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ROWAN COMPANIES, INC.

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(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.)

2800 Post Oak Boulevard, Suite 5450 Houston, Texas		77056-6127
(Address of principal executive offices)		(Zip Code)

 

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Registrant's telephone number, including area code

 

 

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(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 o 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes x    No o 

The number of shares of common stock, $.125 par value, outstanding at October 31, 2003 was 94,062,562.

 

 

 

 

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROWAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)

 

 

ROWAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(IN THOUSANDS EXCEPT SHARE AMOUNTS)

		September 30,			December 31,
			2003			2002
LIABILITIES AND STOCKHOLDERS' EQUITY			(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt		$	52,809		$	42,458
Accounts payable - trade			29,083			30,000
Other current liabilities			61,982			43,517
Total current liabilities			143,874			115,975
LONG-TERM DEBT - less current maturities			552,110			512,844
OTHER LIABILITIES			109,864			127,848
DEFERRED INCOME TAXES - net			207,308			166,060
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized 5,000,000 shares issuable in series:
Series III Preferred Stock, authorized 10,300 shares, none outstanding
Series A Preferred Stock, authorized 4,800 shares, none outstanding
Series B Preferred Stock, authorized 4,800 shares, none outstanding
Series C Preferred Stock, authorized 9,606 shares, none outstanding
Series D Preferred Stock, authorized 9,600 shares, none outstanding
Series E Preferred Stock, authorized 1,194 shares, none outstanding
Series A Junior Preferred Stock, authorized 1,500,000 shares, none issued
Common stock, $.125 par value:
Authorized 150,000,000 shares; issued 95,697,024 shares at September 30, 2003 and 95,340,597 shares at December 31, 2002			11,962			11,918
Additional paid-in capital			656,330			647,600
Retained earnings			545,304			557,523
Cost of 1,734,440 treasury shares			(30,064	)		(30,064	)
Accumulated other comprehensive loss			(55,200	)		(55,200	)
Total stockholders' equity			1,128,332			1,131,777
TOTAL		$	2,141,488		$	2,054,504
See Notes to Consolidated Financial Statements.

 

 

	-3-

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,
			2003			2002			2003			2002
		(Unaudited)
REVENUES:
Drilling services		$	124,582		$	108,483		$	297,606		$	265,450
Manufacturing sales and services			27,067			28,754			86,738			92,340
Aviation services			42,234			46,916			98,994			112,666
Total			193,883			184,153			483,338			470,456
COSTS AND EXPENSES:
Drilling services			86,162			79,091			242,793			229,162
Manufacturing sales and services			25,199			26,852			80,518			86,896
Aviation services			33,327			32,005			86,697			89,681
Depreciation and amortization			21,740			20,330			62,973			57,332
General and administrative			6,126			6,434			19,420			19,251
Total			172,554			164,712			492,401			482,322
INCOME (LOSS) FROM OPERATIONS			21,329			19,441			(9,063	)		(11,866	)
OTHER INCOME (EXPENSE):
Net proceeds from Gorilla V settlement												157,125
Interest expense			(5,213	)		(5,255	)		(14,869	)		(15,479	)
Less interest capitalized			1,004			846			3,457			3,980
Interest income			139			945			1,023			3,267
Other - net			38			48			417			433
Other income (expense) - net			(4,032	)		(3,416	)		(9,972	)		149,326
INCOME (LOSS) BEFORE INCOME TAXES			17,297			16,025			(19,035	)		137,460
Provision (credit) for income taxes			5,710			5,861			(6,816	)		48,358
NET INCOME (LOSS)		$	11,587		$	10,164		$	(12,219	)	$	89,102
NET INCOME (LOSS) PER SHARE OF COMMON STOCK (Note 6):
Basic		$	.12		$	.11		$	(.13	)	$	.95
Diluted		$	.12		$	.11		$	(.13	)	$	.93
See Notes to Consolidated Financial Statements.

 

 

	-4-

ROWAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS)

 

 

1.   The consolidated financial statements of Rowan included in this Form 10-Q have been prepared without audit in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission. Certain information and notes have been condensed or omitted as permitted by those rules and regulations. We believe that the disclosures included herein are adequate, but suggest that you read these consolidated financial statements in conjunction with the financial statements and related notes included in our 2002 Annual Report to Stockholders, which are incorporated by reference in our Form 10-K for the year ended D ecember 31, 2002.

