1
EXHIBIT 13
Rowan Companies, Inc. and Subsidiaries
TEN-YEAR FINANCIAL DATA
(In thousands except per share
amounts and ratios) 1996 1995 1994 1993
---------- ---------- ---------- ----------
OPERATIONS
Revenues:
Drilling services $ 316,123 $ 250,080 $ 245,917 $ 271,022
Manufacturing sales and services 143,768 133,755 96,664
Aviation services 111,269 87,462 95,578 82,174
---------- ---------- ---------- ----------
Total 571,160 471,297 438,159 353,196
---------- ---------- ---------- ----------
Costs and expenses:
Drilling services 202,878 207,934 207,577 211,095
Manufacturing sales and services 131,665 120,378 87,382
Aviation services 93,473 79,993 79,955 68,882
Depreciation and amortization 47,882 50,555 50,790 51,918
General and administrative 16,591 14,692 13,862 13,940
---------- ---------- ---------- ----------
Total 492,489 473,552 439,566 345,835
---------- ---------- ---------- ----------
Income (loss) from operations 78,671 (2,255) (1,407) 7,361
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (27,547) (27,702) (27,530) (25,361)
Less interest capitalized 2,516
Gain on disposals of property,
plant and equipment 2,359 6,598 1,344 1,955
Interest income 4,157 5,209 4,813 2,348
Other -- net 374 468 260 150
---------- ---------- ---------- ----------
Other income (expense) -- net (18,141) (15,427) (21,113) (20,908)
---------- ---------- ---------- ----------
Income (loss) before income taxes 60,530 (17,682) (22,520) (13,547)
Provision (credit) for income taxes (808) 754 469 (288)
---------- ---------- ---------- ----------
Income (loss) before extraordinary charge 61,338 (18,436) (22,989) (13,259)
Extraordinary charge from
redemption of debt
---------- ---------- ---------- ----------
Net income (loss) $ 61,338 $ (18,436) $ (22,989) $ (13,259)
---------- ---------- ---------- ----------
Per share of common stock:
Net income (loss):
Primary $ .70 $ (.22) $ (.27) $ (.17)
---------- ---------- ---------- ----------
Fully diluted $ .70 $ (.22) $ (.27) $ (.17)
---------- ---------- ---------- ----------
Cash dividends $ -- $ -- $ -- $ --
---------- ---------- ---------- ----------
FINANCIAL POSITION
Working capital $ 232,045 $ 200,588 $ 195,945 $ 172,117
---------- ---------- ---------- ----------
Property, plant and equipment -- at cost:
Drilling equipment 954,249 944,021 961,391 950,538
Aircraft and related equipment 188,681 189,954 176,874 166,791
Manufacturing plant and equipment 37,377 25,037 18,955
Construction in progress 77,318
Other property and equipment 94,517 91,089 86,883 81,636
---------- ---------- ---------- ----------
Total 1,352,142 1,250,101 1,244,103 1,198,965
---------- ---------- ---------- ----------
Property, plant and equipment -- net 546,200 487,039 506,121 507,193
Total assets 899,308 802,488 805,179 765,263
Capital expenditures 117,947 33,881 43,377 21,989
Long-term debt 267,321 247,744 248,504 207,137
Common stockholders' equity 496,219 429,155 442,347 460,300
---------- ---------- ---------- ----------
STATISTICAL INFORMATION
Current ratio 3.72 3.75 4.39 4.90
Long-term debt/total capitalization .35 .37 .36 .31
Book value per share of common stock $ 5.80 $ 5.06 $ 5.25 $ 5.49
========== ========== ========== ==========
* 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
1992 1991 1990 1989 1988 1987
- ---------- ---------- ---------- ---------- ---------- ----------
$ 162,121 $ 170,739 $ 180,118 $ 128,818 $ 144,018 $ 90,145
87,877 101,433 111,992 97,446 72,667 52,984
- ---------- ---------- ---------- ---------- ---------- ----------
249,998 272,172 292,110 226,264 216,685 143,129
- ---------- ---------- ---------- ---------- ---------- ----------
162,816 147,853 130,845 119,182 126,288 113,348
74,347 82,364 88,182 75,943 62,571 48,996
51,367 52,954 50,702 52,062 60,324 61,312
12,092 11,739 9,549 7,690 7,313 6,766
- ---------- ---------- ---------- ---------- ---------- ----------
300,622 294,910 279,278 254,877 256,496 230,422
- ---------- ---------- ---------- ---------- ---------- ----------
(50,624) (22,738) 12,832 (28,613) (39,811) (87,293)
- ---------- ---------- ---------- ---------- ---------- ----------
(26,254) (21,379) (21,601) (23,682) (23,920) (23,463)
237 319
731 1,660 3,996 2,320 27,578 1,814
2,658 4,763 8,635 12,709 4,002 4,917
165 127 178 161 345 407
- ---------- ---------- ---------- ---------- ---------- ----------
(22,700) (14,829) (8,792) (8,492) 8,242 (16,006)
- ---------- ---------- ---------- ---------- ---------- ----------
(73,324) (37,567) 4,040 (37,105) (31,569) (103,299)
429 1,174 2,081 672 32 (34,009)
- ---------- ---------- ---------- ---------- ---------- ----------
(73,753) (38,741) 1,959 (37,777) (31,601) (69,290)
(5,627)
- ---------- ---------- ---------- ---------- ---------- ----------
$ (73,753) $ (44,368) $ 1,959 $ (37,777) $ (31,601) $ (69,290)
- ---------- ---------- ---------- ---------- ---------- ----------
$ (1.01) $ (.61)* $ .03 $ (.52) $ (.44) $ (1.12)
- ---------- ---------- ---------- ---------- ---------- ----------
$ (1.01) $ (.61)* $ .03 $ (.52) $ (.44) $ (1.12)
- ---------- ---------- ---------- ---------- ---------- ----------
$ -- $ -- $ -- $ -- $ -- $ --
- ---------- ---------- ---------- ---------- ---------- ----------
$ 61,397 $ 125,996 $ 134,393 $ 143,963 $ 152,335 $ 76,779
- ---------- ---------- ---------- ---------- ---------- ----------
939,793 913,379 885,264 867,540 863,450 946,127
162,001 158,361 138,327 107,985 97,500 98,860
79,801 76,251 73,504 70,598 88,039 88,113
- ---------- ---------- ---------- ---------- ---------- ----------
1,181,595 1,147,991 1,097,095 1,046,123 1,048,989 1,133,100
- ---------- ---------- ---------- ---------- ---------- ----------
537,819 552,481 549,608 542,995 585,365 697,144
684,301 895,889 739,133 737,826 800,684 827,785
39,528 85,618 59,905 22,945 18,318 14,123
212,907 220,764 153,621 163,473 181,330 184,187
375,754 445,368 485,748 479,287 515,491 546,078
- ---------- ---------- ---------- ---------- ---------- ----------
2.47 1.71 ** 4.00 4.55 4.07 2.88
.36 .33 .24 .25 .26 .25
$ 5.13 $ 6.11 $ 6.69 $ 6.64 $ 7.16 $ 7.59
========== ========== ========== ========== ========== ==========
11
3
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):
1996 1995 1994
-------- -------- --------
Revenues:
Drilling $ 316.1 $ 250.1 $ 245.9
Manufacturing 143.8 133.7 96.7
Aviation 111.3 87.5 95.6
-------- -------- --------
Total $ 571.2 $ 471.3 $ 438.2
-------- -------- --------
Operating Profit (Loss)*:
Drilling $ 79.3 $ 5.0 $ 0.2
Manufacturing 9.5 11.7 7.7
Aviation 6.5 (4.3) 4.6
-------- -------- --------
Total $ 95.3 $ 12.4 $ 12.5
-------- -------- --------
Net Income (Loss) $ 61.3 $ (18.4) $ (23.0)
======== ======== ========
* Income (loss) from operations before deducting general and administrative
expenses.
