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Rowan Companies 10-Q 2011
form10_q06302011.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.  20549

FORM 10-Q

R   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011

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 logo
 
ROWAN COMPANIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
75-0759420
(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 R   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 R   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 R   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 R

The number of shares of common stock, $0.125 par value, outstanding at July 31, 2011, was 127,427,323.



ROWAN COMPANIES, INC.

 
 
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27




ROWAN COMPANIES, INC. AND SUBSIDIARIES
(In thousands, except shares)
(Unaudited)


   
June 30,
   
December 31,
 
   
2011
   
2010
 
 ASSETS
   
           
CURRENT ASSETS:
         
Cash and cash equivalents
  $ 711,327     $ 437,479  
Restricted cash
    -       15,265  
Receivables - trade and other
    254,682       269,896  
Prepaid expenses and other current assets
    43,378       31,646  
Deferred tax assets - net
    2,955       36,945  
Assets of discontinued operations (Note 2)
    373,703       984,022  
Total current assets
    1,386,045       1,775,253  
                 
PROPERTY, PLANT AND EQUIPMENT - at cost:
               
Drilling equipment
    5,238,877       3,799,902  
Construction in progress
    1,046,138       1,584,802  
Other property and equipment
    137,649       145,698  
Property, plant and equipment - gross
    6,422,664       5,530,402  
Less accumulated depreciation and amortization
    1,260,330       1,185,880  
Property, plant  and equipment - net
    5,162,334       4,344,522  
                 
Other assets
    96,660       97,682  
                 
TOTAL ASSETS
  $ 6,645,039     $ 6,217,457  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
1


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


   
June 30,
   
December 31,
 
   
2011
   
2010
 
LIABILITIES AND STOCKHOLDERS' EQUITY
           
             
CURRENT LIABILITIES:
           
Current maturities of long-term debt
  $ 52,149     $ 52,166  
Accounts payable - trade
    69,829       66,766  
Deferred revenues
    20,916       7,748  
Accrued compensation and related employee costs
    40,118       77,926  
Accrued income taxes
    141,056       10,847  
Accrued interest
    25,712       25,962  
Other current liabilities
    6,184       9,804  
Liabilities of discontinued operations (Note 2)
    41,467       278,011  
Total current liabilities
    397,431       529,230  
                 
Long-term debt - less current maturities
    1,107,983       1,133,745  
Other liabilities
    273,221       251,145  
Deferred income taxes - net
    587,729       551,027  
Commitments and contingent liabilities (Note 6)
    -       -  
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $1.00 par value, 5,000,000 shares authorized, issuable in series:
               
Series A Junior Preferred Stock, 1,500,000 shares authorized, none issued
    -       -  
Common stock, $0.125 par value, 150,000,000 shares authorized; 127,519,095 shares
               
and 126,346,627 shares issued at June 30, 2011 and December 31, 2010, respectively
    15,940       15,794  
Additional paid-in capital
    1,465,419       1,433,999  
Retained earnings
    2,947,452       2,449,521  
Cost of 114,447 and 52,408 treasury shares, respectively
    (4,641 )     (1,509 )
Accumulated other comprehensive loss
    (145,495 )     (145,495 )
Total stockholders' equity
    4,278,675       3,752,310  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 6,645,039     $ 6,217,457  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
2


ROWAN COMPANIES, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
(Unaudited)


   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
REVENUES
  $ 223,497     $ 282,180     $ 429,463     $ 570,680  
                                 
COSTS AND EXPENSES:
                               
Direct operating costs (excluding items below)
    104,517       105,444       215,791       209,907  
Depreciation and amortization
    40,807       33,928       78,961       67,382  
Selling, general and administrative
    21,729       18,626       42,543       34,617  
Gain on disposals of  property and equipment
    (1,391 )     (17 )     (1,422 )     (288 )
Charges to settle litigation (Note 8)
    6,100       4,500       6,100       4,500  
Total costs and expenses
    171,762       162,481       341,973       316,118  
                                 
INCOME FROM OPERATIONS
    51,735       119,699       87,490       254,562  
                                 
OTHER INCOME (EXPENSE):
                               
Interest expense, net of interest capitalized
    (7,449 )     (5,251 )     (12,768 )     (10,930 )
Interest income
    32       211       61       372  
Other - net
    365       291       (719 )     308  
Total other income (expense) - net
    (7,052 )     (4,749 )     (13,426 )     (10,250 )
                                 
INCOME FROM CONTINUING OPERATIONS
                               
BEFORE INCOME TAXES
    44,683       114,950       74,064       244,312  
Provision for income taxes
    280       31,505       2,866       71,933  
                                 
NET INCOME FROM CONTINUING OPERATIONS
    44,403       83,445       71,198       172,379  
                                 
DISCONTINUED OPERATIONS (Note 2):
                               