2.   We believe the accompanying unaudited consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly Rowan’s financial position as of September 30, 2003 and December 31, 2002, and the results of its operations for the three and nine months ended September 30, 2003 and 2002 and its cash flows for the nine months ended September 30, 2003 and 2002.

3.   Rowan’s results of operations and cash flows for the nine months ended September 30, 2003 are not necessarily indicative of results to be expected for the full year.

4.   Rowan has three principal operating segments: contract drilling of oil and gas wells, both onshore and offshore ("Drilling"), helicopter and fixed-wing aircraft services ("Aviation") and the manufacture and sale of heavy equipment for the mining, timber and transportation industries, alloy steel and steel plate and drilling products ("Manufacturing"). The following table presents certain financial information of Rowan by operating segment as of September 30, 2003 and 2002 and for the nine month periods then ended (in thousands).

5.   Rowan had no items of other comprehensive income during the nine months ended September 30, 2003 and 2002.

6.   Rowan’s computation of basic and diluted income (loss) per share is as follows (in thousands, except per share amounts):

 

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2003			2002			2003			2002
Weighted average shares of common stock outstanding			93,877			93,724			93,738			93,836
Dilutive securities:
Stock options			1,064			602			-			705
Convertible debentures			936			851			-			892
Weighted average shares for diluted calculation			95,877			95,177			93,738			95,433
Net income (loss) for basic and diluted calculation		$	11,587		$	10,164		$	(12,219	)	$	89,102
Net income (loss) per share:
Basic		$	.12		$	.11		$	(.13	)	$	.95
Diluted		$	.12		$	.11		$	(.13	)	$	.93

 

 

Incremental shares related to convertible debentures and stock options are excluded from the computation of diluted income (loss) per share for the nine months ended September 30, 2003 as their inclusion would have reduced the per share amount of loss for such period.

Rowan uses the intrinsic value method of accounting for stock-based employee compensation, whereby the cost of each option is measured as the difference between the market price per share and the option price per share on the date of grant, in accordance with Accounting Principles Board Opinion No. 25. The following table is provided pursuant to Statement of Financial Accounting Standards No. 148 to illustrate the effect on Rowan’s net income (loss) and net income (loss) per share for the first nine months of 2003 and 2002 of measuring stock-based compensation cost based upon estimated fair values in accordance with Statement of Financial Accounting Standards No. 123:

 

 

7.   On November 16, 2001, an English Court ruled in Rowan’s favor and dismissed the plaintiff’s claim that it had been entitled, in January 1999, to terminate its drilling contract with a Rowan subsidiary for the use of the jack-up rig Rowan Gorilla V . The Court ordered the plaintiff to pay Rowan for all unpaid day rates, damages, interest and an interim payment for legal costs, for which Rowan received $88.6 million. The matter was under appeal at December 31, 2001 and such amoun t, along with investment earnings, less outstanding receivables dating from contract inception, was deferred at year end. On March 14, 2002, a settlement agreement was reached among the parties whereby all litigation involving this matter was dropped and Rowan received an additional $84.2 million. In total, Rowan received $175 million in connection with the Gorilla V contract dispute and such amount is shown, net of final legal costs and expenses, as Other Income on the Consolidated Statement of Operations for the nine months ended September 30, 2002.

8.  Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations", addresses accounting and reporting for fixed asset retirement costs and obligations. Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", addresses accounting and reporting for costs and obligations related to exit or disposal activities initiated on or after January 1, 2003. Rowan’s adoption of Statement Nos. 143 and 146, effective January 1, 2003, did not materially impact its financial position or results of operations.

    

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

Rowan incurred a net loss of $12.2 million, or $.13 per diluted share, in the first nine months of 2003 compared to net income of $89.1 million, or $.93 per share, in the same period of 2002. The prior year period included net proceeds from the settlement of the Gorilla V contract dispute, which increased net income by approximately $102 million, or $1.07 per share. Excluding the effects of the settlement, Rowan’s results for the first nine months of 2002 would have been a net loss of approximately $13 million, or $.14 per share.