Growing worldwide demand for energy products, higher oil and natural gas
prices, lower finding and recovery costs and the relative scarcity of capable
equipment combined to dramatically improve energy service economics in 1996,
enabling the Company to achieve its best results since 1982. As reflected
above, the Company's 1996 operating results were significantly improved over
1995 primarily through the strength of the drilling division, as near-100%
utilization of the offshore rig fleet afforded continual escalations in
drilling day rates. The Company achieved near-record aviation services revenues
primarily in support of oil and gas and fire control activities and commuter
transportation, and the manufacturing division continued to provide meaningful
returns while assuming a lead role in the Company's offshore drilling fleet
expansion program.
The Company's 1995 results were improved over 1994 primarily due to higher
rig utilization and, beginning in the second quarter, increasing drilling day
rates which, coupled with gains realized on sales of drilling and aviation
equipment and continued growth in the Company's manufacturing operations, more
than offset unfavorable results of aviation operations and reduced turnkey
drilling.
DRILLING OPERATIONS. The Company's drilling operating results are generally a
function of rig rates and activity achieved in its offshore drilling business
conducted primarily in the Gulf of Mexico and the North Sea. Such rates and
activity are, in turn, primarily influenced by the level of offshore
expenditures by energy companies and the availability of competitive equipment.
Market conditions in the offshore drilling industry improved considerably
during the last half of the 1994 -- 1996 period. Firming natural gas prices
strengthened offshore utilization and day rates in the Gulf of Mexico
throughout much of 1994, while North Sea drilling activity and rates were
generally weak due to many energy companies downsizing their drilling programs
in the face of anticipated changes in United Kingdom energy policies. In late
1994, Gulf of Mexico utilization and day rates were impaired by softening
natural gas prices while the North Sea market began to stabilize as changes in
UK policies were deferred. Beginning in the second quarter of 1995, both
markets began to offer improving returns due to increasing worldwide demand for
oil and gas. Activity and day rates in the Gulf of Mexico were positively
influenced by strengthening natural gas prices, while North Sea utilization
approached 100% due to the relatively scarce supply of harsh environment
drilling equipment. The Gulf of Mexico and North Sea drilling markets continued
to improve dramatically in 1996 primarily due to consistently high energy
prices and advances in horizontal drilling and 3-D seismic technologies which
together have yielded the following industry conditions, each of which has
proven directly or indirectly beneficial to the Company's operations:
o the economic viability of deep-water prospects in the Gulf of Mexico
o the growth of drilling markets in west Africa, southeast Asia and The
Netherlands
o the trend toward longer-term drilling contracts.
As a result, the Company's Gulf of Mexico rigs were 99% utilized in 1996 and
achieved a 41% increase in average day rates compared to 1995, while the North
Sea fleet was 94% utilized and averaged a 32% increase in day rates between
years. The Company considers only revenue-producing days in computing rig
utilization.
The Company's worldwide fleet of 20 jack-ups (two of which are leased) was
utilized 97%, 90% and 86% in 1996, 1995 and 1994, respectively, while the
Company's semi-submersible achieved 100%, 85% and 73%, respectively. The
Company sold its three submersible barge rigs during the fourth quarter of
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):
1995 1994
TO 1996 TO 1995
-------- --------
Utilization $ 24.0 $ 33.9
Drilling Rates 79.4 (13.3)
======== ========
12
4
These fluctuations, net of a decline in turnkey drilling, yielded a $66.0
million or 26% increase in 1996 drilling revenues compared to 1995, which was
2% over 1994. Drilling operations expenses were 2% lower in 1996 compared to
1995, which was unchanged from 1994. The expense variations do not correlate
with the revenue fluctuations primarily due to the effects of turnkey drilling
operations.
Three of the Company's deep-well land rigs were under contract in Texas and
Louisiana for almost all of 1996 and one other worked much of the third quarter
and all of the fourth in Louisiana. The Company sold its ongoing Argentina
operations in November 1996 including its three trailer-mounted rigs. Two other
deep-well land rigs in Argentina were idle at year end. The Company's five
arctic land rigs and remaining three rigs in Oklahoma were idle in 1996. The
cost of maintaining the idle rigs is modest and the remaining investment in
such rigs is not significant.
Perceptible trends existing in the offshore drilling markets in which the
Company operates are shown below:
- -------------------------------------------------------------------------------
GULF OF MEXICO -- Continuing high levels of exploration and development
activity
NORTH SEA -- Continuing high levels of drilling activity for jack-up rigs
EASTERN CANADA -- Improving demand
===============================================================================
The drilling markets in which the Company competes frequently experience
significant fluctuations in the demand for drilling services, as measured by the
level of exploration and development expenditures, and the supply of capable
drilling equipment. These expenditures, in turn, are affected by many factors
such as existing and newly discovered oil and natural gas reserves, political
and regulatory policies, seasonal weather patterns, contractual requirements
under leases or concessions, trends in finding and extraction costs and,
probably most influential, oil and natural gas prices. The volatile nature of
such factors prevents the Company from being able to accurately predict whether
existing market conditions or the perceptible market trends reflected in the
preceding table will continue beyond the near term. In response to fluctuating
market conditions, the Company can, as it has done in the past, relocate its
drilling rigs from one geographic area to another, but only when such moves are
economically justified. Assuming current conditions and trends prevail, the
drilling division should experience increased profitability in 1997.
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, among other services, forest fire control, commuter airline services,
flightseeing and medivac services, and, in recent years, has developed and sold
auxiliary fuel tanks for helicopters. The Company further broadened its aviation
operations in 1994 to include China, where two twin engine helicopters are
currently under contract.
