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EX-31.1 - EXHIBIT 31.1 - ROWAN COMPANIES PLCexhibit-311xq12015.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.  20549

FORM 10-Q

þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

OR

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____TO_____

1-5491
Commission File Number
Rowan Companies plc
(Exact name of registrant as specified in its charter)

England and Wales
98-1023315
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

2800 Post Oak Boulevard, Suite 5450, Houston, Texas
77056-6189
(Address of principal executive offices)
(Zip Code)
(713) 621-7800
(Registrant's telephone number, including area code)

Inapplicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨   No þ

The number of Class A ordinary shares, $0.125 par value, outstanding at April 30, 2015, was 124,762,684, which excludes 1,166,123 shares held by an affiliated employee benefit trust.



ROWAN COMPANIES PLC

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 



FORWARD-LOOKING STATEMENTS

Statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements include words or phrases such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “could,” “may,” “might,” “should,” “will,” “forecast,” “potential,” "outlook," “scheduled,” “predict,” “will be,” “will continue,” “will likely result,” and similar words and specifically include statements regarding expected financial performance; dividend and share repurchases; growth strategies; expected utilization, day rates, revenues, operating expenses, contract terms, contract backlog, capital expenditures, tax rates and positions, insurance coverages, access to financing and funding sources; the availability, delivery, mobilization, contract commencement, relocation or other movement of rigs and the timing thereof; future rig construction (including construction in progress and completion thereof), enhancement, upgrade or repair and costs and timing thereof; the suitability of rigs for future contracts; general market, business and industry conditions, trends and outlook; future operations; the impact of increasing regulatory requirements and complexity; expected contributions from our new rigs and our entry into the ultra-deepwater market; divestiture of selected assets; expense management; the likely outcome of legal proceedings or insurance or other claims and the timing thereof; activity levels in the offshore drilling market; customer drilling programs; and commodity prices. Such statements are subject to numerous risks, uncertainties and assumptions that may cause actual results to vary materially from those indicated, including:

prices of oil and natural gas and industry expectations about future prices;

changes in worldwide rig supply and demand, competition or technology, including as a result of delivery of newbuild drilling rigs and reactivation of rigs;

variable levels of drilling activity and expenditures, whether as a result of actions by OPEC, global capital markets and liquidity, prices of oil and natural gas or otherwise, which may cause us to idle or stack additional rigs;

drilling permit and operations delays, moratoria or suspensions, new and future regulatory, legislative or permitting requirements (including requirements related to certification and testing of blowout preventers and other equipment or otherwise impacting operations), future lease sales, changes in laws, rules and regulations that have or may impose increased financial responsibility, additional oil spill contingency plan requirements and other governmental actions that may result in claims of force majeure or otherwise adversely affect our existing drilling contracts;

governmental regulatory, legislative and permitting requirements affecting drilling operations or compliance obligations in the areas in which our rigs operate;

tax matters, including our effective tax rates, tax positions, results of audits, changes in tax laws, treaties and regulations, tax assessments and liabilities for taxes;

downtime, lost revenue and other risks associated with drilling operations, operating hazards, or rig relocations and transportation, including rig or equipment failure, collisions, damage and other unplanned repairs, the limited availability of transport vessels, hazards, self-imposed drilling limitations and other delays due to weather conditions or otherwise, and the limited availability or high cost of insurance coverage for certain offshore perils or associated removal of wreckage or debris and other losses;

access to spare parts, equipment and personnel to maintain, upgrade and service our fleet;

possible cancellation or suspension of drilling contracts as a result of economic conditions in the industry, force majeure, mechanical difficulties, delays, performance or other reasons;

potential cost overruns and other risks inherent to shipyard rig construction, repair or enhancement, unexpected delays in rig and equipment delivery and engineering or design issues following shipyard delivery, or delays in the dates our rigs will enter a shipyard, be transported and delivered, enter service or return to service;

changes or delays in actual contract commencement dates; contract terminations, contract extensions, contract option exercises, contract revenues, contract awards; the termination of contracts or renegotiation of contract terms by customers, or payment or operational delays by our customers;

potential delays for our recently delivered drillship, such as customer acceptance or readiness to drill;


1


operating hazards, including environmental or other liabilities, risks, expenses or losses, whether related to well-control issues, or storm or hurricane damage, losses or liabilities (including wreckage or debris removal), collisions, or otherwise;

our ability to attract and retain skilled personnel on commercially reasonable terms, whether due to competition from other contract drillers, labor regulations or otherwise; our ability to seek and receive visas for our personnel to work in our areas of operation in a timely manner;

governmental action and political and economic uncertainties, including uncertainty or instability resulting from civil unrest, political demonstrations, strikes, or outbreak or escalation of armed hostilities or other crises in oil or natural gas producing areas in which we operate, which may result in extended business interruptions, suspended operations, or claims by our customers of a force majeure situation and payment disputes;

terrorism, piracy, cyber-breaches, outbreaks of any disease or epidemic and other related travel restrictions, political instability, hostilities, acts of war, nationalization, expropriation, confiscation or deprivation of our assets or military action impacting our operations, assets or financial performance in any of our areas of operations;

the outcome of legal proceedings, or other claims or contract disputes, including any inability to collect receivables or resolve significant contractual or day rate disputes, any purported renegotiation, nullification, cancellation or breach of contracts with customers or other parties, and any failure to negotiate or complete definitive contracts following announcements of receipt of letters of intent;

potential for additional long-lived asset impairments;

impacts of any global financial or economic downturn;

effects of accounting changes and adoption of accounting policies;

potential return to shareholders in the form of dividends and share repurchases;

costs and uncertainties associated with our redomestication, or changes in laws that could reduce or eliminate the anticipated benefits of the transaction;

potential unplanned expenditures and funding requirements, including investments in pension plans and other benefit plans; and

other important factors described from time to time in the reports filed by us with the Securities and Exchange Commission and the New York Stock Exchange.

In addition to the risks, uncertainties and assumptions described above, you should also carefully read and consider the risk factors and forward-looking statement disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2014. We disclaim any obligation to update or revise any forward-looking statements except as required by applicable law or regulation.


2


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements


ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
56,792

 
$
339,154

Receivables - trade and other
503,151

 
545,204

Prepaid expenses and other current assets
24,903

 
29,253

Deferred tax assets - net
27,144

 
27,485

Total current assets
611,990

 
941,096

 
 
 
 
PROPERTY, PLANT AND EQUIPMENT:
 

 
 

Drilling equipment
8,440,018

 
7,639,171

Construction in progress
737,298

 
1,023,646

Other property and equipment
138,623

 
137,365

Property, plant and equipment - gross
9,315,939

 
8,800,182

Less accumulated depreciation and amortization
1,451,913

 
1,367,970

Property, plant and equipment - net
7,864,026

 
7,432,212

 
 
 
 
Other assets
35,948

 
37,884

 
 
 
 
TOTAL ASSETS
$
8,511,964

 
$
8,411,192



See Notes to Unaudited Condensed Consolidated Financial Statements.


3



ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except shares)
(Unaudited)


 
March 31, 2015
 
December 31, 2014
LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable - trade
$
118,073

 
$
102,773

Deferred revenues
37,352

 
36,189

Accrued pension and other postemployment benefits
26,219

 
26,219

Accrued compensation and related employee costs
53,798

 
88,186

Accrued income taxes
25,565

 
13,265

Accrued interest
35,363

 
47,414

Other current liabilities
21,863

 
19,175

Total current liabilities
318,233

 
333,221

 
 
 
 
Long-term debt
2,807,114

 
2,807,324

Other liabilities
373,373

 
368,266

Deferred income taxes - net
206,898

 
210,982

Commitments and contingent liabilities (Note 4)


 


 
 
 
 
SHAREHOLDERS' EQUITY:
 

 
 

Class A Ordinary Shares, $0.125 par value, 125,928,807 and 124,828,807 shares issued at March 31, 2015, and December 31, 2014, respectively
15,741

 
15,604

Additional paid-in capital
1,440,690

 
1,436,910

Retained earnings
3,578,100

 
3,466,993

Cost of 1,165,394 and 264,903 treasury shares at March 31, 2015, and December 31, 2014, respectively
(11,453
)
 
(7,990
)
Accumulated other comprehensive loss
(216,732
)
 
(220,118
)
Total shareholders' equity
4,806,346

 
4,691,399

 
 
 
 
TOTAL LIABILITIES AND EQUITY
$
8,511,964

 
$
8,411,192



See Notes to Unaudited Condensed Consolidated Financial Statements.


