1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ ROWAN COMPANIES, INC. --------------------- (Exact name of registrant as specified in its charter) Delaware 1-5491 75-0759420 -------- ------ ---------- (State or other jurisdiction of Commission File (I.R.S. Employer incorporation or organization) Number Identification No.) 5450 Transco Tower, 2800 Post Oak Boulevard, Houston, Texas 77056-6196 - ----------------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (713) 621-7800 -------------- Registrant's telephone number, including area code Inapplicable ------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of common stock, $.125 par value, outstanding at October 31, 1996 was 85,539,572. 2 ROWAN COMPANIES, INC. INDEX Page No. -------- PART I. Financial Information: Consolidated Balance Sheet -- September 30, 1996 and December 31, 1995 . . . . . . . . 2 Consolidated Statement of Operations -- Three and Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statement of Cash Flows -- Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements . . . . . . . 6 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 8 PART II. Other Information: Exhibits and Reports on Form 8-K . . . . . . . . . . . 12 3 PART I. FINANCIAL INFORMATION ROWAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS EXCEPT SHARE AMOUNTS) September 30, December 31, 1996 1995 ------------- ------------ ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents................................................. $ 75,233 $ 90,338 Receivables - trade and other............................................. 114,323 87,811 Inventories - at cost: Raw materials and supplies.............................................. 59,061 51,898 Work-in-progress........................................................ 28,047 23,015 Finished goods.......................................................... 3,236 708 Prepaid expenses.......................................................... 11,401 11,430 Cost of turnkey drilling contracts in progress............................ 13,044 8,259 ---------- ---------- Total current assets................................................ 304,345 273,459 ---------- ---------- INVESTMENT IN AND ADVANCES TO 49% OWNED COMPANIES........................... 28,362 29,770 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT - at cost: Drilling equipment........................................................ 954,241 944,021 Aircraft and related equipment............................................ 188,929 189,954 Manufacturing plant and equipment......................................... 33,140 25,037 Other property and equipment.............................................. 94,321 91,089 Construction in progress.................................................. 43,842 ---------- ---------- Total............................................................... 1,314,473 1,250,101 Less accumulated depreciation and amortization 797,775 763,062 ---------- ---------- Property, plant and equipment - net ................................ 516,698 487,039 ---------- ---------- OTHER ASSETS AND DEFERRED CHARGES........................................... 7,749 12,220 ---------- ---------- TOTAL............................................................... $ 857,154 $ 802,488 ========== ========== See Notes to Consolidated Financial Statements. -2- 4 September 30, December 31, 1996 1995 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) CURRENT LIABILITIES: Note payable and current maturities of long-term debt............. $ 4,276 $ 7,039 Accounts payable - trade.......................................... 32,846 21,774 Other current liabilities......................................... 59,831 44,058 ----------- ----------- Total current liabilities.................................... 96,953 72,871 ----------- ----------- LONG-TERM DEBT - less current maturities........................... 238,402 247,744 ----------- ----------- OTHER LIABILITIES.................................................. 36,109 36,227 ----------- ----------- DEFERRED CREDITS: Income taxes...................................................... 4,502 4,146 Gain on sale/leaseback transactions............................... 9,953 12,345 ----------- ----------- Total deferred credits....................................... 14,455 16,491 ----------- ----------- 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 86,974,216 shares at September 30, 1996 and 86,353,792 shares at December 31, 1995........................................... 10,872 10,794 Additional paid-in capital......................................... 400,362 396,092 Retained earnings.................................................. 62,486 24,754 Less cost of 1,457,919 treasury shares............................. 2,485 2,485 ----------- ----------- Total stockholders' equity................................... 471,235 429,155 ----------- ----------- TOTAL........................................................ $ 857,154 $ 802,488 =========== =========== See Notes to Consolidated Financial Statements. -3- 5 ROWAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) For The Three Months For The Nine Months Ended September 30, Ended September 30, ----------------------- ------------------------ 1996 1995 1996 1995 --------- -------- --------- --------- (Unaudited) REVENUES: Drilling services........................................... $ 77,927 $ 65,738 $ 226,000 $ 174,529 Manufacturing sales and services............................ 