Aviation revenues grew by 27% in 1996 compared to 1995, which was 8% less
than 1994. Aviation division expenses in 1996 were up by 17% over 1995, which
was unchanged from 1994. Though each of the Company's aviation service lines and
areas contributed to the improved 1996 operating performance, the largest growth
beyond oil and gas related flying was achieved in forest fire control services,
which are traditionally provided during the third quarter throughout the western
United States, and in the Company's scheduled and charter airline services in
Alaska.
The number of aircraft operated by the Company at the end of each year in
the 1994 -- 1996 period and the revenue hours for each of those years are
reflected in the following table:
1996 1995 1994
-------- -------- --------
Twin Engine Helicopters:
Number 62 62 63
Revenue Hours 34,848 29,129 33,330
Single Engine Helicopters:
Number 26 25 27
Revenue Hours 11,466 9,563 11,574
Fixed-Wing Aircraft:
Number 21 19 17
Revenue Hours 20,669 20,430 23,136
======== ======== ========
Excluded from the preceding table are fifteen twin engine helicopters owned
by the Company's Dutch affiliate which recorded revenue hours of 10,378 in
1996, 8,907 in 1995 and 8,134 in 1994.
Perceptible trends existing in the aviation markets in which the Company
operates are shown below:
- -------------------------------------------------------------------------------
ALASKA -- Moderately improving market conditions
GULF OF MEXICO -- Moderately improving market conditions
NORTH SEA -- Moderately improving flight support activity
CHINA -- 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. Assuming the
foregoing trends continue, the aviation division should contribute positive
operating results in 1997.
13
5
MANUFACTURING OPERATIONS. The Company's manufacturing division generated a 7%
increase in revenues in 1996 compared to 1995, which was 38% higher than 1994,
and continued to measurably enhance operating results while devoting
substantial efforts towards reactivating its marine rig construction capability
and the design and construction of Rowan Gorilla V. The heavy equipment line
shipped 56 mining, timber and transportation loaders, stackers and cranes
during 1996, or 19% more than in 1995, which was 34% higher than 1994.
Consolidated manufacturing operations exclude approximately $46.9 million of
products and services provided to the Company's drilling division in 1996
compared to $4.7 million in 1995.
The Company's manufacturing operations are considerably less volatile than
its drilling and aviation operations. Given a year-end external backlog of
about $44 million and barring unforeseen circumstances, the Company's
manufacturing division should continue to contribute positive operating results
during 1997.
- -------------------
The Company's overall financial goals for 1997 include revenues approaching
$650 million and earnings near $160 million. Most of the expected improvement
over 1996 should be contributed by the drilling division.
In light of the increasing demand for the Company's daywork drilling
services, and the relatively unfavorable results of the Company's turnkey
drilling operations during the recent past, management has elected to focus on
daywork drilling and project management contracts and not pursue additional
turnkey work at this time. The Company expects to conclude its current turnkey
operations during the first quarter of 1997. The Company estimates that its
first quarter 1997 earnings will be in the range of $24 million to $26 million
(before an extraordinary charge from the redemption of debt).
LIQUIDITY AND CAPITAL RESOURCES
Key balance sheet amounts and ratios for 1996 and 1995 were as follows (dollars
in millions):
December 31, 1996 1995
-------- --------
Cash and cash equivalents $ 97.2 $ 90.3
Current assets $ 317.3 $ 273.5
Current liabilities $ 85.3 $ 72.9
Current ratio 3.72 3.75
Note payable and current maturities
of long-term debt $ 3.9 $ 7.0
Long-term debt $ 267.3 $ 247.7
Stockholders' equity $ 496.2 $ 429.2
Long-term debt/total capitalization .35 .37
======== ========
Reflected in the comparisons above are the effects of net cash provided by
operations of $83.7 million, capital expenditures of $117.9 million, proceeds
from equipment disposals and the sale of the Argentina operations totaling
$13.8 million, and proceeds from borrowings of $29.0 million.
During 1996, the Company began 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 is
financing up to 87.5% of the construction cost through a 12-year bank loan
guaranteed by the Maritime Administration of the U.S. Department of
Transportation under its Title XI Program.
Under the Title XI Program, the Company obtains funding for Gorilla V as
construction progress is achieved and outstanding borrowings bear interest at
.45% above a short-term LIBOR rate. The Company may fix the interest rate at
any time and must fix the rate on all outstanding principal amounts on the
earlier of July 1, 2000 or two years following completion of construction.
Interest is payable semi-annually beginning July 1, 1997 and principal will be
repaid in semi-annual installments commencing January 1, 1999. Gorilla V is
pledged as security for the government guarantee. At December 31, 1996, the
Company had drawn down about $29 million of the $153 million total credit
facility at an interest rate of 6.075%
The reactivation of the Company's marine construction capability,
principally through rebuilding of the Vicksburg shipyard, should be
substantially complete in early 1997. Capital expenditures encompass new assets
or enhancements to existing assets as expenditures for routine maintenance and
major repairs are charged to operations as incurred.
Capital expenditures in 1996 included $68.5 million toward the design and
construction of Gorilla V and about $15 million related to reactivation of the
Company's Vicksburg facility. The remainder primarily reflects major rig
enhancements and purchases of aircraft and components.
14
6
On October 28, 1996, the Company announced plans for the construction of
Rowan Gorilla VI and Rowan Gorilla VII. Each rig will be a combination drilling
and production unit 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
approximately $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 construction of both rigs, with outside
financing obtained if necessary. There can be no assurance that working capital
will be adequate or that outside financing will be available. The Company
currently has no other available credit facilities.
The Company estimates 1997 capital expenditures to be between $160 and $170
million, including $85 -- 90 million for Gorilla V and $35 -- 40 million for
Gorilla VI. The Company may also spend amounts to acquire additional aircraft
as market conditions justify and to upgrade existing offshore rigs.
On February 3, 1997, the Company announced plans for a partial redemption
of its $200 million 11 7/8% Senior Notes due 2001. On April 1, 1997, the Company
will redeem $50 million of the notes and pay a 6% premium. The Company will
record an estimated $3.5 million loss on the transaction as an extraordinary
charge in the first quarter of 1997, though remaining 1997 operations will be
enhanced by an estimated $2.6 million reduction in net interest cost. The
Company intends to refinance the remaining $150 million of 11 7/8% Senior Notes
during 1997 and would realize an estimated $10 million extraordinary loss upon
such redemption.
Based on current operating levels and the previously discussed market
trends, management believes that 1997 operations, together with existing
working capital and available financial resources, will generate sufficient
cash flow to sustain planned capital expenditures and debt service requirements
at least through the remainder of 1997.