4


ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
Three months ended March 31,
 
2015
 
2014
 
 
 
 
REVENUES
$
547,039

 
$
377,602

 
 
 
 
COSTS AND EXPENSES:
 
 
 
Direct operating costs (excluding items below)
255,734

 
220,369

Depreciation and amortization
89,690

 
70,873

Selling, general and administrative
27,586

 
29,875

(Gain) loss on disposals of property and equipment
(513
)
 
803

Litigation settlement

 
(20,875
)
Total costs and expenses
372,497

 
301,045

 
 
 
 
INCOME FROM OPERATIONS
174,542

 
76,557

 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
Interest expense, net of interest capitalized
(32,746
)
 
(20,960
)
Interest income
155

 
587

Other - net
(1,041
)
 
(351
)
Total other income (expense) - net
(33,632
)
 
(20,724
)
 
 
 
 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
140,910

 
55,833

Provision for income taxes
17,241

 
281

 
 
 
 
NET INCOME FROM CONTINUING OPERATIONS
123,669

 
55,552

 
 
 
 
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX

 
4,043

 
 
 
 
NET INCOME
$
123,669

 
$
59,595

 
 
 
 
INCOME PER SHARE - BASIC:
 
 
 
Income from continuing operations
$
0.99

 
$
0.45

Discontinued operations
$

 
$
0.03

Net income
$
0.99

 
$
0.48

 
 
 
 
INCOME PER SHARE - DILUTED:
 
 
 
Income from continuing operations
$
0.99

 
$
0.45

Discontinued operations
$

 
$
0.03

Net income
$
0.99

 
$
0.48

 
 
 
 
CASH DIVIDENDS DECLARED PER SHARE
$
0.10

 
$



See Notes to Unaudited Condensed Consolidated Financial Statements.


5


ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three months ended March 31,
 
2015
 
2014
 
 
 
 
NET INCOME
$
123,669

 
$
59,595

 
 
 
 
OTHER COMPREHENSIVE INCOME:
 
 
 
Net reclassification adjustment for amounts recognized in net income as a component of net periodic benefit cost, net of income tax expense of $1,808 and $1,287, respectively
3,386

 
2,404

 
 
 
 
COMPREHENSIVE INCOME
$
127,055

 
$
61,999



See Notes to Unaudited Condensed Consolidated Financial Statements.


6


ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three months ended March 31,
 
2015
 
2014
CASH PROVIDED BY OPERATIONS:
 
 
 
Net income
$
123,669

 
$
59,595

Adjustments to reconcile net income to net cash provided by operations:
 

 
 

Depreciation and amortization
90,564

 
70,873

Deferred income taxes
(7,541
)
 
(1,489
)
Provision for pension and other postemployment benefits
7,844

 
6,170

Share-based compensation expense
5,190

 
7,547

Gain on disposals of property, plant and equipment
(513
)
 
(1,110
)
Other postemployment benefit claims paid
(1,115
)
 
(894
)
Contributions to pension plans
(375
)
 
(6,448
)
Changes in current assets and liabilities:
 

 
 

Receivables - trade and other
42,053

 
(39,090
)
Prepaid expenses and other current assets
4,350

 
12,248

Accounts payable
6,894

 
(13,637
)
Accrued income taxes
12,300

 
9,222

Deferred revenues
1,163

 
(13,502
)
Other current liabilities
(47,075
)
 
(11,037
)
Net changes in other noncurrent assets and liabilities
7,358

 
2,075

Net cash provided by operations
244,766

 
80,523

 
 
 
 
CASH USED IN INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(514,265
)
 
(532,518
)
Proceeds from disposals of property, plant and equipment
1,680

 
6,600

Net cash used in investing activities
(512,585
)
 
(525,918
)
 
 
 
 
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
 

 
 

Proceeds from borrowings

 
793,380

Dividends paid
(12,562
)
 

Debt issue costs

 
(687
)
Excess tax benefit (deficit) from share-based compensation
(1,981
)
 
(563
)
Proceeds from exercise of share options

 
810

Net cash provided by (used in) financing activities
(14,543
)
 
792,940

 
 
 
 
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(282,362
)
 
347,545

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
339,154

 
1,092,844

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
56,792

 
$
1,440,389



See Notes to Unaudited Condensed Consolidated Financial Statements.


7


ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
Shares outstanding
 
Class A ordinary shares/ Common stock
 
Additional paid-in capital
 
Retained earnings
 
Treasury shares
 
Accumulated other comprehensive income (loss)
 
Total shareholders' equity
Balance, January 1, 2014
124,237

 
$
15,597

 
$
1,407,031

 
$
3,619,540

 
$
(5,962
)
 
$
(142,445
)
 
$
4,893,761

Net shares issued (acquired) under share-based compensation plans
78

 
2

 
529

 

 
(4,381
)
 

 
(3,850
)
Share-based compensation

 

 
5,717

 

 

 

 
5,717

Excess tax benefit (deficit) from share-based compensation plans

 

 
(563
)
 

 

 

 
(563
)
Retirement benefit adjustments, net of taxes of $1,287

 

 

 

 

 
2,404

 
2,404

Other

 

 

 

 

 
(287
)
 
(287
)
Net income

 

 

 
59,595

 

 

 
59,595

Balance, March 31, 2014
124,315

 
$
15,599

 
$
1,412,714

 
$
3,679,135

 
$
(10,343
)
 
$
(140,328
)
 
$
4,956,777

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
124,564

 
$
15,604

 
$
1,436,910

 
$
3,466,993

 
$
(7,990
)
 
$
(220,118
)
 
$
4,691,399

Net shares issued (acquired) under share-based compensation plans
199

 
137

 

 

 
(3,463
)
 

 
(3,326
)
Share-based compensation

 

 
5,761

 

 

 

 
5,761

Excess tax benefit (deficit) from share-based compensation plans

 

 
(1,981
)
 

 

 

 
(1,981
)
Retirement benefit adjustments, net of taxes of $1,808

 

 

 

 

 
3,386

 
3,386

Dividends

 

 

 
(12,562
)
 

 

 
(12,562
)
Net income

 

 

 
123,669

 

 

 
123,669

Balance, March 31, 2015
124,763

 
$
15,741

 
$
1,440,690

 
$
3,578,100

 
$
(11,453
)
 
$
(216,732
)
 
$
4,806,346


See Notes to Unaudited Condensed Consolidated Financial Statements.

8

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1 – Basis of Presentation and Nature of Operations

The financial statements included in this Form 10-Q are presented in United States (U.S.) dollars and include the accounts of Rowan Companies plc ("Rowan plc") and its subsidiaries.  Intercompany balances and transactions are eliminated in consolidation.  Unless the context otherwise requires, the terms “Company,” “we,” “us” and “our” are used to refer to Rowan plc and its consolidated subsidiaries.

The financial statements included in this Form 10-Q have been prepared without audit in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information 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.  Management believes the accompanying financial statements contain all adjustments, which are of a normal recurring nature unless otherwise noted, necessary for a fair statement of the results for the interim periods presented.  The Company’s results of operations and cash flows for the interim periods are not necessarily indicative of results to be expected for the full year.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

We are a global provider of offshore oil and gas contract drilling services utilizing a fleet of 30 self-elevating mobile offshore “jack-up” drilling units and four ultra-deepwater drillships.  Historically, our primary focus has been on high-specification and premium jack-up rigs, which our customers use for exploratory and development drilling and associated drilling services.  In 2009, we began executing a new strategic plan that included divesting non-core assets and investing in ultra-deepwater assets, with a goal of balancing our earnings from jack-ups and deepwater rigs over the long term. In 2011 and 2012 we entered into contracts for the construction of four ultra-deepwater drillships, and during 2014, we took delivery of the first three drillships: the Rowan Renaissance, which commenced drilling operations offshore West Africa in April 2014; the Rowan Resolute, which commenced operations in the United States Gulf of Mexico (US GOM) in October 2014; and the Rowan Reliance, which commenced operations in the US GOM in February 2015. Our fourth drillship, the Rowan Relentless, was delivered in late March 2015 and is expected to commence operations in the US GOM in July 2015.

The Company conducts offshore drilling operations in various markets throughout the world including the US GOM, the United Kingdom (U.K.) and Norwegian sectors of the North Sea, the Middle East, West and North Africa, Southeast Asia and Trinidad.

The financial information as of December 31, 2014, presented in this report does not constitute the Company's statutory accounts for that year within the meaning of the U.K. Companies Act 2006 (the "Companies Act").  Statutory accounts as required by the Companies Act for the year ended December 31, 2014, have been delivered to the Registrar of Companies in the U.K. The auditors reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under Sections 498(2) or (3) of the Companies Act.

New Accounting Standards In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which sets forth a global standard for revenue recognition and replaces most existing industry-specific guidance. As proposed, we would be required to adopt the new standard in annual and interim reports for periods beginning January 1, 2017; however, in April 2015, the FASB voted for a one-year deferral of the effective date. We are currently evaluating the potential effect of the new standard.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. We will be required to adopt the new standard in annual and interim reports beginning January 1, 2016. We do not expect adoption of the new standard will have a material effect on our financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under this ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. Debt issuance costs incurred before the associated funding is received (i.e., the debt liability) should be reported on the balance sheet as deferred charges until the debt is recognized on the balance sheet. We will be required to adopt the new standard in annual and interim reports retrospectively for periods beginning January 1, 2016. We do not expect adoption of the new standard will have a material effect on our financial statements.


9



Note 2 – Earnings Per Share

A reconciliation of basic and diluted shares follows (in thousands):

 
Three months ended March 31,
 
2015
 
2014
 
 
 
 
Average common shares outstanding
124,294

 
123,707

Effect of dilutive securities - share-based compensation
806

 
970

Average shares for diluted computations
125,100

 
124,677


There were no adjustments to net income required for purposes of computing diluted earnings per share.

