887 16,327
Other foreign 2,922 1,171 1,725
------------- ------------- --------------
Total $ 1,728,219 $ 1,567,144 $ 1,418,843
============= ============= ==============
At December 31, 2003, 40 drilling rigs, including 22 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):
YEAR ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
---- ---- ----
Revenues:
Drilling services $ 421,412 $ 357,244 $ 486,291
Manufacturing sales
and services 133,186 118,120 102,150
Aviation services 124,490 141,894 142,623
---------- ---------- -----------
Consolidated $ 679,088 $ 617,258 $ 731,064
========== ========== ===========
Operating profit (loss)*:
Drilling services $ 30,640 $ (2,452) $ 136,409
Manufacturing sales
and services 2,243 837 5,686
Aviation services (5,390) 13,808 10,206
---------- ---------- -----------
Consolidated $ 27,493 $ 12,193 $ 152,301
========== ========== ===========
* Income (loss) from operations before deducting general and administrative
expenses
Excluded from the preceding table are the effects of transactions between
segments. During 2003, 2002 and 2001, Rowan's manufacturing division provided
approximately $135.9 million, $112.9 million and $118.1 million, respectively,
of products and services to the drilling division and Rowan's aviation division
provided approximately $2.2 million, $2.2 million and $1.4 million,
respectively, of flight services to the drilling division.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ROWAN COMPANIES, INC.
Foreign-source revenues were as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
---- ---- ----
Drilling services:
Eastern Canada $ 29,140 $ 19,635 $ 44,296
North Sea 30,006 16,265 287
Manufacturing sales
and services 7,611 2,280 2,798
Aviation services 768 2,082 2,483
---------- ---------- -----------
Total $ 67,525 $ 40,262 $ 49,864
========== ========== ===========
Rowan had revenues, primarily from drilling operations, in excess of 10% of
consolidated revenues from two customers during 2003 (14% and 10%) and one
customer during each of 2002 (13%) and 2001 (14%).
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 operating segments is
summarized as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
---- ---- ----
Depreciation and
amortization:
Drilling $ 60,647 $ 54,850 $ 46,462
Manufacturing 8,715 7,441 7,772
Aviation 17,489 15,800 14,265
Capital expenditures:
Drilling 215,967 205,628 270,341
Manufacturing 18,291 14,839 10,048
Aviation 16,205 22,429 24,791
Repairs and maintenance:
Drilling 45,593 43,773 47,035
Manufacturing 11,871 10,503 10,155
Aviation 18,265 19,758 22,558
11. RELATED PARTY TRANSACTIONS
A Rowan director served until August 2003 as a Managing Director for a financial
institution to which the Company paid interest and lending fees totaling $1.0
million in 2003, $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 and were reviewed and ratified by the
Company's Board of Directors.
A Rowan director 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 relationship, 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.
12. SUBSEQUENT EVENT
In December 2003, Rowan filed a $500 million universal shelf registration
statement. In early 2004, the Company sold 11.5 million shares of common stock,
consisting of approximately 1.7 million shares of treasury stock that cost an
average of $17.33 per share, and 9.8 million newly-issued shares. The net
proceeds of approximately $265 million were retained for general corporate
purposes, including working capital and capital expenditures.
36
INDEPENDENT AUDITORS' REPORT
ROWAN COMPANIES, INC.
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, 2003 and 2002, 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, 2003. 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, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for Goodwill and
Other Intangible Assets.
[/s/ DELOITTE & TOUCHE LLP]
Houston, Texas
March 5, 2004
37
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
ROWAN COMPANIES, INC.
The following unaudited information for the quarters ended March 31, June 30,
September 30 and December 31, 2002 and 2003 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):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
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)
---------- ---------- ---------- ------------
2003:
Revenues $ 131,355 $ 158,100 $ 193,883 $ 195,750
Operating
profit (loss) (16,525) (573) 27,455 17,136
Net income
(loss) (17,182) (6,624) 11,587 4,445
Net income
(loss) per
common share:
Basic (.18) (.07) .12 .05
Diluted (.18) (.07) .12 .05
========== ========== ========== ============
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)
ROWAN COMPANIES, INC.
The price range below is as reported by the New York Stock Exchange on the
Composite Tape. On February 27, 2004, there were approximately 2,000 holders of
record.
2003 2002
------------------- ------------------------
QUARTER HIGH LOW HIGH LOW
- ------- ---- --- ---- ---
First $ 23.80 $ 17.70 $ 23.28 $ 15.89
Second 25.90 19.28 26.84 20.01
Third 25.62 20.80 22.57 16.36
Fourth 26.72 20.45 24.60 17.40
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 2003. 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.
38