Income (loss) from discontinued operations, net of tax
    (3,017 )     7,471       2,260       (16,840 )
Gain on sale of discontinued operations, net of tax
    424,473       -       424,473       -  
Discontinued operations, net of tax
    421,456       7,471       426,733       (16,840 )
                                 
NET INCOME
  $ 465,859     $ 90,916     $ 497,931     $ 155,539  
                                 
INCOME (LOSS) PER SHARE - BASIC:
                               
Income from continuing operations
  $ 0.35     $ 0.74     $ 0.57     $ 1.53  
Discontinued operations
  $ 3.34     $ 0.07     $ 3.39     $ (0.15 )
Net income
  $ 3.69     $ 0.80     $ 3.96     $ 1.38  
                                 
INCOME (LOSS) PER SHARE - DILUTED:
                               
Income from continuing operations
  $ 0.35     $ 0.73     $ 0.56     $ 1.50  
Discontinued operations
  $ 3.30     $ 0.07     $ 3.35     $ (0.15 )
Net income
  $ 3.65     $ 0.79     $ 3.91     $ 1.36  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
3


ROWAN COMPANIES, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)

   
Six Months Ended June 30,
 
   
2011
   
2010
 
             
CASH PROVIDED BY (USED IN) OPERATIONS:
           
Net income
  $ 497,931     $ 155,539  
Adjustments to reconcile net income to net cash provided by operations:
               
Depreciation and amortization
    99,930       91,950  
Material charges (Note 2)
    -       42,024  
Deferred income taxes
    70,692       6,146  
Provision for pension and postretirement benefits
    16,664       19,329  
Stock-based compensation expense
    10,999       7,049  
Gain on disposals of property, plant and equipment
    (3,896 )     (95 )
Gain on sale of manufacturing operations
    (660,877 )     -  
Postretirement benefit claims paid
    (1,388 )     (1,713 )
Contributions to pension plans
    (35,837 )     (42,110 )
Changes in current assets and liabilities:
               
Receivables - trade and other
    9,962       (9,346 )
Inventories
    (104,468 )     28,573  
Prepaid expenses and other current assets
    1,511       953  
Accounts payable
    44,820       (17,242 )
Accrued income taxes
    130,210       (29,549 )
Deferred revenues
    27,603       (23,357 )
Billings in excess of costs and estimated profits on uncompleted contracts
    29,493       (3,624 )
Other current liabilities
    4,461       (12,873 )
Net changes in other noncurrent assets and liabilities
    8,089       (1,369 )
Net cash provided by operations
    145,899       210,285  
                 
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
               
Capital expenditures
    (930,978 )     (210,383 )
Proceeds from sale of manufacturing operations
    1,044,541       -  
Decrease in restricted cash
    15,265       -  
Proceeds from disposals of property, plant and equipment
    4,057       878  
Net cash provided by (used in) investing activities
    132,885       (209,505 )
                 
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
               
Repayments of borrowings
    (26,083 )     (32,461 )
Excess tax benefits from stock-based compensation
    4,664       15  
Proceeds from stock options and other
    16,483       2,924  
Net cash used in financing activities
    (4,936 )     (29,522 )
                 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    273,848       (28,742 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    437,479       639,681  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 711,327     $ 610,939  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
4


ROWAN COMPANIES, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)




   
Shares of common stock outstanding
   
Common stock
   
Additional paid-in capital
   
Retained earnings
   
Treasury stock
   
Accumulated other comprehensive income (loss)
   
Total stockholders' equity
 
                                           
Balance, January 1, 2010
    113,833     $ 14,237     $ 1,078,337     $ 2,169,526     $ (1,409 )   $ (150,321 )   $ 3,110,370  
Stock issued under share-based compensation plans
    543       78       2,846       -       (2,577 )     -       347  
Stock-based compensation
    -       -       6,558       -       -       -       6,558  
Excess tax benefit from stock-based compensation plans
    -       -       15       -       -       -       15  
Net income
    -       -       -       155,539       -       -       155,539  
Balance, June 30, 2010
    114,376     $ 14,315     $ 1,087,756     $ 2,325,065     $ (3,986 )   $ (150,321 )   $ 3,272,829  
                                                         
Balance, January 1, 2011
    126,294     $ 15,794     $ 1,433,999     $ 2,449,521     $ (1,509 )   $ (145,495 )   $ 3,752,310  
Stock issued under share-based compensation plans
    1,111       146       17,815       -       (3,132 )     -       14,829  
Stock-based compensation
    -       -       8,941       -       -       -       8,941  
Excess tax benefit from stock-based compensation plans
    -       -       4,664       -       -       -       4,664  
Net income
    -       -       -       497,931       -       -       497,931  
Balance, June 30, 2011
    127,405     $ 15,940     $ 1,465,419     $ 2,947,452     $ (4,641 )   $ (145,495 )   $ 4,278,675  

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
5

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



The condensed consolidated financial statements of Rowan Companies, Inc. (“Rowan” or the “Company”) 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.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Rowan believes the accompanying unaudited condensed consolidated 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.  Rowan’s results of operations and cash flows for the interim periods are not necessarily indicative of results to be expected for the full year.

