1
EXHIBIT 13
Rowan Companies, Inc. and Subsidiaries
FINANCIAL REVIEW
(In thousands except per share amounts and ratios) 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Revenues:
Drilling services $ 245,917 $ 271,022 $ 162,121 $ 170,739 $ 180,118
Aircraft services 95,578 82,174 87,877 101,433 111,992
Manufacturing sales and services 96,664
--------------------------------------------------------------------------------------------------------------------------
Total 438,159 353,196 249,998 272,172 292,110
--------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Drilling services 207,577 211,095 162,816 147,853 130,845
Aircraft services 79,955 68,882 74,347 82,364 88,182
Manufacturing sales and services 87,382
Depreciation and amortization 50,790 51,918 51,367 52,954 50,702
General and administrative 13,862 13,940 12,092 11,739 9,549
--------------------------------------------------------------------------------------------------------------------------
Total 439,566 345,835 300,622 294,910 279,278
--------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (1,407) 7,361 (50,624) (22,738) 12,832
--------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (27,530) (25,361) (26,254) (21,379) (21,601)
Gain on disposals of property,
plant and equipment 1,344 1,955 731 1,660 3,996
Interest income 4,813 2,348 2,658 4,763 8,635
Other -- net 260 150 165 127 178
--------------------------------------------------------------------------------------------------------------------------
Other income (expense) -- net (21,113) (20,908) (22,700) (14,829) (8,792)
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (22,520) (13,547) (73,324) (37,567) 4,040
Provision (credit) for income taxes 469 (288) 429 1,174 2,081
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary charge (22,989) (13,259) (73,753) (38,741) 1,959
Extraordinary charge from redemption
of debt (5,627)
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (22,989) $ (13,259) $ (73,753) $ (44,368) $ 1,959
--------------------------------------------------------------------------------------------------------------------------
Per share of common stock:
Net income (loss):
Primary $ (.27) $ (.17) $ (1.01) $ (.61)* $ .03
--------------------------------------------------------------------------------------------------------------------------
Fully diluted $ (.27) $ (.17) $ (1.01) $ (.61)* $ .03
--------------------------------------------------------------------------------------------------------------------------
Cash dividends $ -- $ -- $ -- $ -- $ --
--------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Working capital $ 195,945 $ 172,117 $ 61,397 $ 125,996 $ 134,393
--------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment -- at cost:
Drilling equipment 961,391 950,538 939,793 913,379 885,264
Aircraft and related equipment 176,874 166,791 162,001 158,361 138,327
Manufacturing plant and equipment 18,955
Other property and equipment 86,883 81,636 79,801 76,251 73,504
--------------------------------------------------------------------------------------------------------------------------
Total 1,244,103 1,198,965 1,181,595 1,147,991 1,097,095
--------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment -- net 506,121 507,193 537,819 552,481 549,608
Total assets 805,179 765,263 684,301 895,889 739,133
Capital expenditures 43,377 21,989 39,528 85,618 59,905
Long-term debt 248,504 207,137 212,907 220,764 153,621
Common stockholders' equity 442,347 460,300 375,754 445,368 485,748
--------------------------------------------------------------------------------------------------------------------------
STATISTICAL INFORMATION
Current ratio 4.39 4.90 2.47 1.71** 4.00
Long-term debt/total capitalization .36 .31 .36 .33 .24
Book value per share of common stock $ 5.25 $ 5.49 $ 5.13 $ 6.11 $ 6.69
--------------------------------------------------------------------------------------------------------------------------
* Includes $.08 per share effect of extraordinary charge.
** At December 31, 1991, the $125,000,000 principal amount of the
Company's 13 3/4% Senior Notes had been called for redemption and
appeared as a current liability.
If redemption had occurred prior to year-end, the current ratio would
have been 3.61.
10
2
Rowan Companies, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following analysis highlights the Company's operating results for the years
indicated (in millions):
1994 1993 1992
--------------------------------------------------------------------------
Revenues:
Drilling $ 245.9 $ 271.0 $ 162.1
Aviation 95.6 82.2 87.9
Manufacturing 96.7
--------------------------------------------------------------------------
Total $ 438.2 $ 353.2 $ 250.0
==========================================================================
Operating Profit (Loss)*:
Drilling $ 0.2 $ 19.1 $ (40.4)
Aviation 4.6 2.2 1.9
Manufacturing 7.7
--------------------------------------------------------------------------
Total $ 12.5 $ 21.3 $ (38.5)
==========================================================================
Net Income (Loss) $ (23.0) $ (13.3) $ (73.8)
==========================================================================
* Income (loss) from operations before deducting general and
administrative expenses.
Continued volatility in energy prices and in the resulting demand for
drilling and aviation services, has pervaded the principal markets in which the
Company has operated during the past several years. As shown above, the
Company's results have been directly impacted. Faced with reorganizations and
downsizings by major energy companies, domestic drilling moratoriums and
increasing governmental regulations, the Company has taken several steps during
this period to broaden its revenue base and maintain or enhance its operating
results, including:
o the introduction of Total Project Management drilling services in
mid-1992, which has to date contributed $169.0 million in turnkey revenues
and a 9% incremental return
o the continued diversification of aircraft services toward non-energy markets
o the acquisition, completed in early 1994, of substantially all of the net
manufacturing assets of Marathon LeTourneau Company, including a mini-steel
mill, a manufacturing facility that produces heavy equipment for the mining,
timber and transportation industries, and a marine division that has built
over one-third of all mobile offshore jack-up drilling rigs, including all
20 operated by the Company.
The increase in the Company's net loss in 1994 in comparison to 1993
resulted primarily from a decrease in turnkey drilling revenues and a softening
of drilling day rates, which more than offset the improved results of aviation
operations and the addition of profitable manufacturing operations. The
Company's results in 1993 were improved over 1992 as a result of strong natural
gas prices and the growth of Total Project Management, principally turnkey
drilling.
DRILLING OPERATIONS. The Company's drilling operating results are dependent
upon rig rates and the level of rig utilization achieved in its offshore
drilling business conducted primarily in the Gulf of Mexico and the North Sea.
In turn, the rates obtained and the utilization of the Company's offshore rigs
are influenced by the level of offshore expenditures by energy companies.
The offshore drilling industry has fluctuated throughout the 1992-1994
period but overall, has continued to experience weak market conditions since the
early 1980's. Throughout much of 1992, low natural gas prices curtailed drilling
activity in the Gulf of Mexico and depressed drilling day rates. In the North
Sea, energy prices remained more stable and, as a result, utilization and day
rates were not as affected. In late 1992, conditions in the two markets moved in
opposite directions. An improvement in natural gas prices strengthened
utilization and day rates in the Gulf of Mexico throughout 1993 and most of
1994, while North Sea drilling activity and rates weakened due to energy
companies downsizing their drilling programs in the face of impending changes in
United Kingdom energy policies. In response, the Company relocated the
Rowan-Gorilla II from the North Sea to the Gulf of Mexico during the first half
of 1994. In late 1994, Gulf of Mexico utilization and day rates were again
forced to lower levels by the downward trend of natural gas prices. The North
Sea market appears to have stabilized and shows prospects for improvement in
1995.