36,538 37,107 104,205 100,165 Aircraft services........................................... 40,218 31,498 88,452 69,828 --------- -------- --------- --------- Total..................................................... 154,683 134,343 418,657 344,522 --------- -------- --------- --------- COSTS AND EXPENSES: Drilling services........................................... 47,674 55,471 150,478 151,517 Manufacturing sales and services............................ 33,710 33,491 95,232 91,986 Aircraft services........................................... 28,892 22,606 72,370 60,940 Depreciation and amortization............................... 12,083 12,591 36,113 38,271 General and administrative.................................. 4,046 3,770 11,963 10,992 --------- -------- --------- --------- Total..................................................... 126,405 127,929 366,156 353,706 --------- -------- --------- --------- INCOME (LOSS) FROM OPERATIONS................................. 28,278 6,414 52,501 (9,184) --------- -------- --------- --------- OTHER INCOME (EXPENSE): Interest expense............................................ (6,903) (6,933) (20,714) (20,771) Less: interest capitalized.................................. 711 1,270 Gain on disposals of property, plant and equipment.......... 165 153 2,171 1,230 Interest income............................................. 875 1,071 3,124 3,825 Other - net................................................. 93 170 351 408 --------- -------- --------- --------- Other income (expense) - net.............................. (5,059) (5,539) (13,798) (15,308) --------- -------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES............................. 23,219 875 38,703 (24,492) Provision for income taxes.................................. 509 212 971 286 --------- -------- --------- --------- NET INCOME (LOSS)............................................. $ 22,710 $ 663 $ 37,732 $ (24,778) ========= ======== ========= ========= EARNINGS (LOSS) PER COMMON SHARE (Note 4)..................... $ 0.26 $ 0.01 $ 0.43 $ (0.29) ========= ======== ========= ========= See Notes to Consolidated Financial Statements. -4- 6 ROWAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) For The Nine Months Ended September 30, ---------------------------- 1996 1995 ---------- ----------- (Unaudited) CASH PROVIDED BY (USED IN): Operations: Net income (loss)........................................................ $ 37,732 $ (24,778) Noncash charges (credits) to net income (loss): Depreciation and amortization........................................... 36,113 38,271 Gain on disposals of property, plant and equipment...................... (2,171) (1,230) Compensation expense.................................................... 3,510 3,153 Change in sale/leaseback payable........................................ (4,258) (3,138) Amortization of sale/leaseback gain..................................... (2,392) (2,392) Provision for pension and postretirement benefits....................... 6,510 5,597 Other - net............................................................. 2,072 (767) Changes in current assets and liabilities: Receivables- trade and other............................................ (26,512) (7,531) Inventories............................................................. (14,723) (9,373) Other current assets.................................................... (2,019) (17,337) Current liabilities..................................................... 16,755 10,440 Net changes in other noncurrent assets and liabilities................... 3,657 894 ---------- ----------- Net cash provided by (used in) operations................................. 54,274 (8,191) ---------- ----------- Investing activities: Property, plant and equipment additions.................................. (71,486) (20,457) Repayments from affiliates............................................... 32 3,676 Proceeds from disposals of property, plant and equipment................ 3,583 2,138 ---------- ----------- Net cash used in investing activities..................................... (67,871) (14,643) ---------- ----------- Financing activities: Repayments of borrowings................................................. (2,096) (215) Other - net.............................................................. 588 488 ---------- ----------- Net cash provided by (used in) financing activities....................... (1,508) 273 ---------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS..................................... (15,105) (22,561) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 90,338 111,070 ---------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 75,233 $ 88,509 ========== =========== See Notes to Consolidated Financial Statements. -5- 7 ROWAN COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements of the Company included herein have been prepared without audit pursuant to generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. Certain information and notes have been condensed or omitted pursuant to such rules and regulations and the Company believes that the disclosures included herein are adequate. It is suggested that these condensed financial statements be read in conjunction with the financial statements and related notes included in the Company's 1995 Annual Report to Stockholders incorporated by reference in the Form 10-K for the year ended December 31, 1995. 2. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications, which are of a normal recurring nature, necessary to present fairly its financial position as of September 30, 1996 and December 31, 1995, and the results of its operations for the three and nine month periods ended September 30, 1996 and 1995 and its cash flows for the nine months ended September 30, 1996 and 1995. 3. The results of operations for the three and nine month periods ended September 30, 1996 are not necessarily indicative of the results to be expected for the full year. -6- 8 4. Computation of primary and fully diluted earnings (loss) per share is as follows (in thousands except per share amounts): For The For The Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- --------------------------- 1996 1995 1996 1995 ----------- ------------ --------- ----------- Weighted average shares of common stock outstanding ...................................... 85,495 84,727 85,261 84,517 Stock options and related (treasury stock method)......... 2,195 949(A) 1,828 327 (A) ----------- ------------ --------- ----------- Weighted average shares for primary earnings (loss) per share calculation................... 87,690 85,676 87,089 84,844 Stock options and related (treasury stock method)......... 241 466 241 (A) Shares issuable from assumed conversion of the Series II Convertible Subordinated Debenture .............................................. 400 400(A) 400 400 (A) ----------- ------------ --------- ----------- Weighted average shares for fully diluted earnings (loss) per share calculation .................. 88,331 86,076 87,955 85,485 =========== ============ ========= =========== Net income (loss) for primary calculation................. $ 22,710 $ 663 $ 37,732 $ (24,778) Subordinated debenture interest, net of income tax effect ...................................... 80 96 242 279 ----------- ------------ --------- ----------- Net income (loss) for fully diluted calculation ............................................ $ 22,790 $ 759 $ 37,974 $ (24,499) =========== ============ ========= =========== Earnings (loss) per share: Primary ................................................ $ .26 $ .01 $ .43 $ (.29) =========== ============ ========= =========== Fully diluted .......................................... $ .26 $ .01 $ .43 $ (.29) =========== ============ ========= =========== (A) Included in accordance with Regulation S-K Item 601 (b) (11) although not required to be provided by Accounting Principles Board ("APB") Opinion No. 15 because the effect is insignificant. Earnings (loss) per share computed under APB Opinion No. 15 is as set forth on the Consolidated Statement of Operations. -7- 9 ROWAN COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995 The Company achieved net income of $37.7 million in the first nine months of 1996 compared to a net loss of $24.8 million in the same period of 1995. The improvement in financial results was primarily due to increased drilling day rates and fleet utilization, in addition to the enhanced contribution made by the Company's aviation operations. A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the first nine months of 1996 and 1995, respectively, is reflected below (dollars in thousands): Drilling Manufacturing Aviation Consolidated --------------------- ---------------------- --------------------- ---------------------- 1996 1995 1996 1995 1996 1995 1996 1995 --------- --------- --------- --------- -------- -------- --------- --------- Revenues $ 226,000 $ 174,529 $ 104,205 $ 100,165 $ 88,452 $ 69,828 $ 418,657 $ 344,522 Percent of Consolidated Revenues 54% 51% 25% 29% 21% 20% 100% 100% Operating Profit (Loss)(1) $ 49,637 $ (5,215) $ 7,196 $ 6,954 $ 7,631 $ 69 $ 64,464 $ 1,808 - ----------------------------------------------------------------------------- (1) Income (loss) from operations before deducting general and administrative expenses. As reflected above, the Company's consolidated operating results improved by $62.7 million when the first nine months of 1996 is compared to the same period of 1995. Day rate drilling revenues increased by $75.0 million between periods as the Company's offshore fleet achieved a 36% increase in average rates, or about $9,300 per day, while overall utilization improved from 88% to 97%. Offshore day rates began to improve in the second quarter of 1995 due to increasing demand for drilling services brought on by strengthening oil and natural gas prices. The Company's day rate drilling expenses do not typically fluctuate in direct correlation with revenues and increased by only $21.0 million between periods. Turnkey drilling generated revenues of $10.7 million and an incremental operating loss of $1.3 million in the first nine months of 1996, compared to $34.3 million and a $.2 million profit, respectively, in the