In June 2011, the Company completed the sale of its manufacturing operations and committed to a plan to sell its land drilling operations.  Results of manufacturing and land drilling operations have consequently been reclassified to discontinued operations for all periods presented (see Note 2).

Note 2 – Discontinued Operations

On June 22, 2011, the Company completed the sale of its wholly owned manufacturing subsidiary, LeTourneau Technologies, Inc, (“LeTourneau”), at a price of $1.1 billion in cash, subject to certain post-closing working capital adjustments, and recognized a gain on sale of $660.9 million ($424.5 million, net of tax) in the second quarter of 2011.

The operations of LeTourneau previously comprised the “Drilling Products and Systems” segment and the “Mining, Forestry and Steel Products” segment and, accordingly, have been included in “Discontinued operations, net of tax,” in the Condensed Consolidated Statements of Income for all periods presented.

In connection with the sale, the Company entered into certain other agreements with LeTourneau including a facilities lease agreement, an employee services agreement, and an amendment to the construction contract for the Joe Douglas drilling rig currently under construction in Vicksburg, Mississippi, in order for the Company to direct the completion of construction, commissioning and delivery of such rig.  The lease and employee services agreements shall terminate at the earliest of (i) 120 days following completion of construction, (ii) one year following the Closing Date or (iii) the effective date of any other termination of the lease or employee services agreements pursuant to the agreements.  Costs incurred in connection with the facilities lease and employee services agreements will be capitalized as part of the cost of the rig.

Additionally, on July 19, 2011, the Company entered into an agreement to sell its land drilling services business for $510 million in cash, plus a working capital adjustment currently estimated to be approximately $30 million, and expects to recognize a gain on sale of approximately $200 million ($132 million, net of tax) upon closing, which is expected to occur in the third quarter of 2011.  The land drilling services business was previously a component of the Company’s Drilling Services segment, and, accordingly, results of land drilling services have been reclassified to discontinued operations for all periods presented.



 
6

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table sets forth the components of “Discontinued operations, net of tax,” for the three and six months ended June 30, 2011 and 2010 (in thousands):





   
2011
   
2010
 
   
Manufacturing
   
Drilling
   
Total
   
Manufacturing
   
Drilling
   
Total
 
Three months ended June 30:
                                   
Revenues
  $ 110,242     $ 48,445     $ 158,687     $ 161,759     $ 46,097     $ 207,856  
                                                 
Pretax income (loss)
  $ (3,113 )   $ 3,770     $ 657     $ 4,725     $ 4,240     $ 8,965  
Provision (benefit) for
                                               
taxes on income
    2,295       1,379       3,674       (36 )     1,530       1,494  
Income (loss) from discontinued
                                               
operations, net of tax
    (5,408 )     2,391       (3,017 )     4,761       2,710       7,471  
                                                 
Pretax gain on sale of
                                               
discontinued operations
    660,877       -       660,877       -       -       -  
Provision for tax on gain on sale
    236,404       -       236,404       -       -       -  
Gain on sale of discontinued
                                               
operations, net of tax
    424,473       -       424,473       -       -       -  
                                                 
Discontinued operations, net of tax
  $ 419,065     $ 2,391     $ 421,456     $ 4,761     $ 2,710     $ 7,471  
                                                 

   
2011
   
2010
 
   
Manufacturing
   
Drilling
   
Total
   
Manufacturing
   
Drilling
   
Total
 
Six months ended June 30:
                                   
Revenues
  $ 224,488     $ 92,514     $ 317,002     $ 263,180     $ 88,581     $ 351,761  
                                                 
Pretax income (loss)
  $ (950 )   $ 9,654     $ 8,704     $ (32,518 )   $ 6,273     $ (26,245 )
Provision (benefit) for
                                               
taxes on income
    3,006       3,438       6,444       (11,647 )     2,242       (9,405 )
Income (loss) from discontinued
                                               
operations, net of tax
    (3,956 )     6,216       2,260       (20,871 )     4,031       (16,840 )
                                                 
Pretax gain on sale of
                                               
discontinued operations
    660,877       -       660,877       -       -       -  
Provision for tax on gain on sale
    236,404       -       236,404       -       -       -  
Gain on sale of discontinued
                                               
operations, net of tax
    424,473       -       424,473       -       -       -  
                                                 
Discontinued operations, net of tax
  $ 420,517     $ 6,216     $ 426,733     $ (20,871 )   $ 4,031     $ (16,840 )



During the first quarter of 2010, the Drilling Products and Systems Manufacturing segment performed an assessment of its Houston-based raw materials and supplies inventory.  As a result, the Company increased its inventory valuation reserve by approximately $42.0 million and recorded a corresponding charge to its operations during the period to reflect a reduction in the estimated realizable value of items that were deemed to be nonconforming or slow-moving.  Such amount is included in discontinued operations for manufacturing for the three and six months ended June 30, 2010.