Share options, appreciation rights and restricted share units granted under share-based compensation plans are antidilutive and excluded from diluted earnings per share when the hypothetical number of shares that could be repurchased under the treasury stock method exceeds the number of shares to be exercised.  Antidilutive shares, which could potentially dilute earnings per share in the future, are set forth below (in thousands):
 
Three months ended March 31,
 
2015
 
2014
 
 
 
 
Share options and appreciation rights
1,456

 
1,108

Restricted share units
1,533

 

Total potentially dilutive shares
2,989

 
1,108


Note 3 – Pension and Other Postemployment Benefits

The Company provides defined-benefit pension, health care and life insurance benefits upon retirement for certain full-time employees.

Net periodic pension cost recognized during the periods included the following components (in thousands):

 
Three months ended March 31,
 
2015
 
2014
 
 
 
 
Service cost
$
4,189

 
$
3,620

Interest cost
7,860

 
8,092

Expected return on plan assets
(10,414
)
 
(10,251
)
Amortization of net loss
6,311

 
4,231

Amortization of prior service credit
(1,115
)
 
(1,110
)
Total net pension cost
$
6,831

 
$
4,582



10

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other postemployment benefit cost recognized during the periods included the following components (in thousands):

 
Three months ended March 31,
 
2015
 
2014
 
 
 
 
Service cost
$
320

 
$
267

Interest cost
695

 
757

Amortization of net loss
(2
)
 
(39
)
Amortization of prior service credit

 
(8
)
Total other postemployment benefit cost
$
1,013

 
$
977


During the three months ended March 31, 2015, the Company contributed $1.5 million to its pension and other postemployment benefit plans and expects to make additional contributions to such plans totaling approximately $24.8 million for the remainder of 2015.

Note 4 – Commitments and Contingent Liabilities

Uncertain tax positions – In 2009, the Company recognized certain tax benefits as a result of applying the facts of a third-party tax case to the Company’s situation.  That case provided a more favorable tax treatment for certain foreign contracts entered into in prior years.  Our position was challenged by the U.S. Internal Revenue Service.  We appealed their findings and reached a settlement agreement in September 2014 with respect to three of the four years under review in the amount of approximately $36 million, including interest, which we collected in October 2014. A remaining year continues to be under examination. We plan to vigorously defend our position.

Other matters – On March 22, 2015, while working for Cobalt International Energy, Inc. (“Cobalt”) in the Gulf of Mexico, the Rowan Reliance drillship experienced a loss of seal in the riser connection system which resulted in a spill of approximately 2,200 barrels of synthetic-oil based mud.  The drillship commenced operations on the well on February 1, 2015, and the well was plugged and abandoned on April 6, 2015.  On April 22, 2015, we commenced drilling the next well under our existing contract. We had seven days of zero rate in the first quarter (with associated lost revenues of approximately $4 million). We are in discussions with Cobalt to resolve this matter. It is reasonably possible that a resolution of the matter could result in the loss of day rate or a reduced operating rate for a period of time. Such additional lost revenue cannot be determined with certainty at this time but is not expected to have a material impact on our financial condition.

On April 21, 2015 the Bureau of Safety and Environmental Enforcement (BSEE) informed the Company it will conduct a Quality Control - Failure Incident Team (QC-FIT) evaluation of the incident, and the Company is cooperating with BSEE in the evaluation. 

We periodically employ letters of credit in the normal course of our business, and had outstanding letters of credit of approximately $24.5 million at March 31, 2015.

We are involved in various other legal proceedings incidental to our business and are vigorously defending our position in all such matters.  Although the outcome of such proceedings cannot be predicted with certainty, we do not expect resolution of these matters to have a material effect on our financial position, results of operations or cash flows.

Note 5 – Share-Based Compensation

On February 26, 2015, the Company granted restricted share units (RSUs) to employees and officers for annual incentive awards pursuant to our long-term incentive plan with a grant-date fair value aggregating $22.5 million.  The awards vest ratably over three years except to the extent they may vest earlier under our retirement policy. The aggregate fair value, net of estimated forfeitures, was $21.2 million, which will be recognized as compensation expense over a weighted-average period of 2.7 years from the grant date.  

Each RSU awarded to employees is granted in tandem with a corresponding dividend equivalent which entitles the employee to receive an amount in cash equal to any cash dividends paid by the Company with respect to the underlying shares. Dividend

11

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

equivalents are payable as and when the RSUs vest. Any dividend equivalent amounts are forfeited if the corresponding RSUs are forfeited or do not vest. The Company began paying dividends in May 2014.

Additionally, on February 26, 2015, the Company granted to certain members of management performance units (P-Units) that have a target value of $100 per unit.  The amount ultimately earned with respect to the P-Units will depend on the Company’s total shareholder return (TSR) ranking compared to a group of peer companies over a three-year period ending December 31, 2017, and could range from zero to $200 per unit depending on performance.  Twenty-five percent of the P-Units’ value is determined by the Company’s relative TSR ranking for each one-year period ended December 31, 2015, 2016, and 2017, respectively, and 25% of the P-Units’ value is determined by the relative TSR ranking for the three-year period ending December 31, 2017.  Vesting of awards and any payment with respect to the P-Units would not occur until the third anniversary following the grant date and would be settled in cash.

The grant-date fair value of the P-Units was estimated to be $9.0 million.  Fair value was estimated using a Monte Carlo simulation model, which considers the probabilities of the Company’s TSR ranking at the end of each performance period and the amount of the payout at each rank to determine the probability-weighted expected payout.  The Company uses liability accounting to account for the P-Units.  Compensation is recognized on a straight-line basis over a maximum period of three years from the grant date and is adjusted for changes in fair value through the vesting date. 

Estimated liabilities for all outstanding P-Unit obligations are classified between current and long-term liabilities and aggregated $9.6 million and $11.6 million, at March 31, 2015, and December 31, 2014, respectively.

At March 31, 2015, the Company had approximately $60.4 million of estimated unrecognized share-based compensation, which is expected to be recognized as compensation expense over a remaining weighted-average period of 2.1 years.

Note 6 – Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The fair value hierarchy prescribed by US GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of inputs that may be used to measure fair value are:

Level 1 – Quoted prices for identical instruments in active markets;
Level 2 – Quoted market prices for similar instruments in active markets; quoted prices for identical instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable, such as those used in pricing models or discounted cash flow methodologies, for example.

The applicable level within the fair value hierarchy is the lowest level of any input that is significant to the fair value measurement.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):


12

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
 
 
Estimated fair value measurements
 
Carrying value
 
Quoted prices in active markets (Level 1)
 
Significant other observable inputs (Level 2)
 
Significant other unobservable inputs (Level 3)
March 31, 2015:
 
 
 
 
 
 
 
Assets - cash equivalents
$
30,084

 
$
30,084

 
$

 
$

Other assets
14,945

 
14,945

 

 

 
 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
 
Assets - cash equivalents
$
314,570

 
$
314,570

 
$

 
$

Other assets
16,304

 
16,304

 

 


At March 31, 2015 and December 31, 2014, we held Egyptian pounds in the amount of $14.9 million and $16.3 million, respectively, which are classified as other noncurrent assets. We ceased drilling operations in Egypt in 2014, and to date we have been unable to convert, utilize or repatriate such funds.

Trade receivables and trade payables, which are also required to be measured at fair value, have carrying values that approximate their fair values due to their short maturities.

Other Fair Value Measurements

Those financial instruments not required to be measured at fair value consist of the Company’s publicly traded debt securities.  Estimated fair values and related carrying values of our long-term debt securities aggregated $2.694 billion and $2.807, respectively, at March 31, 2015, compared to $2.755 billion and $2.807, respectively, at December 31, 2014. Fair values of the Company’s debt securities were provided by a broker who makes a market in our debt securities and were measured using a market-approach valuation technique.  Fair value was determined by adding a spread based on actual trades for that security (or a trader quote where actual trades were unavailable) to the applicable benchmark Treasury security with a comparable maturity in order to derive a current yield.  The yield is then used to determine a price given the individual security’s coupon rate and maturity.  Such inputs are considered “significant other observable inputs” which are categorized as Level 2 inputs in the fair value hierarchy.  

Note 7 – Shareholders' Equity

In February 2015, the Company issued 1.1 million shares of common stock, $0.125 par value per share, in a noncash transaction. The shares were immediately transferred to an affiliated employee benefit trust for use in connection with the Company's share-based employee incentive plan. Shares held by the Company's employee benefit trust are not eligible to vote or to receive dividends and are classified as treasury shares in the condensed consolidated balance sheet.

The following table sets forth the significant amounts reclassified out of each component of accumulated other comprehensive loss and their effect on net income for the period. The amounts reclassified are included in the computation of net periodic pension costs. (See Note 3 – Pension and Other Postemployment Benefits.) Amounts in parentheses are charges against income (in thousands):

 
Three months ended March 31,
 
2015
 
2014
 
 
 
 
Amounts recognized as a component of net periodic pension and other postretirement benefit cost:
 
 
 
Amortization of net loss
$
(6,309
)
 
$
(4,811
)
Amortization of prior service credit
1,115

 
1,120

Total before income taxes
(5,194
)
 
(3,691
)
Income tax benefit
1,808

 
1,287

Total reclassifications for the period, net of income taxes
$
(3,386
)
 
$
(2,404
)


13

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On January 29, 2015, the Board of Directors approved a quarterly cash dividend of $0.10 per share, paid on March 3, 2015, to shareholders of record at the close of business on February 9, 2015.