At December 31, 1996, the provisions of the Company's existing indebtedness
would allow the Company to enter into sale/leaseback transactions with a
maximum value of approximately $81 million.
In December 1995, in connection with the purchase of 16 aircraft and a
hangar and office facility in Alaska, the Company issued a $7 million
non-interest bearing promissory note payable at the end of one year. The note
was repaid in full during 1996.
In February 1994, the Company paid $10.4 million in cash and issued $41.7
million of 7%, 5-year notes in connection with its acquisition of the net
manufacturing assets of Marathon LeTourneau Company. During 1996, the Company
assumed certain environmental obligations related to its manufacturing
facilities from the previous owners in exchange for $4 million in cash and a
$5.5 million reduction in one of the notes. The Company believes it has
adequately accrued for environmental liabilities. See Notes 1 and 9 of the
Notes to Consolidated Financial Statements.
The Company did not pay any dividends on its common stock during the
1994--1996 period. See Note 5 of the Notes to Consolidated Financial
Statements.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, which governs accounting for the impairment of
long-lived assets. The effect of adopting the statement on the Company's
financial position and results of operations was not material.
The Company does not intend to adopt the accounting provisions of Statement
of Financial Accounting Standards No. 123, but rather has elected to continue
to apply Accounting Principles Board Opinion No. 25 for measurement and
recognition of employee stock-based compensation. The Company estimates that
the provisions of the statement, if adopted, would not have materially affected
reported amounts for net income (loss) and earnings (loss) per share in 1996
and 1995.
This report contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including, without
limitation, statements as to the expectations, beliefs and future expected
financial performance of the Company that are based on current expectations and
are subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected by the Company. Among the
factors that could cause actual results to differ materially are the following:
o oil and natural gas prices
o the level of offshore expenditures by energy companies
o the general economy, including inflation
o weather conditions in the Company's principal operating areas
o environmental and other laws and regulations.
Other relevant factors have been disclosed in the Company's filings with the
U.S. Securities and Exchange Commission.
15
7
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31,
----------------------
(In thousands except share amounts) 1996 1995
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 97,225 $ 90,338
Receivables -- trade and other 112,836 87,811
Inventories:
Raw materials and supplies 65,734 51,898
Work-in-progress 21,181 23,015
Finished goods 1,758 708
Prepaid expenses 8,750 11,430
Cost of turnkey drilling contracts in progress 9,835 8,259
---------- ----------
Total current assets 317,319 273,459
---------- ----------
Investment In and Advances To 49% Owned Companies 28,049 29,770
---------- ----------
Property, Plant and Equipment -- at cost:
Drilling equipment 954,249 944,021
Aircraft and related equipment 188,681 189,954
Manufacturing plant and equipment 37,377 25,037
Construction in progress 77,318
Other property and equipment 94,517 91,089
---------- ----------
Total 1,352,142 1,250,101
Less accumulated depreciation and amortization 805,942 763,062
---------- ----------
Property, plant and equipment -- net 546,200 487,039
---------- ----------
Other Assets and Deferred Charges 7,740 12,220
---------- ----------
Total $ 899,308 $ 802,488
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable and current maturities of long-term debt (Note 2) $ 3,932 $ 7,039
Accounts payable -- trade 28,106 21,774
Other current liabilities (Note 4) 53,236 44,058
---------- ----------
Total current liabilities 85,274 72,871
---------- ----------
Long-Term Debt -- less current maturities (Note 2) 267,321 247,744
---------- ----------
Other Liabilities (Notes 6 and 9) 39,573 36,227
---------- ----------
Deferred Credits:
Income taxes (Note 7) 1,774 4,146
Gain on sale/leaseback transactions (Note 9) 9,147 12,345
---------- ----------
Total deferred credits 10,921 16,491
---------- ----------
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 87,054,028
shares at December 31, 1996 and 86,353,792 shares at December 31, 1995 (Note 3) 10,882 10,794
Additional paid-in capital 401,730 396,092
Retained earnings (Note 5) 86,092 24,754
Less cost of treasury stock -- 1,457,919 shares 2,485 2,485
---------- ----------
Total stockholders' equity 496,219 429,155
---------- ----------
Total $ 899,308 $ 802,488
========== ==========
See Notes to Consolidated Financial Statements.
16
8
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31,
---------------------------------
(In thousands except per share amounts) 1996 1995 1994
--------- --------- ---------
Revenues:
Drilling services $ 316,123 $ 250,080 $ 245,917
Manufacturing sales and services 143,768 133,755 96,664
Aviation services 111,269 87,462 95,578
--------- --------- ---------
Total 571,160 471,297 438,159
--------- --------- ---------
Costs and Expenses:
Drilling services 202,878 207,934 207,577
Manufacturing sales and services 131,665 120,378 87,382
Aviation services 93,473 79,993 79,955
Depreciation and amortization 47,882 50,555 50,790
General and administrative 16,591 14,692 13,862
--------- --------- ---------
Total 492,489 473,552 439,566
--------- --------- ---------
Income (Loss) From Operations 78,671 (2,255) (1,407)
--------- --------- ---------
Other Income (Expense):
Interest expense (27,547) (27,702) (27,530)
Less: interest capitalized 2,516
Gain on disposals of property, plant and equipment 2,359 6,598 1,344
Interest income 4,157 5,209 4,813
Other -- net 374 468 260
--------- --------- ---------
Other income (expense) -- net (18,141) (15,427) (21,113)
--------- --------- ---------
Income (Loss) Before Income Taxes 60,530 (17,682) (22,520)
Provision (credit) for income taxes (Note 7) (808) 754 469
--------- --------- ---------
Net Income (Loss) $ 61,338 $ (18,436) $ (22,989)
========= ========= =========
Earnings (Loss) Per Share of Common Stock (Note 1):
Primary $ .70 $ (.22) $ (.27)
Fully Diluted $ .70 $ (.22) $ (.27)
========= ========= =========
See Notes to Consolidated Financial Statements.