The effects of fluctuations in activity and day rates are shown in the
following analysis of changes in the Company's contract drilling revenues (in
millions):
1993 1992
to 1994 to 1993
------------------------------------------------------------------
Utilization $ 22.1 $ 25.4
Drilling Rates (20.7) 9.3
==================================================================
12
3
These fluctuations, combined with the impact of Total Project
Management, resulted in a 9% decrease in 1994 drilling revenues compared to
1993, which was 67% improved over 1992. Drilling operations expenses decreased
2% in 1994 compared to 1993, which was 30% higher than 1992. The expense
variations do not correlate with the revenue fluctuations primarily due to the
effects of Total Project Management operations.
The number of marine rigs operated by the Company at the end of each
year in the 1992-1994 period and the rig utilization percentages (number of
days producing revenue as a percent of days the rig was available for service)
for each of those years are reflected in the following table:
1994 1993 1992
--------------------------------------------------------------
Jack-ups:
Number 20 20 20
Utilization 86% 85% 70%
Semi-submersible:
Number 1 1 1
Utilization 73% 94% 37%
Submersible Barges:
Number 3 3 3
Utilization 52% 30% 22%
==============================================================
In the Gulf of Mexico drilling market, where the Company currently has
18 of its 24 marine rigs, three notable changes occurring in recent years
continue to affect the market. First, the Gulf of Mexico is now the only
domestic market in which large scale drilling activity is occurring, because the
U.S. government has imposed moratoriums on drilling in most other domestic
offshore areas. Second, many major energy companies have downsized their
domestic drilling organizations and have generally abandoned the United States
market. Third, a growing number of independent energy companies have become
operators in this market, in part because the Minerals Management Service of the
U.S. government has modified the process by which such companies are permitted
to farm-in on existing leases. These changes have led the Company to move
towards Total Project Management, which emphasizes drilling and completing wells
on a turnkey basis.
Perceptible trends existing in the offshore drilling markets in which
the Company operates are shown below:
--------------------------------------------------------------------------------
GULF OF MEXICO - Weak market demand due to depressed natural gas prices in the
near term
NORTH SEA - Moderately improving drilling activity for jack-up rigs used in the
exploration and development of natural gas
EASTERN CANADA - Generally stable demand
TRINIDAD - Decreasing demand in 1995, increasing in 1996
================================================================================
The drilling markets in which the Company competes frequently
experience significant changes in supply and demand. Drilling
utilization and day rates achievable in offshore markets are affected by
changes in overall exploration and development expenditures, as well as shifts
in such expenditures between markets. These expenditures, in turn, are
influenced by discoveries of oil and natural gas reserves, shifts in the
political climate, regulatory changes, seasonal weather patterns, contractual
requirements under leases or concessions and, perhaps most disruptive, changes
in oil and natural gas prices. The Company can, as it did on two separate
occasions in 1994, relocate its drilling rigs from one geographic area to
another, but only when such moves are economically justified.
The volatile nature of the various factors affecting the level of
offshore expenditures by energy companies and shifts of such expenditures
between domestic and international markets prevent the Company from being able
to predict whether the perceptible market trends reflected in the preceding
table will continue, or their impact on the results of drilling operations in
1995.
Five of the Company's land rigs were under contract in Texas, Oklahoma,
Mississippi and New Mexico at year end and one of the Company's arctic land rigs
worked most of the first quarter in Alaska. The Company's three trailer-mounted
rigs recently arrived in Argentina to commence a two year assignment. The
Company's remaining four arctic land rigs and four rigs in western Texas and
Oklahoma were idle in 1994. The cost of maintaining the idle rigs is modest and
the remaining investment in the rigs is not significant.
AVIATION OPERATIONS. Although the aviation division's operating results are
still heavily influenced by oil and natural gas exploration and production,
principally in the Gulf of Mexico, and seasonal weather conditions, primarily in
Alaska, the division has continued to diversify its flight services. The Company
offers forest fire control, commuter airline services, flightseeing, medivac
services, airborne environmental surveys and other services. The Company further
broadened its aviation operations in 1994 to include China and Trinidad.
Aviation revenues increased by $13.4 million or 16% in 1994 compared to
1993, which was 6% below 1992. Comparable period fluctuations in aviation
division expenses were a 16% increase and a 7% decrease, respectively. The
increase in 1994 was primarily due to significant forest fire control services
provided during much of the third and fourth quarters throughout the western
United States. The Company had as many as 25 aircraft involved in fighting fires
at one time. In addition, the Company's commuter airline services grew by 15% in
1994, maintaining its 28% share of total division revenues.
The number of aircraft operated by the Company at the end of each year
in the 1992-1994 period and the revenue hours for each of those years are
reflected in the following table:
1994 1993 1992
---------------------------------------------------------------------------
Twin Engine Helicopters:
Number 63 63 64
Revenue Hours 33,330 29,715 31,370
Single Engine Helicopters:
Number 27 31 30
Revenue Hours 11,574 10,150 10,700
Fixed-wing Aircraft:
Number 17 15 13
Revenue Hours 23,136 22,728 21,426
===========================================================================
13
4
Excluded from the preceding table are eleven twin engine helicopters
owned by the Company's Dutch affiliate which recorded revenue hours of 8,134,
8,420 and 9,800 in 1994, 1993 and 1992, respectively.
Perceptible trends existing in the aviation markets in which the Company
operates are shown below:
--------------------------------------------------------------------------------
ALASKA -- Generally stable market conditions
GULF OF MEXICO -- Generally stable market conditions in the near term
NORTH SEA -- Moderately improving flight support activity
CHINA -- Generally stable demand in 1995, possibly improving in 1996
TRINIDAD -- Generally stable demand
================================================================================
The Company cannot predict whether these market trends will continue.
Changes in energy company exploration and production activities, seasonal
weather patterns and other factors can affect the demand for flight services in
the aviation markets in which the Company competes. The Company can, as it has
done in the past, move aircraft from one market to another, but only when the
likelihood of higher returns makes such action economical.
MANUFACTURING OPERATIONS. In February 1994, the Company completed the
acquisition of the net assets of Marathon LeTourneau Company for $52.1 million
with $10.4 million cash paid at the time of closing and the balance being
financed by nonrecourse promissory notes bearing interest at 7% and payable at
the end of five years. The manufacturing division generated $96.7 million in
revenues and an 8% operating profit in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Key balance sheet amounts and ratios for 1994 and 1993 were as follows (dollars
in millions):
December 31, 1994 1993
--------------------------------------------------------------------------
Cash and cash equivalents $111.1 $116.8
Current assets $253.7 $216.3
Current liabilities $ 57.8 $ 44.2
Current ratio 4.39 4.90
Current maturities of long-term debt $ 0.3 $ 8.1
Long-term debt $248.5 $207.1
Stockholders' equity $442.3 $460.3
Long-term debt/total capitalization .36 .31
==========================================================================
Reflected in the comparison above is the acquisition of the net assets
of Marathon LeTourneau Company discussed previously, as well as the effects of
net cash provided by operations of $42.8 million, property, plant and equipment
additions of $33.0 million, and repayments of borrowings totaling $8.1 million.