On May 1, 2015, the Board of Directors approved a quarterly cash dividend of $0.10 per share, payable on May 26, 2015, to shareholders of record at the close of business on May 12, 2015.

Note 8 – Other Financial Statement Disclosures

Accounts Receivable – The following table sets forth the components of Receivables - trade and other (in thousands):

 
March 31, 2015
 
December 31, 2014
Trade
$
486,265

 
$
524,712

Income tax
5,186

 
6,315

Other
11,700

 
14,177

Total receivables - trade and other
$
503,151

 
$
545,204


Discontinued Operations – In February 2014, the Company sold a land rig it retained in the 2011 sale of its manufacturing operations. The net carrying value was $4.1 million, consisting of a $24.2 million asset previously classified as assets of discontinued operations, less $20.1 million of deferred revenues previously classified as liabilities of discontinued operations. The Company received $6.0 million in cash resulting in a $4.0 million gain, net of tax effects, which was recognized in the quarter ended March 31, 2014.

Supplemental Cash Flow Information – Accrued capital expenditures, which are excluded from capital expenditures in the Condensed Consolidated Statements of Cash Flows until settlement, totaled $57.1 million and $39.0 million at March 31, 2015 and 2014, respectively.  Interest capitalized in connection with rig construction projects totaled $7.5 million and $17.5 million in the three months ended March 31, 2015 and 2014, respectively.

Income TaxesIn accordance with US GAAP for interim reporting, the Company estimates its full-year effective tax rate and applies this rate to its year-to-date pretax income.  In addition, the Company separately calculates the tax impact of unusual items, if any. We provide for income taxes based upon the tax laws and rates in effect in the countries in which we conduct operations. The amounts of our provisions are impacted by such laws and rates and the availability of deductions, credits and other benefits in each of the various jurisdictions. Our overall effective tax rate may therefore vary considerably from quarter to quarter and from year to year based on the actual or projected location of operations and other factors.

Our effective tax rate was 12.2% for the three months ended March 31, 2015, compared to 0.5% for the three months ended March 31, 2014. The higher effective rate for the current-year period was due to additional income in high-tax jurisdictions and limitations on interest expense deductions in the U.S.

The Company has not provided for deferred income taxes on undistributed earnings of its non-U.K. subsidiaries, including non-U.S. entities under Rowan Companies, Inc. (RCI), except for a portion of its Saudi Arabia operating entity that is expected to be distributed in 2015.  It is the Company’s policy and intention, except as noted above, to permanently reinvest outside the U.S. the earnings of non-U.S. entities directly or indirectly owned by RCI.  Generally, earnings of non-U.K. entities in which RCI does not have a direct or indirect ownership interest can be distributed to the Company without imposition of either U.K. or local country tax.

In December 2014, the U.K. Treasury released a draft proposal that would impose tax on groups that use certain tax planning techniques that are perceived as diverting profits from the U.K. The Diverted Profit Tax rule was included in the 2015 Finance Bill and on March 26, 2015 the legislation received Royal Assent with an effective date of April 1, 2015.  We currently do not know what the financial impact is from this legislation but do not believe it will have a material impact on our financial statements.

Litigation Settlement – In the first quarter of 2014, the Company settled its litigation with the owners and operators of a tanker that collided with the Rowan EXL I in May 2012 and received $20.9 million in cash as compensation for damages incurred in 2012 for repair costs to and loss of use of the rig. Such amount was recognized as a component of operating income in the three months ended March 31, 2014.


14

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 9 – Guarantees of Registered Securities

Rowan plc and its 100%-owned subsidiary, RCI, have entered into agreements providing for, among other things, the full, unconditional and irrevocable guarantee by Rowan plc of the prompt payment when due of any amount owed to the holders of RCI’s 5% Senior Notes due 2017, 7.875% Senior Notes due 2019, 4.875% Senior Notes due 2022, 4.75% Senior Notes due 2024, 5.4% Senior Notes due 2042, and 5.85% Senior Notes due 2044 (the “Senior Notes”).

The condensed consolidating financial information that follows is presented on the equity method of accounting in accordance with Rule 3-10 of Regulation S-X in connection with Rowan plc’s guarantee of the Senior Notes and reflects the corporate ownership structure as of March 31, 2015. Financial information for the three months ended March 31, 2014, has been recast to reflect changes to the corporate ownership structure that occurred in the third quarter of 2014 and is presented as though the structure at March 31, 2015, was in place at January 1, 2014.

15

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Balance Sheets
March 31, 2015
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
CURRENT ASSETS:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
895

 
$
2,946

 
$
52,951

 
$

 
$
56,792

Receivables - trade and other
76

 
5,617

 
497,458

 

 
503,151

Other current assets
212

 
43,565

 
8,270

 

 
52,047

Total current assets
1,183

 
52,128

 
558,679

 

 
611,990

 
 
 
 
 
 
 
 
 
 
Property, plant and equipment - gross

 
550,095

 
8,765,844

 

 
9,315,939

Less accumulated depreciation and amortization

 
228,765

 
1,223,148

 

 
1,451,913

Property, plant  and equipment - net

 
321,330

 
7,542,696

 

 
7,864,026

 
 
 
 
 
 
 
 
 
 
Investments in subsidiaries
4,754,045

 
6,196,899

 

 
(10,950,944
)
 

Due from affiliates
57,359

 
1,556,471

 
246,421

 
(1,860,251
)
 

Other assets

 
17,792

 
18,156

 

 
35,948

 
$
4,812,587

 
$
8,144,620

 
$
8,365,952

 
$
(12,811,195
)
 
$
8,511,964

 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 

 
 

 
 

 
 

 
 

Accounts payable - trade
$
229

 
$
14,576

 
$
103,268

 
$

 
$
118,073

Deferred revenues

 

 
37,352

 

 
37,352

Accrued liabilities
321

 
85,130

 
77,357

 

 
162,808

Total current liabilities
550

 
99,706

 
217,977

 

 
318,233

 
 
 
 
 
 
 
 
 
 
Long-term debt

 
2,807,114

 

 

 
2,807,114

Due to affiliates
1,081

 
245,024

 
1,614,146

 
(1,860,251
)
 

Other liabilities
4,610

 
306,343

 
62,420

 

 
373,373

Deferred income taxes - net

 
517,836

 
162,544

 
(473,482
)
 
206,898

Shareholders' equity
4,806,346

 
4,168,597

 
6,308,865

 
(10,477,462
)
 
4,806,346

 
$
4,812,587

 
$
8,144,620

 
$
8,365,952

 
$
(12,811,195
)
 
$
8,511,964


16

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Balance Sheets
December 31, 2014
(in thousands)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
45,909

 
$
48,580

 
$
244,665

 
$

 
$
339,154

Receivables - trade and other
26

 
4,317

 
540,861

 

 
545,204

Other current assets
424

 
47,986

 
8,328

 

 
56,738

Total current assets
46,359

 
100,883

 
793,854

 

 
941,096

 
 
 
 
 
 
 
 
 
 
Property, plant and equipment - gross

 
610,063

 
8,190,119

 

 
8,800,182

Less accumulated depreciation and amortization

 
271,293

 
1,096,677

 

 
1,367,970

Property, plant  and equipment - net

 
338,770

 
7,093,442

 

 
7,432,212

 
 
 
 
 
 
 
 
 
 
Investments in subsidiaries
4,624,874

 
5,863,509

 

 
(10,488,383
)
 

Due from affiliates
36,586

 
1,412,860

 
71,867

 
(1,521,313
)
 

Other assets

 
18,103

 
19,781

 

 
37,884

 
$
4,707,819

 
$
7,734,125

 
$
7,978,944

 
$
(12,009,696
)
 
$
8,411,192

 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 

 
 

 
 

 
 

 
 

Accounts payable - trade
$
912

 
$
8,576

 
$
93,285

 
$

 
$
102,773

Deferred revenues

 

 
36,189

 

 
36,189

Accrued liabilities
400

 
100,167

 
93,692

 

 
194,259

Total current liabilities
1,312

 
108,743

 
223,166

 

 
333,221

 
 
 
 
 
 
 
 
 
 
Long-term debt

 
2,807,324

 

 

 
2,807,324

Due to affiliates
9,282

 
45,457

 
1,466,574

 
(1,521,313
)
 

Other liabilities
5,826

 
312,575

 
49,865

 

 
368,266

Deferred income taxes - net

 
507,281

 
167,094

 
(463,393
)
 
210,982

Shareholders' equity
4,691,399

 
3,952,745

 
6,072,245

 
(10,024,990
)
 
4,691,399

 
$
4,707,819

 
$
7,734,125

 
$
7,978,944

 
$
(12,009,696
)
 
$
8,411,192



17

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Income Statements
Three months ended March 31, 2015
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
REVENUES
$

 
$
15,046

 
$
547,351

 
$
(15,358
)
 
$
547,039

 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 

 
 