17
9
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
-----------------------------------------------------------
Common Stock
--------------------------------------- Additional
Issued In Treasury Paid-in Retained
(In thousands) Shares Amount Shares Amount Capital Earnings
-------- -------- -------- -------- -------- --------
Balance, January 1, 1994 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
Exercise of stock options 538 67 472
Value of services rendered by
participants in the Nonqualified
Stock Option Plans (Note 3) 4,255
Conversion of subordinated debentures 78 10 440
Net loss (18,436)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 86,354 10,794 1,458 2,485 396,092 24,754
Exercise of stock options 626 78 548
Value of services rendered by
participants in the Nonqualified
Stock Option Plans (Note 3) 4,600
Conversion of subordinated debentures 74 10 490
Net income 61,338
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 87,054 $ 10,882 1,458 $ 2,485 $401,730 $ 86,092
======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
18
10
Rowan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31,
---------------------------------
(In thousands) 1996 1995 1994
--------- --------- ---------
Cash Provided By (Used In):
Operations:
Net income (loss) $ 61,338 $ (18,436) $ (22,989)
Noncash charges (credits) to net income (loss):
Depreciation and amortization 47,882 50,555 50,790
Gain on disposals of property, plant and equipment (2,359) (6,598) (1,344)
Compensation expense 4,600 4,255 4,648
Change in sale/leaseback payable (1,232) (1,460) (1,405)
Amortization of sale/leaseback gain (3,198) (3,198) (3,198)
Provision for pension and postretirement benefits 1,217 7,402 6,922
Other -- net (210) 1,161 (503)
Changes in current assets and liabilities:
Receivables -- trade and other (28,658) (9,494) 18,080
Inventories (13,052) (16,235) (9,205)
Other current assets 2,713 (17,718) (2,464)
Current liabilities 11,033 3,148 6,064
Net changes in other noncurrent assets and liabilities 3,673 (171) (2,591)
--------- --------- ---------
Net cash provided by (used in) operations 83,747 (6,789) 42,805
--------- --------- ---------
Investing activities:
Capital expenditures:
Property, plant and equipment additions (117,947) (33,881) (32,963)
Acquisition of net manufacturing assets (10,414)
Proceeds from sale of Argentina drilling operations 6,946
Proceeds from disposals of property, plant and equipment 6,829 16,013 2,604
Repayments from affiliates 32 3,676
--------- --------- ---------
Net cash used in investing activities (104,140) (14,192) (40,773)
--------- --------- ---------
Financing activities:
Proceeds from borrowings 29,009
Repayments of borrowings (2,355) (290) (8,127)
Other -- net 626 539 387
--------- --------- ---------
Net cash provided by (used in) financing activities 27,280 249 (7,740)
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 6,887 (20,732) (5,708)
Cash and Cash Equivalents, Beginning of Year 90,338 111,070 116,778
--------- --------- ---------
Cash and Cash Equivalents, End of Year $ 97,225 $ 90,338 $ 111,070
========= ========= =========
See Notes to Consolidated Financial Statements.
19
11
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.
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, 1996, the unamortized excess cost was $2,690,000.
Intercompany transactions are eliminated in consolidation.
REVENUE RECOGNITION. Most drilling contracts provide for payment 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 included sales and costs of sales
of $134,929,000 and $111,973,000, $119,640,000 and $97,324,000, and $90,460,000
and $72,717,000 in 1996, 1995 and 1994, 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 in 1996 consisted of the retirement of
$4,684,000 of debt through the disposition of aviation equipment, a $5,500,000
reduction in debt in exchange for assumption of certain environmental
obligations and the conversion of $500,000 of Series III Floating Rate
Convertible Subordinated Debentures into 74,074 shares of common stock. Noncash
transactions in 1995 included the issuance of a $6,972,000 non-interest bearing
promissory note in connection with the purchase of certain aviation assets and
the conversion of $450,000 of Series I Floating Rate Convertible Subordinated
Debentures into 78,261 shares of common stock. Noncash transactions in 1994
included the issuance of $10,300,000 Series III Floating Rate Convertible
Subordinated Debentures and the issuance of $41,656,000 7% promissory notes in
connection with the acquisition of the net assets of Marathon LeTourneau
Company. See Notes 2, 3 and 9.
PROPERTY AND DEPRECIATION. For financial reporting purposes, the Company
computes depreciation using the straight-line method over the estimated lives
of the related assets as follows:
Salvage
Years Value
- ------------------------------------------------------------
Offshore drilling equipment:
Semi-submersible 15 20%
Cantilever jack-ups 15 20%
Conventional jack-ups 12 20%
Land drilling equipment 12 20%
Drill pipe and tubular equipment 4 10%
Aviation equipment:
Aircraft 7 to 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.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This statement generally
requires a periodic review of long-lived assets for indications that their
carrying amount may not be recoverable and governs the measurement and
disclosure of any resulting impairment loss. Its application did not have a
material impact on the Company's financial position or results of operations.
ENVIRONMENTAL MATTERS. Environmental remediation costs are accrued based on
estimates of known remediation requirements even if uncertainties about the
ultimate cost of the remediation exist. Ongoing environmental compliance costs
are expensed as incurred and expenditures to mitigate or prevent future
environmental contamination are capitalized. The Company's estimated liability
is not discounted. See Note 9.
INCOME TAXES. The Company accounts for income taxes under an asset and
liability approach that requires the recognition of deferred income tax assets
and liabilities which reflect the future tax consequences of differences
between the financial statement and tax bases of assets and liabilities. See
Note 7.
20
12
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, plus any shares issuable upon the exercise
of stock options and the conversion of debentures, when dilutive.
MANAGEMENT ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS. Certain reclassifications have been made in the 1995 and
1994 amounts to conform with the 1996 presentations.
2. LONG-TERM DEBT
Long-term debt consisted of (in thousands):
December 31, 1996 1995
-------- --------
11 7/8% Senior Notes due 2001 $200,000 $200,000
Nonrecourse notes payable in quarterly
installments through 1997 with a
final balloon payment due
in 1998; bearing interest at 7% and
collateralized by two aircraft costing
approximately $3.6 million 2,488 2,797
Nonrecourse notes payable due 1999
bearing interest at 7% 36,156 41,656
Promissory note payable in 1996; non-
interest bearing and secured by 15
aircraft costing approximately
$ 6.7 million 6,730
Floating-rate note payable guaranteed under
U.S. Department of Transportation
Title XI; secured by drilling rig
Rowan Gorilla V 29,009
Series II subordinated convertible
debenture due 1997 bearing interest
at 1/2% above prime rate 3,600 3,600
-------- --------
Total 271,253 254,783
Less current maturities 3,932 7,039
-------- --------
Remainder $267,321 $247,744
======== ========
Maturities of long-term debt for the five years ending December 31, 2001
are as follows: 1997 -- $3,932,000, 1998 -- $2,156,000, 1999 -- $38,573,000,
2000 -- $2,417,000 and 2001 -- $202,417,000.
The 11 7/8% Senior Notes due 2001 became redeemable on December 1, 1996, in
whole or in part, upon payment of a premium of 6%. The premium decreases by 2%
annually from that date to December 1, 1999, when the Company may redeem the
notes at the principal amount. See Note 12.
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 1997, with a final balloon payment due in January 1998.
In February 1994, in connection with the acquisition of certain net
manufacturing assets, the Company issued $41,656,000 in 7% promissory notes due
in 1999. During 1996, the Company obtained a $5,500,000 reduction in one of the
notes in return for assuming certain environmental remediation obligations. See
Note 9 for further information.