Capital expenditures included acquisitions of four aircraft ($9.3
million), major rig enhancements ($7.1 million) and the purchase of a marine
yard ($3.1 million). The remainder reflects new assets or enhancements to
existing assets as expenditures for routine maintenance and major repairs are
charged to operations as incurred.
The Company estimates 1995 capital expenditures to be between $30
million and $35 million. The Company may also spend amounts to acquire
additional aircraft as market conditions justify and to upgrade existing
offshore rigs.
In 1993, the Company sold 10 million shares of common stock using the
$92 million net proceeds to expand the Company's turnkey drilling operations
and increase working capital. Also during 1993, the Company repaid $10 million
outstanding under its $35 million unsecured revolving line of credit, canceling
the line at the time of repayment, and entered into a $3.6 million nonrecourse
bank loan agreement to finance the purchase of two fixed-wing aircraft in
conjunction with a five-year medivac service contract.
Cash flow from operations improved to $42.8 million in 1994, more than
double the amount generated in 1993, which was a $48.3 million improvement over
1992. Based on current operating levels and the previously discussed market
trends, management believes that cash provided by operations and existing
working capital will be adequate to sustain planned capital expenditures and
debt service requirements for the foreseeable future.
At December 31, 1994, the provisions of the Company's existing
indebtedness would allow the Company to enter into sale/leaseback transactions
with a maximum value of approximately $74 million.
In 1992 and through the first five months of 1993, the Company was
prohibited from paying dividends on its common stock under the terms of its
Senior Notes. With the addition of the proceeds from the June 1993 public
offering, the Company's ability to pay cash dividends was restored, although no
dividends were paid. Furthermore, the Company does not intend to pay dividends
on its common stock until it achieves and sustains a suitable level of
profitability. See Note 5 of the Notes to Consolidated Financial Statements.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions." The effect of adopting the statement for the
year ended December 31, 1993 was to increase net periodic postretirement
benefit cost and the net loss by approximately $3 million. See Note 6 of the
Notes to Consolidated Financial Statements.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The effect of
adopting the statement on the Company's 1993 consolidated financial statements
was not significant due to the expected realization of sufficient tax loss
carryforwards and other future deductible amounts to offset future taxable
amounts, based on the projected reversal of such differences. See Note 7 of the
Notes to Consolidated Financial Statements.
14
5
INDEPENDENT AUDITORS' REPORT
Rowan Companies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Rowan
Companies, Inc. and Subsidiaries (the "Company") as of December 31, 1994 and
1993, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. 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 generally accepted auditing
standards. 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, 1994 and 1993, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
As described in Notes 1 and 6 to the Consolidated Financial Statements,
the Company changed its methods of accounting for income taxes and the cost of
retiree health care effective January 1, 1993 to conform with the provisions of
Statements of Financial Accounting Standards Nos. 109 and 106, respectively.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
March 3, 1995
15
6
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31,
-------------------------------
(In thousands except share amounts) 1994 1993
------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 111,070 $ 116,778
Receivables -- trade and other 78,317 83,429
Inventories:
Raw materials and supplies 42,364 14,002
Work-in-progress 14,238
Finished goods 2,784
Prepaid expenses 3,290 1,312
Cost of turnkey drilling contracts in progress 1,642 785
------------------------------------------------------------------------------------------------------------------------
Total current assets 253,705 216,306
------------------------------------------------------------------------------------------------------------------------
Investment In and Advances To 49% Owned Companies 34,476 33,569
------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment -- at cost:
Drilling equipment 961,391 950,538
Aircraft and related equipment 176,874 166,791
Manufacturing plant and equipment 18,955
Other property and equipment 86,883 81,636
------------------------------------------------------------------------------------------------------------------------
Total 1,244,103 1,198,965
Less accumulated depreciation and amortization 737,982 691,772
------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment -- net 506,121 507,193
------------------------------------------------------------------------------------------------------------------------
Other Assets and Deferred Charges 10,877 8,195
------------------------------------------------------------------------------------------------------------------------
Total $ 805,179 $ 765,263
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (Note 2) $ 289 $ 8,127
Accounts payable -- trade 20,513 15,887
Other current liabilities (Note 4) 36,958 20,175
------------------------------------------------------------------------------------------------------------------------
Total current liabilities 57,760 44,189
------------------------------------------------------------------------------------------------------------------------
Long-Term Debt -- less current maturities (Note 2) 248,504 207,137
------------------------------------------------------------------------------------------------------------------------
Other Liabilities (Notes 6 and 9) 36,557 30,409
------------------------------------------------------------------------------------------------------------------------
Deferred Credits:
Income taxes (Note 7) 4,468 4,314
Gain on sale/leaseback transactions (Note 9) 15,543 18,742
Other 172
------------------------------------------------------------------------------------------------------------------------
Total deferred credits 20,011 23,228
------------------------------------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 9)
------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $1.00 par value:
Authorized 5,000,000 shares issuable in series:
Series I Preferred Stock, authorized 6,500 shares, none issued
Series II Preferred Stock, authorized 6,000 shares, none issued
Series III Preferred Stock, authorized 10,300 shares, none issued
Series A Junior Preferred Stock, authorized 1,500,000 shares, none issued
Common stock, $.125 par value; authorized 150,000,000 shares;
issued 85,737,581 shares at December 31, 1994 and 85,349,906 shares at
December 31, 1993 (Note 3) 10,717 10,669
Additional paid-in capital 390,925 385,937
Retained earnings (Note 5) 43,190 66,179
Less cost of treasury stock -- 1,457,919 shares 2,485 2,485
------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 442,347 460,300
------------------------------------------------------------------------------------------------------------------------
Total $ 805,179 $ 765,263
========================================================================================================================
See Notes to Consolidated Financial Statements.
16
7
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31,
--------------------------------------
(In thousands except per share amounts) 1994 1993 1992
----------------------------------------------------------------------------------------------------------
Revenues:
Drilling services $245,917 $271,022 $162,121
Aircraft services 95,578 82,174 87,877
Manufacturing sales and services 96,664
----------------------------------------------------------------------------------------------------------
Total 438,159 353,196 249,998
----------------------------------------------------------------------------------------------------------
Costs and Expenses:
Drilling services 207,577 211,095 162,816
Aircraft services 79,955 68,882 74,347
Manufacturing sales and services 87,382
Depreciation and amortization 50,790 51,918 51,367
General and administrative 13,862 13,940 12,092
----------------------------------------------------------------------------------------------------------
Total 439,566 345,835 300,622
----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations (1,407) 7,361 (50,624)
----------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest expense (27,530) (25,361) (26,254)
Gain on disposals of property, plant and equipment 1,344 1,955 731
Interest income 4,813 2,348 2,658
Other -- net 260 150 165
----------------------------------------------------------------------------------------------------------
Other income (expense) -- net (21,113) (20,908) (22,700)
----------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (22,520) (13,547) (73,324)
Provision (credit) for income taxes (Note 7) 469 (288) 429
----------------------------------------------------------------------------------------------------------
Net Income (Loss) $(22,989) $(13,259) $(73,753)
----------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share of Common Stock (Note 1) $ (.27) $ (.17) $ (1.01)
==========================================================================================================
See Notes to Consolidated Financial Statements.