 
 

 
 

 
 

Direct operating costs (excluding items below)

 
1,697

 
268,291

 
(14,254
)
 
255,734

Depreciation and amortization

 
4,580

 
84,861

 
249

 
89,690

Selling, general and administrative
4,212

 
642

 
24,085

 
(1,353
)
 
27,586

Gain on disposals of  property and equipment

 
(342
)
 
(171
)
 

 
(513
)
Total costs and expenses
4,212

 
6,577

 
377,066

 
(15,358
)
 
372,497

 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
(4,212
)
 
8,469

 
170,285

 

 
174,542

 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 

 
 

 
 

Interest expense, net of interest capitalized

 
(32,746
)
 
(2,449
)
 
2,449

 
(32,746
)
Interest income
134

 
2,467

 
3

 
(2,449
)
 
155

Other - net
5,604

 
(5,523
)
 
(1,122
)
 

 
(1,041
)
Total other income (expense) - net
5,738

 
(35,802
)
 
(3,568
)
 

 
(33,632
)
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
1,526

 
(27,333
)
 
166,717

 

 
140,910

Provision for income taxes

 
390

 
28,749

 
(11,898
)
 
17,241

 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
1,526

 
(27,723
)
 
137,968

 
11,898

 
123,669

 
 
 
 
 
 
 
 
 
 
DISCONTINUED OPERATIONS, NET OF TAX

 

 

 

 

 
 
 
 
 
 
 
 
 
 
EQUITY IN EARNINGS OF SUBSIDIARIES, NET OF TAX
122,143

 
22,078

 

 
(144,221
)
 

 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
123,669

 
$
(5,645
)
 
$
137,968

 
$
(132,323
)
 
$
123,669










18

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Income Statements
Three months ended March 31, 2014
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
REVENUES
$

 
$
16,162

 
$
376,494

 
$
(15,054
)
 
$
377,602

 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 

 
 

 
 

 
 

 
 

Direct operating costs (excluding items below)

 
3,156

 
232,267

 
(15,054
)
 
220,369

Depreciation and amortization

 
4,562

 
66,311

 

 
70,873

Selling, general and administrative
5,820

 
1,229

 
22,826

 

 
29,875

Loss on disposals of  property and equipment

 
17

 
786

 

 
803

Litigation settlement

 

 
(20,875
)
 

 
(20,875
)
Total costs and expenses
5,820

 
8,964

 
301,315

 
(15,054
)
 
301,045

 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
(5,820
)
 
7,198

 
75,179

 

 
76,557

 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 

 
 

 
 

Interest expense, net of interest capitalized

 
(20,960
)
 
(240
)
 
240

 
(20,960
)
Interest income
109

 
447

 
271

 
(240
)
 
587

Other - net
3,500

 
(3,494
)
 
(357
)
 

 
(351
)
Total other income (expense) - net
3,609

 
(24,007
)
 
(326
)
 

 
(20,724
)
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(2,211
)
 
(16,809
)
 
74,853

 

 
55,833

(Benefit) provision for income taxes

 
(8,949
)
 
16,406

 
(7,176
)
 
281

 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
(2,211
)
 
(7,860
)
 
58,447

 
7,176

 
55,552

 
 
 
 
 
 
 
 
 
 
DISCONTINUED OPERATIONS, NET OF TAX

 
4,043

 

 

 
4,043

 
 
 
 
 
 
 
 
 
 
EQUITY IN EARNINGS OF SUBSIDIARIES, NET OF TAX
61,806

 
25,380

 

 
(87,186
)
 

 
 
 
 
 
 
 
 
 
 
NET INCOME
$
59,595

 
$
21,563

 
$
58,447

 
$
(80,010
)
 
$
59,595




19

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Statements of Comprehensive Income
Three months ended March 31, 2015
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
123,669

 
$
(5,645
)
 
$
137,968

 
$
(132,323
)
 
$
123,669

 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

 
 

 
 

 
 

Net reclassification adjustments for amount recognized in net income as a component of net periodic benefit cost, net of income taxes
3,386

 
3,386

 

 
(3,386
)
 
3,386

 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
$
127,055

 
$
(2,259
)
 
$
137,968

 
$
(135,709
)
 
$
127,055




Rowan Companies plc and Subsidiaries
Statements of Comprehensive Income
Three months ended March 31, 2014
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET INCOME
$
59,595

 
$
21,563

 
$
58,447

 
$
(80,010
)
 
$
59,595

 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

 
 

 
 

 
 

Net reclassification adjustments for amount recognized in net income as a component of net periodic benefit cost, net of income taxes
2,404

 
2,404

 

 
(2,404
)
 
2,404

 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
$
61,999

 
$
23,967

 
$
58,447

 
$
(82,414
)
 
$
61,999





20

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Consolidating Statements of Cash Flows
Three months ended March 31, 2015
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
$
(3,615
)
 
$
(19,741
)
 
$
266,064

 
$
2,058

 
$
244,766

 
 
 
 
 
 
 
 
 
 
INVESTING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Property,  plant  and  equipment  additions

 
(1,758
)
 
(512,507
)
 

 
(514,265
)
Proceeds  from  disposals  of  property,  plant  and  equipment

 
1,198

 
482

 

 
1,680

 
 
 
 
 
 
 
 
 
 
Net  cash  used  in  investing  activities

 
(560
)
 
(512,025
)
 

 
(512,585
)
 
 
 
 
 
 
 
 
 
 
FINANCING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Advances (to) from affiliates
(28,837
)
 
(23,352
)
 
54,247

 
(2,058
)
 

Dividends paid
(12,562
)
 

 

 

 
(12,562
)
Excess tax benefit (deficit) from share-based compensation

 
(1,981
)
 

 

 
(1,981
)
 
 
 
 
 
 
 
 
 
 
Net  cash  provided  by  (used  in)   financing  activities
(41,399
)
 
(25,333
)
 
54,247

 
(2,058
)
 
(14,543
)
 
 
 
 
 
 
 
 
 
 
DECREASE IN CASH AND  CASH EQUIVALENTS
(45,014
)
 
(45,634
)
 
(191,714
)
 

 
(282,362
)
CASH  AND  CASH  EQUIVALENTS,   BEGINNING  OF  PERIOD
45,909

 
48,580

 
244,665

 

 
339,154

 
 
 
 
 
 
 
 
 
 
CASH  AND  CASH  EQUIVALENTS,   END  OF  PERIOD
$
895

 
$
2,946

 
$
52,951

 
$

 
$
56,792


21

ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Consolidating Statements of Cash Flows
Three months ended March 31, 2014
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
$
67,801

 
$
287,495

 
$
290,409

 
$
(565,182
)
 
$
80,523

 
 
 
 
 
 
 
 
 
 
INVESTING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Property,  plant  and  equipment  additions

 
(4,236
)
 
(528,282
)
 

 
(532,518
)
Proceeds  from  disposals  of  property,   plant  and  equipment

 
6,007

 
593

 

 
6,600

Investments in consolidated subsidiaries

 
(74,305
)
 

 
74,305

 

 
 
 
 
 
 
 
 
 
 
Net  cash  used  in  investing  activities

 
(72,534
)
 
(527,689
)
 
74,305

 
(525,918
)
 
 
 
 
 
 
 
 
 
 
FINANCING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Advances (to) from affiliates
(16,893
)
 
(355,605
)
 
(42,684
)
 
415,182

 

Contributions from parent

 

 
74,305

 
(74,305
)
 

Proceeds from borrowings

 
793,380

 

 

 
793,380

Debt issue costs

 
(687
)
 

 

 
(687
)
Dividends paid

 
(75,000
)
 
(75,000
)
 
150,000

 

Excess tax benefit (deficit) from share-based compensation

 
(563
)
 

 

 
(563
)
Proceeds from exercise of share options
810

 

 

 

 
810

 
 
 
 
 
 
 
 
 
 
Net  cash  provided  by (used in)  financing  activities
(16,083
)
 
361,525

 
(43,379
)
 
490,877

 
792,940

 
 
 
 
 
 
 
 
 
 
INCREASE (DECREASE) IN  CASH  AND   CASH  EQUIVALENTS
51,718

 
576,486

 
(280,659
)
 

 
347,545

CASH  AND  CASH  EQUIVALENTS,   BEGINNING  OF  PERIOD
64,292

 
92,116

 
936,436

 

 
1,092,844

 
 
 
 
 
 
 
 
 
 
CASH  AND  CASH  EQUIVALENTS,   END  OF  PERIOD
$
116,010

 
$
668,602

 
$
655,777

 
$

 
$
1,440,389





22


ROWAN COMPANIES PLC AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited consolidated financial statements as of and for the three months ended March 31, 2015, included in this Form 10-Q and with our annual report on Form 10-K for the year ended December 31, 2014. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our annual report, as updated in our subsequent quarterly reports. See “Forward-Looking Statements.”

OVERVIEW

Rowan Companies plc is a global provider of offshore oil and gas contract drilling services with a focus on high-specification and premium jack-up rigs and high-specification ultra-deepwater rigs, which our customers use for both exploratory and development drilling.