In December 1996, the Company obtained financing for up to $153,091,000 of
the cost of designing and constructing Rowan Gorilla V through a 12-year bank
loan guaranteed by the Maritime Administration of the U.S. Department of
Transportation under its Title XI Program. The Company obtains funding as
construction progress is achieved and outstanding borrowings bear interest at
.45% above a short-term LIBOR rate. At December 31, 1996, the interest rate was
6.075%. The Company may fix the interest rate at any time and must fix the rate
on all outstanding principal on the earlier of July 1, 2000 or two years
following completion of construction. Interest is payable semi-annually
beginning July 1, 1997 and principal will be repaid in semi-annual installments
commencing January 1, 1999. Rowan Gorilla V is pledged as security for the
government guarantee.
The $3,600,000 principal amount of the Series II Floating Rate Convertible
Subordinated Debenture is convertible into $3,600,000 of Series II Preferred
Stock, which may be converted into an aggregate of 400,000 shares of the
Company's common stock. At December 31, 1996, the interest rate was 8.75%. 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. At December 31, 1996,
debentures in the amount of $9,200,000 were outstanding. The outstanding
debentures are convertible into $9,200,000 of Series III Preferred Stock, which
may be converted into an aggregate of 1,362,963 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 1996, 1995 and 1994 were $27,073,000, $27,433,000 and
$26,900,000, respectively.
Certain debt agreements of the Company contain provisions that require an
excess of current assets over current liabilities, an excess of stockholders'
equity over consolidated funded indebtedness and a minimum level of
stockholders' equity, 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.
The Company's 1980 Nonqualified Stock Option Plan authorized the Board of
Directors to grant, through January 25, 1990, options to purchase a total of
1,000,000 shares of the Company's common stock.
21
13
Under the terms of the 1988 Nonqualified Stock Option Plan, as amended (the
"1988 Plan"), the Board of Directors can grant, before January 21, 2003,
options to purchase a total of 7,000,000 shares of the Company's common stock.
At December 31, 1996, options for 6,453,504 shares had been granted at
exercise prices ranging from $1.00 to $15.25 per share, and 348 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.
The Company recognizes compensation expense with respect to any
nonqualified option pursuant to Accounting Principles Board (APB) Opinion No.
25 as 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 in which the employee performs services to earn the right to
exercise the option and an equal amount is credited to additional paid-in
capital. The Company has elected not to adopt Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" which offers an
alternative method for measuring compensation cost. The statement, if adopted,
would not have materially affected reported amounts for net income (loss) and
earnings (loss) per share in 1996 and 1995.
Stock option activity was as follows:
Number of Shares
------------------------------------
1996 1995 1994
---------- ---------- ----------
Stock options outstanding,
January 1 2,499,700 2,182,650 1,616,325
Changes during the year:
Granted:
at $1.00 per share 928,000 982,000
at $7.625 per share 525,000
at $8.00 per share 25,000
at $15.25 per share 177,000
Exercised, at
$ 1.00 per share (626,162) (537,950) (387,675)
Forfeited (102,250) (73,000) (28,000)
---------- ---------- ----------
Stock options outstanding,
December 31 2,498,288 2,499,700 2,182,650
---------- ---------- ----------
Stock options exercisable,
December 31 564,476 494,513 440,338
========== ========== ==========
Stock options available for
grant, December 31:
1988 Plan 1,984,071 2,608,821 3,463,821
========== ========== ==========
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. At December 31, 1996,
all $5,125,000 principal amount of Series I debentures issued in 1986 had been
converted into common stock at $5.75 per share. In 1987, the Company issued a
Series II debenture in the principal amount of $4,500,000, of which $3,600,000
was outstanding at December 31, 1996. 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 Series III debentures in the principal amount of $10,300,000, of
which $9,200,000 was outstanding at December 31, 1996. This amount is
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: $4,300,000 through
November 29, 1997; $6,700,000 on or after November 30, 1997 and $9,200,000 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 one-half 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.
4. OTHER CURRENT LIABILITIES
Other current liabilities consisted of (in thousands):
December 31, 1996 1995
--------- ---------
Gain on sale/leaseback transactions $ 3,198 $ 3,198
Accrued liabilities:
Income taxes 1,009 1,321
Compensation and related
employee costs 29,084 25,610
Interest 2,033 2,012
Taxes and other 17,912 11,917
--------- ---------
Total $ 53,236 $ 44,058
========= =========
22
14
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, 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 $44,894,000 at December 31, 1996. 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. In 1994, in connection with its acquisition
of certain manufacturing assets, the Company assumed the assets and obligations
of a separate plan covering manufacturing employees.
Pension 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 (in thousands):
December 31, 1996 1995
--------- ---------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
Vested benefits $ 113,833 $ 107,803
========= =========
Total benefits $ 121,455 $ 115,533
========= =========
Plan assets at fair value $ 141,997 $ 108,056
Projected benefit obligation
for service rendered to date 136,721 130,722
--------- ---------
Plan assets in excess of (less than)
projected benefit obligation 5,276 (22,666)
Unrecognized net (gain) loss (16,013) 9,857
Unrecognized net benefits being
recognized over 15 years (3,634) (4,845)
Unrecognized prior service cost 440 555
--------- ---------
Accrued pension cost included in
Current and Other Liabilities $ (13,931) $ (17,099)
========= =========
The plans' assets consist primarily of equity securities and U.S. Treasury
bonds and notes and, at December 31, 1996, included 1,500,000 shares of the
Company's common stock at an average cost of $4.81 per share.
At December 31, 1996, $11,800,000 of the plans' assets were invested in a
dedicated bond fund. The plans had a basis in these assets of $9,300,000
yielding approximately 5.7% to maturity.
Net pension cost included the following components (in thousands):
1996 1995 1994
-------- -------- --------
Service cost -- benefits
earned during the period $ 5,757 $ 4,335 $ 4,784
Interest cost on projected
benefit obligation 9,477 8,580 7,879
Actual return on plan
assets -- (gain) loss (31,607) (24,166) 7,264
Net amortization
and deferral 20,692 15,280 (17,105)
-------- -------- --------
Net periodic pension cost $ 4,319 $ 4,029 $ 2,822
======== ======== ========
Assumptions used in actuarial calculations were:
1996 1995 1994
------- ------- -------
Discount rate 7.5% 7.25% 8.75%
Rate of compensation
increase 4.0% 4.0% 4.0%
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, 1996 and 1995 of $3,317,000 and $3,021,000,
respectively. The net pension liabilities included in the Company's
consolidated balance sheet were $2,615,000 and $2,230,000 at December 31, 1996
and 1995, respectively. Net pension cost was $508,000 in 1996, $473,000 in 1995
and $437,000 in 1994.