17
8
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1993 and 1992
------------------------------------------------------------
Common Stock
------------------------------------
Issued In Treasury Additional
----------------- ---------------- Paid-in Retained
(In thousands) Shares Amount Shares Amount Capital Earnings
-----------------------------------------------------------------------------------------------------------------
Balance, January 1, 1992 74,327 $ 9,291 1,458 $2,485 $285,371 $153,191
Exercise of stock options 318 40 279
Value of services rendered by
participants in the Nonqualified
Stock Option Plans (Note 3) 3,820
Net loss (73,753)
-----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 74,645 9,331 1,458 2,485 289,470 79,438
Exercise of stock options 531 66 464
Value of services rendered by
participants in the Nonqualified
Stock Option Plans (Note 3) 4,282
Conversion of subordinated debentures 174 22 978
Sale of common stock (Note 3) 10,000 1,250 90,743
Net loss (13,259)
-----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 85,350 10,669 1,458 2,485 385,937 66,179
Exercise of stock options 388 48 340
Value of services rendered by
participants in the Nonqualified
Stock Option Plans (Note 3) 4,648
Net loss (22,989)
-----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 85,738 $10,717 1,458 $2,485 $390,925 $ 43,190
=================================================================================================================
See Notes to Consolidated Financial Statements.
18
9
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31,
-----------------------------------------
(In thousands) 1994 1993 1992
------------------------------------------------------------------------------------------------------------
Cash Provided By (Used In):
Operations:
Net income (loss) $(22,989) $ (13,259) $ (73,753)
Noncash charges (credits) to net income (loss):
Depreciation and amortization 50,790 51,918 51,367
Gain on disposals of property, plant and equipment (1,344) (1,955) (731)
Compensation expense 4,648 4,282 3,820
Change in sale/leaseback payable (1,405) (273) 1,668
Amortization of sale/leaseback gain (3,198) (3,198) (3,207)
Provision for pension and postretirement benefits 7,536 6,123 2,881
Other -- net (503) (1,271) (1,936)
Changes in current assets and liabilities:
Receivables -- trade and other 18,080 (28,867) (3,815)
Inventories (9,205) 670 1,212
Other current assets (2,464) 2,257 (2,622)
Current liabilities 6,064 774 (6,457)
Net changes in other noncurrent assets and liabilities (3,205) 1,165 1,628
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations 42,805 18,366 (29,945)
------------------------------------------------------------------------------------------------------------
Investing activities:
Capital expenditures:
Property, plant and equipment additions (32,963) (21,989) (39,528)
Acquisition of net manufacturing assets (10,414)
Advances to affiliates (100) (1,956)
Proceeds from disposal of property, plant and equipment 2,604 2,929 2,686
------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (40,773) (19,160) (38,798)
------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from common stock offering, net of issue costs 91,993
Proceeds from revolving credit arrangements 10,000
Payments on revolving credit arrangements (10,000)
Proceeds from other borrowings 3,560
Repayments of other borrowings (8,127) (8,061) (132,857)
Premium on redemption of debt (3,750)
Other -- net 387 530 319
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (7,740) 88,022 (136,288)
------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (5,708) 87,228 (205,031)
Cash and Cash Equivalents, Beginning of Year 116,778 29,550 234,581
------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $111,070 $116,778 $ 29,550
============================================================================================================
See Notes to Consolidated Financial Statements.
19
10
Rowan Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Rowan Companies, Inc. and all of its wholly and majority owned
subsidiaries (the "Company").
On February 11, 1994, the Company completed the acquisition of
substantially all of the assets, and assumed certain related liabilities, of
Marathon LeTourneau Company for $52,070,000 pursuant to an agreement with
General Cable Corporation dated November 12, 1993. The acquisition was financed
with $10,414,000 in cash and $41,656,000 in 7% promissory notes due in 1999 and
has been recorded using the purchase method of accounting. The accompanying
consolidated financial statements give effect to the acquisition as of January
1, 1994 and include the financial position, results of operations and cash flows
associated with the acquired net assets from that date. Had the acquisition been
completed effective January 1, 1993, the Company's unaudited pro forma operating
results for 1993 would have been as follows: revenues -- $449,400,000, net loss
-- $10,300,000 and net loss per share of common stock -- $.13.
The Company accounts for its investment in 49% owned companies using
the equity method.
The excess of cost over the net assets of subsidiaries at dates of
acquisitions ($8,452,000) is being amortized over a thirty-year period. At
December 31, 1994, the unamortized excess cost was $3,244,000.
Intercompany transactions are eliminated in consolidation.
REVENUE RECOGNITION. Most drilling contracts are on a day rate basis, and
revenues and expenses are recognized as the work progresses. The Company also
utilizes turnkey contracts for certain of its drilling operations. Under these
short-term, fixed price arrangements, revenues and expenses are recognized on a
completed contract basis.
The Company's aviation services generally are provided under master
service agreements (which provide for incremental payments based on usage), term
contracts, or day-to-day charter arrangements. Aviation revenues and expenses
are recognized as services are rendered.
Manufacturing sales and related costs are generally recognized as
products are shipped. Revenues and costs and expenses in 1994 included sales and
costs of sales of $90,460,000 and $72,717,000, respectively.
INVENTORIES. Manufacturing inventories are stated principally at lower of
first-in, first-out cost or market. Drilling and aviation materials and supplies
are carried at average cost.
STATEMENT OF CASH FLOWS. The Company generally considers all highly liquid
instruments with a maturity of three months or less when purchased to be cash
equivalents.
Noncash financing activities consisted of the issuance of $41,656,000 7%
promissory notes in connection with the acquisition of the net assets of
Marathon LeTourneau Company in 1994, the issuance of $10,300,000 Series III
Floating Rate Convertible Subordinated Debentures in 1994 and the conversion of
$1,000,000 principal amount of Series I Floating Rate Convertible Subordinated
Debentures into 173,913 shares of common stock in 1993. See Notes 2 and 3.
PROPERTY AND DEPRECIATION. For financial reporting purposes, the Company
computes depreciation using the straight-line method over the estimated useful
lives of the related assets as follows:
Salvage
Years Value
-------------------------------------------------------------------------------
Marine drilling equipment:
Semi-submersible 15 20%
Cantilever jack-ups 15 20%
Conventional jack-ups 12 20%
Barges 12 20%
Land drilling equipment 8 to 12 20%
Drill pipe and tubular equipment 4 10%
Aviation equipment:
Aircraft 7 to 10 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
================================================================================
The Company depreciates its equipment from the date placed in service
until the equipment is sold or becomes fully depreciated.
The Company capitalizes, during the construction period, an allocation
of the interest cost incurred during the period required to complete the asset.
Engineering salaries and other expenses related to the construction of drilling
equipment are also capitalized.
Expenditures for new property or enhancements to existing property are
capitalized. Expenditures for routine maintenance and major repairs are charged
to operations as incurred. See Note 10.