During 2014, we took delivery of three newly constructed drillships: the Rowan Renaissance commenced drilling operations offshore West Africa in April 2014; the Rowan Resolute commenced operations in the US GOM in October 2014; and the Rowan Reliance commenced operations in the US GOM in February 2015. Our fourth drillship, the Rowan Relentless, was delivered in late March 2015 and is expected to commence operations in the US GOM in July of 2015.

As of April 22, 2015, the date of our most recent Fleet Status Report, we had six jack-ups in the North Sea, ten in the Middle East, seven in the US GOM including three cold-stacked, four in Malaysia, two in Trinidad, and one in Tunisia. Additionally, we have two ultra-deepwater drillships operating in the US GOM and one that is planning to mobilize to the US GOM from West Africa by the third quarter of 2015.

Revenues increased by $169 million, or by 45%, to $547 million for the three months ended March 31, 2015, over the comparable prior-year period primarily as a result of the commencement of operations of the Rowan Renaissance and the Rowan Resolute in 2014 and the Rowan Reliance in 2015. Net income from continuing operations rose to $124 million in the first quarter of 2015 from $56 million in the first quarter of 2014.

Revenue-producing days increased by 12% to 2,411 for the three months ended March 31, 2015, from 2,153 in the first quarter of 2014. The addition of the drillships accounted for 226 of the 258 increase in days.
 
As a result of the dramatic decline in oil and natural gas prices since mid-2014, many oil and gas operators have significantly reduced their capital expenditure budgets for 2015 and beyond. This has led to a reduction in demand for both shallow and deepwater offshore drilling services. In the current environment, we may have difficulty securing new drilling contracts; we may enter into contracts at day rates substantially below their current levels; customers may seek to renegotiate or terminate existing contracts; and we may have difficulty selling older rigs. Additionally, the supply of offshore drilling rigs has grown significantly in recent years and the newbuild orderbook remains at relatively high levels, which could prove to exacerbate the gap between supply and demand if significant rig retirements do not occur in the coming years.







23


KEY PERFORMANCE MEASURES

The following table sets forth certain key performance measures by rig classification:

 
Three months ended March 31,
 
2015
 
2014
Revenues (in thousands):
 
 
 
Ultra-deepwater drillships
$
142,676

 
$

High specification jack-ups(1)
312,664

 
281,801

Premium jack-ups(2)
80,475

 
76,262

Conventional jack-ups
716

 
10,961

Subtotal - Day rate revenues
$
536,531

 
$
369,024

Other revenues(3)
10,508

 
8,578

Total revenues
$
547,039

 
$
377,602

 
 
 
 
Revenue-producing days:
 
 
 
Ultra-deepwater drillships
226

 

High specification jack-ups
1,471

 
1,410

Premium jack-ups
705

 
653

Conventional jack-ups
9

 
90

Total revenue-producing days
2,411

 
2,153

 
 
 
 
Average day rate: (4)
 

 
 

Ultra-deepwater drillships
$
631,949

 
$

High specification jack-ups
$
212,591

 
$
199,848

Premium jack-ups
$
114,195

 
$
116,802

Conventional jack-ups
$
72,975

 
$
121,797

Total fleet
$
222,532

 
$
171,401

 
 
 
 
Utilization: (5)
 
 
 
Ultra-deepwater drillships
94
%
 
%
High specification jack-ups
86
%
 
83
%
Premium jack-ups
98
%
 
91
%
Conventional jack-ups
4
%
 
33
%
Total fleet
82
%
 
80
%
 
 
 
 
(1) We define high-specification jack-ups as those that have hook-load capacity of at least two million pounds.
(2) We define premium jack-ups as those cantilevered rigs capable of operating in water depths of 300 feet or more.
(3) Other revenues, which are primarily revenues received for contract reimbursable costs, are excluded from the computation of average day rate.
(4) Average day rate is computed by dividing day rate revenues by the number of revenue-producing days, including fractional days. Day rate revenues include the contractual rates and amounts received in lump sum, such as for rig mobilization or capital improvements, which are amortized over the initial term of the contract. Revenues attributable to reimbursable expenses are excluded from average day rates.
(5) Utilization is the number of revenue-producing days, including fractional days, divided by the aggregate number of calendar days in the period, or, with respect to newly constructed rigs, the number of calendar days in the period from the date the rig was placed in service.


24


The following information is presented by geographic area:

 
Three months ended March 31,
 
2015
 
2014
Revenues (in thousands):
 
 
 
North Sea
$
154,971

 
$
104,460

Middle East(1)
118,868

 
114,094

US GOM
122,292

 
62,362

Southeast Asia
35,042

 
52,266

West Africa
56,573

 

Other international(2)
48,785

 
35,842

Subtotal - Day rate revenues
536,531


369,024

Other revenues(3)
10,508

 
8,578

Total revenues
$
547,039

 
$
377,602

Revenue-producing days:
 
 
 
North Sea
524

 
382

Middle East
858

 
839

US GOM
449

 
406

Southeast Asia
225

 
329

West Africa
90

 

Other international
265

 
197

Total revenue-producing days
2,411

 
2,153

Average day rate:(4)
 
 
 
North Sea
$
295,793

 
$
273,612

Middle East
$
138,516

 
$
135,971

US GOM
$
272,100

 
$
153,601

Southeast Asia
$
155,742

 
$
158,703

West Africa
$
628,589

 
$

Other international
$
184,428

 
$
182,151

Total fleet
$
222,532

 
$
171,401

Utilization:(5)
 
 
 
North Sea
97
%
 
71
%
Middle East
95
%
 
93
%
US GOM
58
%
 
64
%
Southeast Asia
63
%
 
92
%
West Africa
100
%
 
%
Other international
98
%
 
73
%
Total fleet
82
%
 
80
%
 
 
 
 
(1) Our rigs operating in the Middle East are located in Saudi Arabia and Qatar.
(2) "Other international" includes two rigs operating in Trinidad. Additionally, another rig operated in Egypt in 2014 and Tunisia in 2015.
(3) Other revenues, which are primarily revenues received for contract reimbursable costs, are excluded from the computation of average day rate.
(4) Average day rate is computed by dividing day rate revenues by the number of revenue-producing days, including fractional days. Day rate revenues include the contractual rates and amounts received in lump sum, such as for rig mobilization or capital improvements, which are amortized over the initial term of the contract. Revenues attributable to reimbursable expenses are excluded from average day rates.
(5) Utilization is the number of revenue-producing days, including fractional days, divided by the aggregate number of calendar days in the period, or, with respect to newly constructed rigs, the number of calendar days in the period from the date the rig was placed in service.

25


RESULTS OF OPERATIONS

Three months ended March 31, 2015, compared to three months ended March 31, 2014

Our operating results for the three months ended March 31, 2015 and 2014 are highlighted below (dollars in millions):
 
Three months ended March 31, 2015
 
Three months ended March 31, 2014
 
Amount
 
% of Revenues
 
Amount
 
% of Revenues
 
 
 
 
 
 
 
 
Revenues
$
547.0

 
100
 %
 
$
377.6

 
100
 %
Direct operating costs (excluding items below)
(255.7
)
 
-47
 %
 
(220.4
)
 
-58
 %
Depreciation expense
(89.7
)
 
-16
 %
 
(70.9
)
 
-19
 %
Selling, general and administrative expenses
(27.6
)
 
-5
 %
 
(29.9
)
 
-8
 %
Net gain (loss) on disposals of property and equipment
0.5

 
 %
 
(0.8
)
 
 %
Litigation settlement

 
 %
 
20.9

 
6
 %
Operating income
$
174.5

 
32
 %
 
$
76.5

 
20
 %

Revenues for the three months ended March 31, 2015, increased by $169.4 million or 45% compared to the three months ended March 31, 2014, as a result of the following (in millions):
 
Increase
 
 
Addition of the Rowan Renaissance, Rowan Resolute, and Rowan Reliance
$
142.7

Higher average day rates
19.3

Higher jack-up utilization
5.5

Revenues for reimbursable costs and other, net
1.9

Net increase
$
169.4


The number of revenue-producing days increased by 258, or approximately 12%, to 2,411 for the three months ended March 31, 2015, compared to the comparable prior-year period. The commencement of operations of the company's three new drillships accounted for 226 of the increase in revenue producing days.

Operating costs for the three months ended March 31, 2015, increased by $35.4 million or 16% compared to the three months ended March 31, 2014 as a result of the following (in millions):
 
Increase (decrease)
 
 
Addition of the Rowan Renaissance, Rowan Resolute and Rowan Reliance
$
42.9

Return to work of the Rowan Gorilla III and Gorilla VI
12.8

Reimbursable costs and other, net
(20.3
)
Net increase
$
35.4


For purposes of this discussion, we define our operating margin as revenues in excess of operating costs, excluding depreciation, selling, general and administrative expenses, gains and losses on asset disposals, litigation settlement, and material charges and other operating expenses. Operating margin as we have computed it, is a non-GAAP financial measure. The impacts on operating margin of those excluded items are discussed separately below. Such items have been excluded solely to simplify the discussion. Our operating margin, as we have defined it, increased to approximately 53% of revenues in the first quarter of 2015 from 42% in the first quarter of 2014.  Margins were favorably impacted as a result of the commencement of operations of the Rowan Renaissance, Rowan Resolute and Rowan Reliance.


