Other Financial Statement Disclosures

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



	September 30, 2015		December 31, 2014

Trade	$	486,193	$	524,712
Income tax	9,900		6,315
Other	12,245		14,177
Total receivables - trade and other	$	508,338	$	545,204

Accrued Liabilities – The following table sets forth the components of accrued liabilities (in thousands):



	September 30, 2015		December 31, 2014

Pension and other postretirement benefits	$	17,897	$	26,219
Compensation and related employee costs	66,144		88,186
Interest	35,578		47,414
Income taxes	16,514		13,265
Other	15,358		19,175
Total accrued liabilities	$	151,491	$	194,259

Derivative Instruments – A substantial majority of our revenues are received in U.S. dollars, which is our functional currency. However, in many of our international operations, we are required to pay certain employees (and related payroll liabilities) and suppliers in local currency. We are exposed to foreign currency exchange risk to the extent the amount of our monetary assets denominated in the foreign currency differs from our obligations in that foreign currency. In order to mitigate the effect of exchange rate risk, we attempt to limit foreign currency holdings to the extent they are needed to pay liabilities denominated in the foreign currency. In addition, we may periodically enter into spot purchases or short-term derivative transactions, such as forward exchange contracts. A forward exchange contract obligates us to exchange a predetermined amount of a specified currency at a stated exchange rate by a stated date or to make a U.S. dollar payment equal to the value of such exchange. We do not enter into such transactions for the purpose of speculation, trading or investing in the market. We believe that our use of forward exchange contracts reduces our exposure to foreign currency exchange rate risk and does not expose us to material credit risk or other material market risk. Our forward exchange contracts typically mature within one month.

As of September 30, 2015, we had outstanding forward exchange contracts maturing on October 30, 2015, in the aggregate notional amount of $20.2 million consisting of $7.1 million in Norwegian kroner, $6.2 million in Saudi riyals, $5.3 million in British pounds sterling, $1.0 million in euros, and $0.6 million in other currencies. The forward exchange contracts were not designated nor accounted for as hedges; changes in fair value were therefore recognized currently in earnings and included in other income and expense. At September 30, 2015, we recognized an accrued liability and related loss on outstanding contracts in the amount of $45 thousand.

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 nine months ended September 30, 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 $36.5 million and $48.9 million at September 30, 2015 and 2014, respectively. Interest capitalized in connection with rig construction projects totaled $16.2 million for the nine months ended September 30, 2015, as compared to $15.5 million and $46.0 million for the three and nine months ended September 30, 2014. We did not capitalize any interest in the three months ended September 30, 2015.

Income Taxes – In 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)% and 256.2%, respectively, for the three and nine months ended September 30, 2015, compared to (47.3)% and (21.0)%, respectively, for the comparable prior-year periods. The higher effective tax rate for the nine months ended September 30, 2015 was primarily due to the establishment of a valuation allowance on the U.S. deferred tax assets, impairments of assets in foreign jurisdictions with no tax benefits, and an increase in income in high-tax jurisdictions, offset by additional tax benefit for the U.S.-impaired assets and an increase in income in low-tax jurisdictions. The negative effective rates for the 2014 periods were primarily the result of a favorable settlement agreement reached with the U.S. Internal Revenue Service (IRS) in the third quarter of 2014 in connection with U.S. tax return issues of certain prior-year periods.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. The significant pieces of negative evidence evaluated were the cumulative loss in the U.S. incurred over the three-year period ended September 30, 2015, and the forecast taxable losses based on information as of September 30, 2015. Such evidence limits our ability to consider other positive evidence.

On the basis of this evaluation, as of September 30, 2015, an additional valuation allowance of $75.4 million on the U.S. deferred tax assets has been recorded for the nine months ended September 30, 2015 to recognize only the portion of the deferred tax assets that more likely than not will be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if negative evidence in the form of cumulative losses is no longer present, and additional weight may be given to evidence such as our projections for growth.

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's earnings that are 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 do not believe the legislation will have a material impact on our financial statements.

Proceeds from Litigation Settlement – In the first quarter of 2014, we settled our 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 nine months ended September 30, 2014.

Material Charges and Other Operating Expenses – We review the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable.

During the quarter ended September 30, 2015, we conducted an impairment test of our assets and determined that the carrying values for ten of our jack-up drilling units aggregating $458 million were not recoverable from their undiscounted cash flows and exceeded the rigs' estimated fair values measured under an income approach. As a result, we recognized a noncash impairment charge of $329.8 million in the third quarter of 2015. Our estimate of fair value required us to use significant unobservable inputs, which are internally developed assumptions not observable in the market, including assumptions related to future demand for drilling services, estimated availability of rigs, and future day rates, among others.

In addition, material charges for the three and nine months ended September 30, 2015, included adjustments in the amount of $2.6 million and $7.6 million, respectively, to an estimated liability in connection with a shipyard dispute (see Note 4).

Material charges for the nine months ended September 30, 2014 included an $8.3 million noncash impairment charge for the carrying value of the Company's sole aircraft, which had been used to support operations. The asset had a carrying value of $12.7 million prior to the write-down. The amount of the impairment was based on actual sales prices for similar equipment obtained from a third-party dealer of such equipment. The aircraft was sold later in 2014 at an immaterial loss.