INCOME TAXES. Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109")
20
11
under which deferred income tax assets and liabilities reflect the future tax
consequences of differences between the financial statement and tax bases of
assets and liabilities. The cumulative effect of adopting SFAS 109 on the
Company's 1993 consolidated financial statements was not significant. In 1992,
the Company provided for income taxes under Accounting Principles Board Opinion
No. 11, which was superseded by SFAS 109.
EARNINGS (LOSS) PER COMMON SHARE. Earnings (loss) per share amounts are
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the year. Shares issuable upon conversion of the
Series I, Series II and Series III Floating Rate Convertible Subordinated
Debentures are excluded from the computation because their effect is
antidilutive. Additionally, shares issuable upon the exercise of stock options
are excluded because their effect is insignificant.
RECLASSIFICATIONS. Certain reclassifications have been made in the 1993 and
1992 amounts to conform with the 1994 presentations.
2. LONG-TERM DEBT
--------------------------------------------------------------------------------
Long-term debt consisted of (in thousands):
December 31, 1994 1993
--------------------------------------------------------------------------------
11 7/8% Senior Notes due 2001 $200,000 $200,000
Nonrecourse note payable in
quarterly installments through
1994 at various rates 7,857
Nonrecourse notes payable in quarterly
installments through 1998 with a
final balloon payment due at
maturity; bearing interest at 7% and
collateralized by two aircraft costing
approximately $3,600,000 3,087 3,357
Nonrecourse notes payable due 1999
bearing interest at 7% 41,656
Series I subordinated convertible
debentures due 1996 bearing interest
at 1/2% above prime rate 450 450
Series II subordinated convertible
debenture due 1997 bearing interest
at 1/2% above prime rate 3,600 3,600
--------------------------------------------------------------------------------
Total 248,793 215,264
Less current maturities 289 8,127
--------------------------------------------------------------------------------
Remainder $248,504 $207,137
================================================================================
Maturities of long-term debt for the five years ending December 31, 1999
are as follows: 1995 -- $289,000, 1996 -- $759,000, 1997 -- $3,932,000, 1998 --
$2,157,000 and 1999 -- $41,656,000.
The 11 7/8% Senior Notes due 2001 may be redeemed early, in whole or in
part from time to time at the Company's option, beginning December 1, 1996, upon
payment of a premium of 6% and descending 2% annually from that date to December
1, 1999, when the Company may redeem them at the principal amount.
In January 1993, the Company entered into a five-year nonrecourse loan
agreement with a bank to finance the purchase of two fixed-wing aircraft for
$3,560,000. The resulting notes payable are collateralized by the aircraft and
bear a fixed interest rate of 7%. The notes will be repaid in quarterly
installments through 1998, with a final balloon payment due at maturity.
In February 1994, in connection with the acquisition of net
manufacturing assets, the Company issued $41,656,000 in 7% promissory notes due
in 1999. See Note 1 for further information.
The $450,000 principal amount of Series I Floating Rate Convertible
Subordinated Debentures is convertible into $450,000 Series I Preferred Stock,
which may be converted into an aggregate of 78,261 shares of the Company's
common stock. At December 31, 1994, the interest rate was 9%. See Note 3 for
further information.
The $3,600,000 principal amount of the Series II Floating Rate
Convertible Subordinated Debenture is convertible into $3,600,000 Series II
Preferred Stock, which may be converted into an aggregate of 400,000 shares of
the Company's common stock. At December 31, 1994, the interest rate was 9%. See
Note 3 for further information.
In November 1994, the Company issued $10,300,000 principal amount of
Series III Floating Rate Convertible Subordinated Debentures. The debentures are
convertible into $10,300,000 Series III Preferred Stock, which may be converted
into an aggregate of 1,525,926 shares of the Company's common stock. The
debentures were issued in exchange for promissory notes containing provisions
for setoff. 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.
Interest payments for 1994, 1993 and 1992 were $26,900,000, $24,867,000
and $32,965,000, respectively.
Certain debt agreements of the Company contain provisions that require
an excess of current assets over current liabilities, require an excess of
stockholders' equity over consolidated funded indebtedness, and restrict
investments, sale/leaseback transactions, mergers, consolidations, sales of
assets, borrowings, creation of liens, purchases of the Company's capital stock,
and present and future common stock dividend payments. See Note 5 for further
information.
3. STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
The Company has two nonqualified stock option plans through which options have
been granted to certain key employees.
Under the terms of the Company's 1980 Nonqualified Stock Option Plan
(the "1980 Plan"), the Board of Directors granted options to purchase a total of
1,000,000 shares of the Company's common stock. The Board of Director's
authority to grant additional options under the 1980 Plan expired on January 25,
1990.
Under the original terms of the 1988 Nonqualified Stock Option Plan (the
"1988 Plan"), the Board of Directors could grant before January 21, 1998 options
to purchase a total of 2,000,000 shares of the Company's common stock.
Subsequently, at its April 1992 annual meeting, the stockholders of the Company
approved an
21
12
amendment to extend the term of the 1988 Plan to January 21, 2003 and to
increase to 7,000,000 the number of shares of common stock that could be issued
pursuant to options granted thereunder.
At December 31, 1994, options for 4,798,504 shares had been granted at
an exercise price of $1.00 per share and 301 active, key employees had been
granted options. Options are exercisable to the extent of 25% after one year
from date of grant, 50% after two years, 75% after three years and 100% after
four years. All options not exercised expire ten years after the date of grant.
For financial accounting purposes, the Company recognizes compensation
expense with respect to any nonqualified option in an amount equal to the
difference between the market price per share and the option price per share on
the date of grant. The compensation is recorded as expense over the period of
time during which the employee performs services to earn the right to exercise
the option and an equal amount is credited to additional paid-in capital.
Stock option activity was as follows:
Number of Shares
-----------------------------------------------
1994 1993 1992
--------------------------------------------------------------------------------
Stock options outstanding,
January 1 1,616,325 1,490,475 1,492,900
Changes during the year:
Granted, at $1.00
per share 982,000 707,250 344,750
Exercised (387,675) (530,650) (318,675)
Forfeited (28,000) (50,750) (28,500)
--------------------------------------------------------------------------------
Stock options outstanding,
December 31 2,182,650 1,616,325 1,490,475
================================================================================
Stock options exercisable,
December 31 440,338 317,137 389,975
================================================================================
Stock options available for
grant, December 31:
1988 Plan 3,463,821 4,417,821 5,074,321
================================================================================
The Rowan Companies, Inc. 1986 Convertible Debenture Incentive Plan (the
"Plan") provides for the issuance to key employees of up to $20,000,000 in
aggregate principal amount of the Company's floating rate convertible
subordinated debentures. The debentures are initially convertible into
preferred stock which has no voting rights (except as required by law or the
Company's charter), no dividend and a nominal liquidation preference. The
preferred stock is immediately convertible into common stock.