 
7

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following assets and liabilities have been segregated and included in “Assets of discontinued operations” and “Liabilities of discontinued operations,” as appropriate, in the Condensed Consolidated Balance Sheets at June 30, 2011, and December 31, 2010 (in thousands):


   
June 30, 2011
   
December 31, 2010
 
   
Manufacturing
   
Drilling
   
Total
   
Manufacturing
   
Drilling
   
Total
 
                                     
Cash and cash equivalents
  $ -     $ -     $ -     $ -     $ -     $ -  
Receivables - trade and other
    -       46,914       46,914       106,705       41,280       147,985  
Inventories - raw materials and supplies
    -       -       -       277,527       -       277,527  
Inventories - work-in-progress
    -       -       -       70,114       -       70,114  
Inventories - finished goods
    -       -       -       212       -       212  
Prepaid expenses and other current assets
    -       -       -       37,368       332       37,700  
Property and equipment, net
    -       299,994       299,994       137,624       311,291       448,915  
Other assets
    26,795       -       26,795       1,569       -       1,569  
Assets of discontinued operations
  $ 26,795     $ 346,908     $ 373,703     $ 631,119     $ 352,903     $ 984,022  
                                                 
Accounts payable - trade
  $ -     $ 5,452     $ 5,452     $ 44,223     $ 5,876     $ 50,099  
Deferred revenues
    20,122       1,479       21,601       143,950       1,748       145,698  
Billings in excess of costs and estimated
                                               
profits on uncompleted contracts
    -       -       -       7,915       -       7,915  
Accrued compensation and related costs
    -       2,587       2,587       20,217       2,738       22,955  
Other current liabilities
    10,600       1,227       11,827       47,737       3,607       51,344  
Liabilities of discontinued operations
  $ 30,722     $ 10,745     $ 41,467     $ 264,042     $ 13,969     $ 278,011  

In connection with the sale of LeTourneau, the Company took ownership of a land rig that LeTourneau was constructing on behalf of a customer, plus a related customer deposit.  The Company is holding the asset for sale.  The asset and related deposit are classified as other assets and deferred revenues, respectively, at June 30, 2011, in the table above.

At June 30, 2011, estimated accrued transaction costs in connection with the sale of manufacturing operations totaled $10.6 million, which is classified as other current liabilities in the table above.

Note 3 – Earnings Per Share

A reconciliation of basic and diluted shares for the three and six months ended June 30, 2011 and 2010 follows (in thousands):


   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Average common shares outstanding - basic
    126,252       113,171       125,793       113,016  
Effect of dilutive securities - stock-based compensation
    1,331       1,827       1,516       1,758  
Average common shares - diluted
    127,583       114,998       127,309       114,774  

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

Options and other potentially dilutive securities are antidilutive and excluded from the dilutive calculations when their exercise or conversion price exceeds the average stock market price during the period.  The following table sets forth the shares excluded from the diluted calculations for the three and six months ended June 30, 2011 and 2010, because they were antidilutive.  Such securities could potentially dilute earnings per share in the future (in thousands):

 
8

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)




   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Employee and director stock options
    42       164       42       164  
Stock appreciation rights and other
    313       180       218       169  
Total potentially dilutive shares
    355       344       260       333  


Note 4 – Pension and Other Postretirement Benefits

Rowan sponsors defined benefit pension plans covering substantially all of its employees, and provides health care and life insurance benefits upon retirement for certain employees.  In December 2010, the Company amended certain plans with respect to its manufacturing operations in order to freeze benefits as of December 31, 2010, which resulted in a curtailment gain of $5.4 million at that date.  The curtailment gain was recorded as a reduction to accumulated other comprehensive loss.

Net periodic pension cost recognized for the three and six months ended June 30, 2011 and 2010 included the following components (in thousands):

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Service cost
  $ 3,107     $ 3,969     $ 6,181     $ 7,894  
Interest cost
    7,718       7,737       15,350       15,389  
Expected return on plan assets
    (8,352 )     (7,611 )     (16,613 )     (15,138 )
Recognized actuarial loss
    5,774       5,318       11,515       10,621  
Amortization of prior service cost
    (1,665 )     (1,665 )     (3,312 )     (3,312 )
Total net pension cost
  $ 6,582     $ 7,748     $ 13,121     $ 15,454  
Less: Discontinued operations
    2,247       3,809       4,595       7,516  
Continuing operations
  $ 4,335     $ 3,939     $ 8,526     $ 7,938  