same period of 1995. The Company's manufacturing operations achieved a 4% increase in revenues between periods and consistent profitability while making meaningful progress on the construction of Rowan Gorilla V. Manufacturing operations exclude approximately $20.7 million of products and services provided to the Company's drilling division during the first nine months of 1996, including more than $17 million related to Gorilla V, as compared to $3.7 million in the same period of 1995. -8- 10 The Company's aviation operations achieved significant improvements in revenues and profitability between periods as demand for the Company's flying services increased in all markets, especially in the commuter airline and forest fire control areas. Three Months Ended September 30, 1996 Compared to Three Months Ended September 30, 1995 The Company achieved net income of $22.7 million in the third quarter of 1996 compared to $.7 million in the same period of 1995. The improvement in financial results was primarily due to increased drilling day rates coupled with continued strong fleet utilization, in addition to the enhanced contribution made by the Company's aviation operations. A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the third quarter of 1996 and 1995, respectively, is reflected below (dollars in thousands): Drilling Manufacturing Aviation Consolidated --------------------- ---------------------- --------------------- ---------------------- 1996 1995 1996 1995 1996 1995 1996 1995 --------- --------- --------- --------- -------- -------- --------- --------- Revenues $ 77,927 $ 65,738 $ 36,538 $ 37,107 $ 40,218 $ 31,498 $ 154,683 $ 134,343 Percent of Consolidated Revenues 50% 49% 24% 28% 26% 23% 100% 100% Operating Profit (Loss) $ 21,665 $ 1,039 $ 2,130 $ 3,185 $ 8,529 $ 5,960 $ 32,324 $ 10,184 As reflected above, the Company's consolidated operating results improved by $22.1 million when the third quarter of 1996 is compared to the third quarter of 1995. Day rate drilling revenues increased by $23.9 million between periods as the Company's offshore fleet achieved a 43% increase in average rates, or about $11,200 per day, while overall utilization improved from 92% to 98%. Offshore day rates began to improve in the second quarter of 1995 due to increasing demand for drilling services brought on by strengthening oil and natural gas prices. The Company's day rate drilling expenses do not typically fluctuate in direct correlation with revenues and increased by only $4.0 million between periods. Turnkey drilling generated revenues of $2.5 million and an incremental operating profit of $.3 million in the third quarter of 1996 as compared to $14.3 million and $.2 million, respectively, in the third quarter of 1995. The Company's manufacturing operations achieved slightly less volume between quarters as meaningful progress on the construction of Rowan Gorilla V was attained. Manufacturing operations exclude approximately $9.7 million of products and services provided to the Company's drilling division during the third quarter of 1996, as compared to $.6 million in the third quarter of 1995. The Company's aviation operations experienced the normal seasonal improvement in flying activity in Alaska during both periods, but third quarter 1996 operating results were further enhanced as demand for the Company's flying services increased in all markets, especially in the commuter airline and forest fire control areas. -9- 11 Perceptible trends in the offshore drilling markets in which the Company is currently operating and the number of Company-operated rigs in each of those markets are as follows: AREA RIGS PERCEPTIBLE INDUSTRY TRENDS ---- ---- --------------------------- Gulf of Mexico 16 Continuing high levels of exploration and development activity North Sea 4 Continuing high levels of drilling activity for jack-up rigs Eastern Canada 1 Stable demand The preceding table does not reflect the impending relocation of Rowan Gorilla IV to the North Sea from the Gulf of Mexico. Perceptible trends in the aviation markets in which the Company is currently operating and the number of Company aircraft based in each of those markets are as follows: COMPANY-OWNED AREA AIRCRAFT (1) PERCEPTIBLE INDUSTRY TRENDS ---- -------------- --------------------------- Alaska 62 Normal seasonal decline Gulf of Mexico 43 Moderately improving market conditions China 2 Generally stable flight support activity North Sea (Dutch) 9 Generally stable flight support activity North Sea (U. K.) 5 Generally stable flight support activity - ------------------------------------------- (1) Includes 13 units which are 49% owned. The drilling and aviation markets in which the Company competes frequently experience significant changes in supply and demand. Drilling utilization and day rates achievable in offshore markets are a function of the demand for drilling services, as measured by the level of exploration and development expenditures, and the supply of capable drilling equipment. These expenditures, which often fluctuate between markets, are affected by many factors such as existing and newly discovered oil and natural gas reserves, political and regulatory policies, seasonal weather patterns, contractual requirements under leases or concessions