Since the inception of the plan, debentures in the aggregate principal
amount of $19,925,000 have been issued by the Company. Out of the initial issue
of $5,125,000 principal amount of debentures in 1986, $450,000 were outstanding
at December 31, 1994 and are ultimately convertible into common stock at
$5.75 per share for each $1,000 principal amount of debenture at any time
through June 13, 1996, unless earlier redeemed or the conversion privilege is
terminated. In 1987, the Company issued a debenture in the principal amount of
$4,500,000, of which $3,600,000 was outstanding at December 31, 1994. This
residual amount is ultimately convertible into common stock at $9.00 per share
for each $1,000 principal amount of debenture at any time through September 10,
1997, unless earlier redeemed or the conversion privilege is terminated. In
November 1994, the Company issued debentures in the principal amount of
$10,300,000 which are ultimately convertible into common stock at $6.75 per
share for each $1,000 principal amount of debenture through November 30, 2004,
as follows, unless earlier redeemed or the conversion privilege is terminated:
$2,350,000 on or after November 30, 1995; $4,800,000 on or after November 30,
1996; $7,500,000 on or after November 30, 1997 and $10,300,000 on or after
November 30, 1998.
On February 25, 1992, the Company adopted a Stockholder Rights
Agreement to protect against coercive takeover tactics. The agreement provides
for the distribution to the Company'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 the Company at an exercise price of $30. In addition, under certain
circumstances, each Right will entitle the holder to purchase securities of
the Company or an acquiring entity at 1/2 market value. The Rights are
exercisable only if a person or group acquires 15% or more of the Company'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 February 25,
2002. The Company may generally redeem the Rights at a price of $.01 per Right
at any time until the 10th day following public announcement that a 15%
position has been acquired.
In June 1993, the Company sold 10,000,000 shares of its common stock
in a public offering. Net proceeds of the sale were $91,993,000 after deducting
underwriting commissions and direct offering costs totaling $4,257,000.
4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of (in thousands):
December 31, 1994 1993
--------------------------------------------------------------------------------
Gain on sale/leaseback transactions $ 3,198 $ 3,198
Accrued liabilities:
Income taxes 577 596
Compensation and related employee costs 15,803 9,082
Interest 2,195 2,018
Taxes and other 15,185 5,281
--------------------------------------------------------------------------------
Total $36,958 $20,175
================================================================================
5. RESTRICTIONS ON RETAINED EARNINGS
--------------------------------------------------------------------------------
Under the terms of certain debt agreements, the Company has agreed not
to declare dividends or make any distribution on its common stock unless the
total dividends or distributions subsequent to December 31, 1991 are less than
the sum of a) $20,000,000, plus b) 50% of cumulative consolidated net income, if
positive, subsequent to December 31,
22
13
1991, plus c) the net proceeds from the sale of any class of capital stock
after December 31, 1991, less d) 100% of cumulative consolidated net income, if
negative, subsequent to December 31, 1991. Under this dividend restriction, the
Company had a computed positive balance of $1,992,000 at December 31, 1994.
Subject to these restrictions, the Board of Directors will determine payment,
if any, of future dividends or distributions in light of conditions then
existing, including the Company's earnings, financial condition and
requirements, opportunities for reinvesting earnings, business conditions and
other factors.
6. BENEFIT PLANS
--------------------------------------------------------------------------------
Since 1952, the Company has sponsored defined benefit pension plans covering
substantially all of its employees. The benefits are based on an employee's
years of service and average earnings for the five highest consecutive calendar
years of compensation during the ten years immediately preceding retirement.
The Company's policy is to fund the minimum amount required by the Internal
Revenue Code.
The following table sets forth the plans' funded status and the amounts
recognized in the Company's consolidated balance sheet and includes, at
December 31, 1994, amounts related to a separate plan covering manufacturing
employees that was assumed in the acquisition of net manufacturing assets (in
thousands):
December 31, 1994 1993
--------------------------------------------------------------------------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
Vested benefits $ 80,539 $ 76,974
================================================================================
Total benefits $ 87,380 $ 83,960
================================================================================
Plan assets at fair value $ 88,650 $ 89,843
Projected benefit obligation
for service rendered to date 99,275 98,263
--------------------------------------------------------------------------------
Plan assets less than projected
benefit obligation (10,625) (8,420)
Unrecognized net loss 2,941 4,091
Unrecognized net benefits being
recognized over 15 years (6,057) (7,268)
Unrecognized prior service cost 671 892
--------------------------------------------------------------------------------
Accrued pension cost included in
Other Liabilities $(13,070) $(10,705)
================================================================================
The plans' assets consist primarily of equity securities and U.S.
Treasury bonds and notes and, at December 31, 1994, included 1,500,000 shares
of the Company's common stock at an average cost of $4.81 per share.
At December 31, 1994, $12,120,000 of the plans' assets were invested
in a dedicated bond fund. The plans had a basis in these assets of $10,757,000
yielding approximately 6.4% to maturity.
Net pension costs included the following components (in thousands):
1994 1993 1992
--------------------------------------------------------------------------------
Service cost-benefits
earned during the period $ 4,784 $ 3,982 $ 3,632
Interest cost on projected
benefit obligation 7,879 6,796 6,334
Actual return on plan assets 7,264 (8,580) (9,590)
Net amortization and deferral (17,105) (5) 1,948
--------------------------------------------------------------------------------
Net periodic pension cost $ 2,822 $ 2,193 $ 2,324
================================================================================
Assumptions used in calculations were:
1994 1993 1992
--------------------------------------------------------------------------------
Discount rate 8.75% 7.5% 8.5%
Rate of compensation increase 4.0% 4.5% 4.5%
Expected rate of return on
plan assets 9.0% 9.0% 9.0%
================================================================================
The Company also sponsors pension restoration plans to supplement the
benefits for certain key executives that would otherwise be limited by section
415 of the Internal Revenue Code. The plans are unfunded and had projected
benefit obligations at December 31, 1994 and 1993 of $2,404,000 and $2,246,000,
respectively. The net pension liabilities included in the Company's
consolidated balance sheet were $1,497,000 and $1,118,000 at December 31, 1994
and 1993, respectively. Net pension cost was $437,000 in 1994, $408,000 in 1993
and $557,000 in 1992.
In addition to providing pension benefits, the Company provides
certain health care and life insurance benefits for retired employees.
Substantially all of the Company's drilling and aviation employees may become
eligible for those benefits if they reach normal retirement age while working
for the Company.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 "Employer's Accounting for Postretirement
Benefits Other Than Pensions," which requires accrual of the cost of retiree
health care and other postretirement benefits during the years an employee
provides services. Prior to 1993, the Company recognized the cost of these
benefits as they were paid. The effect of adopting the statement for the year
ended December 31, 1993 was to increase net periodic postretirement benefit
cost and the net loss by approximately $3,000,000 ($.04 per share).
23
14
The following table sets forth the plan's status and the amounts
recognized in the Company's consolidated balance sheet (in thousands):
December 31, 1994 1993
--------------------------------------------------------------------------------
Accumulated postretirement
benefit obligations:
Retirees $ 8,081 $ 8,980
Fully eligible active plan participants 5,388 5,880
Other active plan participants 9,057 9,464
--------------------------------------------------------------------------------
Total benefits 22,526 24,324
Unrecognized transition obligation
being recognized over 20 years (17,022) (17,967)
Unrecognized net gain (loss) 1,195 (3,321)
--------------------------------------------------------------------------------
Accrued postretirement benefit cost
included in Other Liabilities $ 6,699 $ 3,036
================================================================================
The actuarially determined accumulated postretirement benefit obligation
reflects health care cost trend rates of 13% for 1994 and decreasing by 1%
annually through 2001 and a discount rate of 8.75%. A one percentage point
increase in the assumed health care cost trend rate would increase net periodic
postretirement benefit cost by approximately $729,000 and increase the
accumulated postretirement benefit obligation by approximately $3,837,000.