Other postretirement benefit cost recognized for the three and six months ended June 30, 2011 and 2010 included the following components (in thousands):


   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Service cost
  $ 541     $ 589     $ 1,076     $ 1,172  
Interest cost
    1,053       1,147       2,094       2,282  
Recognized actuarial loss
    73       98       146       195  
Amortization of transition obligation
    165       165       328       328  
Amortization of prior service cost
    (51 )     (51 )     (101 )     (102 )
Total other postretirement benefit cost
  $ 1,781     $ 1,948     $ 3,543     $ 3,875  
Less: Discontinued operations
    599       703       1,220       1,364  
Continuing operations
  $ 1,182     $ 1,245     $ 2,323     $ 2,511  

During the six months ended June 30, 2011, Rowan contributed $37.2 million to its pension and other postretirement benefit plans and expects to make additional contributions to such plans totaling approximately $18.3 million during the remainder of 2011.

 
9

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Under the terms of the sale of LeTourneau, the Company retained pension assets and liabilities related to former LeTourneau employees.  As a result of the sale, the Company may be required to make additional contributions to the plan in excess of currently estimated amounts.  Management does not believe that any such additional contributions will have a material effect on the Company’s financial position, results of operations or cash flows.

Note 5 – Cash and Cash Equivalents

Certain debt securities which are collateralized by rigs are government guaranteed through the Title XI program of the U.S. Department of Transportation’s Maritime Administration (“MARAD”).  At the Company’s request, MARAD has waived certain windstorm insurance coverage requirements under the loan agreements, for which the Company agreed to a covenant to maintain a minimum cash balance of up to $25 million.  The minimum amount varies depending on the geographical location of rigs, and is currently $10 million.  Rowan remains subject to restrictions on the use of certain insurance proceeds should the Company experience future windstorm losses.  Each of these security provisions will be released by MARAD should Rowan be able to obtain windstorm coverage that satisfies the original terms of its debt agreements.

Note 6 – Commitments and Contingent Liabilities

On May 31, 2011, the Company entered into contracts with Hyundai Heavy Industries Co., Ltd for the construction of two ultra-deepwater drillships at its Ulsan, Korea, shipyard for delivery in late 2013 and mid 2014, respectively.  The Company has an option for an additional drillship of the same specifications exercisable in the third quarter of 2011 for delivery in the fourth quarter of 2014.

The following table presents the status of the Company’s rig construction program as of June 30, 2011.  Amounts include capitalized interest and, in the case of the drillships, an estimate for project contingencies (in millions):


 
Actual or expected delivery date
 
Total estimated project costs
   
Total costs incurred through June 30, 2011
   
Projected costs for the remainder of 2011
   
Projected costs in 2012
   
Projected costs in 2013
   
Projected costs in 2014
   
Total future costs
 
                                             
Rowan Norway
Jun-11
  $ 488     $ 446     $ 42     $ -     $ -     $ -     $ 42  
Joe Douglas
Dec-11
    257       222       35       -       -       -       35  
EXL IV
Dec-11
    196       139       57       -       -       -       57  
Ultra-deepwater Drillship 1
Dec-13
    740       168       18       60       479       15       572  
Ultra-deepwater Drillship 2
Jun-14
    738       56       114       21       149       398       682  
Total rigs under construction
  $ 2,419     $ 1,031     $ 266     $ 81     $ 628     $ 413     $ 1,388  


Rowan periodically employs letters of credit or other bank-issued guarantees in the normal course of its businesses, and had outstanding letters of credit of approximately $59.8 million at June 30, 2011.

During 2005, Rowan lost four offshore rigs, including the Rowan-Halifax, and incurred significant damage on a fifth as a result of Hurricanes Katrina and Rita.  The Company had leased the Rowan-Halifax under a charter agreement that commenced in 1984 and was scheduled to expire in March 2008.  The rig was insured for $43.4 million, a value that Rowan believes to be more than sufficient to satisfy its obligations under the charter agreement, and by a margin sufficient to cover the $6.3 million carrying value of Rowan equipment installed on the rig.  However, the parties holding interests in the rig under the charter claimed that the rig should have been insured for its fair market value and sought recovery from Rowan for compensation above the insured value.  Thus, Rowan assumed no insurance proceeds related to the Rowan-Halifax and recorded a charge during 2005 for the full carrying value of its equipment.  In November 2005, the Company filed a declaratory judgment action styled Rowan Companies, Inc. vs. Textron Financial Corporation and Wilmington Trust Company as Owner Trustee of the Rowan-Halifax 116-C Jack-Up Rig in the 215th Judicial District Court of Harris County, Texas.  The owner interests filed a counterclaim