26


Depreciation increased by $18.8 million or 27% compared to the first quarter of 2014 due to the addition of the three drillships and capital improvements to the fleet.

Selling, general and administrative expenses declined by $2.3 million, or 8% from the prior-year period, due primarily to lower equity compensation expense resulting from fair market adjustments to certain share-based awards recorded under the liability method of accounting.

Our effective tax rate was 12.2% for the three months ended March 31, 2015, compared to 0.5% for the three months ended March 31, 2014. The higher effective rate for the current-year period was due to additional income in high-tax jurisdictions and limitations on interest expense deductions in the U.S.

OUTLOOK

As a result of the dramatic decline in oil and natural gas prices since mid-2014, many oil and gas operators have significantly reduced their capital expenditure budgets for 2015 and beyond. This has led to a reduction in demand for both shallow and deepwater offshore drilling services. In the current environment, we may have difficulty securing new drilling contracts; we may enter into contracts at day rates substantially below their current levels; customers may seek to renegotiate or terminate existing contracts; and we may have difficulty selling older rigs. Additionally, the supply of offshore drilling rigs has grown significantly in recent years and the newbuild orderbook remains at relatively high levels, which could prove to exacerbate the gap between supply and demand if significant rig retirements do not occur in the coming years.

The influx of 213 newbuild jack-ups and 144 newbuild floaters delivered since early 2006, combined with numerous rigs recently idled as a result of the current reduction in demand, has increased competition for contracts in many regions in which we operate, putting significant downward pressure on utilization and day rates. Further, as of April 21, 2015, there were approximately 126 jack-up rigs under construction worldwide for delivery through 2018 (32% of the currently utilized jack-up fleet of 390 rigs), approximately 50 of which are considered high-specification (72% of the current high-specification fleet).
There were also approximately 85 floaters under construction worldwide for delivery through 2020 (62% of the currently utilized floater fleet of 232 rigs). We believe the current depressed demand and growing supply will likely continue to create a challenging business environment beyond 2015. Even when demand for offshore drilling services begins to recover, the positive effect on contracting terms may be muted unless meaningful supply is also rationalized. However, given the near-term pressure on utilization and day rates, combined with the high fixed-cost nature of the business and the growing number of older rigs, we believe a significant number of rigs are likely to be retired over the next several years. Newbuild delivery delays in the face of weak market conditions could also ultimately lead to a more balanced supply and demand.
Backlog

Our backlog by geographic area as of the date of our most recent Fleet Status Report is presented below (in millions):
 
April 22, 2015
 
Jack-ups
 
Drillships
 
Total
 
 
 
 
 
 
US GOM
$
6

 
$
2,022

 
$
2,028

Middle East
1,556

 

 
1,556

North Sea
835

 

 
835

West Africa

 
25

 
25

Southeast Asia
47

 

 
47

Other international
196

 

 
196

 Total backlog
$
2,640

 
$
2,047

 
$
4,687


The Rowan Renaissance drillship is completing the first year of its three-year contract, which commenced in April 2014. We anticipate the rig will relocate from West Africa to the US GOM by the third quarter of 2015, where it would earn a contract day rate of $620,000 and $630,000 in the second and third year, respectively, of its three-year contract. Alternatively, if the rig operates in West Africa during years two and three, the contract day rate would be $650,000 and $660,000, respectively.


27


We estimate our backlog will be realized as follows (in millions):
 
April 22, 2015
 
Jack-ups
 
Drillships
 
Total
 
 
 
 
 
 
2015
$
759

 
$
573

 
$
1,332

2016
786

 
885

 
1,671

2017
490

 
571

 
1,061

2018
256

 
18

 
274

2019 and later years
349

 

 
349

 Total backlog
$
2,640

 
$
2,047

 
$
4,687


Our backlog at February 19, 2015, as reported in our 2014 Form 10-K totaled $5.1 billion, consisting of $2.9 billion and $2.2 billion for our jack-up and drillship fleets, respectively.

Rig Utilization

About 60% of our remaining available rig days in 2015 (excluding our three cold-stacked rigs) and 43% of available rig days in 2016 were under contract or commitment as of April 22, 2015. As of that date, we had four rigs that were available (excluding our three cold-stacked rigs).

Out-of-Service Days – We define out-of-service days as those days when a rig is (or is planned to be) out of service and is not able to earn revenue. The Company may be compensated for certain out-of-service days, such as for shipyard stays or for rig transit periods preceding a contract; however, recognition of any such compensation is deferred and recognized over the primary term of the drilling contract.

Our out-of-service days declined to approximately 2.8% of available rig days in the first quarter 2015 from 3.5% in the fourth quarter 2014 and 13% in the first quarter 2014.  Out-of-service days for the first quarter 2015 were favorably impacted by fewer shipyard days compared to the first quarter of 2014, when three rigs were out of service for major shipyard projects. We estimate planned out-of-service time to range from 3% to 6% for the remainder of 2015 for inspections and special surveys, customer required equipment upgrades and other equipment modifications.

Idle Days We define idle days as the time a rig is not under contract and available to work. Idle days exclude cold-stacked rigs, which are not marketed. Our jack-up rigs experienced 139 idle days during the three months ended March 31, 2015, or 5.1% of total available jack-up rig-days. Our drillships were fully contracted during the quarter.

Operational Downtime We define operational downtime as the unbillable time a rig is under contract and unable to conduct planned operations due to equipment breakdowns or procedural failures. Our operational downtime, which is in addition to out-of-service days, was approximately 2% of in-service days for the three months ended March 31, 2015, compared to approximately 1% for the same period in 2014. We estimate operational downtime for our jack-up fleet will typically approximate 2.5% of operating days on a go-forward basis.

During the first quarter of 2015, our three ultra-deepwater drillships experienced a total of 13 days of operational downtime, or 5.5% of in-service days, which was within our expectation.

We estimate that operational downtime for our newly constructed ultra-deepwater drillships will be less than 5% of operating days following an initial break-in period of operations, which could range from approximately six months to one year, during which time the actual rate could be somewhat higher.


28


LIQUIDITY AND CAPITAL RESOURCES

A comparison of key balance sheet amounts and ratios follows (dollars in millions):
 
March 31, 2015
 
December 31, 2014
 
 
 
 
Cash and cash equivalents
$
56.8

 
$
339.2

Current assets
$
612.0

 
$
941.1

Current liabilities
$
318.2

 
$
333.2

Current ratio
1.92

 
2.82

Long-term debt
$
2,807.1

 
$
2,807.3

Shareholders' equity
$
4,806.3

 
$
4,691.4

Debt to capitalization ratio
37
%
 
37
%

Sources and uses of cash and cash equivalents were as follows (in millions):
 
Three months ended March 31,
 
2015
 
2014
 
 
 
 
Net cash provided by operating activities
$
244.8

 
$
80.5

Capital expenditures
(514.3
)
 
(532.5
)
Proceeds from borrowings, net of issue costs

 
792.7

Payment of cash dividends
(12.6
)
 

Proceeds from disposals of property and equipment
1.7

 
6.6

Proceeds from exercise of share options

 
0.8

Excess tax benefits (deficit) from share-based compensation
(2.0
)
 
(0.6
)
Total net source (use)
$
(282.4
)
 
$
347.5


Operating Cash Flows

Cash flows from operations increased by approximately $164.2 million to $244.8 million in the three months ended March 31, 2015, from $80.5 million in the comparable prior-year period primarily due to the commencement of operations of the three new drillships and to timing of collections of accounts receivable.

The Company has not provided for deferred income taxes on undistributed earnings of its non-U.K. subsidiaries, including non-U.S. entities under RCI, except for a portion of its Saudi Arabia operating entity that is expected to be distributed in 2015.  It is the Company’s policy and intention, except as noted above, to permanently reinvest outside the U.S. the earnings of non-U.S. entities directly or indirectly owned by RCI.  Generally, earnings of non-U.K. subsidiaries in which RCI does not have a direct or indirect ownership interest can be distributed to the Company without imposition of either U.K. or local country tax.

As of December 31, 2014, RCI's portion of the unremitted earnings of its non-U.S. entities in which it has a direct or indirect ownership interest was approximately $205 million.  Should the non-U.S. entities of RCI make a distribution from these earnings, we may be subject to additional U.S. income taxes.  It is not practicable to estimate the amount of deferred tax liability related to the undistributed earnings, and RCI's non-U.S. entities have no plan to distribute earnings in a manner that would cause them to be subject to U.S., U.K. or other local country taxation except as noted above in Saudi Arabia.

At March 31, 2015, non-U.S. entities directly or indirectly owned by RCI held approximately $40 million of the $57 million of consolidated cash and cash equivalents.   On April 1, 2015, we borrowed $50 million under our revolving credit facility. Management believes we have significant net assets, liquidity, contract backlog and/or other financial resources available to meet our operational and capital investment requirements and otherwise allow us to continue to maintain our policy of reinvesting such undistributed earnings outside the U.K. and U.S. indefinitely.


29


Investing Activities

During 2014, we took delivery of three of our four newly constructed ultra-deepwater drillships, and in late March 2015, we took delivery of the fourth and final drillship in our current construction program.