A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the first nine months of 2003 and 2002, respectively, is reflected below (dollars in thousands):

		Drilling		Manufacturing		Aviation		Consolidated
		2003	2002	2003	2002	2003	2002	2003	2002
Revenues		$ 297,606	$ 265,450	$ 86,738	$ 92,340	$ 98,994	$ 112,666	$ 483,338	$ 470,456
Percent of Consolidated Revenues		62%	56%	18%	20%	20%	24%	100%	100%
Operating Profit (Loss) (1)		$ 11,142	$ (3,833)	$ (185)	$ (20)	$ (600)	$ 11,238	$ 10,357	$ 7,385
(1) General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arrive at Operating profit (loss), which Rowan believes is a better measure of segment financial performance.

 

As shown above, Rowan’s consolidated operating results improved by $3.0 million or 40% when comparing the first nine months of 2003 and 2002. Drilling revenues increased by $32.2 million or 12% as our offshore fleet of 23 jack-ups and one semi-submersible was 88% utilized during the first nine months of 2003, compared to 87% in the first nine months of 2002, and achieved a 17% increase in average day rates between periods. Rowan’s fleet of 18 land rigs was 72% utilized during the first nine months of 2003, compared to 67% in the first nine months of 2002, and achieved a 4% increase in average day rates between periods. Drilling expenses increased by $13.6 million or 6% between periods, primarily due to higher pension and insurance costs, the expansion of our land drilling operations and the addition to our offshore fleet, in February 2002, of Rowan Gorilla VII.

Rowan’s manufacturing operating results in the first nine months of 2003 reflect the effects of generally weak market conditions prevailing in the division’s equipment and steel groups, which were largely offset by the contribution from the drilling products group during the period. Manufacturing operations exclude approximately $92 million of products and services provided to the drilling division during the first nine months of 2003, most of which was attributable to construction progress on the Bob Palmer (formerly Gorilla VIII ) and the Scooter Yeargain , compared to about $82 million in the same period of 2002, primarily due to the Bob Palmer . The division’s external backlog was approximately $45 million at September 30, 2003.

 

 

A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the third quarters of 2003 and 2002, respectively, is reflected below (dollars in thousands):

 

		Drilling		Manufacturing		Aviation		Consolidated
		2003	2002	2003	2002	2003	2002	2003	2002
Revenues		$ 124,582	$ 108,483	$ 27,067	$ 28,754	$ 42,234	$ 46,916	$ 193,883	$ 184,153
Percent of Consolidated Revenues		64%	59%	14%	16%	22%	25%	100%	100%
Operating Profit (Loss) (1)		$ 23,404	$ 14,897	$ (482)	$ 6	$ 4,533	$ 10,972	$ 27,455	$ 25,875
(1) General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arrive at Operating profit (loss), which Rowan believes is a better measure of segment financial performance.

As shown above, Rowan’s consolidated operating results improved by $1.6 million or 6% when comparing the third quarters of 2003 and 2002. Drilling revenues increased by $16.1 million or 15% as our offshore fleet of 23 jack-ups and one semi-submersible was 94% utilized during the third quarter of 2003, compared to 93% in the third quarter of 2002, and achieved a 17% increase in average day rates between periods. Rowan’s fleet of 18 land rigs was 72% utilized during the third quarter of 2003, compared to 76% in the third quarter of 2002, and achieved a 15% increase in average day rates between periods. Drilling expenses increased by $7.1 million or 9% between periods, primarily due to higher pension costs, the expansion of our land drilling operations and the addition to our offshore fleet, in August 2003, of the Bob Palmer.

Rowan’s manufacturing operating results in the third quarter of 2003 reflect the effects of generally weak market conditions prevailing in the division’s equipment and steel groups, which were largely offset by the contribution from the drilling products group during the period. Manufacturing operations exclude approximately $22 million of products and services provided to the drilling division during the third quarter of 2003, most of which was attributable to construction progress on the Scooter Yeargain , compared to about $25 million in the same period of 2002, primarily due to th e Bob Palmer . The division’s external backlog was approximately $45 million at September 30, 2003.