 
10

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


for a variety of relief, claiming a right to payment under the charter based on a post-casualty rig valuation of approximately $83 million.  The insurance proceeds were placed in escrow.  The district court ultimately granted judgment against Rowan for the difference between (a) what Rowan had already paid to the Owner Trustee out of the escrowed insurance proceeds (approximately $22.9 million) and (b) that rig valuation.  In March 2009, the Court of Appeals for the 14th District of Texas reversed this judgment, holding that the Company’s interpretation of the charter was substantially correct, but directing Rowan to pay an additional amount of approximately $3.2 million due under the charter.  The Company made this payment out of the escrowed insurance proceeds.  In addition, the Court of Appeals remanded the case for further proceedings in the district court to resolve additional issues and to determine the parties’ respective rights to the balance of the escrowed insurance proceeds, which is currently $21.4 million.  The owner interests filed a motion for rehearing of the Court of Appeals’ decision.  In October 2009, the Court of Appeals denied the motion, but issued a substitute opinion to clarify the scope of the remand.  The Court of Appeals again held that the trial court is to resolve issues concerning the proper disposition of excess insurance proceeds.  The Court of Appeals further held that the owner interests’ claim that Rowan breached the charter agreement by failing to maintain adequate insurance remains to be decided by the trial court.  The owner interests filed another motion for rehearing, which motion was denied in January 2010.  In March 2010, the owner interests filed its petition for review in the Supreme Court of Texas.  In June 2011 the parties to the dispute reached an agreement to settle all claims and to dismiss the litigation.  Pursuant to that settlement, Rowan agreed to pay the owner group a net amount of approximately $6.1 million in addition to the escrowed insurance proceeds.  Consequently, in June 2011, the Company accrued $6.1 million in connection with the settlement, which is classified as “Charges to settle litigation” in the Condensed Consolidated Statements of Income.

Rowan is involved in various legal proceedings incidental to its businesses and is vigorously defending its position in all such matters. The Company believes that there are no known contingencies, claims or lawsuits that could have a material adverse effect on its financial position, results of operations or cash flows.

Note 7 – Stock-Based Compensation

2009 Rowan Companies, Inc. Incentive Plan

In February 2011, the Company granted under the 2009 Rowan Companies, Inc. Incentive Plan (the “Rowan Plan”) 382,809 shares of restricted stock and 313,518 stock appreciation rights (“SARs”) to employees.  The restricted stock and SARs vest in one-third annual increments over a three-year service period.  The aggregate grant-date fair value of awards expected to vest totaled approximately $22.0 million, which will be amortized on a straight-line basis over a period of 3.0 years from the date of grant.

In June 2011, upon consummation of the LeTourneau sale, unvested awards granted under the Rowan Plan to LeTourneau employees became fully vested, and the Company recognized noncash stock-based compensation expense of $1.5 million in the second quarter attributable to such accelerated vesting.  Such amount is classified within “Income from discontinued operations” in the Condensed Consolidated Statements of Income.

At June 30, 2011, the Company had approximately $32.5 million of unrecognized future stock-based compensation, which is expected to be recognized as compensation expense over a remaining weighted-average period of 2.1 years.

LeTourneau Technologies, Inc. Incentive Plan

In December 2010, the Company adopted the LeTourneau Technologies, Inc. Incentive Plan, effective January 1, 2011 (the “LeTourneau Plan”), under which the compensation committee of the board of directors of Rowan (the “Compensation Committee”) could grant to LeTourneau employees stock appreciation rights (“LeT SARs”) and restricted stock units (“LeT RSUs) denominated in common stock of LeTourneau.  On January 1, 2011, the Company granted to 50 LeTourneau employees LeT SARs and LeT RSUs with a fair value aggregating $5.3 million.

LeT SARs conferred on the grantee the right to receive cash, or shares of LeTourneau at the discretion of the Compensation Committee, of an amount equal to the excess of the fair market value per share on the exercise date over the fair market value per share on the grant date with respect to a specific number of shares of LeTourneau

 
11

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


common stock.  LeT RSUs were rights to receive cash, or shares of LeTourneau stock at the discretion of the Compensation Committee, equal in value to the fair market value of a specific number of shares of common stock of LeTourneau.

In June 2011, all awards granted under the LeTourneau Plan became fully vested and payable in cash under the change-in-control provisions of the plan as a result of the sale of LeTourneau.  The Company’s share of such cost was $2.1 million, which is classified within discontinued operations in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011, respectively.

  Note 8 – Other Financial Statement Disclosures>

Long-term Debt – In connection with the acquisition of Skeie Drilling & Production ASA (“SKDP”) in 2010, the Company assumed first and second lien SKDP bonds with a par value of approximately $225 million and $267 million, respectively, as of the acquisition date.  In the third and fourth quarters of 2010, the Company retired all of the SKDP debt through a combination of open market purchases and redemption.  Certain of the SKDP bondholders disputed the Company’s ability to call the debt in 2010; consequently, pending arbitration proceedings, the Company deposited in escrow with the bond trustee $15.3 million, which was classified as restricted cash on the Consolidated Balance Sheet at December 31, 2010, to cover interest that would accrue on the first lien bonds until their May 2011 call date, and on the second lien bonds until their respective call dates in March and July 2011.  In June 2011, the Company won both arbitrations and has received the $15.3 million placed in escrow plus attorneys’ fees and other expenses. The effect of the settlement on second quarter results of operations was not material.