In addition to 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.
The following table sets forth the plans' funded status and the amounts
recognized in the Company's consolidated balance sheet (in thousands):
December 31, 1996 1995
-------- --------
Accumulated postretirement
benefit obligations:
Retirees $ 12,322 $ 12,006
Fully eligible active plan
participants 8,933 7,751
Other active plan participants 12,257 11,570
-------- --------
Total benefits 33,512 31,327
Unrecognized transition obligation
being recognized over 20 years (12,103) (12,859)
Unrecognized net gain (loss) (7,803) (8,870)
-------- --------
Accrued postretirement benefit cost
included in Other Liabilities $ 13,606 $ 9,598
======== ========
The actuarially determined accumulated postretirement benefit obligation
reflects health care cost trend rates of 11% for 1996 and decreasing by 1%
annually through 2001 and a discount rate of 7.5%. A one percentage point
increase in the assumed health care cost trend rate would increase net periodic
postretirement benefit cost by approximately $535,000 and increase the
accumulated postretirement benefit obligation by approximately $3,125,000.
23
15
Net postretirement benefit cost included the following components (in
thousands):
1996 1995 1994
-------- -------- --------
Service cost $ 1,686 $ 1,157 $ 1,475
Interest cost 2,269 1,998 1,799
Net amortization and
deferral 1,129 797 1,003
-------- -------- --------
Net periodic postretirement
benefit cost $ 5,084 $ 3,952 $ 4,277
======== ======== ========
Cash payments for postretirement benefits in 1996, 1995 and 1994 were
approximately $1,076,000, $1,052,000 and $614,000, respectively.
During 1995, the Company commenced the Rowan Companies, Inc. Savings and
Investment Plan in conformity with section 401(k) of the Internal Revenue Code.
The plan, to which the Company contributed about $1,377,000 in 1996 and
$988,000 in 1995, covers all drilling and aviation employees. Manufacturing
employees are covered by a separate plan to which the Company contributed
approximately $637,000, $620,000 and $433,000 in 1996, 1995 and 1994,
respectively.
7. INCOME TAXES
The detail of income tax provisions (credits) is presented below (in
thousands):
1996 1995 1994
-------- -------- --------
Current:
Federal $ 1,236 $ 87 $ (98)
Foreign 141 787 145
State 187 202 268
-------- -------- --------
Total current provision 1,564 1,076 315
Deferred -- Foreign and other (2,372) (322) 154
-------- -------- --------
Total income tax
provision (credit) $ (808) $ 754 $ 469
======== ======== ========
Total income tax expense (credit) shown in the consolidated statement of
operations is reconciled to the amount that would be computed if the income
(loss) before income taxes was multiplied by the federal income tax rate
(statutory rate) as follows (in thousands):
1996 1995 1994
-------- -------- --------
Statutory rate 35% 35% 35%
Tax at statutory rate $ 21,186 $ (6,189) $ (7,883)
Increase (decrease)
in taxes resulting from:
Net operating loss
carryforward (21,155) 6,224 7,663
Foreign taxes (2,336) 465 753
Alternative minimum tax 1,226 87 (98)
Other -- net 271 167 34
-------- -------- --------
Total income tax
provision (credit) $ (808) $ 754 $ 469
======== ======== ========
Temporary differences and carryforwards which gave rise to deferred tax
assets and liabilities at December 31, 1996 and 1995 were as follows (in
thousands):
December 31, 1996 1995
--------- ---------
Deferred tax asset:
Deferred sale/leaseback gain $ 4,324 $ 5,443
Accrued pension and
postretirement benefit costs 10,574 10,190
ESOP/PAYSOP contributions 832 1,428
Net operating loss carryforward 77,912 97,608
Investment tax credit carryforward 36,723 49,495
Other 6,439 4,457
--------- ---------
136,804 168,621
--------- ---------
Valuation allowance (38,415) (69,278)
--------- ---------
98,389 99,343
--------- ---------
Deferred tax liability:
Property, plant and equipment 97,062 99,162
Foreign income taxes 393 2,632
Other 2,708 1,695
--------- ---------
100,163 103,489
--------- ---------
Deferred tax liability -- net $ 1,774 $ 4,146
========= =========
The valuation allowance at December 31, 1996 consists primarily of
investment tax credit carryforwards which are forecast as not being utilized
prior to their statutory expiration dates. The valuation allowance decreased by
$30,863,000 in 1996 primarily as a result of expiring tax credits and reduced
net operating loss carryforwards.
At December 31, 1996, the Company had $34,345,000 of regular investment tax
credits and $2,378,000 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: 1997 -- $11,069,000, 1998 --
$8,026,000, 1999 -- $10,110,000, 2000 -- $2,017,000 and 2001 -- $5,501,000.
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $222,607,000 which will expire, if
not utilized, as follows: 2001 -- $30,986,000, 2002 -- $129,124,000, 2006 --
$1,860,000, 2007 -- $50,260,000, 2008 -- $3,002,000, 2009 -- $1,465,000 and
2010 -- $5,910,000.
Deferred income taxes not provided for undistributed earnings of foreign
subsidiaries, because such earnings are considered permanently invested abroad,
amounted to approximately $6,951,000 at December 31, 1996.
Income (loss) before income taxes consisted of $58,573,000, $(17,292,000)
and $(21,640,000) of domestic earnings (losses), and $1,957,000, $(390,000) and
$(880,000) of foreign earnings (losses) for 1996, 1995 and 1994, respectively.
Income tax payments exceeded refunds by $1,747,000 in 1996, $388,000 in
1995 and $393,000 in 1994.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
At December 31, 1996, the carrying amounts of the Company's cash and cash
equivalents, receivables and payables approximated their fair values due to the
short maturity of such financial 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, 1996 based upon quoted
market prices for similar issues.
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The 11 7/8% Senior Notes had a fair value of $213,250,000 at December 31,
1996, or a $13,250,000 premium to carrying value, based upon the closing price
quoted on the New York Stock Exchange.
9. COMMITMENTS AND CONTINGENT LIABILITIES
During 1984 and 1985, the Company sold two cantilever jack-ups, Rowan-Halifax
and Cecil Provine, for a total of $126,500,000 in cash and leased each rig back
under 15-year operating leases at effective interest rates of 9.3% and 8.0%,
respectively. In each of 1999 and 2000, the Company will have an option to
purchase the respective 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 resulted in a gain which
is being recognized over the respective lease term.
Total payments to be made under the sale/leaseback agreements are being
expensed on a straight-line basis though the payments are variable. Other
liabilities at December 31, 1996 and 1995 included the excess of
inception-to-date sale/lease-back expenses over related payments of $8,063,000
and $12,857,000, respectively.