 

 

Expected near-term conditions in our principal drilling markets, based upon recent bid inquiries and other indications from our energy company customers, and the numbers of our rigs in each of those areas are as follows:

AREA		RIGS		EXPECTED NEAR-TERM CONDITIONS
Gulf of Mexico		22		Moderately improving exploration and development activity, with increasing emphasis on potential deep-well natural gas reserves on the Outer Continental Shelf
North Sea		1		Moderately improving jack-up drilling activity, fluctuating with oil prices
Eastern Canada		1		Moderately improving demand for harsh environment equipment, fluctuating with oil and natural gas prices

Expected near-term conditions in our principal aviation markets and the numbers of our aircraft based in each of those markets are as follows:

 

The drilling and aviation markets in which Rowan competes frequently experience significant changes in supply and demand. Drilling utilization and day rates are primarily 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, in turn, are affected by many factors such as existing and newly discovered oil and natural gas reserves, political and regulatory policies, seasonal weather patterns, contractual requirements under leases or concessions, effects of energy company consolidations, and, probably most influential, oil and natural gas prices. Our aviation operations are also affected by the same factors, as flying in support of offshore energy operations remains a major source of business and Alaska operations are hampered by weather each winter. The volatile nature of these factors prevents us from being able to accurately predict whether existing market conditions will continue beyond the near term. In response to fluctuating market conditions, we can relocate our drilling rigs and aircraft from one geographic area to another, but only when we believe such moves are economically justified. Currently, Rowan’s drilling operations are profitable, but we can offer no assurance that existing operating conditions will prevail or that expected improvements in market conditions, as reflected in the preceding tables, will materialize. Our operations will be adversely affected should market conditions deteriorate.

A comparison of key balance sheet figures and ratios as of September 30, 2003 and December 31, 2002 is as follows (dollars in thousands):

Reflected in the comparison above are the effects in the first nine months of 2003 of capital expenditures of $184.7 million, proceeds from borrowings of $84.4 million, debt repayments of $34.7 million and net cash used in operations of $3.9 million.

The Bob Palmer is an enhanced version of our Super Gorilla class jack-up, designated a Super Gorilla XL , that is outfitted with 713 feet of leg, 139 feet more than Gorillas V, VI or VII , and has 30% larger spud cans, enabling operation in the Gulf of Mexico in water depths up to 550 feet. The rig can also operate in water depths up to 400 feet in the hostile environments offshore eastern Canada and in the North Sea. The Bob Palmer was delivered on August 18, 2003 and is currently under contract in the Gulf of Mexico. We financed $187.3 million of the cost of the Bob Palmer through an 18-year bank loan guaranteed by the U. S. Department of Transportation’s Maritime Administration ("MARAD") under its Title XI Program. The notes require semiannual interest payments in each January and July, with semiannual principal repayments commencing on January 15, 2004, and the Bob Palmer secures the government guarantee. At September 30, 2003, we had borrowed about $186 million under this facility, which bore interest at a n annual rate of 1.35%.

The Scooter Yeargain is the first of as many as four of a new Tarzan class of jack-up rig, designed specifically for deep drilling in water depths up to 250 feet on the outer continental shelf in the Gulf of Mexico. The Tarzan class will offer drilling capabilities similar to our Gorilla class jack-ups, enabling more efficient drilling beyond 15,000 feet, but with reduced environmental criteria (wind, wave and current). The Scooter Yeargain is being constructed at Vicksburg, Mississippi with delivery expected during the second quarter of 2004. Construction of Tarzan II recently began at Vicksburg and should be completed during the first quarter of 2005. Delivery of the two additional Tarzan class jack-ups is expected to follow in six- to nine-month intervals in 2005 and 2006. The aggregate cost of the four Tarzan rigs will be around $400 million. We are financing up to $181 million of the cost of the first two Tarzan rigs through 15-year bank loans guaranteed by MARAD under its Title XI Program. The notes require se miannual interest payments in each May and November, with semiannual principal repayments commencing on November 10, 2004, and the rigs secure the government guarantees. At September 30, 2003, we had borrowed about $46 million under the Scooter Yeargain facility, which bore interest at an annual rate of 1.25%. We intend to pursue outside financing for Tarzans III and IV , if necessary. However, there can be no ass urance that such financing will be obtainable.