Net postretirement benefit cost included the following components (in
thousands):
1994 1993
--------------------------------------------------------------------------------
Service cost $ 1,475 $ 1,039
Interest cost 1,799 1,537
Net amortization and deferral 1,003 946
--------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 4,277 $ 3,522
================================================================================
Cash payments for postretirement benefits in 1994, 1993 and 1992 were
approximately $614,000, $500,000 and $856,000, respectively.
In October 1994, the Board of Directors approved the Rowan Companies,
Inc. Savings and Investment Plan in conformity with section 401(k) of the
Internal Revenue Code. The plan will commence on or about April 1, 1995 and
cover all drilling and aviation employees. Manufacturing employees are covered
by a separate plan to which the Company contributed approximately $397,000
in 1994.
7. INCOME TAXES
--------------------------------------------------------------------------------
The detail of income tax provisions (credits) is presented below (in
thousands):
1994 1993 1992
--------------------------------------------------------------------------------
Current:
Federal $ (98) $ 123 $ (82)
Foreign 145 501 707
State 268 7
--------------------------------------------------------------------------------
Total current provision 315 624 632
Deferred -- foreign and other 154 (912) (203)
--------------------------------------------------------------------------------
Total income tax provision (credit) $ 469 $(288) $ 429
================================================================================
Total income tax expense (credit) shown in the consolidated statement
of operations differs from the amount that would be computed if the income
(loss) before income taxes was multiplied by the federal income tax rate
(statutory rate) applicable in each year. The reasons for this difference
are as follows (in thousands):
1994 1993 1992
--------------------------------------------------------------------------------
Statutory rate 35% 35% 34%
Tax at statutory rate $(7,883) $(4,742) $(24,930)
Increase (decrease) in taxes resulting
from:
Limitation on utilization of tax
benefits 7,663 3,679 24,214
Additional taxes on foreign source
income 753 551 505
Nondeductible compensation expense 28 609
Alternative minimum tax (98) 123
Other -- net 34 73 31
--------------------------------------------------------------------------------
Total income tax provision (credit) $ 469 $ (288) $ 429
================================================================================
Temporary differences and carryforwards which gave rise to deferred
tax assets and liabilities at December 31, 1994 and 1993 were as follows
(in thousands):
1994 1993
--------------------------------------------------------------------------------
Deferred tax asset:
Deferred sale/leaseback gain $ 6,563 $ 7,682
Accrued pension and postretirement
benefit costs 7,454 5,109
ESOP/PAYSOP contributions 1,753 1,836
Net operating loss carryforward 95,352 91,869
Investment tax credit carryforward 56,450 58,256
Other 3,256 1,629
--------------------------------------------------------------------------------
170,828 166,381
Valuation allowance (69,031) (61,665)
--------------------------------------------------------------------------------
101,797 104,716
--------------------------------------------------------------------------------
Deferred tax liability:
Property, plant and equipment 102,113 104,974
Foreign income taxes 3,030 2,644
Other 1,122 1,412
--------------------------------------------------------------------------------
106,265 109,030
--------------------------------------------------------------------------------
Deferred tax liability - net $ 4,468 $ 4,314
================================================================================
The valuation allowance consists of investment tax credit
carryforwards and a portion of the net operating loss carryforwards which are
forecast as not being utilized prior to their statutory expiration dates.
The valuation allowance increased by $7,366,000 in 1994 primarily as a result
of the Company's loss in the current year.
At December 31, 1994, the Company had $51,441,000 of regular
investment tax credits and $5,009,000 of ESOP (Employee Stock Ownership Plan)
tax credits available for application against future federal taxes payable.
Total credits, if not utilized, will expire as follows: 1995 -- $6,954,000,
1996 -- $12,772,000, 1997 -- $11,069,000,
24
15
1998 -- $8,027,000, 1999 -- $10,110,000, 2000 -- $2,017,000 and 2001 --
$5,501,000.
At December 31, 1994, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $272,434,000 which will
expire, if not utilized, as follows: 2001 -- $88,977,000, 2002 -- $129,123,000,
2007 -- $49,047,000, 2008 -- $3,003,000 and 2009 -- $2,284,000.
Deferred income taxes not provided for undistributed earnings of foreign
subsidiaries, because such earnings are considered to be permanently invested
abroad, amounted to approximately $3,500,000 at December 31, 1994.
Loss before income taxes consisted of $(21,640,000), $(10,346,000) and
$(64,158,000) of domestic losses, and $(880,000), $(3,201,000) and $(9,166,000)
of foreign losses for 1994, 1993 and 1992, respectively.
Income tax payments exceeded refunds by $393,000 in 1994, $248,000 in
1993 and $1,493,000 in 1992.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
At December 31, 1994, the carrying amount of the Company's cash and cash
equivalents approximated fair value due to the short maturity of the
instruments. Except for the 11 7/8% Senior Notes discussed below, the carrying
amount of the Company's long-term debt was estimated to approximate its fair
value at December 31, 1994 based upon quoted market prices for similar issues.
The 11 7/8% Senior Notes had a fair value of $210,000,000 at
December 31, 1994, or a $10,000,000 premium to carrying value, based upon
the closing price quoted on the New York Stock Exchange.
9. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------------------------------------------------
During 1984, the Company entered into a sale/leaseback transaction whereby the
Company sold the Rowan-Halifax, a cantilever jack-up, for $66,500,000 in cash
and leased the rig back under a 15-year operating lease at an effective
interest rate of 9.3%. In 1985, the Company sold a similar jack-up, the Cecil
Provine, for $60,000,000 in cash and entered into a 15-year operating lease at
an effective interest rate of 8.0%. Under each lease agreement, at the end of
the basic 15-year lease, the Company has an option to purchase the rig at the
then fair market value, terminate the lease, or renew the lease at the lesser
of a) a fixed rental renewal of 50% of the weighted average amount of the semi-
annual installments during the basic term, or b) a fair market rental renewal.
Each transaction has resulted in a gain which has been deferred for financial
statement purposes and is being recognized over its respective lease term.
Total payments to be made under the sale/leaseback agreements are being
expensed on a straight-line basis though the payments themselves are variable.
The excess of inception-to-date sale/leaseback expenses over related payments
was $14,089,000 and $15,549,000 at December 31, 1994 and 1993, respectively.
The Company has operating leases covering aircraft hangars, offices and
computer equipment and the sale/leaseback rigs. Net rental expense under all
operating leases was $20,756,000 in 1994, $17,633,000 in 1993 and $18,746,000
in 1992.
As of December 31, 1994, the future minimum payments to be made under
noncancelable operating leases were (in thousands):
1995 $ 21,907
1996 20,499
1997 22,653
1998 18,549
1999 21,007
Later Years 18,254
----------------------------------------------------------
Total $122,869
==========================================================
The Company estimates 1995 capital expenditures at between $30,000,000
and $35,000,000.