Effective June 30, 2011, the Company amended and restated its credit agreement dated September 16, 2010 (the “Amended Agreement”), under which the Company may borrow up to $500 million on a revolving basis through June 30, 2016.  Interest and commitment fees payable under the Amended Agreement are based in part on the Company’s then current credit ratings.  The annual commitment fee is currently 0.25% of the unused commitment, and advances would currently bear interest at Libor plus 1.75% per annum.  There were no amounts drawn under the Amended Agreement at June 30, 2011.  The Amended Agreement limits total consolidated indebtedness and contains events of default, the occurrence of which may trigger an acceleration of amounts outstanding under the agreement.  As a result of the effective termination of the prior credit agreement, the Company wrote off unamortized issue costs of $0.7 million, which is included in interest expense for the quarter ended June 30, 2011.

Fair Values of Financial Instruments – The carrying amounts of the Company’s cash and cash equivalents, trade receivables and trade payables approximated their fair values due to their short maturities.  As of June 30, 2011, the fair values of the Company’s debt, which had an aggregate carrying value of $1.160 billion, approximated $1.311 billion.  Fair values of the Company’s debt were estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.

Supplemental Cash Flow Information – Accrued capital expenditures, which are excluded from capital expenditures in the Condensed Consolidated Statements of Cash Flows until settlement, totaled $25.0 million at both June 30, 2011 and 2010.  Interest capitalized in connection with rig construction projects totaled $12.1 million and $25.7 million in the three and six months ended June 30, 2011, as compared to $7.7 million and $14.9 million, respectively, in the comparable periods of the prior year.

Other Comprehensive Income – Rowan had no items of other comprehensive income during the three or six months ended June 30, 2011 or 2010.

Charges to Settle Litigation – Charges to settle litigation for the three and six months ended June 30, 2011, consists of a $6.1 million charge to operations for the settlement of the Textron litigation (see Note 6).

Charges to settle litigation for the three and six months ended June 30, 2010, consists of a $4.5 million charge to operations for the expected cost of terminating the Company’s agency agreement in Mexico.

Income Taxes – Historically, the Company has conducted its foreign operations through its U.S. subsidiaries, which resulted in income tax at the U.S. statutory rate of 35%.  In late 2009, the Company began operating many of its

 
12

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


foreign-based rigs through its international subsidiaries, and has asserted that such earnings are permanently reinvested abroad.

In accordance with generally accepted accounting principles, 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.  For the three and six months ended June 30, 2011, the Company’s consolidated effective tax rate applicable to income from continuing operations was less than 1% and 3.9%, respectively, as compared to 27.4% and 29.4%, respectively, for the comparable prior year periods.  The lower tax rates in 2011 were principally the result of the sale of the Company’s manufacturing operations and the pending sale of the Company’s land drilling operations, which were taxed at a 35% U.S. statutory rate, and a greater proportion of income from drilling operations expected to be earned in lower-tax foreign jurisdictions in 2011 as compared to 2010. The lower rate in the three months ended June 30, 2010 as compared to the six months then ended was due to the quarterly effect of outbounding of certain rigs into our offshore subsidiaries in the second quarter of 2010, which resulted in lowering the annual effective tax rate from 31% to 29%.

Note 9 – Subsequent Events

On July 19, 2011, the Company entered into an agreement to sell its land drilling services business for $510 million in cash, plus a working capital adjustment currently estimated to be approximately $30 million, and expects to recognize a gain on sale of approximately $200 million ($132 million, net of tax) upon closing, which is expected to occur in the third quarter of 2011 (see Note 2).
 
 
   


ROWAN COMPANIES, INC. AND SUBSIDIARIES



SUMMARY

As previously reported, in June 2011 we sold our manufacturing business, and in July 2011 we entered into an agreement to sell our land drilling business.  As a result, such operations have been segregated from continuing operations and classified as discontinued operations in the accompanying financial statements for all periods presented.  Our manufacturing operations were previously reported as the “Drilling Products and Systems” and the “Mining, Forestry and Steel Products” segments, and our land drilling operations were previously reported as a component of our “Drilling Services” segment.  Prior period results of operations and the related discussions which follow have been revised to conform to the current period presentation.