In September 1996, the Company assumed certain environmental liabilities
related to its manufacturing facilities in exchange for $4,000,000 in cash and
a $5,500,000 reduction in a promissory note. The measurement of remediation
costs is subject to uncertainties, including the evolving nature of
environmental regulations and the extent of any agreements to mitigate
remediation costs. Other liabilities at December 31, 1996 included $8,763,000
related to environmental matters. The Company believes that it has adequately
accrued for environmental liabilities.
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 $20,820,000 in 1996, $20,365,000 in 1995 and $20,756,000
in 1994.
As of December 31, 1996, the future minimum payments to be made under
noncancelable operating leases were (in thousands):
1997 $ 24,698
1998 20,254
1999 22,277
2000 17,781
2001 249
Later years 1,518
--------
Total $ 86,777
========
The Company estimates 1997 capital expenditures at between $160,000,000 and
$170,000,000, including $120,000,000 to $130,000,000 toward construction of the
offshore rigs Rowan Gorilla V and Rowan Gorilla VI.
In the Company's opinion, at December 31, 1996, there were no
contingencies, claims or lawsuits against the Company which could 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, manufacture and sale 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 are provided primarily in Alaska, the western United States and along
the Gulf Coast and include charter airline, flightseeing and forest fire
control services as well as oil and gas related flying. Manufacturing
operations are primarily 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, in excess of 10% of consolidated revenues from one
customer in each of 1995 (11%) and 1994 (10%). In 1996, no customer accounted
for more than 10% of consolidated revenues.
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 bodies. The addition of manufacturing
operations in 1994 has diversified the Company's operations and attendant
credit risk. Further, the Company retains 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 $105,010,000 in 1996.
Domestic drilling operations included export revenues of $104,596,000 in
1996, $82,177,000 in 1995 and $84,025,000 in 1994. Except for $46,000,000 in
1996, $39,826,000 in 1995 and $34,533,000 in 1994, from other foreign areas,
such export revenues were generated from North Sea operations. Manufacturing
operations included export sales of $70,695,000, $48,222,000 and $34,543,000 in
1996, 1995 and 1994, respectively.
At December 31, 1996, 27 drilling rigs, including 15 offshore rigs, with a
carrying value of $206,430,000 were located in the United States and 8 drilling
rigs, including 6 offshore rigs, with a carrying value of $121,674,000 were
located in foreign jurisdictions.
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Information concerning the Company's operations is summarized by segment as
follows (in thousands):
1996 1995 1994
--------- --------- ---------
Revenues:
Drilling services:
Domestic $ 289,622 $ 224,563 $ 216,983
Foreign 26,501 25,517 28,934
Manufacturing sales
and services 143,768 133,755 96,664
Aviation services 111,269 87,462 95,578
--------- --------- ---------
Consolidated $ 571,160 $ 471,297 $ 438,159
========= ========= =========
Operating profit (loss):
Drilling services:
Domestic $ 72,549 $ 9,075 $ 1,942
Foreign 6,698 (4,056) (1,768)
Manufacturing sales
and services 9,468 11,737 7,667
Aviation services 6,547 (4,319) 4,614
--------- --------- ---------
Consolidated 95,262 12,437 12,455
Gain on disposals
of property, plant
and equipment 2,359 6,598 1,344
Interest and other
income 4,531 5,677 5,073
General and
administrative (16,591) (14,692) (13,862)
Interest expense -- net (25,031) (27,702) (27,530)
--------- --------- ---------
Income (loss) before
income taxes $ 60,530 $ (17,682) $ (22,520)
========= ========= =========
Identifiable assets at
December 31:
Drilling services:
Domestic $ 573,849 $ 483,354 $ 531,990
Foreign 44,592 56,077 40,863
Manufacturing sales
and services 135,750 108,798 83,616
Aviation services 145,117 154,259 148,710
--------- --------- ---------
Total assets $ 899,308 $ 802,488 $ 805,179
========= ========= =========
Certain other financial information for each of the Company's principal
business segments is summarized as follows (in thousands):
1996 1995 1994
-------- -------- --------
Depreciation and amortization:
Drilling $ 33,998 $ 37,127 $ 38,166
Aviation 11,248 11,788 11,009
Manufacturing 2,636 1,640 1,615
Capital expenditures:
Drilling 87,927 14,846 17,033
Aviation 8,913 12,897 14,657
Manufacturing 21,107 6,138 11,687
Maintenance and repairs:
Drilling 32,947 25,870 27,237
Aviation 18,248 13,911 16,138
Manufacturing 9,389 9,071 7,836
-------- -------- --------
11. RELATED PARTY TRANSACTIONS
A member of the Company's Board of Directors also served as a director of one
of the Company's drilling customers during 1995 and part of 1996. The
transaction with this customer in 1995 involved a day rate 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, the contract between the Company and the customer was reviewed
and ratified by the Board of Directors of the Company. Related 1995 revenues
were $2,755,000.
12. SUBSEQUENT EVENT
On February 3, 1997, the Company announced plans for a partial redemption of
its $200,000,000 11 7/8% Senior Notes due 2001. On April 1, 1997, the Company
will redeem $50,000,000 of the notes and pay a 6% premium plus accrued
interest. The Company will record an estimated $3,500,000 loss on the
transaction as an extraordinary charge in the first quarter of 1997.
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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, 1996 and
1995, 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, 1996. 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,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
March 3, 1997
SELECTED QUARTERLY
FINANCIAL DATA (UNAUDITED)
The following unaudited information for the quarters ended March 31, June
30, September 30 and December 31, 1995 and 1996 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
--------- --------- --------- ---------
1995:
Revenues $ 92,797 $ 117,382 $ 134,343 $ 126,775
Operating
profit (loss) (13,637) 5,261 10,184 10,629
Net income (loss) (21,735) (3,706) 663 6,342
Earnings (loss) per
common share (.26) (.04) .01 .07
--------- --------- --------- ---------
1996:
Revenues $ 126,808 $ 137,166 $ 154,683 $ 152,503
Operating profit 10,315 21,825 32,324 30,798
Net income 2,357 12,665 22,710 23,606
Earnings per
common share .03 .15 .26 .27
========= ========= ========= =========
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 (UNAUDITED)
The price range below is as reported by the New York Stock Exchange on the
Composite Tape. On February 27, 1997 there were approximately 3,100 holders of
record.
Quarter 1996 1995
------------------ ------------------
High Low High Low
-------- -------- -------- --------
First $ 13.13 $ 8.88 $ 6.75 $ 5.38
Second 16.75 12.75 8.38 6.38
Third 19.13 14.00 8.63 6.75
Fourth 24.50 18.50 10.00 6.00
======== ======== ======== ========
The Company did not pay any dividends on its common stock during 1996 and
1995. 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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