Rowan estimates remaining 2003 capital expenditures will be between $45 million and $60 million, including approximately $30-40 million towards the construction of the Tarzan rigs. We may also spend amounts to acquire additional aircraft as market conditions justify and to upgrade existing rigs and manufacturing facilities.

On June 30, 2003, Rowan completed the refinancing of our $162.2 million of outstanding floating-rate Gorilla VII debt through the issuance of a 2.8% fixed-rate note maturing in October 2013. The floating-rate debt was issued under MARAD’s Title XI program to finance the construction of Rowan Gorilla VII , which was completed in December 2001. The fixed-rate note is U.S. Government-guaranteed under the Title XI program, and Gorilla VII secures the government guarantee.

On November 16, 2001, an English Court ruled in Rowan’s favor and dismissed the plaintiff’s claim that it had been entitled, in January 1999, to terminate its drilling contract with a Rowan subsidiary for the use of the jack-up rig Rowan Gorilla V . The Court ordered the plaintiff to pay Rowan for all unpaid day rates, damages, interest and an interim payment for legal costs, for which we received $88.6 million. The matter was under appeal at December 31, 2001 and such amount, along with investment earnings, less outstanding receivables dating from contract inception, was deferred at year end. On March 14, 2002, a settlement agreement was reached among the parties whereby all litigation involving this matter was dropped and we received an additional $84.2 million. In total, Rowan received $175 million in connection with the Gorilla V contract dispute and such amount is shown, net of final legal costs and expenses, as Other Income on the Consolidated Statement of Operations for the nine months ended September 30, 2002.

Critical Accounting Policies and Management Estimates. Rowan’s significant accounting policies are outlined in Note 1 to our financial statements included in our 2002 Annual Report to Stockholders, which is incorporated by reference in our Form 10-K for the year ended December 31, 2002. Such policies, and management judgments, assumptions and estimates made in their application, underlie reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. We believe our most critical accounting policies and management estimates involve property and depreciation, specifically capitali zable costs, useful lives and salvage values, and pension liabilities and costs, specifically assumptions used in actuarial calculations, as changes in such policies and/or estimates would produce significantly different amounts from those reported herein.

Rowan provides depreciation under the straight-line method from the date an asset is placed into service until it is sold or becomes fully depreciated based upon estimated lives and salvage values. Such estimates of lives and salvage values include 25 years and 20%, respectively, for each of our Super Gorilla and Tarzan class rigs which collectively comprise more than 80% of our offshore drilling equipment carrying value. Expenditures for new property or enhancements to existing property are capitalized and expenditures for routine maintenance and major repairs are charged to operations as incurred. On construction projects, Rowan capitalizes a portion of interest cost incurred during the period required to complete the asset. Long-lived assets are reviewed for impairment whenever circumstances indicate their carrying amounts may not be recoverable.

Rowan uses the intrinsic value method of accounting for stock-based employee compensation pursuant to Accounting Principles Board Opinion No. 25. We estimate that use of the fair value method outlined by Statement of Financial Accounting Standards Nos. 123 and 148 would have reduced (increased) reported amounts of net income (loss) and net income (loss) per share by approximately $(3.3) million or $(.04) per share for the nine months ended September 30, 2003 and by approximately $3.0 million or $.03 per share for the nine months ended September 30, 2002.

Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations", addresses accounting and reporting for fixed asset retirement costs and obligations. Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", addresses accounting and reporting for costs and obligations related to exit or disposal activities initiated on or after January 1, 2003. Rowan’s adoption of Statement Nos. 143 and 146, effective January 1, 2003, did not materially impact our financial position or results of operations.

 

Rowan believes that its exposure to risk of earnings loss due to changes in market interest rates is not significant. In addition, virtually all of the Company’s transactions are carried out in U. S. dollars, thus Rowan’s foreign currency exposure is not material. Fluctuating commodity prices affect Rowan’s future earnings only to the extent that they influence demand for Rowan’s products and services, as contracts based directly upon such prices are not significant to the Company’s operations . Rowan does not hold or issue derivative financial instruments.