and, probably most influential, oil and natural gas prices. The Company's aviation operations are also affected by such factors, as flying in support of offshore energy operations remains a major source of business and Alaska operations are hampered each winter. The volatile nature of such factors prevents the Company from being able to predict whether existing market conditions or the perceptible market trends reflected in the preceding tables will continue. Assuming such conditions and trends prevail, however, the Company should remain profitable throughout 1996. The Company can, as it has done in the past, relocate its drilling rigs and aircraft from one geographic area to another in response to such changing market fundamentals, but only when these moves are economically justified. The Company's manufacturing operations are considerably less volatile than its drilling and aviation operations and, given a current order backlog of about $40 million and barring unforeseen circumstances, should continue to contribute positive operating results throughout the remainder of 1996. -10- 12 LIQUIDITY AND CAPITAL RESOURCES A comparison of key balance sheet figures and ratios as of September 30, 1996 and December 31, 1995 is as follows (dollars in thousands): September 30, December 31, 1996 1995 ------------- ------------ Cash and cash equivalents $75,233 $90,338 Current assets $304,345 $273,459 Current liabilities $96,953 $72,871 Current ratio 3.14 3.75 Note payable and current maturities of long-term debt $4,276 $7,039 Long-term debt $238,402 $247,744 Stockholders' equity $471,235 $429,155 Long-term debt/total capitalization .34 .37 Reflected in the comparison above are the effects in the first nine months of 1996 of net cash provided by operations of $54.3 million and capital expenditures of $71.5 million. The operating cash surplus was constrained by investments in receivables and inventories consistent with expanding operations. During the first nine months of 1996, the Company completed the design and began the construction of Rowan Gorilla V, an enhanced version of the Company's Gorilla Class jack-ups, which will be the world's largest bottom supported mobile offshore drilling unit. The rig is being constructed at the Company's Vicksburg, Mississippi shipyard and should be completed by mid-1998 at an estimated cost of $175 million. The Company will finance 87.5% of the construction cost though a 12-year bank loan guaranteed by the Maritime Administration of the U. S. Department of Transportation under its Title XI Program. The reactivation of the Company's marine construction capability, principally through rebuilding of the Vicksburg shipyard, is expected to cost approximately $20 million. Capital expenditures during the first nine months of 1996 included $34.3 million related to construction of Gorilla V and $12.0 million toward reactivation of the Vicksburg shipyard. The Company estimates remaining 1996 capital expenditures will be between $20 million and $25 million, primarily for Gorilla V and the Vicksburg facility. The Company may also spend amounts to acquire additional aircraft as market conditions justify and to upgrade existing offshore rigs. Based upon current operating levels and the previously discussed market trends, management believes that remaining 1996 operations, together with existing working capital, will generate sufficient cash flow to sustain planned capital expenditures and debt service requirements for the remainder of 1996. On October 28, 1996, the Company announced plans for the construction of Rowan Gorilla VI and Rowan Gorilla VII. Each will be combination drilling and production units like Gorilla V, capable of operating in hostile environments like the North Sea in water depths of up to 400 feet. The rigs will be constructed at the Company's Vicksburg facility at a combined cost of $380 million, with delivery expected during the first quarter of 1999 and the second quarter of 2000. The Company believes that if operating conditions continue to improve as expected, internally generated working capital may be sufficient to finance both rigs, with outside financing obtained if necessary. There can be no assurance, however, that working capital will be adequate or that outside financing will be available. The Company's 11 7/8% Senior Notes contain terms which limit the Company's ability to pay a cash dividend on its common stock. -11- 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following is a list of Exhibits filed with this Form 10-Q: 3 - Amendment Dated August 30, 1996 to the Bylaws of the Company, as Amended 27 - Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the third quarter of fiscal year 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ROWAN COMPANIES, INC. (Registrant) Date: November 14, 1996 /s/ E. E. THIELE -------------------------------------- E. E. Thiele Senior Vice President- Finance, Administration and Treasurer (Chief Financial Officer) Date: November 14, 1996 /s/ W. H. WELLS -------------------------------------- W. H. Wells Controller (Chief Accounting Officer) -12- 14 EXHIBIT INDEX Exhibit No. Description - -------- ----------- 3 Amendment Dated August 30, 1996 to the Bylaws of the Company, as Amended 27 Financial Data Schedule