In management's opinion, at December 31, 1994, there were no
contingencies, claims or lawsuits against the Company which are expected to
have a material adverse effect on its financial position or results of
operations.
10. SEGMENTS OF BUSINESS
--------------------------------------------------------------------------------
The Company has three principal segments of business: contract and turnkey
drilling of oil and gas wells, both onshore and offshore ("Drilling"), charter
helicopter and fixed-wing aircraft services ("Aviation") and, beginning in
1994, the manufacture of heavy equipment for the mining, timber and
transportation industries, alloy steel and steel plate and marine drilling
equipment ("Manufacturing").
Drilling services are provided in both domestic and foreign areas.
Aviation services include charter airline, flightseeing and forest fire control
services in Alaska as well as oil and gas related services in the Gulf of
Mexico. Manufacturing operations are conducted in Longview, Texas, but sales and
services are carried out throughout the United States and in many foreign
locations.
Total revenues reported by industry segments consist principally of
revenues from unaffiliated customers. The Company had revenues, primarily from
drilling operations, of 10% or more of consolidated revenues from one customer
in each of 1994 (10%), 1993 (17%) and 1992 (11%).
The Company 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 entities. The addition of
manufacturing operations in 1994 has diversified the Company's operations and
attendant credit risk. Further, the Company has the ability to relocate its
major drilling and aviation assets over significant distances on a timely
basis in response to changing market conditions.
Assets are identified to a segment by their direct use. The Company
classifies its drilling rigs for segment purposes as domestic or foreign based
upon the drilling rig's country of registry. Accordingly, drilling rigs
registered in the United States are classified with domestic operations and
revenues generated from foreign operations of these rigs are considered export
revenues. Revenues generated by foreign-registered drilling rigs from
operations offshore the United States are classified as foreign revenues.
Assuming revenues derived from all drilling operations within the United
States, both onshore and offshore, were treated as domestic revenues and
export revenues were treated as foreign revenues, revenues from foreign
drilling operations would have been $84,343,000 in 1994.
25
16
Domestic drilling operations included export revenues of
$84,025,000 in 1994, $79,697,000 in 1993 and $91,563,000 in 1992. Except for
$34,533,000 in 1994, $38,005,000 in 1993 and $30,552,000 in 1992, from other
foreign areas, such export revenues were generated from North Sea operations.
Manufacturing operations in 1994 included export sales of $34,543,000.
At December 31, 1994, 35 drilling rigs, 18 of which were marine rigs,
with a carrying value of $213,454,000 were located in the United States and
6 marine drilling rigs having a carrying value of $164,175,000 were located
in foreign jurisdictions.
Information concerning the Company's operations is summarized by
segment as follows (in thousands):
1994 1993 1992
-----------------------------------------------------------------------------------------------
Revenues:
Drilling services:
Domestic $217,395 $243,993 $143,818
Foreign 28,522 27,029 18,303
Aviation services 95,578 82,174 87,877
Manufacturing sales and services 96,664
-----------------------------------------------------------------------------------------------
Consolidated $438,159 $353,196 $249,998
===============================================================================================
Operating profit (loss):
Drilling services:
Domestic $ 4,771 $ 22,856 $(36,726)
Foreign (4,597) (3,803) (3,688)
Aviation services 4,614 2,248 1,882
Manufacturing sales and services 7,667
-----------------------------------------------------------------------------------------------
Consolidated 12,455 21,301 (38,532)
Gain on disposals of property, plant and equipment 1,344 1,955 731
Interest and other income 5,073 2,498 2,823
General and administrative (13,862) (13,940) (12,092)
Interest expense (27,530) (25,361) (26,254)
-----------------------------------------------------------------------------------------------
Income (loss) before income taxes $(22,520) $(13,547) $(73,324)
===============================================================================================
Identifiable assets at December 31:
Drilling services:
Domestic $531,990 $584,583 $491,456
Foreign 40,863 41,687 50,061
Aviation services 148,710 138,993 142,784
Manufacturing sales and services 83,616
-----------------------------------------------------------------------------------------------
Total assets at December 31 $805,179 $765,263 $684,301
===============================================================================================
Certain other financial information for each of the Company's principal
business segments is summarized as follows (in thousands):
1994 1993 1992
-----------------------------------------------------------------------------------------------
Depreciation and amortization:
Drilling $38,166 $40,874 $39,719
Aviation 11,009 11,044 11,648
Manufacturing 1,615
Capital expenditures:
Drilling 17,033 12,741 31,014
Aviation 14,657 9,248 8,514
Manufacturing 11,687
Maintenance and repairs:
Drilling 26,499 22,129 19,515
Aviation 16,138 10,197 13,718
Manufacturing 7,836
==============================================================================================
11. RELATED PARTY TRANSACTIONS
The chairman of the board of one of the Company's drilling customers served as
a director of the Company until 1993. Transactions with this customer involved
day rates and operating costs which were comparable to those experienced by the
Company in connection with third party contracts for similar rigs. Because of
the aforementioned relationship, each drilling contract between the Company and
the customer was reviewed and ratified by the Board of Directors of the Company
during his tenure as a board member. Related revenues were $3,469,000 in 1993
and $5,284,000 in 1992 and trade receivables at December 31, 1993 included
$216,000 from this customer.
In 1993, a director of the Company was an investment banker with one
of the underwriters of the Company's 10,000,000 share common stock offering.
That underwriter received $2,876,000 in commissions from the offering.
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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
--------------------------------------------------------------------------------
The following unaudited information for the quarters ended March 31, June 30,
September 30 and December 31, 1993 and 1994 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
--------------------------------------------------------------------------------
1993:
Revenues $ 73,540 $ 82,093 $106,629 $ 90,934
Operating profit (loss) (4,093) 1,195 16,385 7,814
Net income (loss) (13,509) (8,197) 8,175 272
Earnings (loss) per common share (.18) (.11) .10 .00
--------------------------------------------------------------------------------
1994:
Revenues $100,704 $105,380 $129,219 $102,856
Operating profit (loss) 3,432 3,596 13,859 (8,432)
Net income (loss) (5,958) (5,862) 5,646 (16,815)
Earnings (loss) per common share (.07) (.07) .07 (.20)
================================================================================
The sum of the per share amounts for the quarters may not equal the
per share amounts for the full years since the quarterly and full year per
share computations are made independently.
COMMON STOCK PRICE RANGE,
CASH DIVIDENDS AND STOCK SPLITS
--------------------------------------------------------------------------------
The price range below is as reported by the New York Stock Exchange on the
Composite Tape. On March 1, 1995 there were approximately 3,800 holders of
record.
Quarter 1994 1993
--------------------------------------------------------------------------------
High Low High Low
--------------------------------------------------------
First $9.13 $6.88 $10.00 $6.63
Second 8.75 6.63 10.75 8.63
Third 9.25 7.00 10.38 7.63
Fourth 7.88 5.75 10.63 7.50
================================================================================
The Company did not pay any dividends on its common stock during 1994
and 1993. 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.
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