Capital expenditures totaled $514 million for the first three months of 2015, and included the following:

$478 million for construction of the Rowan Reliance and Rowan Relentless, including costs for mobilization, commissioning, riser gas-handling equipment, software certifications and spares.

$32 million for improvements to the existing fleet, including contractually required modifications; and

$4 million for rig equipment inventory and other.

For the remainder of 2015, we estimate our capital expenditures to be approximately $250 million, consisting of approximately $75 million in connection with mobilization and commissioning of the Company's final drillship and $25 million for riser gas-handling equipment, software certifications and spares to support our deepwater operations. The remaining amount is related to existing fleet maintenance capital and worldwide spares.

We expect to fund our 2015 capital expenditures using available cash, cash flows from operations, and our revolving credit facility.

Financing Activities

On April 1, 2015, we borrowed $50 million under our revolving credit facility in order to fund a portion of our fourth drillship's final shipyard payment. There were no amounts drawn under the revolving credit facility at March 31, 2015.

On May 5, 2015, RCI entered into an amendment to its revolving credit facility to increase the borrowing capacity from $1.0 billion to $1.5 billion with an accordion to increase, subject to lender consent, borrowing capacity to $1.75 billion.  Under the amendment, the maximum amount of draws that may be outstanding increases from $1.0 billion to $1.5 billion through January 22, 2019; thereafter, such amount declines to $1.44 billion through the final maturity date of January 23, 2020.

Restrictive provisions in our bank credit facility agreement limit consolidated debt to 60% of book capitalization. Our consolidated debt to total capitalization ratio at March 31, 2015 was 37%. We were in compliance with our debt covenants at March 31, 2015, and we do not expect to encounter difficulty complying in the following twelve-month period.

On January 29, 2015, the Board of Directors approved a quarterly cash dividend of $0.10 per share, paid on March 3, 2015, to shareholders of record at the close of business on February 9, 2015.

On May 1, 2015, the Board of Directors approved a quarterly cash dividend of $0.10 per share, payable on May 26, 2015, to shareholders of record at the close of business on May 12, 2015.

We expect to fund our cash requirements over the next twelve months from available cash, cash flows from operating activities and the revolving credit facility.

Critical Accounting Policies and Management Estimates

The Company’s significant accounting policies are presented in Note 2 of “Notes to Consolidated Financial Statements” in Item 8 of our 2014 Form 10-K.  These 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 that our most critical accounting policies and management estimates involve carrying values of long-lived assets, pension and other postemployment benefit liabilities and costs (specifically, assumptions used in actuarial calculations), and income taxes (particularly our estimated reserves for uncertain tax positions), as changes in such policies and/or estimates would produce significantly different amounts from those reported herein.

During the quarter ended March 31, 2015, there were no material changes to the judgments, assumptions or policies upon which our critical accounting estimates were based.


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New Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which sets forth a global standard for revenue recognition and which replaces most existing industry-specific guidance. We will be required to adopt the new standard in annual and interim reports for periods beginning January 1, 2018. We are currently evaluating the potential effect of the new guidance.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. We will be required to adopt the new standard in annual and interim reports beginning January 1, 2016. We do not expect adoption of the new standard will have a material effect on our financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under this ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. Debt issuance costs incurred before the associated funding is received (i.e., the debt liability) should be reported on the balance sheet as deferred charges until the debt is recognized on the balance sheet. We will be required to adopt the new standard in annual and interim reports retrospectively for periods beginning January 1, 2016. We do not expect adoption of the new standard will have a material effect on our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our outstanding debt at March 31, 2015, consisted of fixed-rate debt with a carrying value of $2.807 billion and a weighted-average annual interest rate of 5.6%.  Due to the fixed-rate nature of our debt, we believe the risk of loss due to changes in market interest rates is not material.

There were no borrowings outstanding under our revolving credit facility at March 31, 2015. On April 1, 2015, we borrowed $50 million under the facility. On May 5, 2015, RCI entered into an amendment to its revolving credit facility to increase the borrowing capacity from $1.0 billion to $1.5 billion with an accordion to increase, subject to lender consent, borrowing capacity to $1.75 billion.  Under the amendment, the maximum amount of draws that may be outstanding increases from $1.0 billion to $1.5 billion through January 22, 2019; thereafter, such amount declines to $1.44 billion through the final maturity date of January 23, 2020.

The U.S. dollar is the functional currency for operational and accounting purposes. In order to reduce the impact of exchange rate fluctuations, we generally require customer payments to be in U.S. dollars and try to limit local currency holdings to the extent they are needed to pay liabilities denominated in local currencies; however, in certain countries in which we operate, local laws or our customers may require us to receive payment in the local currency.  In such instances, we may be exposed to devaluation and other risk of exchange loss.  In the event we terminate operations in such countries we may not be able to utilize or convert such funds to another currency for future use. In 2014 we ceased drilling operations in Egypt, where we held approximately $14.9 million in Egyptian pounds as of March 31, 2015. To date we have been unable to convert, utilize or repatriate such funds, and we can provide no assurance we will be able to do so in the future.

Fluctuating commodity prices affect our future earnings materially to the extent that they influence demand for our products and services.  As a general practice, we do not hold or issue derivative financial instruments and had no derivatives outstanding during the periods covered by this report.

Item 4. Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on that evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2015.

There have been no changes to our internal controls over financial reporting during the quarter ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

There were no new material legal proceedings filed during the quarter, nor any material developments to proceedings reported in prior periods.

Item 1A.  Risk Factors

There are numerous factors that affect our business and results of operations, many of which are beyond our control. Security holders and potential investors in our securities should carefully consider the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2014, in addition to other information in such annual report and in our Quarterly Reports on Form 10-Q.  These risk factors are important factors that could cause our actual results to differ materially from those currently anticipated or expected.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table presents information with respect to acquisitions of our shares for the first quarter of 2015:
Month ended
 
Total number of shares acquired 1
 
Average price paid per share 1
 
Total number of shares purchased as part of publicly announced plans or programs 2
 
Approximate dollar value of shares that may yet be purchased under the plans or programs 2
Balance forward
 
 
 
 
 
 
 
$

January 31, 2015
 
1,734

 
$9.56
 

 

February 28, 2015
 
1,101,133

 
$0.13
 

 

March 31, 2015
 
47,760

 
$20.19
 

 

Total
 
1,150,627

 
$0.98
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 The total number of shares acquired includes shares acquired from employees by an affiliated employee benefit trust (EBT) upon forfeiture of nonvested awards or in satisfaction of tax withholding requirements and shares purchased, if any, pursuant to a publicly announced share repurchase program. The price paid for shares acquired as a result of forfeitures is the par value of $0.125 per share. The price paid for shares acquired in satisfaction of withholding taxes is the share price on the date of the transaction. In February 2015, the Company issued 1.1 million shares to the EBT, which shares were acquired at a price equal to the par value of $0.125 per share. There were no shares repurchased under any share repurchase program during the first quarter of 2015.
2 The ability to make share repurchases is subject to the discretion of the Board of Directors and the limitations set forth in the Companies Act, which generally provide that share repurchases may only be made out of distributable reserves. In addition, U.K. law also generally prohibits a company from repurchasing its own shares through “off market purchases” without the prior approval of shareholders, which approval is valid for a maximum period of five years. Prior to and in connection with the redomestication, the Company obtained approval to purchase its own shares. To effect such repurchases, the Company entered into a purchase agreement with a specified dealer in July 2012, pursuant to which the Company may purchase up to a maximum of 50,000,000 shares over a five-year period, subject to an annual cap of 10% of the shares outstanding at the beginning of each applicable year. Subject to Board approval, share repurchases may be commenced or suspended from time to time without prior notice and, in accordance with the shareholder approval and U.K. law, any shares repurchased by the Company will be cancelled. The authority to repurchase shares terminates in April 2017 unless otherwise reapproved by the Company’s shareholders prior to that time. U.K. law prohibits the Company from conducting “on market purchases” because its shares are not traded on a recognized investment exchange in the U.K.

On January 29, 2015, the Board of Directors approved a quarterly cash dividend of $0.10 per share, paid on March 3, 2015, to shareholders of record at the close of business on February 9, 2015.

On May 1, 2015, the Board of Directors approved a quarterly cash dividend of $0.10 per share, payable on May 26, 2015, to shareholders of record at the close of business on May 12, 2015.

We expect to continue paying quarterly dividends for the foreseeable future; however, our Board of Directors may change the timing and payment amount depending on various factors including our profitability, liquidity, financial condition, reinvestment opportunities, capital requirements and market outlook.


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Item 6.  Exhibits

The following is a list of exhibits filed with this Form 10-Q:
31.1*
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
__________________
* Filed or furnished herewith.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
ROWAN COMPANIES PLC
 
 
(Registrant)
 
 
 
 
 
 
Date: May 6, 2015
 
/s/ STEPHEN M. BUTZ                                    
 
 
Stephen M. Butz
 
 
Executive Vice President,
 
 
Chief Financial Officer and Treasurer
 
 
 
 
 
 
Date: May 6, 2015
 
/s/ GREGORY M. HATFIELD
 
 
Gregory M. Hatfield
 
 
Vice President and Controller
 
 
(Chief Accounting Officer)

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