Net income from continuing operations declined to $44.4 million in the second quarter of 2011 from $83.4 million in the second quarter of 2010, due primarily to lower day rates and utilization of our rigs.  The effective tax rate was negligible in the second quarter of 2011, as compared to 27.4% in the second quarter of 2010, primarily due to the effect on the quarter of significantly lowering our full year 2011 effective tax rate to 3.9% as a consequence of a greater proportion of income projected to be earned in lower-tax foreign jurisdictions in 2011 as compared to 2010.

Net income from continuing operations declined to $71.2 million in the six months ended June 30, 2011 from $172.4 million in comparable period of 2010, due primarily to lower day rates and utilization.  The effective tax rate declined to 3.9% in the first six months of 2011 from 29.4% in the same period of 2010 primarily due to a greater proportion of income projected to be earned in lower-tax foreign jurisdictions in 2011 as compared to 2010.

Our drilling operating results in 2011 benefited from the addition of four newly constructed rigs to our offshore fleet during 2010, the effects of which partially offset the impact of our completing several peak day rate contracts and lower utilization of our less capable rigs in 2011 as compared to 2010.  The net decline in drilling revenues together with the incremental costs of the fleet additions resulted in lower operating margins as compared to the comparable periods of 2010.

We have continued to be successful in maintaining a high level of utilization for our higher specification rigs and in obtaining contractual commitments for our newly constructed high-specification jack-ups, as oil and gas companies have increasingly sought more capable equipment to meet more demanding drilling requirements.  Our less capable rigs, however, have encountered more competition for the relatively few available assignments, resulting in extended periods of idle time.  This segmentation of demand based on rig capability has been an emerging trend over the past two years, and one that we believe will continue.  Utilization of our high-specification jack-ups for the quarter ended June 30, 2011 was 84%, as compared to 60% and 33% for our premium and conventional jack-ups, respectively.  For the six months ended June 30, 2011, utilization of our high-specification jack-ups was 83%, as compared to 58% and 25% for our premium and conventional jack-ups, respectively.  We define high-specification jack-ups as those that have hook load capacity of at least two million pounds and premium jack-ups as those cantilevered rigs capable of operating in water depths of 300 feet or more.

On May 31, 2011, we entered into contracts with Hyundai Heavy Industries Co., Ltd for the construction of two ultra-deepwater drillships at its Ulsan, Korea, shipyard for delivery in late 2013 and mid 2014, respectively.  See “Liquidity and Capital Resources – Investing Activities” for further information.

In June 2011, our newbuild rig, the Rowan Viking, commenced operations under a 19-month assignment in the UK sector of the North Sea, and our newbuild Rowan Stavanger commenced operations for approximately 180 days of accommodation work in the Norwegian sector of the North Sea.  Following completion of accommodation work, the Rowan Stavanger is expected to commence drilling the first of four wells beginning in late 2011 in the UK and Norwegian sectors of the North Sea under an approximately 10-month commitment.  Two of our four rigs currently under construction (the Joe Douglas and EXL IV) and the Rowan Norway (which was delivered in July 2011 and has a contract with a customer) are expected to be available for service in the fourth quarter of 2011.

As of July 26, 2011, we had ten offshore rigs in the Middle East, seven in the U.S. Gulf of Mexico, six in or en route to the North Sea, one each in Mexico and Trinidad, and four under construction.  Additionally, three rigs were in a


Gulf of Mexico shipyard undergoing contract modifications for work beginning later in 2011 in the Middle East, Malaysia, and Trinidad, respectively, and another was mobilizing from Egypt to a shipyard in Singapore before commencing work in Vietnam.  At July 26, 2011, seven of our offshore rigs had drilling contracts estimated to complete in 2011, six had contracts estimated to complete in 2012, three had contracts estimated to complete in 2013, nine had contracts estimated to complete in 2014, one had a contract estimated to complete in 2016, and three were available.



KEY PERFORMANCE MEASURES

The following table presents certain key performance measures for our fleet for the three and six months ended June 30, 2011 and 2010:

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues (in thousands):
                       
Gulf of Mexico
  $ 80,970     $ 79,995     $ 147,269     $ 160,936  
Middle East
    65,286       66,646       133,091       139,381  
North Sea
    56,452       47,119       102,983       98,613  
Other international
    19,601       83,588       40,359       163,494  
Subtotal - Day rate revenues
    222,309       277,348       423,702       562,424  
Other revenues(1)
    1,188       4,832       5,761       8,256  
Total
  $ 223,497     $ 282,180     $ 429,463     $ 570,680  
                                 
Revenue producing days:
                               
Gulf of Mexico
    682       583       1,243       1,153  
Middle East
    528       467       1,055       917  
North Sea
    289       175       544       354  
Other international
    169       364       303       721  
Total
    1,668       1,589       3,145       3,145  
                                 
Average day rate:(2)
                               
Gulf of Mexico
  $ 118,724     $ 137,213     $ 118,479     $ 139,580  
Middle East
  $ 123,648     $ 142,711